Share Transfer Procedures

18/08/2008

One of our clients recently had an errant shareholder who decided to completely ignore the provisions of the company’s constitution and the shareholders agreement when he decided to transfer his shares to a related entity. While the other shareholders did not have a problem with the share transfers as a legitimate reconstruction of the shareholders business interests, they became concerned when the new shareholder entity appeared to be operating in a competitive nature to their own business. When this fact was investigated by our client the situation quickly deteriorated into a dispute between the transferring shareholder and the remaining shareholders. However, as it was the transferring shareholder who did not bother to comply with the applicable procedural requirements for transferring shares, it was this transferring shareholder who soon found himself in a difficult situation.
 
Shareholders of small and medium size companies need to stay alert to the procedures and requirements which must be followed when they want to transfer or sell their shares. Failure to follow the necessary procedures – whether such procedures are required because of the Corporations Act, the company’s constitution or an applicable shareholders agreement – can cause a misguided shareholder considerable grief and lead to disputes between shareholders.
 
It is important to know what the requirements are for transferring shares, and equally important, what law, document or agreement takes precedent when determining the correct procedure. To begin with, most companies will have a constitution that stipulates certain requirements that must be met when transferring shares. However, some companies don’t have a constitution and rely on the Replaceable Rules contained in the Corporations Act to determine what must be done in order to transfer shares.
 
Where a company’s shareholders have an approved Shareholder’s Agreement in place, this document will override any conflicting provisions contained in the company’s constitution, or the Replaceable Rules. Often a Shareholders Agreement will contain much more detailed requirements and restrictions concerning the transfer of a shareholder’s shares than are normally found in a constitution. At the very least, it would be highly unusual for a Shareholders Agreement to allow a shareholder to transfer shares to a new entity, without requiring that new entity to sign an agreement to be bound by the existing Shareholders Agreement.
 
All transfers of shares must be registered in the company’s share register before the transfer is complete and the new shareholder is recognised as a shareholder of the company. The board of director of the company are the only people who have the power to approve the registration of the transfer. Directors will be unlikely to instruct the company secretary to register a share transfer if the proper procedures have not been followed. By ensuring that you follow the correct procedures, issue the right notices and generally comply with your obligations as a shareholder, you should have no problem in dealing with your shares – unlike the errant shareholder referred to above who was clearly not doing the right thing.
 
If you have any questions concerning share transfers, shareholder agreements or other company advice please contact Townsends Business & Corporate Lawyers on (02) 8296 6222.