7 March 2024
In this instalment of the KPMG Law ‘Guide To…’ series we will look at the legal basis for share transfers, the share transfer process, and the legal documentation and reporting requirements for share transfers under the relevant provisions of the Companies Act 2014 (the “Act”).
Share transfers play a crucial role in the dynamic landscape of business, facilitating changes in ownership, investment, and strategic direction. In Ireland, a country with a robust business environment, the process of share transfers is governed by Section 94 of the Act. This comprehensive piece of legislation outlines the procedures for transferring shares and ensuring transparency in corporate transactions. The Act streamlines the transfer of shares and debentures along with the Stock Transfer Act 1963, which deals with the transfer of securities including shares.
A company’s constitution and/or a shareholders' agreement can have a significant bearing on an issuing company's ability to transfer shares where express provisions in the company's constitution provide otherwise or where contractual restrictions are present in the shareholders' agreement. This article explores the key aspects of share transfers for Irish private companies limited by shares, providing insights into the procedures and considerations involved.
Share transfers can take different forms, including voluntary transfers, transfers by operation of law and transfers due to court orders. Voluntary transfers are the most common, occurring when a shareholder willingly sells or transfers their shares to another party.
The transfer of shares typically involves several steps. Often, the constitution of a private company limited by shares will include pre-emption rights restricting the transfer of shares. This means the selling shareholder must first offer the shares to existing shareholders, allowing them to purchase the shares before offering them to external parties.
If the existing shareholders decline, the shares can be offered to external parties. In addition, shareholders may enter into a shareholder’s agreement which impose restrictions on offering shares to third parties not bound by the shareholders' agreement.
Unlike the company’s constitution which binds all new shareholders, a shareholders' agreement will only bind the parties to it unless the person to whom shares are transferred enters into a deed of adherence agreeing to be bound by the terms of the shareholders agreement.
Board approval is a crucial step in the share transfer process. The board of directors must review and approve the proposed transfer, ensuring it aligns with the company's objectives and complies with legal requirements. This is achieved through a duly convened meeting of the board of directors.
Directors have a general discretion to refuse a share transfer pursuant to Section 95(1) of the Act. However, this power of refusal must be exercised within 2 months of delivery of the instrument of transfer and can be modified or disapplied by the company's constitution.
As discussed above, pre-emption rights give existing shareholders the first opportunity to purchase newly issued shares. However, these rights can be restricted or excluded by the company's constitution or a shareholders' agreement. If a company wishes to disapply restrictions on a share transfer, it will need to pass a special resolution in writing to amend its constitution.
The share transfer process involves the preparation and execution of various documents. It is common practice for the parties to enter into a share purchase agreement which captures the details of the transaction. The stock transfer form and share certificate are essential components for facilitating the legal and beneficial transfer of ownership. Once the company has approved the transfer for registration, it must issue a new share certificate to the transferee in respect of the shares and update its register of members within two months.
However, it should be borne in mind that a purchaser of the shares only becomes the legal owner of the shares when their name is entered upon the register of members of the company as per Section 94(3) of the Act. Prior to entry on the register of members, the purchaser is the beneficial owner of the shares only.
Stamp duty is payable on certain share transfers in Ireland. The rate can vary depending on the value of the consideration paid for the shares. For example, stamp duty is currently payable at the rate of 1% where consideration payable on the shares exceeds €1,000. If shares derive the greater part of their value from Irish real estate, stamp duty is payable at a rate of 7.5%.
Where the consideration payable on the shares is equal to or less than €1,000, an exemption can be availed of. Another example of when an exemption can be applied is where shares are transferred between spouses, known as a spousal exemption under Section 96 of the Stamp Duties Consolidation Act, 1999.
It is essential to assess the stamp duty implications of a share transfer and ensure compliance with tax regulations.
Following a share transfer, Irish companies are required to update their register of members and notify the Companies Registration Office ("CRO") of the changes within a specified timeframe. This is typically achieved where the company files its CRO form B1 Annual Return. Compliance with these reporting requirements is vital to maintain transparency and legal standing.
If certain thresholds pursuant to the Competition Acts 2002 to 2023 are met it may become necessary to notify the Competition and Consumer Protection Commission ("CCPC") under Ireland’s merger control regime, but this is unlikely in most share transfers involving small privately held companies.
Shareholders involved in a transfer should carefully consider the financial, tax and legal implications. Seeking professional advice, especially from legal and financial experts, can help ensure a smooth and compliant transfer process.
Share transfers are integral to the evolution and growth of Irish companies. Understanding the legal framework, adhering to procedural requirements, and considering the implications are essential elements in navigating this process successfully. As with any complex legal matter, seeking professional advice and maintaining a thorough understanding of the applicable regulations are paramount for all parties involved in a share transfer transaction in Ireland.
If you are considering transferring shares in your company, please do not hesitate to contact us at KPMG Law LLP, where our dedicated team of professionals will guide and assist you every step of the way.
Please contact KPMG Law LLP if you require any advice or assistance in relation to a transfer of shares.
