I am often asked by clients when they buy shares in a company or want to invest in a company what is the best way to do it. Do I buy shares, or should I get shares issued?
There are two ways that you become a shareholder in a company, either through a share transfer (purchase) or a share issue. They are uniquely different processes.
In very simple terms a share transfer is the act of changing a share or group of shares from one owner to another. Whereas a share issue is an occasion when a company creates new shares available for sale, or the number of shares offered.
It is important when you are considering either option you obtain expert legal and accounting advice as there are significant legal and taxation consequences that are relevant to each.
The starting point with either transaction is to consider the current legal documentation relevant to the company such as the shareholders agreement and the company constitution.
These documents will outline certain restrictions on how each transaction can be achieved.
What are the differences between a Share Transfer and Share Issue?
The first step when a shareholder intends selling its shares is that it must notify any other shareholders that it is their intention to sell.
The other shareholders often have pre-emptive rights or can exercise a first right of refusal which enables them to either purchase the shares or waive their rights to do so.
If there is more than one shareholder who wants to buy the shares they will do so in proportion to their existing shareholdings.
If no current shareholders want to purchase the shares, the selling shareholder can then proceed to offer and sell to a third party.
A share sale agreement is prepared which will contain various terms, conditions and warranties relating to the shares.
Once the share sale agreement is agreed upon then the parties will sign a share transfer form.
The company will then ratify the share sale agreement and will resolve to transfer the shares.
A share certificate is then prepared for the purchaser.
The Australian Securities and Investments Commission (ASIC) is then notified of the change in the shareholders.
The company register and the ASIC register is then updated to reflect the new shareholder.
If the purchasing shareholder is a new shareholder, it is important for them to sign the shareholders agreement or a deed of accession.
A deed of accession is a written, formal agreement which new shareholders and investors usually sign. It indicates their consent to be bound by the terms of an existing shareholders agreement.
A company issues shares to raise capital or to incentivise employees or third parties.
It is important when considering a share issue that you review your constitution and shareholder agreement to ensure you are doing it without breaching any of those terms and conditions in those company documents.
At a minimum you will likely have to offer the shares to existing shareholders and get approval of the board.
If you are intending to issue shares to an investor you will need to prepare either a prospectus or information memorandum unless you:
- are a private company that issues shares to a personal or professional connection and the shares are not being offered publicly
- offer the new shares to less than 20 people in a 12 month period and not raise more than $2 million in a 12 month period
- are a sophisticated Investor who has purchased shares worth over $500,000 or received certification from their accountant that their net assets or gross income meet certain requirements
- are a professional Investor, who has an Australian Financial Services Licence or manage gross assets of at least $10 million
The next step is to set the share price and the directors must act in the best interests of the company when doing so. Generally, you will obtain a report as to the reasonable share price from a third party such as an accountant.
There are serious tax implications if a director is issuing shares to itself and receives a benefit without paying a reasonable price, so it is important to get advice.
The investor and the company will then negotiate a term sheet.
A share subscription agreement is then executed so the company can issue shares, subject to complying with certain terms and conditions.
The existing shareholders when they resolve to issue shares also agree to waive their first right of refusal.
Investors sign a share application form, and the company updates the company records.
The Australian Securities and Investments Commission (ASIC) is then notified of the change in the shareholders. The company register and the ASIC register is then updated to reflect the new shareholder.
If the purchasing shareholder is a new shareholder, it is then important for them to sign the shareholders agreement or a deed of accession.
How can FC Lawyers help?
Our experienced business and corporate team have advised companies and investors in a broad range of options when it comes to investing in and raising capital by way of both share transfer and share issues.
It is a complex area of the law with significant regulatory and taxation implications.
Contact our team today to discuss how we can assist you.
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