Introduction – What is share allotment and subscription?
When the company is incorporated, the articles of association will specify the shares of each founder member. The founder members are the first shareholders of the company. More shares can be issued after incorporation. The process of a company issuing new shares is called share allotment. The act of buying these new shares from the company is called subscription.
Start-up companies require a significant amount of capital to realize their business ideas. However, many of these founders lack the financial power to fund the company (or may find it too risky to do so). Therefore, they will need help from other parties such friends, family members and outside (institutional) investors. The mode of financing a company by these parties could be:
- Equity financing (advancing payment to the company in exchange for the shares)
- Debt financing (advancing payment to the company by way of loan)
Allotment and subscription of shares is almost inevitable for most startups. The section outlines the basic idea and procedure of allotment of shares, i.e. equity financing.
- Types of share allotment
1.1 Pro rata Allotment
Pro rata allotment is an allotment whereby the existing shareholding/power distribution of the company will remain unchanged, i.e. where shares are offered to existing members proportional to members’ existing shareholdings. For example, a company may offer one new share for every ten shares held by each member.
These are offers made by the company to the members who can then choose not to take up the new shares. Offers can be renounceable. Renounceable offers are where a nominee may take up the shares if the existing member does not wish to take up the new shares and renounces the shares.
Pro rata allotment generally does not require shareholders’ approval via ordinary resolution. Board of Directors’ approval will suffice. See Corporate Governance.
1.2 Non pro rata allotment
Non pro rata allotment is an allotment whereby the existing shareholding/power distribution of the company will be changed, e.g. where shares are offered to non-members or offered non-proportional to members’ existing shareholdings.
Non pro rata allotment might dilute existing members’ percentage of shareholding in the company. Therefore, to protect existing members, prior approval by shareholders via ordinary resolution is required.  See Corporate Governance.
2. Pre-emption rights
The company’s Articles of Association and/or Shareholders’ Agreement (if any) may contain pre-emption clauses which provide pre-emption rights to existing members, whereby (a) if new shares are allotted by the company to any non-member, or (b) if existing shares are transferred by a member to any non-member, then the offer must first be made to all existing members.
The rationale is to avoid third parties from joining the company as shareholders unless with all existing members’ consent. Note that the allotment being authorised by the company is not the same as all existing members’ consent: the former means ordinary resolution, i.e. authorised by more than 50% votes of attendees in a general meeting where quorum is attained. See Corporate Governance. This means that, other things being equal, the majority shareholder may ignore the minority shareholder and unilaterally authorise the allotment. But with pre-emption rights, the minority shareholder’s consent will be required because the offer must first be made to all existing members.
For further discussion, see Shareholders’ Agreements
3. Weighted voting rights
Normally, each share carries the same voting right in general meetings. But it is possible for the company to allot shares that carry “less” or even “zero” voting rights than other shares.
The advantage of equity financing is that the company can get the money without needing to repay it back, unlike debt financing. But the cost of equity financing is the increased risk of losing control of the company because shares usually carry voting rights in general meetings. Thus, weighted voting rights is a possible way to “have both”.
For further discussion, see Share Structure & Capital
4. How to allot new shares?
- Obtain approval at a general meeting.
- The company enters into a contract with the allottee (the party that will purchase the shares). The contract will specify the terms of the allotment. The price of these shares is entirely a matter of negotiation, unless specified in the Articles.
- After the shares are allotted, the allottee shall be registered in the company’s register of members within two months.
- A return of allotment (Form NSC1) shall be filed with the Companies Registry within one month of allotment. The return of allotment shall state:
- the number of shares allotted;
- the name and address of the allottee;
- if the company’s issued share capital is increased as a result of the allotment, the amount of the increase; and
- where the shares are allotted for consideration, the amount paid for each share.
A statement of capital which complies with shall also be filed together with the return of allotment. The statement of capital must state:
- the total number of issued shares in the company;
- the amount paid up and unpaid on the total number of issued shares in the company;
- the total amount of the company’s issued share capital; and
- for each class of shares, all the above and particulars of the rights of each class of shares.
5. A share certificate shall be delivered to the shareholder, stating that:
- The capital is divided into different classes of shares, specifying the voting rights attached to each class
- The shares are non-voting (if applicable) 
6. A new subscription and shareholders’ agreement will be issued to regulate the relationship between the existing and new shareholders. (Click here to know more about shareholders’ agreement)
|Checklist – You should: |
Understand what is and why you may need to know about share allotment and subscription
Understand that there are 2 types of allotment offers
Understand pre-emption rights as a tool of protection
Understand the basic procedures of allotment by a company
 ss.140-141 Companies Ordinance Cap.622
 s.143 Companies Ordinance Cap. 622
 s.142 Companies Ordinance Cap. 622
 s.201 Companies Ordinance Cap. 622
 s.144 Companies Ordinance Cap. 622
 s. 179 Companies Ordinance Cap. 622
 hyperlink to the Article “Shareholders’ Agreement”