Share transfer legal requirements

Share Transfer Legal Requirements & Restrictions

Share transfer legal requirements and restrictions comes into picture for public and private company when a shareholder from any organization want to sell or transfer shares. To protect illegal transfer or damage company financial matter legal restrictions came to manage this scenario. This article talks about the legal validity on transfer of shares in public and private companies.

Shares:

The shares are the unit of ownership that represent an equal proportion of a company’s capital. It entitles its holder to an equal claim on the company’s profit and an equal obligation for the company’s debts and losses.

Reference 1 – www.businessdictionary.com/definition/share.html

Share Transfer Legal Requirements & Restrictions Public Company:

According to Section 2(71) of the Companies Act, 2013 –

Public Company:

  • A company which is not a private company.
  • Minimum paid up of five lakh rupees or higher as prescribed.
  • Provided that a company is a subsidiary of a company, not being a private company.
  • Shall be deemed to be public company for the purposes of this Act even where such subsidiary company continues to be a private company.

Reference 2 – Section 2(71) Companies Act, 2013

Share Transfer Process Public Company:

  • The transferability of shares in a public company is clearly stated in Section 58(2) of the Companies Act.
  • Shares of any member in public company are freely transferable.
  • This provision on free transferability of shares is founded on the principle that public must have the freedom to purchase and every shareholder have a right to transfer.
  • The board of directors of a particular public company has no discretion to refuse any transaction related to transfer of any security.

Reference 3 – Section 58(2) Companies Act, 2013

Share Transfer Restrictions Public Company:

  1. The court held that freedom of contract can be restricted in case of benefit of the community. e.g: International Holdings B.V. vs. Union of India
  2. The legislation does not forbid the shareholder to enter into an agreement telling how to exercise rights attached to their shares.
  3. An agreement between shareholders restricting the transfers of shares in a public company does not violate the free transferability of shares of a company.
  4. The restriction must not violate an Article of Association (AOA) of the public company governing by law.
  5. Agreement of restriction on transfer of shares can become a contract amongst or against the shareholders and the parties.
  6. However this contract is not enforceable against the company if the company is not the party to the agreement containing such restrictions on shares.

Reference 4 – www.ilntoday.com/2013/12/legal-validity-of-transfer-of-shares-of-public-companies/

 

Share Transfer Legal Requirements & Restrictions Private Company

According to the Section 2(68) of Companies Act, 2013

Private Company:

A company having a minimum paid up share capital of one lakh rupees or such higher paid up share capital as may be prescribed.

 

Share Transfer Restrictions Private Company

  • Except in case of one person company, limits the number of its members is up to two hundred.
  • Prohibits any invitation to the public to subscribe for any securities of the company.
  • The Article of Association (AOA) of a private company should be clearly stated so that any contract which includes restriction on rights to transfer shares does not violate the AOA.
  • Therefore the question arises whether shareholders can come in a contract which is inconsistent to the Article of Association of the private company.
  • As per Supreme Court – Only restriction on transfer of shares of a private company is as laid down in its article of association.
  • Any restriction not specified in company’s AOA is not binding on company or on the shareholders.
  • Restriction mentioned in AOA on transfer of shares where it has two meanings and the less restrictive will be adopted by the courts.
  • The power to refuse transfer of shares should not be entertained for any collateral purpose.
  • It can be exercised for the general interest of the company and shareholders.
  • There cannot be an absolute prohibition on the right to transfer the shares.
  • However the right of preemption has been held to not imply prohibition upon transfer.

Reference 5 – Section 2(68) Companies Act, 2013

Reference 6 – V B Rangraj v. V B Gopalakrishnan(1992) 73 Comp Cas 201 SC

Any public and private company shareholder can share their experience. There may be few special notes which requires case to case while transferring shares legally within private or public company.

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