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New shareholders can be introduced to a company in two main ways: (1) by issuing new shares or (2) by transferring shares by way of a sale or gift. These are relatively simple procedures; however, it is important to understand the basic requirements of how this can be done.
Issuing New Shares
Companies may want to issue new shares for many reasons, such as raising capital. This can be done by bringing in outside investors or by increasing the number of shares to existing shareholders. Capital could be required to fund an expansion of the company or to pay debts. Another reason to issue new shares may be to introduce a bonus “option” scheme for employees or to gift shares to family members.
Share Subscription Letter:
To issue and allot new shares, a company will usually receive a Share Subscription Letter, in which the new investor makes a formal application to subscribe for the shares. This letter clearly sets out the number of shares requested, the price to be paid (if any), and the method of payment (if any).
Board Meeting:
The board of directors must either convene a board meeting or pass a board resolution to approve the application for the shares and to authorise the issue and allotment of the new shares.
Share Certificate(s):
Once the board of directors has approved the issue of the new shares, a Share Certificate should be issued to the new member. The Share Certificate records the number of shares held by the new member.
Deed of Adherence:
The new shareholder should then agree to the terms of the existing Shareholders’ Agreement, if one already exists. This should be done with a Deed of Adherence. A Request for Payment of Interest or Dividends then enables the new shareholder to receive any interest or dividends that are due.
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Transferring Shares
Shareholders have the ability to transfer their shares to existing shareholders or third parties by way of a sale of the shares or a gift, though this must be done in accordance with the company’s Constitution and any Shareholders’ Agreement.
Instrument of Transfer:
To effect a transfer of the shares, the existing shareholder will need to complete an Instrument of Transfer to transfer the legal title of the shares from the existing shareholder to the new shareholder. The Instrument of Transfer will record the names of the transferor and the transferee and, in the case of shares being sold to the transferee, the price paid for the respective shares.
The board of directors must convene a board meeting to approve the transfer of shares to the new shareholder. However, instead of a board meeting, the directors may pass a written board resolution to do the same.
Once the board of directors has approved the transfer, a Share Certificate should be issued to the new member. The Share Certificate records the number of shares held by the new member.
Request for Payment of Interest or Dividends:c
The new shareholder should then agree to the terms of the existing Shareholders’ Agreement, if one already exists. This should be done with a Deed of Adherence. A Request for Payment of Interest or Dividends then enables the new shareholder to receive any interest or dividends that are due.
Shareholders can also sell their entire company by transferring their entire shareholding in the company to a third party. When shareholders decide to sell their entire company, it is necessary to establish the terms of the sale in a Share Purchase Agreement. This is a contract which sets out in detail the terms of the purchase, including the price and conditions and assurances from the seller regarding the finances and liabilities of the business. This is important as the purchaser will acquire not only the assets but also the liabilities of the company.
Whenever shares are transferred by an existing shareholder to any third party, stamp duty must be paid on those shares. This is done by taking the Instrument of Transfer to the relevant government authority for stamping and payment of stamp duty.
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Related Documents
- Share Purchase Agreement
- Share Certificate
- Deed of Adherence
- Instrument of Transfer
- Share Subscription Letter
- Option Certificate
- Directors’ resolution to issue shares
- Shareholders’ Agreement
- Request for Payment of Interest or Dividends
