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How the transfer of shares procedure works

As your business evolves, new investors come on board, and your team grows it’s likely that the transfer of share capital will become a more common occurrence. Although commonly seen across start-ups and high growth businesses, the transfer of shares procedure is fairly complex so seeking support from a specialist corporate solicitor is advisable. Here, we’ll help you learn more about the procedural aspects of the voluntary transfer of share capital in a UK private limited company between two parties, ensuring you fulfil necessary obligations and foresee potential restrictions that could hinder a successful transfer of shares.

Are there contractual restrictions on the transfer of shares that you need to be aware of?

The rules governing the transfer of the share capital of a private limited company are set out in the Companies Act 2006. The Act states that the transfer of shares should take place in accordance with the articles of association of the company whose shares are being transferred.

A transferor can transfer the legal and/or beneficial interest in the shares that it holds. A party holds a legal interest in shares if its interest or ownership in the shares is formally and officially registered by the company whose shares are sold.

By contrast, a beneficial ownership in shares relates to any interest or benefit in the shares that a party may have (on trust or by contract for example), even if it does not legally own the shares and they are held by another party. Usually a transferee will insist upon the entire legal and beneficial interest in the shares being transferred to it so that it has certainty that it holds all the rights to the shares that it is purchasing.

The articles are a publicly available, legally binding contract between the company and the owners of the share capital in the company (‘shareholders’) and are automatically legally binding for all shareholders. The articles are a ‘rulebook’ by which the company is governed and will set out how it should be managed, and shares transferred. Under the Act, the default articles for private companies limited by shares, called ‘model articles’, are articles that will apply to a company if it has not chosen its own bespoke articles or has not amended the default articles. A company’s articles will usually set out at least some of the rights and obligations of owners of the company in relation to the transfer of shares, including:

  • Pre-emption rights: These are rights given to existing shareholders of the company in the articles or in a company’s shareholders’ agreement that require a shareholder to first offer the shares being sold to the other existing shareholders or to other specific persons (as stated in the articles or the shareholders’ agreement). Pre-emption rights are fairly common in private companies as they are a way of ensuring that an unknown third party is not brought on board without the existing shareholders having a chance to effectively block them.
  • Directors’ right to refuse to register the transfer and make it proper and valid: Depending on the facts and circumstances surrounding the company, the directors may have a discretionary veto right to be able to refuse to register a transfer (the model articles contain such a provision). This right can be limited to particular events or circumstances depending on what is agreed by the company and its shareholders.
  • A restriction on the transfer of shares: This provision is often seen in companies that require a long-term commitment to the company or that have a limited number of key shareholders that are important to the business. This provision essentially ‘locks in’ shareholders by restricting their ability to transfer their shareholding for a certain period of time.

In addition to this, a company may also have a shareholders’ agreement in place which is a private legally binding contract between the shareholders (who all voluntarily choose to enter into it, in comparison to the articles which are automatically binding on shareholders) and usually the company. The agreement may set out the rights and obligations of the shareholders in more detail, often including detailed financial obligations and other restrictions on share transfers (such as ‘lock in’ periods discussed above). Unsurprisingly, restrictions on transfers in a private company can be a lot more detailed and far reaching than the restrictions on transfers in publicly listed companies.

The articles can provide that the shareholders and company can either comply with the provisions restricting the transfer or decide to waive them or disapply them. This can be done by the shareholders’ passing a resolution to disapply the provision or agreeing unanimously that the provision should be waived or disapplied. But this is something that the party who is buying the shares should check carefully, otherwise the transfer may not be effective. In practice, it is usual to see provisions restricting transfers to include an option for the existing shareholders to waive the restriction, either because of certain conditions not being met or on a discretionary basis.

What documents are required for the transfer of shares?

To effect a legal transfer of shares in a private company, once any restrictions in the company’s constitutional documents have been addressed, a transferor and transferee will need to make sure that the following documents are drafted and processed as follows:  

DocumentCommentary
Share Purchase AgreementIt is a good idea, but not legally required, for the transfer of the legal and beneficial interests in shares to be documented in a share purchase agreement. This is an agreement between the transferee and the transferor (and sometimes the company as well) for the sale of shares in a target company.

