The world of share transfers is full of pitfalls, especially when share certificates are involved. Mistakes in this process can not only harm the company but also expose board members to liability and lengthy legal disputes. This article outlines the key points boards must consider to ensure a compliant and transparent share transfer process.
Focus on share certificates
The legal requirements for transferring shares depend on whether they are issued in certificated or uncertificated form. Share certificates must include specific information such as the designation “share,” the company name, the holder’s name, nominal value, serial number, paid-in amount (if partly paid), and the signature of a board member. Invalidly issued certificates must be withdrawn by the board.
Endorsement of share certificates
If the company issues physical share certificates, a valid sale contract, ownership rights of the seller, and the delivery of endorsed certificates are required. The endorsement—a notation on the back of the certificate—transfers ownership and includes the buyer’s name and the seller’s signature. Blank endorsements, where only the signature is provided, are also permitted. However, merely handing over the certificate without an endorsement is insufficient: ownership remains with the seller.
A prudent buyer should verify that the seller is the lawful owner. Transfers of registered shares may also require the board’s approval (vinkulated registered shares).
Keeping registers up to date
Maintaining an accurate share register and a register of beneficial owners is mandatory. These records identify shareholders and ultimate beneficial owners. Failing to maintain them can lead to fines, but in practice, reporting obligations are often neglected.
Consequences of defective transfers
Defective share transfers are usually invalid, meaning dividend rights, voting rights, and other shareholder privileges do not pass to the buyer. If non-shareholders participate in a general meeting, its resolutions may be voidable. In due diligence processes, purchasers check ownership chains; mismatches between endorsements and the share register can halt transactions. Former owners may even claim profits from invalid later transfers.
The board is therefore responsible for maintaining clarity on who the actual shareholders are. If the board, for example, pays dividends to a non-shareholder due to an invalid transfer, it may incur liability.
Recommendations for a smooth process
Boards should verify the validity of certificates, ensure proper endorsements or written assignments, obtain necessary approvals for registered shares, and keep the registers accurate and up to date.
Share certificates vs. dematerialized shares
Transferring certificated shares is not only cumbersome but often beyond the board’s control, as shares may be transferred without its knowledge. Parties frequently overlook legal formalities, and certificates can be lost or damaged. This is why more and more companies are phasing out paper certificates and adopting dematerialized shares, recorded as book-entry securities or digital share registers.
Konsento represents all forms of shares and is happy to advise you on the conversion of share certificates into value rights. Book a free consultation now!
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