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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.

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 

·       No stamp duty

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.

*****

About the author:
This article was written by Wong Shen Ming, Corporate Associate – law firm in Kuala Lumpur, Malaysia.
 
The view expressed in this article is intended to provide a general guide to the subject matter and does not constitute professional legal advice. You are advised to seek proper legal advice for your specific situation.

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