What is a Transfer of Shares?
A transfer of shares agreement is a legal document that allows a transferor (the seller) of shares who wishes to sell the shares of a particular company to another person to sell or transfer those shares (the transferee) by way of a private sale. This transfer will involve the entering into the share transfer by the transferor to the transferee and the entry of the transferee into the share subscription agreement with the company. The standard formalities for meetings will be required for a private sale and once the transferee becomes the holder of the shares, the company will be required to issue new shares to this transferee. Further, the normal rules of a share subscription agreement can be agreed upon by both the company and the shareholder or transferee.
There are various circumstances for a transfer of shares agreement, such as a divorce situation where the spouse may want to dispose of the shares in exit settlements . Another example would be to dispose of minority interests (as bulk discounts apply to the minority shareholders). A transfer of shares agreement may also be used where a shareholder wishes to exit and/or the parties wish to include a buy-sell agreement entailing the disposing of shareholders as well as the exiting of a shareholder.
The transfer of shares agreement is intended to be flexible in the sense that the parties may change their rights and obligations by way of negotiation and agreement. It is important for the parties to the agreement to ensure that all relevant rights and obligations are recorded therein. In terms of what should be included in the transfer of shares agreement, bespoke or custom-made agreements are often used rather than a standard form transfer of shares agreement.
Key Clauses in a Transfer of Shares Agreement
Similar to many contracts, there are a number of clauses and terms that are essential in a transfer of shares agreement. These basic contractual elements are often used in rendering the final sale price for the seller’s shares.
Purchase price
It is understood that the shares being sold are not worthless and that a fair price has been agreed to by both parties. As such, a purchase price clause is generally included, stating the number of shares being sold and what actions must be taken to determine the price of the shares. Value on the stock exchange, fixed or variable prices based on assets or other agreed-upon amounts may be some ways companies determine the price of the shares being transferred. Normally, the terms of payment will be outlined in the agreement, stating whether immediate or deferred payments are required. A specific date for payment and any security or collateral for the payment should also be outlined.
Representations and warranties
Without a representation and warranty clause, transferring parties would be unable to link the warranties and representations made by either party regarding the shares in question. This could include accounting audits and other important declarations that offer perspective on the true value of the shares, also referred to as due diligence. If required in a transaction, a representation and warranty clause may enforce a clause for indemnification in the case that either party fails to uphold their side of the deal.
Closing conditions
A closing condition is an important aspect to include as it determines the ability of either party to go through with the sale. If a condition is not met within a certain time period, the buyer may cancel the purchase and sue for breach of contract.
Legal and Regulatory Considerations
Compliance with relevant laws is essential for the validity of a transfer of shares agreement. Companies Act provisions and underwriting agreements that form part of a private placement or public offering often impose additional requirements. A transfer of shares agreement must, however, satisfy the exchange control regulations (if applicable) and other applicable laws.
No transfer of shares agreement will be valid if it is in contravention of the exchange control regulations.
A transfer of shares agreement must be in writing and signed by or on behalf of both the transferor and the transferee. The signatures may be electronic.
All applicable corporate approvals must be obtained. Regulatory approval may be required in terms of relevant legislation.
Common Mistakes in Transferring Shares
Vagueness in Term Use – Using or defining terms in unclear or ambiguous ways, without any future references to their real purposes can lead to many problems. Defining the sale price by using vague terms (ex., ‘arms-length’, ‘market’), or using the term "proceeds of sale" without additional clarification are problematic.
Lack of Due Diligence – Even if a potential buyer has assembled a team of advisors , it’s essential for the seller to conduct due diligence on the buyer. This can include (but is not limited to) reviewing the buyer’s financials, assets and purchase methods.
