Company shares are a form of property. As per the Companies Act 2006 and the conditions set out in a company’s articles of association and shareholders’ agreement, their ownership can be transferred or sold to other people. To do so, a stock transfer form must be completed.
A company may also wish to create more shares by increasing its ‘share capital’. This often happens when a business needs to raise funds by bringing in additional investors. To do this, an application needs to be made to the company for shares, the company should approve the allotment (as well as carry out any additional procedures dictated by its constitution), and a Return of Allotment be completed and filed at Companies House.
How to transfer shares
They can be transferred from one person to another in exchange for:
- A cash payment.
- A non-cash consideration such as goods, services, knowledge or writing off debts.
- As part of an employee share scheme.
- As a gift to a family member or spouse.
If you wish to transfer or sell shares after company formation, you should begin by completing a Stock Transfer Form. The following details must be provided:
- Name of company.
- Company registration number (CRN).
- Quantity and class (s) being transferred.
- Name and address of existing shareholder (transferor).
- Name and address of new shareholder (transferee).
- Amount paid for the transfer.
- Details of non-cash payments, if applicable.
- Signature of the transferor.
- Stamp Duty liability, if applicable.
The proposed transfer will then need to be approved by the board or members (the latter of whom may also need to waive their right to pre-emption, if applicable). When the transfer is complete, the director should provide a copy of the stock transfer form to both parties. The company should retain a copy with its statutory records. These are usually stored at the registered office or SAIL address.
New members should be issued with share certificates as proof of ownership. The statutory register of members should be updated as soon as possible to reflect the transfer and record details of new and departing members. If necessary, you should amend your register of persons of significant control and make the associated filings with the Registrar.
There is no need to immediately notify Companies House about the transfer. These changes will be reported when the next annual confirmation statement is filed. You can, however, file an early statement or update it if would like this information to be reflected on the public register immediately. This is particularly recommended if you are setting up a bank account, or otherwise engaging with a third party.
A copy of the stock transfer form must be delivered to HMRC if the sale value of the transfer exceeds £1,000. The transferee will be liable to pay Stamp Duty of 0.5% of the total sale value.
Issuing shares after incorporation
Companies may be required to issue new shares for many reasons, such as bringing in business partners, raising capital from outside investors to fund expansion or pay for a new project, to pay debts, to introduce a bonus scheme for employees, or to gift shares to family members.
The Companies Act 2006 imposes no legal restriction on the number of shares a private company can issue during or after incorporation, but it is possible to include certain restrictions in the articles of association and a shareholders’ agreement, including authorised share capital, pre-emption rights of existing members, and the director’s power to authorise allotments.
To issue more shares after company formation, the prospective members will need to make an application to the company (together with any relevant payments), members should waive their right to pre-emption (where necessary), and any other provisions described in the constitution should be complied with. Finally, the allotment should be accepted (by either the directors or shareholders, dependent on the company’s articles). Once the allotment has taken place, the directors must provide the following details in a Return of Allotment (Companies House form SH01):
- Company name.
- Company Registration Number.
- Date(s) of allotment(s).
- Number, class (type), currency and nominal value of each unit.
- Amount paid or unpaid on shares.
- Details of non-cash payments, if applicable.
- Statement of capital.
- Prescribed particulars (rights) attached to shares.
- Director’s signature.
Directors are legally responsible for filing Form SH01 with Companies House no later than 1 month after the allotment.
A certificate should be issued to each member upon taking new shares. The company should also retain copies of these certificates at its registered office or SAIL address.
The statutory register of members should be updated with details of the new shares and the people who hold them. If your register of persons of significant control changes, as a result, this should be amended and the relevant filings made. There is no need to provide Companies House with members’ details until the next confirmation statement is filed although, as before, it is recommended.
What is the authorised share capital?
Authorised capital is an optional provision that can be included in the articles of association. It limits the number of shares that can be issued. Companies formed before 1st October 2009 under the Companies Act 1985 have this provision automatically included in their articles, but the introduction of the Companies Act 2006 allows members to amend or remove this provision at any time by passing a special resolution.
Companies incorporated after 1st October 2009 are free to forgo this provision entirely (unless explicitly required in their articles).
Why is authorised share capital no longer a legal requirement?
This provision became optional when Stamp Duty ceased to be payable on the authorised capital. When companies were incorporated under the Companies Act 1985, they were required to pay Stamp Duty to HMRC in relation to their authorised capital. This was stated in the memorandum and articles of association as a sum of money divided into a quantity of shares of a fixed value. They were not required to issue all of their authorised shares, but they were not permitted to issue more than the maximum figure shown in the memorandum and articles.
Stamp Duty is now only payable when the sale value of a transfer exceeds £1,000.
What are pre-emption rights of existing shareholders?
Pre-emption rights are provisions that provide existing members first refusal of new or existing shares that become available. The Companies Act provides default pre-emption rights on allotment of shares, which companies can disapply or replace in their articles. Whilst there are no automatic statutory provisions for pre-emption rights on the transfer of shares, companies can choose to include such provisions in their constitution.
This provision protects owners against the unfair dilution of their investments because it enables them to maintain their existing proportion of ownership and control. For example:
You own 25% of the issued shares. You must be given the option to purchase 25% of any shares that become available. If you decline to purchase them, they can then be offered to outside investors.
Pre-emption rights can also prevent non-members joining a company and potentially harming the status quo or mission of the business.
Directors’ power to transfer and allot shares
The rights and powers of directors, including the power to transfer and allot, are outlined in the Companies Act 2006, the articles of association and any service agreement between the company and director. Members have the power to change these rights at any time by passing a resolution.
Transfers can usually be authorised by directors, but due to the impact transfers can have on members’ beneficial rights and controlling interests, it is often desirable to prohibit directors from authorising transfers without the permission of existing members.
When a director has no power to authorise transfers, the members must pass a resolution to grant such authorisation to the director or to permit the transfer on that occasion.
The articles adopted by any private limited company formed after 1st October 2009 permits directors of companies with a single share class to authorise the allotment of ordinary shares without the approval of the existing owners. This power, however, is still at the discretion of company owners because they can restrict the director’s powers in the articles. If the director is not permitted to authorise an allotment (including as a result of it being a multiple share class company), the shareholders must either pass a resolution to approve the allotment, or amend the articles to grant such power to the directors.