When can a company’s directors refuse to register a transfer of shares?

Lush Cosmetics has refused to register a transfer of a 19.8% stake in the company to Silverwood PLC (Silverwood), serving as a reminder of the need to ensure that share transfers are in accordance with the company’s articles of association.

Background

In December 2022, Silverwood acquired around a 19.8% stake Lush Cosmetics Ltd and Lush Cosmetic Warriors (together Lush) from Lush co-founder Andrew Gerrie and his wife, Alison Hawksley.

The total consideration for the acquisition was in the region of £216 million to be satisfied by the issue and allotment of shares in Silverwood to Mr Gerrie and Ms Hawksley.

In February, Lush refused to register the transfer of shares on the grounds that the transfer was not in accordance with Lush’s articles of association.

Restrictions on transfers of shares

Shareholders will often look to control the admission of new shareholders to the company. Therefore, it is common for the company to impose restrictions on the shareholders’ ability to transfer their shares.

Typically, restrictions such as these are found in the company’s articles of association and the shareholders’ agreement (if one exists).

Section 544(1) of the Companies Act 2006 states that a company’s shares are transferable in accordance with the company’s articles of association. In addition, Section 33 of the Companies Act 2006 states that a company’s articles of association bind the company and its shareholders as if they were a contract between them. Any restrictions in the articles will be enforceable against a shareholder looking to transfer their shares.

Typical restrictions include prohibitions on transfer (during a specified period or to a particular type of buyer), a power for the directors to refuse registration of a transfer of shares and pre-emption rights.

A power for the directors to refuse registration is common. This can be a general power (such as Article 26(5) of the Model Articles) or a limited power, which can only be exercised in certain circumstances.

Legal ownership of shares will not transfer until, among other things, the company’s board of directors approves the registration of the stock transfer form. So, refusal to register can be a fundamental issue for the buyer of shares.

If the board of directors does refuse to register the transfer, the buyer is entitled to request reasons for the refusal, and the company must provide such reasons (Section 771 of the Companies Act 2006).  Copies of meeting minutes are not required to be submitted.

However, unless the articles of association contain an express right to refuse the transfer of shares, if the company is presented with a duly completed and stamped stock transfer form and the transfer is in accordance with the company’s articles of association, the directors will not have a right to refuse the transfer.

Transfer of beneficial interest

A refusal by the company to register the transfer will not prevent a shareholder from transferring the beneficial interest in the shares (as this interest is not registered). The effect of this is that the seller holds the shares in trust for the buyer, pending registration.

Until registration of the transfer, only the seller will be recognised by the company as being entitled to exercise the rights attached to shares (for example, the right to vote and the right to a dividend).

Therefore, it is common in share sale transactions for the buyer to require the seller to enter into a power of attorney on completion. Under this power of attorney, the buyer can exercise the rights attached to the shares pending registration of the transfer and subsequent transfer of legal title.

Conclusion

Lush has now provided Silverwood with the reasons for refusal to register the transfer. Silverwood has rejected these reasons, and it remains to be seen whether the refusal was justified.

Silverwood has issued a statement to its shareholders confirming that, “pending the transfers being recorded, it continues to hold contractual rights of control through an agreement with Andrew Gerrie and Alison Hawksley in respect of the Lush shares”, indicating that there is some protection in place for Silverwood whilst this dispute unfolds.

The Birketts view

This story serves as a reminder that share transfers should be made in accordance with the company’s articles of association. In addition, you should be aware of the potential right of the directors to refuse the registration of the transfer of shares and the practical consequences of this.

Buyers must be suitably protected in the event of a refusal or a delay in registration of the transfer by the company.

The Corporate Team at Birketts has extensive experience advising on share transfers, including restrictions in a company’s articles of association. For further information or to discuss the issues raised in this article, please contact a member of the Team.