Is Your Share Capital in Order? The Due Diligence Red Flags Every Business Owner Should Know.
You have spent years building your business. The product is strong, the team is solid, and an investor or buyer is finally at the table. Then your lawyers start the due diligence exercise – and everything grinds to a halt.
The reason? Missing stock transfer forms. Incomplete statutory registers. Share allotments that were never properly authorised. Discrepancies between what Companies House shows and what your internal records say. These are not edge cases. In my experience advising clients on corporate transactions, these issues arise far more often than most business owners would expect – and they can delay, re-price, or even derail a deal entirely.
The Most Common Issues I See
Missing or unsigned stock transfer forms are probably the single most frequent issue. A founder leaves, shares change hands informally, or an early transfer was done on a handshake. Years later, there is no paper trail to prove that the person recorded as the shareholder actually holds legal title to those shares. Without a properly executed stock transfer form – and, where required, appropriate stamp duty treatment – the legal ownership of shares can be called into question.
Incomplete or poorly maintained statutory registers are another recurring problem. The register of members, the register of directors, the PSC register – these are legal requirements, not optional extras. Yet it is surprisingly common to find registers that have not been updated for years, that contain incorrect details, or that simply do not exist at all. When a buyer or investor conducts due diligence, these registers are among the first documents they will ask for. If they are missing or inaccurate, it immediately raises concerns about the governance and reliability of the target company.
Share allotments made without proper board or shareholder authority are also alarmingly common, particularly in early-stage companies. Directors have a statutory duty to obtain the necessary authorisations before allotting shares, and shareholders generally have pre-emption rights that must be either observed or properly disapplied. If shares were issued without following these procedures, the allotment may be voidable – creating a serious cloud over the company’s entire capital structure.
Share buybacks are another area where companies frequently encounter difficulties. On the face of it, buying back shares from a departing shareholder may seem straightforward. However, the Companies Act 2006 imposes a detailed set of procedural requirements that must be followed precisely, including requirements relating to shareholder approval, financing, documentation and timing. Businesses often attempt to implement buybacks without legal advice, only to discover later that one or more of the statutory requirements were overlooked. The consequences can be significant: an invalid buyback may be void, meaning the shares never ceased to be owned by the selling shareholder and the company’s share capital position may not be what everyone believed it to be.
Then there are the discrepancies between Companies House filings and the company’s own records. Annual confirmation statements that were filed with outdated information, SH01 returns that were never submitted after a share allotment, or changes of director that were notified late or not at all. While Companies House records are not conclusive evidence of legal title, they are the public face of your company – and any inconsistency with your internal records will need to be explained and resolved.
Why Does This Matter?
In a transactional context, these issues matter because they often go to the heart of one fundamental question: who actually owns the shares in the company? While the original mistake may have been nothing more than an administrative oversight or a missing document, the impact can be far more significant. A buyer or investor needs certainty that the shares they are acquiring (or investing alongside) have been validly issued, transferred and are legally owned by the people who claim to hold them. If that certainty is missing, the consequences are real: deals get delayed while rectification work is carried out, purchase prices get adjusted to reflect the risk, indemnities get widened, and in the worst cases, parties walk away altogether.
What makes these issues particularly problematic is that they often involve historic events. A missing stock transfer form from twenty years ago or a defective share buyback involving a former shareholder may require the company to locate individuals who have long since left the business and may no longer be easily contactable. Unlike many due diligence issues, these problems cannot always be addressed through warranties and indemnities because the uncertainty relates to legal ownership of the shares themselves. As a result, transactions frequently pause while corrective action is taken, and in some cases the issue is serious enough to jeopardise the deal altogether.
Outside of transactions, there are also ongoing compliance and liability risks. Directors have personal obligations to maintain proper company records. Failure to do so can result in criminal penalties under the Companies Act 2006. And if a dispute ever arises between shareholders – over ownership, voting rights, or entitlement to dividends – incomplete records make that dispute significantly harder and more expensive to resolve.
The Cost of Rectification
The good news is that most of these issues can be fixed. The bad news is that fixing them under the time pressure of a live transaction is stressful, expensive, and entirely avoidable. Rectification typically involves tracing the history of each share transfer or allotment, obtaining confirmations or ratifications from current and former shareholders and directors, preparing and executing corrective documents, updating statutory registers, and filing corrective returns at Companies House. In complex cases – particularly where former shareholders are uncooperative or cannot be traced – court applications may be necessary.
Prevention Is Better Than Cure
The simplest advice I can give is this: do not wait until a transaction is on the horizon to get your corporate house in order. A regular corporate housekeeping review – even once a year – can identify and resolve issues before they become costly problems. Here are a few practical steps every company should consider:
First, ensure that every share transfer is supported by a properly executed stock transfer form and that the register of members is updated promptly. Second, keep a well-organised minute book containing all board and shareholder resolutions, particularly those authorising share allotments and disapplying pre-emption rights. Third, reconcile your internal records against Companies House filings at least annually and file any outstanding returns. Fourth, if shares have changed hands, check that stamp duty has been properly addressed. Fifth, if you have any doubt about whether historic transactions were properly documented, take legal advice sooner rather than later – it is always easier to fix these things proactively.
Final Thoughts
Corporate housekeeping is not glamorous, and it rarely feels urgent – until it is. But in my experience, the companies that invest a small amount of time and attention in keeping their records in order are the ones that move through transactions smoothly, negotiate from a position of strength, and avoid unnecessary cost and delay. If you are a founder, director, or in-house counsel and you are not sure whether your company’s share capital documentation is in good shape, now is the time to find out. Feel free to get in touch if you would like to discuss a corporate housekeeping review.
