If you’d like to buy shares in a private limited company, there are two ways to go about it. You can either buy someone else’s shares or subscribe for new shares in the company. This is different from buying shares in public limited company, whose shares are traded on the open market. In the case of a public company, anyone can buy shares – you don’t need to be vetted beforehand. But, with a private company, things are a little more complex.
Different procedures apply, depending on whether you’re buying existing shares or acquiring shares as part of a share issue. Read on to find out how this works in practice.
- What is a share transfer or share issue?
- How do I work out the price for the shares?
- When does a share transfer or share issue occur?
- What’s the process for each type of transaction?
- Share transfer process
- Share issue process
- How does a share transfer or share issue affect me as a shareholder?
- What are the company control issues involved?
What is a share transfer or share issue?
A share transfer is where someone buys shares in a company from an existing shareholder. The number of shares and percentage of equity owned by the various shareholders remains unchanged after the share transfer.
On the other hand, a share issue is where an incoming investor subscribes for new shares issued by the company. This is usually to enable the company to acquire new funds to grow the business. The existing shareholdings may be affected by the issue of new shares and become 'diluted'.
How do I work out the price for the shares?
When you buy shares as part of a share transfer, you agree the share price with the seller. The Articles of Association and any shareholders agreement may set out how the share price will be calculated in case of a disagreement. In the case of a new issue of shares, you’ll normally pay ‘fair market price’ for the shares, calculated with reference to the company’s value.
When does a share transfer or share issue occur?
A transfer of shares usually happens when an existing shareholder of an SME (small or medium-sized company) wants to retire or otherwise would like to sell their shares. They look for an investor who would like to participate in the company’s success, and who’d be acceptable to the other shareholders.
A share issue, on the other hand, normally takes place when a company needs more finance to grow. Rather than borrow money, it issues new shares so that it can get the capital it needs to scale.
What’s the process for each type of transaction?
The process for a share transfer or share issue may vary, depending on the company’s legal constitution, but generally this is how it works:
Share transfer process
The person that wants to sell their shares tells the other shareholders of their intention. Depending on the terms of the Articles of Association or any shareholders agreement, this may trigger the right for the existing shareholders to have a first right of refusal (right of pre-emption) to buy the shares themselves. This is to prevent an unwanted ‘outsider’ becoming a shareholder. If the existing shareholders don’t want to buy, the seller will enter into a sale and purchase agreement with the buyer to transfer the shares. The company will then transfer the shares and issue the new shareholder with a share certificate, updating the register of members in the meantime. For more information see our article How the transfer of shares procedure works.
Share issue process
In the case of a share issue where the company is looking for fresh equity, the first step is for the directors of the company to decide how much money needs to be raised, and therefore how many shares need to be issued. The directors need authority to issue new shares in the Articles of Association, and may need to go back to the shareholders for permission to issue new shares.
As with the transfer of shares, the Articles of Association and any shareholders agreement may also contain restrictions in terms of the share issue procedure, and who can be given shares in the company. Once the new shares have been issued, the buyer pays over the purchase price, subscribes for the shares and is entered onto the register of members.
How does a share transfer or share issue affect me as a shareholder?
If you already own shares in a company, and someone is coming in as a new shareholder, here’s how it could affect you.
In the case of a share transfer, things remain pretty much the same. You’ve gained a new shareholder, but your holding remains intact. In the case of a share issue, things are a little different. Because new shares have been issued, your holding will ‘dilute’ – that’s to say your percentage ownership of the company will decrease. So, it’s important to stay on top of things if the ownership of the company in which you’ve invested threatens to change. For more information, see our article Share dilution: impact on existing and future shareholders.
What are the company control issues involved?
Depending on the percentage share of the company you’re acquiring, you may get a degree of control over company decision-making. Owners of 50% or more of a company’s shares can dictate the outcome of an ordinary resolution of a company, and 75% a special resolution. Minority shareholders also have certain rights, particularly where the company proposes to take action they disagree with. You can read more about that in our shareholder remedies guide.
If existing shareholders are bothered by your proposed purchase of shares and the degree of power over decision-making that that might entail, they can exercise their right of first refusal and buy the shares themselves.