The transfer of shares in a private limited company is the process by which one or more shareholders give up all or some of their shareholding, and another person or entity takes the shares over. There are some important things you should know before you get started, including the legal process you need to follow and the potential risks.
What's the difference between transferring shares and issuing shares?
When you set up a private limited company, you will need to decide how many shares to issue. These are then allocated amongst the shareholders according to what has been agreed. Shares can be transferred between shareholders at any time, but it's important to note that with a share transfer, it doesn't increase or decrease the number of shares that are already in circulation.
Issuing shares creates new shares.
The distribution of shares is detailed in a partnership agreement.
Why might the company issue new shares?
There are a few reasons why a company might issue new shares. One of the most common reasons is when the company wants to raise money from investors and therefore give them a significant stake in the business. It can also be used to reward employees or directors, or as part of a business sale or merger.
Why might a shareholder want to transfer shares?
One of the most common reasons a shareholder might want to transfer their shares is when they want to sell them to another person or entity to raise money or even to remove themselves from the business.
They may also want to gift them to someone else or transfer them as part of a divorce settlement.
Other common types of share transfer include:
- Transfer to a business partner
- Transfer on the death of an existing shareholder
- Transfer as part of a corporate restructure
What are the steps involved in transferring shares?
If the sums of money involved in the transfer are large, the buyer may want to get a professional valuation and draw up a thorough agreement for purchase before making an offer.
It is also worth having the relevant agreements checked by a professional to ensure that no restrictions apply.
The share transfer process is usually as follows:
- The seller of the shares fills out and signs the stock transfer form.
- The form is stamped by HMRC and any stamp duty is paid.
- The company receives and verifies the transfer documents.
- The board of directors decides whether or not to approve the transfer and notes its decision.
- The business updates its statutory records, replaces share certificates, and creates new certificate(s) as necessary.
- The transfer is confirmed to Companies House as part of a confirmation statement.
What information needs to be added to the stock transfer form?
To transfer company shares, you must first complete and submit a stock transfer form. You will be required to submit the following information when completing the stock transfer form:
- Consideration money (How much is paid for the shares)
- Name of Security (e.g. 100 Ordinary Shares for YOUR COMPANY LIMITED)
- Description of Security
- Number of shares to be transferred
- Name and address of the transferor
- Name and address of the transferee
- Authorising signature from the transferor
- Declaration of Stamp Duty Liability
What are the potential risks associated with transferring shares?
There are a few things you should be aware of before you go ahead with a share transfer:
There is always a risk that the sale could fall through, so it's important to have an agreement in place that sets out all the terms and conditions of the sale.
If the company is not solvent (i.e. it doesn't have enough money to pay its debts), any shareholders who sell their shares may end up being liable for these debts.
If the company is in financial difficulty, the buyer may not be able to get their money back once the shares have been transferred.
There could also be tax implications for both the seller and the buyer, so it's important to seek professional advice before you proceed.
If you're thinking of selling your shares or buying them from someone else, it's a good idea to speak to an accountant or solicitor who can guide you through the process and help minimise any risks involved.
Do you need shareholders' approval to issue private company shares?
The company will often need to get shareholders' approval before it can issue or transfer shares. This is usually done at a general meeting, where all the shareholders will have the opportunity to vote on the proposal.
Shareholders usually acquire 'pre-emption' rights under the Companies Act. This implies that they must be offered first refusal on any new private company shares, depending on their existing stake.
Pre-emption rights may also apply where transferring of shares is involved.
What are the benefits of issuing private company shares?
There are a few benefits of issuing private company shares:
- It can help the company raise money from investors.
- It can be used to reward employees or directors.
- It can be used as part of a business sale or merger.
- It can give the company greater control over its affairs.
If you're thinking of transferring shares, it's important to weigh up these pros and cons and make sure it's in the best interests of you and your business.
What are the tax implications of transferring private company shares?
The tax implications of issuing and transferring private company shares can be complex, so it's important to seek professional advice before you go ahead. There are a number of things to take into consideration, such as whether the shares are being sold for money or in exchange for something else (e.g. goods or services).
This can be complicated further if the person receiving the shares becomes an employee or director of the company in future.
Can private company shares be transferred to a spouse or children?
Yes, private company shares can be transferred to a spouse or children.
The company's articles of association may need to be amended to allow for this and the shareholders to approve it by passing a special resolution.
They'll have to pay income tax on any dividends from the business, and the amount of tax they'll owe will be determined by how much other income they earn.
How does transferring private company shares affect existing shareholders' rights?
Issuing new private company shares or transferring existing shares can affect existing shareholders' rights if it means they have less of a stake in the business.
Shareholders can sometimes reject pre-emption rights by passing a particular resolution, which must be supported by a certain percentage of votes (usually 75%).
What types of private company shares can be transferred?
There are three types of private company shares that can be transferred:
- Ordinary Shares - these are the most common type of shares issued in a private company and give shareholders the right to vote on key decisions.
- Preference Shares - these entitle shareholders to a fixed dividend, usually at a higher rate than ordinary shares. They can also have a fixed amount bought back by the company when it gets into financial difficulties.
- Founders' Shares - these are shares that are issued to the company's original shareholders and give them certain rights, such as the right to appoint or remove directors.
What are the rules for share transfers involving a director of the company?
If a director is transferring shares, they must disclose this to the company and it must be entered into the company's register of members.
How is a fair value established for private company share transfers?
When a private company share transfer takes place, the fair value of the shares must be established. This is done by considering the following factors:
- The nature and history of the business
- The present state of affairs and prospects for the future
- The book value of any assets owned by the company
- The liabilities of the company.
What are the costs associated with issuing or transferring private company shares?
The costs associated with issuing or transferring private company shares can be significant and will vary depending on the size and complexity of the transaction. Some of the most common costs include; legal fees, stamp duty and valuation fees.
What are the tax implications of a private company share issue or transfer?
The tax implications of a private company share issue or transfer will depend on the individual circumstances of each case. Generally, any capital gains made on the sale of shares will be subject to capital gains tax, and any dividends received from the company will be subject to income tax.
Transferring shares may also affect future tax obligations, as well.
For example, a person might be able to transfer shares to their spouse with a lower income in order to decrease their overall tax burden. Giving shares away to your children or placing them in trust can also aid in reducing Inheritance Tax liabilities in the future.
Can private company shares be transferred for less than their value?
It is possible for private company shares to be transferred for less than their value, but this will usually only occur in cases where the seller is in financial difficulty.
If a share transfer takes place at below market value, the tax authorities may deem it to be a 'disguised sale' and apply appropriate taxes.
Can companies and partnerships own shares?
Yes, companies and partnerships can own shares in each other. This is known as a cross-shareholding and it allows for greater control and cooperation between businesses.
What are the consequences of share transfers not being recorded?
If share transfers are not recorded, it can lead to a number of problems. For example, the company might not be able to accurately track its ownership structure or calculate its financial liabilities. This could have serious consequences for the business if it needs to raise money from investors or creditors.
In addition, the tax authorities may become involved if the company fails to record share transfers.