General Procedures for a Bonus Issue of Shares in UK Companies

The bonus issue of shares is a method UK companies employ to reward shareholders by allocating additional shares to them at no extra cost. This approach involves converting a portion of the company’s accumulated reserves into share capital. While this process seems straightforward, companies must follow specific procedures, as laid out in the UK’s regulatory framework. Here’s a quick look at the general procedures required when a UK company opts for a bonus issue of shares.

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1. Verification of Articles of Association

The first step in initiating a bonus issue of shares is to check the company’s Articles of Association. If the Articles do not provide for a bonus issue of shares, an amendment is necessary. This alteration typically requires the company to pass a special resolution.

2. Board of Directors Meeting

Before proceeding with a bonus issue of shares, the board of directors must convene a meeting to deliberate on the matter. During this meeting, several essential decisions are made:

  • The quantum of free reserves available for capitalisation.
  • The ratio for the bonus issue of shares, for instance, 1:3, which implies one bonus share for every three held.
  • A date is set to identify shareholders eligible for the bonus shares.
  • A subsequent general meeting is scheduled to get shareholders’ approval.

3. Issuance of General Meeting Notice

Once the board decides on the bonus issue, a notice of the general meeting must be circulated among shareholders. This notice will explicitly mention the bonus issue of shares proposal and request shareholders to participate in the voting process.

4. General Meeting & Shareholder Approval

For the bonus issue of shares to proceed, the proposal must secure approval during the general meeting. A three-quarters majority of the total votes cast by entitled members is mandatory for the resolution to pass.

5. Alteration in Capital Structure

After the bonus issue of shares is approved:

  • A portion of the company’s reserves, such as the retained earnings or securities premium, diminishes by the bonus issue’s amount.
  • The company’s issued share capital correspondingly increases.

Even though there’s a change in the capital structure, the total equity remains unchanged; only its constituents vary.

6. Allotment and Credit of Bonus Shares

Upon the successful passing of the resolution and ensuring compliance with all procedural requirements, the company undertakes the bonus issue of shares. These bonus shares are allotted to the shareholders in the predetermined ratio, ensuring they get credited to their Demat accounts. For those who hold physical shares, the company issues new share certificates.

7. Compliance with Regulatory Obligations

The company must file the necessary documentation with Companies House post the bonus issue to inform about the alteration in share capital. For companies listed on stock exchanges, there’s an added responsibility to notify the exchange about the bonus issue, ensuring transparency for potential investors and the general market.

8. Update of Statutory Registers

The company should promptly revise its statutory registers, primarily the Register of Members, reflecting the post-bonus issue shareholding pattern.

9. Communication with Shareholders

It’s best practice for companies to formally notify shareholders once the bonus shares are allocated. A confirmation, either through email or a physical letter, detailing the number of bonus shares received, serves to keep shareholders informed and uphold company-shareholder relations.

10. Periodic Review

Although not a direct step in the bonus issue of shares, it’s wise for companies to periodically review the effects of the bonus issue. The focus should be on evaluating if the bonus issue aligns with the company’s long-term strategic objectives or if it’s meeting the desired outcome of enhancing liquidity in the market or attracting more investors.

Opting for a bonus issue of shares is a strategic decision that UK companies can take to reward shareholders without affecting their cash reserves. The outlined procedures provide a framework to ensure that the process is undertaken with diligence, in adherence to the UK’s regulatory guidelines. In doing so, companies can maintain shareholder trust and ensure that such endeavours effectively cater to both the company’s and shareholders’ interests.