Shares are the small units which a person owns in a company. Share transfers reflect the voluntary transfer of shares from one party to another. A company can freely transfer its shares.
However, implementing rules may impose specific restrictions on the issuance of shares from private limited companies. For a private company, outright ownership is a reflection of shareholder power. To transfer ownership of a company or bring in new investors, a share of a private equity firm must be offered.
Let’s explore how to transfer shares in a private limited company in the following sections!
What is a share transfer?
The voluntary transfer of ownership of a share from one party to another is called a “transfer”. The power to issue shares in a company is generally unrestricted but shares in a private company may be limited by the laws governing the company.
Importance of Share Transfer
The process of transferring shares in a private limited company is important for several reasons. This allows ownership and rights to be reconfigured, thereby facilitating business expansion, capital raising, and structural changes in ownership structure Furthermore, dividends can work to attract potential investors and to give current shareholders a way to exit the company if necessary. However, the process of transferring shares in a private company satisfies specific legal and regulatory prerequisites.
Share Transfer Restrictions in AOA
A private company is considered a “closed corporation” with members like a partnership. Thus, the issuance of shares in a private company may be restricted by the Articles of Association (AOA). Therefore, before initiating the transfer of shares, the rules and regulations of the company should be reviewed.
Restrictions on the rights of shareholders to assign shares typically take two forms:
- Right of preemption: If a shareholder wishes to sell some or all of his shares, he must first offer such shares to the other existing shareholders of the private company at price ordered by the directors or auditors of the company. When no existing shareholders are interested, shares in the company can be freely transferred to an outsider.
- Power of directors to refuse: A director may have the power in certain circumstances to refuse to register the transfer of shares – specified in the articles of association of the company.
Only restrictions under the articles of association are considered legally binding. There are no personal contracts between the shareholders that bind the company or the shareholders. The transfer of shares may be restricted only by the articles of association. The right of a private company to transfer shares cannot constitute an absolute prohibition or restriction on the transfer of power.
Documents Required To Transfer Shares In A Private Limited Company
Obtaining shares in a private firm requires a number of key papers. These documents assist to assure transparency, legal compliance, and the protection of all parties' rights.
The following are some of the documentation necessary to own shares in a private company:
- Share certificate: The share certificate is a tangible proof of ownership and is mandatory for the seller (supplier) to give to the buyer (supplier).
- Board Resolution: A formal Board resolution is necessary to approve a transfer notice and must be properly recorded.
- Transferee notification: The transferee (seller) assumes the responsibility of giving written notice to the company expressly indicating the transfer of shares in the private company
- Offer Letter: The offer letter is sent to existing shareholders and constitutes a formal communication regarding the purchase of shares. This document includes important information such as the sale price and the proposed purchase date.
- Letter of Objection: Existing shareholders have the right to send a letter of objection, stating that they are interested in acquiring the proposed shares.
- Transfer of Shares: A complete share transfer agreement including the necessary stamp duty must be duly drafted and signed by the transferor and the transferee.
- Board Resolution: Obtaining board approval is an important step, which requires the board to approve the transfer of shares by a formal resolution.
The Procedure for Transfer of Shares in a Private Limited Company
As mentioned earlier, in a private company, the transfer of shares is governed by the articles of association of the company or their association. The following steps involve transferring shares in a private limited company.
- Step 1: The transferor must notify the company in writing of its intention to transfer the shares in the private limited company
- Step 2: Upon receipt of a notice from the issuer, the company will notify the shareholders that shares are available for purchase
- Step 3: In the process of issuing shares in a private company, thereafter, is for the company to announce the price of such shares with the time frame in which the members have to state whether they are interested in buying the shares
- Step 4: If none of the members express interest in allocating shares to the private company, the issuer can transfer the shares to an outsider, without objection from the company
- Step 5: If a person expresses an interest in the issue of shares in a private company, a share transfer form, or a private company share transfer form, must be completed in accordance with SH 4 on transfer of shares in the new form
- Step 6: The next step in issuing shares in a private company is the relevant share certificate or distribution deed
- Step 7: The transfer form in a private company should be duly executed by the shareholder and the issuers. The execution paper must be duly, expensively stamped, dated and cancelled
- Step 8: As regards allotment of shares, you have to attach the prospectus and send the same to the company within 60 days from the date of exercise by the issuer or issuer of the shares
- Step 9: The Share Transfer Agreement and the Executive Shareholder Agreement will govern the relationship between the shareholders.
Conclusion
Transferring stocks in a personal confined employer entails a structured system ruled by means of torganisationion's Articles of Association (AOA). Key steps include notifying the agency, imparting shares to current shareholders, finishing important documentation, and acquiring board approval. This technique ensures transparency and compliance with legal necessities, allowing ownership reconfiguration, capital elevating, and business expansion whilst shielding the rights of all parties concerned.
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