There are several reasons why a company may want to convert its shares to stocks. Companies sometimes convert their shares to stocks, especially if they’re going to sell those shares and use the money raised to finance other activities.
Some other reasons are the desire to have a more liquid asset on hand or simply because it is easier to trade a stock than a share certificate. In this article, we’d be discussing converting a company’s shares into stocks; why companies take this route in their development; and other details concerning the sales of shares and stocks to customers.
What is the difference between shares and stocks?
The terms “stock” and “share” are often used interchangeably. However, these two words have different meanings.
Stock is a piece of ownership in a company. If you own stock in a company, you are an owner of that company. You can sell your shares or get paid dividends on them.
When you buy stock in a company, you usually receive voting rights and an income stream from dividends. Your income stream may be steady or vary according to the company’s performance or stock market conditions.
Shares represent ownership units in a corporation that trade on public markets such as exchanges like the New York Stock Exchange (NYSE). Shares are equities, or equity securities because they represent ownership in companies instead of debt instruments like bonds.
Simply put, the stock is a security representing a company’s ownership. It can be common stock or preferred stock (or both). The main feature of stock is that it gives an investor the right to vote on corporate matters such as electing directors and approving mergers.
While shares are ownership units in a corporation, shareholders generally own stocks directly through either a direct or indirect registration system.
How to Convert a Company’s Shares into Stocks
This section presents a step-by-step guide on how to convert a company’s shares into stocks if as a founder or company executive, you have been charged with the responsibility of helping the company convert its shares into stocks.
Schedule a shareholder’s meeting to pass a resolution to initiate the conversion
The first step in converting your company’s shares to stocks is calling a meeting with all the company’s shareholders. It is not a trivial issue to want to convert your company’s shares to stock. However, it needs the cooperation and support of all the shareholders in the company.
Inform Registrar of Share to Stock Conversion
After the company has notified the shareholders about the proposed conversion, they are to inform the Registrar of the plans to convert the company’s shares to stocks. A company executive or founder in charge of the share to stock conversion should prepare a document informing the Registrar of the plan to convert the company’s shares to stocks. You should do this after the agreement between shareholders and the enactment of a resolution to initiate the conversion.
Edit the company’s Articles
For every company, some Articles decide how the company should take actions, what actions can be taken, and what steps should be followed before an action is taken. Some companies’ Articles support the conversion of shares to stocks, while others do not. Suppose in your company’s Articles; that there is no provision for the conversion of shares to stock; it is essential to edit the papers and ensure that the possibility of converting shares to stock is documented in the articles.
Begin the closure of transfer books
The next step to kick in the process of converting a company’s shares to stock is to begin the closure of transfer books. Transfer book closure refers to a time the company will no longer adjust the shareholder register or acknowledge any request for the transfer of shares.
By initiating a book closure, a company can channel its focus on the process of shares to stock conversion without adding more bodies. Since the company plans to convert its shares to stocks, there is no point in making adjustments to the current database of shareholders in the company or the transfer of shares from one shareholder to another.
Retrieve share certificates from shareholders
Companies usually issue share certificates to shareholders. These certificates prove that a person or an individual owns shares in a particular company. When it is time for the conversion of shares to stocks, the company should request that each shareholder return their shares certificate. The return of the certificate of shares is mainly for documentation purposes.
Issue stock certificates to previous shareholders
When the retrieval of share certificates is completed, the company should provide stock certificates to previous shareholders. Since the shares will be converted to stocks and all shareholders will keep equivalent stocks of their shares, the company is mandated to issue stock certificates to previous shareholders.
Transfer stocks to stockholders
To complete the conversion of shares to stocks, the company will transfer the equivalent of a company’s stocks to previous shareholders. When this is done, the company will begin to issue stocks instead of shares to intending investors.
What Happens When a Company Converts Shares to Stocks?
Some investors and employees may not understand the idea behind converting a company’s shares to stocks or what happens if the conversion is possible. It is essential to note that when a company with share capital chooses to convert part of its shares into stock and notifies the Registrar, all provisions of the Act applicable to shares will no longer apply as they apply only when there are outstanding share certificates.
For instance, a company that has completed the conversion of its shares to stocks and begins to issue stocks is exempt from the legal requirement to have directors or shareholders hold an annual general meeting (AGM) or file its financial statements with Companies House.
Why do Companies Convert Shares into Stock?
