Companies are independent legal entities owned by one, several or many people. When a company is registered shares are allotted between the various owners, who hold different-sized interests in the company.
This article explains how shares may be acquired in a company, and what happens to the shares when a company is sold.
The distinction between business sales and share transfers
Whilst a business and a company are often considered the same, they are not. A key distinction is that a ‘sale of a business’ involves sale of the business assets and the good will, but no shares.
Conversely, when you sell a company, the composition of share ownership is changed. Shares can be transferred, either to another shareholder (or new investor) or back to the company itself. Of course, the process will differ depending on the entity or person to whom a person sells their shares. This article details how to transfer shares to another shareholder or back to the company.
It should always be remembered each situation is different, and for these reasons advice from commercial and transactional specialists like Biztech Lawyers, can help you better understand your situation.
Scenario 1: Transferring shares to another shareholder
When a shareholder sells their shares to another shareholder or new investor, the sale process typically requires a:
- share sale agreement;
- resolution of shareholders;
- resolution of the board;
- share transfer form; and
- share certificate.
A share sale agreement is a formal document that details the terms and conditions of the sale. It must be clear and comprehensive and provide information about the number of shares for sale and the price paid. It should also outline when and where the sale will take place and whether the purchaser will pay in instalments or one transaction. The vendor should make appropriate warranties to the buyer.
If the company’s shareholders’ agreement provides members with the ‘right of first refusal’, the consent of other shareholders will be necessary before the transfer can take place. The right of first refusal requires a member wishing to sell their shares to offer them first to other shareholders. Similarly, a company constitution may require the consent of the board before a share transfer can take place. The resolution should be recorded the meeting minutes.
Once the purchase has taken place, the purchasers must be provided with a signed share transfer form. Share certificates must then be issued in the purchasers’ names. Only then do they become members of the company. Finally, if any seller of shares is also a director, they must resign before or at the time of the sale. The company must also notify the Australian Securities and Investment Commission (ASIC). ASIC requires a company to submit Form 484 within twenty-eight days.
Scenario 2: Transferring Back to the Company
If a company intends to acquire its own shares by way of a share buyback, it must satisfy all necessary formalities. These formalities depend on the kind of buyback, but normally require obtaining shareholder assent through a general meeting of the company, as well as the consent of the board. The company must also notify ASIC. The company will then distribute a shareholder buyback agreement to shareholders detailing the conditions upon which the buyback offer is made, including:
- company obligations;
- details of completion;
- vendor warranties; and
- indemnities and releases.
The agreements should also outline the company’s obligations. This includes the offer price and how is to be made payment. For example, a company could pay for the shares in one transaction or by instalments. Where payment is to be by instalments, the agreement should include a detailed schedule for those payments.
Exchange and Completion
Any agreement for sale of shares should also detail arrangements for exchange and completion. The exchange occurs when the parties sign the agreement and completion when the transfer takes places. The dates for exchange and completion may differ. The provision concerning completion should outline when it will happen and that the company will pay a specified amount for the shares. It will also list the tasks that parties to the sale (whether vendor or purchaser) must do. These could include giving a letter of resignation and returning any company documents in their possession.
The agreement should also outline the warranties that the vendor makes to the company upon completion. These will likely include an assurance that the seller owns the shares legally and beneficially and has the right to sell them unencumbered by other interests, and that the transfer does not breach any third-party agreement.
In addition, the company will typically indemnify the vendor against any future claims made against the company and release the vendor from current and future liabilities. In exchange, the vendor typically releases the company from any claim it may have against the company.
Scenario 3: Compulsory acquisition of shares
Compulsory acquisitions of shares is a right under the Corporations Act 2001 (Cth) (‘the Act’). It gives a shareholder who holds at least 90% of the shares in a company the ability to compulsorily acquire the remaining shares. Consequently, that shareholder ends up with 100% of the shares. The compulsory acquisition of shares allows a shareholder to access the benefits and flexibility of fully owning a company. It also encourages company acquisitions and provides shareholders with the prospect of obtaining full ownership.
There are two forms of compulsory acquisition, being:
- compulsory acquisition following a take-over bid; or
- general compulsory acquisition, in the absence of a takeover bid.
Compulsory acquisition of shares requires the lodging the following prescribed notices with the Australian Securities and Investments Commission (ASIC):
- Form 6021 for a compulsory acquisition following a take-over bid; or
- Form 6024 for a general compulsory acquisition.
The Corporations Act also outlines additional requirements for general compulsory acquisitions to ensure that minority shareholders receive protection.
Where shareholders holding 10% or more of the shares object to the acquisition, court approval is required before compulsorily acquisition can be made. There is also the expectation that they will pay for the court proceedings.
Things to remember:
Share transfers can be complex, and it is recommended that professional advice be obtained before embarking on such transactions. Shareholders holding a majority interest can achieve full ownership of a company through compulsory acquisition of shares. However, depending on the company, the type of acquisition may differ. It is also critical to be aware of and adhere to Corporations Act requirements.
For more assistance, or guidance around share transfers and acquisitions contact the experienced team at Biztech Lawyers.