Maintenance of share capital
Once a shareholder has decided to invest in shares in a company, that investment cannot normally be returned to the shareholder. In other words, a company is not usually permitted to return capital to its shareholders – all payments by a company to its shareholders should be made out of distributable profits. This is primarily for the benefit of the company’s creditors. In practice, many private companies have only a small issued share capital so this capital maintenance regime is of little relevance. There are some exceptions to the maintenance of capital rule. These include court-approved reductions of capital and a new procedure introduced for private companies to make out-of-court reductions under Part 17 CA 2006 (ss.642 – 644). Such exceptions will be explored later in the module.
Transfer/Transmission of shares
Circumstances
Shares may be transferred by way of sale or gift or transmitted following death or bankruptcy.
‘Transmission’ means that following death, legal title to shares will vest automatically in the personal representative; and, following bankruptcy, title will vest automatically in the trustee in bankruptcy.
Restrictions on transfer
Shareholders are free to transfer their shares subject to any provisions in the articles (s.544(1) CA 2006).
The two most common forms of restriction on the transfer of shares are:
1. Directors’ power to refuse to register
Article 26(5) MA states:
“The directors may refuse to register the transfer of a share, and if they do so, the instrument of transfer must be returned to the transferee with the notice of refusal unless they suspect that the proposed transfer may be fraudulent”
Under s.771 CA 2006, a company must give reasons if it refuses to register a transfer.
2. Pre-emption clauses
Here we are looking at pre-emption rights on a transfer of shares (which should not be confused with pre-emption rights on allotment under s.561 CA 2006). Such rights are usually set out in the articles. CA 2006 and MA do not contain any pre-emption rights on transfer, so they must be specially inserted into the articles of any company wishing to establish them.
Pre-emption rights on transfer will often require that a shareholder wishing to sell shares must offer them to the other existing shareholders before being able to offer them to an outsider.
A listed company must have freely transferable shares. Therefore such restrictions on transfer are not permitted in a listed company.
Method of transfer
1. Instrument of transfer
A transfer of shares must be made by a ‘proper instrument of transfer’ – s.770(1) CA 2006. The usual method is by way of a stock transfer form, which has to be signed by the transferor and submitted, with the share certificate, to the company.
2. Stamp duty
The stock transfer form must be stamped before the new owner can be registered as the holder of those shares. Stamp duty is payable at 0.5% of the consideration rounded up to the nearest £5. Since 13 March 2008 (when the Finance Act 2008 came into force), no stamp duty is payable where the consideration is £1000 or less; but where the consideration is more than £1000, a minimum fee of £5 is payable.
3. Legal and equitable ownership
Legal title to shares passes on the registration of the member as the owner of those shares in the register of members (s.112 CA 2006). Beneficial title passes on the execution of the stock transfer form.