A General Practitioner at a medical practice was offered the opportunity to be a director of the practice.  After discussions with the other directors and shareholders, they decided each shareholder was going to ‘carve out’ some of their shares, so that all shareholders would have equal rights.

When a business is run by a company, generally there are two ways that an employee can become a shareholder (owner) of that business:

  1. The first is by carving off shares from someone else’s shares, or buying shares off every other shareholder as above (if all shareholders agree to this).  In this case, the shareholders transferring the shares, as well as the person who receives the shares, will sign an agreement for sale and purchase of shares and a share transfer form;
  2. The second way is by issuing brand new shares in the company.  This will require 75% shareholder approval of the existing shareholders and will mean that if the company started with a certain number of shares, the number will now be higher, and therefore voting rights will be affected.   A person gets shares this way by virtue of a notice of issue of shares, then as above, an agreement for sale and purchase of shares and a share transfer form is signed by the company and the buyer.

Using either option, the Companies Office needs to be updated with the new shareholdings once the transfer is completed, as well as the company updating its own share register.

There are also some other important considerations when buying shares in a company.

First, you will need to consider whether the existing shareholders have ‘pre-emptive rights’. This means that shares have to be offered to existing shareholders first, proportionate to their current shareholding in the company. This right of pre-emption process will need to be followed before any transfer can occur to the new shareholder.  This is often recorded in a constitution or shareholders agreement.

If there is no shareholders agreement or constitution, pre-emptive rights won’t apply.

If the company does not have a shareholders agreement or constitution already, we would generally recommend that the company puts in place at least one (preferably both) of these before a new shareholder buys in, so that each shareholder is aware of their rights and obligations.

These documents would also outline any dispute resolution process in the event of disagreement between shareholders, as well as a process to be followed if shareholders ever want to sell their shares in future.

If there is a shareholders agreement in place, the terms of that must be followed as part of the transfer process. This will often require the new shareholder to sign a Deed of Covenant or Accession, agreeing to be bound by the terms of the shareholders agreement.  The incoming shareholder may try to negotiate changes to the shareholders agreement, but generally the same terms will remain.

The shareholders agreement may also require the new shareholder to be bound by a restraint of trade, which may not have previously been included in their employment agreement. 

This is a restriction on the shareholder competing against the company for a length of time and particular kilometre radius.  It may also include not contacting existing clients of the business.  Restraints of trade are known to be hard to enforce, however they can generally be enforceable if they are ‘reasonable’ for the type of business.

An issue often overlooked when an employee buys in is the proper termination of the employer/employee relationship, and adjustment of all entitlements in the same manner as would be done for a departing employee.

Buying shares in a company is an important transaction, and it pays to take expert legal and accounting advice to ensure you understand what you are buying into.

Leading law firms committed to helping clients cost-effectively will have a range of fixed-price Initial Consultations to suit most people’s needs in quickly learning what their options are.  At Rainey Collins we have an experienced team who can answer your questions and put you on the right track.