Shares
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Author Elaine Obika
Date July 2023
INTRODUCTION
Shares occupy a central position in company law, functioning both as units of capital and as bundles of rights that shape the relationship between shareholders and the company. Understanding their legal nature, the rights they confer, and the mechanisms by which they are valued or bought back is essential to grasping the structure of corporate finance. The following two short essays outline the doctrinal foundations of shares under English law, drawing on leading cases and statutory provisions to clarify their legal character and practical significance.
THE NATURE OF SHARES
A security is a fungible, negotiable, financial instrument that holds some type of monetary value (1) and a share is a type of security. (2) In Borland’s Trustee v Steel Bros, Farwell J described a share as,’….an interest measured by a sum of money and made up of various rights contained in the contract, including the right to a sum of money of a more or less amount.’ (3)
Different rights are ascribed to different shares. Some of the rights are economic e.g., rights to dividends and pay outs upon the removal of a company. Other rights are control rights like the power to choose directors or consent to mergers.
Two classes of shares are commonly used in the UK. Ordinary shares and preference shares. The Companies Act (4) describes shares as, “of one class if the rights attached to them are in all respects uniform.”
Before the Companies Act 2006, the courts widened the definition of class rights to include rights included in the articles of association of a company to a particular shareholder and so in the case of Cumbrian Newspapers Group Ltd v. Cumberland, an investor who helped a company with capital was given in return pre-emption rights in capital increase, the sale of shares of an investor and the right to appoint a director. Twenty years later the board tried to remove the articles, but it was held that it could not be done because they were class rights that belonged to the shareholder. (5)
Possession of a share of stock in a corporation does not entitle one to an ownership interest in a companybecause shareholders own a type of security commonly called stock. Also, shareholders own the corporation not its assets. They are separate from their status as shareholders. (6)
THE VALUE OF SHARES
All shares must have a nominal value which is usually £1. (7) This value is the sum that a person has paid to become a shareholder. The nominal value of shares can change however, increasing the value increases personal liability. A company cannot sell shares at a lower price than the nominal value.
Valuing shares in a private company is harder than in a public company because its financial information is not publicly available, and they are not subject to the same meticulous accounting standards and audits as public companies. (8)
There are many methods of valuing the shares of a private company; Discounted, cash flow method, (9) Net book value method (10) and Price to Earnings multiple. (11) For private companies this may be difficult and may involve approximations and suppositions. Additionally, UK accounting methods are shrewd and encourages caution so as not to arrive at unrealistic valuations. (12)
A company can purchase its own shares in one of three ways. From distributable reserves or issuing new shares, (13) from capital (14) or £15000 or 5% of the nominal value of the fully paid share capital as at the beginning of the financial year. (15) Distributable reserves are sometimes used when a shareholder wants to leave a company and their cash needs to be returned to them. This is subject to the articles of association of the company which should be checked for restrictions. (16) The tax profits made less any dividends taken can be used by a companyto buy its own shares. If the tax profits are not enough, a buy-back of shares in instalments can be agreed upon. (17) The buyback must be approved by a resolution (ordinary) and may qualify for capital gains treatment and tax at lower rates depending on the strategy used. (18)(19)
CONCLUSION
Taken together, the nature and value of shares reveal the dual character of equity participation in a company: shares operate both as units of capital and as bundles of rights that shape governance, control, and financial entitlement. Their legal definition, the rights they confer, and the mechanisms by which they are valued or bought back all reflect the balance company law seeks to maintain between flexibility for the company and protection for shareholders and creditors. Whether through class rights entrenched in the articles, valuation methods shaped by accounting prudence, or statutory rules governing buy‑backs, the law treats shares not as abstract financial instruments but as structured legal relationships. Understanding these foundations is essential to appreciating how corporate ownership functions in practice and how the law mediates the interests of those who hold it.
REFERENCES
1.Will Kenton, Gordon Scott and Amanda Bellucco-Chatham ‘What are financial securities? Examples, Types, Regulations and Importance’ ( Investopedia 24th April 2023)
https://www.investopedia.com/terms/s/security.asp <Accessed 12th September 2023>.
