Bonus Issue of Shares – A Practical Guide for UK Companies

Managing corporate finances often involves balancing shareholder expectations with long-term stability. One effective strategy available to UK companies is a bonus issue of shares.

Although issuing shares without receiving new cash may appear unusual, a bonus issue can be a strategic decision that enables your company to:

• Reward shareholders without reducing cash reserves
• Increase the number of shares in circulation and improve affordability
• Strengthen the company’s balance sheet
• Increase share capital while keeping ownership percentages unchanged

However, bonus issues must be handled carefully. Compliance with the Companies Act 2006, board approvals, shareholder resolutions, and proper filings are essential.

This guide explains how bonus issues work, their benefits and risks, and the legal requirements involved.

What Is a Bonus Issue of Shares?

Definition

A bonus issue (also known as a scrip issue or capitalisation issue) is when a company gives additional shares to existing shareholders free of charge.

Shareholders receive extra shares in proportion to the number they already hold. No payment is required from them.

How Does a Bonus Issue Work?

The Basic Process

A bonus issue typically involves:

• The board deciding to convert part of the company’s reserves into share capital
• Allocating new shares to existing shareholders proportionally
• Informing shareholders of their entitlement and the issue date

No new money enters the company. Instead, retained earnings or other reserves are capitalised into share capital.

Why Might a Company Consider a Bonus Issue?

Rewarding Shareholders

• Shareholders receive additional shares without paying for them
• It recognises loyalty and long-term investment
• It avoids using company cash for dividends

Improving Share Liquidity

• The total number of shares increases
• The price per share usually reduces proportionally
• Lower share prices may make shares more accessible to investors

Strengthening the Capital Structure

• Converts retained profits into permanent share capital
• Enhances the appearance of financial strength
• May support future borrowing or negotiations

Maintaining Control

• Shares are issued proportionally
• Ownership percentages remain unchanged
• Voting power is preserved

Signalling Confidence

• Indicates the company has sufficient reserves
• Demonstrates financial stability
• May improve investor confidence

What Are the Potential Disadvantages?

Share Price Adjustment

• The share price typically decreases to reflect the increased share count
• Some investors may misunderstand this adjustment

Administrative Burden

• Board and shareholder approvals are required
• Companies Act 2006 compliance must be ensured
• Records and registers must be updated

No Cash Injection

• The company does not receive new capital
• Retained earnings are reduced
• Fewer reserves remain available for future needs

What Are the Legal Requirements Under UK Law?

To issue bonus shares lawfully, a company must:

• Have sufficient distributable reserves
• Obtain board approval
• Obtain shareholder approval where required
• Ensure the Articles of Association permit a bonus issue
• Prepare formal resolutions and documentation
• Issue updated share certificates if applicable
• File a Statement of Capital with Companies House within one month
• Update statutory registers

Failure to follow proper procedure can invalidate the issue or create compliance risks.

How Do You Check If You Have Sufficient Reserves?

Step-by-Step Approach

• Decide the bonus ratio, for example 1 new share for every 5 existing shares
• Calculate the number of bonus shares to be issued
• Multiply that number by the nominal value per share
• Ensure retained earnings or distributable reserves cover that amount

Example:

If a company has 100,000 shares and declares a 1-for-5 bonus issue:

• 20,000 bonus shares will be issued
• If each share has a £1 nominal value
• The company must have at least £20,000 in distributable reserves

If reserves are insufficient, the bonus issue cannot proceed.

What Are the Tax Implications?

For the Company

• No corporation tax arises from issuing bonus shares
• No new income is generated

For Shareholders

• No income tax is payable when receiving bonus shares
• No immediate capital gains tax arises

Tax consequences may arise later when shares are sold.

How Does a Bonus Issue Affect Ownership and Control?

• Shares are issued proportionally
• Each shareholder’s percentage ownership remains the same
• Voting rights remain unchanged
• There is no dilution among existing shareholders

What Is the Difference Between a Bonus Issue and a Stock Split?

Although both increase the number of shares in circulation:

• A bonus issue capitalises reserves into share capital
• A stock split simply subdivides existing shares
• A stock split does not alter the company’s reserves
• A bonus issue changes the structure of the balance sheet

Can a Private Company Issue Bonus Shares?

Yes. Private companies may issue bonus shares provided:

• The Articles allow it
• Proper resolutions are passed
• Companies Act 2006 requirements are met

The process is similar to that followed by public companies, without stock exchange obligations.

How Long Does a Bonus Issue Take?

A typical timeframe is between 6 and 12 weeks, depending on complexity.

Key stages usually include:

• Initial planning and consultation
• Board approval
• Shareholder approval
• Document preparation
• Filing with Companies House
• Updating registers
• Communicating with shareholders
• Final implementation

Delays may occur if documentation is incomplete or approvals are contested.

What Documentation Is Required?

Board Resolution

Must confirm:

• The amount of reserves to be capitalised
• The bonus ratio
• The record date
• The terms of the issue

Shareholder Resolution

• Approves the proposal
• Can be passed at a general meeting or by written resolution
• Must be properly recorded

Amended Articles (If Required)

• Necessary if current Articles do not permit a bonus issue
• Must be filed at Companies House

Statement of Capital

• Filed within one month of issue
• Updates Companies House records

Updated Register of Members

• Reflects new shareholdings

New Share Certificates

• Issued if the company uses physical certificates

How Can a Solicitor Assist?

A corporate solicitor can:

• Review and amend Articles of Association
• Ensure compliance with the Companies Act 2006
• Draft board and shareholder resolutions
• Prepare and file Companies House forms
• Identify potential legal risks
• Assist in resolving shareholder disputes

Professional guidance reduces the risk of errors and regulatory breaches.

What Should You Look for in a Solicitor?

When selecting legal support, consider:

• Experience in corporate law and share restructuring
• Clear communication and practical advice
• Transparent fee structures
• Positive reputation and client feedback
• Understanding of your business objectives

Can a Bonus Issue Be Reversed?

Once implemented and recorded, a bonus issue is generally final.

Reversing it would involve retracting issued shares, which could infringe shareholder rights and create disputes.

Alternative solutions may include:

• Share buybacks
• Share consolidations
• Adjustments in future corporate actions

How Does a Bonus Issue Differ from Dividends?

• A bonus issue distributes additional shares
• A dividend distributes cash
• Dividends provide immediate income
• Bonus shares may provide long-term value instead

Can Bonus Shares Be Issued to Employees?

Yes. Companies may issue shares under employee incentive schemes such as:

• Employee Share Ownership Plans (ESOPs)
• Share Incentive Plans (SIPs)

Clear terms must be established, including:

• Eligibility criteria
• Vesting periods
• Performance conditions
• Number of shares allocated

How Zavri Law Can Support You

At Zavri Law, we provide clear, practical legal guidance for companies considering a bonus issue of shares. From reviewing your Articles to preparing resolutions and ensuring Companies House compliance, we help you complete the process efficiently and correctly.

Whether you are a private company planning internal restructuring or preparing for growth, our corporate law team can guide you through every step.

Contact Zavri Law today to discuss your situation and receive tailored support.

Disclaimer

This content is provided for general informational purposes only and does not constitute legal advice. Every company’s circumstances are different. You should seek independent legal advice before making decisions regarding a bonus issue of shares.