Share Transfer Restrictions in AOA
A private limited company is considered to be a “closed corporation,” similar to a partnership company. Therefore the Articles of Association (AOA) can limit the transfer of share in a Private Limited Company. Consequently, the company’s Articles of Association must be checked before beginning the share transfer process.
Restrictions on the right of the shareholders to transfer shares are usually in two forms:
· Rights of pre-emption: If a shareholder wishes to sell some or all of his shares, such shares must first be offered to other existing members of the private limited company at a price determined by the Directors or the Auditor of the Company. The value of the shares can be determined based on the formula/method prescribed in the Articles of Association. If no existing shareholder is interested, then shares of the Company can be freely transferred to an outsider.
· Powers of Directors to refuse: The Director may have the powers to refuse the registration of the transfer of shares under certain circumstances – prescribed in the Articles of Association.
The only restriction contained in the Articles of Association is considered legally binding. Any private agreement between the shareholders is not binding either on the company or on the shareholders. Further, share transfer can only be restricted by the Articles of Association. The right to transfer shares of a private limited company cannot be a total prohibition or ban on share transferability.
Share transfer procedure initiation:
To initiate the share transfer procedure, the following steps must be followed:
- Step 1: Review the AOA: Articles of Association of the Private Limited Company must be reviewed and restrictions, if any must be addressed.
- Step 2: Shareholder must give notice in writing to the Director of the Company about the intention to transfer a share of the company.
- Step 3: Determine the price as per Articles of Association at which the shares of the Company will first be offered to present shareholders of the Company. (Usually, this price is determined by the Directors of the Company or an Auditor of the Company.)
- Step 4: The company must then give notice to the other shareholders about the availability of shares, the last date to purchase the shares, and the price at which the share is available.
If any of the present shareholders come forward for the purchase of shares, such shares must be allotted to them. In case no present shareholder is interested or excess shares are available, the same can be transferred to the outsider.
How to transfer shares:
To effect the share transfer, the following steps must be followed:
- Step 1: Obtain share transfer deed in the prescribed format.
- Step 2: Execute the share transfer deed duly signed by the Transferor and Transferee.
- Step 3: Stamp the share transfer deed as per the Indian Stamp Act and Stamp Duty Notification in force in the State.
- Step 4: Have a witness sign the share transfer deed with his/her signature, name, and address.
- Step 5: Attach the share certificate or allotment letter with the transfer deed and deliver the same to the Company.
- Step 6: The company must process the documents and if approved, issue a new share certificate in the name of the transferee.