Sep 2026
In the context of private equity and venture capital financings of a Cayman exempted company, whether a seed round or pre-IPO round, considerable time is typically spent negotiating restrictions on the transfer of shares. These commonly include rights of first refusal (ROFR), rights of first offer (ROFO) and tag-along / drag-along provisions, which are designed to give investors a say over voluntary exits and the composition of the shareholder base.
Less frequently considered is the treatment of transmission of shares, being a transfer of shares otherwise than by a voluntary transfer such as transfer on death, bankruptcy or the winding-up of a shareholder vehicle. While the distinction between transfer and transmission is well established, it is not always addressed expressly in constitutional documents (specifically the articles of association) or shareholders’ agreements of the company. This article provides a brief overview of how transmission of shares can be treated in Cayman structures in a series financing context.
In general, a transfer of shares refers to a voluntary disposition by a shareholder, while a transmission of shares refers to a passing of title by operation of law. Often during the drafting stage of the series financing package, the articles of association and shareholders’ agreements are drafted primarily with voluntary transfers in mind, and transmission events are addressed either indirectly or sometimes not at all.
There is no uniform approach adopted by companies to deal with this issue. In series financings, it is not uncommon to see express provisions in the articles of association deeming transmissions
to be transfers, so that they are subject to applicable ROFR, ROFO and tagalong / drag-along procedures. Alternatively, some articles of association treat transmission as a distinct legal mechanism, being subject to the directors’ over-riding discretion to refuse transfer based on reasonable grounds. The appropriate approach depends on the commercial context, the requirements
of the investors and the anticipated exit priority and timing.
Where transmission events are expressly brought within the scope of transfer restrictions, this is typically driven by the underlying commercial objective of controlling the identity of shareholders. Transfer restrictions are intended, among other things, to enable existing investors to maintain visibility (and priority) over who acquires shares in the company. This approach can give rise to operational challenges, particularly where the provisions capture routine estate or fund distributions, but there may well be good commercial reasons not to permit such transmission without going through the usual transfer restrictions. Depending on those entitled to benefit, a transmission of shares in the company may result in many underlying investors or beneficiaries holding such shares directly, resulting in the company having a vastly different share capital table than originally contemplated. A materially expanded shareholder base may also have implications for voting (where obtaining a unanimous written resolution becomes increasingly difficult), information rights (with a greater number of people entitled to receive private or sensitive company information) and consent thresholds. For these reasons, investors may prefer to ensure that transmission events do not result in an uncontrolled change to the shareholder base.
Where transmission is not expressly captured by transfer restrictions, the company and its board of directors may need to rely on alternative mechanisms to limit the expansion in the shareholder
base, each of which may present practical difficulties. Directors may seek to rely on their over-riding discretion to refuse to register new shareholders, but this requires the exercise of that discretion in good faith and for a proper purpose with clear and defensible reasoning based on case law, which introduces further litigation risks. The company may also need to coordinate waivers from existing shareholders who hold ROFR or ROFO rights, which can be administratively complex and time-consuming.
An alternative would be to buy-back or redeem shares on a case-by-case basis as negotiated with the outgoing shareholder (or its executor or liquidator). This may be particularly attractive to professional liquidators who prefer to distribute proceeds in cash, but may be less welcomed by general partners of a partnership looking to distribute the shares of the company in kind due to liquidity concerns. A buy-back or redemption also requires the company to have sufficient financial resources to fund it and might inadvertently trigger any previously agreed redemption or liquidation waterfall among the investors.
Transmission of shares is often considered a technical issue, but in the context of series financings (particularly where investment is made through funds) it can have significant practical implications. Whether to deem transmission as a transfer is ultimately a matter of commercial allocation of risk and control between investors and the company. As such, it is best considered at the time the series financing documentation is drafted, rather than retrospectively once a transmission event has occurred.
This article was originally published in the September 2026 edition of Hong Kong Lawyer by The Law Society of Hong Kong.