logo

Purchase and sale of shares between shareholders: individual transactions or in the context of a capital increase

LetsLaw / Commercial Law  / Purchase and sale of shares between shareholders: individual transactions or in the context of a capital increase
Compraventa de participaciones entre socios

Purchase and sale of shares between shareholders: individual transactions or in the context of a capital increase

Shares in a company represent fractions of the share capital of a limited liability company. Unlike shares in public companies, they are not easily transferable. The acquisition of shares is subject to their nature and to agreements between the shareholders. As we will see below, the sale of shares is often the only option for transferring them and obtaining liquidity, unless, of course, they generate dividends.

As mentioned, shares represent a fraction of the company’s share capital and, therefore, their transfer requires a buyer willing to acquire them. Although secondary markets (a kind of “share marketplace”) are emerging, the reality is that, given the entry requirements, the transfer of shares remains a legal transaction between the shareholder and the potential buyer, whether an individual or a legal entity. Both parties must agree on the price and the number of shares to be transferred. 

It is important to note that, in order for the transaction to have legal effect against third parties, the sale of shares must be notarized. Additionally, the transfer must be registered in the company’s shareholder ledger. Shareholders are responsible for keeping their information up to date in the ledger, as failure to communicate a change of address means that notices, such as meeting invitations, will be sent to the registered address.

We mentioned that the sale of shares is a transaction between the shareholder and the buyer, but this is not entirely accurate, especially in limited liability companies, where the company and the other shareholders also have a say in the matter.

In all companies, under Article 107 of the Spanish Companies Act, supplemented by corporate documents, there is a pre-emptive right for shareholders (and sometimes, secondarily, the company) to acquire shares that are subject to transfer between living persons, except in cases where the transfer is considered free. A typical example of free transfer is between shareholders of the same company, although other scenarios can also be defined. Outside of these free transfer scenarios, a regulated procedure must be followed, where the shareholders (and sometimes the company) have the right to acquire the shares under the same conditions as those offered to the third-party buyer.

As we can see, the transfer of shares, especially to a third party, is not a straightforward process. This is where secondary market transactions come into play, which are legal transactions that transfer ownership of the shares.

As mentioned in the title of this article, the sale of shares can take place individually, typically between shareholders or related companies, through prior agreements or within the framework of an investment or financing process. These transactions are becoming more common due to the triple benefit they generate: the seller can transfer their shares and obtain a profit (usually minority shareholders who entered early on at a low valuation, allowing them to achieve a decent multiple even if the sale is made at a valuation lower than the current round); the buyer can acquire shares at a lower value than a capital increase and suffer less dilution; and the company can “clean up” its cap table by reducing the number of minority shareholders.

To execute a proper sale agreement, which, as mentioned, must be notarized, it is crucial to identify the parties involved, as well as the company, its legal representative, the shares subject to the transaction (i.e., their specific numbering), and the ownership of the shares being transferred. Furthermore, it will be necessary to prove to the notary that the seller is the legitimate owner of the shares, and finally, to provide a certificate from the shareholders’ meeting confirming that the transfer is free and that neither the company nor the shareholders have exercised their pre-emptive right to purchase, as mentioned earlier.

Contact Us

    By clicking on "Send" you accept our Privacy Policy - + Info

    I agree to receive outlined commercial communications from LETSLAW, S.L. in accordance with the provisions of our Privacy Policy - + Info