Shares & Shareholders in UK Companies

UNITED KINGDOM INCORPORATION SERVICES: PURCHASE OF OWN SHARES IN PRIVATE COMPANIES. WHO CAN OWN SHARES IN A PRIVATE LIMITED COMPANY? WHAT IS A SHARE?

A Share is a token of ownership. A typical start-up company will have 1,000 shares (although they may have many more). Any individual shareholder can have just one, or many shares. A private company is normally restricted to issuing shares to its members, to staff and their families and to debenture holders. However, by private arrangement, the company may issue shares to anyone it chooses. Shares in a private limited company may only be sold or transferred with the permission of the Directors.

Given that the separation between a company and its shareholders is one of the most fundamental principles of company law, a purchase or buy back of own shares - the acquisition by a company of shares in itself - may seem like a slightly odd concept. However, buy backs are common amongst private companies in England and Wales and, despite lengthy procedural requirements, are often relatively quick and inexpensive to carry out.

One of the most common reasons for undertaking a buy back is to return surplus cash to shareholders. Although this could often be achieved by payment of a dividend, a purchase of own shares can have certain advantages. Another common reason for a purchase of own shares is to provide a willing buyer for shares in the relevant company where there is no 3rd party willing or able to acquire them.

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Every shareholder may empower a third person (credit institution, professional shareholder representative or other trustee) to execute his voting right at a general assembly. Many shareholders empower their depository banks to execute their voting rights. Upon taking on the duties of Nominee Shareholder, we would hold your shares on trust in the form of a Nominee Shareholders agreement. Our Nominee Shareholders agreement would serve the purpose of ensuring that your identity as Beneficial Owner(s) is only known to us and not put on public record at the Company's Registry.

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A private company can purchase its own shares either using available distributable profit or in certain circumstances from capital - however the former process is by far the simplest. The most significant procedural requirements where the purchase is being funded from distributable profit are (i) that the company is being funded from distributable profit are that the company has the power to make the purchase in its memorandum and articles of association and (ii) that the purchase is approved by a special resolution of its members (in respect of which the shares to be bought back cannot be voted). The proposed draft agreement for the buy back of shares must also be made available to the members for at least 15 days prior to the relevant members meeting, although it is sometimes possible to circumvent this requirement by the use of written resolutions.

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CAN A COMPANY BUY ITS OWN SHARES?

This used to be completely prohibited. Now it is permitted subject to quite restrictive and detailed rules. The problem with companies buying their own shares is that, if completely unrestricted, there is a danger that creditors (and potential creditors) may be misled as to the size of the company's capital. This is part of the wider area of maintenance of capital. This is a very technical area. The rules are set out in some detail below, but a summary of them is:

At common law companies were prohibited from buying their own shares: Trevor v. Whitworth (1887) 12 App Cas 409. Successive Companies Acts have made it possible for companies to buy their own shares in a number of ways. One way is for the company to create redeemable shares and then redeem them. This has long been permitted and redeemable preference shares are quite common. Redemption is subject to the rules on finance mentioned below. A company listed on the Stock Exchange can make a 'market purchase' of its shares through the Exchange, if authorised to do so by an ordinary resolution in general meeting. The shares must be cancelled once bought. This, too, is subject to the rules on finance mentioned below.

Any company may make an 'off-market purchase' of its shares by contract with one or more particular shareholders. The contract must be approved by a special resolution in general meeting. The shares must be cancelled when purchased and this, too, is subject to the rules on finance mentioned next. Redemption, market purchases and off-market purchases are all subject to restrictions as to financing the redemption or purchase. This may come from either distributable profits (i.e. profits which could be paid out by way of dividend) or from the proceeds of issuing new shares. In either case the company's capital is maintained.

Further, a private company (only) may make a 'permissible capital payment' to finance a redemption or off-market purchase. Any available profits must be used first and the payment must be approved by a special resolution and advertised to creditors. Creditors and dissenting shareholders may object to the court against such payment. Shares may be bought back as part of a reduction of capital sanctioned by the court under Companies Act 1985, sec. 135.

