Shares of stock are transferred by the delivery of the stock certificate endorsed by the owner (or their attorney-in-fact), together with a deed of assignment. But the transfer is valid only between the parties until it is recorded in the corporation's stock and transfer book; only upon recording does the transfer bind the corporation and third parties, and the transferee become a stockholder of record entitled to vote and receive dividends. The transfer is also subject to taxes, including capital gains tax on the gain (for unlisted shares) and documentary stamp tax.
Selling shares in a corporation is not like selling a car in the parking lot. To make the buyer a real stockholder — with voting rights and dividends — the transfer must be recorded on the corporation’s books.
How Shares Are Transferred
Shares represented by a stock certificate are transferred by:
- Endorsement of the certificate by the owner (or a duly authorized attorney-in-fact); and
- Delivery of the certificate to the transferee, usually with a Deed of Assignment of Shares documenting the sale or transfer.
Endorsement and delivery transfer ownership between the parties — but that is not the whole story.
Recording in the Stock and Transfer Book
The decisive step is recording the transfer in the corporation’s Stock and Transfer Book. Under the Corporation Code, no transfer is valid, except as between the parties, until it is recorded in the books of the corporation. Until recorded:
- The transfer does not bind the corporation or third parties;
- The transferee is not a stockholder of record — the corporation still recognizes the seller on its books; and
- The transferee generally cannot vote the shares or receive dividends in their own name.
So a buyer who does not have the transfer recorded holds an unenforceable-against-the-corporation interest — a common and costly oversight. After recording, the corporation cancels the old certificate and issues a new one to the transferee.
Restrictions on Transfer
Some corporations, especially close corporations, place valid restrictions on the transfer of shares in their articles or bylaws — such as a right of first refusal in favor of the corporation or other stockholders. Such restrictions are enforceable if reasonable and properly disclosed (noted on the certificate). A buyer should check for these, since a transfer violating a valid restriction can be refused.
The Taxes on a Share Transfer
Transferring shares triggers taxes:
- Capital gains tax — for shares of stock not traded on the stock exchange, the sale is subject to a capital gains tax on the net gain (a flat rate under the TRAIN Law), computed on the gain over the cost, with the fair market value considered;
- Documentary stamp tax — on the transfer of shares; and
- The BIR issues a Certificate Authorizing Registration (CAR/eCAR) after the taxes are paid, which the corporation may require before recording the transfer.
For listed shares traded on the exchange, a stock transaction tax applies instead, in lieu of capital gains tax.
Practical Advice
- Endorse and deliver the certificate with a deed of assignment, then — critically — have the transfer recorded in the stock and transfer book so you become a stockholder of record.
- Pay the capital gains and documentary stamp taxes and secure the CAR; the corporation may require it to record the transfer.
- Check for transfer restrictions (like a right of first refusal), especially in a close corporation.
Frequently Asked Questions
How do I transfer shares of stock? By endorsing the stock certificate and delivering it to the transferee, usually with a deed of assignment. This transfers ownership between the parties, but the transfer must be recorded on the corporation's books to be complete.
Why must the transfer be recorded? Because no transfer is valid, except between the parties, until recorded in the corporation's stock and transfer book. Only upon recording does it bind the corporation and third parties and make the transferee a stockholder of record entitled to vote and receive dividends.
What taxes apply to a share transfer? For unlisted shares, capital gains tax on the net gain and documentary stamp tax, with a BIR Certificate Authorizing Registration issued after payment. Listed shares traded on the exchange are subject to a stock transaction tax instead.
Can share transfers be restricted? Yes. Corporations, especially close corporations, may impose valid, reasonable transfer restrictions like a right of first refusal, enforceable if disclosed and noted on the certificate. A transfer violating a valid restriction can be refused.
This commentary is for general informational purposes only and does not constitute legal advice. For guidance specific to your situation, please consult a licensed attorney.
If you are buying or selling shares, our firm can document the transfer and ensure it is properly recorded and taxed. You may reach us via Viber or WhatsApp, call us at 0995 433 5550, or send an email to vivasnobles@gmail.com. We look forward to hearing from you.