This is part 5 of a series of posts about the new Companies Act. You can read the first three parts and other posts about South African corporate law right here.
This post was written by Shirley Fodor during her time as a partner at Jacobson Attorneys
It has come to our attention that a number of our clients do not understand what a share is and what the rights and obligations of a person being the registered and/or beneficial shareholder may be.In addition to this, the means by which a company can obtain capital appears to be equally confusing.Accordingly, in lieu of launching into a discussion on the changes in the New Act relating to shares and shareholders we thought it prudent to dispel some of the myths surrounding the capitalisation of a company.
As such company’s can raise money (read, capital) by one of two methods, the issue of shares (“equity shares”) or by debt.Either incurring the debt funding or by issuing debt shares (debentures and bonds) or, as is becoming more prevalent hybrid instruments which combine elements of both equity and debt financing.
The share capital of any company is comprised of two elements: an authorised share capital and an issued share capital.
The authorised share capital is the initial capital investment made in the company by its founders.This amount can then be adjusted (either increasing or decreasing the authorised share capital by a special resolution) according to the needs of the company in question.
The authorised share capital is then divided up into units (or shares) which are capable of being disposed of either to selected individuals or to the public at large (in the case of a public company), when these units are taken up by subscribers, who become shareholders (under the 1973 Act upon payment of the subscription price in full), it is transformed from being authorised share capital into issued share capital.
In Borland’s Trustee v Steel Brothers and Company Ltd (1901) 1 Ch 279 the court described a share is “an interest of a shareholder in the company measured by a sum of money, for the purpose of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders inter se.”This is not the most helpful definition.In effect, because shares can be bought, sold and owned, they are really a type of property.A form of property that cannot be seen or felt, but can be moved or traded from one person to another.That is to say, incorporeal movable property carrying the obligation of compliance with the founding documents of the company and granting, amongst others the fundamental rights to:
- vote at any meeting of the shareholders of that particular class of share;
- information (both financial information and access to the share register);
- share in the profits of the company;
- share in the residual assets of a company on its dissolution.
Many people believe that the fact that they have a share certificate means that they are shareholders in a company with all the rights and obligations attaching thereto.This is not entirely correct.The simple fact is that anyone with a computer and a printer can create share certificates.It is the share register that is important.A share register sets out the classes of shares, who all shareholders are, the amounts paid for the shareholding, and the changes in shareholding over time. Every company is obliged to keep and maintain a share register at its registered offices.A share certificate therefore is merely evidence that a person may be a shareholder, but it is the share register that will ultimately provide conclusive proof.This is why when there is a dispute as to whom may be shareholders in a company: the primary order sought is for rectification of the share register and not the issue of a share certificate.
A company under the 1973 Act was able to choose whether the share capital of the company would consist of par value shares or no par value shares (but not a combination of both) irrespective of the class of share being issued.
A par value share contains an indication of that share’s value.This notional value often has no correlation to the market value of the share in question.Frequently one finds in the constitutive documents of a company that the share capital consists of:
“Authorised Share Capital: R1000 divided into 1000 shares of R1,00 each; and
Issued Share Capital: R100 divided into 100 shares of R1,00 each”
The value of R1,00 attaching to the share represents its par value.This does not mean that the shares are necessarily sold for R1, as frequently a premium is applied to the par value of the shares in order to bring them in line with what the market value may be.
Additionally, there is also no reason to issue all of the shares in the authorised share capital on incorporation or in any subsequent share issue, as long as the shares actually issued reflect the correct shareholding percentages.It is in fact prudent not to issue all of the authorised share capital as this will allow for further subscriptions and conversions into preference shares or debentures as needs be, without first having to increase the authorised share capital, which requires the passing and lodging of a special resolution with the Registrar of Companies.
This is an important area of change under the New Act, which specifically prohibits the issue of further par value shares and in fact abolishes par value shares altogether going forward, thereby bringing our law in line with that which is practiced by some of the first world English speaking countries.
