When a shareholder leaves a company, their shares need to be transferred by sale or gift to someone else. This is because you cannot have unallocated shares in a company. Below, we explain how to transfer shares and remove a shareholder from a limited company.
Shareholders can leave a company at any time after incorporation for any number of reasons, whether to recoup an investment, remove their association from a company, or as a result of illness or death.
Whatever the reason, the process of selling or gifting shares must be in line with any provisions stipulated in the company’s articles of association, such as pre-emption rights, and initiated through a Stock Transfer Form.
The Stock Transfer Form should be submitted to the board of directors for approval. When the transfer is approved, a share certificate should be issued to the new shareholder. You can download a free share certificate template here.
The directors must update the company’s Register of Members, in addition to notifying Companies House on the next Confirmation Statement (formerly the annual return) to ensure that the information held on the public register of companies is accurate and up to date.
The death of a shareholder
If a shareholder dies, the shares form part of their estate. The executors of the will then enact their will, signing the Stock Transfer Form in this capacity. Again, it befalls the board to accept the transfer (taking into account any requirements under the company’s articles of association) and update the Register of Members as appropriate.
Many companies include provisions in a shareholders’ agreement to deal with the death of a shareholder. It is common for an agreement to dictate that, upon the death of a shareholder, their shares will pass to a specific person or be made available for purchase by the company or existing company members.
The death of a shareholder is a particularly complex area for many companies, so it really is best to consult a solicitor and prepare an effective shareholders’ agreement that provides clear resolutions for the transfer of shares due to death.
Forcing a shareholder to leave
Shareholder disputes can cause a number of problems, so do try to avoid them as best you can. It’s incredibly difficult to force members to leave a company. After all, they are under no obligation to sell their shares unless the shareholders’ agreement or articles are well-drafted to include a specific departure procedure.
The first course of action you must take to resolve an issue should be a negotiation. The majority shareholders could offer a fair value for the minority’s shares.
If they refuse to negotiate, you could then take drastic measures by winding up the company. However, you can only do this if the minority has less than 25% of the issued shares. You will need a 75% majority of shareholder’s votes to pass a special resolution to wind up the company.
If the company is solvent, winding up the company may be a feasible option. You can start a members’ voluntary liquidation and transfer the company’s assets to a new company that excludes the minority. This can be costly and time-consuming, but it may be the only course of action in certain situations.
Best advice: avoid this potential nightmare by drafting a sound shareholders’ agreement when the company is set up. Otherwise, consult a solicitor for professional advice.
Updating the register of members
Every limited company must keep a Register of Members. This statutory register is used to record the names and addresses of all members (or guarantors, if the company is limited by guarantee), the date they were registered as a member of the company, details of the shares they hold, and the date they ceased to be a member (where applicable).
Shareholders become members on the date they purchase new shares or receive existing shares via transfer. They cease to be members on the date their shares are transferred to someone else.
It is the responsibility of directors to ensure that this register is accurate, up to date, and kept available for public inspection at the company’s registered office or alternative inspection location (SAIL address). Therefore, this register must be updated as soon as possible whenever a company chooses to add or remove a shareholder.
Notifying Companies House when you remove a shareholder
You must notify Companies House if you bring in a new shareholder or remove a shareholder from your company. These changes should be reported in Part 4 of the next Confirmation Statement. However, we recommended updating the Confirmation Statement immediately after the transfer.