Shares and Shareholders 5 Min Read
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.
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.
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.
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.
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.
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.
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.
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.
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:
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:
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.
Certificate 1 must be completed if:
Certificate 2 must be completed if:
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.
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.
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!
Mathew is a Senior Content Writer at 1st Formations, responsible for creating articles and advice-driven content. He has 20+ years of industry experience and is an expert on the entire company formation process. Mathew believes in empowering business owners with clear and valuable information that simplifies the company formation process and enables founders to complete their real-world responsibilities.
Hi Please help; I founded a company with a pater, each owning 50% of the shares. I was a sleeping partner. I was made a director at the inception of the company. I moved abroad during this time. Seven years in, my Directorship was annulled without my knowledge and consent. Some 13 after the formation of the company and by the time t/o was substantial, my shares were transferred into my business partners wife’s name without my permission or consent. Any thoughts would be greatly appreciated.
Mathew Aitken says:
Thank you for your comment, Alan. Whether you will have recourse in this scenario will depend on a number of things such as what the company’s articles of association say and whether you have a shareholders’ agreement. We are unable to give legal advice but would strongly recommend that you seek the assistance of a company lawyer specialising in shareholder disputes. Kind regards,
The 1st Formations Team
Myself and 3 friends started a LTD company December 2022, 25% each allocated shares and the 4 of us were directors, 2 of the directors (man and wife) first removed me as a director without my knowledge, and split my shares between themselves giving them 37% and 38% leaving the other director 25%, 3 months later the man and wife then removed the other director and took his shares giving them 50% each without his knowledge either… The company will be very profitable and i feel as though we have been shafted as we put a lot of work into this… we do not care about being directors or working with these fraudsters ever again… but how on earth can they steal our shares? Can this be legal? If not how do we get recourse and our shares back? Regards Steve
1st Formations says:Thank you for your kind enquiry, Stephen. Although we can’t comment on specific cases, please see below some thoughts on the points you have raised: As a general rule, it is not possible for shares to be compulsorily acquired unless there are specific provisions within the company’s articles or a shareholder agreement (for example, you might have had provisions in place to handle exits or removals). It is also not normally possible for a director to be compulsorily removed by the company unless said removal is undertaken in accordance with section 168 of the Companies Act 2006 or, if present, in line with any specialist provisions within the company’s articles, shareholder agreements, or any other agreements in place. We would suggest you seek legal advice to discuss possible next steps as they are differ on a case-by-case basis. Kind regards,
The 1st Formations Team
Hi
In a private company , can the company charge a fee for registering a share transfer where there is N O provision contained in the mem and articles allowing them to make a charge
John Pettman
Thank you for your kind enquiry, John. Unfortunately, we can’t provide a definitive answer on this. It may not be possible to charge a fee for registering a transfer of shares if no such provisions are set out in the company’s articles of association. For various reasons, any such charges should usually be clarified in the articles, and in the absence of this any charging of a fee may cause issues. We would suggest seeking legal advice on this matter, if you are uncertain. Kind regards,
The 1st Formations Team
I have purchased shares from BSE 1994.ihave share Transfer form duly signed and stamped I have send share for transferring my name but some technical response not transferred my name what can do for this if possible give me proper advices for ihave original shares certificate and shares transfer form in physically with me
1st Formations says:Thank you for your kind enquiry, Parikh. We understand from your comment that you have completed the Stock Transfer Form (and assumingly any other requirements of the company), but as yet the company has not completed this transfer. In the first instance, it should be noted that a person does not become a shareholder until their name is entered into the company’s register of members. So even if you have signed the Stock Transfer Form and presented it to the company, unless they register it you would not become the holder of those shares. It’s not entirely clear from your comment as to the reason the transfer has not been completed. When you say you received a “technical response”, perhaps the transfer request did not meet the requirements of the company’s articles of association (as well as any shareholder agreements that might be in place). For example, there might be a special procedures or requirements in place as regards allowing for transfers. Another possibility of what might have happened is that the directors of the company refused to transfer the shares. Directors are required to register a properly presented transfer request, however they can refuse to do so if permitted by the company’s articles of association. For example, article 26(5) of the model articles of association states “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”. As you can see from this example article, if your transfer was refused by the directors, then you might expect to receive notice of this having taken place. It’s not entirely clear from your query if this is the case. I’m afraid in this instance you might want to seek legal advice to explore what has happened in more detail, and what can be done about it. It could be a case that your transfer request didn’t meet the company’s requirements, in which case you would be looking at fulfilling said requirements. Alternatively, if your transfer was refused, then the directors would need to have a good reason for doing, so you might check if this was indeed the case. We hope the above helps. Kind regards,
The 1st Formations Team
