What to consider when transferring shares in a private limited company

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What to consider when transferring shares in a private limited company

As a lawyer, I am frequently asked to document a simple share transfer for a private limited company. This sounds straightforward. However, what may seem like a routine request actually involves more than perhaps first thought to ensure that the transfer is done correctly.

In this blog, we will look at the key questions to raise and consider and the process and documents required.

Basics

First the basics:

● who is the transferring the shares (name and address required as it appears on the company’s share register)

● who is receiving the shares (name and address which will be entered on the company’s share register, if not already a member)

● what shares are being transferred (number, share class, nominal (par) value per share and whether they are fully paid)

Consideration

Next, what is the price to be paid for the shares. This could be:

● cash

● non-cash assets, such as shares in another company

● transfer of a debt or receivable, including a balance outstanding between group companies

Shareholders Agreement and Articles of Association

Does the company have a Shareholders Agreement? If so, check this for:

● rules governing share transfers. These might be:

o pre-emption rights (rights of first refusal) in favour of one or more existing shareholders. If there are pre-emption rights:

▪ do these permit specified transfers to take place as exceptions to the pre-emption rights, such as permitted transfers to members of the same family as the transferor or, if a company, to a company in the same group as the transferor

▪ can they be waived and disapplied with the approval of one or more shareholders or a specified majority of shareholders

o consent rights, including requirement for share transfers to be approved by the board of directors, by one or more shareholders or with the consent of a specified majority of shareholders

o tag-along or co-sale rights – does the proposed share transfer trigger either:

▪ tag-along rights – rights which allow minority shareholders to join in a sale when majority shareholders sell their shares to a third party. The minority shareholders may choose to sell all of their shares at the same price as the majority shareholders

▪ co-sale rights – rights which allow minority shareholders to join in a sale when majority shareholders sell their shares to a third party. The minority shareholders may choose to sell the same proportion of their shares as the majority shareholders are selling

● whether the transferee (if not already a shareholder) will be required to become bound by the Shareholders Agreement by executing what is known as a Deed of Adherence. If so, does the Shareholders Agreement prescribe the form of Deed of Adherence or will a form need to be prepared?

Review the company’s Articles of Association as well for broadly similar issues as for a Shareholders Agreement

Tax

Consider the tax consequences of the proposed transfer:

● transferor: the transfer will act as a disposal for capital gains tax purposes (if the transferor is an individual) or for corporation tax purposes (if the transferor is a company). The transferor should take tax advice to check what tax may become payable as a consequence of the share transfer

● transferee: if an employee, under employment securities rules, a transfer of shares at less than market value could give rise to income tax and national insurance contributions for both the transferee and the company itself

● stamp duty: stamp duty is payable in the UK on the transfer of shares, at the rate of 0.5% of the consideration for the transfer (if £1,000 or more and rounded up to the nearest £5.00 of stamp duty). Stamp duty is usually payable by the transferee and must be paid, and payment confirmed by HMRC as having been made, before the transfer can be registered in the company’s register of members. It is only at this point that the transferee becomes the legal owner of the shares

Documenting the transfer

The documents required will depend on the answers to the questions highlighted above

● stock transfer form: a stock transfer form will be required. The form is freely available on the internet (form J3O for fully-paid shares and J10 for nil or partly-paid shares). The form must be completed and signed by the transferor and, if the shares are not fully-paid up, by the transferee as well

● share purchase agreement: a share purchase agreement (SPA) is not a requirement but the parties may want to document their transaction in an SPA, particularly for an arms’ length sale of shares with more complex terms than simply the shares being transferred and the price being paid for them

● consents/waivers: depending on the terms of the company’s Shareholders Agreement and/or Articles of Association:

o pre-emption rights waiver, signed by one or more existing shareholders

o written consent to the share transfer from one or more existing shareholders

● Deed of Adherence: if needed, a Deed of Adherence to the company’s Shareholders Agreement. This should be executed as a deed by the transferee and, depending on the form specified by the Shareholders Agreement, the transferor and possibly also the company itself and the remaining shareholders

● share certificate:

o share certificate for shares being transferred: the transferor must deliver the original issued share certificate for the shares being transferred to the company. If this has been lost or destroyed, the transferor will need to sign an indemnity for lost share certificate

o new share certificate(s): a new share certificate will be required for the transferee and, if the transferor will retain a reduced shareholding, for the transferor’s remaining shares

● voting power of attorney: if stamp duty is payable, the transferee may require a voting power of attorney from the transferor. This enables the transferee to act as the transferor’s attorney to exercise the voting and other membership rights of the shares which have been transferred, pending the registration of the transfer in the company’s register of members once the stamping process has been concluded

● board approval: the transfer will need to be approved by the company’s directors, either at a duly convened board meeting or by way of directors’ written resolution

Post-transfer process

Even once the documents have all been prepared, signed and delivered to the company, the process isn’t complete yet

● stamp duty: within 30 days of the date of transfer:

o the transferee will need to pay the required amount of stamp duty to HMRC. This can be done online

o once the stamp duty has been paid, the transferee should submit the signed stock transfer form to HMRC. This should be done electronically to HMRC’s email address for this purpose, together with a request for HMRC to confirm that the correct amount of stamp duty has been paid.

The bank account and email address for this are available from the UK.GOV website (https://www.gov.uk/guidance/pay-stamp-duty). There will then be a period of usually 4-6 weeks for HMRC to reply and confirm that this has been done

● company registers: once the stamp duty process has been completed, the transfer can be recorded in the company’s registers of transfers and members. If stamp duty is not payable, registration can be done immediately following the approval of the transfer by the board of directors

● Companies House filings: filings at Companies House may be required if the transfer results in a change to the persons who have significant control (PSCs) over the company:

o transferor: the transferor may have either ceased to be a PSC or reduced its registered level of control, for example if the transferor has ceased to own more than 50% of the company but still retains more than 25% of the issued shares

o transferee: the transferee may have become a PSC, or increased its level of control

● tax: the transferor and transferee will need to file tax returns and pay any tax as a consequence of the transfer

Conclusion

Transferring shares in a UK private limited company is more involved than it sounds. However, giving due consideration to the legal and tax implications as well as complying on procedural matters will ensure that the process is documented and completed correctly.

About the author

Jonathan Dawe is a co-founder of PaperRock and a practising corporate and commercial lawyer, with over 30 years’ experience advising clients on corporate transactions and matters.

Paper Rock documents

Paper Rock has templates of all the documents which may be required for a share transfer. Each document is available for immediate download, with no subscription necessary, and is accompanied by a clear explanatory guidance note.

Click the links below to access each document:

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