In practice, redeemable shares and off-market purchases by private companies are reasonably commonplace. The off-market purchase is useful where a director/shareholder of a successful private company is retiring and selling out his interest, or as a means of buying out a dissenting shareholder. Purchase by the company is an alternative to purchase by the other shareholders in the company. The off-market purchase is also used as part of some management buyouts.

Care must be taken with regard to the taxation of the purchase price. This will be treated as income in the hands of the seller of the shares unless the requirements of Income and Corporation Taxes Act 1988, sec219 are met. Discussion of these tax rules is beyond the scope of this database. The following is a more detailed account of the statutory rules on redemption and buy back.

Redemption of redeemable shares. Companies Act 1985, sec. 159: A company can issue shares of any class which are to be redeemed, at the option of the company or the shareholder, if they are authorised to do so by their articles (Table A, art. 3 does so) and subject to the following conditions: Redeemable shares can be issued only if the company has other shares which are not redeemable. Redeemable shares may not be redeemed unless they are fully paid. There are restrictions on the financing of the redemption. These restrictions apply also to a company purchasing its own shares and are dealt with in detail below.

Shares redeemed must be cancelled on redemption and the amount of the company's issued capital (but not its authorised capital) is diminished by the nominal value of the shares.

Purchase by a company of its shares. A company may purchase any of its shares (whether or not they are expressed to be redeemable) provided it is authorised by its articles to do so (Table A, article 35 does so), and it complies with Companies Act 1985, sec 162-170.

Market purchase. A market purchase is a purchase of shares on the Stock Exchange (and so limited to PLC's). By sec. 166 such a purchase must be authorised by ordinary resolution which may give a general authority to purchase the company's own shares or be limited to shares of a particular class or description. The authority may be unconditional or conditional. The authority cannot last for more than 18 months. It is standard practice in many PLC's to have such a resolution passed at each AGM. Any shares purchased must be cancelled. A market purchase is subject to the rules on finance mentioned below.

Off-market purchase. This is any purchase of shares other than through the Stock Exchange. It can include shares in a PLC bought other than through the market, or any buy-back by a private company. The statutory provisions are to be found in Companies Act 1985, sec. 162 - 170. An off-market purchase may be made only if the terms of the contract of purchase are authorised before the company enters into the contract by a special resolution. In most cases this will be under a contract drawn up for the purposes of the buyback, but it may also be done under the terms of a previously authorised 'contingent purchase contract': a contract under which a company may, subject to any conditions, become entitled or obliged to purchase its own shares.

The member (or his proxy) whose shares are the subject of such a special resolution to approve the purchase of them cannot exercise the votes attached to those shares. The member may, however, exercise any votes on any other shares. Notwithstanding anything in a company's articles, any member of the company (and any proxy) may demand a poll on the question whether such a resolution shall be passed: Companies Act 1985, sec. 1 64 (5). The special resolution will not be effective unless a copy of the proposed contract of purchase, or a written memorandum of its terms if it is not in writing, is available for inspection by members of the company, both at the registered office for at least 15 days before the date of the meeting at which the resolution is passed, and at the meeting itself: Companies Act 1985, sec 164 (6). The shares must be cancelled.

Where a company has purchased its own shares it must, within 28 days, deliver to the Registrar a return (form G169) stating the number and nominal value of those shares and the date they were purchased. A public company is required to disclose the price paid for the shares: Companies Act 1985, sec. 169 (2). The company must keep a copy of any contract to purchase its own shares, or a memorandum of its terms if it was not in writing, at its registered office for 10 years. It must be made available for inspection by members and, if a public company, by any other person.

Financing redemption or purchase of own shares. Subject to the provisions which enable private companies to make payments out of capital in certain circumstances (see below) shares may be redeemed or bought back by a company only out of the distributable profits of the company or the proceeds of a fresh issue of shares made for the purpose: Companies Act 1985, sec. 162, applying sec. 160.

