If 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.

ProcessDescription
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:

  • the board may have to pass a resolution approving the share transfer; and
  • other shareholders may need to waive any rights they have to the shares being transferred.

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:

  • details of the buyer and seller;
  • the purchase price and how it is to be paid;
  • any conditions which the seller must satisfy before the shares are bought, and the purchase price transferred;
  • the process for completing the share sale; and
  • representations, warranties and indemnities.
Share Transfer Company Secretarial StepsThere are also certain corporate secretarial steps which you must take to properly effect the transfer of shares. Here, the:

 

  • buyer and seller must sign a share transfer form;
  • company must issue a new share certificate to the buyer;
  • seller of the shares must destroy its old share certificates; and
  • company must record in its members register that the shares are transferred.
Notifying ASICOnce 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.

ProcessDescription
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 DocumentsA 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:
  • the process to complete the buy-back;
  • warranties and indemnities; and
  • post-buy-back obligations (for example, any non-compete obligations which will apply to the departing shareholder).

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 ASICThe 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: 

 

  • explanatory memorandum;
  • proposed share buy-back agreement; and
  • either the proposed notice of meeting (if the company intends to hold a meeting to approve the buy-back) or the proposed shareholder resolution (if it intends to obtain shareholder approval via a written resolution).
14 day Holding PeriodOnce 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-BackOnce the 14 day period is over, the company can proceed with the buy-back:
  • the company and the departing shareholder can sign the share buy-back agreement;
  • shareholder approval can be obtained;
  • board approval can be obtained;
  • the purchase price can be paid;
  • old share certificates of the departing share certificates will be destroyed; and
  • the company’s members register will be updated to record the shares as having been bought-back and cancelled.
Notify ASIC That Buy-Back Is CompleteOnce 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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