For those of you with par value shares in issue, there is no need to panic.The transitional provisions of the New Act specifically allow for the continued existence of all par value shares until such time as the Minister has promulgated regulations for the conversion of such shares into no par value shares.The transitional provisions likewise provide for the rights of the par value shareholders to be preserved and if this proves to be impossible then those shareholders prejudiced by the conversion become entitled to compensation from the company.
No par value shares, by necessary implication, are shares in respect of which no par value, or no notional value, is attached to the individual shares, allowing a degree of greater flexibility to the company as it is not tied to the par value of the shares.This in theory allows for different share issues to be priced at different values, including a lower value that the initial issue of shares.
This brings us to the different classes of share:
- In the absence of any indication to the contrary all shares are considered to be ordinary shares.This means that the shares grant the same fundamental rights listed above to all of the shareholders;
- A preference share as the name indicates confers some form of preference on the holder.The most common preference granted relates to dividends.A preference share holder is commonly entitled to a percentage of any dividend in priority to the ordinary shareholders, with a similar preference applying to the division of the company’s assets on winding up.There are various types of preference shares, however the most commonly found preference shares are:
- cumulative/non-cumulative preference shares: a dividend may only be declared if a company has sufficient profits and on occasion a company is not in any position to grant a dividend at all.If a preference share is cumulative it means that in the event that no dividend is declared is declared in a particular year, the entitlement to that dividend, is carried forward to the following year.Where a dividend is non-cumulative, it means that one is only entitled to a dividend in that particular year, and if it is not declared and paid, the entitlement lapses.
- participating preference shares/non participating preference shares: unless otherwise expressly stated, preference shares are considered to be non- participating.If a preference shareholder is entitled to participate, this means that they are entitled to share in the surplus profits after the payment of their preferential dividends irrespective of the profitability of the company.These surplus profits may, depending on how the preference share terms are drafted, beshared with the ordinary shareholders on a pro rata basis.
- convertible preference shares: as the name implies these preference shares may, on the fulfillment of certain conditions (which will be specified in the terms attaching to relevant preference share) then the holders thereof, will be entitled to change the preference share into another class of share issued by the company.The conversion is most commonly from a preference share to an ordinary share.
- It should also be borne in mind that there may be a combination of the forms of preference share above, which means that you may for example have a cumulative convertible preference share.All this means is that the dividends accumulate in the event of non-payment of a dividend in any period and that on the occurrence of a specified event (or after a specified period of time) the preference share may be converted into another class of share.
- The term treasury share refers to fully paid up shares, which a company has re-purchased from its shareholders, which the company may then resell, as opposed to cancel.The right to repurchase shares is not an automatic one, and the Articles of Associate or the Memorandum of Incorporation must specifically authorize the repurchase and warehousing of such shares.The period of time that the repurchased shares are warehoused before being sole is termed as being “held in the company’s treasury”.
- Capitalisation shares are those shares created, when a company converts its distributable reserves into shares instead of declaring a dividend and paying such dividend to the shareholders.So instead of paying a cash dividend, the dividend is paid by means of shares in proportion to the shareholding held by each shareholder.
- Deferred shares are fairly uncommon.These are shares issued to the founders and promoters of a company for their assistance in the formation and incorporation of a company.The reason why they are referred to as “deferred” is because payment of any dividend to such shareholders, is deferred until the ordinary shareholders have received their dividend.Effectively this means that the deferred shareholders are last in the dividend queue.
Most companies are reliant on debt funding in one form or another.Debentures are found in many forms, so it is no easy task to define exactly what constitutes a debenture.In effect it is a documentary acknowledgement of debt by a company in favour of a specific person. Cause for frequent confusion is that while every debenture is an acknowledgement of debt, not every acknowledgement of debt is a debenture. The element that identifies a document as a debenture, will be the manner in which it was issued – which is very similar to the manner in which a share is issued.
The New Act does not fundamentally change the nature of a share- other than to abolish no par value shares.This concept together withthe rights and obligations of shareholders will be considered in the next installment of this series of posts.