These agreements will deal with several issues and usually include contractual protections for both the purchaser (such as warranties) and the seller as to the status of the company and the title in the shares themselves. Depending on the complexity of the company and the value of the shares, it is very usual to put a share purchase agreement in place to ensure that any pre or post completion matters, risks and liabilities are suitably apportioned between the purchaser and the seller. A share purchase agreement can often be heavily negotiated and it is a good idea to seek legal advice from specialist corporate solicitors when entering in to such a document to make sure that you are not left with unreasonable or onerous liabilities following the transfer.
Stock transfer formThis is a transfer instrument and in all but a few exceptions (such as where shares are transferred through a computerised system, for example, where title to the shares is transferred electronically through the CREST system), it is a legal requirement under the Act. It means that a proper instrument for transfer, that will trigger stamp duty, is presented to the company whose shares are being sold before the transfer can be registered.

The stock transfer form will usually need to be stamped by HMRC once any required stamp duty is paid before it is considered a complete and valid instrument of transfer.

An example of a stock transfer form can be found in Schedule 1 of the Stock Transfer Act 1963 (as amended). But the Stock Transfer Act 1963 states that all that is needed for a form to be considered a proper instrument is that it sets out the details of the consideration (the value) that is being paid for the shares, the names of the transferor and the transferee, and the details of the amount and type of shares to be transferred. It also must be fully executed by the transferor.
Share certificateThe company having registered the transferee as a new shareholder in its register of members can issue a share certificate to the new shareholder. This sets out how many shares it holds and the type of shares that are held in the company. The share certificate is evidence that the transferee is the legal owner of the transferred shares.

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What about stamp duty on transfer of shares?

Unless an exception applies, the Finance Act 1999 states that the transfer of shares in a private company will attract what is called ‘stamp duty’, a tax payable to HMRC. In practice, stamp duty is almost always paid by the purchaser of the shares (the transferee). Once stamp duty is paid, the stock transfer form will be stamped by HMRC and then it is ready to be presented to the company for registration.

Stamp duty is payable if:

  • The shares are existing shares in a UK company (or a foreign company with a share register in the UK)
  • If the transferee held an option to buy shares
  • If the transferee has an interest in the shares (such as a claim to part of the consideration for the transferring shares or other rights attaching to the shares)

Stamp duty tax is not payable:

  • If the shares are transferred for no consideration (with a value of nil)
  • If the shares do not exist and are being newly issued by the company
  • If the shares are bought in an ‘open ended investment company’ from the fund manager
  • Are part of units in a unit trust and are being bought from the fund manager

The current stamp duty rate is 0.5% of the consideration (value) paid for the shares, rounded up to the nearest multiple of £5. Stamp duty is not payable when the consideration for the transfer is £1,000 or less. If an exemption applies, the stock transfer form will be marked as being exempt from stamp duty and can be presented to the company for registration.

There is a ‘same day’ stamping service available in exceptional circumstances, such as unexpected or unforeseen circumstances where it is essential to have a document stamped immediately and these requests must be emailed to HMRC. The same day service cannot be used if the urgency could have been avoided by either party, or their agents or the law requires a party to apply to HMRC for a decision on how much stamp duty is payable (such as when a tax relief is being claimed). Shares that are transferred electronically will incur ‘stamp duty reserve tax’ which is generally at the rate of 0.5% of the consideration (value) paid for the shares.

If stamp duty is not paid then the stock transfer form will not be stamped. This means that the company whose shares are being transferred cannot register the transfer by law or issue a share certificate, and the directors can refuse to register the transfer. This is a reason why the transferee might want to make sure it has control over the whole process, ensuring that the transferring shares can be formally registered, and the transfer becomes effective.

COVID 19 update on the stamp duty process

On 25 March 2020, the UK government announced temporary changes as to how the stamp duty process should be conducted, as a result of precautions being taken due to the COVID-19 pandemic.

HMRC now no longer require stock transfer forms to be posted and physically stamped but an electronic or PDF copy of the stock transfer form should be sent to HMRC by email and payment of the applicable stamp duty should be made electronically (by Faster Payment, BACS or CHAPS – not by cheques as they will not be processed until the temporary measures end).

Signatures on the forms can be electronic signatures. HMRC will then email the transferee a letter confirming receipt of stamp duty, providing reference codes for the transaction, and stating that HMRC will not issue a penalty to the company for registering the transfer in its register of members. There is no timeframe at the moment setting out how long these temporary measures will be in place. The transferee will then be able to send the letter along with the stock transfer form and the transferor’s share certificate to the company for registration.

What are directors’ obligations on registering the transfer of shares?

Once they have been presented with a proper instrument of transfer, the directors of the company responsible for registering the transfer are under a statutory obligation to consider whether to refuse or approve the transfer.

If the directors approve and register the transfer, they can issue a share certificate in favour of the transferee certifying its status as a shareholder of the company. If the directors refuse to register the transfer, they must let the transferee know why they are doing so within two months of the transfer being notified to the company. If they do not do this, the company and each of its directors could be subject to fines.

