Difference Between a Share Transfer and a Share Issue in the UK

Share transfers and share issues sound similar. However, they are two different kinds of transactions. A share transfer describes a transaction where an existing shareholder transfers some or all of their shares to a third party. In this instance, the company does not create any new shares. In contrast, a share issue describes a company creating new shares that it transfers to third parties in exchange for a payment. This article will examine the differences between a share transfer and a share issue in more detail. It will also consider their respective advantages and disadvantages. 

Share Transfer

A share transfer is a transaction in which an existing shareholder transfers their shares to a third party. This third party may be another existing shareholder or someone unaffiliated with the company. The third party can likewise be an individual or another company.

In most cases, the company where the existing shareholder holds the shares is not a party to the transaction. However, share buybacks and redemptions, where a company repurchases or redeems existing shares, may technically count as a form of a share transfer.

Subject to any agreements otherwise in effect, an existing shareholder can transfer shares in private or public companies. However, private companies often restrict the ability of their shareholders to transfer shares (see below). 

An existing shareholder may transfer their shares for several reasons. These include:

• looking to cash out on their investment in the company by selling the shares to another person; 
• estate planning, such as creating a trust; or
• making a gift. 

Restrictions on a Share Transfer

The law permits shareholders to deal with their shares as they wish, including transferring them to third parties. This can pose a problem for most private companies in the UK because shareholders possess substantial rights and powers over the company. Accordingly, shareholders often wish to restrict the ability of outsiders to own shares without the approval of the existing shareholders. 

A company may employ a shareholder agreement and restrictions in the articles. Therefore, if you are considering transferring or purchasing shares from an existing shareholder, you should instruct a solicitor. The solicitor can review the company’s articles of association and inspect any shareholders’ agreement. Otherwise, you may breach the restrictions and accordingly face liability. 

Share Issue

A share issue, also called a share allotment, describes a transaction between the company issuing the shares and the share purchasers (also called share subscribers). Companies issue shares to raise equity financing. When your company issues shares, it does so in exchange for investors paying the company cash. The subscribers may be:

• existing shareholders, such as when all the founders agree to contribute additional capital; or
• professional investors looking to invest in your company for several years before exiting. 

Unlike share transfers, a share issue creates new shares. This means that the total number of shares in existence increases. As a result, ownership in the company is diluted. To illustrate this effect, consider a company’s share capital before and after an allotment:

While the value per share has not changed, there are 50,000 more shares. This reflects the £50,000 the company received from the new investors.

As an existing shareholder, the allotment would not affect your ownership if you invested enough money to receive the same portion of ownership in the company. However, as often happens, if you owned 30,000 shares before the allotment and did not participate in the new issue, your share of ownership would decrease from 30% to 20%. 

Further Considerations on Share Issues

The law regulates share issues more rigorously than share transfers. If you are a director in  a company considering a share issue, you must comply with these laws. Significantly, you cannot market your shares to the public. Therefore, you may wish to instruct a solicitor to ensure you comply with the laws. 

Which is Best?

Share transfers and share issues serve different purposes. Share transfers are appropriate where you, as a shareholder, wish to unlock some value in your investment. While it does not directly affect the company, the purchaser will obtain the rights and powers the law affords shareholders. 

On the other hand, if you wish to raise additional capital in your company, a share issue is an alternative to borrowing money. 

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Key Takeaways 

Share transfers and share issues are different transactions, though both involve ownership over shares. A share transfer describes a transaction where an existing shareholder transfers some or all of their shares to a third party. At no point does the company create new shares under a share transfer. In contrast, a share issue describes a company creating new shares that it transfers to third parties in exchange for a payment. 

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