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COMPANIES
PART 2
“the Act” refers to the Companies Act

All formal definitions can be found in s1 of Act

UNIT 1
CORPORATE FINANCE

GENERAL
How does company raise money to fund its business?
1. Securities
i. Shares:
- Benefit for company = receives money or property (value)
- Benefit for holder = right to vote, right to share (profit/left-overs after liquidation)
ii. Debt instruments
- Benefit for company = receives cash/funds
- Benefit for provider = repayment + interest + voting rights + status of creditor
(ranking upon insolvency: 1st creditors, then shareholders)
2. Normal loans (credit)
- Benefit for company = receives cash/funds
- Benefit for provider = repayment + interest + status of creditor

SHARES
*SHs = shareholders
▪ Company can issue shares either initially (when the company is starting up and needs money to
commence trading) or later on, when it requires working capital to fund its operational
requirements.
▪ Shareholder = person who holds at least one share issued by company and is entered as a SH in
securities register of company.
- “Shareholders” - profit companies
- “Members” - non-profit companies.
▪ Share = one of the units into which the proprietary interest in a profit company is divided (s1).
- Characteristics: an asset (intangible movable property) conferring rights to the holder
(owner) (section 35)
- These rights can be enforced against the company.
- NB: SHs do not own the company or its assets (separate legal personality). Hence, not
correct to refer to SHs as “owners” of company.
- Company cannot hold shares in itself.

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- Shares constitute movable property of value, so it can be “sold” and used as security.
- Value of shares lies in success of company because highly profitable company will be
able to distribute higher value dividends.

BASIC RIGHTS OF SHs

1. Right to vote (power of control)
▪ Organs of company = SHs + Board of Directors.
- SHs are required to make important decisions regarding management of company.
- These decisions are made at a shareholders’ meeting.
- Just as SHs cannot make decisions required to be made by directors, directors cannot
make decisions required to be made by SHs.
2. Right to income
▪ = manifests once company (via Board) declares a dividend.
- Thus, SH only becomes a creditor once right to claim dividends arises (upon declaration).
▪ NB: payment of dividends constitutes a distribution - rules regarding distributions (e.g.
compliance with solvency and liquidity test) is mandatory.
3. Right to capital
▪ = sharing of assets available for distribution at liquidation & after all debts of company have
been paid.
- i.e. SH receives the money that he paid for the share (capital).
- Risk involved: if company is insolvent, SH loses the capital invested in the form of money
paid for the share.
- Only if there is a surplus after capital has been repaid, the SHs can share in this surplus.

Summary: Management rights = voting rights + attend meetings

Financial rights = share in profits + share in capital (upon winding-up)

NATURE OF SHARES
▪ Shares represent the interest of a person in company, composed of a bundle of personal rights
and obligations – the rights conferred are personal rights in the company, not in its assets
(case: Standard Bank v Ocean Commodities)
▪ Company still separate legal personality!
- Hence, SHs cannot claim from directors of company.
- Instead, SHs must rely on the company to claim for any loss caused to the company by
the directors’ breach of duty (De Bruyn v Steinhoff).
- Diminution in value of shares caused by directors’ conduct is simply one of many risks
assumed by investors when they acquire risk assets.

CLASSES OF SHARES (S37)

▪ MOI or Directors determine rights & obligations of shares, which are then grouped in a “class”.
- These classes each have rights, preferences & limitations attached to them.
▪ Voting rights: default position = 1 voting right per share (alterable provision)
- But each SH has irrevocable right to vote on proposal to amend preferences, rights,
limitations & other terms associated with that share (unalterable provision)

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1. Ordinary shares
▪ = basic shares – (norm against which other classes of share’s rights are usually compared).
- Usually have voting rights, share in profit (dividends – usually only once directors declare
a dividend & there can also be provision for a “fixed” dividend), and share in capital &
left-over assets after company has been wound-up.

2. Preference shares
▪ Only exist if ordinary shares exist.
- Has preference above ordinary shares for dividends.
- Can also have preference over surplus capital upon liquidation.
i. Cumulative
- Entitled to dividend % every year, irrespective if declared or not.
- Can claim in arrear dividends not declared.
ii. Participating
- Also entitled to share in the residual distributable profits
iii. Redeemable

AMENDMENT OF CLASS RIGHTS

▪ Amendment of class rights in MOI that “materially and adversely” affects a class of SHs can be
objected by SHs.
Steps to object:
1. SH is informed of proposed resolution & that he has an appraisal right (S164)
2. SH notifies company BEFORE the meeting that he will vote against the decision
3. SH attends meeting where vote takes place and votes AGAINST the resolution
4. If resolution is adopted, SH who 1) previously informed company and 2)
voted against resolution, may demand that company pay him fair value of the share

BECOMING A SHAREHOLDER
Process:
1st. Authorisation of shares
2nd. Offering of shares
3rd. Issue of shares

AUTHORISATION OF SHARES
= MOI sets out classes of shares & nr of shares for each class.
- MOI can set out rights & preferences of each class, or leave it to Directors to decide.
▪ Changing this capital structure? (authorised shares):
- Amend MOI through special resolution by SHs, or,
- If MOI does not prohibit it, S36 allows Directors to make some changes:
a. Increase/decrease nr of authorised shares of a class
b. Reclassify any classified shares that have been authorised but not issued
c. classify any unclassified shares that have been authorised
d. determine preferences, rights, limitations or other terms

