Guide to Transferring Shares in a Singapore Private Company

Are you the director of a private company incorporated in Singapore? Your shareholders may be considering selling their shares for various reasons, such as:

• Having a minority stake in the business and are looking to realise the value of their investment.
• They have been given shares as part of an employee share scheme and you want them to sell their shares as they are moving on to another job.
• Maybe they are the founder of the company, and want to sell their shares to outside investors either to raise funds for expansion or to exit the company totally.

Regardless of the reason, it is important to ensure that the shareholders follow the correct procedures and pay the appropriate stamp duty when selling their shares. This is so that the transfer cannot be challenged as invalid, and you cannot be accused of failing to carry out your duties as a director. Additionally, in private companies, directors are often shareholders too.

In this article, the shareholder intending to sell their shares will be referred to as the “transferor”, while the shareholder intending to receive the transferred shares will be referred to as the “transferee”. Please also note that share transfer is different from share transmission. You may refer to our article on share transmission in Singapore for more information on the latter.

Documents Required

Some documents will always be relevant:

• Instrument of Transfer
• Notice of Transfer
• Board Resolution
• Share Certificate (the document which proves ownership of the shares)
• Share Transfer Form
• Inland Revenue Authority of Singapore (IRAS) stamp duty acknowledgement

Depending on the situation, other documents such as a Consent for Waiver of Pre-Emption Rights may also be required (explained below).

Procedure

Before the share transfer application is made

Basis of the transfer

As a preliminary step, the basis for the transfer must be clear. This may not be necessary where the transfer is a gift, for example. However, depending on the situation, you may need to advise the transferor to get a lawyer to prepare a contract for the sale of the shares (if they are selling 100% of the shares in a private company, it would be crucial to have a proper Share Purchase Agreement, for example).

Most crucially, this contract should make the sale price clear. The sale price may not be so easy to calculate if, for example, the amount payable is to be adjusted according to the future profits of the company. Occasionally however, the price payable may be fixed beforehand. This is common where there is a shareholder agreement with ”drag-along” or “tag-along” clauses.

For example, if the shareholder agreement contains a drag-along clause, then if the majority shareholder(s) are selling their shares to a third-party, minority shareholder(s) are compelled to sell their shares at the same price too. Alternatively if the shareholder agreement contains a tag-along clause, then the minority shareholder(s) can compel the majority shareholder(s) to require the buyer to buy their shares at the same price too.

As a director, knowing the basis for the transfer is good practice to help prevent fraudulent transfers.

Company-level restrictions on transferring shares

Advising shareholders on restrictions on transferring shares (if any)

When approached by a shareholder who intends to transfer their shares, the board should first advise the shareholder if there are any restrictions on the share transfer.

For example, the company constitution usually provides that share transfers can only take place with board approval. (If your company has adopted the Model Constitution wholesale, the relevant provision requiring board approval for share transfers will be regulation 24 of the Model Constitution.)

Although the step of obtaining board approval usually only has to be settled when the transferor presents a Share Transfer Form to the board (more on this below), it may be a good practice for shareholders to discuss their intentions to transfer their shares with the board early, so you and the other board members can give some sort of indication of where it stands beforehand.

When should the board approve the transfer?

If share transfers can only take place with board approval, the board should then consider whether approving the transfer would be in the company’s interests.

For example, the following might be good reasons to deny the transfer:

• The board (who may be majority shareholders in the company) feels that it will not be able to work with the proposed new shareholder effectively. This might apply especially in smaller companies where shareholders have a close relationship with company management.
• The board has genuine concerns about whether the proposed new shareholder would act in a way that supports the company’s aims and values. This might be especially true in companies with a smaller number of shareholders, and where it is expected that a significant level of shareholder input is needed for various management decisions.

However, it would likely be inappropriate to deny a transfer request so as to “punish” a transferor for “disloyalty”.

When deciding whether to approve the share transfer, the board should record its decision and the reason for its decision in a properly-minuted board resolution. The board’s decision (and the reasons for it) should then be promptly communicated to the transferor.

Importance of prioritising pre-emption rights before selling shares

It is also possible that, before offering their shares for sale to outsiders, the transferor must first offer their shares to all existing shareholders proportionately. Such pre-emption rights may be specified in the company constitution or in the shareholder agreement.

If the other shareholders have pre-emption rights, they will need to be sent a Notice of Transfer of Shares to indicate if they want to exercise their pre-emption rights. Assuming none of them wish to exercise their pre-emption rights, they should all sign a Consent for Waiver of Pre-emption Rights.

