Transfer of Shares of a Private Limited Company

Transferability of shares has been an important feature of the company business model. Shares are personal property and can be transferred. Transfer of shares is a voluntary process by which an existing shareholder of a company transfers the title on their shares to a transferee. The Companies Act 2006 (2063) (Act) recognises this concept and allows for transfer of shares within the ambit of the Act, Memorandum of Association (memorandum) and Articles of Association (articles).

Restrictions on Transfer of Shares

While the transfer of shares is a right guaranteed to shareholders by the Act, there can be several restrictions imposed on it. This is especially true for a private company since a private company is usually akin to partnerships from a personal and business perspective even though legally it is a separate and distinct entity from its owners. In terms of general statutory restrictions, the Act provides that promoters, other than those of a private company which has not obtained a loan from any other company, are restricted from transferring their shares:

  1. without holding the first annual general meeting, and
  2. without fully paying up the call amount on the issuance of their shares.

The company may also be allowed to make such restrictions if:
(a) the call amount of the shares has not been paid,
(b) the transfer would be contrary to the articles or an agreement concluded among the shareholders of the company, and
(c) the applicable fees for transfer are not submitted with the application.
Particularly in relation to (b), the articles or the shareholders’ agreement may impose certain limitations on the transfer of shares. One example of this may be limiting transfer to outsiders at first by ensuring the right of first refusal of other existing shareholders of a company to purchase the shares (ensuring preemptive rights). In such cases, whenever any shareholder wants to sell their shares, they would first have to offer the shares for sale to the existing shareholders of the company. Only when they refuse, will such a shareholder be allowed to sell their shares to a third party. The articles or the shareholders agreement may even stipulate the process governing the sale and transfer of such shares. The shareholders agreement may usually set out a number of restrictions and mechanisms regulating transfer of shares depending upon the nature and size of investment of shareholders in the company.

besides the provisions of the Act, the transfer of shares of a private company usually requires a careful assessment of any restrictive clauses or any prescribed manner of transfer noted in the memorandum or articles of the company or the shareholders’ agreement concluded among shareholders

Process of Transfer

The general framework for the process of transfer of shares has been outlined in the Act. Pursuant to the Act, the process of transfer of shares involves first, the transfer of shares from the transferor to the transferee through conclusion of a validly executed sale deed. Second, it involves the process of recording the transaction with the company for the company to effectively grant them rights as a shareholder of the company. The failure to record the name and details of the transferee in the company’s shareholder register book will not render such a transferee as a shareholder of the company. The Act provides clearly that in the event of a dispute regarding the ownership of securities of the company, the person whose name is recorded in the company’s shareholders register book will be deemed as the owner of such securities. Further, the Act only recognises persons whose names are recorded in the shareholders register book as the shareholder of the company for the purposes of exercising voting rights in the general meeting of the company. But until the transfer is registered with the company, the transferor should act as a constructive trustee of the transferee.

The transferee will have to submit an application in the prescribed format to the registered office of the company with the sale deed and the share certificate paying the applicable fees. Within 15 days of receiving the application, the company will then have to remove the name of the previous shareholder or transferor and register the name of the new shareholder or transferee in the register book. This will be carried out with the decision of the Board. Alternatively, the transferor can also submit an application to the company to record the transfer of their shares to the transferee along with the sale deed that is duly executed by the transferee. The company will have to treat such an application in the same manner as if it was made by the transferee and include the name of such transferee in the register book. It has been considered good practice for a private company to notify the previous shareholder of such transfer for verification upon the receipt of the application from the transferee.

Besides the general framework, it is important to comply with any requirements that may have been set in the articles or the shareholders agreement as well.

Finally, the regulatory body, the Office of the Companies Registrar (OCR) should be notified of the share transfer by the company. The shareholder register book of the company will have to be updated with the OCR.

Conclusion

In conclusion, besides the provisions of the Act, the transfer of shares of a private company usually requires a careful assessment of any restrictive clauses or any prescribed manner of transfer noted in the memorandum or articles of the company or the shareholders’ agreement concluded among shareholders.

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Kirit Mani Adhikari

Kirit Mani Adhikari is a Trainee Associate at Pioneer Law Associates and is specialising in corporate law.

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