As many people would appreciate, shares in a company is a type of property and can be transferred just like land and other types of property. Whether you are buying or selling shares in a company, it is important that you follow all the legal requirements to properly transfer or obtain shares. Failing to do this could result in the legal right to the ownership of shares not being transferred.
The terms of the sale agreement should be placed in writing and if you are a purchaser of shares, proper due diligence of the seller and the company whose shares are being bought should be undertaken. The terms of the agreement are generally laid out in a Share Sale/Purchase Agreement, although this is not mandatory. Once the terms of the sale/purchase are finalised, the parties, that is the transferor and the transferee, will both be required to also execute an Instrument of Transfer or Share Transfer Form, which is mandatory. The Instrument of Transfer or Share Transfer Form should include the name, address and Tax Registration Number of both parties, the number of shares being transferred, the company where the shares are registered and the consideration for the shares, in monetary value. Once the Instrument of Transfer or Share Transfer Form has been executed, it should then be submitted to Tax Administration Jamaica (“TAJ”) to be assessed for stamp duty and transfer tax.
The transfer of shares attracts transfer tax at the rate of 2% on the stated consideration. The TAJ may seek to disregard the stated consideration and to assess the market value of the shares. The market value will be derived from the net asset value based on the audited financial statements of the company. The TAJ requires that Instruments of Transfer be submitted along with the audited financials of the company, unless the company is exempted from having audited financials due to it being a small company within the meaning of the Companies Act. In this scenario, the TAJ may request other documents such as certified copies of the company’s constituent documents, unaudited financials or a letter from the company’s auditor/accountant.
Transfer tax is by law borne by the transferor.
Stamp duty is also payable at the rate of (a) J$100 per document relating to transactions valued below J$500,000.00 and (b) J$5,000.00 per document relating to transactions valued J$500,000 or more. Stamp duty is customarily shared equally by the transferor and the transferee.
Once the transfer tax and stamp duty have been assessed this is usually due to be paid within 2 weeks of the date of the assessment in order not to incur any penalties. Once the assessed duties have been paid the TAJ will provide the stamped Instrument of Transfer along with a Transfer Tax Certificate.
The transferee or purchaser of the shares would then provide a copy of the stamped Instrument of Transfer to the secretary of the company along with the share certificate from the transferor. The secretary would then (1) cancel the share certificate of the transferor, (2) register the transferee as the new owner of the shares in the company’s register of members and (3) issue a new share certificate with the details of the transferee as the new owner. Under the Companies Act it is unlawful for a company to register a transfer of shares in the company unless a proper Instrument of Transfer has been delivered to the company. This means a transfer duly stamped. If a company contravenes this provision the company and every officer of the company who knowingly authorizes or permits the contravention is liable to a fine. The Articles of most companies also indicate that the transferor is deemed to remain a holder of the share(s) until the name of the transferee is entered in the register of members.
Bear in mind that shares which trade on the Jamaica Stock Exchange are exempt from transfer tax and stamp duty, so long as they are traded in the course of business on the exchange and would likewise not require an Instrument of Transfer being submitted to TAJ along with the audited financials of the company.
For private companies, the transfer of shares are subject to the restrictions set out in its Articles of Incorporation which may include requiring the seller of the shares to first offer them to existing shareholders before being able to sell them to a third party.
Whether you are a vendor, purchaser or officer of the company, you should ensure all the required steps are followed to properly pass ownership in shares subject of a sale.
Shaniel May is an associate at Myers, Fletcher & Gordon, and is a member of the firm’s Commercial Department. Shaniel may be contacted via email@example.com or www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.