A rights issue is an offer of new shares to existing shareholders in proportion to what they already hold, usually at a fixed price, so that each can keep their percentage if they pay up. In a private company the directors need authority to allot under section 550 or 551 of the Companies Act 2006, and an offer of ordinary shares for cash must follow the pre emption procedure in sections 561 and 562 unless the articles exclude it. The offer must stay open for at least 14 days, the allotment must be entered in the register within two months, and form SH01 must reach Companies House within one month.

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What is a rights issue, and how is it different from other share issues?

A company can raise new share capital in three broad ways: by inviting a new investor, by offering shares to a selected few, or by offering them to every existing shareholder pro rata. The last is a rights issue. If a shareholder owns 30% of the ordinary shares, they are offered 30% of the new ones.

A rights issue differs from a bonus issue, where shares are issued free out of reserves, and from a placing, where shares go to chosen investors. Because everyone is offered the same proportion, a fully taken up rights issue leaves the ownership percentages unchanged. That is why it is the default method under the statutory pre emption rights, and why minority shareholders often insist on it.

This page deals with the mechanics. For allotments generally, see how to allot new shares.

Do the directors have authority to allot the shares?

Section 549 prevents directors allotting shares except in accordance with section 550 or 551. Which route applies depends on the share structure:

  • Section 550. Where a private company has only one class of shares, the directors may allot shares of that class unless the articles prohibit it. No shareholder resolution is needed.
  • Section 551. Otherwise the directors need authority from the articles or a resolution. The authority must state the maximum amount of shares that may be allotted and an expiry date not more than five years away. An ordinary resolution is enough, even though it amends the articles, but under section 551(9) the resolution is one to which Chapter 3 of Part 3 applies, so a copy must be filed at Companies House within 15 days under section 30.

Section 549(4) makes it an offence for a director knowingly to allot without authority, although section 549(6) says the allotment itself remains valid.

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How do the statutory pre emption rules shape the offer?

Section 561 applies to equity securities, which section 560 defines as ordinary shares or rights to subscribe for or convert into them. Ordinary shares here means any shares other than those whose dividend and capital rights are capped at a specified amount, so most growth or participating classes count. The section bites only on allotments for cash; section 565 excludes shares paid up wholly or partly otherwise than in cash.

Under section 561(1), the company must not allot equity securities to anyone unless it has first offered each ordinary shareholder, on the same or more favourable terms, a proportion as nearly as practicable equal to their share of the ordinary share capital by nominal value. Section 562 then governs how the offer is made:

  • it may be in hard copy or electronic form;
  • it must state the period for acceptance, which must be at least 14 days, running from the date the offer is sent;
  • it cannot be withdrawn before the end of that period.

Section 561(2) allows the offered shares to be allotted either to the shareholder or to anyone in whose favour they have renounced the right. That is what makes a rights issue renounceable: a shareholder who does not want to subscribe can pass the entitlement to someone else, subject to anything in the articles.

A private company does not have to use the statutory procedure. Section 567 allows its articles to exclude sections 561 and 562 generally or for particular allotments, and section 569 lets a private company with only one class of shares give its directors power, by the articles or special resolution, to allot as if section 561 did not apply or applied with modifications. Many companies replace the statutory regime with their own rights issue procedure in the articles or a shareholders’ agreement. Check both before drafting the offer.

What happens to shares nobody takes up?

Section 561(1)(b) allows the allotment once the acceptance period has expired or every shareholder has accepted or refused. Shares not taken up can then go elsewhere, but the words “same or more favourable terms” in section 561(1)(a) mean existing shareholders must have been offered terms at least as good as those given to anyone else. In practice the leftover shares should not be offered to outsiders at a lower price than the rights issue price. If the board wants to offer excess shares to members who took up their full entitlement, the offer letter should say so and explain how excess applications will be scaled back.

Is a rights issue a public offer or a financial promotion?

Section 755 prohibits a private company from offering its securities to the public. Section 756 explains that an offer is presumed to be a private concern of the person making it and the person receiving it if it is made to a person already connected with the company and, where renunciation is allowed, renunciation is only permitted in favour of another connected person. Existing members, employees and their close family are connected persons under section 756(5). A rights issue that limits renunciation to connected people therefore stays well inside the rules.

The offer letter is also an invitation to buy shares. The financial promotion restriction applies, but article 43 of the Financial Promotion Order exempts non real time and solicited real time communications by a company to its existing members and creditors about investments it issues. If renunciations to outsiders are allowed, the outsiders are not members, so a separate exemption may be needed; see raising money from friends and family: promotion rules.

What are the steps and filings?

  1. Check the constitution. Confirm the share classes, any class rights, any pre emption provisions in the articles or shareholders’ agreement, and whether section 550 or 551 authority exists.
  2. Pass any resolutions. A section 551 ordinary resolution if needed, and any special resolution to disapply or modify pre emption. File them within 15 days.
  3. Board meeting. Approve the price, the ratio, the timetable, the offer letter and the acceptance form, and minute the decision.
  4. Send the offer. Give every ordinary shareholder at least 14 days and state how to accept, pay and renounce.
  5. Allot. Once the period ends, the board allots the shares to those who accepted and paid, plus any renouncees or excess applicants.
  6. Update the register. Section 554 requires the allotment to be registered as soon as practicable and in any event within two months.
  7. Share certificates. Section 769 requires certificates to be ready within two months of allotment unless the terms of issue say otherwise.
  8. File SH01. Section 555 requires a return of allotment with a statement of capital within one month; see the SH01 return of allotment.
  9. Book the proceeds. Any amount above nominal value goes to the share premium account under section 610.

How does this look in practice?

Illustration only. A company has 1,000 ordinary £1 shares: Anna 600, Ben 300, Cara 100. It needs £20,000 and offers 1 new share for every 5 held at £100 each, making 200 new shares.

Shareholder Existing Entitlement Takes up Cost
Anna 600 120 120 £12,000
Ben 300 60 60 £6,000
Cara 100 20 0 £0

Cara declines. After the 14 day period, the board may allot her 20 shares to Anna and Ben under an excess application at £100 each, or to a third party at no less than £100. If only Anna and Ben subscribe, the company raises £18,000, of which £180 is share capital and £17,820 share premium, and Cara’s stake falls from 10% to about 8.5% (100 of 1,180 shares).

What are the tax points?

For capital gains tax, an allotment to existing holders in proportion to their holdings is a reorganisation under section 126 of the Taxation of Chargeable Gains Act 1992, so the new shares join the original holding. Section 128 treats the subscription money as consideration given for the original shares. The detail, including selling rights nil paid, is on bonus issues and rights issues: CGT base cost. Where investors want relief under the Enterprise Investment Scheme, check the scheme conditions before the shares are issued, not afterwards.

What mistakes come up most often?

  • Too short an acceptance period. Section 562 requires at least 14 days and the offer cannot be withdrawn early.
  • Offering leftovers more cheaply. Existing members must have had terms at least as favourable.
  • No allotment authority. Companies with more than one class need section 551 authority.
  • Missing the filings. SH01 within one month, resolutions within 15 days and the register within two months.
  • Ignoring the consequences. Under section 563, the company and officers who knowingly authorised a breach of sections 561 or 562 are jointly and severally liable to compensate the shareholders who should have been offered shares, with claims possible for two years after the return of allotment is filed.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.