26 FAQs about issuing and transferring private company shares.
- When might a company issue new shares?
- Do we need shareholders' approval to issue private company shares?
- Do we have to offer new private company shares to existing shareholders first?
- How does issuing new private company shares affect existing shareholders' rights?
- What types of private company shares can we issue?
- What are the advantages and disadvantages of issuing different kinds of private company shares?
- What effect does issuing private company shares have on our accounts?
- Does it matter how many shares are issued when forming a new business?
- Can we issue bonus company shares instead of paying a dividend and what are the implications?
- Are there any special rules for share issues or transfers involving a director of the company?
- Can we issue private company shares or share options as a form of remuneration?
- How do private company share options work?
- Can private company shares be issued or transferred to my spouse to reduce our tax bills?
- Can private company shares be issued or transferred to my children to reduce our tax bills?
- What is the procedure for issuing new private company shares?
- What is a share transfer?
- What is the procedure for share transfers?
- Can shareholders transfer or sell their private company shares to someone else?
- How is a fair value established for private company share transfers?
- What costs are there when private company shares are issued or transferred?
- What are the tax implications of a private company share issue or transfer?
- Can private company shares be issued or transferred for less than they are worth?
- Can we offer private company shares to the public?
- What happens if a shareholder dies or becomes bankrupt?
- Can companies and partnerships own shares?
- Can overseas individuals or businesses own shares in our company?
1. When might a company issue new shares?
A company typically issues new shares to raise funds for its business, or to achieve some other business objective. For example:
- When a company is first formed, it will usually issue enough shares (when added to any sums it will borrow) to enable the company to start trading.
- Later, it may issue shares because it plans some new project or development that needs to be funded, or simply to grow the existing business.
- It may choose to issue shares in order to repay some of the company's borrowings.
- It may issue shares directly to the owner of a business that it wants to buy, as payment for that business (or issue shares to raise cash, which it then uses to pay for that business).
- It may issue shares or options to employees to help with recruitment and retention.
- If it wants to buy all the shares in another company, it may issue shares to that company's shareholders as payment. In effect, those shareholders swap their shares in the company that is being bought for shares in the company that is doing the buying.
- It may choose to make a bonus issue of shares to existing shareholders by using its profits (which it could otherwise have paid in cash as dividends) to pay for new shares for them instead. This reduces the value of each share, making it more marketable, without the shareholders having to find new cash to pay for the shares. It can also be used to increase a private company's issued share capital to £50,000 (or its euro equivalent) so it can re-register as a public company.
- A company may give shareholders the choice of receiving a 'scrip' dividend of new shares rather than a cash dividend, reducing the drain on the company's cash reserves and suiting shareholders who have no need for a cash dividend.
- A company might need to issue shares under the terms of any share options that had previously been granted.
Always take legal advice before issuing shares. The directors must be sure that the decision to issue shares, and the procedure that is followed, is lawful. The transaction must be in accordance with the directors' duties to the company (both at common law and under sections 171 - 177 inclusive of the Companies Act 2006). The company must comply with applicable provisions in the Companies Act, its articles of association, and any external agreements such as a shareholders' agreement when making the issue.
These often require new shares to be offered to existing shareholders first, in proportion to the number of shares they already hold. If the shareholders pay for such an issue of shares in cash, this is called a 'rights issue'.
If a company wants to make any other sort of issue, it may, where permitted by companies legislation, need to alter, vary, disapply or waive those provisions.
2. Do we need shareholders' approval to issue private company shares?
Many SME and start-up companies have the default model articles of association and only one class of ordinary shares. If so, the directors can issue new shares without requiring prior authority from the shareholders. However, if the directors want to issue shares without offering them to existing shareholders first, they will still need shareholder approval (see 3 below).
The directors of any other company (for example, with more than one class of shares) must have shareholders' authorisation to issue new shares. The company's articles of association might give the directors this authorisation. The authorisation may include restrictions, such as pre-emption rights (the right of first refusal) or a limit on the number of shares that can be issued.