PERMISSIBLE CAPITAL PAYMENTS

Where a private company redeems shares or enters into an off-market purchase for its own shares it will usually finance the transaction out of distributable profits or the proceeds of a fresh issue of shares, but it is possible for a private company to make all or some of the payment for these purposes out of capital if it complies with Companies Act 1985, sec 171 - sec 177. The payment is called a 'permissible capital payment' and it may be made only after profits available for distribution have been used. The procedure for a payment out of capital is as follows:

The directors must make a statutory declaration of solvency that, having made full inquiry into the affairs and prospects of the company, the directors have formed the opinion that, having made the payment, there will be no ground on which the company could be found to be unable to pay its debts, and for the year following that date the company will be able to carry on business as a going concern and be able to pay its debts as they fall due. Annexed to the statutory declaration must be a report by the auditors that they have inquired into the company's state of affairs and they are not aware of anything to indicate that the opinion of the directors in the declaration is unreasonable.

The proposed payment out of capital must be approved by a special resolution passed within a week after the date of the statutory declaration. The statutory declaration and auditors' report must be available for inspection at the meeting. The voting rights attached to the shares which are the subject of the special resolution cannot be exercised in respect of the resolution. Within one week of the special resolution, the company must advertise the payment in the London Gazette and either in a national newspaper or by writing to each of the company's creditors. The actual payment out of capital can be made only between five and seven weeks after the date of the special resolution.

Within five weeks of the special resolution, any member of the company (other than one who consented to or voted in favour of the resolution) and any creditor may apply to the court for the cancellation of the resolution. On hearing an application the court has wide powers to confirm or cancel the resolution on such terms and conditions as it thinks fit. If the company is wound up within one year of a payment for shares out of capital and the assets are insufficient to meet the company's liabilities the vendor of the shares and the directors who made the statutory declaration of solvency will be liable to contribute up to the amount of the capital payment. A director can escape liability by showing reasonable grounds for the opinion expressed in the statutory declaration.

WHAT ARE SHARES?

A company set up to run a business will usually have money (and perhaps other assets) put into it by the shareholders in return for shares. E.g. A, B and C set up a company and decide that they will each put in £1,000 as share capital. The simplest way for this to be represented is for the company to issue 1,000 £1 ordinary shares to each of the three shareholders. The company's issued share capital will then be £3,000 divided into 3,000 shares of £1 each. It is not the only way. An alternative would be for the three shareholders to take one share each and to lend the money to the company.

Share capital. The capital of a UK company limited by shares has to be divided into shares of a fixed amount (usually £1). Because the company is a separate legal entity the company is regarded as selling its shares to the (prospective) shareholders, who pay for them in cash or other assets. Because the creditors of the company can usually only look to the company's assets for payment, share capital is locked into the company and can be returned to the members only subject to strict rules (maintenance of capital). The shareholders are the members of the company and are the owners of it.

Nature of shares. Shareholding is a complex system of joint ownership. The shareholders jointly own the company. At the same time a share is itself an item of property which (subject to the company's articles) can be transferred by sale or gift. In return for investing in a company a shareholder gets a bundle of rights in the company which may vary according to the type of shares acquired. Most companies only have one class of shares (ordinary shares) but the law in the UK is extremely flexible and allows any classes of shares to be created. This is done by setting out the different rights attached to the various classes (usually in the company's articles). What rights are attached to the different classes of shares is essentially a matter for the company to determine. The main rights which usually attach to shares are:

To attend general meeting and vote. Typically shares carry one vote each but there may be nonvoting shares or shares with multiple votes. Some shares may carry the right to vote only in particular circumstances. To a share of the company's profits. The distribution of profits is paid by means of a dividend of a certain amount paid on each share. A dividend may be paid only if the company has made profits and to the extent that it decides to distribute them. (See Companies Act 1985, sec 263-281).

