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Companies Act 2006 - Section 538

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Section 538: Disclosure of agreement by company

829. This section requires companies to disclose any liability limitation agreement they have made with their auditor in accordance with any regulations made by the Secretary of State subject to negative resolution. Subsection (2) provides that the regulations may require this disclosure to be in a company’s annual accounts (or in any other manner in the case of group accounts), or in the directors’ report.


Section 539: Minor definitions

830. This section defines a number of terms used in this Part.


831. This Part of the Act deals with various matters relating to a company’s share capital. It replaces Part 4 and (in part) Part 5 of the 1985 Act and contains a mixture of new sections which replace corresponding provisions in the 1985 Act and sections which restate corresponding provisions in that Act. Sections 541, 543 to 544, 547 to 548, 552 to 553, 558, 561, 563 to 568, 570 to 572, 574 to 577, 579 to 582, 584 to 588, 590 to 605, 607 to 609, 611 to 616, 645 to 648 and 655 to 656 restate various provisions in the 1985 Act but do not make any changes to those provisions.


Section 540: Shares

832. As now, generally speaking, references to a “share” in the Companies Acts (defined in section 2) includes stock. However, as recommended by the CLR, in future it will no longer be possible for a company to convert its shares into stock (see subsection (2)) but a company that has stock at the date that this provision comes into force will be able to reconvert its stock back into shares (see note on section 620).

Section 542: Nominal value of shares

833. This is a new provision, which is required as a result of the changes to the requirements with respect to the memorandum (see note on section 8).

834. Currently, section 2(5)(a) of the 1985 Act (requirements with respect to memorandum) requires that, in the case of a company having a share capital, the memorandum of a limited company must state the amount of the share capital with which the company proposes to be registered and the division of that share capital into shares of a fixed amount. This capital figure as stated in the memorandum (known as the “authorised share capital”) acts as a ceiling on the amount of shares that a company may issue. Such authorised share capital may, however, be increased by ordinary resolution under section 121 of that Act. The CLR recommended that the requirement for a company to have an authorised share capital should be abolished (Final Report, paragraph 10.6), and so the Act does not require a company to state in its memorandum the amount of its authorised share capital.

835. This section is required as a consequence of the repeal of this requirement. It does two key things:

• it makes it clear that the shares in a limited company having a share capital must have a fixed nominal value, e.g. 1p, £1, $1 or 1 euro and therefore prevents a company from issuing shares of no par value (thereby implementing for public companies, Article 8 of the Second Company Law Directive (77/91/EEC)); and

• it places in statute the common law rule that shares may be denominated in any currency and that different classes of shares may be denominated in different currencies. However, this is subject to the requirement in section 765 that a public company may only satisfy its initial authorised minimum share capital requirement if its shares are denominated in either sterling or euros.

836. Where a company purports to allot shares without a fixed nominal value, every officer of the company who is in default commits an offence and is liable to a fine (see subsections (4) and (5)). Moreover, such a purported allotment is void (see subsection (2)).

837. This section needs to be read alongside section 9, which requires the application for registration of a company that is to be formed with a share capital to include a “statement of capital and initial shareholdings”. The contents of this statement are prescribed in section 10 and this includes a requirement to set out the total number of shares and the aggregate nominal value of the shares which are to be taken by the subscribers to the memorandum on formation.

Section 545: Companies having a share capital

838. Section 545 is a new provision which makes it clear that references in the Companies Acts (defined in section 2) to a company having a share capital are to company that has power under its constitution to issue shares.

Section 546: Issued and allotted share capital

839. Section 546 is a new provision which makes it clear that references in the Companies Acts (defined in section 2) to issued or allotted shares include the shares taken by the subscribers to the memorandum on the formation of a company.


840. Generally speaking, the directors of a company may currently only allot shares (or grant rights to subscribe for shares or to convert any security into shares) if they are authorised to do so by ordinary resolution of the company’s members or by the articles.

841. Such an authority may be general or specific (that is, it may, for example, be restricted to a specified allotment, an allotment of shares up to a specified value, or an allotment of shares of a particular class). In either case, the authority must state the “maximum amount of relevant securities that may be allotted under it” and the date when the authority will expire, (which must not be more than five years from the date on which the authority is given). The authority may be renewed for further periods not exceeding five years.

842. There is a relaxation for private companies from the requirement to state the date on which the authority will expire and so such companies may, by elective resolution under section 379A of the 1985 Act, give such authority either for an indefinite period or a fixed period of the company’s choice.

843. The Act removes for private companies the requirement for prior authorisation in certain circumstances (described in section 550). It also abolishes the concept of authorised share capital (see note on section 542) and a company’s constitution will therefore no longer have to contain a ceiling on the number of shares that the directors are authorised to allot.

Section 549: Exercise by directors of power to allot shares etc

844. This section replaces section 80(1), (2), (9) and (10) of the 1985 Act. It provides that the directors may not allot shares (or grant rights to subscribe for shares or to convert any security into shares) except in accordance with one of the following two sections.

845. Subsection (2) of this section provides that directors may allot shares in pursuance of an employees’ share scheme without having to comply with one of the following two sections. This mirrors the current position (see section 80(2) of the 1985 Act).

846. Similarly, where a right to subscribe for, or to convert any security into, shares already exists, then the directors may allot shares pursuant to that right without having to comply with one of the following two sections (see subsection 3).

847. A director who knowingly allots shares in contravention of the requirements imposed by this section commits an offence. Such an allotment is not, however, invalid.