Bonus shares – everything you need to know

Businessman holding 5 red cubes spelling the word 'BONUS' on the palm of his hand.

UK companies can carry out a bonus issue of shares to their existing shareholders without needing them to pay. There are a number of reasons why companies may decide to carry this out. This blog looks at what those reasons are, when and how bonus issues of shares can be carried out, and how Linnear CoSec can help you.

What is a ‘bonus issue of shares’?

A bonus issue of shares is a way of increasing the share capital in a company by giving additional shares to its existing shareholders free of charge. It is sometimes referred to as a ‘scrip issue’ or ‘capitalisation’. That’s because, when bonus shares are issued, a company is effectively ‘capitalising’ its undistributed reserves or profits in order to pay up the issue of its shares.

When a company issues bonus shares to shareholders, it generally does so in the same proportion to each shareholder’s existing holding. For example, a company can carry out a bonus issue of shares wherein each shareholder shall receive one bonus share for every ten shares they already hold.

That being said, it’s worth pointing out that a bonus issue doesn’t necessarily need to be awarded to all shareholders. They can be restricted to a certain class of shares if desired.

Unlike an issue of ordinary shares, shares that are created and distributed as part of a bonus issue can only be awarded to existing shareholders. Further, bonus shares must always be issued free of charge — meaning the company can’t ask shareholders to pay for the additional shares.

A bonus issue of shares differs from a rights issue insofar as the bonus shares are issued for free, being funded by accumulated profits and reserves. On the other hand, shares created through a rights issue are sold to shareholders on a voluntary basis. Whether the company has any profits or reserves is immaterial.

Why might a company issue bonus shares?

There are several key reasons a company might opt to issue bonus shares. The first of which is simply to give existing shareholders more shares. This means that if any other shareholders are brought into the company in the future, the amount that the existing shareholders are diluted by may be reduced, given there are now more shares in the company.

Another reason for carrying out a bonus issue of shares is that it is often viewed as an effective alternative to paying a dividend. Instead of paying out cash dividends to existing shareholders, companies can instead issue bonus shares as a way to build confidence.

This is common among companies that are generating irregular profits. It’s also often used by smaller companies and start-ups that want to attract new investors but don’t yet have earnings that are consistent enough to pay out regular dividends.

A bonus issue can also be used by a company that wants to increase their company’s overall share capital. This can be useful for companies for a number of reasons.

First, a private limited company has to meet a minimum share capital threshold in order to make it eligible to re-register as a public limited company. At present, to become a public limited company, a company is required to have an issued share capital of at least £50,000 (of which at least 15% of this capital needs to be paid up). Carrying out a bonus issue of shares can therefore help a company hit this threshold.

If the company is already a public limited company, then increasing the number of shares in the company can help add some liquidity – subsequently driving down the share price. This makes the company’s shares more affordable and easier for retail investors to buy and sell. In addition, more affordable shares will enable keen investors to purchase more units and reduce your overall slippage costs.

Finally, companies may choose to issue bonus shares as a way to strengthen their respective balance sheets.  If a company has excess profits, a bonus issue can ensure the position of the balance sheet is reflected accordingly rather than distributing those profits in the form of dividends.

When can a company issue bonus shares?

Under normal circumstances, a limited company can issue bonus shares whenever it has sufficient profit or cash reserves to fund the issue and is duly authorised by the company’s Articles of Association.

Because bonus shares must be given to existing shareholders free of charge, the company must fund the issue completely out-of-pocket. If a company doesn’t have enough reserves or profits, then it won’t be able to carry out a bonus issue of shares.

What is the process of issuing bonus shares?

In order to carry out a bonus issue of shares, the articles of association should be checked to ensure the company has the authority to do so.

If a private company has opted for the Model Articles of Association, then Article 23 permits bonus issues. That being said, it’s worth double-checking that no modifications have been made in this area — and to see if any specific procedure has been set out.

It’s also important to check your Articles of Association for any special pre-emption rights or other restrictions that might be in place.

Next, the company’s directors and shareholders must approve the bonus issue of shares. Again, if you’ve used the Model Articles of Association, Article 36 requires shareholders to pass an ordinary resolution in order to gain authorisation for a bonus issue of shares. Note that the normal statutory pre-emption rights do not apply here, per section 564 of the Companies Act 2006.

After this resolution has been passed and the company’s register of members has been updated to reflect the bonus issue, you’ll need to complete and file Form SH01 (Return of allotment of shares) within 30 days.

The bottom line

Bonus shares are an incredibly effective way for small companies to reward shareholders, improve their balance sheet, or achieve their share capital requirements.

Undoubtedly their biggest advantage is that they can be given to existing shareholders for free, which contrasts with both ordinary share issues and rights issues. All a company needs is excess profit or reserves and the relevant approvals to carry this out.

If you are looking to carry out a bonus issue of shares for your company or would like to discuss your company’s secretarial needs, get in touch with Linnear CoSec’s team of experts today.

About the author

Nicholas joined in 2018 to set up the Company Secretarial Department in the group’s company formation divisions. After establishing the department, he was a key stakeholder in the development of Linnear CoSec. Prior to joining the group, Nicholas worked in a variety of client-facing positions at an international provider of corporate services, caring for a diverse portfolio of companies. He is a Chartered Secretary and Governance Professional, and holds a bachelor's degree in Politics as well as a Masters in Corporate Governance.

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