Directors wish to raise additional finance via issue of shares to investors. Should this be done via a premium on ordinary shares or via a new class?

[Simply Accounting]

Clients purchased an off the shelf Ltd Co, and ownership of the 2 subscriber shares were transferred to the two directors. More shares were then allotted to the directors 48 & 49 respectively and a further 1 share issued to an investor at the same time. The investor paid £5000 for the share; the directors only paid par value - £1.

Could there be a PAYE problem here in that shares are issued at undervalue? Could this be avoided by director selling own share to investor for £5000? CGT issue but £5k is only gain in the year.

Further finances are being sort via the issue of further shares. The company is currently loss making as it is in the R&D stages, but could potentially become very profitable. However the issue of additional ordinary shares would affect the relative % share holding of directors and investors?

Any thoughts are welcome.

[Nigel Lord]

Stuck1

This is a common problem for start-ups raising second and third round funding.

Surely the correct answer would be to firstly increase the shares in issue to the existing equity holders, by way of a bonus issue. This does not affect the base cost of their total holding (i.e. 50 shares cost £50, then 1,000 shares cost £50). The company has the same valuation.

Subsequently, new shares are issued to the second round investor in return for cash. Providing the investor is not a director/employee, and is unconnected with the existing shareholders, he has acquired the shares at an open market value (and CGT base cost) of £5,000.

In occurs to me that if these and future investments were correctly structured, there may be some availability of EIS, EMI or CVS relief. You may wish to seek advice in this connection.

If you have already undertaken the restructuring, there is probably no significant CGT or income tax problem if the company is of negligible value. However, if it does become of significant worth, this could create a major problem, as the District Valuer will have the benefit of hindsight. I suggest that you get your ducks in a line now and take professional advice to avoid any nasty surprises.

My firm specialises in this area of taxation. If you would like us to assist you further we would be delighted to do so.

Nigel Lord
Lord Associates
Taxation & Business Consultants
Caxton House
Old Station Road
Loughton
Essex, IG10 4PE
020 8418 9101 & 07769 931852
mail@lordassociates.co.uk

[assetlink@eircom.net]

You can issue ordinary shares, or you can attach restirction to different classes of shares.

You can give the new shareholders rights like "non-voting" or "non Yeilding shares" etc. one should consider the value of the business and the price paid for the shares.

If the company made 1 million in profits and had assets worth 3 Million, 2 issued shares of £1 each then you would not want to sell new shares at £1.00 each. Vodafone has 0.10 Cents orinary shares and they are trading over £1.20 each.

The premium is the difference between the nominal amount and the value of the company.

You would need to speak to Nigel Regarding the taxation issues.

Raymond Kearney
Assetlink Consulting Corp Ltd
assetlink@eircom.net