Alternatively, shareholders of such a company can pass a shareholder resolution giving the directors authorisation to issue new shares. This is generally for a fixed term of up to the maximum of five years permitted by the Companies Act, and can limit the authorisation to a specified number of shares. Always take advice before making a share issue, to ensure that the authorisation covers the share issue to be made.
In public companies, it is common practice for the shareholders to give the board authorisation to issue a relatively small number of shares in relation to the company's total issued share capital - perhaps 5%. This means that the directors can, for example, issue shares to satisfy the terms of employee share option schemes, but still have to consult the shareholders before making any major share issue - for example, to fund a substantial acquisition.
3. Do we have to offer new private company shares to existing shareholders first?
Under the Companies Act, shareholders typically benefit from 'pre-emption' rights. This means that they must be given first refusal on any issue of new private company shares, in proportion to their existing holdings.
However, a private company's articles of association can potentially exclude pre-emption rights (although the default model articles of association do not). In any case, unless otherwise agreed pre-emption rights do not apply to shares issued under an employee share option scheme, or issued for non-cash payment.
Shareholders can pass a special resolution, by a majority of 75% or more of the votes cast, not to apply pre-emption right, though for a public company there can be additional, complex requirements.
The directors of a public company often ask shareholders to 'disapply' pre-emption rights in respect of a relatively small number of shares each year - say equivalent to 5% of the issued share capital. This allows small share issues to be made more flexibly (for example, for a small acquisition) without the complication and expense of applying pre-emption rights.
4. How does issuing new private company shares affect existing shareholders' rights?
The rights carried by shares - for example, voting rights - are generally included in the company's articles of association. Issuing new shares does not change these rights but can, of course, dilute any individual shareholder's overall percentage ownership of the company (unless the shareholder acquires an appropriate percentage of the new shares).
This dilution can reduce the degree of control a shareholder or group of shareholders can exercise over the company. For example, shareholders with 50% of the voting rights have the power to pass a resolution appointing or dismissing directors, giving them effective control of the company. If their shareholdings fall below this level, they might no longer be able to do this.
For a more detailed summary of all the rights you will have as a holder of ordinary shares, see quick guide to shareholder rights.
5. What types of private company shares can we issue?
The company's articles of association should set out what classes of shares the company can issue, and what rights are attached to each class.
The most common class is 'ordinary shares'. Owners of ordinary shares are normally entitled to a dividend - a share of the profits of the company. If the company only has ordinary shares, the ordinary shareholders usually share dividends, according to the amounts paid up on their shares (see below).
Ordinary shares usually carry a right to vote on shareholder resolutions, although companies can issue non-voting ordinary shares if they choose to.
Ordinary shares are normally issued 'fully paid' - ie the shareholder pays the company the full amount that has been agreed should be paid for their shares at the outset, and has no ongoing or future obligation to pay the company any further sums.
Ordinary shares can also be issued as nil paid or partly paid shares. This leaves the shareholder owing the full amount due on the shares, or the balance, to be paid at a time or times agreed between them. For example, on a specified date, by instalments, on demand by the company, or when the company is wound up.
A company can also issue preference shares. Preference shares typically entitle the holder to a fixed dividend each year, if the company has the profits to pay it, before any dividend is payable to any other shareholders (eg ordinary shareholders). If it has insufficient profits in any year, the preferential dividend is usually cumulative - that is, if the company cannot pay it in one year, the obligation carries forward to the next. Preference shares do not usually carry voting rights unless the company is in arrears with payments of the preferential dividends.
Shares can be redeemable - so that the company has either the right or the obligation to buy them back at some future date. A redeemable preference share can be similar to a bank loan: requiring the company to pay a fixed interest rate until a certain date, and then to repay the capital amount.
Companies can only issue redeemable shares when at least one non-redeemable share (which has to be a different class of share) is in issue.
