If looking to give equity in your company or transfer it completely, one way to do that is to sell your shares. You can sell them for full market value, discounted market value, or for nominal value (e.g. £0.01 per share) using the process set out below. Alternatively, if looking to give equity to investors or a co-founder, you could issue new shares to reach your desired percentages (e.g. issue 100 new shares to a co-founder, so that you both then own 100 shares, and 50% each).
If looking to sell shares in your company, for any value, from a legal perspective you should go through the following steps. For a simple transfer for no value, then also see here.
STEP 1 – Consider existing shareholder rights in your Shareholders’ Agreement and/or Articles of Association
These documents, if properly in place, will usually set out pre-agreed processes for what happens in case of a sale of shares in a company.
For example, existing shareholders may have a right of first refusal (known as a pre-emption right) to buy the shares being offered to the third party, on the same terms and valuation offered to the third party, before the third party has the chance to close the sale. In this case, the shareholders’ may decide to take up their pre-emption rights and purchase the shares, or they may agree to waive their rights to do so to allow the buyer to buy the shares as planned.
Equally, you may also need to consider ‘drag along’ and ‘tag along’ rights in your shareholders’ agreement. Drag along rights, when triggered, will permit you to force minority shareholders’ to participate in a sale of a company, to ensure that the buyer can purchase all of the company’s shares, and not just your shares. Tag along rights, conversely, will enable minority shareholders to ‘tag along’ in the sale, even if you don’t want them to if the rights are triggered in your shareholders’ agreement. Note, these are typically only relevant in the context of an overall sale of a company, and not just for a sale of a small percentage of it.
STEP 2 – Valuations
If shares are being sold, you will need to establish a price for them with the purchaser. The price per share will be calculated by dividing the total value of the company by the number of shares in issue.
e.g. if the company is valued at £10,000,000 and there are 20,000 shares in issue, then each share will be valued at (10,000,000 / 20,000 =) £500.
You will need to check your shareholders’ agreement to check if there are any prescribed methods for valuing shares in your company in a sale. For example, it may be a requirement that a certain accounting method is used, or that you use a certain preferred firm of accountants for it. Either way though, the price will ultimately determined by and be subject to negotiations with the eventual purchaser.
Alternatively, if it is agreed (always in accordance with your shareholders’ agreement and/or articles of association) that the shares are to be sold for nominal value, you can usually skip straight to step 5 to complete a share transfer form without additional formalities.
STEP 3 – Due Diligence Process
The buyer will likely want to investigate your company in some detail before acquiring it or a part of it. For example, they may want to review financial information, contracts in place, technology systems, etc.
Once reviewed, they may also require certain promises or ‘warranties’ in the eventual share purchase contract to be made by the seller of the shares, to give them some security that everything is as it seems and there are no secret problems waiting to be revealed once the share purchase is complete.
The warranties will be linked to rights to compensation or reimbursement (known as indemnities), so if they are breached, the purchaser has security to fall back on. Exceptions to warranties can be given in a separate disclosure letter. For example, a warranty might state that the company has no outstanding borrowings, but the disclosure letter might set out an exception to this warranty that the company has an outstanding loan with Lloyds Bank for £10,000 due for repayment next year.
STEP 4 – Contractual Process
The main contract in a share purchase is called a Share Purchase Agreement. Please contact email@example.com if looking for support with a share purchase agreement.
The terms of the share purchase agreement will vary depending on a case by case basis, but be ready that it can be a long and complex document – especially if it relates to the full sale of a company.
However, if yours is a transaction for low or nominal value only, then you may not need a full contract, and may simply need a stock transfer form (AKA a share transfer form). You can download a Word version of the share transfer form here.
STEP 5 – Stock Transfer Form
Once all other terms and prices are agreed, the final major step is to physically transfer the shares. You do this via a stock transfer form. It simply sets out the transferor, the buyer, the shares being transferred and the price being paid, along with the transferor’s signature.
The form does not need to be registered with Companies House, but the company’s Annual Confirmation Statement will need to record the new shareholdings.
Importantly, if the value of the transfer is more than £1,000 then the buyer has to pay stamp duty as set out on the back of the stock transfer form at 0.5% of the total amount rounded up to the nearest whole £5. The original signed form and a cheque is then sent to the relevant HMRC stamp office who then return the form to the buyer once it has been physically stamped. Stamp duty must be paid within 30 days after the share transaction is concluded.
STEP 6 – Post-Closing Administration
Once completed, the company’s register of members should be updated – you can download a template register of members here.
Share certificates should be issued to the buyer to demonstrate their ownership of shares in the company – you can download a template share certificate here.
If the sale involves the full sale of the company, there will be a large number of matters to hand over and account for, particularly relating to physically transferring assets to the buyer. However, from a legal perspective, at this point the transfer is complete, and all other matters are practical considerations which the new owners of the company will handle, with the seller’s support if agreed.
Selling shares can be a relatively complex process if selling for real value to a purchaser of your company. However, if simply transferring shares for nominal value (e.g. £0.01), then it is a simple process which can be completed via a stock transfer form, after ensuring that the existing shareholders’ agreement is complied with.
This Step-by-Step guide was written by Legal Sidekick. Legal Sidekick is the legal platform for startups. We offer automated contracts and loads of startup legal resources and guides. For queries on company shares or generally, contact us directly.