Transferring shares is when a shareholder in the company sells their shares to an existing shareholder or third party. Shareholders transfer shares for three reasons, such as:
- if they no longer want to own shares in the company;
- reduce the percentage of shares; or
- earn income from the sale.
If you are a shareholder, this article will explain when and how to transfer shares.
Is A Share Transfer Different From Share Issue?
There is a difference between a share transfer and a share issue. A share transfer involves exchange of shares between shareholders.
A share issue is where a company issues new shares to increase its amount of cash. Investors buy the new shares for a price based on the company’s value. The new shareholder’s money goes directly into the company. The other shareholders now own a smaller percentage of the company, but the company is worth more money.
However, share transfers occur between shareholders. There are no new shares. The shareholder could sell all their shares, or some of them. The purchaser buys the shares on a purchase price based on what they are willing to pay as well as the current share value. The company’s current revenue, cashflow and future revenue are influential factors that determine the value.
How Do You Transfer Shares?
1. The Decision
You decide you want to sell your shares in a company as you are not happy with the company’s direction or you want to make some money. You can sell all or some of your shares. There may be a company that has offered to buy the company, so you will join the other shareholders to sell shares to the same buyer.
2. Offer Shares to Existing Shareholders
The standard share transfer process for your company depends on your company’s shareholders agreement and constitution. You must consult these agreements so that you follow company protocol. Offer the shares for sale to the existing shareholders.
3. Offer Shares to Third Parties
If the existing shareholders choose not to buy all the shares, offer the remaining shares to third parties based on the same terms as the existing shareholders. Alternatively, sell all the shares to a third party rather than find someone who will only buy a select percentage. A shareholders agreement may clarify this approach.
4. The Shareholders Agreement and Constitution
The purchaser of the shares agrees to abide by the company’s shareholders agreement (if it has one) and the company constitution. The company provides those documents for review. Both documents govern the relationship between the purchaser, the existing shareholders and the company.
5. Legal Documents
A share transfer requires a few key legal documents:
Share Sale Agreement: The agreement outlines the terms of sale and forms a written record of the parties’ intentions. The agreement contains details about the purchase price, how the sale will take place and may include purchaser and/or seller warranties and obligations.
Share Transfer Form: You will need a Share Transfer form. The form contains sale details, but the terms and conditions are not as detailed. Sometimes, that form is an alternative to the Share Sale Agreement. You will need to update ASIC that a change has been made to the company’s member register. This can be done online through the ASIC portal.
Shareholders Agreement: Any new shareholders must agree to the company’s shareholders agreement, if there is one in place. Some companies will sign a new shareholders agreement that is entered into by all shareholders when the share sale is complete. For others, the new shareholder can sign a deed of accession to the existing shareholders agreement of the company so they are also bound by its terms.
Governance: Refer to the company constitution and shareholders agreement for the approval process. You may have the board will agree to the share sale through a resolution. Once the sale is over, the company must cancel the seller’s share certificate and issue a new share certificate to the purchaser. They can issue a replacement share certificate to the seller if they are only sell some of their shares. The company must update its members register to record the new shareholder and the change in the share ownership.You must notify ASIC of the change to the share structure within 28 days of the sale to avoid a late fee.
Drag Along and Tag Along Provisions
Depending how much percentage of the company you are selling as part of the share transfer, you may trigger certain provisions called drag along and tag along provisions. A shareholders agreement contains both clauses to balance minority and majority shareholder rights.
A drag along clause allows shareholders who hold the majority of shares (75%) to force the remaining shareholder(s) to sell their shares at the time they sell their shares. The clause allows a majority shareholder (often the founder) to offer a potential buyer to buy the whole company. The drag along clause will ensure the potential sale won’t be frustrated by a minority shareholder who disagree with the sale.
Tag along clauses have the opposite effect. They allow minority shareholders to ‘tag along’ if the majority shareholder is selling to a third party. Minority shareholders may wish to ‘tag along’ so they are not shareholders in a company controlled by people who did not want to be controlled in the company.
Existing shareholders transfer shares to end their share ownership within a company. The shareholders agreement and company constitution usually has a process for transferring shares. Once you have found a buyer, you should:
- Draft the share sale agreement;
- Ensure the company approves the sale; and
- Issue updated share certificates and update records.
If you have any questions, get in touch with LegalVision’s business lawyers on 1300 544 755 or fill out the form on this page.
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