The issuance of bonus shares represents a mechanism through which companies distribute extra shares to their existing shareholders at no additional cost. Rather than disbursing cash dividends, a company may opt to reward its shareholders with additional shares. For UK-based companies, there’s a regulated procedure for this issuance to ensure fairness and transparency. Here’s a look at the general steps involved in the issuance of bonus shares for UK companies.
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1. Rationale for Issuing Bonus Shares
Before initiating the process, the company’s board of directors must ascertain the rationale behind issuing bonus shares. These reasons could be:
- To bring the share price within a more manageable range.
- To convey a message of company’s sound financial health.
- To capitalize part of the company’s reserves.
2. Check Company’s Articles of Association
Before issuing bonus shares, a company must ensure that its Articles of Association permit the issue of bonus shares. If the Articles don’t contain such a provision, the company will have to alter them to incorporate this power. This alteration will require passing a special resolution by the shareholders.
3. Board Meeting Convened
The directors will convene a board meeting. In this meeting, the board will:
- Ascertain the amount of free reserves available for the issuance of bonus shares.
- Determine the ratio at which bonus shares will be issued, e.g., 1:2 means one bonus share for every two shares held.
- Fix a date for identifying the list of shareholders who will be eligible to receive the bonus shares.
- Convene a general meeting to obtain approval from the shareholders for the issuance.
4. Notice of General Meeting
After the board meeting, the company will send a notice for the general meeting to all its shareholders, detailing the agenda of the meeting. The notice will inform shareholders about the proposal to issue bonus shares and will invite them to vote on the matter.
5. General Meeting and Resolution
In the general meeting, shareholders will deliberate on the proposal. For the resolution to pass, it requires the approval of at least three-quarters of the votes cast by members entitled to vote. Upon approval, the company can proceed with the issuance of bonus shares.
6. Update Share Capital Details
Following the issuance, the company’s balance sheet will undergo changes:
- The company’s reserves (like the retained earnings or securities premium) get reduced by the amount capitalized for the bonus issue.
- The issued share capital of the company increases by the same amount.
The total shareholders’ equity remains the same, but its composition between reserves and share capital changes.
7. Allotment of Bonus Shares
Once the resolution is passed and all procedural steps are completed, the company will proceed to the allotment of bonus shares in the predetermined ratio. The shares are credited to the Demat accounts of the shareholders or share certificates are dispatched in case of physical holdings.
8. Comply with Regulatory Filings
Post allotment, the company has to file necessary forms with Companies House in the UK to intimate them about the change in share capital. Moreover, if the company is listed on the stock exchange, it must inform the exchange about the bonus issue to maintain transparency for investors and the market.
9. Update Statutory Registers
The company should update its statutory registers, specifically the Register of Members, to reflect the new shareholding pattern after the bonus issue.
10. Communication to Shareholders
After the bonus shares are allotted, it’s a good practice to communicate the same to the shareholders. A letter or email confirming the number of bonus shares allotted to them can provide clarity and maintain goodwill among shareholders.
The issuance of bonus shares in the UK is a regulated process, ensuring that the interests of all stakeholders are protected. While it’s a non-cash way to reward shareholders, the procedure demands diligence and adherence to the company’s Articles of Association and prevailing UK laws. Companies considering this route should be aware of the implications, both regulatory and financial, and should ensure they undertake each step with thoroughness and accuracy.
