As a company grows you may wish to add a shareholder or seek investment via the purchase of shares. Here is a brief overview of how this is done…
Who can be a shareholder?
A shareholder is any legal person, corporation, group or company who has purchased a share in a company.
Under the Companies Act 2006, section 112, there are two requirements which need to be met when a person becomes a shareholder:
1.The person has agreed to become a shareholder, and
2.The shareholders name is entered onto the register of members held by the company.
How to acquire shares
When incorporating, a company will have to declare the initial shareholders in the memorandum of association. It’s normal practice that the shareholders have purchased one share for £1 on the formation of the company, but there are other methods people can use to acquire shares:
1. Buying shares from the company
A positive way to seek investment while not affecting a company’s credit score is to issue shares to new members in return for money or property.
When a company takes this option, it allots new shares to the shareholder. The allotee formally agrees to become a shareholder by applying to the company to buy new shares. The shares are purchased and belong to the new shareholder when their name is entered on the Register of Members.
2. Buying shares from an existing shareholder
Shares are a form of tangible property and can therefore be bought and sold. If a shareholder wishes to reduce their holding or remove their investment in the company, they can attempt to sell their shares. The sale of shares won’t generate funds for the company – just money for the selling shareholder.
A shareholder can chose to sell their shares to another shareholder or advertise these to people outside the company. The sale of these shares is known as a share transfer, which is completed by the seller and, once the name is entered onto the company’s Register of Member, the buyer becomes the new owner. This will have no impact on the company, bar a change in the registered shareholder.
The directors of the company must action the entering of the name on the Register of Members. Some companies allow directors to act at their own discretion when entering names on the register, and therefore if they refuse, the shares will remain in the seller’s ownership.
3. A gift of shares
Shares can be gifted to an individual or group of individuals. Once again this won’t generate any income or new investment in the company.
The gift of shares is effected via a transfer; the recipient submits the completed share transfer documentation to the company, and, upon the entry of their name on the Register of Members, ownership becomes theirs.
4. Inheriting shares
Shares can be passed under the terms of a will. Known as the transmission of shares, upon death they’ll automatically vest in the personal representative of the deceased.
If the representatives are the beneficiary they’ll become the shareholder, however if the beneficiaries differ, a transfer will need to be effected. The ultimate recipient signals their acceptance of the shares by applying to be registered on the company’s Register of Members.
5. Insolvency of a shareholder
If a shareholder becomes insolvent and is declared bankrupt, their property will automatically vest in the trustee in bankruptcy, via a transmission of shares.
The trustee will try to sell the shares and generate money to help in the payment of the bankrupt’s creditors. The process is the same as a shareholder selling them him or herself, and therefore, upon sale the buyer will have to be entered on the Register of Members by the directors.
As you can see, shares can be transmitted in various ways - the company can use the addition of shareholders, not only to change its ownership, but to also generate income. Shares are a valuable commodity, not only for the owner but also for the company. So remember to use them wisely.