Selling shares in a company can be a significant decision for shareholders, with various motivations such as raising additional investment, realising the value of an investment, or transferring ownership to another party. Regardless of the reasons behind a share sale, it is crucial to follow a strict legal process to protect both the investment and the company, while ensuring compliance with regulatory requirements. In this blog, we will explore the key steps involved in selling shares in a company.
Step 1: Reviewing Articles of Association and Shareholders’ Agreements
Before initiating a share sale, it is essential to review the company’s articles of association and shareholders’ agreements. These documents outline the agreed-upon process for selling shares in the company and may include provisions concerning rights of first refusal for other shareholders. Often, the company itself may also have the right of first refusal to buy back shares, especially in cases involving employee ownership schemes. Consulting with an experienced lawyer is highly recommended at this stage to ensure a smooth and compliant share sale process.
Step 2: Valuation
Determining the value of shares is a critical step in the selling process. Several methods can be used to value shares in a private company, and the shareholders’ agreement may provide a pre-agreed mechanism for this purpose. Valuation can be based on various factors, including the company’s assets, revenue, and profitability. While internal valuations conducted by the company’s accountants are common, it is often advisable to seek an independent valuation for transparency and objectivity. The agreed valuation will play a crucial role in setting the sale price of the shares, which may be at market value, discounted market value, or even a nominal rate depending on the circumstances.
Step 3: Due Diligence
The buyer interested in purchasing the shares will typically conduct due diligence on the company. This process involves a comprehensive investigation of the company’s financial health, revenue, expenses, profits, key contracts, assets, and liabilities. Since due diligence involves the exchange of sensitive information, it is typically done on a privileged basis, and the buyer signs a non-disclosure agreement (NDA) to maintain confidentiality.
Step 4: Share Purchase Agreements
The sale of company shares is formalised through a legally binding Share Purchase Agreement. This agreement will cover all details of the sale, including the agreed-upon price, what assets or liabilities are included in the sale, and any warranties offered by the seller to assure the buyer that there are no undisclosed issues with the business that could adversely affect them post-sale.
Step 5: Stock Transfer Forms
The actual transfer of shares is carried out using a Stock Transfer Form. This document records essential details, including the transferor and transferee’s names, the number of shares being transferred, and the price paid for the shares.
Step 6: Stamp Duty for Share Sales
If the value of the share transfer exceeds £1,000, the buyer is required to pay Stamp Duty to HM Revenue & Customs (HMRC). The Stamp Duty rate is currently set at 0.5% of the sale value, rounded up to the nearest £5.
Step 7: Issuing Share Certificates
Once the share transfer is completed, the buyer is issued with a share certificate as proof of their ownership of the company shares they have purchased.
Step 8: Updating the Company’s Register of Members
While immediate registration of share changes with Companies House is not mandatory, the company’s next Annual Confirmation Statement will need to record the new shareholding.
Selling shares in a company involves a comprehensive legal process to protect the interests of all parties involved. From reviewing agreements and valuations to conducting due diligence and finalising the sale through Share Purchase Agreements and Stock Transfer Forms, each step is vital to ensure a successful and compliant share sale. Engaging with experienced professionals can help streamline the process and provide valuable guidance throughout the transaction.
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