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The share issue: Implementation and the main pitfalls

By Niklas Virtanen
Published: 19.04.2023 | Posted in Insights

What is a share issue, and how is it decided?

A share issue is an effective way for a public limited company to raise capital by selling either existing or new shares to the public, employees, or a group of investors. A share issue can be either an issue in accordance with existing shareholders’ pre-emptive right to subscribe or a directed share issue. In addition, a share issue may take the form of a so-called public or offer issue, which is not addressed here. The share issue may involve the issue of shares against payment, or the shares may be issued free of charge.

In a pre-emptive right share issue, existing shareholders of the company are given priority to subscribe for new shares in proportion to their current shareholdings. In a directed issue, this subscription right is waived, and a specially defined group is entitled to subscribe for shares in the company.

The implementation of the share issue requires proper decision-making at the General Meeting and, in some situations, an amendment to the Articles of Association. The terms and conditions of the share issue must be set out in a prospectus, including, inter alia, the maximum number of shares to be subscribed to, the price, any special rights or liabilities attached to the share, and the subscription period.

Investor protection considerations are inherent to the share issue. The terms and conditions of the share issue must contain sufficient information to support investors’ decision-making. After the share issue, the new shareholders will have the same rights and obligations as the existing shareholders, unless the company has different series of shares, such as A and B shares or other shares separated by the Articles of Association.

Overall, the share issue is a flexible and widely used instrument for the growth and development of a company, but it must be carried out in accordance with the Finnish Companies Act, the Articles of Association, and with due care.

Directed share issue

A directed share issue is a form of share issue by a limited company in which shares are sold to a selected group of investors without subscription rights. A directed issue requires a precise definition of the terms of the issue, as it is an exception to the general rule. It is therefore advisable to use the services of a lawyer or other expert in the planning and implementation of the share issue. A directed share issue is very common in practice.

In principle, the process of a share issue starts with a General Meeting or a unanimous decision of the shareholders. The General Meeting must decide on the share issue and its terms or authorise the board of directors to decide on it, and, if necessary, approve amendments to the Articles of Association. A directed share issue, or the authorisation of the board of directors to decide on such an issue, must be made by a qualified majority. If the share issue is a directed share issue, this must already be expressly mentioned in the notice of the General Meeting. This reflects the exceptional nature of a directed share issue and the importance of the principle of equality among shareholders.

The terms of the share issue must respect the principle of equality, which means that all investors must be treated equally. In addition, a directed share issue must meet the requirements of company law, such as the purpose of the funds and the legal basis for the issue. Under the Companies Act, a directed share issue is possible if there is a weighty financial reason for the company to do so. When assessing the admissibility of a directed issue, particular attention must therefore be paid to the relationship between the subscription price and the fair price of the share. Furthermore, the directed share issue should improve the company’s financial situation and business conditions and, in practice, increase the company’s chances of success in the market, at least in the long term.

The implementation of the share issue must not lead the company into a financial situation that would jeopardise the company’s ability to continue as a going concern. In practice, a directed share issue may be free of charge only if there are particularly weighty financial reasons from the company’s perspective and considering the interests of all shareholders. The existence of a serious or particularly serious economic reason is always assessed on a case-by-case basis from the company’s point of view and depending on the timing of the share issue.

In practice, the prevention of changes in ownership resulting from share transactions or the protection of the majority position of certain shareholders cannot be regarded as an weighty financial reason. In particular, situations where the subscribers include significant shareholders or their close associates may give rise to doubts about the existence of serious economic reasons.

In addition, share issues in which the ownership of existing shareholders participating in the issue remains unchanged despite the reorientation cannot, in principle, be considered acceptable.

In other words, a directed share issue is an important form of financing and commitment for companies, but it must be carried out with care.

Objectives and benefits of the share issue

The main objective of a directed share issue is usually to secure the company’s financing or, for example, to retain staff. A share issue can provide the company with additional funds to finance acquisitions, investments, or growth, for example.

Another objective may be to attract new shareholders to the company. Through a directed share issue, a company can attract strategically important investors, such as large institutional investors or other companies, who can bring new skills, development ideas, and networks to the company.

A directed share issue can also help a company strengthen its position in the market. The share issue or the proceeds can be used to expand the company’s activities and take on new market shares. At the same time, it can strengthen its own position vis-à-vis its competitors.

Commonly accepted reasons include strengthening the company’s capital structure, securing cheap financing, safeguarding operating conditions, engaging new key personnel, and implementing the company’s strategy. For example, in times of economic instability, it may be impossible for a company to obtain sufficient and necessary financing from its shareholders or external financing at a low cost without a directed share issue. A successful share issue and thus “low-cost” financing may even help a company avoid bankruptcy.

The advantage of a share issue is that the company receives funds that are equity and therefore cheaper than debt financing. In addition, a directed share issue can be a quicker and easier way to raise funds than, for example, applying for a loan. The subscribers of the shares do not have to pay transfer tax on the issue of new shares in the company.

A directed share issue can also be a challenging and partly complex process, with strict legal requirements and investor protection concerns. Additionally, the implementation of a share issue may affect the company’s Articles of Association, ownership structure, capital structure and potentially lead to changes in control.

In summary, a directed share issue is one way of raising funds for the company and attracting new shareholders. The share issue and its implementation require compliance with several provisions of the Companies Act. It is advisable to make use of the expertise of a lawyer or other expert. I would also recommend noting that a company cannot simply sell its own shares out of hand; instead, this must also be done through a share issue.

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Ota yhteyttä


Niklas Virtanen
Associate, Helsinki +358 40 079 6155

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