Legal foundations, financial logic, and practical implementation
Preliminary note on terminology (common‑law vocabulary)
In many common‑law systems, the standard corporate‑law terms are:
- Issue / issuance of shares (US usage; also used generally), and
- Allotment of shares (UK usage; the act of allocating/appropriating shares to a person).
It is also crucial to distinguish:
- Primary issuance: the company issues new shares (increasing issued share capital).
- Secondary transfer: an existing shareholder transfers shares to another person (no new shares; no capital raised by the company unless structured otherwise).
Your terms “attribution” and “allocation” map onto these common‑law concepts, but under common law the “free of charge” idea requires careful structuring because issuing shares is usually subject to consideration/capital rules, and directors must use the allotment power for proper corporate purposes.
I. Stock Attribution
1. Definition (adapted to common‑law practice)
Stock Attribution refers to an arrangement in which a person receives shares without paying cash to the company at the time of receipt.
Under common law, this can occur in three main ways (and it matters which one you mean, because the legal basis differs):
- A corporate distribution to existing shareholders Examples: bonus issue/capitalisation issue, stock dividend (jurisdiction‑specific terminology). Economically, this is often a reclassification within equity, not a capital raise.
- A compensatory or incentive grant Examples: restricted shares (“free shares”), RSAs/RSUs (US terminology), executive share awards. The recipient may pay no cash, but the company is typically treated as receiving services or other corporate benefit (i.e., there is consideration in a broader sense).
- A gift/transfer from an existing shareholder This is not an issuance by the company; it is a private transfer.
Your original “spirit” statement—gratitude—fits especially well with (2) and (3) (e.g., rewarding founders, early employees, key partners), but legally the structure must align with capital and fiduciary constraints.
2. The legal basis (core common‑law constraints)
a. Directors’ authority to issue/allot shares
In UK‑style common law company law, directors must not exercise the power to allot shares unless they have proper authority, subject to exceptions. The Companies Act 2006 restricts directors’ allotment power (with a specific carve‑out for employee share schemes).
This matters for attribution because “free shares” are still shares: even if no cash is paid, the legal act of allotment must be authorised.
b. Pre‑emption and shareholder protection against dilution
Where statutory pre‑emption rights apply, companies must generally offer new equity to existing ordinary shareholders pro rata before allotting to outsiders, unless rights are excluded or disapplied. The UK statutory pre‑emption framework is set out in Companies Act 2006 s.561.
Even where pre‑emption doesn’t apply (or is disapplied), the economic et governance impact—dilution and change of control—remains central, and directors must justify the issuance in the company’s interests.
c. Capital maintenance / “no discount” rules (UK example)
A classic common‑law capital maintenance constraint is that shares must not be allotted at a discount (i.e., below nominal/par value in systems that use it). In the UK, this prohibition is explicit.
That is why “free shares” as a literal gift by the company can be problematic if it implies issuing shares for less than the required minimum value. In practice, attribution is structured as:
- a bonus issue funded by reserves, or
- a share‑based compensation arrangement where the company receives services (or other benefit).
d. “Consideration” for shares: cash vs non‑cash
Under UK rules, what counts as “cash consideration” is defined broadly, and includes (among other things) cash, cheques, release of certain liabilities, and undertakings to pay cash at a future date.
This matters because:
- If a transaction is for cash, it can trigger different statutory consequences (notably around pre‑emption and procedure).
- If it is non‑cash, additional valuation and disclosure disciplines may apply—especially for public companies.
e. Additional constraints for public companies (UK example)
Common‑law systems often impose tighter rules on public companies.
UK examples include:
- Subscribers’ shares in a public company must be paid up in cash.
- A public company must not accept an undertaking to do work/perform services as payment for shares (preventing a simple “we’ll pay you in shares for future work” structure in that form).
- Non‑cash consideration for shares in a public company generally requires independent valuation and a valuer’s report provided within a specified timeframe and sent to the allottee.