When a company converts shares into stocks, fewer shares will be available on the stock exchange. While this may not look like an advantage, there are a handful of benefits companies derive with less share availability, resulting from the conversion of shares to stocks. Some of these benefits include:
- It helps a company to create demand for its shares in the stock market
- An increase in the earning per share (EPS) of the company’s shares
- It is capable of helping the company avoid hostile takeovers
- Establish a control management system that is conducted by a limited set of people
- When the company increases demand for its shares, it equally increases the market value of its shares
- Handling stocks is easier for companies than handling shares
- Shares have a nominal value, but stocks do not, which makes the latter more advantageous than the former
- Companies can sell fractions of stocks but cannot do so with shares.
Which section of shares can be converted into stock?
It is essential to note the portion of a company’s shares that can be converted into stocks. In Section 61 of the Companies Act, 2013, a company can only convert its shares that have been fully paid up into stocks. That means only the portion of its shares that can be accounted for as regards total payments can be converted.
Another perspective on the shares section that can be converted to stocks by a company is the amount stipulated in the company’s articles. There is a possibility that in the company’s articles, a portion of shares belonging to the founders cannot be converted but transferred.
What happens to the stock price when shares are added?
If not properly managed, the disadvantages of issuing additional shares by a company can be a difficult situation. When companies issue shares to investors, it increases the number of common stocks of the company being traded in the stock market. The company’s stock price is bound to drop with that increase in the number of stocks.
The stock prices could go up a little if the company issues additional shares, but there would be an initial decline. A company’s chances of raising its stock price after issuing additional shares depend on whether they have a solid financial structure. Otherwise, it could be bad business for them and their investors.
Other impacts of issuing additional shares include decreasing a company’s earnings-per-share. A company’s earning-per-share (EPS) is its net profit divided by the number of outstanding common shares it has. It is a metric that indicates how much a company makes for each share of its stock. With additional shares, there would be a decrease in the EPS of a company.
For investors, when a company issues additional shares, it may lead to share dilution. The concept of share dilution refers to the decreasing ownership proportion of a current shareholder when a company gives additional shares. Some disadvantages of share dilution include a decrease in a shareholder’s ownership and stake in the company; increased risk of loss; reduction in earnings of stakeholders per share; removal of the shareholder’s influence in the company and voting rights; etc.
How do you reclassify shares?
Share reclassification is when a company converts shares from one class to another. Share classes exist in a company for several reasons, and the need for share reclassification is based on these same reasons. Some of the reasons why a company or founder may want to carry out share reclassification include:
- To assign a particular type of share and right to employees or co-founders
- To give voting rights and ownership stakes to shareholders
- To attract new investors
- To efficiently and seamlessly facilitate the issuing of additional shares.
For clarity, here is an analogy of how to share reclassification works. Suppose Company ABC has two co-founders, Brian and Jane. One day, Jane decides to leave the company but wants to keep her shares with the company. Brian is happy to allow her to keep her shares, but not with their powers. In the company’s articles, class B shares for shareholders will enable them to have shared without any voting or controlling power.
Brian can reclassify Jane’s shares to Class B shares, which allows her to keep her shares but not with its right. Understanding how to share reclassification works is time to see how it can be done.
To reclassify shares, a company must pass an ordinary resolution that includes the following details:
- The shareholder’s full name and the number of shares to be reclassified
- The class of shares the shareholder’s shares belonged to
- The class of shares they have been reclassified to
Once this is done and the Registrar approves the process, you will have reclassified the shareholder’s shares.
Consolidation of Shares
Consolidation of shares is another concept that relates to the process of converting shares to stock. By combining the shares and raising the face value, a firm can lower the number of outstanding shares. This is known as “share consolidation.” It is often referred to as a “reverse stock split.”
In simpler terms, a company can make more money than it needs and have too many shares. When that happens, it uses a service to combine the shares, so it only has one share for each dollar, or it might turn all its dollars into shares. This is called consolidation. Companies do this when the market is slow and there are not enough people willing to buy their shares.
Final Thoughts
Converting shares to stocks holds a lot of advantages. Companies may need to convert shares to stock to raise money for other activities, increase stock prices, change shareholders’ ownership rights, and much more.
There are dozens of reasons why a company may want to convert its shares to stocks. In this article, we have discussed the process of converting a company’s shares to stocks. We have also discussed other essential details such as the difference between shares and stock, how to reclassify, why it is crucial to convert shares to stock, and consolidation of shares, among other things.
One thought on “How Startups Can Convert Shares to Stock”