The practicalities of dealing in shares

Shares (often referred to as ‘equities’ in investment circles) are one of the most common forms of investments the world over. Investments in shares cover a wide range of asset classes that are normally considered separate, for example they include:

· Investments in international public companies, such as the impending Facebook floatation;

· Private equity investments that will often acquire shares in mid-large private companies; and

· Angel investments in start-up companies.

If you set up your own company, your interest will also be held through share so they are incredibly common. Yet many people have no idea how the underlying shares work and how you transfer them.

Although the rules vary throughout the world and depending on the type of company, the following is a very broad overview of the common rules.

Listed companies

Publicly listed companies will almost always be required to have their shares traded through an electronic and paperless system, such as CREST in the UK. You will need to have an account with the service provider in order to sell or buy shares through the system and this is where a broker often comes in, but everything is handled electronically. As a general rule, anybody should be able to hold shares in a publicly traded company.

The records of who owns the shares will be maintained by the registrar of the company on behalf of the directors and the company secretary (called the corporate secretary in the US) of the company. This record will then form the basis of any dividend payments due to the shares and voting and attendance rights at shareholder meetings.

Private Companies

Private company shares work very differently to shares in public companies. As their name suggests, their shares are not open to anybody and you generally have no right to acquire them. Private companies will normally only have a few shareholders (although there are exceptions) and there are often restrictions on buying and selling the shares contained within the company’s constitutional documents.

The shares are generally transferred by written agreement. In the UK, a stock transfer form is used to actually pass title to the shares although you would often have a share purchase agreement to go along with this. The stock transfer form would then be passed to the company secretary to update the company’s records.

Because of the restrictions around private companies, it is generally considered to be a riskier type of investment and a harder investment to exit. This is part of the reason that most people will invest indirectly through private equity or some other fund and the fund itself will invest in the private shares.

This article has been provided by Elemental CoSec for informational purposes and should not be relied upon as legal advice. We recommend that you always obtain local and specific legal advice.

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