To a final distribution on winding up. If the company is wound up and all the creditors are paid the remaining assets are available for division among the members. This may be in two stages: (1) a return of capital; (2) distribution of surplus capital. Some shares may be given a priority as to one or both of these. That the company be run lawfully. i.e. in accordance with the Companies Acts, the general law and the company's constitution. In most circumstances only the members of the company will have the legal right to sue to make the company act lawfully, and even they may be restricted in their ability to sue under the common law rule in Foss v Harbottle. This is a complex area beyond the scope of this database. For legal definitions of shares, see: Borlands Trustee v. Steel Bros. (1901) 1 Ch 279 at p. 288; C.I.R. v. Crossman (1937) AC 26 at pp. 40-41, 51-52, 66.

WHAT IS AUTHORISED (OR NOMINAL) CAPITAL?

A company's authored or nominal capital must be stated in its memorandum of association. It is the maximum amount of share capital the company can issue (unless it goes through a procedure to increase the figure). authorised capital is one of the items that must be included in the memorandum (CA 1985, sec2(5)). It must be stated as a sum of money divided into shares of a fixed amount, e.g. 'The company's share capital is £50,000 divided into 50,000 shares of £1 each.'

(The authorised capital provisions in the Act are a hangover from the days when stamp duty was paid on registration of a company's memorandum. The higher the capital, the higher was the duty payable. The practice of setting up companies with a capital of £100 was a reflection of the fact that this was the amount at which higher stamp duty started to apply. No stamp duty is now payable on authorised capital, but the statutory provisions are unchanged and many people still set up £100 companies. There is now little point in restricting authorised capital. The figure should be at least sufficient to meet the company's foreseeable share capital requirements.)

A private company can have an authorised capital of any amount. A public company must have an authored capital of at least £50,000 (CA 1985, sec. 117). In either case the capital can be divided into shares of any value (though £1 is by far the commonest amount). The shares need not all be the same amount, e.g. the capital could be £100,000 divided into 50,000 shares of £1 and 100,000 shares of 50 pence. In the case of a private company the capital need not be denominated in sterling, but may be in any currency such as $US. The authored capital is simply an upper limit to the amount of shares the company can issue. There is no requirement for the company to issue all its authored capital and the figure has no implication for the liability of the members. E.g. a company may have an authorised capital of £250,000 divided into 250,000 shares of £1 each, but only ever issue, say, two shares. The shareholders' liability is to pay the company for the two shares issued. If a company wants to issue shares beyond its authored capital, the figure must be increased. Unless the company has some special restriction in its articles this can be done by an ordinary resolution in general meeting: CA 1985, sec121; Table A, art. 32.

HOW MANY SHARES SHOULD A COMPANY HAVE?

There is not a simple answer to this. It depends on the circumstances. A company set up to run a business will usually have money (and perhaps other assets) put into it by the shareholders in return for shares. E.g. A, B and C set up a company and decide that they will each put in £10,000 as starting capital. The simplest way for this to be represented is for the company to issue 10,000 £1 ordinary shares to each of the three shareholders. The company's issued share capital will then be £30,000 divided into 30,000 shares of £1 each. To do this, there must be authorised capital of at least £30,000 and the shares must be issued by the correct procedures.

Putting all the money in as share capital is not the only way. An alternative would be for the three shareholders to take one share each and to lend the money to the company. In this case the company will have an issued share capital of £3, divided into three shares of £1 each. In many cases, either solution would be appropriate. In either case each shareholder is an equal one-third owner of the business. They have one-third of the votes each, will receive one-third of any dividends and are entitled to a one-third share of any net assets remaining if the company winds up. There are, however, striking legal, taxation and practical differences between the two approaches.

