Understanding Share Sales to Existing Shareholders

Introduction

Share sales occur when shares in a company are sold. Often these shares are sold to third parties. However, there may be circumstances where a third-party purchaser is not available. In these cases, it might be necessary to sell your shares to one or more of your fellow shareholders to allow you to voluntarily exit the company.

Commonly, the process for the sale of shares will be outlined in the company’s Shareholders’ Agreement or Constitution.

It is important to note that whether you are selling your shares to a third party or to an existing shareholder, there will be tax implications to the sale and depending on what capacity the shares are held in, this tax may vary. We recommend that you obtain tax advice before selling your shares, as once sold you will be responsible for any tax obligation that arises.

This article will break down the process of selling shares in a private company to an existing shareholder.

Market Value and Purchase Price

If an existing shareholder agrees to purchase your shares, one of the first things that must be agreed is the purchase price for the shares.

However, the price of the shares should at least be equal to the total market value of the shares at the time they are sold. There may be specific provisions regarding the calculation of a share’s value under a company’s Shareholders’ Agreement.

Generally, to determine the value of shares in a privately owned company you will require assistance from the company’s accountant or alternatively, a business valuer.

The reason the shares should be sold at least at market value is to avoid any tax implications that may arise for the parties involved in the sale and the other shareholders’ (if any) in the company.

Facilitating Sale

If the purchase price of the shares has been agreed, the parties should enter into a Share Sale Agreement (‘SSA’) that outlines the specifics of the sale.

The SSA should include:

• How many shares are being sold;
• The purchase price to be paid for the shares; and
• When the purchase price is to be paid. There may be circumstances where the shares are paid in full on completion of the share sale, or where part of the price is paid upfront with the rest to be paid at a later date.

A SSA will also include warranties. Warranties are promises that one party makes to another. In a share sale, these warranties may include the seller warranting that the shares are free from any registered security interests.

However, when entering into a SSA between two current shareholders it is likely that the warranties provided will vary from that of a standard SSA, where shares are being sold to a third party. The reason for this is that the current shareholder purchasing the shares will already have access to the company’s records and aware of the company’s standing. As such, there is no need for warranties regarding the financial position or financial records of the company, the company’s solvency and the company’s overall position.

If the terms of the SSA are agreed, then the parties may sign and the relevant company documents can be prepared.

To facilitate a share transfer under a SSA, the following documents would need to be prepared:

• Resolutions from the company to approve the share sale. The type of resolutions and the content of these resolutions may vary depending on the company’s Constitution and/or Shareholders’ Agreement (if any); and
• A share transfer form that will be filed with ASIC to facilitate the transfer.

Once these documents are prepared, signed and the purchase price paid, the shares may be transferred. The company’s accountant can facilitate this.

Post Sale

Upon the share sale being complete, the company must update the member’s register to reflect the exiting shareholder ceasing to be a shareholder and to reflect the changed shareholding of the purchasing shareholder.

The company will also need to cancel the exiting shareholder’s share certificate and issue a new share certificate to the purchasing shareholder that accurately reflects their shareholding.

Changes may also need to be made if the exiting shareholder was a company director.

Most importantly, the company must notify ASIC within 28 days of the transfer of the change in shareholding. However, it is recommended that this be done immediately.

Conclusion

Selling the shares of an exiting shareholder to an existing shareholder can be beneficial in preserving the company’s vision and continuity. There is always a risk that when a shareholder exits, or a new shareholder is brought in, that the strategic direction or core values of the company will change. However, facilitating the sale of shares to an existing shareholder who is already aligned with the company’s vision and aware of their standing, can ensure a company’s stability.

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