A Deep Dive into Share Transfer Due Diligence 

The transfer of shares entails the change of ownership of the shares from one party, the transferor, to another, the transferee. Publicly traded companies generally permit unrestricted share transfer, whereas private companies typically impose limitations. A transfer deed is the legal instrument used to effectuate such a transaction. 

Consequently, the buyer is obliged to perform due diligence to verify fulfillment of needs and mitigate potential risks. The parties should assess the likelihood of any transfer conditions and the potential impact. Some of these considerations include; 

1. Prior to effecting a transfer, a shareholder must give due consideration to pre-emption rights. A pre-emptive right confers upon a shareholder the privilege of acquiring additional shares in a company prior to their issuance to the public. This entitlement is typically enshrined in the shareholder agreement. 
2. Further, one need to carefully examine the company’s Articles of Association and any relevant shareholders’ agreements for potential restrictions or conditions on share transfers e.g. the “lock in period” clause prevents shareholders from selling their shares or securities for a specific period of time 
3. A company’s articles of association form a binding contract between the company and its shareholders. Any restrictions on share transfers outlined in these articles are enforceable as contractual terms. 
4. Evaluate whether the proposed share transfer is subject to the Competition Act of Kenya’s mandatory notification requirements and, if applicable, requires approval under the Capital Markets (Takeovers and Mergers) Regulations, 2002 and whether it is subject to other industry-specific regulations such as those of the Communications Authority of Kenya. 
5. The departure of a shareholder can significantly impact existing commercial contracts. It is essential to evaluate how a share transfer might affect supply agreements, intellectual property licenses, secondment arrangements and other contractual relationships. These implications should be carefully assessed and addressed within the shareholders’ agreement or the contracts themselves. 
6. Another crucial element to take into account is the formal approval of the share transfer by the board of directors, expressed through a board resolution. 

It is important to note that when a transfer is hindered by the company’s articles, shareholders have the power to alter the articles to permit the transfer, either for all future transfers or solely for the current situation. Additionally, shareholders may choose to temporarily waive pre-emption rights without altering the company’s articles. 

Effectuating a seamless share transfer requires a meticulous approach that harmonizes legal, contractual and corporate governance imperatives. While the complexities involved can be intricate, proactive identification and management of potential challenges are crucial. By conducting comprehensive due diligence and enlisting expert support, concerned parties can navigate this process with confidence.