How does my company issue shares?

Issuing shares – How does this work?

Under section 254A of the Corporations Act, a proprietary company has the power to issue shares but you are limited to having 50 shareholders that are not employees of the company.  

These shareholders do not include employees or shareholders connected with crowd source funding offers. In other words, your company can create and issue thousands of shares, but they can only be controlled by 50 individuals at any given time. 

As prescribed by the Corporations Act, your company has three ways of issuing shares:

1. A person is listed as a shareholder in the initial application for the company’s registration on ASIC. 
2. Your company issues shares to the person. 
3. An existing shareholder sells their shares to another person and the company registers this transfer.

Checking your company documents 

Before issuing any shares, it is important that you check your shareholders agreement and company constitution. If your company does not have a constitution, the replaceable rules under the Corporations Act will apply. These rules provide that the directors of your company must offer new shares to existing shareholders before offering them to a third party. This is known as a right of first refusal. As such, a board of directors may need to approve the issue of new shares prior to selling them. 

Providing Disclosure to Shareholders

In order to issue shares, you may need to provide disclosure on the company to prospective shareholders using a prospectus or information statement. Disclosure requirements are quite stringent, and it is important you meet these when preparing the statements. 

However, disclosure is not required if:

• Your private company is issuing shares to a person or professional connection and shares are not publicly listed for sale. 
• The shares are being offered to less than 20 people in a 12 month period and your company will not raise more than $2 million in a 12 month period.

Setting your share price 

Next, you will need to set the price of the shares. This price must reflect your company’s current value at the time of issuing the shares. Being a director of the company, you are legally obligated to act in the best interests of the company when choosing a share price. 

Generally, you can engage a business valuer or accountant to make a proper valuation of the company. Failure to set the share price at a proper value may result in heavy tax penalties. 

Selling shares to third party buyers

After your company issues new shares to existing shareholders and there are leftover shares, you can offer these shares to a third party buyer on the same terms. 

To formalise the issue of shares, your company must prepare documents such as: 

• A subscription agreement, for sophisticated investments;
• An offer letter, for simple investments; or 
• A share application form.

What happens next?

The new shareholder must sign a deed of accession on the shareholders agreement and agrees to the terms of the constitution. They will then become bound by the agreement. 

Obligations of the Company for new Shareholders

After the new shareholder subscribes to the shares, your company must provide them with a share certificate, update the company’s member register, and notify ASIC within 28 days of the new shareholder. Failure to do so can result in a late fee being incurred.

Key Takeaways

• Your company is obligated to update and inform ASIC of any shares that are distributed and sold to investors. This can be done by lodging an online form. 
• Failure to comply with ASIC can result in late fees being incurred. 
• Consequently, it is important that you maintain a share register that keeps a record of all the shares that you have distributed. 

If you need any legal advice on issuing shares, contact OpenLegal on 1300 337 997 if you would like to discuss your business needs.