If the £30,000 is put is as share capital, it is effectively locked into the company and cannot easily be returned to the shareholders. Companies can buy back their shares but only in quite restricted circumstances and subject to quite strict procedures. Money loaned to the company can be repaid to the lenders at any time. If the company fails, the lenders may claim in the liquidation for the return of their money as creditors of the company. If the loans have been secured by the company issuing debentures to the three shareholder/directors, they may rank as secured creditors, which will put them in a more advantageous position than the ordinary creditors.

There may also be a tax advantage in putting the money in as loans. When the company starts to make money, the loans can be repaid without there being any tax payable by the lender on receiving the repayment. Further, interest may be paid to the lender whether or not the company has made profits. For all these reasons, money put into a company as capital is often put in as loans rather than share capital. There may, however, be good reasons for committing the money as share capital. A company capitalized at £30,000 is clearly more substantial than one with a nominal £3 share capital. The amount of share capital appears on the public record at Companies House and it may be important to display the substance of the company to potential creditors and other business contacts. In some cases, banks or investors may want to see capital committed as share capital simply because it is then 'locked in'.

There may be good reasons as between the three shareholders why they should want to see that the money committed by the others is in the form of share capital. At a more sophisticated level, where substantial investment is being put into a company, the investors may well want a package of loans and shares, perhaps requiring different classes of shares to protect different aspects of their investment and to give them an appropriate package of rights in the company. The decision as to the capitalization in such cases of a company should usually be taken with appropriate legal and accountancy advice.

WHAT ARE CLASSES OF SHARES?

A company can create different classes of shares by giving them different rights. If a company has only one class of shares they will be ordinary shares and will carry equal rights. Different classes of shares within a company are typically created by varying the voting, dividend and capital rights attached to them. The following are descriptions of some typical classes of shares. There are no legal definitions of such classes and shares with the same name (e.g. preference shares) will have different rights in different companies.

The rights attaching to shares will usually be set out in the company's articles (the better method) or by a resolution passed under article 2 of Table A. This provides: Subject to the provisions of the Act and without prejudice to any rights attached to any existing shares, any share may be issued with such rights or restrictions as the company may by ordinary resolution determine. The resolution may be passed within a resolution increasing authorised capital, or giving authority to directors to allot under Companies Act 1985, sec. 80, or by other resolution of the general meeting. The terms attaching to such shares must be registered at Companies House (Companies Act 1985, sec 128).

Preference shares. These will usually have a preferential right to a fixed amount of dividend, expressed as a percentage of the nominal (par) value of the share, e.g. a 1,7% preference share will carry a dividend of 7p each year. It is, however, still a dividend and payable only out of profits. The dividend may be cumulative (i.e. if not paid one year then accumulates to the next year) or non-cumulative. The presumption is that it is cumulative. The dividend is usually restricted to a fixed amount, but alternatively the preference share may be participating, in which case it participates in profits beyond the fixed dividend under some formula. Preference share are often nonvoting (or nonvoting except when their dividend is in arrears). They may be given a priority on return of capital. Often they will not be entitled to share in surplus capital.

Deferred ordinary shares. Shares on which no dividend is paid until other classes of shares have received a minimum dividend. Thereafter they will usually be fully participating.

Management shares. A class of shares carrying extra voting rights so as to retain control of the company in particular hands. This may be done by conferring multiple votes to each share (e.g. they carry ten votes each) or by having a smaller nominal value for such shares so that there are more shares (and so more votes) per £1 invested. Such shares are often used to allow the original owners of a company to retain control after additional shares have been issued to outside investors.

Other classes. Any class of shares may be created. Sometimes different classes are set up for particular purposes: E.g. in a company with two investors, A and B (perhaps a joint venture between two unrelated companies) the company may have two classes of shares, A shares and B shares. The shares may carry the same rights but are intended to protect both A and B in certain ways, e.g. the articles may provide for, say, two directors to be nominated by the holders of the A shares and two by the holders of the B shares, etc.

