Company Share Transfer - Provision, Procedure & Valuation for a Private Company.

Share Transfer Procedure in Private Limited Company

An important characteristic of a company is that its shares are transferable. Shares or debentures are movable property. They are transferable in the manner provided by the articles of the company, especially, the shares of any member of a public company. A private company is required to restrict the right to transfer its shares in its articles.

The ownership of a private limited company is determined by the shareholding of the Company. To induct new investors or transfer ownership of the Company, the share of the private limited company would have to be transferred. In this article, we look at how to transfer shares of a private limited company.

Persons Involved in The Transfer-

• Subscribers to the memorandum.
• Legal Representative, in case of a deceased.
• Transferor.
• Transferee.
• Company (whether listed/ unlisted).

Share Transfer Restrictions In AOA- 

A private limited company is considered to be a “closed corporation” of members, similar to a Partnership Firm. Therefore, the share transfer in a Private Limited Company can be restricted by the Articles of Association (AOA). Hence, the Articles of Association of the Company must be reviewed prior to beginning the share transfer procedure.

Restrictions on the right of the shareholders to transfer shares are usually in two forms:

• Rights of pre-emption: If a shareholder wishes to sell some or all of his shares, such shares must first be offered to other existing members of the private limited company at a price determined by the Directors or the Auditor of the Company. The value of the shares can be determined based on the formula/method prescribed in the Articles of Association. In no existing shareholder is interested, then shares of the Company can be freely transferred to an outsider.

• Powers of Directors to refuse: The Director may have the powers to refuse registration of transfer of shares under certain circumstances – prescribed in the Articles of Association.

The only restriction contained in the Articles of Association is considered legally binding. Any private agreement between the shareholders is not binding either on the company or on the shareholders. Further, share transfer can only be restricted by the Articles of Association. The right to transfer shares of a private limited company cannot be a total prohibition or ban on share transferability.

Procedure for transfer of shares as per the Companies Act, 2013-

The following procedure should be followed by a private company to give effect to the transfer of shares:

• The transferor has to give a notice in writing to convey his intention to transfer his share
• On receipt of such notice, the company has to notify the other members regarding the availability of such shares and the price as determined by the directors or the auditors of the company
• The company has to intimate to the members the time limit within which they should communicate their options to purchase such shares
• If none of the members show interest in purchasing the shares, such shares can be transferred to an outsider and such transfer will be accepted by the company.

Valuation Of Shares-

Valuation of shares is the process of knowing the value of the company's shares. Share valuation is done based on quantitative techniques and share value will vary depending on the market demand and supply. The share price of the listed companies which are traded publicly can be known easily. But w.r.t private companies whose shares are not publicly traded, valuation of shares is really important and challenging.