If you’d like to sell shares in a private limited company, you have two options. You can either transfer existing shares or you can create new ones. Existing shares can only be transferred after your company has been set up. New shares can be issued (allotted) during and after the company formation process
In this post, we’ll look at the most common reasons for selling company shares, and explain the difference between allotting and transferring shares. We will also outline the rules and procedures you’ll need to follow to sell shares in a private limited company.
Why would I sell limited company shares?
There are many reasons why you might want to sell shares in a private limited company, such as:
- generating cashflow or capital investment
- selling all or part of the business to free up private equity, pursue a new venture, or retire
- motivating and rewarding company employees or directors as part of an employee share scheme
- forcing a share buyback when an employee or director leaves the company
- transferring the title to shareholdings upon the death of a shareholder
- mitigating personal tax liability by gifting shares to a spouse, civil partner, or child
- transferring shares as part of a divorce settlement
- participating in liquidity rounds in advance of a private company going public
- facilitating a merger
- converting creditors’ debts into shareholdings, i.e. paying off some of your company debts by giving your creditors shareholdings instead of money
Whatever your reason for wanting to sell shares, it’s important to first check the articles of association, refer to any shareholders’ agreement that exists, and then decide whether issuing or transferring shares is in the best interests of the company and its members
Difference between transferring shares and issuing shares
You can sell shares in a private limited company in one of two ways – by transferring existing shares or by issuing new shares.
A share transfer is where a shareholder sells their existing shares in a company. By doing so, you can release personal equity or remove yourself entirely from the business without diluting the value of all the other shares.
The quantity of shares and percentage of equity that each shareholder owns in the company remains unchanged after a share transfer. As does the company’s share capital. You’re not adding more shares or capital – the ownership of existing shares is simply changing hands.
Shares can only be transferred from one person to another after company formation.
Issuing shares, also known as ‘allotting’ shares, is the process of creating new shares. All limited by shares companies issue shares during the company formation process.
You can also allot new shares after incorporation if there aren’t enough existing ones to facilitate a transfer, or if it’s simply not ideal to distribute existing shares.
By issuing and selling new shares, you can increase your company’s share capital without the need for any member to sell their existing shareholdings.
However, when you increase the number of shares in your company, you will dilute the value of every existing share. This is because each share represents a percentage of the company. So, the more shares there are, the less each one is worth.
Whether you decide to sell shares by allotting new ones or transferring existing ones, the transfer process must be carried out in accordance with the rules and regulations set out in the articles of association and shareholders’ agreement.
Can I sell shares to anyone I want?
The rules and restrictions on share allotments and transfers are set out in your company’s articles of association and/or shareholders’ agreement. This includes provisions on who you can and cannot sell shares to.
Small companies often adopt model articles of association, which includes very few restrictions on selling shares. If you have model articles, you are free to sell or give away shares to anyone you want. The only stipulation is that the director(s) must approve the allotment or transfer.
Selling shares is relatively straightforward if you are the sole shareholder and director of the company. You have full ownership and control of the entire business, so you don’t have to ask anyone else for permission before selling shares.
However, if you’re one of many shareholders in a private limited company, you may find that the articles and a shareholders’ agreement include restrictions on how, when, and to whom shares can be sold.
Restrictions when issuing and transferring shares
The most common types of restrictions that you can include in your company’s articles and shareholders’ agreement are:
- pre-emption rights – any shares available for sale must first be offered on a pro-rata basis to the other shareholders before third parties
- lock-up – transfers and allotments are prohibited for a specified period of time
- unanimous or majority consent of members – all shareholders, or a certain majority of them, must consent to any share transfer or allotment
- family provisions – e.g. shares can only be sold or transferred to family members of existing shareholders, or they can be sold or transferred freely to family members and family trusts
- drag-along rights – members who hold a specified majority of shares can force minority shareholders to join in with the sale of the whole company to a third party
- tag-along rights – when majority shareholders sell their shares, minority shareholders have the right to be included in the sale on the same terms
- compulsory transfer – directors and employees must forfeit their shares when their appointment or employment comes to an end
- transmission clauses for dealing with the death of a shareholder
- cross options – the right of shareholders to buy another member’s shares in certain circumstances, such as incapacitation or death
If you own a company with at least one other person, it would be prudent to include at least some of these provisions within your articles and shareholders’ agreement. By doing so, you can effectively regulate ownership, ensuring that only the right people have influence and control in the company.
Completing the share transfer procedure
The easiest way to sell shares is to transfer existing ones. To do this, you will normally need to complete a J30 stock transfer form with the following details of the sale:
- company registration number
- full company name
- name, address, and signature of seller (existing shareholder)
- name and address of the buyer (new shareholder)
- description of shares being transferred (i.e. quantity, class/type, nominal value, currency)
- chargeable consideration (value of what is due to be paid for the shares, whether cash and/or non-cash)
- details of any non-cash consideration, if applicable
If the share transfer is exempt from Stamp Duty tax, or there is no chargeable consideration, you must fill in one of the certificates on the reverse of the stock transfer form.
Complete Certificate 1 if:
- the new shareholder is paying £1,000 or less for the shares, and
- the share transfer does not form part of a larger transfer or series of transfers where the total value is more than £1,000
Complete Certificate 2 if:
- the transfer is exempt from Stamp Duty
- the consideration for the transfer is not chargeable
There is no need to complete either certificate if Stamp Duty relief is being claimed or no consideration is given for the shares. However, where a relief is being claimed, the stock transfer form and details of Stamp Duty relief must be sent to HMRC for consideration before presenting the form to the company.
Depending on the articles and shareholders’ agreement, either the company director(s) or shareholders will review the stock transfer form and decide whether or not to approve it.
If the transfer is approved, the new shareholder will be the rightful owner of the shares. The company will issue a share certificate to the new shareholder and record their details in the statutory register of members.
Companies House will be notified of the share transfer as part of the next confirmation statement, at which point the public register of companies will be updated accordingly.
Completing the share allotment procedure
If you decide to issue new shares, you will need to complete a ‘return of allotment of shares’ on Companies House form SH01. To do this, you must provide the following information:
- full company name
- company registration number
- the date on which new shares are allotted
- description of shares being allotted – quantity, class/type, currency, nominal value, the amount paid or due to be paid for each share
- details of non-cash consideration
- statement of capital
- prescribed particulars of rights attached to shares
- authorising signature of the director
This form must be filed at Companies House online or by post within one month of the allotment.
You must issue share certificates to each member who purchased new shares and update the statutory register of members accordingly.
You do not have to update shareholder information until it’s time to file your confirmation statement.
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