126. Transfer of shares in private companies Flashcards
- Transfer of shares in private companies
General overview
[126.01] Sections 126–129 deal with the procedure of transferring shares from one member to another. The transfer of shares in private companies is often subject to the consent of the board of directors in a private company. In this regard, the board has to exercise its powers bona fide and for a proper purpose, but save for this, it has absolute discretion whether to approve the transfer or not. Most private companies have provided for preemption clauses in their constitution. The effect of such clauses is that existing members have the first right of refusal, and no transfer to outsiders can take place until the shares are first offered to existing members: see s 18. Section 126(1) also provides for the transmission of shares by operation of law, i.e. under a will or intestacy upon the death of a member.
[126.02] Shares in private companies may be transferred by one member to another according to the provisions in the constitution. Under s 18 of the Act, private companies shall have provisions in their constitution that restrict the transfer of shares. Under s 126(1), no transfer of shares shall be effected without a proper instrument of transfer being delivered to the company: Jamat bin Awang v Lai Wee Ngen [1995] 3 SLR(R) 496 ; applied Hawks v McArthur [1951] 1 All ER 22 for the proposition that to successfully transfer legal title in a share, the transferee’s name must be entered into the register of members maintained by the company. Both these requirements must be complied with, viz., a valid instrument of transfer within the meaning of s 126(1) of the Act and compliance with the articles, which in this case required the entry of the transferee’s name into the register of members.
[126.03] Oftentimes, the directors of the private company have discretion to refuse to register the transfer of shares. But they must exercise their power bona fide and for proper purposes; save for this qualification, they have absolute discretion: Re Smith and Fawcett Ltd [1942] Ch 304, CA ; Re Bede Steam Shipping Co Ltd [1917] 1 Ch 123, CA ; Xiamen International Bank & Ors v Sing Eng Pte Ltd [1993] 2 SLR(R) 176. It would not be for the court to examine or to inquire into the ground on which the directors had formed their opinion; in this case, the directors had exercised their power for a reason not empowered by the articles of the company and therefore this was an improper exercise by the directors of the powers vested in them. The court ordered the company to register the transfer: Lim Ow Goik & Anor v Sungei Merah Bus Co Ltd [1969] 2 MLJ 101. The articles of a company cannot give directors an unrestricted power to disapprove transfers: Canada National Fire Insurance Co v Hutchings & Ors [1918] 1 AC 451, PC. The discretionary power to refuse registration must be affirmatively exercised: Re Swaledale Cleaners Ltd [1968] 1 WLR 1710 . The right to transfer shares could be restricted by agreement even though such restriction was outside the articles such as a moratorium of the sale or disposal of the shares: Pacrim Investments Pte Ltd v Tan Mui Keow Claire & Anor [2011] 2 SLR 438. Upon expiry of a moratorium, the shares, having been approved by the Singapore Exchange for trading, shall be traded and any clause imposing a restriction thereto would be against public policy: Pacrim [2008] 2 SLR(R) 898. However, where the articles of association of a company provided that “all powers, authorities and discretions vested in the directors by the Companies Act or these articles shall be vested in the first directors alone…”, the court held that this article entitled the directors to refuse registration of a transfer of a deceased member’s shares that will cause the company to lose its private company status: HSBC (Malaysia) Trustee Bhd & Ors v Soon Cheong Pte Ltd [2007] 1 SLR(R) 65; [2006] SGHC 193, HC. One of two directors could not wilfully refuse to attend board meetings, so that there would be no quorum to prevent a board meeting to approve the transfers from being registered, and that the transferees under the circumstances were entitled to an order directing the company to register the transfers: Re Copal Varnish Co Ltd [1917] 2 Ch 349, Ch D . Where it appeared that the formal declaration of the call had been postponed in order to assist the transferor in getting the transfer registered, the registration was void, and the transferor was put on the list of contributories in respect of the shares of non est factum in the transferor of shares was rejected in Ong Bee Dee (executor of the estate of Ong Tuan Seng, deceased) v Ong Bee Chew & Ors [2017] 3 SLR 579; [2016] SGHC 270, HC.
[126.04] The delivery of a share certificate with a blank transfer to a purchaser gives him an equitable interest in the shares: Hilckes v Lee Choon Guan [1912] 1 MC 17, HC. The registered owner of certain shares in a company who executed a transfer of them to a purchaser but took no steps to procure the transfer to be registered was liable as a contributory in a winding up order of the company: Re Contract Corp, Head’s case, White’s case (1866) LR 3 Eq 84. The registered owner of shares (W) executed a transfer of shares to S, who did not register the transfer but on-sell the shares to H. S refused to execute a transfer to H, and H persuaded W to execute a fresh transfer to him. When S objected, the directors refused to accept the fresh transfer. Upon the company’s winding up, W remained as a contributory: Re London, Hamburgh, and Continental Exchange Bank, Ward and Henry’s Case (1867) LR 2 Ch App 431, CA. The person whose name is on the register remains the legal owner and holds shares on trust for the purchaser: Lim Eng Yong v Lim Chin Swee (1897) 5 SSLR 4, CA. The purchaser’s inchoate title to the shares can be perfected by registration: Colonial Bank v Hepworth (1887) 36 Ch D 36, Ch D ; Hilckes v Lee Choon Guan (above). For admissibility of “similar fact” evidence of forged transfers of shares: Berger v Raymond Sun Ltd & Ors [1984] 1 WLR 625, Ch D . Where, after the commencement of a voluntary winding up, a shareholder had, with the liquidator’s sanction, transferred shares, and the transferee, with the like sanction, had transferred them to a third person, the transferor was retained on the list of contributories, but both transferees were taken off it, the transferees are bound to indemnify the transferor: Re National Bank of Wales (No 1) [1896] 2 Ch 851, Ch D . A fraudulent transfer of shares in subsidiary companies by a majority shareholder amounts to wrongful conversion
Preemption rights
[126.05] See paras [18.05]-[18.06].
