Sale and Transfer of Shares / Initial Public Offering

A. Sale and Transfer of Shares


The following checklist is to help the Buyer in the purchase and transfer of shares in a company. In relation to the acquisition of the whole company, please refer to the section relating to "Mergers and Acquisitions". 


1. Confidentiality

· Has a confidentiality undertaking been executed?


2. Heads of Terms

· Have they been entered into?
· Would it be useful to have one?
· Will they be binding or non-binding?
· Will they involve a lock-out?
· What points should they cover?


3. Timetable

· Will specialist input (e.g. tax, environment, IP, property) be required?
· Are external advisers (e.g. lawyers, accountants) required/involved and who will be instructing them?
· Will finance need to be raised (see below)?
· Time available for due diligence (see below)?
· Will Heads of Terms be concluded (see above)?
· Will the execution and completion of the Agreement be simultaneous (or should they be)? If different, how much time is needed between contract and completion?
· What clearances/consents are required (see below)?


4. Company Information

· Single company?
· Group of companies?
· Is it a public or a private company? Has it been listed on the Stock Exchange?
· Where is the company located?
· Which locations do the company operate in?
· Where is the main value to the Buyer in the Company e.g. strategic, cash flow, investment value?
· Are there any particular concerns of the Buyer e.g. loss of existing management, liabilities?
· What are the proportion of shares being sold, what about other shareholders? Is a shareholders' agreement required?
· Does the industry in which the Company operates create particular concerns (e.g. environmental) or require particular consents? Can these be dealt with specifically in the Agreement?

· Organise company search and other relevant searches (eg patent). Conduct thorough Due Diligence.


5. Rights of Pre-emption

Pre-emption rights are rights for the existing shareholders to buy the shares first on the basis of equal price and terms. There are no common law pre-emption rights. Shareholders in unlisted companies may, however, be bound by pre-emption provisions in the articles of association or a shareholders' agreement which affect their ability to transfer shares. One should check the articles and any shareholders' agreement to confirm if other shareholders have the rights to receive purchase the securities before they are sold to third parties.



B. Purchase of Own Shares


The basic common law position is that a limited company (by share capital or guarantee) may not purchase its own shares. The rationale for the decision was the principle of maintenance of capital. A company limited by shares has only its capital to back its credit. For this reason, the principle of maintenance of capital was developed by the courts for the protection of creditors. The prohibition applies whether the acquisition is by purchase or by subscription or otherwise.

Exceptions to Basic Rule

There are exceptions to the common-law rule.

1) neither applies to unlimited companies, the rationale being that the credit of an unlimited company is based not only on the capital of the company but also on the unlimited liability of its members for its debts.


2) the following acquisitions are specifically exempt:

  • an acquisition by a company limited by shares otherwise than for valuable consideration of its fully paid shares - for example, by gift or bequest;
  • redemptions or purchases relating to purchases and redemptions of own shares;
  • an acquisition in a duly authorised reduction of capital - a company is permitted to make a payment out of capital only to the extent that the purchase price exceeds its available profits and the proceeds of any fresh issue made for the purpose of the purchase;
  • purchases pursuant to court orders; and
  • where shares are forfeited or surrendered pursuant to a company's articles of association for failure to pay any sum payable in respect of the shares.


C. Offer to the Public and Prospectus Requirement


The basic position in most common law countries is that no new securities are to be offered to the public unless a prospectus has been submitted to the regulator. In most jurisdictions, the public means 50 or more people. In addition, offer to the public does not mean 50 people buying securities in the Company. If an offer can be seen (e.g. online advertisement) by more than 50 people in a jurisdiction, then it can be considered to be an offer to the public in that jurisdiction.


The prospectus requirements only apply to securities which are unlisted (even though the subject of an application for listing - i.e. initial public offering) when the offer is made. Secondary offers of securities which are already admitted to official listing, even if made to the public, do not require listing particulars nor a prospectus.


There are various exemptions from the prospectus requirement. The most useful exemption which is relied on for offerings of securities is that relating to certain "Professional Investors" without preparing a prospectus. Different jurisdictions may have slightly different definitions of "Professional Investors". Please check with your local legal counsel. 


D. Initial Public Offering


An Initial Public Offer (also known as an "IPO"), shares of a company is being introduced to the public to be traded on a stock exchange for the first time. Access to the retail market may be obtained through:

  • a retail offer, which is typically an offering of shares to members of the public  or through their brokers;
  • an institutional offer which is a form of retail offer restricted to professional or institutional clients).

The reasons for conducting an IPO may include:

  • increasing demand for the shares - retail investors tend to apply for shares by value, not by number, and are thought to be relatively price insensitive.
  •  raising the public profile of the company - a retail offer is usually promoted through the medium of the press, TV and radio coverage, poster campaigns and, increasingly, via the internet.

Most IPOs now involve bookbuilding for institutional offerings. The issuer will usually announce the percentage of the total offer which it expects to make available to retail investors. The offering period for a retail offer is usually shorter than for the institutional offer. This is purely for logistical reasons; it generally takes longer for the receiving bank to process the retail applications and communicate the results of the retail offer to the global co-ordinator than it does to work out the results of the institutional offer. A prospectus will be issued for both retail and institutional investors.