How Can I Transfer Shares to the Company or Shareholders?
< Back to Business StructuringIf you are a shareholder of a company, you may want to sell or transfer shares you own at some point.
For example, you are a co-founder of a company and departing from the business. Here, it may be agreed that you should sell some or all of your shares because it is no longer appropriate for you to own a large percentage of the company.
In some instances, it may be agreed by everyone that you can transfer your shares to a third party who is currently unrelated to the company. However, it is common that instead your shares will be taken by the company or an existing shareholder. This article addresses the differences between transferring your shares to the company or another shareholder.
Should I Transfer to the Company or Shareholders?
The processes of transferring your shares to the company compared to other shareholders are different. As such, it is important to understand which party you will be transferring your shares to. This will affect both the legal process, as well as the commercial and tax considerations surrounding the transfer.
Commercial considerations are a key factor in deciding whether to transfer your shares to the company or to shareholders. Primarily, you need to understand who will actually be paying to purchase your shares. If the company agrees to buy your shares using its company funds, you will be transferring your shares to the company. Whereas, if one or more individual shareholders agree to purchase your shares using their own funds, you will be transferring your shares to another shareholder.
Another factor to consider is whether there are any legal requirements guiding the transfer. If the company has a shareholders agreement or constitution, it may contain certain requirements.
For example, it is common that the shares of startup founders will be subject to share vesting in the company’s shareholders agreement. Share vesting terms often require that the unvested shares of founders are bought back to the company in the first instance (rather than another shareholder) if the founder departs.
It is important to consider whether there are any legal terms which will guide the process of whether the shares are bought back by the company or can be transferred to shareholders.
It is also important to obtain tax advice on any proposed transfer because share buy-backs by companies have different tax implications for transferring shares between shareholders. Whether one process is more advantageous from a tax perspective than the other may guide the decision you make.
Transferring to Another Shareholder
If you have agreed to sell your shares to another shareholder, you will need to follow the process below.
| Process | Description |
| Obtain Approvals and Consents | If the company has a constitution or a shareholders agreement, it is important to first review these documents to see if there are any approvals or consents you must obtain before transferring the shares. For example, some common approvals and consents are:
It is also important to notify the company of the intended transfer as it will need to prepare and sign certain company secretarial documents and notify ASIC, as discussed below. |
| Share Sale Agreement | Whether you require a formal share sale agreement depends on the value of the transaction and the amount of risk involved. For example, where the purchase price for the shares is high, and the buyer is taking on a lot of risk, the buyer will want a formal share sale agreement so that the seller is providing appropriate representations and warranties to mitigate the buyer’s risk. Key terms of share sale agreements include:
|
| Share Transfer Company Secretarial Steps | There are also certain corporate secretarial steps which you must take to properly effect the transfer of shares. Here, the:
|
| Notifying ASIC | Once the share transfer is complete, the company will need to notify ASIC that this has occurred. They should do this within 28 days of the share transfer to avoid late fees. |
Transferring to the Company
The legal process to transfer your shares to the company is called a share buy-back. As part of a share buy-back, the company buys back the relevant shareholder’s shares and then cancels them. The process for share buy-backs must follow what is required by the Corporations Act.
It is important to consider what kind of share buy-back is being undertaken as this will affect the process for the buy-back. Common types of share buy-backs for private companies are:
- selective share buy-back;
- equal access buy-back; and
- employee share scheme buy-back.
If it is only your shares being bought by the company, this will be a selective share buy-back. The process for a selective share buy-back is set out below.
| Process | Description |
| Shareholder Approval |
The shareholders of the company will need to approve a selective share buy-back. This can be done either in a meeting of shareholders or via a written resolution signed by all shareholders. The company will also need to prepare an explanatory memorandum which contains all the information shareholders will need to know to decide whether to approve the buy-back. Importantly, they will need to understand whether the buy-back will affect the company’s ability to pay back creditors. |
| Buy-Back Documents | A share buy-back agreement must be prepared, which sets out the key terms of the buy-back and the exit arrangements for the departing shareholder. Examples of key terms include:
There may also need to be ancillary documents prepared, such as a letter of resignation or IP assignment documents. The board will also need to approve the share buy-back either in a board meeting or a written resolution signed by the directors. |
| Notify ASIC | The company must notify ASIC of the proposed share buy-back prior to it occurring. As part of this, the company will need to send to ASIC the:
|
| 14 day Holding Period | Once notified to ASIC, the company must wait at least 14 days before proceeding with the buy-back in case ASIC has any queries or issues regarding the buy-back. |
| Completing the Share Buy-Back | Once the 14 day period is over, the company can proceed with the buy-back:
|
| Notify ASIC That Buy-Back Is Complete | Once the share buy-back is complete and the shares have been cancelled, the company will need to notify ASIC that this has occurred. This should be done within 28 days of the share buy-back to avoid late fees. |
Key Takeaways
As a shareholder, you may want to transfer or sell shares at some point. Whether you transfer shares to the company or to another shareholder will affect the process for the transfer, as well as the legal, commercial and tax implications arising from the transfer. Once you have decided which type of transfer you will be undertaking, it is important to follow the requirements of the Corporations Act, as well as the company’s shareholders agreement and constitution, if it has these in place. This way, you can ensure you are undertaking the process correctly. If you need assistance with transferring your shares, contact LegalVision’s business lawyers on 1300 544 755 or fill in the form on this page.
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