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.

CHAPTER 7: SUPPLEMENTARY PROVISIONS

Section 539: Minor definitions

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

PART 17: A COMPANY’S SHARE CAPITAL

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.

CHAPTER 1: SHARES AND SHARE CAPITAL OF A COMPANY

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.

CHAPTER 2: ALLOTMENT OF SHARES: GENERAL PROVISIONS

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.

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