Contents
Introduction
When it comes to managing your company’s share structure, you may be asking yourself, “How do you split your shares?” In Australia, share splits are an increasingly popular strategy for companies looking to improve liquidity and appeal to new investors without diluting the overall value of the business. In this guide, we’ll take you through what a share split is, how it works, the benefits and legal considerations, and the steps you need to follow for a smooth process.
At its core, a share split (or share division) increases the number of shares in circulation by dividing each existing share into a larger number of lower-value shares. Although the price per individual share drops, the overall market capitalisation remains unchanged. Whether you’re planning to restructure your business structure or simply want to attract a wider pool of investors, understanding how to split your shares is a crucial part of your company’s financial toolkit.
What is a Share Split?
A share split is a corporate action in which a company divides its existing shares into multiple new shares. For example, in a 2-for-1 share split, each shareholder will receive an additional share for every share they currently own. Although this increases the number of shares on the market, the total value of each shareholder’s investment remains exactly the same. Essentially, a share split makes each share more affordable without changing the company’s overall market value.
This strategy is often used to improve market liquidity and make the stock more accessible to a broader spectrum of potential investors. By lowering the price per share, companies hope to encourage greater trading activity and potentially enhance their market profile.
How Does a Share Split Work?
Understanding how a share split works is key to appreciating its benefits. The process is straightforward and is generally broken down into three main steps:
- Division of Shares: The existing shares are divided into a larger number of shares based on a specified ratio. For instance, in a 2-for-1 split, every share is divided into two, effectively doubling the number of shares in circulation.
- Value Adjustment: The market price of each share is adjusted proportionally. In the 2-for-1 example, if the share was worth $10 before, it will be reduced to $5 after the split. However, the overall value of your holdings remains unchanged.
- No Change in Total Value: The aggregate value of the shares held by each investor is the same before and after the split. The goal is to make shares more accessible rather than to raise additional capital.
This approach is particularly appealing for companies with high share prices, where a lower per-share cost may attract new investors and increase trading volumes.
Benefits of a Share Split
There are several strategic benefits associated with share splits. While the overall market value of the company remains constant, the benefits lie in increased accessibility and enhanced liquidity:
- Attracting New Investors: Lowering the share price makes the stock more affordable, which can attract a broader base of retail and institutional investors.
- Increased Liquidity: With more shares available on the market, trading volumes can increase, potentially leading to more efficient price discovery and less volatility.
- Cost-Effective Approach: Share splits are generally less disruptive and more cost-effective than issuing new shares or undertaking a rights issue, as they don’t dilute the voting power or ownership percentages of existing shareholders.
- Improved Market Perception: A share split can be a positive signal to the market that the company is confident in its long-term prospects, which may boost investor sentiment.
In summary, a share split serves as both a marketing and financial tool, enabling your business to better position itself in the competitive investment landscape.
Steps to Completing a Share Split
Successfully executing a share split involves several detailed steps. Below are the key processes you should follow to ensure your company remains compliant with legal and regulatory requirements:
1. Get Shareholder Approval
The first and foremost step is to gain shareholder approval. This is typically achieved through:
- Unanimous Circular Resolution: For smaller companies, a circular resolution signed by all shareholders can suffice.
- General Meeting: Alternatively, you may call a general meeting where shareholders vote on the proposed share split. The resolution must clearly specify the existing share capital and detail the chosen method of division.
2. Update the Share Register
Once approved, you must update your company’s share register to reflect the new share structure. This step is critical, as the share register is the official record maintained by your company. Any inaccuracies here can lead to administrative errors down the line.
3. Re-Allocate Unpaid Share Amounts (if applicable)
If your company has issued shares with unpaid amounts, these need to be re-allocated equally among the new shares. It’s important to ensure that financial records remain accurate post-split.
4. Issue New Share Certificates
After the share register has been updated, new share certificates must be issued to shareholders, and old certificates should be cancelled. This step formalises the transition to the new share structure.
5. Notify ASIC
In Australia, it is a legal requirement to notify the Australian Securities and Investments Commission (ASIC) of any changes to your share capital. The notification must be made within 28 days of the share split taking effect.
Legal Considerations for Your Share Split
While the process of a share split may seem straightforward, there are several legal considerations you must take into account. It is essential to work closely with legal and financial advisors to ensure you comply with all relevant regulations.
For instance, you should review existing shareholders agreements and company constitutions to ensure that the share split does not inadvertently conflict with any contractual obligations. In addition, it is critical to consider taxation and accounting implications. Consulting with experts in these areas can help you navigate potential pitfalls.
Another legal aspect is ensuring that all your legal documents accurately reflect the changes in your share structure. This documentation may also become relevant during future corporate actions or if disputes arise. Taking a proactive approach can safeguard your business interests.
Other Considerations When Splitting Shares
In addition to the procedural and legal steps, there are strategic factors to consider when deciding how to split your shares:
- Market Sentiment: Assess how the market perceives your company’s growth and future potential. A share split can be a vote of confidence, but it must be timed appropriately.
- Existing Share Price: Companies with high share prices might benefit significantly from making their stock more accessible. However, if your share price is already modest, a split may have limited impact.
- Investor Education: It’s worthwhile to communicate with existing and prospective investors about what a share split means for them and the company. Clear, transparent communication can build trust and foster long-term investment.
- Cost Implications: Although share splits are generally cost-effective, there may be administrative costs involved in updating records, issuing new certificates, and notifying regulatory authorities. Planning for these expenses is crucial.
By carefully weighing these factors, you can determine whether a share split aligns with your company’s overall strategic objectives.
Your Business Structure and Share Splits
The decision to split shares is closely linked to your overall company registration and business structure. For instance, if you are operating as a sole trader, the considerations will be different from those required of a fully incorporated company. For companies, especially those planning to raise external capital, a well-planned share split can enhance marketability while maintaining strong control mechanisms.
Key Takeaways
Here’s a quick recap of the main points to remember about share splits:
- A share split divides existing shares into a larger number of lower-value shares without changing the total value of the shares held.
- The process involves obtaining shareholder approval, updating the share register, re-allocating any unpaid amounts, issuing new share certificates, and notifying ASIC within 28 days.
- Benefits include attracting new investors, increasing market liquidity, and offering a cost-effective way to adjust share prices.
- Legal considerations are critical, including reviewing shareholder agreements and ensuring all legal documents accurately reflect the changes.
- Your business structure will influence the process and impact of a share split, making it essential to understand your best options for capital structuring and regulatory compliance.
By planning carefully and seeking the appropriate legal and financial advice, you can successfully implement a share split that benefits your company and its shareholders.
If you would like a consultation on share splits, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
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