The issuance of bonus shares, sometimes referred to as a stock or scrip dividend, represents a distribution of additional shares to shareholders. Rather than distributing dividends in cash, companies offer shareholders additional shares. This can be seen as a method to reward shareholders without affecting the company’s cash reserves. In the UK, the process of issuing bonus shares is subjected to a series of legal and procedural steps. Here’s a general outline of these steps:
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1. Rationale for Issuing Bonus Shares
Before embarking on the process of issuing bonus shares, a company should have a clear understanding of its motivations. Some reasons might include:
- Capitalisation of Reserves: Bonus shares can be issued by capitalising part of the company’s reserves.
- Stock Split: Bonus shares can effectively lower the share price, making it more affordable and potentially increasing liquidity.
- Retain Earnings: By issuing bonus shares, companies can retain earnings while still rewarding shareholders.
2. Check the Company’s Articles of Association
The first procedural step is to check the company’s Articles of Association. These should allow the issuance of bonus shares. If they don’t, they need to be altered, which requires passing a special resolution at a general meeting.
3. Board Meeting to Consider the Proposal
Once the company ensures its Articles of Association are in order, a board meeting should be convened. The main objectives of this meeting include:
- Discussing and proposing the issuance of bonus shares.
- Fixing the date for a subsequent shareholders’ meeting, if necessary.
- Deciding the ratio of bonus shares to be issued. For example, a 1:1 ratio means that a shareholder will receive one bonus share for every share they own.
4. General Meeting of Shareholders
If required by the company’s articles or the board deems it necessary, a general meeting of shareholders must be held. The main objectives are:
- Informing shareholders about the proposal and its implications.
- Seeking their approval through an ordinary resolution.
5. Determine Source of Funds
For the issuance of bonus shares, companies usually capitalize their free reserves, securities premium account, or capital redemption reserve. It’s essential to ensure that these funds are free and not pledged for any other purpose.
6. Adjustment of Reserves
Once the source of funds is identified and the bonus shares issuance is approved, the relevant reserves are reduced by the amount equal to the nominal value of the bonus shares and the share capital account is increased by the same amount.
7. Issue Bonus Shares
Following the above steps, the company then issues the bonus shares. The record date is crucial here – only shareholders on the books as of this date are eligible to receive the bonus shares.
8. Update Register of Members
Post issuance, the company updates its register of members, reflecting the new holding structure. Shareholders usually don’t need to surrender their original share certificates; new certificates for the bonus shares or a consolidated certificate will be issued.
9. Statutory Filings
UK companies must make appropriate filings with Companies House following the bonus shares issuance. They need to file:
- A return of allotment (Form SH01) within one month of the shares being allotted.
- Updated Statement of Capital, which gives details of the total number of shares in the company post the issuance of bonus shares.
10. Tax Implications
It’s crucial to understand the tax implications of issuing bonus shares in the UK. Generally, bonus shares are not treated as income for the shareholder; hence no income tax is due. However, they might affect the capital gains tax position when the shares are eventually sold.
11. Communication
Lastly, it’s vital for the company to communicate the entire process effectively to the stakeholders. This includes sending notifications of the board and general meetings, explaining the rationale for the bonus shares issuance, and detailing the implications for shareholders.
The process of issuing bonus shares in the UK is a meticulous one, demanding strict adherence to regulatory and procedural norms. It not only serves as a means to reward shareholders without dipping into cash reserves but also provides avenues for companies to optimize their financial structures. As with all corporate decisions, thorough consultation with legal and financial advisors is paramount to ensure compliance and make informed decisions.
