In our last article we looked at the first half of the share transfer procedure, including how to complete the stock transfer form and the payment of any stamp duty to HMRC. Today we look at the rest of the procedure for share transfers, starting at the point the company really becomes involved.
4 The company receives and checks the transfer documents
After the stock transfer form is completed and, where required to be stamped, returned from HMRC after payment of stamp duty, the stock transfer form together with the original share certificate should be forwarded to the company for registration.
There are a number of checks the company will wish to perform:
- That the transferor’s details on the stock transfer form match those entered in the register of members;
- That the number and type of shares on the stock transfer form match those held by the transferor;
- If shares are unpaid or partly paid, that the correct form J10 has been completed and the transferee has signed to accept liability for future calls on the shares;
- That the share certificate returned is valid – i.e. an active certificate according to the company’s records. If the share certificate is not available, the company should insist that a form of indemnity is completed by the person transferring the shares – our post on common scenarios involving share certificates talks about how to handle this;
- If the person signing for the transfer is not the shareholder recorded in the register of members, that they have the required authority to arrange the transfer. For example, a grant of probate will need to be seen where a deceased shareholder’s legal personal representatives are acting and, where an attorney acts on behalf of a shareholder, the deed setting out the Power of Attorney.
The person responsible for maintaining the company’s register of members is responsible under the Companies Act 2006 for ensuring that all transfers accepted for registration are properly stamped or correctly certified as exempt. However, they do not need to check that the consideration paid accords to the market value of the shares. It is only required to ensure the stamp duty stated corresponds to the consideration detailed on the stock transfer form.
Aside from good record-keeping and meeting regulatory requirements, the company may also wish to try to identify the likelihood of stakebuilding in the company’s shares by a potential takeover bidder.
5 The board of directors decide whether to approve the transfer
In most cases approval of the transfer by the company is a formality, confirmed via a board resolution unless an officer of the company has previously been authorised to accept share transfers. You can adapt our template directors’ resolution to approve the transfer of shares.
However, there are a number of reasons why the transfer may instead be rejected. We’ll look in detail at the reasons why a share transfer might not be successful in a forthcoming article, but a few possible examples include:
- The transfer has not been documented correctly using an acceptable form;
- The transferring shareholder has failed to return their share certificate or a completed and signed form of indemnity;
- The attempted transfer is in respect of more than one class of share or to more than a certain number of joint beneficiaries, the common upper limit being four;
- The shares are not fully paid and the proposed transferee has not accepted liability for future calls on them;
- The proposed share transfer is to an infant, person of unsound mind, a bankrupt or an entity which is not a corporate body able to hold shares itself;
- Where the company has a lien on the shares;
- Where transfers in the shares have been suspended (for example during a ‘close period’);
- Where the Articles of Association define pre-emption rights over the shares and the appropriate procedure related to these rights has not been followed;
- Where the company’s Articles of Association give the board a blanket discretion to decline share transfers.
If in doubt, check the company’s Articles of Association for restrictions that apply!
A proposed share transfer must be processed or rejected within two months of receipt. Where a transfer is rejected, the reasons for refusal should also be provided within that timescale. While reasons should be provided, there is no need to provide minutes of directors’ meetings as evidence of the reasons stated.
6 The company updates its statutory registers, cancels the old share certificate(s) and issues any new certificate(s) required
Once the transfer is approved, the company should update its statutory registers as follows:
- Cancel the entry in the register of members relating to the former shareholder. If only some of their shares have been transferred, the register will need to reflect their reduced shareholding;
- Insert an entry in the register of members for the transferee and the shares transferred to them. Again, an existing entry may need to be updated if they were a shareholder in the company before the transfer; and
- Make an entry in the register of transfers (if the company keeps one).
It’s worth noting that technically the transferor remains the holder of a share until the transferee’s name is entered in the register of members as the new holder of it.
You’ll also need to update the share certificate position, which will include:
- Cancelling the old share certificate;
- Issuing a new share certificate to the new holder of the shares;
- Where only some of the shares covered by the old share certificate have been transferred, issuing a new certificate for the balance of the shares being retained by the transferor; and
- Updating the company’s log of share certificates in issue accordingly.
We’ve produced a simple checklist covering what’s required on a valid share certificate. If you want a simple means to create new share certificates from a free template, you should also check out our guide to producing share certificates.
The old share certificate and the stock transfer form should be retained by the company, unless the Articles of Association give authority to destroy them after a certain period. Both the former and new holder of the shares may also want to keep a copy of the stock transfer form for their records.
7 At a later point, the transfer is confirmed to Companies House as part of a Confirmation Statement
Neither the stock transfer form nor the new share certificates need to be lodged with Companies House. There is also no requirement to inform Companies House of a share transfer at the time it takes place: effectively, the company still has the same number of shares in issue, even though some of those shares are now owned by different shareholders.
Instead, details of each transfer must be included in the company’s next confirmation statement (which replaced the annual return from 30 June 2016).
Opinions differ on the importance of doing a confirmation statement shortly after significant share transfers, particularly where a change in control of the company is involved. Many companies, perhaps understandably, look to get the confirmation statement completed before a large number of transfers are made, giving time for all the requirements to be satisfied before the next return is due. Others, however, do the opposite and look to file a confirmation statement early. Doing so, and including the transfer details, can provide the purchaser and seller with comfort that the transfer is “official” because anyone then retrieving information from Companies House would see the updated shareholder position. However, in law, it’s the register of members that defines who owns shares in the company, regardless of whether Companies House have yet been updated via a confirmation statement. The choice is up to you.