Shares can also be convertible - so that either the company or the shareholder (or both) have specified rights to convert them into a different class of share. However, non-redeemable shares cannot be converted into redeemable shares and a company may not purchase all other classes of shares to leave only redeemable shares.
Additional rights or restrictions can be attached to different classes of shares. For example, shares used in employee incentive schemes may not be transferable until a certain date, or may become forfeit if specified targets are not met.
6. What are the advantages and disadvantages of issuing different kinds of private company shares?
Companies typically choose to issue ordinary, voting shares as their primary source of share capital. Ordinary shares are the most attractive to founding shareholders and investors seeking high returns, as they offer the greatest potential return and potentially some control over the company. Because ordinary shares rank last for repayment and have no fixed entitlement to receive dividends, issuing ordinary shares to increase your company’s share capital (see 7) may also make it easier to borrow money.
Issuing non-voting shares can be a way of raising additional capital from other investors, such as employees, while retaining control. However, potential investors are likely to insist on some voting rights or other veto rights, so they can protect their interests. In any event, an investor may not be prepared to pay as much for non-voting shares as they would for an equivalent number of voting shares.
Preference shares are less risky than ordinary shares in that they carry a guaranteed dividend (provided the company has profits to pay it). Issuing preference shares can therefore be a way of raising money from more risk-averse investors, or if you want to protect a class of investors (for example, if you are raising money from family). However, if they carry a fixed dividend, they are a less flexible form of financing. Banks might be less likely to lend money to a company that has issued a high proportion of preference shares than if all the shares are ordinary.
In general, the rights attached to a particular class of shares can be tailored to suit your requirements. For example, restricted and partly-paid shares, forfeitable under certain conditions, might be the most effective and tax-efficient choice for your employee incentive scheme. However, you should always take advice on what will best suit your circumstances.
Once granted, share rights can only be varied with the consent of the holders of 75% of the relevant class of shares. So you can't easily change your mind if you subsequently realise you have given shareholders too many, or the wrong, rights. Advice is crucial.
Companies typically choose to issue ordinary, voting shares as their primary source of share capital. Ordinary shares are the most attractive to founding shareholders and investors seeking high returns, as they offer the greatest potential return and potentially some control over the company. Because ordinary shares rank last for repayment, issuing ordinary shares can also make it easier to borrow money.
Issuing non-voting shares can be a way of raising additional capital from other investors, such as employees, while retaining control. However, potential investors are likely to insist on some voting rights, in certain specific circumstances, such as on a potential takeover, creation of new shares or any attempt to vary the rights attached to any class of shares in the company, so they can protect their interests. In any event, they may not be prepared to pay as much for non-voting shares as they would for an equivalent number of voting shares.
Preference shares are less risky than ordinary shares in that they carry a guaranteed dividend (provided the company has profits to pay it). Issuing preference shares can therefore be a way of raising money from more risk-averse investors, or if you want to protect a class of investors (for example, if you are raising money from family). However, if they carry a fixed dividend, they are a less flexible form of financing. Banks are less likely to lend money to a company that has issued a high proportion of preference shares than if all the shares are ordinary.
In general, the rights attached to a particular class of shares can be tailored to suit your requirements. For example, restricted and partly-paid shares, forfeitable under certain conditions, might be the most effective and tax-efficient choice for your employee incentive scheme.
Take advice on what will best suit your circumstances.
Once granted, share rights can only be varied with the consent of the holders of 75% of the relevant class of shares. So you can't easily change your mind if you subsequently realise you have given shareholders too many shares, or the wrong rights.
7. What effect does issuing private company shares have on our accounts?
Issuing new private company shares increases the level of shareholders' funds in your company's balance sheet. This has the effect of increasing the company's total capital and reducing the company's gearing, ie the level of borrowing as compared to total capital.
It's worth noting that all shares have a nominal value - such as £1 or £10. A share cannot be issued on terms a shareholder will pay the company less than that nominal value for the share. The total amount that the company has asked shareholders to pay for their shares on account of the nominal value (which will be all of it if the shares are fully paid) is shown under 'Called up share capital' in the balance sheet.