2.Andreas Cahn and David C Donald Comparative company Law Texts and Cases on the Laws governing Corporations in Germany, the UK and the USA (second edition, Cambridge University Press 2018) 306.
3.Borlands Trustee v Steel Bros and Co Ltd 1901 1 Ch 279.
4. Companies Act 2006 s 629(1)
5.Cumbrian Newspapers Group Ltd v. Cumberland & Westmorland Herald Newspaper & Printing Co. Ltd [1986] BCLC 286.
6.Andreas Cahn and David C Donald Comparative company Law Texts and Cases on the Laws governing Corporations in Germany, the UK and the USA (second edition, Cambridge University Press 2018) 306.
7.Companies Act 2006 s 542(1).
8.Valentina Globuvobic ‘How to Value shares in a private Limited Company’ (Legislate 23rd September 2022) https://www.legislate.tech/post/how-to-value-shares-in-a-private-limited-company <14th September 2023>.
9. The Hut Group Ltd v Nobahar-Cookson [2014] EWHC 3842 [187].
10.ACCA Think Ahead ‘Business valuations’ (ACCA) https://www.accaglobal.com/gb/en/student/exam-support-resources/fundamentals-exams-study-resources/f9/technical-articles/business-valuations.html<Accessed 14th September 2023>.
11. Elliot v Re Planet Organic Ltd [2000] 1 BCLC 366. Jacob J chose to use the BDO figure which was slightly above the P/E figures reported in Acquisitions Monthly for private companies in the last quarter of 1998 to determine the value of the shares.
12. Valentina Globuvobic ‘How to Value shares in a private Limited Company’ (Legislate 23rd September 2022) https://www.legislate.tech/post/how-to-value-shares-in-a-private-limited-company <14th September 2023>.
13. Companies Act 2006 ss 690-708.
14.Companies Act 2006 ss 709-723.
15.Companies Act 2006 s 692 (1ZA).
16.Companies Act 2006 s 690.
17..J. Scott Slorach, Jason Ellis Business Law (twenty-eighth edition OUP 2020) 108.
18.Catherine Gannon ‘Company Buy Back of Shares’ (Gannon Solicitors) https://www.gannons.co.uk/insolvency-restructuring/share-buyback/ <Accessed 12th September 2023>.
19.GOV.UK ‘Tax when you sell shares’ (GOV.UK) https://www.gov.uk/tax-sell-shares/work-out-your-gain<Accessed 12th September 2023>.
BIBLIOGRAPHY
Primary sources
Cases
Borlands Trustee v Steel Bros and Co Ltd 1901 1 Ch 279
Cumbrian Newspapers Group Ltd v. Cumberland & Westmorland Herald Newspaper & Printing Co. Ltd [1986] BCLC 286
Elliot v Re Planet Organic Ltd [2000] 1 BCLC 366
The Hut Group Ltd v Nobahar-Cookson [2014] EWHC 3842
Legislation
Companies Act 2006
Secondary sources
ACCA Think Ahead ‘Business valuations’ (ACCA) https://www.accaglobal.com/gb/en/student/exam-support-resources/fundamentals-exams-study-resources/f9/technical-articles/business-valuations.html<Accessed 14th September 2023>
Cahn A and Donald D C Comparative company Law Texts and Cases on the Laws governing Corporations in Germany, the UK and the USA (second edition, Cambridge University Press 2018)
Gannon C, ‘Company Buy Back of Shares’ (Gannon Solicitors) https://www.gannons.co.uk/insolvency-restructuring/share-buyback/ <Accessed 12th September 2023>
Globuvobic V ‘How to Value shares in a private Limited Company’ (Legislate 23rd September 2022) https://www.legislate.tech/post/how-to-value-shares-in-a-private-limited-company <14th September 2023>
GOV.UK ‘Tax when you sell shares’ (GOV.UK) https://www.gov.uk/tax-sell-shares/work-out-your-gain <Accessed 12th September 2023>
Kenton W, Scott G and Bellucco-Chatham A ‘What are financial securities? Examples, Types, Regulations and Importance’ ( Investopedia 24th April 2023)
https://www.investopedia.com/terms/s/security.asp <Accessed 12th September 2023>
Slorach J S and Ellis J Business Law (twenty-eighth edition OUP 2020)
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