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Are There Restrictions on Share Transfers?

Are There any Restrictions on Share Transfers?

Private companies have the ability to place fairly tight restrictions on the transfer of its shares. Existing shareholders, directors and certain third parties may all have rights to prevent, or at least have notice of, transfers of shares.

The articles of association of a company can (and often will) impose restrictions on the ability of shareholders to transfer shares. The articles of association will therefore need to be checked if a share transfer is proposed. The articles often contain pre-emption rights which give existing shareholders a first right to buy the shares of any shareholder who wishes to transfer them in proportion to their existing shareholding. Therefore transfer of shares other than to existing shareholders may not be possible until after an offer at the same price has been made to the existing shareholders. There may also be a shareholders agreement in place between the shareholders regulating the transfer of shares.

The directors may also refuse to register a share transfer on the register of members. The directors must give the proposed transferee notice of their refusal to register the shares.

On certain occasions third parties may also have rights to restrict share transfers. Whilst only the legal owner will appear on the register of members, this may not reflect the real situation as to share ownership. Shares may actually be owned by a beneficial owner; this could be to reflect a trust or lending arrangement. In such an arrangement there will often be a declaration of trust agreement between the legal and beneficial owner which requires the legal owner to give prior notification of proposed dealings in the shares to the beneficial owner. The beneficial owner will then be in a position to direct the legal owner as to whether to restrict a proposed transfer.

Beneficial owners must be registered as part of the PSC regime if they meet the required thresholds of the regime (e.g. owning or controlling 25%+ of shares in a company). Further details are available in our PSC Registers group of templates.

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