As shareholder dispute lawyers, unfortunately we see instances all too often where minority shareholders are told by company directors or their co-shareholders that their shareholding has been taken off them. In some situations, bad actors go so far as to fraudulently amend Companies House records including stock transfer forms.

Many shareholders don’t realise that there are legal requirements which must be followed for a share transfer to be effective. In this blog, I review the requirements for formalising and transferring shareholdings, and examine some of the legal remedies available to individuals who have been a victim of a purported transfer of their shareholding without their agreement.

Formalities

There are certain requirements that need to be completed in order for a shareholding to be formalised. As a starting point, Company Law is regulated by the Companies Act 2006 (CA 2006). The CA 2006 states that shares should be transferred in accordance with the company’s articles of association. The articles are an essential constitutional document that sets out the company’s rules regarding the company’s operations. The articles set out how shares are to be issued or transferred and will usually state that shares may be transferred by means of an instrument of transfer in any usual form.

What is an instrument of transfer?

The instrument is set out in Schedule 1 of the Stock Transfer Act 1963 and is known as a stock transfer form. There are formalities that need to be completed in order for the stock transfer to be valid. If these steps have not been taken, the purported share transfer will not be effective.

The stock transfer form will need to be executed (signed) by the transferor of the shares and then ‘stamped’ by HMRC, before it can be submitted to the company. The directors must then enter the name of the new shareholder (member) in the register of members which is filed at Companies House or refuse registration by providing a notice of refusal to the company.

Inaccurate filings at Companies House

Directors of a company have a legal duty to ensure that their company’s filings are accurate and up to date. It is an offence for any person to knowingly or recklessly either deliver, or cause to be delivered, a document or statement that is misleading, false or deceptive in a material way.

Unfair Prejudice Petition

A shareholder who has been unfairly prejudiced due to the conduct (or omission) of the company, such as in the manner outlined above, may petition the court for relief under section 994 of the CA 2006. A petition can be made by a minority or majority shareholder and common examples of unfairly prejudicial conduct include where other shareholders in the company are awarding themselves excessive financial benefits or some other form of financial harm has been caused to the shareholder.

Once a court is satisfied that such a petition is well founded, it may make an order to give relief in respect of the matters complained of. The court has a broad discretion to make such an order as it thinks fit in respect of any unfair prejudice which has been established. Common remedies include ordering the company to purchase the petitioner’s shares at a fair market value, but it can also regulate the conduct of the company’s future affairs, compel the company to carry out, or refrain from carrying out, any act, and can even bind directors and third-party respondents where it is just to grant a remedy against them personally.