Shares, like money, can readily change hands and be reissued. They are the lifeblood of a company, and it is by issuing and transferring shares that companies can bring aboard new investment and ensure that the organisation continues long after the founders retire, as well as much more.
There are several compliance issues of which you must be aware when issuing new shares or transferring existing shares. Before we cover this issue, it is useful to understand the reasons for issuing new shares and transferring existing shares.
New shares are issued upon formation of the company as well as during its lifetime for reasons that include:
- To repay some of the company’s borrowings.
- To finance a new company acquisition.
- As part of an employee share option scheme.
- As a payment to the shareholders of a company that it is acquiring: In simple terms, shareholders will swap their shares in the acquired company for shares in the purchasing company.
- Making a bonus issue of shares instead of paying out a dividend. This reduces the value of each share, increasing the marketability of the company, without the shareholders having to find additional funds for the new shares. If the company plans to go public, this strategy can be used to increase a private company’s issued share capital to £50,000.
- To protect cashflow a “scrip” dividend of new shares can be issued.
- To honour the terms of previously granted share options.
Share transfers occur because:
- A shareholder dies or wishes to retire.
- A shareholder wants to make a gift of shares to a family member or friend.
- Investment and additional capital are required by the company.
- A new business partner is joining the company.
You should seek professional advice before allotting new shares or making a transfer. Not only must you comply with the company’s Articles of Association and relevant legislation, but there are also tax implications for new share allotments and transfers of which you need to be aware.
Under section 550 of the Company Act 2006, the directors of a private company with only one class of share can allot new shares without gaining permission from other shareholders as long as the company’s Articles do not preclude such a move.
|Note: The above will not apply if the company was incorporated before 1 October 2009 (or registered or re-registered on or after that date under the Company Act 1985) unless its members have resolved, by ordinary resolution, that the directors should have the powers given by section 550.|
What about pre-emption rights?
Pre-emption is a right of first refusal for the existing members of a company to purchase new shares. This right therefore allows the members to maintain their percentage of shareholding in the company, provided they have enough money to subscribe for the new shares.
The default model Articles contains a statutory pre-emption right in favour of the existing shareholders. However, you can modify the prescribed form to exclude the pre-emption right. Directors can also modify or exclude the statutory pre-emption right if the Articles or a Special Resolution allow for such a power to be granted.
Although voting rights of existing shareholders are usually protected by the company’s Articles, the issuing of new shares will dilute those shareholders’ overall percentage ownership of the company. This can be prevented by the existing shareholders buying an appropriate percentage of new shares.
If the percentage of the company owned by existing shareholders is diluted, certain shareholders’ control of the company will be adversely affected should their percentage of share ownership drop below 50%. For example, they will lose the power to pass a resolution appointing or dismissing directors.
If the company’s Articles allow, you can issue different types of shares. The most common class of share is an “ordinary share” in which dividends are distributed according to the percentage of ordinary shares each shareholder owns. Furthermore, although ordinary shares can be issued without voting rights, one such share normally equals one vote.
Different rights or restrictions can be attached to different classes of shares. For example, if you offer employees shares as part of a retention or bonus scheme then you can stipulate that the shares can only be transferred after a certain length of service has been completed or particular targets met.
Before transferring shares you must check the company’s Articles for any rules or restrictions. For example, the Articles may stipulate that shares can only be transferred to existing shareholders or their family members.
With limited exceptions, Section 770(1)(a) of the Companies Act 2006 states that a company must not register a transfer of shares in, or debentures of, the company unless a proper instrument of transfer has been delivered to it. The company’s Articles will set out what the proper instrument of transfer is. Most companies use a Stock Transfer Form found in Schedule 1 of the Stock Transfer Act 1963 (as amended).
You will need the following information to complete a Stock Transfer Form:
- Company name and registration number.
- The number of shares being transferred.
- The amount paid or due to be paid for the shares, if applicable.
- Details of any non-cash payments, if applicable.
- Name and address of the existing owner (the “transferor”).
- Name and address of the new owner (the “transferee”).
- Authorising signature of transferor and transferee.
- The a amount of Stamp Duty owed (if any).
The Schedule 1 Stock Transfer Form is not the default for the transfers of:
- Partly paid shares.
- Shares in a company limited by guarantee.
- Shares in an unlimited company.
However, if the Articles do not stipulate a particular form to be used to transfer the above then, in principle and subject to any required modifications, the prescribed Stock Transfer Form may be used.
Upon completion, both the transferor and the transferee should receive a copy of the Stock Transfer Form and it is prudent to issue a Share Certificate to the new owner to protect them if their name is mistakenly or fraudulently removed from the register.
You will need to notify HMRC if any Stamp Duty is payable. It is also best practice to file a Confirmation Statement as soon as possible after any share transfers.
Stamp Duty is a government tax paid on certain documents, including share transfers (as they are transferred by a Stock Transfer Form). At the time of writing (September 2021) it is chargeable on transactions where the consideration is over £1,000, at the rate of 0.5% of the share price, rounded up to the nearest £5. Where the consideration is certified to be £1,000 or less, the instrument is exempt from stamp duty.
You may find it surprising that there is no legal obligation to pay Stamp Duty on shares. However, not having a stamp on the Stock Transfer Form or confirmation from HMRC that stamp duty has been paid means a Company Secretary must refuse to register the Stock Transfer Form and a Civil Court is prohibited from admitting the document as evidence in the event of a dispute. Furthermore, if Stamp Duty is not paid at the time of transfer, Stamp Duty Reserve Tax (SDRT) will be due (at 0.5%) on the agreement to transfer the shares.
Due to the above consequences, Stamp Duty should be paid within 30 days of the execution of the Stock Transfer Form: Any later will mean that interest and penalties may be added. Furthermore, although the legislation does not set out who owes the Stamp Duty, this tax is invariably paid by the transferee.
As you can see from reading the above, creating new shares and transferring shares is governed by strict rules that are generated from the company’s Articles and and by legislation. Non-compliance could lead to shareholder disputes and/or non-registration.
In regard to Stamp Duty you might like to note that, in 2020, HMRC launched a consultation on the principles and designs for the modernisation of stamp duty and SDRT. On 20 July 2021 HMRC published a summary of the responses which included a preference for:
- Replacing Stamp Duty and SDRT with a single tax for listed and unlisted securities that is self-assessed and digitised.
- Ending the link between payment of Stamp Duty and entering shares on the register. Company Secretaries should be able to update the register if presented with a unique transaction reference number (UTRN).
- Stamp duty appeals to be heard by the tax tribunals, rather than the High Court.
A working group has been established to implement these and other proposals generated by the consultation for the purposes of including them in the draft Finance Bill 2022.
Uniwide Formations specialises in the registration of limited companies and LLPs. As professional business service providers, we offer a wide range of related services including services relating to company shares. Please feel free to contact us to discuss any of the points raised in this article.