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When it comes to getting finance, one of the most popular options is to issue shares. This could be offered to employees, investors or other third parties.
It’s a great investment, and also works as a great incentive since employees are being given the opportunity to have ownership in the company.
However, if your company is looking to issue shares, it’s important that you understand how the process works, what the law says about it and the kinds of documents you’ll need to ensure you are compliant.
What Is A Company?
A company is a legal entity on its own that operates as a business. This is different to a sole trader or a partnership, both of which have unlimited liability. A company, on the other hand, has limited liability.
This means that the business acts as its own person and any debts that it owes does not affect the directors’ personal assets. So, a company can own property, sell property, enter into contracts and incur debts.
In Australia, there are private companies also known as proprietary companies and public companies. Proprietary companies can have structures that are both limited by shares and unlimited. Therefore, much of what will be discussed below may differ depending on the company type you are inquiring about.
What Are Shares?
Shares essentially give you ownership of the company. If you hold shares, you are a shareholder and ‘own’ part of the company. Usually, companies will have multiple shareholders as a way of getting finance in their early stages, and the ownership of the company is the incentive that is intended to appeal to investors and other parties should the company thrive later down the track.
Who Can Be A Shareholder?
The Corporations Act 2001 has not placed a limit on the minimum age a person can be in order to be a shareholder. A company’s internal policies may differ though. Generally speaking, anyone can hold shares in a company.
However, rules around who can be a shareholder are subject to your Company Constitution. Each company is different, so make sure you carefully review your governing documents.
Can A Director Be A Shareholder?
As a distinction, a shareholder is someone who owns a percentage of the company. A director, on the other hand, manages the operations of that company. A director can own shares in the company they work for, but this will largely depend on the company’s constitution.
If the constitution has nothing in it which limits the director from being a shareholder, a director can purchase shares in the company. On the flip side, it is not necessary that a director must own shares in a company to act as the director.
What Is A Shareholders Agreement?
A Shareholders Agreement is the legally binding contract between the shareholder and the company confirming the shareholders’ ownership of a particular percentage of the company. In addition to this, a shareholders agreement addresses what happens when a shareholder wants to leave the company, what happens if conflict arises and other important matters.
When a company issues shares, it’s important that they understand the ins and outs of Shareholders Agreements in case things get messy later on.
Do I Need To Notify Existing Shareholders When I Issue New Shares?
The replaceable rules under the Corporations Act are applicable here. According to the legislation, a company must offer any new shares to their existing shareholders before anyone else.
However, if the company has a constitution or the shareholders agreement states otherwise, then the rules may differ. Overall, it depends on the company and their operational structure.
Why Do Companies Issue Shares?
Issuing shares brings more money into the company. When issuing shares, an opportunity for more shareholders is created allowing them to purchase a percentage of ownership into the company. Overall, it’s a valuable exchange and an effective way to get finance in your early business stages.
How Does A Company Issue Shares?
The Corporations Act regulates how companies are able to issue shares, depending on the type of company they are. Alternatively, companies can issue shares according to the internal rules of their company. This is usually found in the company constitution or a shareholders agreement. Once it has been decided how to issue shares, capital will need to be assessed.
The point of issuing shares is to bring more revenue into the company, therefore having a target number is key. Once the company has settled on this, a Term Sheet is a great way to ensure all the information is in one place and everybody involved has agreed to it.
Final details and negotiations can be brought up around the term sheet. Once everything is agreed upon, the parties will likely move forward with a formal agreement to lock in the shares and capital. Finally, the application will need to be shared and the company should notify ASIC of the changes made to the company.
Do Shareholders Need To Pay Tax?
According to the guidelines provided by the Australian Taxation Office, any dividends that are a result of shares are considered income. Therefore, tax can be charged on money earned from being a shareholder. If paying taxes for shares seems like something you would like to decrease, then you could consider looking into holding shares through a trust.
What Is A Phantom Share Agreement?
If you’ve done some research on how a company can issue shares, you may have come across a Phantom Share Scheme. So, how does this scheme work?
A Phantom Share Agreement works as an incentive from the employer. In simple terms, the employer offers an opportunity to receive shares, rather than actual shares. So, they don’t exactly exist just yet, but the potential reward is there.
It becomes an incentive for employees to stay with the company and put in hard work. The actual scheme will differ from company to company but the idea is that as the value of the company rises, the employees are paid a certain amount.
There is always the risk of miscommunication in this regard, so it’s advisable to make sure the agreement and communication regarding the phantom share agreement is iron clad.
Do I Need To Notify ASIC?
Usually, ASIC needs to be notified of any changes happening within your company. For example, if you want to change your contact address, you need to submit a Form 486 with ASIC.
It’s always best to consult a legal professional to ensure your business does not incur any fines for not following the proper guidelines.
Key Takeaways
- A company will issue shares to bring more money into the company.
- Anyone can be a shareholder, however this is subject to the company constitution
- There is a legal process to issuing shares that needs to be regarded and applied thoroughly to avoid potential legal troubles.
- When making changes to your company, be sure to update ASIC using the correct process
Next Steps
Issuing shares is a productive way to bring more money into your company. However, there are a lot of factors to consider such as company constitutions, the Corporations Act, ASIC regulations, term sheets and shareholder agreements at the very least.
In order to ensure you get everything right, talking to our lawyers about your next steps is a great way to make sure your business is headed for success.
If you would like a consultation on your options going forward, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
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