The Companies Act 2006 provides that the directors of a company may not allot relevant securities, unless they are authorised by the shareholders to do so in a general meeting, or by the articles of association of the company. There is an exception to this rule which is applicable to private companies with only one type or 'class' of shares in issue. In this case, the directors of the company do not have to get approval from the shareholders of the company.
There is no statutory limit on the amount of shares which can be allotted, but in practice, the directors' authorities to allot are limited by Investor Protection Committee (IPC) guidelines. The relevant IPC in this case is the Association of British Insurers. The main reason for these guidelines is to prevent shareholders from the dilution of their shareholdings and supplements the principle of pre-emption.
The ABI is of the opinion that general share allotment authorities which can be exercised to issue shares totalling up to one third of a company's existing share capital are acceptable. It would also consider an additional authority to allot a further third, provided that the authority specifically relates to a rights issue where all the shares are to be offered to existing shareholders (i.e. fully pre-emptive). If this additional type of authority is sought by directors, the ABI would require both the general and specific authorities to expire on the date of the companies next AGM.
The ABI guidance doesn't have any legal effect, but it is almost invariably followed. This is because the ABI reviews any proposed action by a company which might affect its members due to their shareholdings of that company and then issues advice to its members on how to vote on those actions. Its members, being most of the insurance companies operating in the UK, have shareholdings across a vast swathe of the public companies in the UK and it opines on most public company actions. Its advice is so influential, even non-members follow it.
For a discussion of pre-emption and dilution of shareholdings, see our '' section.