However, shares can be issued for more than their nominal value - ie on terms the shareholder pays a 'premium'. Where shares are issued at a premium, the premium is added to the 'share premium account' in the balance sheet. While share capital and retained profits can be paid out ('distributed') as dividends, the share premium account is not normally distributable to shareholders (although it can be used to pay for bonus shares - see 9).
From a shareholder's perspective, issuing new shares (of course) increases the total number of shares in issue. Depending on the price the shares are issued at, and how the new financing is used, this will change the company's earnings per share and net asset value per share, which can affect investors' perception of share value.
8. Does it matter how many shares are issued when we form a new business?
There is no legal minimum or maximum share capital for a private company.
A public limited company (plc) must have a minimum issued share capital with a nominal value of at least £50,000 in sterling, or its euro equivalent, before it is allowed to trade or borrow money. Companies House issues it with a 'trading certificate' as proof that it has the necessary share capital.
In practice, for a private company there is some advantage in having a reasonable number of shares (say 1,000) to make it possible to issue or transfer shares representing a reasonably small percentage of the company's overall share capital. If a company has only two shares in issue, each share will represent 50% of the total worth of the company.
You may also want to ensure that the value of the share capital represents a significant percentage of the overall capital requirement of the business. Banks may be unwilling to lend to a company with insufficient share capital, and will almost certainly require personal guarantees from the directors - that you may not wish to give.
The appropriate level of gearing (borrowing as a percentage of capital) depends on the riskiness of your business. A ratio of 1:1 for borrowing to share capital is fairly typical, but what is appropriate or desirable can of course vary depending on the nature of your business.
Find a detailed guide on issuing a company’s first shares, to help you decide how to organise your shares when forming a new company.
9. Can we issue bonus shares instead of paying a dividend and what are the implications?
You can make a bonus issue of shares, provided that you have the authority to do so - for example, through a shareholder resolution - and sufficient profits. A bonus issue is sometimes also called a 'scrip issue' or a 'capitalisation of reserves'.
A company issues bonus shares when it uses its profits (which it could otherwise have paid to shareholders as cash dividends), to pay for new shares and to offer them to the existing shareholders. It is also possible to use any share premium account and certain reserves in the company's balance sheet to fund a bonus issue, even though these cannot be used to fund a dividend. The offer is made to shareholders in the same proportions as they would have been entitled to a dividend.
This reduces the value of each share, making shares more marketable, without the shareholders having to find new cash to pay for their new shares.
A bonus issue might also be used to increase a private company's issued share capital to £50,000 (or its euro equivalent) so it can re-register as a public company - it may not re-register until it has satisfied this requirement.
(Although not technically a bonus issue, public companies often give shareholders the choice of whether to receive a cash dividend or to increase their shareholding by taking a 'scrip dividend' in the form of shares of approximately equal value.)
For the company, paying a scrip issue helps maintain the company's cash balances.
10. Are there any special rules for share issues or transfers involving a director of the company?
In a public company, it is illegal to use your inside knowledge of the company to trade shares, profiting at other investors' expense.
In a private company, the articles of association may include rules relating to director's shareholdings. For example, you might be required to sell your shares if you cease to be a director.
Directors will also need to declare their shareholdings or potential shareholdings when board meetings are held to discuss share issues or transfers. Whether such directors are entitled to vote on such issues or transfers depends on the provisions of your articles of association.
11. Can we issue private company shares or share options as a form of remuneration?
Subject to shareholder authorisation, yes. Many companies use shares or share options as a way of aligning the interests of key individuals, or employees generally, with the company.
The best way to structure your share or share option scheme will depend on the circumstances and exactly what you are trying to achieve. Some scheme structures can offer tax advantages as well. This is a complex area where you should take advice.
12. How do private company share options work?
A private company share option gives its owner the right - but not the obligation - to buy a specified number of shares at a set 'exercise' or 'strike' price. The terms of the option specify on what dates the option can be 'exercised' in this way.
