If you’re looking to prepare your company for new investment, a share split may be right for you. A share split is when a company divides its existing shares into multiple shares.
Why split shares?
But why would your company do this? For a public company, this is usually done when the share price is relatively high. Because the value of the company does not change, but more shares are available, a split will usually result in greater liquidity. So while the split itself should not change the value, a split may renew investor interest in the company.
For a private company, since the shares are not traded, the main reason to conduct a split is preparing for a new shareholder to purchase an interest in your company. This could be, for example, in preparation for selling a portion of your business, or engaging in an employee stock ownership plan.
In either case, a share split is a way to prepare your company for new investors, by increasing the number of shares available for purchase.
How does a share split work?
A share split involves dividing the existing shares of a company into 2 or more shares. The most common share split ratios are 2-1 and 3-1. For example, in a 2-1 split, each shareholder receives 2 shares for each 1 they already hold. Since the value of the underlying business does not change, the value of each shareholder’s parcel should not change. However, each individual share will be worth less.
This is the opposite of a share consolidation (such as a share buy-back) where the total number of shares is reduced, but the value of the individual shares increases.
How can I split my company’s shares?
If you would like to conduct a share split, you must follow the correct procedure administered by the Australian Securities and Investments Commission (ASIC). The process is as follows:
- Get shareholder approval. You can get approval by passing a resolution at a general meeting, or by unanimous circular resolution.
- Update the share register.
- Reallocate any unpaid share amounts. Any outstanding amounts for partly paid (or nil-paid) shares should be reallocated to newly split shares.
- Issue new share certificates. You should destroy the old certificates and give each shareholder new certificates to reflect the changes of the split.
- Notify ASIC of the changes. You must lodge the changes within 14 days or late fees may apply.
To sum up
A share split increases the total number of shares your company has on issue. Share splits can prepare your company to prepare for new investment, improve liquidity and generate new interest.
Daniel is a paralegal at OpenLegal. He is a final year business and law student at the University of Technology Sydney, majoring in finance and legal futures. His interests are newlaw, legal technology and commercial law.
Phil is a director at OpenLegal. He has over 16 years experience working in private practice and in-house counsel in Sydney and London, giving him expertise in employment law, IP, finance, leases, dispute resolution, insurance and contracts.
