A share split is when a company increases or decreases the number of shares issued in a company. Share splits may also be known as share subdivision or consolidation. Companies may choose to split shares for a number of reasons including to manage the value of the shares or to increase/decrease the number of issued shares. Share splits often take place before additional investments being made in the company.
Subdivision of Shares
When a company completes an increase in number of shares through a share split, usually through an approval of the company’s board of directors, every shareholder involved in the share split will receive additional shares. For example, in a 2-1 share split, each shareholder who has one share will receive an additional share. In total, if there are 10,000 issued shares in the company before the split, the shareholder will have 20,000 shares after the split. Such a split will reduce the value in the shares from say $1 per share to 50c a share. A company may complete a share split to reduce the value of the shares and, therefore, make them seem more affordable to investors. The overall value of the company though does not change.
Share Consolidation
The opposite of share subdivision is share consolidation (i.e. share reduction). Share subdivision is generally used by companies which have low share prices and are seeking to increase the value in the shares. For example, in a 1-2 share split, 10,000 shares at 50c each would become 5,000 shares at $1 each. Again similar to share subdivision, the overall value of the company does not change.
How to Complete a Share Split
In either a share subdivision or a share consolidation, there are a number of steps which must be taken from a legal perspective. For a proprietary limited company, this includes:
- The shareholders should sign and date a unanimous circular resolution approving the share split or hold a general meeting to pass the resolution for the share split. The resolution should specify the existing share capital (i.e. ten shares), the split calculation of the shares (i.e. each share is split into 20 shares) and the new total number of shares (i.e. 200 shares). The resolution should also specify the date of effect of the share split.
- The company will need to update the Share Register to record the share split.
- If there is amount unpaid on shares being converted, this must be divided equally among the replacement shares.
- The company will need to issue replacement Share Certificates to each shareholder and the initial ones should be destroyed.
- The shareholders must inform ASIC of the share spilt by lodging the ASIC Form 2205 “Notification of Resolutions Regarding Shares” including attachment one if applicable within 28 days of the changes to the company details (i.e. the share split). If the company fails to lodge the Form on time, late fees will apply.
Conclusion
Before completing a share split, it is best first to obtain taxation and accounting advice. You may also require legal assistance to ensure the process is completed correctly from a legal point of view. If you are considering restructuring your company and require assistance with completing the legal steps involved in the process, get in touch with us.