The method of buying and selling shares in a company will depend on a number of factors. In particular it depends on whether the company is a publicly listed company.
If the company is publicly listed, its shares will be listed on the stock exchange and different rules apply to the sale and purchase of the shares. If the company is a private company, the rules about buying and selling shares are set out in the company's constitution and in the COMPANIES ACT 1993.
It is quite usual for a company's constitution to contain "pre-emption" rights for existing shareholders, requiring existing shares to first be offered to the existing shareholders before they can be offered to non-shareholders. The purpose is to maintain the ranking of existing shareholders so that their voting and distribution rights are not diminished.
The COMPANIES ACT 1993 also provides for existing shareholders to have pre-emptive rights over the issuing of new shares by the company. The Act states that any new shares must first be offered to existing shareholders on a proportional basis so that the shareholders' existing voting and distribution rights are maintained. The offer to the existing shareholders must remain open for a reasonable time.
However, it is open for the company's constitution to negate, limit or modify this statutory pre-emptive right over new shares.
A company is permitted to buy its own shares if certain requirements are met. Aside from some special situations (such as where dissenting shareholders exercise "minority buy-out" rights), the COMPANIES ACT 1993 gives company boards a general power to make offers to existing shareholders to buy their shares, provided the following requirements are met.
The board of directors cannot make an offer to buy shares unless this is permitted by the company's constitution. If so, the board may make an offer to all shareholders to buy a proportion of their shares, in such a way that the acquisition would maintain each shareholder's relative voting and distribution rights. Alternatively, the board may make a special offer to one or more shareholders to acquire their shares, provided all shareholders have consented to this or the offer is permitted under the constitution.
The board may not offer to buy shares unless it has passed a resolution stating:
When a valid transfer of shares has taken place, the company is obliged to register the transfer in its share register. The entry of the buyer's name is evidence of that person's legal title. For information on the share register, see related article How to maintain a company share register.
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