Following this procedure and obtaining the relevant consents is important. It will make it less likely that the transfer will be subsequently challenged or found to be invalid, which is likely towould cause administrative difficulties for directors.

Agreements between shareholders affecting transfers

The transferor should next consider any applicable “drag-along” or “tag-along” clauses which they will have to comply with. For example, if they are selling a majority stake, but the buyer does not want to buy the shares of the minority shareholders (as per a “tag-along” clause), they should talk to the minority shareholders beforehand.

In such a case, it may be advisable to ask the minority shareholders to waive their tag-along rights by a Consent for Waiver of Tag-Along Rights. Formally settling this beforehand will prevent the transaction from being disrupted later on.

It would be good practice for the board to ensure that any “drag-along” or “tag-long” clauses have been complied with (or any rights under such clauses have been waived), even though this is primarily the transferor’s responsibility.

Making the share transfer application

Execution of Instrument of Transfer

To formally commence the transfer process, the transferor will have to execute an Instrument of Transfer with the transferee. This document will indicate that the transferor agrees to transfer their shares to the transferee, and that the transferee agrees to take the shares.

Making a transfer request to the board

Next, the transferor should make a written share transfer request to the board. The board then has 30 days to decide whether to approve the transfer. As mentioned above, the board’s decision (and the reasons for it) should be recorded in a properly-minuted board resolution.

If the board decides to deny the transfer during this period of time, it has to send a written Notice of Refusal to both the transferor and the transferee. However as mentioned earlier, the board should only deny the transfer for proper reasons relating to the good of the company.

Payment of stamp duty

Stamp duty will have to be paid within 14 days of the Instrument of Transfer being executed. (This is even if the shares are being transferred as a gift.)

The transferor and transferee will usually decide amongst themselves who should be paying the stamp duty. (For example, the Instrument of Transfer may state who is to pay the stamp duty.) However if the parties have not agreed on this, then the transferee will be the one liable to pay stamp duty.

The party paying stamp duty should submit a Share Transfer Form to IRAS for stamping, i.e. for paying the relevant stamp duty. They can either go down to IRAS to get a physical stamp affixed to the Share Transfer Form in exchange for a fee, or complete the procedure online and keep a record of the online acknowledgement slip.

See below for more information on calculating stamp duty.

After the board has approved the share transfer

Surrender of Share Certificate

If the board decides to approve the transfer, the transferor (or the person holding on to the original Share Certificate) will need to surrender their original Share Certificate to the company, for cancellation or rectification, within 7 to 28 days of the written share transfer request being made.

The board has the discretion to determine the exact deadline, but it is better that the Share Certificate be submitted early so the board can register the transfer in a timely manner.

After receiving the Share Certificate, the board will then have to submit a Notice of Transfer to the Accounting and Corporate Regulatory Authority (ACRA) through the Bizfile+ website.

Updating electronic register of members by ACRA

The transfer will only be effective once ACRA has updated the electronic register of company members (which all private companies must submit to ACRA).

Issuing a new share certificate

The company will then be obliged to issue a new Share Certificate to the transferee (or the person who will be holding on to the new Share Certificate) within 30 days of registering the transfer with ACRA. This is typically the duty of the company secretary.

Fees

ACRA does not charge any fee for updating the company’s register of members. The company should not charge any fee for processing the share transfer either.

However, stamp duty is payable to IRAS for share transfers. Stamp duty is calculated with reference to the higher of the actual price paid for the shares or the actual value of the shares, at a rate of 0.2%.

The actual value of the shares is calculated by first taking the net asset value of the company (net assets less net liabilities as reflected in the latest annual accounts) and dividing that by the total number of shares in issue.

Then, having found the value of each share, multiply it by the number of shares being transferred. This is very straightforward where there are only ordinary shares in issue. However, the party paying stamp duty will need to consult IRAS should there be multiple classes of shares in existence.

Documents should be stamped on time. In cases of late stamping, IRAS may levy a fee of up to $25 or 4 times the normal stamp duty payable, whichever is higher.

While paying stamp duty is primarily a concern for the shareholders rather than the directors, the directors should be conscious of their duty to act honestly and to use reasonable diligence. The directors may be in breach of this duty if the company’s reputation and profitability is affected due to inadequate advice being given to shareholders in this situation.

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Transferring shares in a private company is undoubtedly more difficult for an individual shareholder than simply selling shares in a listed company. However, if you check what consents are needed, you should be able to navigate and advise your shareholders on these procedural requirements with confidence.

Nevertheless, many shareholders and directors alike in private companies prefer to engage a corporate lawyer to assist with negotiating and drafting an Instrument of Transfer, as well as to take care of various other matters which may arise in the course of the transaction.