Understanding Share Allotment And Share Transfer And Selecting The Right Strategy For Business Expansion
As an entrepreneur, you are aware that shares are more than just ownership stakes. Shares are assets that can attract investors, bring in new funds as well as act as incentives for your key employees.
Malaysia
Corporate/Commercial Law
As an entrepreneur, you are aware that shares are more than just
ownership stakes. Shares are assets that can attract investors,
bring in new funds as well as act as incentives for your key
employees.
Let's say you are the sole owner of a thriving cafe. You
plan to bring in new partners to join your business by offering
them some ownership. You also plan to offer ownership to your
dedicated key employees as a reward for their hard work. You
believe that these steps will contribute to your business
expansion.
But now, you face a question: how should you give them
ownership? Should you provide them ownership through transferring
your existing shares or opt for your company to create new shares
for them? This is where the choice between share transfer and share
allotment comes into play.
Think of share allotment like brewing a fresh pot of coffee, it
is about creating new shares in your company. On the other hand,
share transfer is like sharing a piece of your cafe's famous
cake, it involves moving around the shares that already exist,
transferring existing shares from one owner to another. To make the
right call for your business's expansion, it is important to
understand the fundamental differences between these two
concepts.
We have laid out a table below, summarising the key differences
between share allotment and share transfer for your better
understanding:
| Aspect |
Share Transfer |
Share Allotment |
| Meaning |
- Buying and selling of shares. The incoming shareholder/an
existing shareholder (Buyer) buys existing shares from an existing
shareholder (Seller).
- The Company's total equity remains unchanged; it only
involves change of ownership of the existing shares.
|
- The incoming shareholder (or investor) subscribes for new
shares to be allotted and issued by the Company.
- The Company "creates" new shares by allotting and
issuing shares to the investor in exchange for additional equity to
grow the business.
|
| Special Purpose |
- Seller wants to sell shares because he needs money, or he no
longer wants to be part of the company.
- Merger & Acquisition.
|
- The Company wishes to raise money and grow the business (i.e.,
fundraising).
|
| Common Purpose |
- Shares may be transferred/allotted as part of an employee
incentive scheme.
|
| Price |
- The Buyer and Seller can mutually agree on the purchase price.
The Shareholders' Agreement may provide guidance on how to
determine the price where parties disagree.
- The purchase price will be paid to the Seller.
|
- The incoming shareholder generally subscribes for shares at
fair market value based on the valuation of a Company.
- The subscription price will be paid to the Company.
|
| Pre-Conditions |
- Companies Act 2016, the Shareholders Agreement and/or the
Company Constitution (if any) may contain provisions that restrict
allotment of shares or transfer of shares.
- Common pre-conditions often involve the existing
shareholders' right of first refusal to buy the sale shares or
subscribe to new shares.
- Consent/approval from the existing shareholders (such as the
founder of the Company), financial institutions (if the Company
obtains any loans), regulators (pursuant to laws or conditions of
licences).
|
| Specific Legal Documents |
- Term Sheet
- Share Transfer Agreement or Share Purchase Agreement
|
- Term Sheet
- Share Subscription Agreement
|
| Common Legal Documents |
- Shareholders' Agreement (if the Company does not have a
shareholders' agreement or if new shareholders request a new
shareholders' agreement) OR Deed of Adherence to adopt the
existing Shareholders' Agreement (if the Company already has
one and new shareholders agree to it).
- Company Constitution – if the Company does not have one
or if modification is necessary.
|
| Company Secretary Documents/Forms
|
- Directors' resolution/ Shareholders' resolution
- Section 105 (Share Transfer Form) + stamping
- Section 51 (Register of Members)
|
- Directors' resolution/ Shareholders' resolution
- Section 78 (Allotment of Shares)
- Section 51 (Register of Members)
|
| Stamp Duty |
- Stamp duty is applicable, usually payable by the Buyer (unless
the Buyer and Seller agreed otherwise), the calculation is stated
as follows:
Types of Companies & Calculation
(a) Dormant Company or Company making losses/making profit
- NTA or Consideration, whichever is higher.
* NTA = Total Asset – Intangible Asset – Total
liability
* NTA per shares = NTA/ total issued shares
(b) New Company
- Consideration
|
|
| Dilution |
- The Seller owns less shares (if he is only selling part of his
shares).
- Every other shareholder's ownership remains the same.
|
- Existing shareholders' ownership dilutes proportionately
(unless such shareholders have an anti-dilution protection).
|
Understanding the differences between share allotment and share
transfer is important for making well-informed decisions that align
with your business goals. But this understanding is only the
beginning.
The next step is known as "structuring your shares"
which involves precise calculation to determine exactly how much of
your company's ownership should be transferred or allotted and
at what price. This task requires not only legal expertise but also
financial expertise. Seeking guidance from accountant and financial
valuer can assist to determine the ideal number of shares to be
transferred or allotted and appropriate pricing. By collaborating
with professionals, you are empowered to make the most informed
decision to expand your business.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
