In a share transfer transaction, the transfer of the legal title to shares does not take place until the name of transferee has entered into the company's register of members. Upon such entry, the transferee takes legal ownership of the subject shares. Registration creates membership of the company.
It is usual for the right to transfer shares in private company to be subject to restrictions. The intended transferor and transferee should carefully consider the following before entering into such share transfer transaction:
1) the Articles of Association of the Company
2) the existing shareholders' agreement
These documents may contain provisions of restrictions like pre-emption rights which must be observed by the intended transferor of the shares.
In some circumstances, directors of the company may refuse to register the transfer of shares. This will prevent the transfer of legal title of the shares while the equitable title to the shares may still be transferred.
But directors must exercise the right of refusal in good faith and in the best interests of the company and for proper purpose, and send a notice of refusal to both the transferor and transferee within 2 months after the transfer is lodged with the company.
Acting purely in a director’s own interests, for instance by preventing liquidation of a shareholder’s investment or the acquisition of shares by other entities, would be an improper purpose.
The transferor or transferee may request a statement of reasons for the refusal. Then, the board of directors must provide a statement of reasons within 28 days, or approve that the transfer be registered within that period.
Application can be made to the Hong Kong for an order that the directors must register the transfer of shares. Order will be made if the Court considers that the application is well-founded.
Common grounds for challenging a board of directors’ decision to refuse to register include procedural grounds or the board of directors did not act in the best interests of the company.
In the case of Ngan Kwing Sun v Top Well Industrial Ltd. (HCMP 420/2019), the board of directors refused to register the transfer of the shares as it is alleged that the transfer did not have beneficial ownership of the shares.
The Court held that the decision of the board was defective as there was insufficient quorum present at the meeting. Also, the Articles of Association of the company required the company to treat the registered owner of any shares as the absolute owner, and beneficial ownership should not be a concern of the company. The Court therefore ordered registration of the transfer.
For legal advice or services on commercial or company disputes, please contact CHOW & CHEUNG, Hong Kong Solicitors & Notary Public. [Tel: +852 2856 3799 Email: cac@ccsn.hk]
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