When shareholders in a private company are arranging for the transfer of shares to other shareholders or potential new shareholders, there are a number of documents that should be considered. Firstly, there should be a sale and purchase agreement entered into which records the price for the shares, the date for settlement of the transfer and the new party who is to become the shareholder for that holding. Such an agreement should also cover off any pre-emptive rights requirements that need to be dealt with, and provide a mechanism and timeframe for the vendor of the shares to liaise with the interested parties to ensure the appropriate consents are given. The consideration to be paid for the share sale should be thought through carefully because it will no doubt have an impact on the remaining shareholders’ interests. Shares are often quite difficult to value, but often companies will use “directors’ valuations” to determine the value of the shares. Secondly, share transfer documents should be prepared and signed so that there is a written record of the actual transfer. These transfer forms go hand-in-hand with the sale and purchase agreement and can be kept in the company’s management records for future reference, especially for when annual returns are being filed. However, before any transfer of shares takes place it is vitally important that the company consider the income tax ramifications of the transfer. There are two major issues to consider:

  • Losses – If the company has tax losses to carry forward to future years it is important that a shareholder continuity level of 49% is preserved from the date the losses were incurred to the date they are utilised against company profits. If a share transfer is going to breach the 49% continuity rule, special consideration should be given as to whether the losses can somehow be utilised pre-transfer, or whether the transfer should be delayed.
  • Imputation Credits – Where a company has accumulated imputation credits from historic tax payments it is important to ensure that a 66% shareholder continuity level is maintained so as to avoid the loss of those credits. The imputation credits are important because they can be attached to dividends the company may declare to shareholders so that the shareholders can utilise those credits against their personal tax bill on the receipt of those dividends. Forfeiting imputation credits due to a share transfer that breaches the 66% continuity rules can be costly to the actual ultimate owners of the business.

The important message with regards to any shareholder changes that a company is wanting to make is that care needs to be taken in the documentation process, the consultative process that may be required under the constitution or shareholders agreement, and the impact on the company from the tax perspective.

Prudentia Law is here to help you through these issues. Feel free to call us with your questions.