Notably, the statute clarifies that capitalising reserves/profits to pay up shares allotted to members does not count as consideration for that allotment—this is one legal pathway for “bonus shares.”
f. Fiduciary duties and “proper purpose” limits
In common‑law corporate governance, issuing shares is not merely mechanical: it is a power held in a fiduciary setting.
Under the UK Companies Act, directors must:
- act within powers and only use powers for their proper purposes (s.171), and
- act in good faith to promote the success of the company for the benefit of members as a whole, with attention to fairness between members (s.172).
This is highly relevant to attribution because share issuances can be used improperly (e.g., to entrench control, punish a minority, or engineer voting outcomes). Common‑law courts scrutinise purpose and fairness when dilution appears abusive.
3. Financial notion and economic effects of attribution
a. Attribution does not necessarily “finance” the company
If the recipient pays no cash, then no cash enters the company. Economically, attribution is mainly used to:
- reward or retain talent,
- align incentives with long‑term value,
- recognise past contributions,
- restructure equity ownership (e.g., founders, partners),
- distribute value to members without cash (in some structures).
b. Dilution and value transfer
Even when no cash is involved, issuing new shares generally:
- increases the denominator of ownership (more shares outstanding),
- dilutes existing shareholders’ percentage ownership and voting power (unless pro rata),
- can transfer value if the shares are issued at a price/value that is “too low” relative to fair value.
That is why pre‑emption, valuation discipline, and fiduciary duties matter: the issuance price/terms determine whether attribution is an incentive tool or an unfair wealth transfer.
c. Accounting perspective (high‑level)
If shares are issued in exchange for services (employee equity), modern accounting frameworks treat this as a share‑based payment: the entity recognises the services received as an expense (or asset, depending on the nature of services) with a corresponding increase in equity for equity‑settled transactions. IFRS 2 explains that share‑based payment accounting applies where an entity receives goods or services in exchange for equity instruments, and requires recognition as services are received with a corresponding increase in equity (for equity‑settled awards).
II. Stock Allocation
1. Definition
Stock Allocation refers to the operation by which a company allocates (allots/issues) existing or newly issued shares for consideration to one or more persons.
The consideration can be:
- cash (subscription money),
- non‑cash (property, IP, debt conversion, release of liabilities, business assets), or
- in some jurisdictions, broader “corporate benefit.”
The spirit of allocation, as you noted, is often incentive + performance (e.g., allocating shares to a contractor for deliverables, or to executives under performance conditions), but in finance it is also fundamentally a capital formation et risk‑sharing mechanism.
2. Legal basis (common‑law corporate law approach)
a. UK‑style statutory architecture (selected anchors)
- Authority to allot: directors’ power is controlled and may require shareholder authorisation, with exceptions such as employee share schemes.
- Pre‑emption: new equity generally must be offered to existing ordinary shareholders first unless disapplied.
- No discount: shares must not be allotted at a discount.
- Cash consideration definition (important for classification):
- Public company rules: cash‑only or independent valuation regimes for certain payments, including independent valuation requirements for non‑cash consideration.
- Mandatory filings: in the UK, after an allotment, a limited company must deliver a return of allotment to the registrar within one month.
These constraints govern not only “fundraising rounds” but also strategic allotments (M&A consideration shares, debt conversions, equity issued to consultants, etc.).
b. Delaware (US) corporate law as a common‑law reference point
Delaware is influential in corporate structuring. Delaware law provides broad flexibility on what constitutes lawful consideration.
DGCL §152 states, in substance, that the board determines the form/manner of payment, and may authorise stock to be issued for consideration consisting of cash, tangible or intangible property, or any benefit to the corporation, and may issue in one or more transactions pursuant to board resolutions (with delegation permitted if the resolution sets limits like maximum shares, time period, and minimum consideration).
DGCL §153 adds important minimum‑value logic where par value exists:
- shares with par value must be issued for consideration not less than par value (as determined under §152),
- shares without par value may be issued for consideration determined under §152, and
- treasury shares may be disposed of for consideration greater/less/equal to par value.
