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A share split allows your company to increase the number of shares it has without affecting its overall value. You will need to undergo a share split if you intend for your company to use a specific percentage of the company’s shares, like when:

  • raising equity capital;
  • making offers under an ESOP; or
  • transferring shares.

This article will explain what a share split is and when you will need to undertake this process.

What is a Share Split?

A share split is a way of increasing the number of shares in a company without issuing new shares. Also known as a share division, this process involves taking the company’s existing number of shares and splitting them to create a larger number of shares without changing the company’s underlying share capital.

For example, if you have 50 shares on issue at $1 per share, your total share capital is $50 (50 x $1 = $50). 

If you split each share by 100, this will result in 5,000 shares at $0.01 each, and your total share capital is still $50 ( 5,000 x $0.01 = $50).

Why Is a Share Split Needed?

You will need to increase the number of shares in a company through a share split when you intend to transact with a specific percentage of a company’s shares. Because you cannot transact with fractions of shares, having a small number of shares limits what you can offer.

For example, if your company only has two shares on issue, you can only sell one share (50% of the company), or two shares (100% of the company). 

If you promised to sell, for example, 25% of the company to a third party, this is not possible. However, if you split the two shares to 2,000 shares, you would then be able to sell 500 shares (which is 25% of the company).

Before Raising Capital

It is common that startups will undertake a share split before raising equity capital. When you are raising equity capital, your company will typically issue investors with a minority percentage of the company. As such, you will need to ensure that your company has enough shares prior to the capital raise. This way, it can issue shares equivalent to the minority percentages that you have agreed to.

For example, if you are undertaking an equity round with five investors and issuing shares equivalent to 20% of the company in total, each investor will only receive around 4% of the company. You need to ensure that your company has enough shares prior to raising capital that you can issue a certain number of shares to each investor that will be equivalent to around 4%.

If you had ten shares in the company to begin with, this would not be possible, so a share split would be required.

Before ESOP

Your company may also require a share split prior to making offers under its Employee Share Option Plan (‘ESOP’). ESOPs are a common way for startups to issue equity to their employees to incentivise them and to align their interests with those of the company. Under an ESOP, you will grant an employee with a certain number of options. These options may exercise into shares in the company once the employee has met the ‘vesting conditions’ which attach to their options.

When you make an offer under an ESOP to an employee, you will need to determine the number of options you will grant to that employee in their offer letter. The number of options granted (which is equivalent to the number of shares they will receive when they exercise their options) will likely equal a minority percentage of the company. 

As such, you need to ensure that your company has enough shares that it can offer a certain number of options which are equivalent to a minority percentage of the company. If your company has a small number of shares and is unable to issue small percentages to employees, you will need to undertake a share split prior to making any ESOP offers.

Prior to Share Transfer

Another situation when your company may require a share split is prior to transferring the company’s shares. Shares are transferred when a shareholder agrees to sell some or all of their shares to another party. As part of a share sale transaction, your company will need to transfer the seller’s shares to the purchaser.

If the seller and purchaser have agreed to a particular percentage of the company being transferred, then your need to ensure that you have enough shares to facilitate this transfer. 

If your company has a small number of shares and the seller is unable to transfer shares equivalent to the agreed percentage, your company will need to undertake a share split prior to the share transfer.

How Do I Split My Shares?

To undertake a share split, you need to take the following steps:

  1. gain shareholder approval – the shareholders must approve the proposed share split by either signing a unanimous circular resolution or attending a shareholder meeting and passing a resolution for the share split;
  2. update the Members Registeryou will need to update the company’s Members Register to record that a split has occurred;
  3. issue new share certificatesyou will need to issue the shareholders with replacement share certificates as the number of shares they own has now changed. You will need to destroy the original share certificates; and
  4. notify ASIC – the company must notify ASIC within 28 days of the share split that the share split has occurred. You will need to pay late fees if you fail to notify ASIC on time.

Key Takeaways

A share split will divide the existing shares in your company without affecting the company’s total share value. You will need to increase the number of shares in your company by undertaking a share split when your company is intending to transact with a specific percentage of the company’s shares, such as when it is:

  • raising equity capital;
  • making offers under an ESOP; or
  • transferring shares.

If you have any questions or would like assistance in undertaking a share split, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.

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