If the value of the company's shares is above the strike price, exercising an option provides a discounted way to acquire shares - and an immediate gain if the shares are then sold at a higher price.
Companies often issue options as a way of incentivising employees - rewarding them if the company's value increases. An appropriately structured option scheme allows this kind of remuneration to be very tax efficient.
For example, two HM Revenue & Customs (HMRC) approved schemes are the Share Incentive Plan and the Enterprise Management Incentive scheme. Shares acquired correctly under these schemes are generally free from income tax and National Insurance contributions and may attract no, or reduced, Capital Gains Tax when employees sell their shares.
An accounting charge is normally made against the company's profit and loss account to reflect the value of any options issued. Establishing the appropriate amount to charge can be complex.
Take specialist legal and tax advice to understand the alternatives and the potentially complex income tax, NI and Capital Gains Tax issues for each one.
13. Can private company shares be issued or transferred to my spouse to reduce our tax bills?
If you are free to transfer private company shares to your spouse under the company's articles of association, you can do this without becoming liable for Capital Gains Tax, even if the shares have increased in value since you bought them. Subsequently, your spouse will be taxed on the dividend income from those shares.
This can be an effective way of reducing your family tax bill if your spouse has a lower marginal tax rate (eg if you pay higher rate income tax but your spouse does not). Each of you has a tax-free Dividend Allowance of £2,000. Any dividend income over that amount is taxed at 8.75% (for basic rate tax payers), 33.75% (higher rate tax band) or 39.35% (additional rate band).
Similarly, if you are setting up a new company, it may be advantageous for both you and your spouse to subscribe for shares - reducing your overall tax bill on future dividends if one of you does not pay tax at the higher rate.
However, it is important to note that in a limited number of circumstances it may be possible for HM Revenue & Customs to challenge arrangements designed to avoid tax. You may want to take advice on the issue or transfer of shares in a company you control to your spouse.
14. Can private company shares be issued or transferred to my children to reduce our tax bills?
Shares for children under the age of 18 are usually held in trust for them. This can be a 'bare trust', with the shares held in an account designated with the child's name, and becoming the child's outright property when the child reaches the age of 18. Or shares can be held in more complex trusts, for the benefit of one or more children (and other beneficiaries if so desired).
Although a parent can put shares into bare trust for the benefit of a child, this is not very tax-effective. Any income over £100 is taxed as the parent's income. However, if shares are put into bare trust by someone else - such as a grandparent - the income is taxed as the child's own income. The child's income is taxed in the same way as an adult: a tax-free personal allowance, then basic rate tax on the next band of personal income and so on.
Parents can put shares into more complex trusts for the benefit of their own children, and this can have tax benefits. Given the costs of establishing and administering these more complex trusts, it is generally not worthwhile establishing a trust for assets worth less than £100,000. Advice on the most appropriate trust arrangement is essential.
Putting shares into trust (including a bare trust) for a child can also be an effective way of reducing future Inheritance Tax liabilities.
15. What is the procedure for issuing new private company shares?
Take advice before issuing private company shares, as this is a complex transaction. In outline, however, the directors of the company:
- Decide whether a share issue is the best way to raise funds, in accordance with their duties to the company.
- Decide how many shares they want to issue.
- Make sure the directors have authority to issue shares from the shareholders (see 3). If they do not, pass a shareholder resolution to obtain authority (either by circulating a written resolution or calling a shareholders' meeting).
- Ensure the issue complies with any pre-emption rights or other restrictions in the Companies Act, articles of association and shareholders' agreement. If it does not, it may be possible to pass a shareholder resolution to vary or disapply pre-emption rights.
- Pass board resolutions to offer the shares to the intended recipients and, upon receipt of acceptances and any payments due, issue the shares.
- Notify Companies House by filing form SH01 and a copy of any shareholder resolution. See Step-by-step guide to completing form SH01 for guidance.
