Bonus Issue of Shares in the UK: An Overview of Procedures

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A bonus issue of shares is a method employed by companies to reward their shareholders by issuing additional shares free of charge, proportionate to their existing holdings. This is also commonly referred to as a stock dividend. When a UK company decides to undertake a bonus issue of shares, there are strict protocols and procedures to be followed to ensure legality and fairness. Here’s a quick guide detailing the general procedures for a bonus issue of shares in the UK.

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1. Evaluating the Rationale

Before the procedure begins, the company’s management should clearly understand and articulate the rationale behind the bonus issue of shares. Typical reasons include:

  • Capitalizing on accumulated profits.
  • Adjusting the company’s share price in the stock market to a more desirable level.
  • Demonstrating confidence in the company’s future profitability.

2. Reviewing the Articles of Association

The company must confirm that its Articles of Association permits the bonus issue of shares. If the current Articles don’t allow for this, an alteration will be necessary, which involves passing a special resolution by the shareholders.

3. Convening a Board Meeting

The initial procedural step involves a board meeting. During this meeting, the board will:

  • Decide on the feasibility and appropriateness of the bonus issue.
  • Determine the source of funds for the bonus issue, such as from free reserves, capital redemption reserves, or profits.
  • Set the ratio of bonus shares to be issued.
  • Schedule a date for the general meeting where shareholders will give their consent for the bonus issue of shares.

4. Issuing a General Meeting Notice

Subsequent to the board’s decision, the company needs to notify its shareholders of the impending bonus issue. This is typically done by sending out a general meeting notice, detailing the intent to discuss and potentially approve the bonus issue of shares.

5. Conducting the General Meeting

The general meeting involves:

  • Presentation of the proposal for the bonus issue of shares to the shareholders.
  • Voting on the proposal. To pass, it typically requires a majority—often a three-quarters majority—of votes from the shareholders.

6. Adjusting Financial Statements

Post-approval, the company’s financial statements need adjustments:

  • The company’s reserves (from which the bonus issue is proposed) decrease by the bonus issue amount.
  • The issued share capital of the company will proportionally increase by the bonus issue amount.
  • It’s essential to note that while these changes affect the structure of the equity, the total shareholders’ equity remains unchanged.

7. Allotment of Bonus Shares

After the general meeting’s approval and necessary adjustments to financials:

  • Bonus shares are allotted to the shareholders based on the predetermined ratio.
  • Shareholders will either see these shares added to their Demat accounts (electronic form) or receive physical certificates.

8. Regulatory Compliance

Once the shares are allotted:

  • The company needs to inform Companies House about the bonus issue, providing details of the increased share capital.
  • If the company is listed, it should also notify the relevant stock exchange, ensuring transparency for investors.

9. Updating Company Records

The company must ensure its internal records are updated, which includes:

  • Updating the Register of Members to reflect the new shareholding structure post the bonus issue.
  • Amending other statutory registers and company books as necessary.

10. Communicate with Shareholders

After the bonus issue of shares is completed, it’s prudent for the company to notify the shareholders, detailing the bonus shares they’ve received. This is a crucial step for transparency and to maintain a positive relationship with the shareholders.

The decision to undertake a bonus issue of shares is a significant one, reflecting a company’s desire to reward its shareholders and potentially strategize its financial and market position. However, UK companies need to be meticulous in following the stipulated procedures, ensuring that the bonus issue not only aligns with corporate goals but also stands up to regulatory scrutiny. Through careful planning and adherence to the procedures, UK companies can efficiently and effectively carry out a bonus issue of shares.

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