The ownership of a private limited company is determined by the shareholding of the Company. To induct new investors or transfer ownership of the Company, the share of the private limited company would have to be transferred.

Share Transfer Restrictions in AOA

A private limited company is considered to be a “closed corporation” of members, similar to a Partnership Firm. Therefore, the share transfer in a Private Limited Company can be restricted by the Articles of Association (AOA). Hence, the Articles of Association of the Company must be reviewed prior to beginning the share transfer procedure.

Restrictions on right of the shareholders to transfer shares are usually in two forms:

• Rights of pre-emption: If a shareholder wishes to sell some or all of his shares, such shares must first be offered to other existing members of the private limited company at a price determined by the Directors or the Auditor of the Company. The value of the shares can be determined based on the formula / method prescribed in the Articles of Association. In no existing shareholder is interested, then shares of the Company can be freely transferred to an outsider.
• Powers of Directors to refuse: The Director may have the powers to refuse registration of transfer of shares under certain circumstances – prescribed in the Articles of Association.

Only restriction contained the Articles of Association are considered legally binding. Any private agreement between the shareholders are not binding either on the company or on the shareholders. Further, share transfer can only be restricted by the Articles of Association. The right to transfer shares of a private limited company cannot be an total prohibition or ban on share transferability.