TRANSFER OF SHARES

TRANSFER OF SHARES

Transfer of shares means shares are passed from one person to another. This must be distinguished from issue of shares, where the company issues the shares to an individual.

Shares can be transferred: s 98, CA 1965. However, with regard to a private company, s 15(1) of CA 1965 places a restriction on the right to transfer shares. Nevertheless, the right to transfer shares cannot be prohibited.

The restrictions to the transfer of shares must be expressly stated in the A/A – GREENHALGH v MALLARD [1943] 2 All ER 234. Therefore, a member is bound by the restrictions provided in s 33(1) of CA 1965 which stated that a member is bound by the company’s M/A and A/A.

When the BOD refuses to register a transfer of shares, the reasons for refusing the transfer must comply with the restrictions as provided in the A/A.

Examples of restrictions include:

—  The A/A gives absolute discretionary power to the BOD. Even in such a situation the power should be exercised in the interests of the company – KESAR SINGH v SEPANG OMNIBUS CO LTD [1964] MLJ 122. If the directors were to give their reasons for their refusal, the court will evaluate whether they were sufficient – LIM OW GOIK v SUNGEI MERAH BUS CO LTD [1969] 2 MLJ 101.

—  The A/A contains a pre-emption clause. A pre-emption clause means the existing shareholders have a right to be offered the shares before a shareholder offers his shares to an outsider. If the shareholder offers to an outsider first, he is in breach of the pre-emption clause and therefore the BOD has a right to refuse to register the transfer of shares.

If refusal to register a transfer of shares amounts to oppression, the affected shareholder can bring an action under s 181 of CA 1965.

Forged transfer means the transfer is unauthorised. It is a nullity. It is not valid. Therefore ownership of the shares will not pass. Usually the situation is as follows:

—  A is the original owner. B forges a transfer without anyone’s knowledge, i.e. A or the company. B is then issued a share certificate in his name which shows he is owner of the shares. B then transfers the shares to C who has no knowledge that it is a forged transfer. The company then issues a share certificate to C who is now the owner of the shares. A now realises the position. The Register of Members has C’s name as the member.

—  It should be noted that the ownership of the shares will not pass to the transferee, i.e. B or C. This is so even if the transferee has provided value for the shares and acted in good faith, i.e. he has no knowledge that it is a forged transfer. Therefore the ownership of the true owner is protected, i.e. A.

—  However, A must make an application to the company to restore his name to the Register of Members. This is because at present, the transferee’s name, i.e. C is in the register. In such a case, the transferee (i.e. C) is no longer a member of the company because the register has been rectified. His ownership is affected. What should C do then? C has no knowledge that it is a forged transfer.

—  The transferee (i.e. B) was registered under a forged transfer. Therefore, the share certificate issued to him is not valid. In fact he is liable to compensate the company for any loss suffered. The subsequent transferee (i.e. C) did not make the forged transfer. He does not get back his shares since the true owner’s name has been restored. Furthermore, he cannot obtain ownership from a person who has no ownership himself. This is based on the rule of ‘nemo dat quod non habet’.

—  However, he has two options – he can bring an action against B who committed the forgery; or he can bring an action against the company for compensation.

—  In such a case, the company may refuse to pay compensation to the subsequent transferee on the ground that it is not responsible for the forgery. In other words the company is denying C’s rights. In such a case the subsequent transferee (i.e. C) is advised to rely on the doctrine of estoppel. The purpose of the doctrine is to stop the company from denying the rights of the subsequent transferee. In order for the doctrine to apply, the following must be satisfied:

—  a representation is made by the company that the transferor has rights on the shares

—  the representation is made to the transferee, and

—  the transferee must have relied upon the representation before buying the shares.

—  If the doctrine applies, the company will have to compensate the loss suffered by the subsequent transferee – RE BAHIA & SAN FRANCISCO RLY CO (1868) LR 3 QB 584.

TRANSMISSION OF SHARES

Transmission of shares means the shares passes to another involuntarily. This could happen as a result of death, mental or physical incapacity or bankruptcy of a shareholder.

Note that this will not affect the company due to the concept of separate legal entity. This is to be contrasted with a partnership firm.