If one had to explain in layman’s terms what a share of a profit company is, one might say that such a company is divided into small pieces of value which are held by the shareholders of the relevant company. The holder of one of these “small pieces of value” is then entitled to, amongst other things, share in the profit of the company by way of a dividend. Even though the idea of profit companies and their shares is quite common and easy to understand, the underlying technicalities attaching thereto, which are rooted in legislation, is not always that easy to grasp.
For a more technically correct explanation of what a share in a profit company is, it is best to look at a few different concepts, not just shares per se, as they are defined in the Companies Act, Act 71 of 2008 (hereinafter referred to as the “Act”). These concepts are “profit companies”, “shareholders” and lastly “shares”. A profit company is a company that was incorporated for the purpose of creating financial gain for its shareholders. A shareholder is a person that holds a share that has been issued by a company and who is reflected as a shareholder in the securities register of the relevant company. A share is one of the units into which the proprietary interest of a profit company is divided. All of us know that if you are the owner of one of these “units into which the proprietary interest of a profit company is divided”, you are entitled to receive a dividend – but what else does ownership of a share mean to the shareholder?
The rules regarding the capitalisation of profit companies, or in other words, the rules regarding the money received by the company in exchange for the issuing of its shares, are contained in part D of chapter 2 of the Act, which consists out of sections 35 to 48. For purposes of this article, we will only be focusing on sections 35 to 37. These rules, as contained in sections 35 to 37, become exceedingly important when structuring or restructuring a company or a group of companies.
Section 35 of the Act describes the legal nature of shares and states that a share that is held by a shareholder, is movable property that is transferable from one person to another, subject to law. Shares issued since the Act came into effect in 2011 do not have a par value or nominal value (i.e. a face value or standard value for which the shares are issued and for which they can be redeemed). Under the previous Companies Act, Act 61 of 1973, companies were allowed to issue par value shares. A company may not issue its own shares to itself and authorised shares of the company that have not yet been issued, do not have any rights associated with it until it has been issued. If a company legally reacquires shares that were previously issued, such shares will be deemed to be authorised shares that have not been issued.
Section 36 of the Act contains the rules regarding the authorisation of a company’s shares. The particulars of a company’s shares must be contained in the company’s Memorandum of Incorporation (hereinafter referred to as the MOI).
A company may authorise different classes of shares which must be set out in the MOI, as well as the number of shares of each class that have been authorised. The purpose of having different classes of shares is to provide for different preferences, rights, limitations and other terms attaching to the shares of each class. Certain classes of shares may for example have voting rights associated with them, while others are limited by not having any voting rights at all, or the holders of shares of a certain class of shares may be entitled to dividends before the holders of shares of other classes. In a lot of instances, a company would just be authorised to issue ordinary shares and in such a case there would only be one class of shares. Where a company’s MOI does however make provision for different classes of shares, the MOI must also contain different designations or names for each class and the specific preferences, rights, limitations and other terms associated with each class must also be clearly set out. If planned and structured correctly, different classes of shares can be a tool of great significance to a company.
Notwithstanding the contents of the previous paragraph, a company may also authorise a number of shares that are labelled as unclassified. These unclassified shares can then later be classified by the board of directors by way of resolution which is to be filed with the Companies and Intellectual Property Commission (hereinafter referred to as the “CIPC”). The shares have to be classified before they are issued. A company can also authorise a specific class of shares without setting out the preferences, rights, limitations and terms associated with such class, and the board of directors can then, also by way of resolution which is to be filed with the CIPC, determine the preferences, rights, limitations and terms of the class before the shares are issued.
If a company wishes to make any changes to the authorisation and classification of its shares, the numbers of shares authorised in each class or the preferences, rights, limitations and other terms associated with each class, same has to be done by way of a special resolution of the shareholders to amend the MOI, or the directors can, if the MOI doesn’t provide otherwise, increase or decrease the authorised number of shares of a specific class, reclassify any class of shares that have been authorised but not issued, classify any unclassified shares (as mentioned above) or determine the preferences, rights, limitations and other terms of any class of shares that have been authorised without the said preferences, rights, limitations and other terms being defined (as also mentioned above). If the directors take any of the aforementioned actions, a Notice of Amendment of the MOI must be filed with the CIPC in the prescribed manner.
Section 37 of the Act deals with the preferences, rights, limitations and other terms associated with a specific class of shares. Each of the shares in the same class as provided for in the company’s MOI, have the same preferences, rights, limitations and other terms associated with it.
Each share of a company automatically has one general voting right associated with it, unless otherwise provided for by the Act or by the preferences, rights, limitations and other terms of the class to which that share belongs as per the MOI. With regard to the specific preferences, rights, limitations and other terms attached to a share that has been issued, the holder of such share has an irrevocable right to vote in the event that there is a proposal to amend the said specific preferences, rights, limitations or other terms, even if the MOI provides otherwise.
Where a company only has one class of shares, each share then carries a voting right pertaining to any matter that has to be decided by the shareholders and in the event of liquidation of the company, the shareholders are entitled to receive the net assets. Where there are more than one class of shares, the MOI must provide for at least one of the classes to have a voting right associated with its shares for purposes of deciding matters by the shareholders. The MOI must also, where there are more than one class of shares, ensure that the holders of at least one of the classes’ shares are entitled to receive the net assets in the event of liquidation.
The MOI of a company may, subject to other laws, establish preferences, rights, limitations or other terms for any specific class of shares that confer special, conditional or limited voting rights to the holders of such shares; or that determines that such shares are redeemable or convertible; or that determines that the holders of such shares are entitled to distributions to be calculated in a certain way or that determines that the holders of such shares have a preference over the holders of any other classes’ shares when it comes to distributions or rights in the event of liquidation. It may even be provided for in the MOI that the preferences, rights, limitations and other terms attaching to a specific class of shares may vary depending on an objectively ascertainable external fact or facts (for example, the MOI can determine that the holders of a specific class’ shares will be entitled to vote on matters that need to be decided by the shareholders only after the directors have declared the first dividend to these shareholders).
Should there be a proposed amendment to the MOI that materially and adversely changes the preferences, rights, limitations or other terms attaching to an issued share, the holder of such a share can notify the company in advance of his intention to oppose the amendment and can then later vote against such amendment. If the amendment is none the less made to the MOI, the aforementioned shareholder may then, in terms of and subject to the provisions of section 164 of the act, demand that the company pay to him the fair value of the shares held by him, whereafter such shareholder shall have no further rights pertaining to the applicable shares.
A person who has obtained shares in a company acquires the rights pertaining to those shares as soon as his name has been entered into the company’s securities register and such person ceases to have these rights as soon as the shares are transferred to another person, or if the shares are re-acquired by or surrendered to the company (in the case of certified securities).
The above mentioned is a brief breakdown of the rules pertaining to the shares of a profit company as contained in sections 35, 36 and 37 of the Act and hopefully sheds some light on some of the more technical aspects surrounding the subject.
Written by: L Theron (B.com Law, LL.B, Dipl. Fin. Plan)