Recently, our corporate law team have been assisting a number of clients with redenominating their share capital. Accordingly, we thought it would be useful to share some examples of the issues to consider before effecting a redenomination.
What is a redenomination of share capital?
A redenomination of share capital is to convert shares from having a fixed nominal value in one currency to having a fixed nominal value in another currency. Each share in a company limited by shares has a nominal value (also known as par value), which is its face value. The nominal value of a share is in a particular currency and is usually a low figure, such as £1.00 or £0.01, but the price paid for the share is usually higher and includes the share premium.
Why undertake a redenomination of share capital?
We have found that a lot of companies who want to redenominate their share capital do so because they have shares with nominal values in different currencies and want to align them. This is often because a company is incorporated and initially raises investment in one jurisdiction (e.g. the UK) and issues shares with a nominal value of £0.01, but then starts raising money from investors in a different jurisdiction (e.g. the US) and issues shares with a nominal value of $0.01.
Furthermore, companies may see their future predominately in one country or region and consequently want all of the references to share capital and nominal value in their group accounts and financial documents to be in the currency of that country or market.
Initial considerations before redenominating share capital
There are some issues to consider before undertaking a redenomination to ensure that the company does not fall foul of, and updates where relevant, its constitutional documents and to understand any unintended consequences of a redenomination before it is too late:
1. Variation of class rights: A redenomination of a company's share capital may be regarded as a variation of the rights attaching to the company's existing classes of shares, as the rights may specify that a redenomination of shares will amount to a variation of the class rights. If so, class consent of the holders of any class of shares will be needed to vary the rights.
2. Consents and restrictions: A company should always consider whether any other consents are required before a redenomination of shares can be effected. The company should review its articles, any shareholders' agreement and its banking facilities. Furthermore, a company's articles may restrict or prohibit a redenomination of share capital.
3. Consequences of using the expedited reduction of capital procedure: A company limited by shares that redenominates its share capital may then reduce its share capital under an expedited procedure, where the reduction is in connection with the redenomination. This is usually done to align the nominal values of all the shares.
For example, if the £0.01 shares are redenominated to $0.013 shares, after applying the relevant exchange rate, the company may want to reduce the share capital of the company in order to alter the $0.013 shares to $0.01 so they align with any existing $0.01 shares.
If the company uses this expedited reduction of capital procedure to align the nominal value of each class of shares, then the aggregate nominal value of one class of share may be proportionately less than the other classes of shares compared to the position before the redenomination.
For example, the nominal value of 100 ordinary shares could be reduced from $0.013 to $0.01 to align with the 50 preferred shares with a nominal value of $0.01 each. This would reduce the aggregate nominal value for the ordinary shares from representing 72.22% to 66.67% of the total aggregate nominal value. This can cause a couple of issues:
a. Entrepreneurs' relief: As well as needing to satisfy other requirements, an individual needs to hold 5% of the ordinary shares capital in order to qualify for capital gains entrepreneurs' relief. The reduction in share capital of shares of a particular class could unintentionally result in a shareholder's holding of ordinary shares dropping below 5% and losing the relief. Notwithstanding, we always advise that companies should take tax and accounting advice before redenominating, as there may well be other tax and/or accounting issues to consider.
b. References to nominal share capital in constitutional documents: Certain provisions in a company's articles of association or shareholders' agreement, such as voting rights or dividend rights, may be by reference to the nominal value of a share. For example, for a general meeting of the shareholders to be quorate, shareholders holding over 50% in nominal value of the issued shares are required to be in attendance. The articles or shareholders' agreement may need to be amended to refer to the number of shares in issue so as to ensure the relevant shareholders are not unfairly affected
4. Liquidation preferences and anti-dilution rights: As mentioned above, companies may have raised money in different currencies. There could, therefore, be one class of shares with preferential rights paid for in Pound Sterling and another paid for in Dollars. These preferential shares could have a liquidation preference which is by reference to how much has been paid up for such shares (including premium). If a company is going to redenominate its share capital, it would also be sensible to amend the articles so that the preference amounts are in one currency. If this happens, the company will need to agree with its shareholders what exchange rates to use. The company should use the same exchange rate for all preference amounts, otherwise one shareholder could benefit from the fluctuation in an exchange rate over another shareholder if their shares were paid for on different dates.
If relevant to the company, a similar point applies for the subscription price (i.e. price paid) for the purposes of determining when the anti-dilution rights apply.
How to effect a redenomination of share capital
The actual process of effecting a redenomination of share capital is relatively straightforward. A shareholder resolution will need be passed, the relevant exchange rate will need to be decided and a number of Companies House forms will need to be filed.
However, before undertaking this process, it is always sensible to consider the issues set out above.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.