There are two ways of becoming a shareholder in a company: either by purchasing existing shares (a share transfer) or by subscribing for new shares (a share issue).
If you wish to become a shareholder in a company, you should know the difference between a share transfer and a share issue. Choosing either option depends on whether you want to make a direct investment or join an existing shareholding. Both options require different legal documents and procedures that will allow you to become a shareholder of the company. This article tackles the most common questions as well as an explanation of the process and potential benefits as a shareholder.
|Question||Share Transfer||Share Issue|
|What is a share transfer or share issue?||
A share transfer is the buying and selling of shares between shareholders. The incoming shareholder (buyer) buys existing shares from a current shareholder (seller) who wishes to sell their stake in the business. The company’s total equity remains unchanged.
|The incoming shareholder (or investor) subscribes for new shares. The company “creates” new shares by issuing shares to the investor in exchange for additional equity to grow the business.|
|When does a share transfer or share issue occur?||
Shares are transferred where an existing shareholder fully or partially exits the company. A seller wants to sell shares because they need money or they no longer want to be part of the company.
|Shares are usually issued when a company wishes to raise money and grow the business.|
|What is the share price?||
The buyer and seller agrees on the price. The shareholders agreement or constitution can provide guidance on how to determine the price where parties disagree.
|The incoming shareholder generally subscribes for shares at fair market value. Different tax rules may apply if the shareholder gets discounted shares.|
How Do You Transfer or Issue Shares?
- The seller notifies all other shareholders of their intention to sell. Shareholders may notify the seller of their intention to buy shares within a specified time period or waive their right to purchase shares. This process is known as exercising pre-emptive rights or first right of refusal.
- If more than one shareholder intends to buy the shares, each shareholder buys shares in proportion to its existing shareholding.
- If no shareholder intends to purchase shares, the seller or the company finds a third party buyer.
- The seller prepares a share sale agreement with company warranties depending on the buyer’s familiarity with the company. The parties ratify the share sale agreement and share transfer form.
- The company resolves to transfer the shares, prepares a share certificate for the buyer updates the internal and ASIC register.
- If the buyer is a new shareholder, they sign the shareholders agreement.
- The investor and the company typically negotiate a term sheet.
- Parties sign a share subscription agreement for the investor to invest funds and for the company to issue shares, subject to company warranties.
- Existing shareholders resolve to issue shares and agree to waive their first right of refusal. Investors sign a share application form and the company updates the company records.
- A new investor becomes a party to the shareholders agreement.
How Am I Affected as a Shareholder?
If you are buying shares in the company as part of a share transfer, you may gain some decision-making ability within the company depending on the size of your shareholding.
Similarly, the company’s shareholders agreement could stipulate privileges if you hold a certain percentage of shares.
Similarly, in a share issue, you could have greater influence on the company’s affairs depending on the percentage of shares that you own. However, the process is quite different from a share transfer. There are also different tax implications for both processes. These differences are summarised below.
Company Control and Tax Implications
|Question||Share Transfer||Share Issue|
|How does this affect dilution and control of the shares in the company?||
The seller owns less shares (if they are only selling part of the shares) and the buyer owns more shares. Every other shareholders’ ownership remains the same.
Existing shareholders’ ownership dilutes. For example, where two equal shareholders hold 40 shares, their ownership decreases from 50% to 40% if an incoming shareholder purchases 20 shares.
Existing shareholders may lose some control, similar to a share transfer.
|What are the tax implications?||
For the seller, the share sale triggers a capital gains tax (CGT) when shares are held on capital account.
CGT is calculated on the difference between the sale price and the original price of the share when they were bought by the seller.
As a general rule, an individual investor will not be taxed for subscribing for shares unless the investor received a discount on market value.
Once a shareholder, any dividend received will form part of the investor’s taxable income subject to its marginal tax rate.
How Are Existing Shareholders Affected?
Existing shareholders can exercise their first right of refusal before you join as a shareholder.
If it is a share transfer, they can notify the seller of their intention to buy shares within a specified time period or waive their right to purchase shares. If it is a share issue, they can resolve to issue shares and agree to waive their rights of refusal.
A share transfer or share issue could significantly impact their ability to make decisions within the company or control the company.
A share transfer allows new shareholders to buy into an existing shareholding. A share issue allows a shareholder to come on board as an investor, increasing the equity available for company growth. Existing shareholders should be wary of a share transfer or share issue if either process could affect their decision-making ability or dilute their control of the company. If you have any questions or need assistance with a share transfer or a share issue, get in touch with LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.
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