What is the approval process?

Once a proper instrument of transfer (such as a stock transfer form) that has been executed and stamped has been delivered to the company whose shares are being transferred, the directors will either refuse or approve the registration of the transfer.

The transfer of legal title is only effective once the transfer has been registered in the company’s register of members (a register of all shareholdings in the company) and it is explicitly stated that the transferee is the new owner of all the shares being transferred. The date of transfer will be the date when the transfer is written up in the register and not the date of the transfer itself (i.e. when the consideration was transferred, and the transaction completed).

In accordance with the Act, the directors must provide the transferee with reasons as to why they are refusing to register the transfer. The grounds on which the directors might refuse to register the transfer will be limited to the rights set out in the company’s articles. Ss previously mentioned, the right to refuse to register can be discretionary or limited to specific reasons or triggers, such as if the stock transfer form has not been duly stamped when it needs to be or if the instrument of transfer is not accompanied by the valid current share certificate for the transferring shares. If the directors cannot agree on whether to refuse the transfer, the transferee will be entitled to have the transfer registered.

The directors are still under a duty to the company however and any discretionary powers they exercise should be for the best interests of the company and should promote the success of the company as a whole.

Once the directors have approved the registration of the transfer instrument, they will register the transferee as a new shareholder of the company by adding their name to the company’s register of members as the legal owner of all of the transferring shares.

Within two months of the transfer being lodged for registration, the company must then (unless otherwise stated in the Act) issue a share certificate which evidences the transferee’s legal title to those shares. The transferor may also have a share certificate and as part of the arrangements for the transfer, it is usual for the transferor to be required to send the transferee its share certificate (or to provide an indemnity for a share certificate if it is lost or damaged). This is so that it can be presented to the company along with the application to register the corresponding transferring shares.

Where there is a gap between a stock transfer form or instrument of transfer being given to the transferee and the registration of the transfer by the company, the parties can agree that the transferor will hold the shares on trust for the transferee.

To mitigate the risk that the transferee has a lack of control over its new shareholding, the transferee may grant a power of attorney to the transferor to deal with the shares on its behalf. Alternatively, the share purchase agreement may state that the parties agree that the transferee has a right to exercise the rights attached to the shares prior to registration of the transfer (such as the right to a dividend or the right to vote at meetings).

What needs to be filed following approval of transfer?

Once the transfer has been approved by the directors, registered in the company’s register of members, and the transferor’s name replaced with the transferee’s name as holder of the shares, a private company limited by shares will need to file the update of the transfer at Companies House within two months of the transfer being lodged.

The company will also need to update its register of transfers (a register of the transfers of shares of the company) and its register of persons with significant control (‘PSC register’) or legal entities with significant control (‘RLE register’).

Any changes to the PSC or RLE registers are legally required to be notified to Companies House. A transferee’s unregistered beneficial interest in the shares may cause them to have significant control over the company and so it may be the case that the PSC register is updated before the register of members reflects the transfer of legal title. The PSC register should be updated 14 days after the changes to the PSC register or RLE register are confirmed.

A private company may also opt to include the information on its PSC register in a central register held at Companies House instead of keeping its own register. A failure to update the registers is an offence by the company and its officers. The company will also need to include the updated list of shareholdings to Companies House as part of its next Confirmation Statement. 

What are the tax implications?

The tax implications of a share transfer can be significant for both transferee and transferor and will often be carefully considered by the parties and their tax advisors prior to the transfer taking place.

Transferors that are corporate entities may be liable for corporation tax on any UK chargeable gain that arises on the disposal of the shares. Individual transferors may be liable for capital gains tax if they make a profit on the sale of the shares, unless they are eligible for tax reliefs such as entrepreneurs’ relief, gift hold-over relief, or rollover relief.

Transferees that are part of an Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) can delay, reduce or eliminate capital gains tax. Enterprise Investment Schemes can delay or reduce applicable capital gains tax if a gain is used to buy unlisted shares in companies approved for EIS. Seed Enterprise Investment Schemes can allow a party to pay no capital gains tax on a gain of up to £100,000 if you use a gain to buy new shares in small early-stage companies approved for SEIS.

It is also important to check whether any income tax becomes chargeable for individual sellers and professional advice should be sought to ensure that the transfer of shares does not detrimentally affect a party’s business or personal affairs.

About our expert

Jas Bhogal

Jas Bhogal

Corporate Partner
Jas qualified as a solicitor in 2006. She has 12 years' experience working almost exclusively with start up companies, high growth potential SMEs, along with venture capitalists, other investment platforms and individual and corporate investors.


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