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OFFERING OF SHARES (S95)

Offerings are under strict rules to protect the public.
Types of offerings:
1. Initial public offering (IPO)
= offer to public, if (i) no securities of that company have previously been offered, or (ii) all of the
securities of that company that had previously been offered have subsequently been reacquired by
the company.
- happens on primary market.
- Requires a prospectus.
▪ Prospectus = detailed info document which must be distributed to prospective SHs when a
company offers its shares to the public.
- contains all info that an investor may require to assess assets, liabilities, financial
position, profits/losses, cash flow of the company (serves as protection).
- must be registered & issued within 3 months of its registration, otherwise it’s seen as
unregistered.
2. Primary offering
= offer to public, made by or on behalf of a company, but not for 1st time.
- Happens on primary market.
- If listed, comply with rules of exchange.
- If unlisted, need prospectus.

3. Secondary offering
= offer to public of securities of a company or its subsidiary, made by a person other than that
company or its subsidiary (e.g. resale).
- Happens on secondary market.
- E.g. Shareholder offers his shares to 3rd party.
- Updated prospectus OR written statement (brief explanation of state of affairs of company
and details of offer, signed by offeror with date on)
Non-compliance
- Incorrect info in prospectus, or omission.
- Liability: person who authorised issue of prospectus or made offer and who claimed to be
an expert – liable for damages sustained as result of the untrue statement.

“Public” (S96)
- Not a public offer if made to:
- persons whose ordinary business is to deal in securities,
- non-renounceable offer made only to existing holders

ISSUING OF SHARES (S38)

= Board issues shares for consideration
- Special resolution by shareholders only required for shares issued to company’s director,
future director or his or her nominee, or a person related or interrelated to the company or
the company’s director.
Consideration (s40)
- Includes money, property, labour etc.

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- Must be adequate.
- Inadequate consideration may only be challenged based on breach of fiduciary duty by a
director (s76), where he can be held liable (S77).

Shareholder to shareholder
▪ Steps for existing SH to sell shares to 3rd party:
i. agreement to transfer
ii. execution of deed of transfer
iii. transfer registered in company’s security register
- Rights are transferred through cession.
- Don’t have to deliver share certificate (only constitutes proof).
- New SH can only exercise these rights when his name is entered into register.
- See Section 51 for details of transfers to enter into securities register.

▪ Certified shares = shares evidenced by a certificate showing to whom the share belongs, the
name of the company and the details of the share.
- Uncertified shares = don’t have such certificate.

▪ Section 50 Securities register:

a. Every company must maintain register of issued shares
b. After issuing shares, company must enter:
- Nr of uncertified shares, and
- For certified shares:
- Name & addresses of persons issued to
- Nr of shares issued to each of them

NOMINEE HOLDINGS & BENEFICIAL INTERESTS

▪ Nominee holdings = one person (nominee) holds share for & on behalf of someone else
(principal) and for that other person’s benefits.
▪ Beneficial interest = one person holds share, but another person holds a beneficial interest
(other person is actual recipient of dividends or directs holder how to vote).
- See S56(2) for all persons who have beneficial interest.
▪ Public companies: nominee must disclose those persons on whose behalf they hold the shares &
a SH must disclose who may have a beneficial interest in the shares (S56).

PRACTICE QUESTIONS
1. When does a company have to issue a prospectus?
In an initial public offering or a primary offering where the securities are unlisted.

2. Jane holds certificated ordinary shares in BT Ltd. Her friend Manny wants to buy her shares and
has offered her a good price. Jane hands over her share certificate, Manny transfers the money
into her account, and they consider the transaction to be complete. Does this constitute a valid
transfer of Jane’s shares to Manny in such a manner that Manny can exercise rights as a
shareholder? Provide comprehensive reasons for your answer by referring to the nature of
shares, whether shares may be transferred, and the three legal requirements for a valid transfer
of shares to take place.

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The nature of a share is defined as intangible movable property and as such it is transferable in
a manner recognized or provided for in the Act or other legislation. As it concerns the transfer
of rights, it is transferable through cession. Cession takes place by means of an agreement to
transfer and the delivery of the certificate is not a requirement – it is mere evidence that the
cession has taken place. The requirements to transfer shares are as follows: an agreement to
transfer, the execution of a deed of transfer and the registration of the transfer – Manny’s
name has to be entered into BT Ltd’s register as a shareholder before he can exercise his rights
as a shareholder.

3. VC Ltd authorised its first securities to be issued to investors. Fifteen investors are interested.
However, the investors require further information before they will invest.
Which type of offering is this?
The platform for offering is the primary market – it is the first time that the securities are
traded and this is therefore an initial public offering.
What are the factors that determine whether there is a legal obligation on VC Ltd to publish
information about the company and its securities?
The three factors which determine the need for disclosure are: there must be an offer + the
offer is of securities + the offer is made to the public.
Which document must be used to publish the information?
The disclosure of information is published in a prospectus that complies with the requirements
of the Companies Act of 2008.

Sources:
- New Entrepreneurial Law, 2nd edition, LexisNexis
- Companies Act 71 of 2008

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