What are Share Split and Subdivision?
Share splitting is an option open to companies whereby each share will be subdivided into two or more new shares. This means that the individual will hold more shares but each share will have a lower nominal value.
A straightforward split will not change the shareholders’ rights, this means that the voting control and rights to dividends will be unchanged after the split. All that has changed is the number of shares and the nominal value of each share.
Share splits can be as straightforward as 2 new shares for every old share; or even 100 new shares for every old share. However, share splitting can be more complex; with 5 new shares issued for every 3 old shares. Or a share class can even be split into 2 different share classes - for example, every £1 ordinary share can be split into one 10p ordinary share and nine 10p deferred shares.
In the 5 for 3 scenario, the shareholders may not have a holding that is divisible by 3. This means that there are remainder shares in the share class being split, these remainders will need to be dealt with.
Dealing with the remainder shares
The company chooses to make a 5 for 3 share split.
A shareholder has 15 shares before the split and therefore receives 25 new shares.
A different shareholder has 11 shares. In exchange for 9 of the original shares, they receive 15 new shares. However, that leaves 2 old shares that will need to be dealt with because it is not possible to have a fraction of a share. When this happens, the company will often cancel the remainder shares, in some cases making a payment to the shareholder in respect of them.
Why do you need to split a company’s shares?
The main reason for doing a share split is to improve the liquidity of the company’s shares.
For example, if a company owner has just 1 ordinary share with a nominal value of £1 they cannot sell half a share, but if there were 100 ordinary shares with a nominal value of 1p, the owner could choose to sell 50 shares. In the same way, a new investor might no be comfortable investing £1000 and only receiving one share, however, they may be more comfortable receiving 1000 shares worth £1 each.
Share splits are frequently done by publicly quoted companies because it can reduce the share price in line with the split, but it does not reduce the market value of the company.
How do I do a share split?
It is best to speak to a professional before embarking on this, however, we will still talk you through the process.
1. Do the articles of association allow for a share split?
Following the Companies Act 2006, there is no longer a requirement for the company’s articles of association to permit the subdivision of shares. However, you will need to check whether the articles of association actively restrict or exclude the right to split the company’s shares.
If the articles of association do not allow for the subdivision, then you will need to amend these.
2. Is there a shareholders’ agreement in place?
Even though the subdivision will leave each shareholder with the same percentage interest after the split, it can be worth checking whether there is a shareholders’ agreement and whether there are any special provisions in place that need to be observed.
3. Ensure the subdivision of shares is appropriate
While it can be nice to have a large number of shares, the benefits can be undone if the number of shares becomes too numerous. It can be worth considering whether there are options available other than the split to achieve the same aim.
4. Pass a shareholders’ resolution approving the split
Provided that everything is in order and you are allowed to carry out the split, it is sufficient to have an ordinary resolution approving it. There will probably only be a few shareholders being affected by the split, so it can be done as a written resolution, although a resolution passed at a shareholders’ meeting is equally acceptable. This resolution does not need to be sent to Companies House but will need to be kept with the company records.
5.File the Form SH02 at Companies House
You will need to complete sections 1, 2, 4, 7, and 10 before signing section 11 of Form SH02. Section 10 requires you to fill out prescribed particulars, these will be the same as the old £1 shares.
6. Update the register of shareholders
The shareholders’ register, also known as the register of members, will need to be amended to show the number of shares held in the nominal value by each shareholder.
7. Issue new share certificates
Sometimes the old share certificates can be called in for amendment, but it is more common to send members a notice that the share split has taken place and enclose a new certificate.
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