Bonus shares represent a reward from a company to its shareholders, usually in the form of additional shares rather than cash dividends. These shares are typically given out of the company’s retained earnings. For UK-based companies, there are specific steps and regulations that must be followed when issuing bonus shares. We will take you through the general steps involved in the issuance of bonus shares for UK companies.
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1. Reason for Issuing Bonus Shares
Before embarking on the issuance process, the company needs to identify and articulate the reasons for issuing bonus shares. Common reasons include:
- Retaining Cash: If a company wants to retain its cash for business expansion or other projects but still reward its shareholders, issuing bonus shares is a suitable alternative to cash dividends.
- Capitalization of Profits: Companies can convert their retained earnings into share capital by issuing bonus shares, which helps in increasing the overall share capital without the need for fresh investments.
- Enhancing Market Liquidity: By increasing the number of shares in circulation without a cash outflow, bonus issues can improve share liquidity in the market.
2. Verify Compliance with the Articles of Association
The Articles of Association of a company may contain provisions concerning the issuance of bonus shares. The directors must ensure that there are no restrictions within the Articles, or if there are, that the appropriate amendments are made.
3. Ascertain Availability of Sufficient Reserves
For the issuance of bonus shares, it’s essential to ensure that there are adequate free reserves or retained earnings. This is important because these reserves will be capitalized to facilitate the bonus issue. The company’s most recent audited financial statements can be referred to for this purpose.
4. Board Meeting and Approval
The directors of the company will need to convene a board meeting to discuss the proposal of issuing bonus shares. During this meeting, a resolution must be passed approving the issuance. The directors will also set a date for a general meeting of the shareholders.
5. Shareholders’ Approval
Following the board’s decision, a general meeting of the shareholders is convened. Here, a special resolution regarding the issuance of bonus shares is presented for approval. A majority (typically 75% or more) of the shareholders need to vote in favour of the resolution for it to be passed.
6. Adjustments to Capital and Reserve Accounts
Upon approval, necessary journal entries are made to capitalize the relevant reserves. Typically, the ‘Reserves and Surplus’ account (or the specific reserve account being utilized) is debited, and the ‘Share Capital’ account is credited with the equivalent amount of the bonus issue.
7. Update the Share Certificates
Existing shareholders need to be given new certificates representing their bonus shares. Companies House, the UK’s registrar of companies, must also be informed of the bonus issue. Details like the total number of shares post-bonus issue, nominal value, and the amount up to which each share is paid up should be updated.
8. Regulatory Filings and Notifications
Companies in the UK are obligated to notify the Companies House about any changes in their issued share capital. Specific forms, including the SH01 (Return of Allotment of Shares), must be duly filled and submitted within a month of the bonus shares issuance. It’s also necessary to inform the stock exchange where the company’s shares are listed, as per the listing agreement’s terms and conditions.
9. Update Company Records
The company’s internal records, such as the Register of Members, should be updated to reflect the newly issued bonus shares. The details would include the names of shareholders, the number of bonus shares held, and the total shareholding post-bonus issue.
Issuing bonus shares in the UK is a method by which companies can reward their shareholders without a direct cash outflow. However, there are specific steps and procedures that need to be followed diligently to ensure compliance with regulatory norms. While this article provides an overview of the general steps, companies should always seek guidance from legal and financial professionals to navigate the complexities of the process.