- Update the company's register of shareholders and issue share certificates.
Sparqa Legal has template company registers you can customise and use for your company.
16. What is a share transfer?
A share transfer is the process by which an existing shareholder sells (or gives) one or more of their existing shares to a new owner. It might also be used to describe the form that the shareholder fills in to carry out the transaction - sometimes also called a 'stock transfer form' or an 'instrument of transfer'.
Download a free blank stock transfer form from Sparqua.
17. What is the procedure for share transfers?
The current owner fills in and signs a share transfer form and passes it, together with any share certificate, to the proposed new owner, in return for payment of the purchase price for the shares.
The proposed new owner does not usually have to sign the share transfer form if the shares are already fully paid, but does if they are nil or partly paid.
The proposed new owner is normally liable for stamp duty on the transfer, and must send the share transfer form and a cheque for stamp duty to the HMRC stamp office as part of completing the stock transfer form. However, there is no stamp duty if the amount the buyer is paying for the shares is £1,000 or less (or, if the transfer is part of a series of transactions, the total value of the transactions is £1,000 or less) and there is a certificate on the reverse of the share transfer form to confirm it meets these criteria. If there is a certificate, the form will not need to be presented to HMRC for stamping and should be sent direct to the company registrar.
The company's articles must then be complied with. These commonly provide that the directors must approve the transfer, but take advice if they say something different. If directors do have to approve the transfer, they will usually do so, and arrange for (1) the share register to be amended accordingly and (2) issue of a new share certificate to the new owner. However, if the directors refuse the transfer (and, if they do, they are required to give their reasons, and provide further information if the proposed new shareholder asks for it), take advice immediately.
Read Sparqa’s step-by-step guide on completing a stock transfer form for more detailed guidance.
18. Can shareholders transfer or sell their private company shares to someone else?
A company's articles of association commonly allow the directors to refuse to register any transfer of a share submitted to the company. The default model articles of association give directors general discretion to refuse a share transfer in this way.
Your company’s articles of association might otherwise include different restrictions on the transfer of shares. For example, they might require any shareholder who wants to sell shares to offer them to existing shareholders first (so called 'pre-emption rights'), or to offer them back to the company through a 'share buy-back'. The articles might also establish how the price for the shares is to be calculated in each case.
Alternatively, they might provide that shares can be transferred freely between members of the same family, but any other transfers are subject to the usual directors' powers to refuse to register a transfer, or to pre-emption rights in favour of existing members or the company.
Separately from the articles of association, there may also be an agreement between the shareholders that includes restrictions on transfer or sale of shares. This is common where the restrictions are to apply only between the current shareholders of the company, so that an agreement is the appropriate place for them, rather than to both present and future shareholders, in which case the articles (that bind all shareholders, present and future) are the more appropriate place.
Sparqa Legal’s share transfer toolkit contains all of the legal documents, template resolutions and guidance that a company’s board of directors will need in order to properly approve and register a share transfer.
19. How is a fair value established for private company share transfers?
If shares can be freely sold, seller and buyer can negotiate a price between them.
However, the company's articles of association, or a shareholders' agreement, may specify how the shares are to be valued. For example, the value might be established by the company's accountant.
There is no agreed method for valuing a private company’s shares, however, so you should always seek separate advice if you are unsure.
20. What costs are there when private company shares are issued or transferred?
Stamp Duty is normally payable by the purchaser when shares are transferred, but not on an issue of shares.
The tax is at £5 per £1,000 paid for the shares, except that transfers for £1,000 or less are exempt, provided that the transfer form is certified on the reverse with an appropriate certificate as to the value of the transaction. In that case, the transfer form need not be submitted to HMRC, and can be submitted to the company for approval by the board, or other compliance with the company's articles.
If duty is payable, the share transfer form should be sent to the Stamp Office of HMRC and the stamp duty paid. The form will be returned embossed with a red stamp showing the duty paid.
21. What are the tax implications of a private company share issue or transfer?
Issuing new shares has little direct impact on a company's tax position.
