As a business evolves investors may come and go, so transfers of share capital become more common. There are some risks involved with the share transfer procedure, so we advise getting the expert help of a specialist corporate solicitor.
Here, we talk about the share transfer procedure as it relates to a voluntary transfer of share capital in a UK private limited company. We also highlight common issues and risks.
Jump to:
- What's the difference between transferring shares and issuing shares?
- Why might a company issue new shares?
- Why might a shareholder want to transfer shares?
- What is the transfer of shares process?
- What documents are needed to transfer shares?
- What about stamp duty on the transfer of shares?
- What are directors’ obligations on registering the transfer of shares?
- What is the approval process?
- Key considerations for the transfer of shares in UK private limited companies
- What needs to be filed following approval of transfer?
- What are the tax implications?
What's the difference between transferring shares and issuing shares?
The share issue process is where you create new shares in a company, either when it’s set up, or during its life. When you form a private limited company, one of your first tasks is deciding how many shares to issue. These new shares are distributed among the company’s founders or investors.
In contrast, with a share transfer, no new shares are created, rather the ownership of existing shares transfers from one person to another.
Why might a company issue new shares?
Leaving aside the initial creation of shares, a company may issue new shares during its lifetime, normally to raise further capital. These may be distributed to investors in return for cash, to employees as part of a share incentive scheme, or to a buyer as part of a merger or acquisition.
Why might a shareholder want to transfer shares?
A shareholder may transfer their shares because they need the cash, they’d rather someone else owned them, or because they want to leave the business.
They can make a transfer as a gift to a family member, to another shareholder, or as part of a company restructure. Shares may also be transferred as part of the probate process when a shareholder dies.
What is the transfer of shares process?
The transfer of shares in a private limited company must be carried out in accordance with the law and the company’s Articles of Association – the ‘rulebook’ by which the company is governed.
Shares can be owned ‘legally’, ‘beneficially’ or both. Someone owns the legal interest in shares if they are officially registered in the company’s records. Someone owns a beneficial interest in shares if they’re entitled to benefits from those shares, such as capital, dividends or voting rights, even if the legal owner is someone else.
Usually, when shares are transferred, the buyer will insist on both the legal and the beneficial ownership being assigned to them.
The company’s articles will describe the rights and obligations of shareholders when shares are transferred, such as:
Pre-emption rights: If a shareholder has a right of pre-emption, any other shareholder wanting to transfer shares must first offer the shares to them (or to other specified persons). Pre-emption rights are common in private companies as, in effect, they prevent shareholders from selling their shares to outsiders. Existing shareholders have a right of veto, since they can buy the shares themselves.
Directors’ right to refuse to register the transfer and make it proper and valid: The directors may be able to refuse to register a transfer. This right can be limited to certain events or circumstances, such as where the directors believe the transfer hasn’t complied with the articles.
A restriction on the transfer of shares: This provision is often seen in companies that require a long-term commitment from investors or key shareholders. This provision essentially ‘locks in’ shareholders by restricting their ability to transfer their shareholding for a certain period.
The articles may also allow the shareholders and the company to decide to waive or disapply a transfer of shares provided they follow a set process.
What documents are needed to transfer shares?
A share purchase agreement. This is an agreement between the seller and buyer (and sometimes the company). While not a legal requirement, having a formal SPA is highly desirable to protect both sides’ interests. It usually contains warranties by the seller as to the company’s status and their title to the shares and provisions to ensure that any pre- or post-completion risks and liabilities are suitably apportioned between the buyer and the seller.
A share purchase agreement can often be heavily negotiated so it’s best to get advice from specialist corporate solicitors to avoid being left with unreasonable or onerous liabilities following the transfer.
A stock transfer form. This is a formal legal document that acts to trigger stamp duty and that’s given to the company as a formal demand to register the shares. It’s usually stamped by HMRC before it’s considered valid. A stock transfer form must describe any value being paid for the shares, identify the buyer and seller, and describe the amount and type of shares being sold. It must be signed by the seller.
A share certificate. This document is given to the new shareholder to evidence that person’s share ownership.
What about stamp duty on the transfer of shares?
The transfer of shares in a private company will attract ‘stamp duty’, a tax payable to HMRC.
Stamp duty is almost always paid by the purchaser (the ‘transferee’). Once it’s been paid, HMRC will stamp it so that it can be given 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)
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. The same day service cannot be used if the circumstances were avoidable or there’s a question about how much tax is payable. Shares transferred electronically will incur ‘stamp duty reserve tax’ which is generally 0.5% of the consideration.
If stamp duty isn’t paid, the stock transfer form will not be stamped so the company can’t register the shares. This is why the transferee should have control over the transfer process.
What are directors’ obligations on registering the transfer of shares?
Once they have been presented with a proper instrument of transfer (like a stamped stock transfer form), the directors must consider whether to refuse or approve the transfer.
If the directors approve and register the transfer, they can issue a share certificate. If they refuse, they must let the transferee know within two months or they and the company could be fined.
What is the approval process?
Once a stamped and signed stock transfer form has been delivered to the company, the directors will decide whether to refuse or accept it.
The transfer is only effective once it’s been entered on the register of members in the name of the new owner. The date of transfer is the date of entry in the register.
If the directors refuse to register the transfer, they tell the transferee why. The grounds for refusal will be described in the articles, for example, 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. The right of refusal may also be discretionary.
If the directors cannot agree on whether to refuse the transfer, the transferee will be entitled to have the transfer registered.
If the directors use their discretion to refuse the transfer, this should be in the best interests of the company and promote the success of the company.
Once the directors have approved registration, they will add the new shareholder’s name to the company’s register of members as the legal owner of the transferring shares. The company must issue a share certificate within two months. The seller will send their share certificate to the buyer.
Where there is a gap between a stock transfer form being given to the transferee and the registration of the transfer, the parties can agree that the transferor will hold the shares on trust for the transferee.
To mitigate the risk that the transferee lacks 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 before registration of the transfer (such as the right to a dividend or the right to vote at meetings).
Key considerations for the transfer of shares in UK private limited companies
There are certain risks involved in share transfers that you should know about.
Firstly, you should make sure you have a share purchase agreement so that if the sale falls through, the rights and duties of the seller and buyer are clear. Secondly, if the company isn’t solvent at the time of sale, selling shareholders can find themselves on the hook for company debts. Equally, if the company is having financial problems, the buyer may lose their money once they’ve acquired the shares.
In addition, there may be restrictions on how, when and to whom shares can be transferred.
- The articles may state that no transfer can take place without the majority or unanimous consent of the shareholders
- The existing shareholders may have pre-emption rights
- There may be restrictions on the type of person who can acquire shares, for example, family members in a family-owned company
- Drag-along and tag-along clauses may require certain groups of shareholders to sell their shares to a potential buyer, or entitle other groups of shareholders to be entitled to sell their share to a potential buyer
- Where a shareholder dies, the articles and any shareholders’ agreement may contain specific provisions as to how that person’s shares must be dealt with
What needs to be filed following approval of transfer?
Once the transfer has been approved by the directors, registered in the company’s register, and the transferor’s name replaced with the transferee’s name as holder of the shares, the company will file the transfer update at Companies House.
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’).
What are the tax implications?
The tax implications of a share transfer can be significant for both buyer and seller, so you should get professional advice before you go ahead.
Transferors that are corporate entities may be liable for corporation tax on any UK chargeable gain that arises on their 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.
