Private limited companies are closely held corporations which have less than 200 shareholders. The provisions of the 2013 Companies Act govern the transfer of shares in a private limited company. But in some circumstances, such as when a member of the firm transfers his share to his legal representative or in the event of a shareholder’s death, the restriction on share transfers in a private corporation is not applicable.
A private limited company’s shareholding is the factor that determines a person’s ownership in it. This interest may be sold to entice new investors or transfer control of the business. Additionally, a private corporation has the unique capacity to limit the transferability of shares, allowing them to keep ownership. This article examines the transfer of shares in a private limited business.
A private limited company differs in that its Articles of Association must prohibit the transfer of shares. This is consistent with the idea behind the formation of private limited businesses, which are typically founded by families, friends, or other individuals with like objectives and vision. Therefore, limitations on the transferability of shares in a partnership firm ensure that control of the company remains with a limited group and that outside influences can be kept out. In contrast, anyone cannot purchase stock in a public limited business. Although the idea of limited share transferability protects a private company’s identity and owners, it can also lead to unworkable circumstances where due to the stipulated restrictions there could be clashes.
What does share transfer Mean?
“Transfer of shares” refers to the voluntarily transfer of a business member’s rights and, maybe, duties (as represented by a company share). The rights and obligations of transferring shares happen when a shareholder decides to leave the business and transfers their shares to a prospective member.
In the absence of any constraints that are explicitly stated in the articles of incorporation of a company, shares of a firm are therefore transferable like any other movable property.
The advantages of share transfer
There are many benefits to transferring shares to private limited companies. Equity share investments come with a number of advantages, including capital increases, entitlements to compensation, limited liability, restricted shares, demand over assets and earnings, control, bonus shares, liquidity, and other advantages. The benefits are mainly:
- lowering the tax obligation.
- being the owner of a growing business
- alignment with the potential private equity acquirer.
- Checklist for Share Transfers
- a statement announcing the transfer of shares to the group.
- Make sure the share transfer agreement form is correctly filled out by the transferor and the transferee.
- The form needs to be carefully marked and recorded.
- It is critical to let clients know how long the organisation will need to ensure the security of any equipment that is being transferred to them.
- The transfer agreement includes stamps for share transfers.
- Send the letter of distribution and the certificate or document out together.
- The transition of power.
- Board determination.
Share Transfer Restrictions in Private limited Companies
A private limited company is composed of a closed corporation of members, which is similar to a partnership corporation. Therefore, limits on the transfer of shares to private limited companies (AOA) may be imposed by the articles of association. Therefore, the Articles of Association (AOA) of a company must be thoroughly studied before the share transfer process is started.
Shareholders of private limited businesses are frequently subject to two different types of restrictions on share transfers. Those are:
Having pre-emption rights:
A shareholder who wishes to sell some of his shares must first make the shares available to the corporation’s current shareholders at a price determined by the auditors and directors. The Articles of Association specify a method or formula for calculating the share’s value.
If the current shareholders decide not to buy the shares, they may then be freely transferred to any other party.
Directors’ refusal:
Under specific circumstances outlined in the Articles of Association (AOA), the Directors may decide not to register the transfer of shares.
The only restriction that is indicated as being enforceable with regard to the transfer of shares to a private limited company is that which is clearly stated in the Articles of Association (AOA). Private shareholder agreements are not enforceable against the company or the shareholders. The sole restrictions on share transfers are found in the Articles of Association (AOA). The ability to transfer shares to other people means that share transferability cannot be completely restricted or forbidden.
How to initiate transfer of shares in private limited companies
Before starting the share transfer process, the following precautions must be taken into consideration:
Step 1: Examining the Articles of Association (AOA) is the first step.
The articles of association (AOA) for the private limited corporation must be evaluated and reviewed. This helps to eliminate any current restrictions.
Step 2: Giving directors notice
If shareholders want to transfer their shares to a private limited company, they must notify the directors.
Step 3: Defining the price in step three
According to the Articles of Association (AOA), a price will be chosen at which the Company’s shares will first be made accessible to its current shareholders. The board and auditors of the organisation frequently choose this pricing.
Step 4: Informing shareholders of the availability of shares
The corporation is supposed to let other shareholders know when shares are available, what they cost, and when the deadline for acquisition is. If the present shareholders are interested in purchasing the shares, they will be given to them. If a shareholder’s interest is absent, the same is transferred outside.
How Shares of a Private Limited Company Are Transferred
Following actions must be taken in order to complete the share transfer:
Step 1: Obtain a share transfer deed in the format required as the first step.
Step 2: Execute the share transfer deed when the Transferor and Transferee have properly signed it.
Step 3: Stamp the share transfer deed in accordance with the Indian Stamp Act and the State’s current Stamp Duty Notification.
Step 4: Have a witness provide their name, address, and signature on the share transfer deed.
Step 5: Deliver the transfer deed to the company together with the share certificate or letter of allocation.
Step 6: The business must review the paperwork and, if accepted, issue a new share certificate in the transferee’s name.
The bottom line
Shares are crucial to a company’s identity, whether it is a private or public company. Companies differ from other types of enterprises due to the transferability of shares, which allows the company to develop its legal identity. The idea of everlasting succession, which is based on the transferability of shares, assures that the company’s legal identity endures a change in its shareholders. As a result, the transferability of shares is crucial for any company.
For more details, connect with our experts at StartupFino.
