In the following article we discuss the legal transaction of transferring registered shares.
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A company has share capital for its (equity) financing. This share capital is divided into partial amounts, the so-called shares. If you own a share, you are an owner in the corresponding company. The shares of a company (limited by stocks) are to be distinguished from the shares of a limited liability company, the transfer of which is subject to more legal requirements.
Registered shares are those shares that are registered in the name of the shareholder. A company that issues registered shares keeps a so-called share register. The respective holders of registered shares are recorded in this register with their names, dates of birth, addresses and the number of shares held.
Bearer shares are to be distinguished from the registered shares of a company. In contrast to the registered share, which is in the name of the holder, the owner of a bearer share is only determined by the actual ownership of the share. The owner is therefore not necessarily known to the company by name. However, bearer shares have been abolished in principle and are now only permissible for companies that have equity securities listed on a stock exchange or have structured the bearer shares as intermediated securities.
Shares can generally be issued in certificated or uncertificated form. If a share certificate is created when the share is issued, it is referred to as a certificated share. If no such share certificate exists, the shares are referred to as non-certificated shares. This results in differences regarding the requirements with regard to whether a share certificate exists or not (more on this here). As a rule, however, these days we are talking about non-certificated shares.
The various rights of the shareholders derive from the holding of shares. The most relevant of these include voting rights, the right to dividends and the right to the proceeds in the event of a sale. In principle, only one duty is imposed on the shareholder, the so-called duty to pay. Accordingly, the shareholder must pay issuance price in full.
Only the transfer of registered shares in non-listed companies is discussed below. Accordingly, bearer shares and listed shares will not be discussed further.
In principle, shares are freely transferable. In practice, however, it often happens that the transfer of registered shares is restricted. As a holder of shares, you cannot therefore transfer your shares without further ado in such a case.
Restrictions on the transferability of registered shares (restriction on transferability) must be laid down in the articles of association. This must be decided by the shareholders’ meeting. Such a restriction on transferability is found in the vast majority of companies. This gives the company the right to refuse the transfer of a registered share. Specifically, the acquirer must submit a request to the board of directors after the conclusion of a share purchase agreement or any agreement under which shares are to be transferred. In response to this request, the board of directors passes a resolution within a 3-month period to accept or reject the acquirer as a shareholder. However, a rejection may not be arbitrary, i.e. without reason. Rather, it must be based on the provisions of the articles of association. Here, “important reasons” come into question. As a rule, important reasons relate to the composition of the group of shareholders with regard to the purpose of the company or its economic independence. Examples of such reasons are:
The so-called “escape clause” is also conceivable. With the application of the escape clause, the board of directors can reject the acquirer of shares without giving reasons. In return, however, it must offer the shareholder willing to sell the shares for purchase at their actual value.
CAUTION: A restriction on transferability cannot only be derived from registered shares with restricted transferability. It often happens that a restriction has been stipulated in a shareholders’ agreement. Pre-emptive rights, co-sale rights, purchase rights, rights of first refusal, etc. can be derived from this. However, these only apply between the parties to the shareholders’ agreement.
In most cases, the transfer occurs as a result of the purchase/sale. However, other constellations are also conceivable, such as transfer by divorce, inheritance, bankruptcy, etc.
The typical procedure for “large share packages” is as follows:
The endorsement is only relevant in connection with the certificated share. The purpose of the endorsement is to make a written declaration that the holder of certificated shares wishes to transfer ownership of these shares as well as all rights and obligations.
The endorsement thus records the transfer of the certificated share certificates. The endorsement must be placed either on the reverse side of the share certificate or, if there is not enough space, in the appendix. It is important throughout that each transfer is recorded and signed by the transferor.
If the share is not certificated, to evidence the ownership or the transfer of the same, a written declaration of assignment (so-called cession) is executed. With this, the owner of the share declares to assign the ownership and all associated rights – i.e. to hand them over to someone else.
If registered shares with restricted transferability are transferred, in theory there is no obligation to submit a request to the board of directors until after the underlying agreement has been concluded. The preparation of a share purchase agreement without knowing whether it can actually be legally executed appears inefficient. In practice, therefore, a potential share transfer is discussed with the company or the board of directors in advance, since in most cases they are also involved in the transactions in some way. This can take the form of discussions with other shareholders, clarification of pre-emptive rights, delivery of financial figures, granting of shareholder loans, etc. In this case, the request loses some of its significance. In any case, however, the approval of the board of directors must be recorded in writing.
In the case of certificated bearer shares, the owner is deemed to be the person holding the share certificate. Presentation of the security is therefore sufficient to prove ownership. The case of certificated registered shares is more difficult. Ownership and associated rights (e.g. voting rights or the right to dividends) are only acquired in the case of a purchase if there is an unbroken chain of endorsements. Thus, in the case of a possible purchase, it must be ensured that there is an unbroken chain of endorsements up to the first subscriber (when the company is founded and the share is issued).
In the case of uncertificated registered shares, care must be taken to ensure that there is an unbroken chain of assignments, evidenced in the share register, which must also go back to the first subscriber.
The individual steps for a successful purchase transaction of an uncertificated registered share with restricted transferability are listed below.
Can you tick all these boxes? Then you have successfully sold or bought your shares. If you are still in the preliminary stages of such a legal transaction, we will be happy to make your work easier with our contract and document creation tool, with which you can easily and time-efficiently draw up your share purchase agreement.
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Tobias Güntensperger
Your Sales Expert
