Summary
- Before selling shares in a private company, you must review the company’s Articles of Association and any shareholders’ agreement to identify restrictions, pre-emption rights, and required approvals.
- The buyer does not become the legal owner until the company updates its register of members, even if payment has been made and a stock transfer form has been signed.
- Stamp duty, capital gains tax, and corporation tax may all apply depending on the structure and parties involved in the sale.
- This article is a plain-English guide to the legal process of selling shares in a UK private company, written for business owners by LegalVision, a commercial law firm.
- LegalVision specialises in advising clients on share transfers and corporate transactions.
Tips for Businesses
Check your Articles of Association and shareholders’ agreement before agreeing any sale. Offer shares to existing shareholders if pre-emption rights apply. Use a written share sale agreement to record price and terms. Submit the stock transfer form, pay stamp duty where required, and ensure the register of members is updated promptly.
Selling your shares in a UK private company requires you to take important and strict legal steps. The process is governed by company law, the company’s Articles of Association, and often a shareholders’ agreement. Overlooking these rules can stall the completion of your share transfer, invalidate it or trigger disputes in the future. This article explores some key legal issues to consider when you are selling shares in a UK private company.
Selling Your Shares
When a shareholder sells shares, ownership transfers to the buyer, who pays the seller directly.
The company must, where required, approve the transfer and update its register of members before ownership changes. Until the buyer is entered into the register of members of the company, the seller stays the legal owner of the shares.
However, the share buyer may obtain the beneficial interest in the shares before registration, even though legal title does not pass until the buyer is entered in the register of members.
Determining the Price You Sell Your Shares For
Private companies do not have a set market price for shares. Buyers and sellers will usually agree on the relevant price between themselves.
In some companies, a shareholders’ agreement sets out how shares must be valued. This may include a formula or an independent valuation. Where such rules apply, the parties must follow them.
Continue reading this article below the formCall 0808 196 8584 for urgent assistance.
Otherwise, complete this form, and we will contact you within one business day.
Legal Steps When Selling Your Shares
Several legal rules apply when selling shares, deriving from both company law and the company’s own governance documents. Generally, your shares are transferable unless your company’s Articles of Association cover express restrictions or qualifications on the transfer.
This document and any shareholders’ agreement usually play a central role and both need reviewing before agreeing to the sale of shares to check if any approvals, restrictions or processes apply to the proposed share sale.
Considering Company Legal Rules
Private companies will often restrict who can become a shareholder. These restrictions usually appear in the Articles of Association, which act as the company’s internal rulebook.
Some companies also adopt a shareholders’ agreement. A buyer is usually bound by a shareholders’ agreement only if they agree to it, often by signing a deed of adherence during the sale.
Before agreeing to sell your shares, you should check these documents carefully as they will often set out required steps or approvals that you need to satisfy for the share sale.
Handling Share Transfer Restrictions
In some cases, it may not be practical to comply with a restriction on the sale of shares. Depending on how the restriction is written, shareholders may be able to waive it, not apply it for a specific transfer, or amend the Articles of Association. What you can do depends on where the restriction is found and how it is drafted. Changing or waiving a restriction usually needs approval from shareholders.
Agreeing on the Terms of the Sale
The law does not require a written share purchase agreement for every share sale. Simple transfers may go ahead without one.
It usually records the price, payment terms, and completion mechanics of the share sale. It also typically allocates risk through warranties, indemnities, and liability limits.
Director Approval and Registration of Share Transfer
Paying the price and signing a stock transfer form does not alone make the buyer the legal owner of the shares you sell to them. The company needs to recognise the buyer as a shareholder, upon the delivery of a transfer document, commonly a completed and signed stock transfer form, by the seller. Where the Articles of Association require it, the directors must also approve the transfer.
The company must then enter the buyer’s name in its register of members. Until this happens, the seller remains the legal owner in the company’s records, even if the buyer has paid and both parties treat the buyer as the owner.
Stock Transfer Forms and Share Certificates
Most transfers of certificated shares use a stock transfer form. This form records the seller, buyer, shares being transferred, and the price. Companies usually require the seller to submit the original share certificate. This shows that the seller owns the shares.
If the seller has lost the certificate, the company may accept a formal indemnity instead. If the seller transfers only part of their holding, the company usually issues new certificates after registration. After approving and registering the transfer, the company must issue a new share certificate to the buyer, usually within two months.
Stamp Duty and Tax Issues
Stamp duty applies if shares are sold for more than £1,000. The buyer typically pays 0.5% of the price, rounded up to the nearest £5.
The company must not register the transfer until HMRC confirms payment or exemption. HMRC usually provides this confirmation through electronic stamping. This often creates a short delay between completion and registration.
Selling shares can have wider tax consequences for both parties as individual sellers may need to pay capital gains tax. Corporate sellers may need to pay corporation tax on any chargeable gain. The position depends on the seller and the sale structure.
Corporate Filing Tasks
A share transfer does not usually require immediate filing at Companies House. The company normally updates the shareholding details in its next confirmation statement.
Because control can change before registration, the company may need to update PSC information before the buyer is formally registered.
Avoiding Pitfalls and Taking Legal Advice
Problems can arise where parties do not check their company documents before agreeing to a share sale.
The rules they need to follow may require shareholder consent, giving existing shareholders pre-emption rights, restricting who can acquire shares, or other requirements. Failing to follow the correct steps or handling them properly could delay or prevent the share transfer.
This guide will help you to understand your corporate governance responsibilities as a director, including the decision-making processes
Key Takeaways
Selling your shares requires you to carefully check your company’s rules, prepare the correct documentation, consider stamp duty and tax issues and ensure that the company records the change in ownership. Following the correct steps from the outset can help the sale complete smoothly and reduce the risk of later problems. You can seek support from a corporate solicitor if you need help with this process.
LegalVision provides ongoing legal support for businesses through our fixed-fee legal membership. Our experienced corporate lawyers help businesses manage contracts, employment law, disputes, intellectual property, and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 0808 196 8584 or visit our membership page.
Frequently Asked Questions
What is a share transfer?
A share transfer is when an existing shareholder sells or gives their shares to someone else. The shares move from one owner to another.
What paperwork is needed for a share transfer?
A stock transfer form is usually required. You may also need your original share certificate, and will often enter into a share sale agreement.
What happens if directors refuse to register a share transfer?
Directors may refuse registration only for reasons set out in the Articles of Association. They must notify the buyer of the refusal and explain why.
Does selling shares require a Companies House filing?
Not immediately. The company updates shareholding details in its next confirmation statement. However, if the sale changes who has significant control, the company may need to update its PSC register sooner.
We appreciate your feedback! Request your free consultation now.
