Understanding Share Premium in Irish Companies

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Who should read this?

This article is written for company directors and business owners who need to understand how share premium works in their company accounts.

If you're involved in company finance or making decisions about share issuance, this guide is essential reading.

Key Takeaways:

Share premium monies received from issuing shares can be used as working capital for company expenses, debts, and acquisitions, while the share premium account is a statutory record that must be maintained
The cash received from share premium appears in the top part of the balance sheet and can be used freely by directors, subject to any stated intentions during share issuance
The share premium account, located at the bottom of the balance sheet, is part of capital maintenance requirements and cannot be distributed without proper reduction procedures
When shares are issued at a premium, the cash received can be used immediately, but the share premium account remains unchanged regardless of how the money is spent
Directors should understand that reserves (including the share premium account) are distinct from cash and represent a different aspect of company finances

When your company issues shares above their nominal value, you're dealing with share premium. But there's often confusion about how this money can be used and how it should be recorded. This guide will help you understand the practical implications for your business.

Share Premiums - The Legal Framework In Ireland

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Section 71 of the Companies Act 2014, says:

Subject to ‍ sections 72, 73 and 75, any value received in respect of the allotment of a share in excess of its nominal value shall be credited to and form part of undenominated capital of the company and, for that purpose, shall be transferred to an account which shall be known, and in this Act is referred to, as the “share premium account”.

(5A) The share premium account may be applied by the company—

(a) in writing off—

(i) the preliminary expenses of the company, or

(ii) the expenses of, or the commission paid on, any issue of shares or debentures of the company,

The language used in Section 71(5A) of the Companies Act 2014 requires careful analysis from a legal interpretation perspective.

The provision states that the share premium account "may be applied" for certain specified purposes, such as writing off preliminary expenses or share issuance costs. The use of the permissive word "may" rather than prescriptive language like "shall only" or "must" is noteworthy.

This wording potentially suggests that the listed applications are not exhaustive, but rather illustrative of permitted uses.

Traditional statutory interpretation principles would indicate that if the legislature intended to limit the uses strictly to those enumerated, it could have employed more restrictive language.

However, this interpretation must be balanced against the broader context of company law principles, particularly those concerning capital maintenance and shareholder protection.

The ambiguity in the drafting has practical implications for companies and their advisors when considering novel uses of the share premium account not explicitly mentioned in the statute.

A conservative approach would be to treat the specified uses as a complete list, while a more expansive interpretation might allow for additional applications that align with the spirit and purpose of the provision. The below is our analysis, but we encourage you do do your own.

The Difference Between Share Premium Money and the Share Premium Account

When your company receives money from issuing shares at a premium, two distinct things happen. First, you receive actual cash that goes into your company's bank account. Second, you need to make accounting entries to record this transaction properly.

The cash you receive - including both the nominal value and the premium - becomes part of your company's working capital. You can use this money for any legitimate business purpose, such as:

Paying company debts
Making acquisitions
Covering operational expenses
Investing in new equipment

However, the share premium account, which appears at the bottom of your balance sheet, is different. This is a statutory record that forms part of your company's capital maintenance requirements.

You cannot distribute this to shareholders unless you follow specific legal procedures to reduce or cancel it.

Using Share Premium Money in Practice

As a director, our view is that you can use the cash received from share premium just like any other money in your business. The only restriction would be if you made specific promises about how you would use the funds when issuing the shares.

When you spend this money, the transaction affects different parts of your balance sheet:

If you buy an asset, cash decreases but your assets increase
If you pay off debt, both cash and liabilities decrease
If you pay expenses, cash decreases and your retained earnings account is reduced

The share premium account itself remains unchanged regardless of how you use the money.

Important Considerations for Directors

Remember that the share premium account is separate from the shares that created it. If you later buy back or cancel shares issued at a premium, this doesn't automatically reduce the share premium account.

You need a separate transaction to reduce or cancel the share premium account.

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