IF you intend to acquire the whole or a part of a company by becoming a shareholder, you can do so by purchasing shares from an existing shareholder or subscribing for shares in the company. Deciding between purchasing shares or subscribing for shares is a critical choice for any investor. Each option carries distinct legal and financial implications, some of which are highlighted below:

Purchasing shares

Purchasing shares requires you to obtain shares from an existing shareholder. Your purchase would result in the number of shares held by that shareholder being reduced, consideration for the shares being paid to the shareholder (not the company), and transfer tax being paid by the purchaser for the shares to be legally transferred. An existing shareholder can sell its shares to a person for whatever consideration it wishes to accept, however the transfer tax is generally assessed on the market value of shares unless the stated consideration is higher. For a more detailed breakdown on the requirements to transfer shares see my prior publication ‘The Transfer of Shares: Did I do it Right?’ which can be found at https://myersfletcher.com/the-transfer-of-shares-did-i-do-it-right/.

The transaction documents in relation to a purchase/sale of shares would be between an existing shareholder and the purchaser of those shares; the company is generally not a party. An important aspect of purchasing shares is having the seller of the shares confirm that (i) there are no restrictions on the transfer of shares (which is something a due diligence exercise would confirm by a review of the Articles of Incorporation of the company); (ii) there are no charges, liens or encumbrances registered over the shares which would restrict the transfer; (iii) the shares are fully paid up (therefore the company has no lien on the shares); and (iv) they are the legal and beneficial owners of the shares and can produce the share certificate (title evidencing ownership). You can also seek to have the shareholder give warranties in relation to the company, but this is subject to negotiations.

Subscribing for shares

Subscribing for shares results in the company, by an action of the directors, issuing and allotting new shares. While this does not result in the number of shares of existing shareholders being reduced, their percentage shareholding would be diluted. Consideration for the shares would be paid to the company and therefore injected as capital. No transfer tax is payable on the issue/allotment of new shares. For a company to be able to issue/allot new shares it must have the share capital to do so, ie it must not have issued all the shares which form part of its maximum authorised share capital (this is set out in its Articles of Incorporation and, again, something that would be uncovered during a due diligence exercise). If the company does not have adequate unissued shares for the investor to subscribe, the company would need to increase its maximum authorised share capital. While directors generally have the power to allot new shares, the increase of the maximum authorised share capital requires a resolution of the shareholders.

The Companies Act states that shares may be paid for in money, or in property, or past service rendered, for value that is the fair equivalent of the money that the company would have received if the share had been issued for money. Where shares are to be allotted for consideration that is not money, the directors shall not allot the shares unless they pass a resolution that the allotment be made and state the nature of the consideration, its value, and the extent to which the shares to be issued, in respect of it, will be credited as paid up.

In a subscription, it is appropriate for a company, if requested, to give warranties and representations regarding its ability to issue/allot the shares and the business/operations of the company. For example, (i) the shares will be free and clear of all liens, pledges and encumbrances; (ii) the company has not suspended or ceased or threatened to suspend or cease to carry on the business or a material part of it; and (iii) the company has good marketable and unencumbered titles to all its property and assets. The greater the shareholding, the more warranties it is customary to request/give.

Post-acquisition matters

Whether you purchase shares or subscribe for shares, the following should be done after:

i. The company should issue a new share certificate, under the common seal of the company, specifying the shares held, which is evidence of the title to the shares. After the transfer of shares and the company is provided with evidence of the stamped instrument of transfer, within three months after the date on which the transfer is lodged with the company, the company shall issue a share certificate unless an earlier date is agreed. After the subscription of shares and consideration paid, within two months of the allotment the company shall issue a share certificate unless an earlier date is agreed.

ii. The new shareholder should provide information on both the legal and beneficial owner(s) to the company so that the company can update the register of shareholders and beneficial owners.

iii. The company should file certain documents with the Companies Office of Jamaica to update the records to reflect the change in shareholders and beneficial owners.

In determining what avenue is best to acquire shares, if the consideration for the shares is to capitalise the company, then it is crucial that subscription is the avenue you would choose. If it is a thriving business without a succession plan, shareholders may be looking to exit and as such, a purchase of shares from them would be the better avenue. An acquisition may also be done by combining both a share purchase and a share subscription. Either way, the tips in this article would be useful.

Shaniel May Brown is an associate at Myers, Fletcher & Gordon, and is a member of the firm’s commercial department. Shaniel may be contacted via shaniel.maybrown@mfg.com.jm or www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.