Getting it right when it comes to dealing with shares in a private company is important. Get it wrong and there can be confusion over who actually owns shares and the effect of attempted transfers. Moreover, the directors can face criticism or even claims if an issue or transfer is not done properly.
Dealing with shares incorrectly can also cause real difficulties if the company is looking for investment or the shareholders decide to sell: an investor or an acquirer will want to know who owns the shares and that the formalities in relation to the issue and any transfers of those shares have been met.
The starting point when dealing with shares in a private company is the company’s articles of association. It is the articles which regulate the internal affairs of the company. Certain provisions of the Companies Act 2006 (“2006 Act”) will also be relevant and if there is a shareholders’ agreement that will also need to be checked, not least because certain shareholders may have a right of veto in relation to the issue or transfer of shares. Without the necessary consent, some or all of the shareholders could find themselves in breach of the shareholders’ agreement.
Issue of shares
Generally, under the 2006 Act and in the absence of a prohibition in the articles, the directors of a company may allot shares without shareholder authority if the company has a single class of share. For older companies where the relevant provisions of the 2006 Act have not been applied by the company, or for companies with more than one class of share or for companies with a single class of share but a prohibition in the articles on issue without shareholder approval, an authority to allot will be required. Authority can be given under a provision in the articles of association of the company (which can be updated to include such a provision) or by an ordinary resolution of the shareholders.
Under the 2006 Act and sometimes under the articles, pre-emption rights may apply to a new issue. Pre-emption rights give a right of first refusal to existing shareholders on an issue of new shares, allowing them to preserve their relative percentage shareholdings in the company. Subject to certain exceptions, those rights must be observed (or waived) on each allotment of shares. A failure to comply may result in claims by affected shareholders so it is important the rights are checked and complied with or formally disapplied or waived.
Transfer of shares
Shares are transferable subject to the company’s articles of association and relevant provisions, if any, in a shareholders’ agreement (if there is one). Restrictions on transfer, common in private companies, are usually designed to ensure shares are offered to existing shareholders first, although often subject to exemptions. A transfer made without complying with those requirements may be void and the directors could face personal criticism or even claims if such a transfer was registered (or in other words written up in the company’s register of members).
The articles will usually govern not just voluntary transfers, but also what happens to shares when a shareholder dies or, in some cases, what happens to shares when a shareholder’s employment or directorship with the company comes to an end, so should be checked in all those circumstances. Shareholders should also be reminded, if it is the case, that share transfers are subject to restrictions.
Sometimes a company will acquire its own shares, which is known as a share buyback. This gives rise to issues about creditor protection and the way the purchase price is covered in the accounts as the company will be paying for the shares. Compliance with the usual restrictions in the articles or a shareholders’ agreement will not be enough on a buyback, where the 2006 Act sets out a detailed process to be followed.
An issue of new shares must be notified to Companies House on the prescribed form. The register of members of the company, which is a key document, and the register of allotments will both need to be updated to show the new shares and, if there is one, the new shareholder.
Transfers do not need to be notified to Companies House when they happen but a change of shareholder following a transfer should be recorded on the company’s next annual return. More importantly, the transfer document, once duly stamped, should be presented to the directors so the transfer can be registered, if approved, and the register of members updated.
Finally, new share certificates should be prepared in favour of any allottee or transferee of shares.