For an individual, the transfer or sale of shares may give rise to a capital gain. This may create a liability to Capital Gains Tax for the seller of shares if total gains within the tax year exceed the allowable threshold and cannot be offset by losses.
Transfer of shares also has an impact on future tax liabilities. For example, an individual might be able to transfer shares to a spouse with a lower income to reduce their overall income tax liability. Gifting shares to your children, or putting them in trust, can also help to reduce future Inheritance Tax liabilities. See 13 and 14.
Take specialist legal and tax advice to understand the alternatives and the potentially complex income tax, National Insurance and Capital Gains Tax issues that can arise.
22. Can private company shares be issued or transferred for less than they are worth?
On an issue of private company shares, the directors of a company have an obligation to act in the company's interests, and also to treat shareholders fairly. This normally precludes issuing shares for clearly less than they are worth. There are, however, exceptions: for example, shares can be offered at a discount to their true market value to existing shareholders as a way of encouraging them to take up the new shares, without disadvantaging individual shareholders.
However, this is subject to the Companies Act rule that shares can never be issued on terms that a shareholder will pay the company less than their nominal value. For example, if they are £1 shares, then the company cannot agree that they will be issued on terms the shareholder will pay less than £1 for them.
An individual might choose to transfer shares for less than they are worth - or indeed to give them away (for example, to children). However, any tax liability such as Capital Gains Tax would normally need to be worked out on the market value of the shares.
More broadly, HMRC can challenge arrangements designed to artificially reduce tax liabilities.
This is a potentially complex area of tax, with hidden opportunities and pitfalls. Get specialist advice on the income tax, National Insurance and Capital Gains Tax issues that can arise.
23. Can we offer private company shares to the public?
A private company must not offer shares to the general public. The company can however offer shares to existing shareholders, or to professional investors and companies.
In order to offer shares to the general public, a company must be a public limited company (plc). The key requirements are that the company's name and memorandum should state that it is a plc, and that it should have an issued share capital of at least £50,000 sterling or its euro equivalent.
If a plc wants to offer shares to the public, it must generally issue a prospectus meeting detailed legal requirements, and will also need to comply with the requirements of any exchange on which the shares are to be traded. The company will need to appoint advisers to handle this complex process.
24. What happens if a shareholder dies or becomes bankrupt?
If a shareholder dies, the shares become part of his or her estate, and the company recognises the shareholder's executors under his or her will (or the 'administrators' if he or she did not leave a will) as the people entitled to deal with them.
If a shareholder becomes bankrupt the shares will form part of the bankrupt's assets, control of which is taken over by the Official Receiver or a trustee in bankruptcy.
However, the company's articles of association may contain restrictions on share transfers and may explicitly set out what will happen if a shareholder dies or becomes bankrupt. For example, articles commonly provide that the shares of a deceased shareholder carry no right to attend or vote at shareholder meetings unless and until either:
- they are transferred by the executors (or administrators) to a new owner
- the executors apply to be registered as the new owners of the deceased's shares
and that in each case the directors have power to refuse to register the transfer or election, as if it were a transfer by a live shareholder.
25. Can companies and partnerships own shares?
In general, companies are permitted to own shares. It is not advisable for a partnership to be registered as the owner of shares (unless it is a Scottish partnership - the relevant law in Scotland is different).
Any particular company or partnership may have restrictions on its ability to own shares in a limited company; for example, if the partnership agreement prohibits it. Similarly, the articles of association of a company, or a shareholder agreement, may prevent its shares being issued or transferred to companies or partnerships.
26. Can overseas individuals or businesses own shares in our company?
In general, overseas individuals and businesses that are recognised by English law as being separate legal entities (for example, the local equivalent of a UK limited company) can own shares in your company unless the company's articles of association, or a shareholders' agreement, prevent them doing so.
In practice, there may be additional issues to consider. For example, laws overseas might make it illegal for you to offer shares to individuals or businesses in that country.