What allotment of shares means
An allotment creates shares that did not exist before and gives them to somebody.
That is the essential difference from a transfer. In a transfer, existing shares change hands and the money goes to the seller. In an allotment, the company issues new shares and the money goes to the company.
Because the total number of shares increases, every existing shareholder's percentage falls even though the number of shares they hold is unchanged. A founder with sixty shares out of one hundred owns sixty percent. After the company issues fifty new shares to an investor, that founder still holds sixty shares, but now out of one hundred and fifty, so forty percent.
That is dilution, and it is not a problem in itself. The founder now owns a smaller share of a company that has more money in it. It becomes a problem when nobody modelled it before signing.
How it is used
Allotment is how a company raises equity capital.
At incorporation, shares are allotted to the initial subscribers. Afterwards, new shares are allotted when an investor comes in, when a co-founder joins, when an employee share scheme vests, or when a convertible instrument converts.
The process runs through the board and the register. The directors must have authority to allot, which comes from the articles or from a shareholders resolution. Pre-emption rights are checked, because articles and shareholders agreements commonly require new shares to be offered to existing shareholders first. The board passes a resolution allotting the shares, the allottee is entered in the register of members, a share certificate is issued, and a return of allotment is filed at the CAC.
That filing deadline is short, measured in days rather than months, so it is easy to miss and worth diarising when the resolution is passed.
Key features
- Creates new shares, increasing the total in issue
- Consideration is paid to the company, not to a shareholder
- Dilutes existing shareholders proportionately
- Requires the directors to have authority to allot
- Usually subject to pre-emption rights in the articles or shareholders agreement
- A return of allotment must be filed at the CAC within a short statutory period
How this works in Nigeria
CAMA 2020 changed the underlying framework. The old concept of authorised share capital was replaced with a minimum issued share capital, and companies are now required to have their shares fully issued rather than holding a large unissued reserve. In practice this means increasing share capital involves a filing and a fee rather than simply drawing down on a previously authorised figure.
Shares may be allotted for cash or for consideration other than cash, such as assets or services, and where the consideration is not cash the value must be properly accounted for rather than assumed.
Founders should also understand what happens on a Nigerian cap table when convertible instruments are used. Money taken in on a convertible note or a simple agreement for future equity does not dilute anybody on the day it arrives. It dilutes at conversion, often at a discount, and founders who did not model that are surprised by how much of the company they gave away.
Beneficial ownership disclosure obligations under CAMA 2020 also mean allotments to nominees are more visible than they used to be.
Allotment vs transfer vs bonus issue
Three ways the shareholder register changes, with different consequences for money and ownership.
An allotment issues new shares. The company receives the consideration, the share count rises, and existing holders are diluted. This is how a company raises capital.
A transfer moves existing shares. The selling shareholder receives the money, the share count is unchanged, and nobody is diluted. This is how a shareholder exits.
A bonus issue creates new shares but nobody pays for them. They are issued to existing shareholders in proportion to what they already hold, out of reserves. Everybody's percentage stays the same, they just hold more shares each.
If you are the founder and an investor is coming in, ask whether they want the company funded or want to buy you out. The first is an allotment. The second is a transfer. Only one of them puts money in the business.
Limits and risks
Dilution is permanent and it compounds. Each round of allotment reduces existing percentages, and founders who did not plan for successive rounds can find themselves holding a minority position in the company they built.
Pre-emption rights can also block or slow an allotment, since existing shareholders may have to be offered the shares first and given time to respond.
Directors need authority, and an allotment made without it can be challenged.
And the paperwork is where Nigerian companies fail most often. Money is received, shares are promised, and the resolution, the register entry, the certificate and the CAC filing never happen. The investor then believes they own something the company's records do not show, and it surfaces during the next round of due diligence.
Worth knowing
Model the cap table before agreeing an investment, including anything convertible that is already outstanding. Founders who look only at the percentage being sold in this round, and forget the note from last year that converts at a discount, routinely end up with far less than they expected.
Questions people ask
What is allotment of shares?
It is the company issuing new shares to somebody. The consideration is paid to the company, the total number of shares in issue increases, and existing shareholders are diluted proportionately.
What is the difference between allotment and transfer of shares?
An allotment creates new shares and the money goes to the company. A transfer moves existing shares from one holder to another and the money goes to the seller. Only an allotment dilutes existing shareholders.
What is dilution?
The reduction in an existing shareholder's percentage when new shares are issued. The number of shares they hold does not change, but the total in issue rises, so their proportion of the company falls.
Do I have to offer new shares to existing shareholders first?
Usually yes. Articles and shareholders agreements commonly contain pre-emption rights requiring new shares to be offered to existing holders before outsiders. Check both documents before agreeing an allotment.
What must be filed with the CAC after an allotment?
A return of allotment, within the short statutory period CAMA prescribes. The company should also pass the board resolution, enter the allottee in the register of members and issue a share certificate.
Can shares be allotted for something other than cash?
Yes, for assets or services, for example. Where consideration is not cash, the value has to be properly determined and recorded rather than assumed, because it affects the company's accounts and the position of other shareholders.