Shares in a company are transferable in accordance with the company's articles of association.
The Model articles (mirroring in outline the Companies Act 2006 provisions) provide that:
- Shares may be transferred by means of an instrument of transfer in any usual form or any other form approved by the directors, which is executed by or on behalf of the transferor
- No fee may be charged for registering any instrument of transfer or other document relating to or affecting the title to any share
- The company may retain any instrument of transfer which is registered
- The transferor remains the holder of a share until the transferee's name is entered in the register of members as holder of it
- The directors may refuse to register the transfer of a share, and if they do so, the instrument of transfer must be returned to the transferee with the notice of refusal unless they suspect that the proposed transfer may be fraudulent. (Under the Companies Act 2006, the company must return the instrument of transfer as soon as practicable, and in any event within two months of it having been lodged with the company. The notice of refusal must specify the reason for the refusal.)
If the company refuses to register the transfer, it must provide the transferee with such further information about the reasons for the refusal as the transferee may reasonably request. This does not extend to providing copies of minutes of meetings of directors.
A company must, within two months after the date on which a transfer of any of its shares is lodged with the company, complete and have ready for delivery the certificates of the shares transferred. The court can make an order requiring the company to make good any default in complying with this obligation.
Transmission is the process whereby, in certain circumstances, a person's shares are automatically transferred to another person as a matter of law. This will occur, for example:
- When a shareholder dies, leaving a Will in which an executor is appointed - the deceased's shares will be transmitted to the executor on the shareholder's death
- When a shareholder dies and the executor or personal representative obtains confirmation or a grant of letters of administration - the deceased's shares will be transmitted to the executor or personal representative following obtaining the making of the grant or receipt of the confirmation
- When a shareholder is declared bankrupt and a trustee in bankruptcy is appointed - their shares will be transmitted to the trustee in bankruptcy on the trustee's appointment
The executor/personal representative of a deceased shareholder must produce the certificate of confirmation/grant of representation to the company to establish their right to deal with the shares. The executor/personal representative can either register himself as a member or else transfer the shares directly to the ultimate beneficiary or other third party.
Similarly, a trustee in bankruptcy has the same choice. They can elect to be registered as a member and then sell the shares or they can sell them directly in their representative capacity. They have to produce a court order concerning their appointment in order to establish their right to deal with the shares.
Acquisition by a company of its own shares
Power to purchase own shares
The Companies Act 1985 gave a company the power to purchase its own shares, if authorised to do so by the Articles of Association. By contrast, the Companies Act 2006 does not include a requirement in the company's Articles to purchase its own shares, although the members may restrict or prohibit a purchase of own shares through the company's Articles, if they wish. This is helpful, as the Articles of some older companies do not contain the necessary authority. The share purchase must not leave the company with only redeemable and/or treasury shares.
Authority for purchase
The Companies Act 2006 requires a contract for an 'off-market' company purchase of own shares to be approved in advance by special resolution. However, that Act allows a company to enter into a contract to purchase its own shares, on condition that the shareholders approve the contract terms by a special resolution. If the contract is not approved, the company may not purchase the relevant shares and the contract lapses. A copy of any written contract (or a memorandum of its terms) must be made available to the members. For resolutions at meetings, it must be available for inspection at the company's registered office for at least 15 days prior to the meeting, and also at the meeting itself.
Payment for the shares
The shares purchased must be fully-paid, and the company must pay for the shares on completion.
A company must purchase its own shares out of distributable profits, or out of the proceeds of a fresh share issue to finance the purchase. An amount equal to the par value of the shares bought back must be transferred to a capital redemption reserve account. However, a private company may purchase its own shares out of capital, if certain conditions are satisfied.
A payment out of capital by a private company for the redemption or purchase of its own shares is not lawful unless the following requirements are met
The company's directors must make a statement specifying the amount of the permissible capital payment for the shares in question and stating that, having made full inquiry into the affairs and prospects of the company, the directors have formed the opinion:
- As regards its initial situation immediately following the date on which the payment out of capital is proposed to be made, that there will be no grounds on which the company could then be found unable to pay its debts
- As regards its prospects for the year immediately following that date, that the company will be able to continue to carry on business as a going concern (and will accordingly be able to pay its debts as they fall due) throughout that year, having regard to
- Their intentions with respect to the management of the company's business during that year
- The amount and character of the financial resources that will in their view be available to the company during that year
The directors' statement must be in the prescribed form and must contain such information with respect to the nature of the company's business as may be prescribed.
It must in addition have annexed to it a report addressed to the directors by the company's auditor stating that:
- He has inquired into the company's state of affairs
- The amount specified in the statement as the permissible capital payment for the shares in question is in his view properly determined
- He is not aware of anything to indicate that the opinion expressed by the directors in their statement is unreasonable in all the circumstances
The payment out of capital must be approved by a special resolution of the company. The resolution must be passed on, or within the week immediately following, the date on which the directors make the statement referred to above.
In order for the resolution to be effective, a copy of the directors' statement and auditor's report must be made available to members:
- In the case of a written resolution, by being sent or submitted to every eligible member at or before the time at which the proposed resolution is sent or submitted to him
- In the case of a resolution at a meeting, by being made available for inspection by members of the company at the meeting
Within the week immediately following the date of the resolution the company must cause to be published in the Gazette a notice (first notice):
- Stating that the company has approved a payment out of capital for the purpose of acquiring its own shares by redemption or purchase or both (as the case may be),
- The amount of the permissible capital payment for the shares in question
- The date of the resolution
- Stating where the directors' statement and auditor's report are available for inspection
- Stating that any creditor of the company may at any time within the five weeks immediately following the date of the resolution apply to the court for an order preventing the payment
Within the week immediately following the date of the resolution the company must also either cause a notice to the same effect as that required above to be published in an appropriate national newspaper, or give notice in writing to that effect to each of its creditors (second notice).
Not later than the day on which the company first publishes the first notice or, if earlier, first publishes or gives the second, the company must deliver to the registrar a copy of the directors' statement and auditor's report.
The directors' statement and auditor's report must be kept available for inspection throughout the period beginning with the earlier of the first and second notice and ending five weeks after the date of the resolution for payment out of capital.
They must be kept available for inspection:
- At the company's registered office
- At another place of inspection designated under section 1136 of the Companies Act 2006
The payment out of capital must be made no earlier than five weeks after the date on which the resolution is passed, and no more than seven weeks after that date.
Cancellation of shares
Following the company share repurchase, the relevant shares are treated as cancelled. The company's share capital is reduced by the nominal value of the cancelled shares.
Return to Companies House
The company can enter into the contract when the resolution is passed. A return must be made to the Registrar of Companies within 28 days, stating the number of shares purchased, their nominal value and the date of purchase. Stamp duty is payable on the form (0.5% of the price paid for the shares). The company must also notify the Registrar of Companies of the cancellation of the shares within 28 days, together with a statement of the company's share capital.
Inspection of contract
The Companies Act 2006 requires that the share purchase contract (or a memorandum of its terms) must be retained at the company's registered office or other designated place of inspection for at least ten years from completion of the contract. Contracts (or memorandums of terms) relating to private companies must be made available for inspection by any of its members.