Transmission by operation of law
[126.06] A transmission by operation of law, whether under a will or the Intestate Succession Act (Cap 146), does not fall within the meaning of a “transfer” under s 126. A preemption clause does not apply to a transmission of shares under the Intestate Succession Act (Cap 146) to a non-member: Guan Soon Development Pte Ltd v Yeo Gek Lang Susie (administratrix of the estate of Teo Lay Swee, deceased) & Ors [2006] 3 SLR(R) 387; [2006] SGCA 18, CA. The applicants, as executors under the will of a deceased member, were entitled to have their names entered on the company’s register, without any statement that they held the shares in a representative capacity, and to have them inserted in such order as they chose: Re TH Saunders & Co Ltd [1908] 1 Ch 415, Ch D : Scott v Frank F Scott (London) Ltd & Ors [1940] 1 Ch 794, CA. Where a shareholder in a company dies and the transmission clause in its articles of association is in the form of clause 39, the personal representative is entitled to be registered in respect of and to have a certificate of the shares. The company had no right to enter in the register of members or in the certificate any statement as to the company’s claim under its articles to a lien on the shares for the liability of the deceased to the company: Re L Y Swee & Co Ltd, Khoo Leong Kee v L Y Swee & Co Ltd [1968] 2 MLJ 104. An article which prohibited the transfer of shares to persons other than the male descendants of the deceased but did not prevent transmission of the shares to the plaintiff’s deceased brother’s male descendants: Lee Eng Eow v Low Ah Lian & Anor [1992] 1 MLJ 678, HC. The executor under the will of a member of a company, who was himself a member, was not able to transfer the shares to the legatees and his safer course would be to give notice to the company that he desired to transfer the shares and then make the company (under that article) “his agent for the sale of the shares to any member or to any person selected by the directors… at the fair value”: Victorine Roberts v Letter “T” Estates Ltd [1961] 3 WLR 176, PC . The registration of a co-executrix as the personal representative entitled to the shares, contrary to the express provision in the will of the deceased member that his estate be granted jointly to the two executrixes at the time when the grant of probate had not been extracted meant that, at the time of registration, there was no document which was by law sufficient evidence of probate of the will to effect transmission of the shares. However, the circumstances were inconsequential, thus attracting the de minimis rule, and furthermore, the provisions of s 103(3) of the Companies Act 1965 (Malaysia) constituted a directory requirement. No fraud of any kind was perpetrated in the registration of the transmission and hence, the objection to the registration would therefore appear to be highly legalistic, trifling and inconsequential as far as the interests of the estate of the deceased were concerned: Gan Tuck Meng & Ors v Ngan Yin Groundnut Factory Sdn Bhd & Anor [1990] 1 MLJ 227, HC. Where a shareholder of a company becomes bankrupt and the transmission clause in the company’s articles of association is in the form of clause 13 of Table A in the First Schedule to the Companies Act 1862 (UK), the trustee is entitled to be registered in respect of and to have a certificate of the shares, and the company has no right to enter in the register of members or in his certificate any statement as to the company’s claim under its articles to a lien on the shares for the liabilities of the bankrupt to the company
“Law of universal succession”
[126.07] A transmission of shares by operation of the “law of universal succession” has been upheld by the courts as an effective devolution of title to shares under a series of corporate restructuring and an “absorption-type” split, such that the original member has ceased to exist. Hence, no instrument of transfer was necessary to prove beneficial ownership of the shares
Competing interests
[126.08] A purchaser who does not register his transfer runs the risk of an earlier equitable title prevailing over his, for the first in time to register generally has priority: Moore v North Western Bank [1891] 2 Ch 599, HC ; Peat v Clayton [1906] 1 Ch 659, Ch D . But the second in point of time could have priority if he acquires the legal title without having had notice of the prior equitable title: Shropshire Union Rlys & Canal Co v R (1875) LR 7 HL 496 ; Josephine Cottrell v (1) Graham King (2) TA King (Services Ltd) [2004] BCC 307 (no priority despite registration as holder of the shares); EG Tan & Co (Pte) v Lim & Tan (Pte) [1987] 2 MLJ 149, HC (no priority if he is not registered as holder of the shares). No legal title to shares can pass until the share transfer forms have been lodged with the company
Winding up
[126.09] A transferee taking shares under a transfer made after the commencement of a voluntary liquidation (even with the sanction of the liquidator) is not liable as a contributory although he may be under liability as a member of the company, but he is bound to indemnify the transferor
Electronic register
[126.10] Section 126(3) provides that no transfer of shares shall be effected until the electronic register of members is updated by the registrar under s 196A(5). In other words, the legal title to the shares is perfected only upon the registrar’s act of updating the register with the transferee’s name. Previously, the legal title is perfected when the company enters the name of the transferee as the new owner. Now it takes a further step for the registrar to update the electronic register for the legal title to pass to the new owner. As the registration of the new owner is done electronically, the transmission of data is instantaneous and there should not be any time lapse between the act of the company in entering the transferee’s name on the register and the registrar updating the electronic register accordingly.
