Need for cash, transfer to the next family generation, a spontaneous offer, disagreement with a fellow shareholder? The reasons that can lead a shareholder to consider selling his shares are many and various.
Regardless of the reasons, the transfer transaction must not violate the restrictions set out in the company’s articles of association, the Companies and Associations Code and/or a shareholders’ agreement.
The purpose of these restrictions is to control the entry and exit of shareholders in the company. More specifically, they may serve to stabilise a common project over time, preserve the family character of a company or prevent an undesirable person from entering the shareholding.
In this article, we provide an overview of (i) the legal regulations applicable to limited liability companies and private limited companies, (ii) the most common contractual restrictions and (iii) the conditions for the validity of these restrictions.
The legal arrangements: an “open” limited liability company versus a “closed” limited liability company
If shareholders have not spontaneously provided a specific framework for the transferability of their shares, the legal arrangements of the Companies and Associations Code apply.
The legal regime of the public limited company is that of free negotiability of its shares: in the absence of a rule established by the shareholders on the transfer, each of them can sell their shares to a third party and according to the terms of their choice.
In contrast, the standard private company regime requires the approval of the proposed transferee by half of the shareholders owning at least three-quarters of the shares (after deducting the shares proposed for transfer), when the proposed transferee is neither a co-shareholder, nor a spouse of the transferor, nor a blood relative in the direct line of the transferor. In the last three cases, the approval procedure does not apply.
However, these additional arrangements may not be suitable for the specific characteristics of a particular company or the expectations of its shareholders. In such cases, it is recommended to agree tailor-made rules on the transferability of shares, provided that certain mandatory provisions of the Companies and Associations Code are complied with.
The usual conventional restrictions
The inalienability or non-transferability clause prevents the sale of shares during a certain period.
The pre-emption clause obliges the selling shareholder to first offer the shares to be sold to a designated beneficiary, usually another shareholder. The beneficiary is then entitled to exercise its “right of pre-emption”.
The approval clause makes the transfer of shares subject to the approval of all or certain other shareholders, or, for example, one of the company’s organs.
Finally, exit clauses include the resale right, whereby certain shareholders can sell their shares at the same time as the transferring shareholder, to the same person and under the same conditions, or the resale obligation, whereby certain shareholders (usually minority shareholders) are obliged to sell their shares at the same time as the transferring shareholder and under the same conditions as the latter, if the latter so decides.
Some points of interest
The inalienability or non-transferability clause prevents the sale of shares during a certain period.
The pre-emption clause obliges the selling shareholder to first offer the shares to be sold to a designated beneficiary, usually another shareholder. The beneficiary is then entitled to exercise its “right of pre-emption”.
The approval clause makes the transfer of shares subject to the approval of all or certain other shareholders, or, for example, one of the company’s organs.
Finally, exit clauses include the resale right, whereby certain shareholders can sell their shares at the same time as the transferring shareholder, to the same person and under the same conditions, or the resale obligation, whereby certain shareholders (usually minority shareholders) are obliged to sell their shares at the same time as the transferring shareholder and under the same conditions as the latter, if the latter so decides.
Conclusion
As we have seen, the Companies and Associations Code provides for two very different legal regimes regarding the transferability of shares in a public limited company on the one hand and in a private limited company on the other. The shareholders of a private limited company have full control over the entry and exit of shareholders by default, while the shareholding of a public limited company is characterised by its openness.
In any case, informed shareholders will question any restrictions on the mutual transferability of shares. While the statutory arrangement may be considered appropriate by some shareholders, it is clear that a tailor-made arrangement is often necessary.
In such cases, the great freedom offered by the Companies and Associations Code should not cause one to lose sight of the various legal limits of the Companies and Associations Code, otherwise the contractual provisions will lose their effect!
Are you looking for help in drafting or analysing clauses relating to the transferability of your company’s shares? If so, please contact Johan Luntumbue.
