Updated: Jun 22, 2020
When talking about funding your company, or your need new capital to be injected to your company, usually your company secretary will advise you by means of Share Allotment, because it is simple, straightforward and easy to arrange. Yet, some of the time, we don’t want to increase the number of shares, perhaps because of certain shares restriction, shareholding portion balance, you want the money but not sacrificing the shareholding power, or simply to make the value per share looks better.
Common scenarios of Alternation of Share Capital
Capitalize on the company’s profit
When the company making profits, despite distribute them as dividends, or leaving them as surplus cash, another choice would be capitalized them; one of the reasons is to allow the company ready to guarantee a loan from the bank for the later-on expansion plan.
Subsequent investor’s injection
Starts-up often needs several stages of injection of funds when approaching the investors, of course, each stage should be guided by clearly defined milestones, while for certain start-ups, if the founder is strong enough, and/or the contribution from the founder is critical to the success of the business, sometimes, the investors are willing to inject more funds at a later stage without diluting the founder’s shareholding power.
Saving the company
In some certain unfortunate cases, the company already pledged its shares for the mortgage, and the company needs more cash to continue operation, as there’s alternation restriction on the pledged shares and/or other borrowing restriction terms (fixed/floating charges … etc.) were positioning the founder can only injecting new funds as capital for the company to get through the tough times.
The above are the common situation. In addition to this, there will still be some more complicated scenarios. When you are considering to inject the fund by share allotment or alternation of share capital, you may seek professional advice because it will bring different effects.
Mandatory documents of Alternation of Share Capital
Director’s resolution – mandatory internal record to be signed by all the directors; usually tailor-made resolutions to state the initiate and background reasons of such new injection of funds without allotment of shares, together with the relevant supporting for the board of directors to determine that this is in the interest of the company to receive the fund in such way;
Shareholder’s resolution – a mandatory internal record by all the shareholders; to state out certain restrictions or unfair and/or prejudice has been fully waived and approved;
Register of Members – mandatory internal record to be updated by the Company and keep at registered office address, no signature is required;
Share Certificate – optional, depending on whether “Consideration” has been stated onto the certificate and if the shareholder requested to issue a new one;
To conclude, alternation of share capital is one of the methods to inject new funds, however, it can only apply to exist shareholders but not to new investor/shareholder. Further, although it is not common, it is more often nowadays especially those start-ups customers come to us for advices.
Any additional information you would like to know, please feel free to drop us an email:- email@example.com. In addition, we dig out below materials in case you need a little more insights.
Major Changes relating to Share Capital