This Delaware approach aligns with the financial reality that consideration can be non‑cash and that corporate “benefit” can be broader than immediate cash, but it still demands proper board process and compliance with any par value/minimum consideration rules.
3. Financial notions: why allocation is “financing,” not only a contract
Stock allocation is a financing instrument because it:
- increases the company’s equity base (or re‑mobilises treasury shares),
- shifts risk from creditors to shareholders,
- often improves leverage ratios and solvency optics,
- can fund growth without fixed repayment obligations,
- changes governance (votes, board dynamics, protective provisions).
Key financial mechanics include:
a. Valuation and pricing
The price/valuation used in an allocation is not just a commercial term—it determines:
- dilution per existing share,
- implied enterprise value,
- investor return profile,
- option pool sizing,
- future anti‑dilution adjustments (for preferred shares).
b. Share classes and capital structure
Allocations frequently involve:
- ordinary/common shares (residual risk/return),
- preferred shares (liquidation preference, protective provisions, conversion),
- convertibles and warrants (future allocations upon conversion/exercise).
These terms are governance tools as much as financial tools.
c. “Cash vs non‑cash” and balance sheet impact
Cash allocations increase cash and equity. Non‑cash allocations may increase assets (e.g., IP) or reduce liabilities (e.g., debt conversion), changing leverage and potentially affecting covenants or financial reporting.
III. Mode of Attribution or Allocation
1. Primary issuance (allotment/issuance of new shares)
This is the classic “company issues shares” mechanism.
Typical steps and documents (common‑law practice):
- Check constitutional authority (articles/charter) and statutory power.
- Board approval (and, where required, shareholder approval/authorisation). In the UK this ties directly to the directors’ allotment authority framework.
- Address pre‑emption rights (offer to existing shareholders or valid disapplication/exclusion).
- Set the consideration (cash or non‑cash) and ensure it is legally sufficient (including “no discount” constraints where relevant).
- Execute subscription/investment documents (subscription agreement, shareholders’ agreement, disclosures).
- Update corporate records (register of members/stock ledger, cap table).
- Make required filings (e.g., UK return of allotment within one month).
Where the shares are “attributed” to employees: many legal systems provide specific carve‑outs or procedural simplifications for employee share schemes. UK law explicitly recognises employee share scheme allotments within the allotment‑authority framework.
2. Bonus issue / capitalisation issue (shares issued “for free” to existing members)
This is the mode that most closely matches “free shares” in a corporate distribution sense.
Economically, a bonus issue typically:
- does not raise new funds,
- converts reserves/profits into share capital (within equity),
- increases the number of shares, often proportionally, leaving percentage ownership unchanged.
The UK public‑company valuation rules for non‑cash consideration also clarify that paying up shares out of reserves/profits to members does not count as consideration for the allotment (which is consistent with the bonus issue concept).
3. Allocation for cash: subscriptions, private placements, rights issues
This is the standard capital raise.
Common‑law financing patterns include:
- seed/venture rounds (private placements),
- rights issues (existing shareholders are offered shares first—aligned with pre‑emption logic),
- strategic placements.
In UK statutory terms, pre‑emption is a central default protection for existing ordinary shareholders when equity is being allotted.
4. Allocation for non‑cash consideration (contributions in kind)
Examples:
- issuance to acquire IP or assets,
- issuance to buy another company (share‑for‑share),
- debt‑to‑equity conversions (shares issued in exchange for release of a liquidated debt can be treated as “cash consideration” in certain statutory contexts).
For UK public companies, non‑cash consideration often triggers independent valuation/report requirements.
For Delaware corporations, lawful consideration can include tangible/intangible property or “any benefit to the corporation,” as determined through board process.
5. Share‑based compensation (employee/executive attribution or allocation)
Typical instruments:
- restricted shares / RSAs (often “attribution” from the employee’s cash perspective),
- options,
- RSUs (promise to deliver shares in the future),
- performance shares.
Securities law overlay (US example)
In the US, issuing shares/options as compensation implicates federal securities registration rules unless an exemption applies.
