Share Transfer
In situations where company directors and shareholders need to transfer shares to other shareholders, the following information must be noted:
Crucial Information
A typical equity transfer occurs when:
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A shareholder owns a minority stake in the business and wishes to achieve a return on their investment through a share transfer.
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Companies use employee share ownership schemes where employees change jobs after having already acquired shares and need to sell their shares through a share transfer.
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Founders of a company sell their shares through a share transfer in order to raise capital or exit the company.
It is essential to ensure that shareholders follow the correct procedures and pay the appropriate stamp duty when selling their shares.
In this way, no objection can be made on the grounds that the transfer is invalid and no allegation can be made that the director’s duties have not been discharged.
How do I transfer my shares?
You must prepare the following: required documents before proceeding with a share transfer application
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Instrument of transfer
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Notification of transfer
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Board resolutions
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Certificate of shares (document evidencing ownership of shares)
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Form of transfer of shares
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Inland Revenue Authority of Singapore (IRAS) Stamp Duty Confirmation Letter
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Depending on the situation, other documents may be required, such as a pre-waiver of use consent form.
Provide basis for transfer
The assignor needs to be advised to have the lawyer prepare a contract for the sale of the stock (for example, if they are selling 100% of the shares of a private company, they must have an appropriate stock purchase agreement).
Most importantly, the sale price should be clearly indicated in the contract. For example, the sale price may not be easy to calculate if the amount payable is to be adjusted based on the company’s future profits. Sometimes, however, the price may be predetermined.
This is common in the case of shareholders’ agreements with “drag-along” drag clauses or “tag-along” tag clauses.
“Tag Clause”
The tag clause gives minority shareholders the right to purchase shares on the same terms (including price) as majority shareholders. This is done by imposing a restriction on the majority shareholder, that he may not first cause an outsider to offer to purchase the minority shareholder’s shares on the same terms before selling his shares to an outsider.
It provides that if the majority shareholder wishes to sell his shares, he must first sell them to the minority shareholder. If the minority shareholder refuses to purchase these shares, he or she may decide to “list” with the selling shareholder and then sell his or her shares together to a third party. The following safeguards can be implemented:
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Establishing a minimum price for the shares so that majority shareholders cannot be forced to sell shares at a less than fair price.
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Provisions limiting the time at which major shareholders may use “tagging clauses”, such as an expiration date, or securing a minimum share price only after the company has reached a certain level of profitability.
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Allow the minority shareholder to find alternative purchasers for all higher-value shares for a certain period of time before he decides whether to exercise his “follow-on” option. If this clause is included in the shareholders’ agreement, it must also allow the minority shareholder to request that he is given the right to decide to “follow through” on the sale of shares to the highest bidder.
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Provides that in the event of a sale, only the majority shareholder can make and be responsible for corporate representations and warranties to the buyer, as the majority shareholder controls the management and operations of the company.
The “Tag Clause” allows minority shareholders to carry the burden of the majority shareholder’s ability to find a buyer at an attractive price. Minority shareholders, especially if they are involved in running the business, often lack the resources to find such buyers. This also benefits the majority shareholders, as it gives them a sense of fairness in the transaction, which makes them less resistant to the possibility of an outright sale.
“Towing Clause”
Gives the selling shareholder the right to compel all other shareholders to sell their stock to a third-party purchaser on the same terms as the shareholder who approved the sale. It prevents a minority shareholder from refusing to sell his or her stock if the majority shareholder wishes to sell to a third-party purchaser interested in acquiring the company.
For example, if the shareholder agreement contains a drag-and-drop clause, and if the majority shareholder sells its shares to a third party, the minority shareholder must also be forced to sell his shares at the same price. Alternatively, if the shareholder agreement contains a tagging clause, the minority shareholder can force the majority shareholder to demand that the buyer also purchase his shares at the same price.
Knowing the basis of the transfer helps prevent fraudulent transfers.
Restrictions on the transfer of shares at the corporate level
When the board of directors is approached by a shareholder wishing to transfer shares, the board should first inform the shareholder of any restrictions on the transfer of the shares.
For example, the company’s articles of association usually provide that a transfer of shares can only be made with the approval of the board of directors. (If your company has fully adopted the Singapore Companies Act, the relevant provision requiring board approval for the transfer of shares is section 24 of the Companies Act.)
The Board needs to consider the following:
If a transfer of shares is made only with the approval of the board of directors, the board should consider whether it is in the interests of the company to approve the transfer.
For example, the following may be sufficient grounds for refusing the transfer.
The board of directors (who may be majority shareholders) feels unable to work effectively with the proposed new shareholder. This may apply particularly to smaller companies where the shareholder has a close relationship with the company’s management.
