Compulsory Share Transfer Provision – All you need to Know 

Introduction

There are several reasons why a shareholder might want to transfer their stock in a company. These can include a shareholder’s voluntary sale (especially if the market value of the shares has increased), retirement, or death. However, there maybe times when a shareholder is forced to sell their shares after a specific event occurs. Today in this article we will cover information related to the compulsory share transfer provision as per the Companies Act, 2013. However, before proceeding with the share transfer provision, it is necessary to have basic knowledge of share transfer.

About Share Transfer

Transfer of shares refers to the voluntary transfer of a business member’s rights and possibly their duties (as represented in a share of the company). The rights and obligations of the transfer of shares take place from a shareholder who chooses to no longer be a member of the firm to a person who seeks to join. In the absence of any specific restrictions under the company’s articles, shares in a company are therefore transferable like any other movable property.

Insights on Compulsory Share Transfer Provision

Section 56 of The Companies Act, 2013 and The Companies (Share Capital and Debentures) Rules, 2014 govern share transfer provisions. A company’s Shareholders’ Agreement or Articles of Association may impose an obligation on shareholders to sell their shares if a specific event occurs. Below is the specific events:

1. Employment termination (especially if the shareholder is a director or employee of the company)
2. Insolvency or bankruptcy of the shareholder or company
3. Death of the shareholder
4. The shareholder’s mental or physical incapacity
5. Change of control of the company
6. Retirement

Share transfer provision Upon Termination of Employment or Directorship

If any shareholder of a company decides to resign as a director or employee of the company, a mandatory share transfer at a fixed price can be mandated. In such a case, the departing director or employee must transfer the shares he or she owns to any other members of the company at a predetermined price. If the shareholders agreement was a contract between specific shareholders, he or she can operate a voluntary procedure for transferring shares when a contingency arises without any restrictions.

Competing Shareholder Transfer Provision

If a company’s shareholder competes against the company’s business or incorporates a new company to compete against the company’s interest, shares can be compulsorily transferred at a fixed price if such a clause exists in the articles of a Private Limited Company. This is only valid if it is used for the benefit and interest of the company.

Provision for share transfer in the event of a Pledge Shares

In the case of pledged shares, the lender has the right to sell or transfer the company’s shares in order to mitigate their risk and ensure repayment of the loan. As a result, the lender maybe forced to sell some of the shares in some cases to ensure that the loan does not become a bad loan or if the collateral coverage ratio falls below a certain threshold. As a result, if the promoter is unable to meet borrowing obligations, ownership of shares is automatically transferred to the lender, who may then sell it to recover loans.

Final Thoughts

Subject to the shareholder’s agreement and the articles of association, a shareholder can transfer shares held in a Private Limited Company. It is not illegal for the articles of association of a private limited company to contain provisions that restrict share transfers or force a shareholder to transfer shares held by him/her at a fixed price. If such provisions are included in the articles of incorporation, they will constitute a binding contract between the company and its shareholders.