Adding and removing company shareholders

Adding and removing company shareholders (members) are common procedures that limited by shares companies must carry out when new members take shares or when existing shareholders sell their shares and cease being members. Any such changes must be reported to Companies House on the next annual confirmation statement (previously the annual return).

Companies must also update their statutory register of members when shareholder information changes, ensuring that it is up-to-date and accurate at all times.

How to add new company shareholders

You can appoint (add) new company shareholders at any point after incorporation. To do so, existing shares must be transferred or sold by a current member to the new person. Alternatively, you can increase your company’s share capital by allotting (issuing) new shares.

Transferring shares

To transfer company shares, a stock transfer form must be completed with the following details:

• Registered name of the company
• Class and value of the stock being transferred
• Number of shares being transferred
• Name and contact address of the current owner (transferor)
• Name and contact of the new owner (transferee)
• Consideration money, or alternate form of non-cash payment, if applicable
• Stamp Duty liability, if any money is exchanged
• Signature of the transferor or authorised person

If money is paid for the transferred shares, a copy of the stock transfer form should be sent to HMRC to be stamped. The new shareholder should pay the required Stamp Duty to HMRC. If no money is paid, there is no need to file this form.

If the company’s articles of association include pre-emption rights on the transfer of shares, the existing members will need to waive their right to the first refusal. Thereafter, the directors (or members, if required by the articles) can approve the transfer and record it in the register of members.

New company shareholders should be issued a share certificate as proof of purchase. A copy of the stock transfer form should also be given to both the transferor and transferee. The company should keep a copy of the new and old certificates and the stock transfer form at its registered office or SAIL address.

Companies House will be notified of transfers and details of new company shareholders when the next annual confirmation statement is filed. It’s usually recommended that you deliver a confirmation statement as soon as possible after share transfers, but it is not a requirement.

Issuing new shares

If you want to create more shares instead of transferring existing ones, you must increase your company’s share capital. You can do this by allotting new shares.

You would normally do this if you needed to raise additional funds without the need for existing company shareholders to sell any of their stock. However, issuing new shares dilutes existing shareholders’ percentages of ownership and control.

To allot new shares, existing members will need to waive pre-emption rights on the allotment of shares. The prospective members should deliver a letter of application to the company, and the board of directors (or members, if required by the articles) must approve the allotment and record it in the register of members.

Companies House Form SH01 ‘Return of allotment’ must then be completed with the following information:

• Company name
• Company Number
• The date(s) of the allotment(s).
• Class, currency, and number of shares allotted
• The nominal value of each unit
• Amount paid, or due to be paid, per share
• Details of any non-cash considerations (payments), if appropriate
• Statement of capital reflecting the new allotment
• Details of any shares allotted in a currency other than pound sterling
• Prescribed particulars of rights attached to shares
• Signature of the company director or other authorised person

Form SH01 must be submitted to Companies House within one month of the allotment. Information about the new member(s) should be provided to Companies House when the next confirmation statement is due – or before this date, if preferred.

If the company’s articles of association include a provision on authorised shares capital (a maximum number and value of shares that can be allotted) and this allotment will take the company above this limit, this provision will first need to be amended or removed.

How many shares can company shareholders take?

Company shareholders must each take a minimum of one share. There is no right or wrong quantity to issue. If you are setting up a company on your own, you can issue just one share and own 100% of the business yourself.

This means you will be entitled to all profits and you will be required to contribute the nominal value of your share(s) toward debts if the business cannot pay its bills.

If you plan to grow your business or bring in new partners at a later date, you should consider issuing more than one share when you register your company. This will enable you to sell some of them in the future, rather than having to go through the process of creating new shares.

It is often a good idea to issue a quantity of 10 or 100 shares because it is easy to work out the percentage of ownership represented by each share. You can also sell smaller portions of the company to more people.

You must remember, however, that the number and value of issued shares determine the liability of company shareholders. Therefore, if you issue 100 units, you will be liable to pay £100 toward company debts (if required) until you sell some of your stock to new investors.

This is not a tremendous figure, but if you decide to issue a greater quantity, your liability will increase accordingly and you will have to pay the total nominal value if the company becomes insolvent. Something to remember if you feel inclined to issue a phenomenal number of shares!

Removing company shareholders

If any member wishes to leave a company, their stock must be transferred or sold to someone else. The directors will be responsible for overseeing the transfer and updating member information at Companies House and in the statutory register of members.

Companies House can be informed about a shareholder leaving when the next confirmation statement is filed. Transfers should also be reported at the same time. A confirmation statement can be filed online through Companies House WebFiling or 1st Formations Company Manager.

Updating company shareholders’ details at Companies House

The full names and contact addresses of the first company shareholders, or ‘subscribers’, are disclosed on public record. Any person who joins after company formation will only need to provide their name and details of their shares unless they are also a person with significant control.

