Rules and restrictions on share transfers in a private limited company

It is common for shareholders to transfer shares by selling or gifting them to other people. Normally, company directors authorise share transfers, but some companies stipulate that permission from other shareholders is required.

In this post, we discuss the rules and restrictions on share transfers in a private limited company. This includes the provisions on transfers under the standard ‘model’ articles, additional restrictions you can impose, and the share transfer procedure you need to follow.

Share transfers under the model articles of association

The model articles of association, which most new private limited companies adopt, set out the default position on share transfers. Under the model articles, you can transfer shares to anyone you like, without permission from other shareholders (members).

You simply need to complete a stock transfer form and get approval from the director(s). If permission is granted, you can sell or gift your share(s) to the person named on the stock transfer form.

Whilst this level of freedom may be suitable for many small companies, especially those with only one shareholder, it is not ideal for larger companies and those with multiple shareholders.

For this reason, it is advisable to impose additional restrictions on share transfers that meet the particular needs of the company and its members. These should be included within the company’s articles of association and/or a private shareholders’ agreement.

Optional restrictions on share transfers

Some companies, especially those with lots of shareholders, choose to impose tighter restrictions on share transfers by including appropriate provisions within their articles of association. Ideally, these restrictions should also be included in a private shareholders’ agreement.

Typically, restrictions on share transfers will set out clear rules on the sale and gifting of shares, as well as the transmission of shares upon the death of a shareholder.

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The most common types of provisions that deal with such circumstances include majority or unanimous consent of shareholders, pre-emption rights on share transfers, family ownership provisions, drag along and tag along clauses, and restrictions on transferring the shares of a deceased shareholder.

1. Majority or unanimous consent of shareholders

In smaller companies, it can be beneficial to stipulate that share transfers require the majority or unanimous consent of shareholders. By including this restriction in the articles, no shares can be sold or gifted unless every shareholder, or the required majority, agrees to the transfer.

2. Pre-emption rights

Pre-emption rights give existing members the right of first refusal on any shares that become available within the company.

Therefore, if any shareholder wishes to transfer shares, the other members will have the option to purchase those shares (usually pro-rata to their existing percentage of shareholdings) before they can be offered to anyone else.

If any existing members decline the option to buy the available shares, they can be offered to other people outside of the company.

3. Family ownership provisions

Some companies include restrictions on share transfers to protect family ownership and/or allow shareholders to freely transfer shares to certain family members.

Such restrictions may state that shares cannot be transferred to non-family members without first applying pre-emption rights, and that transfers to anyone else require permission from all or a majority of members.

4. Drag along and tag along clauses

Drag along and tag along clauses are normally included to prevent issues arising during any future sale of a company. Drag along rights protect majority shareholders, whereas tag along rights protects minority shareholders.

If a specified majority of shareholders want to sell the whole company, a drag along clause requires the minority shareholders to also sell their shares to the buyer. This means that minority shareholders are ‘dragged along’ in the sale, rather than being in a position to block it.

If a majority shareholder is selling their shares, tag along rights give minority shareholders the right to be included (to ‘tag along’) in the sale under the same pricing and terms.

5. Transmission of shares upon the death of a shareholder

Provisions on dealing with the shares of a deceased member are often overlooked in many companies, but it’s important to think about such eventualities.

Under the model articles, a deceased member’s shares will be transferred to whoever is entitled to inherit this property in accordance with the shareholder’s will or intestacy.

However, it’s better to plan ahead and include specific arrangements in the articles and shareholders’ agreement, such as:

• shares must be transferred to specified individuals, e.g. the spouse and/or children of the deceased, or other shareholders
• cross options – an arrangement connected to a life insurance policy, which states that money is paid out from the policy to allow the remaining shareholders to purchase the deceased member’s shares
• pre-emption rights – stipulating that specified or all remaining shareholders have the right to buy a pro-rata percentage of the deceased member’s shares before they can be offered to anyone else
• arrangements to allow the remaining members to buy the deceased member’s shares from whoever inherits them, and pay for the shares over a period of time

How to transfer shares

If you want to transfer shares in a private limited company, you must complete a stock transfer form. This is sometimes referred to as a J30 form.

The seller (transferor) must enter the following details on the stock transfer form:

• Company name and registration number
• Type (class) of shares to be transferred (e.g. ordinary shares)
• Number of shares to be transferred
• Name and address of transferor (old shareholder who is transferring the shares)
• Name and address of transferee (new shareholder who is buying or receiving the shares)
• Consideration value, if any (the amount being paid for the shares, which may be in the form of cash or non-cash payments)
• Details of non-cash consideration, if applicable
• Signature of the transferor (or their personal representatives or Power of Attorney)
• Complete Certificate 1 or Certificate 2 on the back of the form, if applicable

Paying more than £1,000 for shares

If the transferee is paying more than £1,000 for the shares, they will also have to pay Stamp Duty tax to HMRC. This is charged at 0.5% of the sale amount. A copy of the stock transfer form must be sent to HMRC to be stamped.

Paying £1,000 or less for shares

Certificate 1 must be completed if:

• the transferee is paying £1,000 or less for the shares, and
• the share transfer is not part of a larger transaction or series of transfers in which the total sale value exceeds £1,000

Certificate 2 must be completed if:

• the transfer is exempt from Stamp Duty tax
• the consideration given is not chargeable

If no consideration is being given for the shares, or the transferee is claiming Stamp Duty relief, there is no need to complete either certificate. However, if relief is being claimed, the stock transfer form and details of the relief must be sent to HMRC for approval.

Approving a share transfer

When the stock transfer form has been completed, it must be sent to the company for approval. Depending on the provisions in the articles (and shareholders’ agreement, if one exists), the share transfer will need to be approved by the directors or shareholders.

If the transfer is approved, the directors must update the company’s statutory registers and issue new share certificates. The transferor should also return their old share certificate(s) to the company.

There is no need to notify Companies House about changes to shareholders’ details and shareholdings until the next confirmation statement is due. However, you can file an early confirmation statement to ensure the company’s details are immediately updated on the public register.

So there you have it…

We’ve discussed the rules and restrictions on share transfers in a private limited company, and also how to transfer shares. We hope you have found this article useful.

If you have any questions or requests and suggestions for future article topics, please leave a comment below and we will get right back to you!