KembaraXtra - Legal Terms - Share Premium

A share premium is the amount by which the issue price of a company’s shares exceeds their nominal (or par) value. For example, if a company issues a share with a nominal value of £1 for £6, the additional £5 constitutes the share premium. The premium does not represent profit earned from trading but rather additional capital contributed by investors in excess of the share’s stated nominal value. Share premiums commonly arise when successful companies issue new shares at market prices significantly above their nominal values.

Company law requires share premiums to be credited to a separate accounting fund known as the share premium account. This account forms part of the company’s capital structure and is subject to statutory rules designed to protect creditors. Because the share premium represents capital invested by shareholders rather than distributable profits, it cannot ordinarily be distributed as dividends. The maintenance of a separate share premium account helps preserve the company’s financial stability and prevents the erosion of capital available to satisfy creditors’ claims.

The legal treatment of the share premium account closely resembles that of the company’s share capital. It is subject to the rules governing reduction of capital, meaning that the funds cannot simply be withdrawn or distributed at the directors’ discretion. Any reduction generally requires compliance with statutory procedures designed to protect creditors and shareholders. These capital maintenance rules ensure that companies do not improperly return invested capital while leaving creditors inadequately protected.

Although the funds within the share premium account are restricted, company law permits their use for certain specified purposes. One common use is the issue of bonus shares, whereby the company capitalizes part of the share premium account and issues additional fully paid shares to existing shareholders without requiring any further payment. The account may also be used in certain circumstances to write off preliminary expenses, commissions, or discounts relating to the issue of shares, subject to statutory limitations.

The existence of a share premium account reflects an important distinction between capital and profit. While trading profits may generally be distributed as dividends subject to company law restrictions, capital contributions from shareholders are treated differently because they represent the financial foundation upon which creditors rely. Accordingly, the law imposes stricter controls over the use of share premiums than over retained earnings or distributable reserves.

In practice, share premiums are especially common when established companies seek additional investment. As investor confidence increases and the market value of a company’s shares rises, newly issued shares are often sold at prices substantially exceeding their nominal values. The resulting share premium strengthens the company’s capital base while providing additional funds for expansion, acquisitions, research, debt reduction, or other corporate purposes without increasing the company’s borrowing.