How to transfer shares in a private limited company

Looking to transfer shares within a private limited company? Our previous article discusses how shares in a private limited company are issued. Once shares have been issued, shareholders may want to know whether their shares can be transferred. This article looks at the process shareholders will undertake to transfer these shares as well as some practical considerations to be mindful of.

1. Check for restrictions on the transfer of shares

The first step a shareholder must take is to check that a transfer is permitted by the company's articles of association (Articles) as all shareholders are bound by the company's Articles. The Articles may contain provisions which restrict a shareholder's ability to transfer their shares. Generally, these rules are set so that shareholders can exercise some control over who is or isn’t admitted as a member of the company. Restrictions on the transfer of shares might also be found in any shareholders' agreement that is in existence. Unlike the restrictions in the Articles (which are constitutional), restrictions on transfer will only apply to those shareholders who are parties to the agreement, as discussed in this article.

2. Consider any necessary procedures for transfer

Common provisions governing transfer of shares include:

• Permitted transfers – Some Articles or shareholders’ agreements contain provisions carving out “permitted transfers” which would otherwise be restricted. Such provisions will set out the persons – or category of persons - to whom shareholders may freely transfer shares. This might include, for example, group companies, funds/entities under common control, or (in the case of individual shareholders) relatives or family trusts. If the proposed transfer is to someone who falls within the permitted transfer provisions, the shareholder can usually proceed to transfer their shares, subject to any other formalities set out in the Articles or shareholders' agreement.

• Pre-emption rights – These provide a right of first refusal over the transfer shares for some or all of the non-transferring shareholders to buy the shares. The Articles or shareholders' agreement will set out a detailed process and timeline for the offer of the transfer shares to those entitled to pre-emption. If pre-emption rights are not exercised, the relevant provisions will set out what happens and to whom the shareholder can transfer their shares. Very often, if it is clear that pre-emption rights will not be exercised, a written waiver is sought in advance so that that pre-emption process and timeline can be dispensed with.

• Director’s power to refuse transfer – The Articles may give directors the authority to refuse to register a share transfer. For example, under Article 26(5) of the Model Articles (the default statutory articles), directors may refuse to register a transfer of shares, although they are not obliged to exercise that power.

3. Establishing title to the shares

In order to establish title, and to ensure that the transfer documentation is properly drafted, the register of members of the company should be examined. This is the definitive record of ownership of the shares.

The company should request the transferring shareholder's original certificate(s) for surrender and cancellation. If any certificates are not available (being lost, destroyed or never issued), it is normal for the company to request an indemnity to protect against claims for registering the transfer in the absence of such certificates.

4. Process for transferring shares

To effect the transfer, the shareholder must complete and sign a stock transfer form. This form includes details of the company’s name, a description of the shares including the number being transferred, the amount being paid for them, the name of the registered holder and details of the transferee. Once completed, the shareholder must sign the stock transfer form.

Stamp duty may be payable on the transfer. If the chargeable consideration for the transfer or, where there are a series of transfers, if the aggregate chargeable consideration for the transfers is over £1,000, stamp duty will be payable at a rate of 0.5% on the total consideration of the shares, rounded up to the nearest £5.

There are a number of exemptions to stamp duty, examples of which are outlined below:

• shares are gifted and no consideration is paid;
• shares are transferred by a spouse or civil partner upon entry to the civil partnership or marriage; or
• shares left under a will or transferred under a divorce settlement.

The stock transfer form can be stamped electronically via HMRC’s e-stamping process. The deadline for submitting the stock transfer form to HMRC and paying stamp duty is 30 days from when the form is signed

5. Finalising registration

Once registration has been approved by a company’s board (which must observe the provisions of the Articles and any other relevant agreement in doing so), the company must enter the name of the new shareholder into the company’s register of members. A share certificate should then be issued to the new shareholder, and a balancing certificate would be issued in respect of any shares retained by the transferor.

Top Takeaways

• If shareholders wish to guard against the transfer of existing shares to third parties outside their control, they should consider including restrictions on transfer in the Articles and/or a shareholders' agreement.

• Articles may contain permitted transfer provisions, allowing shareholders to freely transfer shares to specified persons. Ordinarily these would override pre-emptive restrictions.

• If restrictions on transfer are contained in the Articles, it is common in consensual situations to obtain a written waiver from shareholders who would otherwise have a pre-emptive right. It is also possible for shareholders to resolve to amend the Articles to disapply the relevant restrictions in relation to the proposed transfer only.

• The legal ownership of shares transfers when the name of the person acquiring the shares is entered into the company's register of members.

• Except in the most straightforward of scenarios, a detailed share purchase agreement will almost always overlay the stock transfer form and process outlined above. This is very important to protect the rights of both buyer and seller, to ensure that risk is allocated appropriately, and to ensure that good title to the shares is obtained.

For more information on how to transfer shares in a private limited company, please get in touch with the authors or one of our corporate lawyers.