Unintended Tax Consequences – Taxes can quickly become a major concern, especially when there is ambiguity regarding what the seller receives for the sale (money, shares or something else). The nature of the consideration will determine if it is regarded as capital gains or employment income. Being specific about this in the agreement can:
How to Draft a Transfer of Shares Agreement
When drafting a transfer of shares agreement, certain steps should be followed to ensure that the agreement encompasses all of the necessary information, and accurately describes the intent of the parties. As always, agreements for the transfer of shares should be reviewed by a corporate counsel, before signing, to ensure that the agreement is compatible with the current laws of the given jurisdiction. As a first step, the parties to the share transfer agreement should review their existing shareholder agreements, if they have one, to determine whether a transfer is permitted under the terms of the current shareholder agreement. If a transfer is permitted under the terms of the current shareholders agreement, the process outlined in the terms of the agreement should be followed. If the parties do not have an existing shareholders agreement, the terms of the transaction can be negotiated by the parties and any relevant provisions outlined in a written agreement. In order to create an accurate agreement that reflects a meeting of the minds and identify any potential problems that may arise later in the transaction, the parties should make full and frank disclosures regarding all material facts related to the share transfer. Once the parties have discussed the relevant terms of the transaction, they should be included in the share transfer agreement. Useful terms to include in a share transfer agreement describe the parties to the transaction, the subject matter of the transaction (including the number of shares being transferred), the current and historical nature of the entity whose shares are being transferred, the purchase price, any applicable warranties and a detailed date of the agreement. In addition to the terms above, a share transfer agreement should contain the signatures of both parties, may require notarization by certified notary public, and be reduced to writing. As always though, it is considered good practice to have a corporate counsel review the agreement before signature.
Case Law on Transfer of Shares Agreements
As with many legal agreements, transfer of shares agreements can often be used in certain instances to accomplish more than one goal. For example, a company does not need to amend its Articles and pass a special resolution to transfer shares or add new shareholders. In effect, it can be accomplished through a mutual agreement among all of the shareholders of record (the opportunity to forego those steps can also alleviate time and cost issues). The idea is that an agreement concerning the sale or transfer of shares will not only serve the business purpose of selling/transferring the shares, but also work to protect the interest of the sellers, the company, and the buyers – whether those buyers are third-party "outsiders" or simply other existing shareholders who may or may not be affiliated with the company’s management or its board of directors.
While there are numerous circumstances in which transfer of shares agreements have been used, one involving a merger and/or acquisition stands out amongst the others because of the complexity of those matters (as well as the fact that both are integral to or the basis for a share transfer). In many instances, especially those involving public companies, there will be an agreement made contingent on the transaction closing and a stock purchase agreement where everything will come together. In addition to these agreements, other transfer of share agreements including stock option and restricted stock grants can also play a pivotal role in those kinds of business transactions.
An example is the 2014 acquisition of the Canadian and Puerto Rico-based Heineken-owned Femsa brand for $420 million by the New York-based brewery, Crown. Not only did that deal include the complete divesture of Femsa’s facilities in Canada and Puerto Rico, but it also involved the purchase of 5 . 83 million of what was called common CWSIA stock for C$73 million from its majority owner Femsa. This agreement had provisions duplicating those in the earlier holding period purchase agreement. Another agreement accompanying the transaction was a second stock purchase agreement in which Crown purchased approximately 3.74 million shares of CWSIA for C$43 million (at the time of the close, Crown owned approximately 39 percent of CWSIA’s average daily issued and outstanding Voting Class A and B shares).
There were certainly hurdles to overcome during and after this particular share transfer matter, including solvency issues, and the fact that the FTC (the U.S. Federal Trade Commission) had to be involved, it was an important merger/acquisition nonetheless. Other examples where the use and implementation of transfer of shares agreements were called for involved private company mergers, acquisition of family businesses, liquidation of privately owned entities, and the purchase of companies publicly traded on the over-the-counter exchange.
There are a number of lessons to be learned from these cases, and it becomes clear that even though share transfers may involve older businesses that are family-owned, for instance, there are still aspects of these types of agreements that can be considered cutting-edge. Consider the fact that the aforementioned Crown agreement reached court approval in March of 2014, at which point Crown was also negotiating with the FTC regarding an agreement on a consent decree that dealt with trucking companies owned by both Femsa and Crown (those cars were essentially being sold off to competitors in order to avoid repeated inquiries from the U.S. government).