Variation of class rights. There is some statutory protection given to the holders of a class of shares against the rights on their shares being altered. A minority class of shares, or a class of nonvoting shares, would otherwise be vulnerable to the rights on those shares being altered by the majority (e.g. by altering the articles by special resolution). Full consideration of this complex area is outside the terms of this database, but the following is a summary of the main statutory provisions:

Companies Act 1985, s. 125 (2): (Class) rights may be varied if, but only if: (a) the holders of three-quarters in nominal value of the issued shares of that class consent in writing to the variation; or (b) an extraordinary resolution passed at a separate general meeting of the holders of that class sanctions the variation. The company's memorandum or articles may impose more stringent requirements. Companies Act 1985, sec 127 (2): The holders of not less than 15% of the issued shares of the class (being persons who did not consent to or vote in favour of the resolution for the variation), may apply to the court to have the variation cancelled.

WHAT IS A SHARE CERTIFICATE?

A share certificate is a certificate issued by a company certifying that on the date the certificate is issued a certain person is the registered owner of shares in the company. The key information contained in the certificate is: the name and address of the shareholder; the number of shares held; the class of shares; the amount paid (or treated as paid) on those shares. Unless the terms of issue or the articles provide to the contrary, the company must issue a share certificate within two months of the issue or transfer of any shares (Companies Act 1985, sec 185).

A share certificate is prima facie evidence (in Scotland 'sufficient evidence unless the contrary is shown') of the member's title to the shares: Companies Act 1985, sec186). At common law a company may be stopped from denying statements in a share certificate against someone who has relied on the statement. Full consideration of this area is beyond the scope of this database.

Most companies will require the share certificate to be produced when a request is made to transfer shares. Duplicate certificates may be made available, but usually on receipt of a statement of the facts and an indemnity against any liability incurred by the company. The usual practice is for a company to issue just one certificate in respect of all the shares issued or transferred at a particular time, but a shareholder may request split certificates. The provisions of Table A relating to share certificates are:

Every member, upon becoming the holder of any shares, shall be entitled without payment to one certificate for all the shares of each class held by him (and, upon transferring a part of his holding of shares in any class, to a certificate for the balance of such holding) or several certificates each for one or more of his shares upon payment for every certificate after the first of such reasonable sum as the directors may determine. Every certificate shall be sealed with the seal and shall specify the number, class and distinguishing numbers (if any) of the shares to which it relates and the amount or respective amounts paid up thereon. The company shall not be bound to issue more than one certificate for shares held jointly by several persons and delivery of a certificate to one joint holder shall be a sufficient delivery to all of them.

If a share certificate is defaced, worn-out, lost or destroyed, it may be renewed on such terms (if any) as to evidence and indemnity and payment of the expenses reasonably incurred by the company in investigating evidence as the directors may determine but otherwise free of charge, and (in the case of defacement or wearing out) on delivery up of the old certificate.

HOW DO PEOPLE GET SHARES IN A COMPANY?

Shares can be acquired either directly from the company itself or from an existing shareholder. Acquisition from the company. When shares are created they are 'allotted' or 'issued' to those people or other companies who become the company's shareholders. (The terms 'allot' and 'issue' are often used interchangeably. In some cases, particularly when shares are created by a public company, there may be a difference. Allotment, strictly, is the allocation of the right to certain shares to particular applicants for them. Such 'allottees' may be sent allotment letters (which may be renounceable in favour of others), and the actual issue of the shares occurs later. In most private companies allotment and issue will be the same process.)

Allotments are made by the directors, but there are various statutory rules and procedures which must be complied with, as well as any provisions in the company's memorandum and articles. In private companies the allotment will be a private arrangement between the company and those who invest in it. A public company may make the issue through the Stock Exchange or on the Alternative Investment Market.

Acquisition from an existing shareholder. Subject to such restrictions as appear in the company's memorandum and articles, a shareholder may sell his or her shares to another person or give them away. A sale or gift will be a transfer of the shares. If a shareholder dies, there is said to be a 'transmission' of the shares.

