A warrant gets exercised when the holder gives the company formal notice before the expiry date, pays the strike price for the number of shares covered, and the company then allots and issues the new shares and updates its register. That sequence sounds simple written out in one sentence, and it is exactly the part most warrant agreements leave under-specified, because the drafting happens years before anyone actually walks through the steps. This article covers the mechanics of exercise itself, not what the agreement should generally contain, which our warrant agreement template guide already sets out. Specialist review is recommended before you rely on any warrant, and this article says so throughout rather than once.
The strike price and why it is fixed years in advance
The strike price is the amount the holder pays per share on exercise, fixed at the point the warrant is issued rather than at the point it is exercised. That is the entire mechanism of a warrant. The company and the holder agree today what a share will cost tomorrow, regardless of what the company is actually worth by the time the holder exercises. If the company has grown substantially, the strike price can look like a bargain. If it has not, the holder may simply let the warrant lapse rather than pay more than the shares are currently worth.
Because the price is fixed so far in advance, the agreement needs to say plainly whether the strike price ever adjusts, and under what circumstances. That is the anti-dilution question, covered in full in our companion piece on what happens to a warrant when you raise the next round. The strike price itself does not move on exercise. Only the anti-dilution mechanics, agreed at issue, can adjust it beforehand.
The exercise window and giving notice
The exercise window is the period during which the holder can actually use the warrant, opening either immediately or after a vesting-style delay, and closing on the expiry date. A warrant not exercised before expiry simply lapses, with no residual value and no automatic extension, unless the agreement says otherwise.
To exercise, the holder gives the company formal written notice, in the form the agreement specifies, stating how many of the covered shares they are exercising for. Some agreements require a set number of days' notice before the shares are actually issued. Others treat the notice itself as triggering an immediate obligation to issue, subject to payment. Read your specific agreement for the exact mechanism, because assuming a generic process here is exactly where warrants go wrong.
Exercise mechanics at a glance
| Step | What happens | Where it can go wrong |
|---|---|---|
| Notice | Holder gives written notice before expiry, stating the number of shares | Vague notice requirements leave both sides unsure the exercise has actually started |
| Payment | Holder pays the strike price by the method the agreement specifies | No stated payment method or deadline creates a dispute about whether exercise is complete |
| Board approval | Directors resolve to allot under the warrant's terms; no fresh authority to allot is needed (Companies Act 2006, s.549(3)) | A consent the articles or a shareholders' agreement require, left unchecked, stalls the process |
| Share issue | Company allots and issues the new shares, updates the register | Skipped paperwork leaves the register wrong and the return of allotment late (it is due within one month) |
| Filings | Confirmation statement and any required Companies House filing updated | Forgetting the filing leaves the public record out of step with reality |
Payment, and partial exercise if the agreement allows it
Payment is usually made in cash for the full number of shares being exercised, though some agreements allow the holder to pay by surrendering some of the warrant's value against the shares issued, sometimes called a cashless exercise. In England and Wales that has to be structured carefully, because shares cannot be issued for less than their nominal value (Companies Act 2006, section 580), so the agreement has to make sure each new share is still paid up to at least that amount, for example by the holder paying it in cash. Whichever method applies, the agreement should specify it precisely, because a holder turning up with the wrong payment method, or an amount that does not match the stated strike price, creates a dispute about whether exercise actually happened at all.
Some warrants allow partial exercise, letting the holder exercise for fewer shares than the full amount covered and keep the remainder live until expiry. If your agreement allows this, the notice and payment need to state clearly how many shares this particular exercise covers, since the unexercised balance continues to exist as a live instrument afterward.
The paperwork that must follow exercise
Exercise is not complete once the holder has paid. The directors allot the new shares, usually by a board resolution, under the terms of the warrant and the company's articles. What they do not need at this point is a fresh authority to allot. Under section 549(3) of the Companies Act 2006, the requirement for directors' authority does not apply to shares allotted under a right to subscribe that was granted earlier: the directors needed authority (or, in a private company with only one class of shares, the power section 550 gives them) when the warrant was granted, and once the warrant has been validly granted, allotting shares under it needs no fresh authority even if the original authority has since expired. Pre-emption works the same way. Unless the articles exclude it or it was disapplied, it applied when a warrant over ordinary shares was granted, and exercising the warrant is not a fresh allotment of equity securities (section 560(2)(b)). The company's articles and any shareholders' agreement can still add consents of their own, and where they do, those consents are often given by shareholders' written resolution.
Once the shares are allotted, the company issues a share certificate and updates its register of members. A return of allotment, form SH01, must reach Companies House within one month of the allotment (section 555), and the next confirmation statement reflects the new shareholding. None of this happens automatically just because the holder paid the strike price. Someone has to actually do the paperwork, and a warrant that sits unexercised for years is exactly the kind of instrument where the company's own internal process for doing this can go stale.
