Disposition of shares: Overview, definition, and example
What is disposition of shares?
Disposition of shares refers to the act of selling, transferring, or otherwise disposing of ownership interests in a company, represented by shares of stock. This can occur through a variety of methods, such as selling shares on the open market, transferring shares to another party (such as through a gift or inheritance), or exchanging shares as part of a merger or acquisition. The disposition of shares often requires compliance with legal and regulatory requirements, and may trigger certain rights, such as a right of first refusal or restrictions outlined in shareholder agreements.
For example, an investor might decide to sell their shares in a publicly traded company, thereby transferring ownership of the shares to the buyer.
Why is disposition of shares important?
The disposition of shares is important because it determines how ownership in a company is transferred, affecting control, voting rights, and the allocation of profits. For shareholders, the disposition of shares is a key mechanism for liquidating investments, realizing profits, or reallocating their investment portfolio. For companies, managing the disposition of shares is important to maintain the integrity of ownership structures, ensure compliance with securities laws, and avoid unwanted takeovers or changes in control.
For businesses, restrictions on the disposition of shares can help preserve strategic ownership or prevent hostile acquisitions. For shareholders, understanding the rights and processes associated with share disposition ensures that they are able to sell or transfer their shares in compliance with company rules and applicable regulations.
Understanding disposition of shares through an example
Imagine a private company where the shareholders have agreed to a right of first refusal clause in their shareholder agreement. This clause states that if a shareholder decides to sell their shares, they must first offer them to the other shareholders before selling to an outside buyer. One of the shareholders wishes to sell their shares to a third party. As per the agreement, the other shareholders are given the opportunity to buy the shares before they are sold to the third party.
In another example, an investor in a publicly traded company may decide to sell their shares on the stock market. The investor disposes of their shares by selling them to another investor. In this case, the disposition of shares is relatively straightforward, with the transfer occurring via a securities exchange.
An example of a disposition of shares clause
Here’s how a disposition of shares clause might appear in a shareholder agreement:
“No Shareholder shall sell, transfer, or otherwise dispose of any Shares of the Company except in accordance with the terms of this Agreement. Any proposed transfer of Shares must be first offered to the other Shareholders, who have a right of first refusal to purchase the Shares on the same terms. If no Shareholder accepts the offer, the transferring Shareholder may sell or transfer the Shares to a third party, subject to compliance with applicable securities laws.”
Conclusion
The disposition of shares plays a critical role in how ownership in a company changes hands. It is important for both businesses and shareholders to understand the mechanisms and legal requirements involved in the transfer of shares to ensure smooth transactions and maintain the desired ownership structure. Whether through sale, transfer, or other means, understanding the rules governing share disposition helps protect all parties involved and ensures compliance with relevant legal frameworks.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.