Rule 701 is a major exemption for compensatory issuances by private companies:
- It exempts certain sales of securities made to compensate employees, consultants, and advisors, and it is not available to Exchange Act reporting companies.
- The regulation emphasises its purpose: it is for compensatory circumstances and cannot be used as a disguised capital‑raising scheme; it also notes resale limitations (Rule 701 securities are treated as restricted).
Tax overlay (US example)
If stock is transferred in connection with services, US tax rules may apply (e.g., IRC §83). §83(b) allows a service provider to elect to include income at transfer based on fair market value (subject to conditions), rather than later upon vesting. (Implementation is technical and timing‑sensitive; in practice people take specialist advice.)
Accounting overlay
As noted above, IFRS 2 governs many share‑based payment transactions, requiring recognition of services received with corresponding equity or liability recognition depending on settlement.
6. Treasury shares and re‑issuance
Some jurisdictions permit companies to hold treasury shares (previously issued and later reacquired). These can sometimes be re‑sold or re‑issued under different constraints than newly issued shares.
Delaware law explicitly addresses disposal of treasury shares and allows disposal for consideration greater/less/equal to par value (if any), and the consideration can be cash, property, or any benefit to the corporation.
IV. Strategic role in finance and governance (why companies use attribution/allocation)
1. Financing and capital formation
Share allocation:
- raises growth capital without immediate repayment obligations,
- can strengthen solvency and reduce leverage,
- often supports acquisitions and restructuring.
2. Incentives, retention, and alignment
Attribution (especially employee equity):
- aligns employees/executives with enterprise value creation,
- can reduce cash compensation pressure,
- introduces vesting/forfeiture mechanics to retain talent and manage performance risk.
3. Governance engineering (control, voting, and protections)
Share issuances change:
- voting power,
- board influence,
- quorum dynamics,
- takeover vulnerability,
- minority protections.
That is why, under common law, fiduciary duties and proper purpose constraints are not decorative—share issuance is one of the most powerful “control levers” directors possess. UK law codifies the duty to use powers for proper purposes and to act in good faith for the company’s success and fairness between members.
V. Risk areas and dispute patterns (common‑law focus)
Even when the paperwork looks correct, stock attribution/allocation can generate disputes in predictable places:
- Dilution claims: allegations that shares were issued too cheaply or for improper reasons.
- Authority defects: lack of proper board/shareholder authority to allot.
- Pre‑emption challenges: failure to respect statutory or contractual pre‑emption.
- Consideration and valuation: especially non‑cash consideration and public company valuation/report duties.
- Filing/record defects: failure to file required returns of allotment (UK example: one‑month deadline).
- Tax surprises: employment tax on equity awards, timing issues (e.g., vesting).
- Securities compliance: ensuring exemptions exist (Rule 701’s compensatory purpose and restrictions).
VI. Practical drafting and documentation (what the “mode” usually requires)
To make attribution/allocation robust under common‑law expectations, companies typically document:
- Corporate approvals: board minutes/resolutions; shareholder resolutions where needed.
- Cap table / register updates: stock ledger/register of members.
- Consideration documentation: subscription funds; assignment agreements; debt release; valuation materials.
- Investor documents (for fundraising): subscription agreement, shareholders’ agreement, disclosure letter.
- Employee equity documents: equity incentive plan, grant notice, vesting schedule, leaver provisions, IP assignment.
- Regulatory filings: (UK) return of allotment within one month; plus any other jurisdiction‑specific filings.
Conclusion
Under common law, Stock Attribution et Stock Allocation are not merely “ways to give shares.” They are legally constrained exercises of corporate power with major financial consequences:
- They reshape ownership, voting, and control.
- They allocate value and risk among founders, investors, employees, and other stakeholders.
- They must respect authority, pre‑emption, consideration/capital rules, filings, and—critically—fiduciary duties and proper purpose.
- In the US context, equity compensation also interacts with securities exemptions such as Rule 701 and with tax rules like IRC §83.
