The Process of Selling Shares in a Company
There are various reasons for selling shares in a company, including to raise additional investment, realise the value of your investment or transfer ownership to someone else.
There are different types of share sales that can take place to facilitate these goals, including issuing new shares in a company you have an interest in, selling some or all of your shares back to the company or transferring your shares to another person.
Whatever the aims and type of a share sale, there is a strict legal process you must go through to protect your investment and the company while maintaining strict regulatory compliance.
Key steps for selling company shares
Reviewing articles of association and shareholders’ agreements
A company’s articles of association and/or its shareholders’ agreement should set out the agreed process for selling shares in the company. Such provisions will need to be carefully reviewed with the help of an experienced corporate lawyer before moving forward with a share sale.
Where a shareholder wishes to sell their shares, the other shareholders will normally have the right of first refusal to buy those shares before they can be offered for sale outside of the business. There may also be a requirement to allow the company first refusal on buying back the shares e.g. if an employee who is part of an employee ownership scheme is leaving the business.
There are many different ways shares in a private company can be valued. If there is a shareholders’ agreement in place, it should include an agreed mechanism for valuing company shares.
Potential options for valuing a company include reference to its assets, revenue and profitability. A valuation may be carried out internally by a company’s accountants, but it is more normal to seek an independent valuation.
Once a valuation has been agreed, it may be decided to sell the shares at full market value, a discounted market value or at a nominal rate e.g. 1p per share. This will depend on the reason for the sale and other circumstances.
The buyer will need to investigate the company before agreeing to the sale e.g. looking at the business’s revenue, outgoings and profits, as well as key contracts and any assets the business owns and liabilities it has. Essentially, this is about finding out the overall ‘health’ of the business.
As due diligence will necessarily involve sharing sensitive information about a company, this is normally done on a privileged basis. The buyer will typically sign a non-disclosure agreement (NDA) meaning they cannot share any of the information they find out during due diligence.
Share Purchase Agreements
The legal contract covering the sale of company shares is called a Share Purchase Agreement. This will cover all of the details of the sale, including the price agreed, what is included with the sale and any liabilities the buyer is taking on.
A company Share Purchase Agreement will normally be supplemented by warranties offered by the seller. These provide security for the buyer that there are no undisclosed issues with the business that could negatively impact the buyer once the sale is agreed.
Stock Transfer Forms
The legal transfer of the shares is carried out with a Stock Transfer Form. This records who the shares are being transferred from and to, as well as how many shares are being transferred and the price paid.
Stamp Duty for share sales
If the share transfer is valued at more than £1,000 then the buyer will need to pay Stamp Duty to HMRC at a rate of 0.5% of the sale value rounded up to the nearest £5.
Issuing share certificates
The buyer will need to be issued with a share certificate to show their ownership of the company shares they have purchased.
Updating the company’s register of members
You do not need to immediately register every change of shareholding with Companies House, but the company’s next Annual Confirmation Statement will need to record the new shareholding.
Speak to our Company Commercial team for advice on share sales
To discuss a share sale with our Company Commercial team, please get in touch.