The board has genuine concerns about whether the proposed new shareholder will act in a way that supports the company’s objectives and values. This is particularly in the case of companies with a relatively small number of shareholders and where significant shareholder input is expected to be required in various management decisions.
However, it is inappropriate to “penalize” the transferor by denying the transfer request.
When deciding whether to approve a share transfer, the board of directors should record its decision and the reasons for its decision in an appropriate board resolution. The board’s decision and the reasons for it should be immediately communicated to the transferor.
Importance of preference in the sale of preferred stock
Before selling his shares to an outside party, the transferor must also first sell his shares to all existing shareholders on a pro rata basis. Such pre-emption rights may be specified in the articles of association or in the shareholders’ agreement.
If the other shareholders have pre-emption rights, they will need to be sent a notice of transfer of their shares, so they may indicate whether they wish to exercise their pre-emption rights. Assuming that none of them wish to do so, they should all sign a “waiver of pre-emptive rights”.
It is important to follow this procedure and obtain the relevant consents This will reduce the likelihood of a subsequent challenge or finding that the assignment is invalid, which is likely to cause administrative difficulties for the directors.
Agreements between shareholders affecting transfers
All applicable “drag clauses” or “tag clauses” that the transferor must comply with:
For example, if they are selling a majority stake, but the buyer does not want to buy the minority stake, they should communicate with the minority shareholders in advance.
In such cases, it is recommended that the minority shareholders waive their rights under the tag clause through a consent form granting rights under the tag clause. Formally resolving this issue in advance will prevent future disruptions to the transaction.
The board of directors should also ensure compliance with all “drag clauses” or “tag clauses”, or waive any rights under such clauses.
Conducting share transfer applications
Implementation of transfer
In order to formally begin the transfer process, the transferor must sign a transfer document with the transferee. This document will indicate that the transferor agrees to transfer his or her shares to the transferee and that the transferee agrees to accept the shares.
Transfer requests to the Board
Next, the transferor should submit a written request to the Board of Directors to transfer the shares. The Board of Directors then has 30 days to decide whether to approve the transfer. The board’s decision and the reasons for it should be recorded in the board’s resolution.
If the board decides to deny the transfer during this period, it must send written notice of the denial to both the transferor and the transferee. However, the Board of Directors shall only refuse the transfer for legitimate reasons related to the interests of the company.
Payment of stamp duty
Stamp duty needs to be paid within 14 days of the assignment being signed.
The assignor and the assignee will usually decide who should pay the stamp duty amongst themselves. (For example, the assignment may state who should pay the stamp duty.) However, if there is no agreement between the parties on this, the assignee will be the person who is liable to pay the stamp duty.
The party paying the stamp duty should submit a share transfer form to IRAS to pay the relevant stamp duty. This can be done either by obtaining a physical stamp from IRAS in exchange for a fee to be affixed to the Share Transfer Form, or by completing the process online and keeping a record of the online confirmation.
After Board approval of share transfer
Surrender of share certificates
If the Board decides to approve the transfer, the transferor (or the person holding the original share certificate) will be required to return their original share certificate to the company for cancellation or correction within 7 to 28 days of the written share transfer.
The Board of Directors may exercise their discretion in determining the exact deadline, but it is advisable to submit the stock certificates as early as possible so that the Board of Directors can register the transfer in a timely manner.
Upon receipt of the stock certificate, the Board will be required to file a notice of transfer with the Accounting and Corporate Regulatory Authority (ACRA) via the Bizfile+ website.
Note: The transfer will only be effective once ACRA has updated the electronic register of company members (which all private companies must submit to ACRA).
Issue of new shares
The company must issue a new share certificate to the transferee (or the person holding the new shares) within 30 days of registering the transfer with ACRA. This is usually the responsibility of the company secretary.
Fees
ACRA does not charge any fees for updating the company’s membership register. Nor should the company charge any fee for processing a transfer of shares.
However, stamp duty is payable to IRAS on the transfer of shares. Stamp duty is calculated on the higher of the price actually paid for the shares or the actual value of the shares (at a rate of 0.2%).
The actual value of the shares is calculated by first dividing the company’s net worth (net assets minus net liabilities as reflected in the most recent annual accounts) by the total number of shares in issue.
Then, having found the value of each share, it is multiplied by the number of shares to be transferred. The case of issuing only common stock is very simple. However, if there are multiple shares, the party paying stamp duty will need to consult IRAS.
The documents should be stamped on time. In the case of stamping, IRAS may impose a charge of up to S$25 or 4 times the normal stamp duty payable, whichever is higher.
It is important to note that directors should be aware of their duty to act honestly and exercise due diligence so that the company’s reputation and profitability will not be affected by inadequate advice to shareholders.