Transferring and issuing company shares in Kenya

Who this guide is for

This guide is for company directors, shareholders, investors and founders moving shares in a Kenyan company. If you are setting the rules between owners, read our guide to shareholders agreements. For the yearly filings and registers, see our guide to annual returns, and for the ultimate-ownership duty, our guide to beneficial ownership.

Transfer or issue: two different things

The first distinction to get right is between a transfer and an issue. A transfer moves shares that already exist from a current shareholder to someone else, so ownership changes hands but the total number of shares does not. By contrast, an issue, or allotment, creates new shares and gives them to a person, which increases the total number of shares and dilutes the existing holders unless they take up their share. In practice, bringing in an investor can be done either way, and the choice has different consequences for the existing shareholders, so it should be a deliberate decision.

How to transfer shares

A share transfer follows a settled sequence under the Companies Act, 2015, and skipping a step causes problems later.

• Check the articles and any shareholders agreement. Many companies have pre-emption rights, which require the seller to offer the shares to existing shareholders first, and the directors may have power to refuse a transfer.
• Sign the instrument of transfer. The seller and buyer execute a share transfer form.
• Pay stamp duty. A transfer of shares attracts stamp duty at one per cent of the consideration or the market value, whichever is higher, and the instrument must be stamped.
• Obtain board approval. The directors approve the transfer and its registration.
• Update the register and file. The company enters the buyer in its register of members, files the change with the Business Registration Service, and issues a new share certificate.

Once the buyer is in the register, they are the legal owner of the shares.

How to issue new shares

Issuing shares is how a company raises capital or brings in a new investor with fresh money. First, the directors must have authority to allot the shares, whether from the articles or a shareholders’ resolution. In addition, existing shareholders usually have pre-emption rights on a new issue, so the new shares must first be offered to them unless those rights are waived or disapplied. The company then passes the necessary resolutions, allots the shares, updates the register of members, issues certificates, and files a return of the allotment with the Registrar. Because an issue dilutes the existing holders, the mechanics and the consents matter.

Tax and beneficial ownership

Two consequences are easy to miss. First, tax: a seller of shares may be liable to capital gains tax on the gain, so the tax position should be worked out before the deal, not after. Second, beneficial ownership: where a transfer or issue changes who ultimately owns or controls the company, the company must update its beneficial-ownership information with the Registrar within the statutory window, as we explain in our guide to beneficial ownership in Kenya. These are the steps companies most often forget.

Common questions

What is the difference between transferring and issuing shares? A transfer moves existing shares; an issue creates new ones and increases the total.

How much is stamp duty on a share transfer? One per cent of the price paid or the market value of the shares, whichever is higher.

Do I have to offer the shares to other shareholders first? Often yes. Pre-emption rights in the articles or a shareholders agreement usually require it.

What do I file after a transfer? The company updates its register of members and files the change with the Business Registration Service, then issues a new certificate.

Does a share deal have tax consequences? A seller may owe capital gains tax, and a change of control can trigger a beneficial-ownership update.

Common pitfalls

The recurring mistakes are ignoring pre-emption rights and offering shares to an outsider before the existing shareholders; failing to stamp the transfer, which leaves it defective; and not updating the register of members, so the company records are wrong. Others forget the beneficial-ownership update on a change of control, or overlook the seller’s capital gains tax until it is due. On an issue, the classic error is allotting shares without the directors’ authority or without dealing with pre-emption.

What you should do now

• First, decide whether you are transferring existing shares or issuing new ones.
• Next, check the articles and any shareholders agreement for pre-emption and transfer restrictions.
• In addition, for a transfer, sign the instrument, pay the one per cent stamp duty, get board approval, and update the register.
• Meanwhile, for an issue, confirm the directors’ authority to allot and deal with pre-emption before allotting.
• Finally, update beneficial ownership and check the capital gains tax position.

How OLM Law can help

Our corporate and company-secretarial team handles share transfers and allotments end to end: checking the articles and shareholders agreement, drafting the transfer and resolutions, dealing with stamp duty, updating the register and beneficial ownership, and making the filings with the Registrar. We also structure investor entries and buy-outs. To move shares in your company, contact John Maina or Kenneth Likoko, Partners, at OLM Law Advocates LLP.

This article is a general guide only and is not legal advice. Please seek advice on your specific circumstances.