If company shareholders’ names or shareholdings change at any point, or members join or leave the firm, Companies House must be notified on the next confirmation statement.

It is the responsibility of the director or secretary to ensure that Companies House is notified of these changes and that the company’s statutory register of members is updated accordingly.

What happens if a company shareholder dies?

When a company shareholder dies, their shares form part of their estate in the same way that other forms of property would. The executors of the estate, who are confirmed by a grant of probate, hold the authority to deal with the shares and enact that person’s will.

Protecting the company and its members

The provision of pre-emption rights is often included in the articles of association and shareholders’ agreement to give remaining members the opportunity to purchase shares from a deceased member’s beneficiary. Some company shareholders set up life assurance policies to enable their fellow members to purchase their holdings in the event of their death.

This allows remaining company shareholders to retain control of the business and uphold the status quo, rather than passing such influential powers to an inexperienced beneficiary who may not possess the necessary skills to make critical decisions about strategy and operational activities.

Protecting the beneficiaries of company shareholders

Whilst it is important to consider the future of your business, you also want to protect the rights and interests of those who inherit the shares of any deceased members. If the articles provide for pre-emption rights, the market value of available shares can be paid to the deceased individual’s beneficiary.

This provision can be drafted as ‘optional’, which allows remaining company shareholders to purchase or decline the available stock.

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If a life assurance plan is put in place, the proceeds of the policy will enable the remaining members to purchase available shares. Alternatively, the articles and shareholders’ agreement may allow for beneficiaries to maintain ownership of the stock and receive dividend payments, whilst removing their right to vote on business decisions.

This option is often mutually advantageous for the business and its surviving owners, as well as the deceased member’s beneficiary.

Transferring ownership of shares

Whether shares are being transferred in absentia from a deceased person to their beneficiary, or from a beneficiary to existing company shareholders, a stock transfer form must be used to legally transfer ownership.

If there is any Stamp Duty liability from the sale, a copy of the transfer form should be filed with HMRC. The new owner will also have to pay 0.5% of the sale value to HMRC.

Notifying Companies House

When a shareholder dies, you must inform Companies House on the next confirmation statement.

Once the shares have been transferred to the new beneficiary, you should state the date on which the deceased person ceased being a member, as well as the details of the person who now owns their shares.

The latter stages of the process are the same as when a member leaves the company for any other reason.

What is a shareholders’ agreement?

Many companies choose to draw up a shareholders’ agreement. This is a legal document that outlines their rights and responsibilities, regulates their relationship with one another, confirms how the company should be managed, and clarifies the way in which decisions can and cannot be made.

It is a useful document to put in place because it covers exceptional eventualities like death, which can create a number of problems for remaining members and the business as a whole.

An agreement usually includes provisions for pre-emption rights, which require available shares to be offered to existing company shareholders before anyone else. If no such agreement is in place, shares could be offered to someone who lacks the necessary business knowledge and experience to support the company’s vision and objectives.

If this were to happen, it could have a negative impact on the decision-making powers of existing company shareholders and the overall success of the business.

Key features and advantages of a shareholders’ agreement:

• Provides greater protection to company shareholders by allowing more specific provisions than those contained in the standard articles of association
• Provisions or arrangements can be included that apply to individual and current shareholders only  – the provisions in the articles are generalised and apply to all current and future members
• Provides an effective framework for resolving disputes between members
• Unlike the articles, this type of agreement is private and confidential so the public has no access to
• Demonstrates unity and stability, which is appealing to banks and investors
• Protects the interests of company shareholders and their beneficiaries in the event of death
• Provides better protection for the rights and investment value of minority shareholders
• Outlines dividend policies and the distribution of profits
• Can specify decisions that require a 100% majority vote of the members
• Clarifies the particulars of pre-emption rights
• Outlines the terms and manner of each member’s investment agreement
• Increase or restrict the powers of company directors
• Set out the terms of directors’ remuneration
• Provides for the regulation and restriction of allotments or transfers
• Outlines the terms of selling or closing the company

How to arrange a shareholders’ agreement

Ordinarily, a shareholders’ agreement should be discussed and drawn up before or immediately after company formation. This reduces the potential for disagreements and internal conflicts further down the line, but it is still possible to introduce one at a later stage, whenever you like.

Standard shareholders’ agreement templates are available online. You can also create a bespoke agreement online with a variety of legal companies. However, we do recommend consulting a reputable solicitor for the most appropriate and up-to-date legal advice.

What is the last members list?

The Last Members List is the most recent listing of shareholders or guarantors that a company has provided to Companies House. Since the introduction of the confirmation statement on 30th June 2016 (which replaced the annual return), there is no longer any need to provide a full list of company shareholders, unless any details have changed. This information is now provided on the register of people with significant control and submitted to Companies House when the director files the confirmation statement.