Share Transfers: The Protection Many Business Owners Assume They Already Have

One of the most common assumptions I see in owner-managed companies is that existing shareholders automatically get first refusal if another shareholder wants to sell.

The Companies Act 2006 contains statutory pre-emption rights for certain issues of new shares. In simple terms, if a company allots new shares, the existing shareholders may need to be offered their proportion first. This is a dilution protection: it helps stop a shareholder’s percentage being reduced without an opportunity to participate.

However, that is different from a transfer of existing shares. If a shareholder wants to sell or transfer the shares they already hold, the Companies Act 2006 does not give the other shareholder(s) an automatic right of first refusal. If the shareholders want that protection, it usually needs to be written into the company’s articles of association and/or shareholders’ agreement.

That wording can be highly bespoke. Some businesses want shares offered first to all existing shareholders pro rata. Others want the company or founders to have a first opportunity; some want family transfers, group transfers or internal restructurings to be carved out.

The key point is simple: whilst there is a natural, market limitation on transferring shares in a private limited company (i.e. nobody is likely to buy the shares), if you want continuing shareholders to have a say about who their fellow shareholders are, then the bespoke protection needs to be drafted and included in the Company constitutional framework.

If you would like to discuss any of the above further, please do contact Tim Grover: timothygrover@bexleybeaumont.com  |  07498 355980