Shares in a company are transferable like any other movable property, subject to any expressed restrictions under the Articles of Association (“AoA”) of the company.
In India, share transfer is governed by the general principles of the Indian Contract Act, 1872 and the Companies Act, 2013. In case the parties would like to execute special terms according to their needs that are beyond the terms mentioned in the Companies Act, 2013, a Share Transfer Agreement (“STA”)/Share Purchase Agreement (“SPA”) can be executed between them.
It is a legal document that regulates the purchase of company shares between the sellers i.e., shareholders and the buyer(s) i.e., incoming members. Therefore, it can be termed as a legal conveyance document, wherein the terms and conditions of the sale and purchase of the shares of a company are understood and mutually agreed upon by all parties.
Importance of STA:
- An STA identifies the legal buyer of shares of a company;
- It specifies the kind of shares purchased, the share price, the number of shares purchased;
- It binds the parties to the contractual terms negotiated and accepted between them. For eg: The conditions to closing i.e., the pre-requisites each party has to fulfil for the transfer to commence and be completed;
- It acts as evidence that determines the ownership of a shareholder of a specific number of shares in a company;
- It specifies the limit of ownership and control of the buyer in the company; and
- It also mentions the rights and the liabilities of the incoming members towards the other parties.
An STA lays down the terms and condition for the sale and purchase of the shares of the company. Therefore, it expressly acknowledges and informs the parties of the commercial terms, while binding them to the various conditions negotiated between them.
Prior to drafting a STA, the parties should also undertake certain due-diligence before drawing up the purchase price and negotiating the key terms of the STA. The parties therefore, need to clearly identify such actions and safeguarded themselves by executing a carefully drafted and tailor-made share transfer agreement.
The content of this article is intended to provide general guidance on the subject matter. Specialist advice should be sought about your specific circumstances.
Key words: Share transfer, purchase terms, share price, ownership, sale of shares.