Similar to any other investment, buying or selling shares requires thought and planning. Whether you are selling your stake in a company or looking to invest in another, you need to be sure that the correct documentation is in place. This is because you need to meet certain formalities to effectively transfer title to shares. This will enable the buyer to enter into the register of members. Each company will have its own transfer process set out in its governing documents, and you need to take care to ensure that the documentation matches these particular requirements. This article details the documents which you will typically need to effect a share sale.
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Share Sale Agreement
A share sale agreement is a document that outlines the terms of the sale. It sets out the:
- rights and obligations of the parties to the transaction;
- actions that the parties need to perform; and
- the process of when and on what conditions the actions need to be performed.
A share sale agreement provides a written record of the agreement between the buyer and the seller. It may be relevant in the event of future disagreement. As such, it should be as comprehensive as possible.
There are typical provisions that each share sale agreement will include. Most importantly, it outlines:
- the number and type of shares you are selling;
- the price that the buyer is paying for them; and
- any conditions that need to be met before the sale takes place.
The agreement should also discuss how payment will be made.
Warranties and Indemnities
Another function of the share sale agreement is to allocate risk between the parties. The seller will be required to give warranties appropriate to their level of involvement with the business and the percentage of the company being sold.
Warranties operate to provide the buyer assurances about what they are buying. A breach of warranty can allow the buyer to claim damages against the seller. To the extent that the buyer is aware of an issue before completion, the seller can provide an indemnity to reimburse the buyer for any loss suffered as a result of the issue.
Transfer Form
The seller and buyer must sign a share transfer form to formally transfer ownership of the shares. The share sale agreement will provide that the share sale does not complete until a signed transfer form has been provided by the seller.
This form details:
- the shares that are subject to the transfer;
- what the buyer is paying for the shares; and
- whether the buyer will hold the shares for itself or on trust.
Board Resolution
Before a share sale is effective, the board of directors needs to approve the transfer. This approval can be by way of a formal board resolution passed at a meeting of directors (documented in the minutes of the meeting). Alternatively, it can be passed by a circular resolution agreed to in writing by all of the directors.
The terms of the company’s constitution or shareholders’ agreement may contain specific requirements regarding the approval of share transfers. Often, the requirement is simply a resolution of the board approving to register the share transfer and enter the name of the buyer in the register of members as the holder of the shares. This entry of the buyer’s name in the register of members completes the transfer of ownership. It means that the buyer has become a shareholder. To obtain the board’s approval, the signed share transfer form should be presented to the board.
Consent of Shareholders
There may be a shareholders’ agreement in place between the seller and other shareholders of the company. Such an agreement will detail the respective rights and obligations of every shareholder in the company.
Often, shareholders have a right of first refusal, sometimes called a ‘pre-emption right’. This means that any shareholder wishing to sell their shares must first offer them to existing shareholders in proportion to their shareholdings before selling them either to one existing shareholder or to a third party. If this is the case, all shareholders must consent in writing to waive their pre-emption rights before the sale can complete.
Share Certificate
Once the seller has sold their shares, the company must cancel their share certificate and issue a new one in the name of the buyer. If the seller has retained some of their shareholding, a balancing share certificate must be issued by the company for their remaining shares.
The cancellation of the old certificate and execution and issue of the new certificates will be one of the items approved by the board at the time of registering the transfer.
Notify ASIC
The company must notify ASIC of the share transfer within 28 days of completing the transfer. The current form to use to notify the transfer is Form 484. It must be submitted online.
Letter of Resignation
If the seller of the shares is also a director of the relevant company, they will likely need to provide a formal letter of resignation. Whether this is a requirement of the sale will be specified in the share sale agreement. If it is required, the resignation letter can be given at or before completion of the share transfer.
Key Takeaways
The process of a share sale is quite complex and involves a number of different documents. It is important that, if you are selling shares, you fulfil all the legal requirements of doing so. If you have any questions about any of these requirements, contact LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.
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