Why specialist review matters here specifically
A warrant commits a company to issue equity it may not have fully modelled at the time of exercise, often years after the original agreement was signed and possibly after several funding rounds have changed the cap table underneath it. Whether the exercise is clean depends on things decided long before it: whether the directors had authority to grant the warrant, whether pre-emption was dealt with when it was granted, and what the articles and any shareholders' agreement require today. It also has tax consequences for the holder that the company should not advise on. Getting any one of these wrong does not usually make the share issue void, since the Companies Act 2006 says a breach of the rule on directors' authority does not affect the validity of an allotment (section 549(6)), but it can mean directors have committed an offence, or that the company and its officers must compensate shareholders whose pre-emption rights were ignored (section 563), which is a far more expensive problem than checking before exercise. Treat any warrant template, including one assembled from a fixed clause library as our guide on drafting a warrant agreement with AI describes, as a strong starting point, and have a specialist review it at the point of exercise. Our assembled clauses versus invented ones guide sets out why that distinction matters most for a document like this.
Keeping the record so exercise is not a scramble
A warrant may not be exercised for years, so how it is stored matters. Keep the signed agreement, the strike price, the exercise window dates and any anti-dilution adjustments recorded together in one place, and set a reminder well before the expiry date rather than relying on memory. Our guide on getting reminded before a contract expires covers why a calendar entry alone is not enough, since the alert needs to sit next to the actual clause, not just the date. Store the executed warrant and any exercise notices in the same room, with page-by-page analytics showing which pages the holder opened when the warrant was first signed.
Where signing is involved, whether the original warrant or a later exercise notice, check whether the specific document needs to be executed as a deed, which carries extra formalities beyond a standard signature. Electronic signatures are valid for most commercial documents in England and Wales (where a deed has to be witnessed, the witness must be physically present, which this e-signature flow does not record; a company can instead execute a deed by two authorised signatories without a witness, and a will should still be signed on paper in front of two witnesses), so confirm the correct execution method before relying on e-signature for either document.
This guide is written for England and Wales, where the Companies Act 2006 governs share allotment and the paperwork described above. If you are dealing with a warrant issued under another jurisdiction's company law, the exercise mechanism, notice, payment, board approval, share issue, is the same checklist, though the specific statutory references will differ.
Frequently asked questions
What happens if a warrant is not exercised before expiry?
It lapses. The holder loses the right to buy shares at the strike price, with no residual value and no automatic extension, unless the specific agreement provides otherwise. This is exactly why tracking the expiry date matters as much as drafting the original terms.
Can a warrant holder exercise only part of their warrant?
Only if the agreement allows partial exercise. Where it does, the notice must state how many shares this exercise covers, and the unexercised balance remains live as a separate claim until its own expiry date.
Does exercising a warrant need board approval?
The directors allot the shares, usually by a board resolution, but they do not need a fresh authority to allot: section 549(3) of the Companies Act 2006 disapplies that requirement for shares allotted under a right to subscribe granted earlier. The company's articles or a shareholders' agreement can still require consents, so check them. This is general information, not legal advice.
What is a cashless exercise?
A cashless exercise lets the holder use some of the warrant's value to cover the strike price rather than paying cash in full, reducing the number of new shares issued accordingly. Whether this option exists depends on the agreement's wording, and it has to be structured so that each new share is still paid up to at least its nominal value, because the Companies Act 2006 does not allow shares to be issued at a discount (section 580).
Should a lawyer review the exercise process, not just the original warrant?
Yes. The exercise engages the company's articles and any shareholders' agreement as they stand at the time, and it depends on the warrant having been validly granted in the first place, with directors' authority and pre-emption dealt with then. It also has tax consequences for the holder. Specialist review at the point of exercise, not only at drafting, is strongly recommended.
Draft your warrant agreement, and keep it until exercise
Assemble a warrant agreement with the strike price, exercise window and notice mechanics stated clearly, drafted from a fixed library of England and Wales clauses, then keep the signed instrument and its expiry date in one place until exercise. The free tier gives three rooms and twenty-five active links, forever, with no card required; e-signature starts on Plus at £19 a month, and every plan, Free included, gets Legal credits for the drafter. Warrants are consequential, so treat any draft as a starting point and get specialist review before issue or exercise. Start for free.
This article is general information, not legal or financial advice. Warrant exercise engages company law, cap table and tax consequences, and every exercise should be reviewed by a qualified adviser before it is relied on.
Sources
- Directors' authority to allot, and why it does not apply to shares allotted under an earlier right to subscribe: Companies Act 2006, s.549, https://www.legislation.gov.uk/ukpga/2006/46/section/549
- Directors' power to allot or grant rights, and acting after an authority expires where the authority allowed for it: Companies Act 2006, ss.550 and 551, https://www.legislation.gov.uk/ukpga/2006/46/section/551
- Return of allotment within one month: Companies Act 2006, s.555, https://www.legislation.gov.uk/ukpga/2006/46/section/555
- Pre-emption applies to the grant of the right, not to the allotment under it: Companies Act 2006, s.560(2), https://www.legislation.gov.uk/ukpga/2006/46/section/560
- Written resolutions of private companies, which can be used to give shareholder consents: Companies Act 2006, Part 13, Chapter 2, https://www.legislation.gov.uk/ukpga/2006/46/part/13/chapter/2
- Electronic signatures, execution of deeds and their formalities in England and Wales: Law Commission, Electronic execution of documents (2019), https://lawcom.gov.uk/project/electronic-execution-of-documents/ ; HM Land Registry Practice Guide 82, https://www.gov.uk/government/publications/electronic-signatures-accepted-by-hm-land-registry-pg82
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