Capital clause

A capital clause is a section within a company’s Memorandum of Association (MoA) that details the authorized share capital of the company. It outlines the maximum amount of share capital a company can issue to its shareholders.
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Updated on Jun 4, 2024
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3 Key Takeaways

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  • Capital clause is a section in a company’s Memorandum of Association.
  • It defines the maximum share capital a company can issue.
  • The clause typically includes details about the types of shares and their nominal value.

What is a Capital Clause?

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In the United Kingdom, a capital clause is a fundamental component of a company’s Memorandum of Association (MoA), one of the key legal documents required for company incorporation. It specifies the authorized share capital, also known as the nominal capital, which is the maximum amount of capital a company is allowed to raise by issuing shares to its shareholders.

The capital clause typically includes:

  • Authorized Share Capital: The total amount of capital the company is permitted to issue.
  • Division of Shares: The number of shares the authorized capital is divided into.
  • Nominal Value: The face value of each share.
  • Types of Shares: The different classes of shares the company is authorized to issue, such as ordinary shares or preference shares.

Importance of the Capital Clause

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  • Legal Requirement: The capital clause is a mandatory requirement for the MoA under the UK Companies Act 2006.
  • Investor Information: It provides potential investors with essential information about the company’s capital structure and shareholding.
  • Company Flexibility: While the authorized share capital sets a maximum limit, the company can choose to issue fewer shares initially, providing flexibility for future fundraising.
  • Protection of Shareholders: The capital clause helps protect shareholders by ensuring that their ownership stake is not diluted without their consent.

How Capital Clauses Work

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The capital clause outlines the framework for a company’s share capital. The company cannot issue more shares than the authorized amount stated in the clause. If the company wishes to increase its authorized share capital, it must amend its MoA through a special resolution passed by its shareholders.

The division of shares and their nominal value determine the ownership structure of the company. Each share represents a unit of ownership, and shareholders’ rights and voting power are often proportional to the number of shares they hold.

Examples of Capital Clauses

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A typical capital clause might state:

“The authorized share capital of the company is £100,000 divided into 100,000 ordinary shares of £1 each.”

This indicates that the company can issue a maximum of 100,000 shares with a nominal value of £1 per share.

Real-World Application

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The capital clause is a fundamental aspect of company formation and governance in the UK. It provides a clear and transparent framework for the issuance and management of share capital, protecting the interests of both the company and its shareholders. For investors, understanding the capital clause is crucial for assessing a company’s financial structure and potential for future growth.pen_sparktunesharemore_vert


Sources & references

Arti

Arti

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Arti is a specialized AI Financial Assistant at Invezz, created to support the editorial team. He leverages both AI and the Invezz.com knowledge base, understands over 100,000 Invezz related data points, has read every piece of research, news and guidance we\'ve ever produced, and is trained to never make up new...