Transfer of Shares

Transfer of shares is when the ownership of the shares is transmitted or passed on from the current holder to another person. The owner of the shares can choose to pass on them at any point to raise working capital or re-organize their investment structure. The sale of shares and gifting them are the most common form of such transfers.

Both parties must inform the company of shares being transferred before it is deemed legal. Only when the company's register reflects the transfer of ownership will the transfer of shares procedure be complete. As a result, the share transfer is often more restricted in private limited companies than in public limited companies.

• Transfer of shares is the voluntary act of passing on the ownership of shares to another individual. It can occur for various reasons, such as the need for capital for the transferor or a gift for the transferor’s dear ones.
• The transfer completion is subject to approval from the company's board of directors. They can accept or deny the application based on their best judgment.
• Private and unlisted companies usually have restrictions for such transfers. These restrictions are exercised to maintain control over the company and ensure that the management remains smooth and hassle-free.

Transfer of shares is when the current shareholder passes the ownership of shares on to another member or non-member of the company. A share transfer can occur due to a variety of reasons.

Usually, the shares of a corporation are transferable freely. However, the Articles of Incorporation, the agreement with the shareholder, or the bylaws may impose few reasonable restrictions on share transfers.

After the related transfer of shares form is filled, the new shareholders might require the approval of the board of directors to complete the procedure and be identified as the owner of those shares.

A transfer of shares form is necessary for the share transfer to be completed as it has details about the buyer, seller, the price at which it is being sold, and the type of shares being transferred.

The parties involved are subject to following the corporation's share transfer agreements and procedures. These documents specify if the transferee (Who receives the shares) can be a shareowner in their organization and define how the share price calculation can be set.

Since a share transfer agreement is optional, many organizations must formulate it. However, the stock price must be reasonable to comply with the state corporation and Internal Revenue System (IRS) rules.

The purchase agreement is a compulsory procedure to transfer shares. This document delineates every detail about the transfer. Once this document is signed, the share certificates must show the name of the new holder.

A physical or electronic transfer of shares has the following steps to follow to complete the transfer:

Step #1 - Sale of Shares Agreement

Both parties (buyer and seller) agree to the purchase and sale of the shares.

Although the agreement is not a legal requirement, drawing a purchase and sale agreement in writing is advised. Then, when the transfer occurs electronically, the seller can execute their stock transfer form and the buyer’s payment details.

However, it is always advised to draw out this form as it creates a legal record between two parties that can be referred to in case of discrepancies or disagreements. This written contract is also called a Share Purchase Agreement (SPA).

Step #2 - Transfer Form

It holds the details of the buyer and seller, the number of shares being transferred, the type of shares, and the decided price. Unless an exception of rule applies, the initiator must pay stamp duty to the concerned authorities depending on the jurisdiction of the transfer. Once the authorities stamp the share transfer form, it can be presented to the company for registration.

Step #3 - Approval/Rejection

When submitted to a company for registration, a stock transfer form is subject to a statutory obligation from the directors on the board. They can accept or reject the application. If the application is approved, the registration process is commenced. On the other hand, if it is rejected, they provide the registering parties with the reasons for refusal.

Step #4 - Issuing the Share Certificate

The new share certificate issued by the company is proof that the transferee is legally the owner of the shares. This certificate must be issued within two months of the transfer. However, as most transfers happen electronically, the new share certificate is issued by the company within a week or two.

Simultaneously, the company must update its registers with the new owner's details and include the updated list of shareowners as a part of their subsequent confirmation.

The most common types of share transfers are as discussed below:

• Bonus Issue - This transfer occurs when the company issues additional shares from its authorized capital to existing shareholders to raise more money.
• Buy-Back/ Purchase - A buy-back occurs when the company purchases shares from an existing investor or shareholder. This nature of purchase usually occurs in a situation where the company wants to exercise more control over the organization.
• Transfer - An existing shareholder transfers their shares to another company investor or a non-investor in the company for various reasons.
• Gift - When existing shareholder wants to present their dear ones with a gift that has a significant impact, they can choose to transfer the ownership to their names. This process is usually carried out through drafting a gift deed.

After both parties involved have thoroughly gone through the Articles of Incorporation to ensure the company does not restrict the transfer, they can draft an agreement on the share transfer, after which the following information requirements must be catered to:

• Company’s name and number.
• Type of shares and quantity being transferred.
• Name and address of the transferor.
• Name and address of the transferee.
• Price of shares.
• Signature of the transferor.
• Stamp duty receipt, if applicable.

Since the transfer of ownership of shares can bring significant changes in the structure of control and management of the company, especially unlisted or private companies, exercise some restrictions to keep the company's control intact.

The obligation and rights relating to share transfers and restrictions are mentioned in the constitutional documents or the shareholders' agreement.

It is essential to remember that the provision in the company's constitutional documents, such as the Articles of Association, will automatically restrict any new shareholder. On the flip side, the shareholders' agreement will specify only the shareholders that have agreed to the terms of it.

With that being established, let us discuss some of the most common restrictions in share transfers:

• Power to Deny Registration - The board of directors’ right to deny approval of share transfers in certain circumstances can be limited depending on the agreement between the shareholders and the company.
• Prohibitions - Under this provision, the shareholder is restricted from transferring shares in a specific time frame, or a particular type of share is prohibited from being transferred.
• Pre-exemption - Any shareholder who wishes to transfer shares should offer them to the company's existing shareholders, often at an agreed price. This provision is a common practice in private companies to disallow third parties from entering the ownership hierarchy.

Depending on when the share transfer process is carried out, the existing owner of shares might be liable to pay short-term capital gains or long-term capital gains tax.

In addition to that, depending on the type of transfer, stamp duty might be applicable. The stamp duty is usually 0.5% of the value paid for the shares.

The transfer of shares agreement is a document that holds essential details of the transfer, such as information about the transferor and transferee, the type of shares, the number of shares, the price, and the agreement date. A template of one such agreement is attached below for the reader's perusal.

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This has been a guide to what is Transfer Of Shares. We explain its types, requirements, restrictions, and comparison with the transmission of shares. You can learn more about it from the following articles –

• Transfer Agent
• Golden Shares
• Pledged Shares