What every entrepreneur should know about shares and share transfer
The business of buying and selling of shares is a potentially profitable one. While there is an element of uncertainty involved, acquisition of company shares is an endeavor that has provided long-term financial security to vast numbers of people. In the early 1970s, foreign owned companies were directed by the Nigerian Government to make their stocks available for local purchase. This created massive opportunities for investment and profitability, which gains are still enjoyed by some of Nigeria’s wealthiest.
Shares are units of ownership that represents an equal proportion of a company’s capital. Ownership of company shares entitles a shareholder to a proportion of the profits, also known as dividend. Ownership of a company’s shares also makes the shareholder liable for any unpaid shares held by the owner. In other words, if a company does not make a profit, the shareholder is not entitled to any dividends. Also, the receipt of dividends and indeed the recovery of the value of shares bought depend on the functionality of the company. In the event of bankruptcy, the shareholders are not automatically entitled to get their money back. The Shareholders usual rank behind secured and unsecured claims.
Shares of publicly traded companies are bought and sold on the stock market in specialized markets like the Nigerian Stock Exchange here in Nigeria or the New York Stock Exchange in the United States. It takes a degree of training and skill to determine potentially profitable stocks, which will yield the desired growth and pay attractive dividend. The viability of a stock for an investor is usually dependent on the ability of the stock to appreciate over time. His extraordinary ability to correctly choose the right stocks to invest in has enabled Warren Buffet, known as the Sage of Omaha, to build a fortune that has made him one of the richest men in the world for most of the last 20 years.
Shares can be transferred to dependants, family and business associates for various reasons. This is a very important aspect of setting up and managing a business, especially when you have succession planning and inheritance options in mind
Share transfer in a private company can become onerous when the relationship amongst the shareholders is strained. Shareholders will simply exercise their preemptive right hereby preventing the shareholder offering the share for sale from selling to the desired buyer. A recent discussion with a colleague who is in the process of getting a divorce also highlighted certain actions entrepreneurs ignorantly take at the point of incorporating their businesses that sometimes lead to a legal battle and the further disintegration of family ties especially where both spouses who are co-owners of the business are engaged in divorce proceedings. Giving a family member or close friend you trust shares in your company at the point of incorporation usually should not be a problem.
Most entrepreneurs incorporate their businesses and make family members or close associates shareholders in the business, allotting shares to them to fulfill regulatory requirement of a minimum of two shareholders or simply on trust as custodians of those shares until it can be transferred back in favor of their children. This tends to occur when the entrepreneur is yet married or was not yet a parent at the time of incorporation. To get more insight into this subject matter, I visited the office of the Nigerian Bar Association’s 2nd Vice President – Taiwo O. Taiwo Esq. He shared his vast legal knowledge on Shares transfer below.
Muna Onuzo