HOW ARE SHARES TRANSFERRED?

The standard form required to transfer shares is a 'stock transfer form', duly stamped with payment of stamp duty. A stock transfer from (in accordance with the Stock Transfer Act 1963) will be a proper instrument for the transfer of any shares in any company, as required by Companies Act 1985, sec 183.

Procedure. The shareholder (usually called 'the transferor') provides the transferee with a duly completed and signed stock transfer form and the share certificate in respect of the shares to be transferred. The transferee has the transfer stamped by paying the relevant amount of stamp duty (see below) and then sends the stock transfer form and the share certificate to the company. By Companies Act sec183 (1) It is not lawful for a company to register a transfer of shares unless a proper instrument of transfer has been delivered to it, or the transfer is an exempt transfer within the Stock Transfer Act 1982. This applies notwithstanding anything in the company's articles.

The company decides whether to accept the transfer. This should be done by a resolution of the board unless the secretary has previously been authorised by the board to accept transfers. The company must accept the transfer unless there is some provision in its memorandum or articles which restricts transfers or gives the board a discretion to decline them - see below). By Companies Act 1985, sec 183(5), if a company refuses to register a transfer it shall within two months after the date on which the transfer was lodged with it, send to the transferee notice of the refusal.

If the transfer is accepted by the company, the secretary will make the necessary entries in the register of members (and, if the company keeps one, the register of transfers) and issues a share certificate to the transferee. The certificate must be available within two months after the date when the transfer was lodged: sec 185(1).

The secretary keeps the stock transfer form and the old share certificate (which should have 'Cancelled' stamped or written across it so that it cannot be re-issued inadvertently). No form or notice is sent to Companies House. If a director has any interest in the shares s/he must notify the company in writing of that interest within 5 days (sec324 and Sched. 13) and an entry must be made in the register of directors' interests kept under sec325. Note that 'interest' for these purposes is widely defined. If the transfer is for part only of the transferor's shareholding, the transferor will not wish to part with a share certificate for the larger number of shares. Either the transferor could request the company for split certificates or a "certificated transfer", a stock transfer form certificated by the company to the effect that the certificate has been lodged. See Companies Act 1985, sec 184.

Stamp duty. Stamp duty is payable on the sale of shares at a rate of 50p per £100 or part thereof. It is payable on the full amount and is subject to a minimum amount of £5. There is no exempt band. If the shares are transferred by way way of a gift or settlement, exemption can be claimed by completing and signing the reverse of the form. Stamp duty is paid by taking or sending the form to the local stamp office of the Inland Revenue. There were minor amendments to stamp duty in October 1999. Restriction on transfer. The only provision in Table A is article 24, which provides:

The directors may refuse to register the transfer of a share which is not fully paid to a person of whom they do not approve and they may refuse to register the transfer of a share on which the company has a lien. They may also refuse to register a transfer unless: (a) it is lodged at the office or at such other place as the directors may appoint and is accompanied by the certificate for the shares to which it relates and such other evidence as the directors may reasonably require to show the right of the transferor to make the transfer; (b) it is in respect of only one class of shares; and (c) it is in favour of not more than four transferees. So under Table A articles fully paid shares are freely transferable. It is, however, usual to have some restriction on transfer to be included in the articles of a private company.

The commonest provision is: 'The directors may, in their absolute discretion and without assigning any reason therefor, decline to register the transfer of any share, whether or not it is a fully paid share, and clause 24 of Table A shall be modified accordingly.' This provision was to be found in part II of the versions of Table A in operation before 1985, and is widely included in various sets of standard articles.

The exercise by the directors of such a power is difficult to challenge. It would be necessary for the transferee to show bad faith: Re Smith & Fawcett Ltd (1942) Ch 304Companies Act. Notice also that there must be a resolution passed to refuse the transfer. It is not worded so that the permission of the directors to the transfer must be sought.

