Provisions relating to the transfer of shares are generally included in the Articles of Association of a corporate company or alternatively they can be included in a Shareholders Agreement. The advantage of including provisions in a Shareholders Agreement is that it is a private document and not on public record, unlike the Articles which are registered at Companies House.
There are various share transfer structures dealing with various scenarios and which include:
1. General Transfers – It is generally in the interests of the founder shareholders to include pre-emption provisions on share transfer. This means that in the first instance, anyone wishing to transfer shares, has to offer the shares to the existing shareholders pro-rata their shareholding. If any of the existing shareholders do not take up their full entitlement, then generally the additional shares can be offered to the other existing shareholders, who have taken up their original full entitlement. If there are any shares which are not taken up by the other existing shareholders, then either: (i) they can be acquired by the company; or alternatively (ii) they can be transferred to third parties. You should consult with your corporate solicitor who will be able to advise on the most appropriate share transfer provisions for your business.
2. Permitted Transfers – This generally allows the shareholder to transfer his shares to certain defined transferees and which generally include (i) a privileged relation such as a spouse or close family member; and (ii) a family trust. The rationale for including such a provision is that there could be tax advantages associated with such a transfer.
3. Compulsory Transfers – Essentially upon the occurrence of a trigger event the shareholder’s shares are transferred either to the company or other shareholders. The trigger events for compulsory transfer where the shareholder is an individual include: (i) death; (ii) bankruptcy; (iii) mental and/ or physical illness. Where the shareholder is a corporate entity, then the trigger event will generally be insolvency and/ or dissolution.
4. Leaver Transfers – This is a category of compulsory transfer, but due to its complexity it is appropriate to consider it in its own right. Where an employee/ director receives shares in return for his endeavour and hard work (sometimes termed “sweat equity”), then if the employee/ director ceases to be an employee or director, he is generally obliged to transfer his shares upon departure. The types of leaver can also be broken down into “good leaver” and “bad leaver”. Where an employee/ director leaves in bad circumstances such as due to gross misconduct, then he will be deemed a “bad leaver” and will have to transfer his shares to the company or the existing shareholders, at nominal value (ie if they are £1 shares then nominal value will be £1). Where an employee/ director leaves on good terms then he would be deemed “good leaver” and it could be the case that he receives market value for the shares, which could be significantly greater than nominal value. Market value would generally be determined by the company’s accountants.
In addition to considering the different types of share transfer provisions, it is also important to consider share valuation in relation to such transfers. In many instances the transfer price, if not agreed, will be “fair value”. Fair value is commonly defined as market value, but this does not have to be the case. Essentially fair value will be as defined in the Articles or Shareholders Agreement.
Summerfield Browne Solicitors have offices in London, Birmingham, Oxford, Cambridge, Northampton and Market Harborough, Leicester.
