The issuance of bonus shares, commonly referred to as a “stock dividend” in other jurisdictions, is a way for companies to reward their shareholders without necessarily distributing cash. Instead, companies reallocate undistributed profits from their reserves to issue new shares to existing shareholders in proportion to their current shareholding. While this doesn’t change the total value of a shareholder’s investment, it increases the number of shares they hold. This process is common in the UK and can be a means to preserve company cash, signal financial health, or adjust share prices. Here are the general steps involved in the issuance of bonus shares for UK companies:
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1. Checking the Company’s Articles of Association
The first step involves confirming if the company’s Articles of Association permit the issue of bonus shares. If the Articles do not contain such a provision, they may need to be amended, which typically requires a special resolution from the shareholders.
2. Board Meeting
The directors will convene a board meeting to discuss and propose the issuance of bonus shares. Here, the amount to be capitalized from the reserves and the rate of bonus shares (like 1:5, which would mean one bonus share for every five held) will be decided.
3. Reserve Identification
For the issuance of bonus shares, undistributed profits or other reserves are capitalized. The company must identify which reserve – free reserves, securities premium, or capital redemption reserve – will be used. These reserves should be freely available and not committed for any other obligation.
4. Drafting the Resolution
Once the board agrees on the issuance of bonus shares, a resolution is drafted for the shareholders’ approval. This resolution will typically outline the rationale, the identified reserves, the proposed ratio of bonus shares, and other relevant details.
5. Convening a General Meeting
A general meeting of the shareholders is then called. Notice of this meeting must be given as per the stipulated time frame and should contain the date, time, place, and agenda. This provides shareholders with the opportunity to discuss and vote on the proposed bonus issue.
6. Shareholders’ Approval
At the general meeting, shareholders will discuss the proposal. For the issuance of bonus shares to proceed, it needs to be approved by the requisite majority.
7. Adjusting the Reserves
After shareholder approval, the necessary amount is capitalized from the identified reserves. For instance, if the company decided to use its free reserves, the accounting books would reflect a reduction in free reserves and a corresponding increase in the share capital account.
8. Issue of Bonus Shares
Once the reserves are adjusted, bonus shares are issued to the shareholders in the ratio that was approved. These shares are credited to the demat accounts of the shareholders or share certificates are issued if they hold physical shares.
9. Compliance with Regulatory Bodies
Companies in the UK are mandated to notify regulatory bodies about the bonus issue. The Companies House must be informed by filing the appropriate forms detailing the increase in share capital. If the company is publicly traded, the UK Listing Authority and the stock exchange should also be informed.
10. Update Statutory Registers
The company’s statutory registers, particularly the Register of Members, must be updated to reflect the new shareholdings post the issuance of bonus shares.
11. Communication to Shareholders
It’s a good practice, and sometimes a requirement, to send a formal communication to shareholders notifying them of the bonus shares credited to their accounts. This can be in the form of a letter or electronic notification depending on the company’s usual mode of communication.
Issuing bonus shares is a strategic move for many UK companies, as it can be a way to reward shareholders without depleting cash resources. While the overall value of the company doesn’t change, shareholders can benefit from potential future earnings and appreciate the gesture of goodwill. However, it’s crucial for companies to ensure they adhere to all the requisite legal and procedural steps, ensuring transparency and upholding shareholder trust.