The second most common restriction which is often included in articles is a pre-emption provision, i.e. that shares must be offered to existing shareholders in proportion to their present holdings. Note that the statutory pre-emptive rights inCompanies Act1985, sec. 89 apply only to allotments of shares. There may be other provisions, e.g. that shares are freely transferable to other members, or members of the family (defined) of the shareholder, but that other transfers may be refused by the directors. There can be provisions that a person who ceases to be a director has to transfer their shares.

Other Table A provisions relating to share transfers. If the directors refuse to register the transfer of a share , they shall within two months after the date on which the transfer was lodged with the company send to the transferee notice of the refusal. The registration of transfers of shares or of transfers of any class of shares may be suspended at such times and for such periods (not exceeding thirty days in any year) as the directors may determine. No fee shall be charged for the registration of any instrument of transfer or other document relating to or affecting the title to any share. The company shall be entitled to retain any instrument of transfer which is registered, but any instrument of transfer which the directors refuse to register shall be returned to the person lodging it when notice of the refusal is given. All the articles relating to the transfer of shares shall apply to the notice or instrument of transfer as if it were an instrument of transfer executed by the member and the death or bankruptcy of the member had not occurred.

WHAT IS THE DIFFERENCE BETWEEN SHAREHOLDERS AND DIRECTORS?

Shareholders and directors have two completely different roles in a company. The shareholders (also called members) own the company and the directors manage it. Unless the articles say so (and most do not) a director does not need to be a shareholder and a shareholder has no right to be a director.

The separation in law between directors and shareholders can cause confusion in private companies. If two or three people set up a company together they often see themselves as 'partners' in the business. That relationship is often represented in a company by them all being both directors and shareholders. The problem with this is that company law requires some decisions to be made by the directors in board meetings and others to be made by the shareholders in general meetings. To complicate matters further, some decisions have to be made by the directors, but only with the shareholders' consent. Whether a particular decision has to be made by the board meeting or the general meeting, or both, depends on the Companies Acts and the company's articles. Most companies have the following provision from Table A:

Powers of directors. Subject to the provisions of the Act, the memorandum and the articles and to any directions given by special resolution, the business of the company shall be managed by the directors who may exercise all the powers of the company. In other words, the directors can decide unless the Act, the articles or a (previously passed) special resolution says to the contrary. In effect, the directors are in control of the day to day running of the company, but must obtain approval from the shareholders for some of the more important decisions.

If the directors are actually or potentially in breach of their fiduciary duties, a resolution in general meeting, properly passed, may be used to authorise a transaction or give the company's consent to a profit or interest of the director. Serious potential liabilities can arise if the directors do not obtain the approval of the general meeting when this is required. The relationship between directors and shareholders is a complex one. The directors are subject to the general fiduciary duty to act bona fide for the benefit of the company as a whole. They are also required to account to the shareholders for their stewardship of the company, in particular by supplying annual accounts and by reporting to them at the Annual general Meeting. While the directors are in control of the day to day running of the company, with access to information about its business and effective control over the calling and conduct of meetings, the shareholders have an ultimate source of power: any director can be removed from office by ordinary resolution:Companies Act 1985, sec 303.

CAN SHARES BE ISSUED FOR ASSETS OTHER THAN CASH?

Yes. Companies Act 1985, sec. 99 (1) provides: Subject to the following...shares allotted by a company, and any premium on them, may be paid up in money or money's worth (including goodwill and know-how). The only restriction on a private company in this connection is that the directors should act in good faith and be satisfied that the assets are worth the value put on them for the purposes of the allotment: Re Wragg Ltd. (1897) 1 Ch 796. Public companies are subject to quite detailed restrictions. Detailed consideration of these is beyond the scope of this database, but in summary they are: sec. 99(2:) Payment cannot be in the form of an undertaking to perform work or services. sec. 102: Payment cannot be in the form of an undertaking which is to be, or may be, performed more than five years after the date of the allotment. sec. 103 - sec. 116: Non-cash consideration has to be independently valued.