Did you know that in Australia, shares can be transferred between shareholders or to a company? If you are a shareholder, it is vital that you have a thorough understanding of how shares can be transferred or sold. Legal Kitz have put together this blog post to provide you with plenty of details as to the transfer of shares in a company, and what your obligations may be as a shareholder.
What does a transfer of shares refer to?
A ‘share transfer’ refers to the process in which shares are transferred between shareholders, or are bought back by the company, with no new shares being created through the transaction. The shares being transferred are still purchased at whatever their current market value stands at. Their value can be influenced by the company’s current revenue, future revenue and cash flow.
A share issue, in comparison, is where a company issues new shares to increase their cash. These issued shares are purchased for a price based on the company’s value, which goes directly into the company.
What is the cost of a transfer of shares?
There is generally no fee for a transfer of shares within a private or public company in Queensland. However, a duty may apply if the corporation:
- has land-holdings worth $2 million or more in Queensland, as the land holder’s duty may be applicable; or
- holds property on trust, as the corporate trustee duty may be applicable.
On another note, it is important to keep in mind that the transfer of shares can impact personal taxes. ‘Capital gains’ refers to the profit made from selling shares. If they were sold for a higher amount than they were originally acquired, then these profits should be recorded and provided to the Australian Taxation Office (ATO).
Should I transfer my shares to the company or shareholders?
There is a different process for the transfer of shares to the company, as opposed to other shareholders. This will impact the legal process, as well as any commercial and tax considerations. If one or more individual shareholders agree to purchase the shares using their own funds, you will be transferring shares to another shareholder. If the company agrees, you will be transferring shares back to the company – a process which is also known as a share buy-back.
Transfer of shares to shareholders: the process
1. Obtaining additional approvals and consent
It is important to first review a company’s constitution or shareholders agreement to see if you must obtain additional documents before initiating the transfer of shares. These may include:
- a board resolution approving the share transfer; or
- other shareholders may need to waive rights they have to the transfer of shares.
The company of the intended transfer will need to prepare and sign company secretarial documents and notify the Australian Securities and Investments Commission (ASIC). More information on this is discussed below.
2. Share sale agreement
A Share sale agreement is a legally binding contract which will outline the terms of purchase for both the departing and purchasing shareholder. This will include important matters such as:
- the kind of shares being purchased;
- the number of shares;
- purchase price of the shares;
- details on the share transfer;
- any pre-sale conditions;
- warranties and indemnities; and
- non-compete clauses.
The agreement of these terms of sale are necessary for protection and resolving potential disputes between parties. For example, a buyer may want a formal share sale agreement where they are taking on a lot of risks. The agreement would provide a guarantee that the seller is providing appropriate representations and warranties.
3. Share transfer form
A share transfer form, sometimes an alternative to the share sale agreement, will contain sale details with more general terms and conditions. ASIC must be informed of any changes to the company’s member register.
4. Corporate secretarial steps
To properly effect the transfer of shares, there are some steps required:
- the buyer and seller must sign a share transfer form;
- the company must issue a new share certificate to the buyer;
- the seller of the shares must destroy its old share certificates; and
- the company must record the transfer in its members register.
The company will have to submit a form 484 – changes to company details. ASIC must be notified, usually through the Form 484, of any changes in shareholders within 28 days of the change occurring. If not, you may be issued with a fine. This form will contain:
- the name and address of the seller;
- the name and address of the purchaser;
- the class of shares being transferred;
- the amount being paid per share; and
- whether the shares will be beneficially held.
Transfer shares in company (share buy-back): the process
In the process of a share buy-back, the company buys back relevant shareholder’s shares and cancels them. This process must follow the requirements set out in the Corporations Act. There are several types of share buy-backs, including:
- selective share buy-back;
- equal access buy-back; and
- employee share scheme buy-back.
Where an individual’s shares are the only ones being bought back by the company, that would be a selective share buy-back. The process of a selective share buy-back is as follows:
1. Shareholder approval
Shareholders of a company must approve a selective share buy-back, either in a meeting of shareholders or a written resolution signed by all shareholders.
There must also be an explanatory memorandum, explaining the necessary information which other shareholders need to know when deciding whether to approve the buy-back. This must set out whether the buy-back will affect the company’s ability to pay back creditors.
2. Buy-back documents
The key terms of the buy-back and exit arrangements for the departing shareholder will be prepared in a share buy-back agreement. These include:
- the process to complete the buy-back;
- warranties and indemnities; and
- post buy-back obligations (for example, non-competing obligations which apply to the departing shareholder).
There may be other documents which need to be prepared, such as a letter of resignation or IP assignment.
The board of directors will also need to approve the share buy-back through a board meeting or a written resolution signed by the directors.
3. Notifying ASIC
The company must notify ASIC of the share buy-back prior to its occurrence. The company will need to send to ASIC:
- the explanatory memorandum;
- the proposed share buy-back agreement; and
- the proposed shareholder resolution, or the proposed notice of meeting (depending on the method of approving the buy-back).
4. 14 day holding period
Once ASIC has been notified, the company must wait at least 14 days before proceeding with the buy-back, in case ASIC has any queries or issues.
5. Completing the share buy-back
At the end of the 14 day holding period, the company can proceed with the following:
- the company and departing shareholder can sign the share buy-back agreement;
- shareholder approval can be obtained;
- board approval can be obtained;
- purchase price can be paid;
- old departing share certificates must be destroyed; and
- the company’s members register will be updated to record the buy-back.
Drag along and tag along provisions
A drag along clause allows shareholders who hold the majority of shares to force the remaining shareholders to sell their shares at the same time as the majority shareholder. This allows a majority shareholder to offer a potential buyer to buy the whole company, and ensures that the potential sale will not be frustrated by a minority shareholder who disagrees with the sale.
The terms of the sale must still remain fair. A minority shareholder must be afforded rights, terms and the price for their sale as they ordinarily would. It does not require the minority shareholder to sell for lower than their value.
On the contrary, tag along clauses allow a minority shareholder to ‘tag along’ if a majority shareholder is selling to a third party.
Legal advice
It can be difficult to understand your obligations when transferring shares. You don’t have to do it alone! If you would like to speak to one of our friendly staff here at Legal Kitz, we offer a FREE 30-minute initial consultation with one of our experienced business specialists. You can also get in contact at [email protected] or at 1300 988 954.