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Share capital, allotment and distributions — SQE1 BLP question

A worked single-best-answer question on share capital, allotment and distributions, with why each wrong option is wrong — the way SQE1 traps candidates.

Share capital, allotment and distributions

Hollins Ltd was incorporated in 2018 with the model articles and has only one class of shares, ordinary shares. The directors want to allot 200 new ordinary shares for cash to Quinn, a new investor, without first offering them to the existing shareholders. The articles have not been amended in any way relevant to the allotment of shares. The company has never passed any resolution concerning the allotment of shares.

Which shareholder resolution(s) must be passed to allow the allotment to Quinn to proceed as the directors intend?

  1. AAn ordinary resolution authorising the directors to allot the shares and an ordinary resolution disapplying pre-emption rights.
  2. BA special resolution disapplying the statutory pre-emption rights; no resolution is needed to give the directors authority to allot.
  3. CNone, because statutory pre-emption rights do not apply to an allotment to someone who is not already a member.
  4. DAn ordinary resolution under s 551 authorising the directors to allot the shares and a special resolution disapplying pre-emption rights.
  5. EA special resolution increasing the company's authorised share capital, followed by a board resolution to allot.
Show answer and reasoning
B is the best answer. In a private company with only one class of shares, the directors may allot shares of that class without members' authority unless the articles prohibit it (s 550 Companies Act 2006), so no s 551 resolution is needed. However, an allotment of equity securities for cash must first be offered to existing shareholders pro rata (s 561) unless pre-emption is disapplied, which for such a company may be done by special resolution under s 569.

Rule: Directors of a private company with one class of shares can allot under s 550 without members' authority, but a cash allotment is subject to pre-emption unless disapplied by special resolution (CA 2006 ss 550, 561, 569).

  • A Disapplication of pre-emption rights requires a special resolution, and no authority to allot is needed under s 550. (wrong rule)
  • C Statutory pre-emption rights protect existing shareholders whenever equity securities are allotted for cash, whoever the allottee is. (wrong rule)
  • D An s 551 authority is unnecessary because the directors already have power to allot under s 550. (right rule, wrong facts)
  • E Companies incorporated under the 2006 Act have no authorised share capital to increase. (wrong rule)

Source: Companies Act 2006, ss 549, 550, 551, 561, 569

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