FLK1 · Multiple-choice practice

FLK1 Business Law — Question 24

Question

ABC Ltd is a private limited company engaged in retail sales. The directors decide to issue new shares to raise additional capital. They have decided to do this without obtaining approval from the existing shareholders. The articles of association require existing shareholders consent to any issue of new shares. Which of the following statements best describes the validity of the share issuance?

The share issuance is valid as long as the directors believe it is in the best interests of the company.
The share issuance is invalid because it was done without obtaining approval from the existing shareholders, as the law requires.
The share issuance is valid if the directors notify the existing shareholders within a specified time frame.
The share issuance is valid if the company’s auditors provide written confirmation of its financial health.
The share issuance is invalid because the articles of association require approval from the existing shareholders.

Answer and explanation

Correct answer: E. The share issuance is invalid because the articles of association require approval from the existing shareholders.

In a private limited company, the issuance of new shares typically requires the approval of the existing shareholders unless the company’s articles of association grant specific authority to the directors to issue shares without shareholder approval. A share issue can impact existing shareholders, as the newly issued shares will dilute their shares. However, current shareholders can opt to buy the new share issue as they have first right under sections 561 and 565 of the Companies Act 2006. These are known as statutory pre-emption rights.

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