Introduction
Shares in a company are transferable like any other movable property, subject to any express restrictions under the Articles of Association ("AoA") of the company.
In India, share transfer is governed by the general principles of the Indian Contract Act, 1872 and the Companies Act, 2013. Where parties would like to include special terms according to their needs, beyond what is mentioned in the Companies Act, 2013, a Share Transfer Agreement ("STA")/Share Purchase Agreement ("SPA") can be executed between them.
It is a legal document that regulates the purchase of company shares between the sellers, i.e. the shareholders, and the buyer(s), i.e. the incoming members. It can therefore be termed a legal conveyance document, wherein the terms and conditions of the sale and purchase of shares in a company are understood and mutually agreed upon by all parties.
Importance of an STA
- An STA identifies the legal buyer of shares of a company;
- It specifies the kind of shares purchased, the share price, and the number of shares purchased;
- It binds the parties to the contractual terms negotiated and accepted between them, for example the conditions to closing, i.e. the pre-requisites each party has to fulfil for the transfer to commence and be completed;
- It acts as evidence that determines a shareholder's ownership of a specific number of shares in a company;
- It specifies the limit of ownership and control of the buyer in the company; and
- It also mentions the rights and liabilities of incoming members towards the other parties.
Conclusion
An STA lays down the terms and conditions for the sale and purchase of shares of a company. Therefore, it expressly acknowledges and informs the parties of the commercial terms, while binding them to the various conditions negotiated between them.
Prior to drafting an STA, the parties should also undertake certain due diligence before drawing up the purchase price and negotiating the key terms of the STA. The parties therefore need to clearly identify such actions and safeguard themselves by executing a carefully drafted, tailor-made Share Transfer Agreement.
Disclaimer: The content of this article is intended to provide general guidance on the subject matter. Specialist advice should be sought about your specific circumstances.