Page 1 of 5

SUMMARY: CORPORATE FINANCE

Overview
This topic deals with company funding. A company obtains funds (also referred to as working
capital) to conduct its business by two possible means: equity financing and debt financing.
Equity financing entails the issuance of shares in return for money, which then makes up the
company’s share capital. The providers of equity financing are the company’s shareholders.
They receive a return on their investment in the form of dividends. Shareholders’ investment
is risky, as there is no guarantee that they will receive a dividend. If the company is wound up,
and after all the company’s creditors have been paid, the shareholders are entitled to the
balance of the company’s assets.
The second way of obtaining funds is through debt financing, which takes the form of loans,
either as bank loans or debt securities. Debt securities are issued in a similar way to shares.
Traditional debt security is called a debenture. The providers of loan capital are company
creditors. The return on their investment is interest, and the principal amount of the loan must
be repaid to the creditors at a specified time, as agreed.
After studying the material for this study unit, you should be able to answer the following key
questions:
• What is the legal definition of a share?
• How can the classes of shares authorised by a company, and the rights attached to
those classes of shares, be amended?
• What types of preference share are issued?
• In what circumstances will the holder of non-voting shares have the right to vote?
• When must the board obtain the approval of the shareholders before issuing shares?
• What are pre-emptive rights?
• How is adequate consideration for an issue of shares determined? And on what basis
may the determination be challenged?
• What is the definition of a debenture?
• How does one determine whether a security is a share or a debenture?
• What is the difference between certificated and uncertificated securities?
• What is a nominee shareholder and what is a beneficial interest?
• What are public offerings?
• What are the requirements for a public offering?

Study each of the following headings in the study guide and in the prescribed textbook:

Security and share

An important distinction is drawn between shares and securities. Under the Companies Act
71 of 2008, a share is defined as “one of the units into which the proprietary interest in a profit
company is divided”. The Act gives a much broader definition of securities, which includes
ordinary and preference shares, and debentures.
Distribution
 Page 2 of 5

Section 46 of the Companies Act regulates distributions. A distribution is any direct or indirect
transfer by a company of money or other property of the company (except its shares) to one
or more of its shareholders or beneficial holders of shares, whether as the payment of
dividends, payment for the purchase by a company of its previously issued shares, the
incurrence of a debt for the benefit of one or more of the shareholders of the company, or the
forgiveness of a debt owed to the company by one or more of the shareholders of the
company.
Solvency and liquidity requirements
The solvency and liquidity tests replace the old capital maintenance rule, and the purpose
thereof is to protect the interests of creditors. The solvency and liquidity tests play an important
role in corporate finance, and must be applied when a company, for instance, wishes to
provide financial assistance for the subscription to its shares (s 44), when it grants loans or
other financial assistance to directors or others (s 45), before it makes a distribution (s 46),
when it wants to pay cash instead of capitalisation shares (s 47), when it wishes to acquire its
own shares (s 48), and when it is involved in amalgamations and mergers (s 113).
Shares as a source of finance
The Companies Act defines a “share” as “one of the units into which the proprietary interest
in a profit company is divided” (s 1). Shares are incorporeal, movable, transferable property
without a nominal or par value. A shareholder is essentially one of the contributors to the fund
that sets up a company.
Authorised, issued and unissued shares
The Companies Act regards the decision to issue shares as a management decision. Unless
the MoI imposes specific limitations, the board of directors has the authority to take the
decision to issue shares without the approval of the shareholders. The board of directors also
has the authority to increase the authorised shares of the company. The classes of shares
most commonly found are preference shares, ordinary shares, deferred shares and
capitalisation shares.
Issue of shares
The board of directors has the power to issue shares without approval of the shareholders,
but these shares must be authorised by the MoI, either before the shares are issued or within
60 business days after issue. The board of directors has the authority to increase or decrease
the authorised number of shares, except to the extent that the company’s MoI provides
otherwise. The shareholders may also amend the authorised share capital by way of an
amendment to the MoI by means of a special resolution.
Section 40 of the Companies Act provides that the board may only issue shares for adequate
consideration. The board must determine what will be an adequate consideration for the
shares. The consideration may be in the form of cash, or an agreement for future services,
future benefits or future payment by the subscriber to the company.
Right of pre-emption
In terms of section 39 of the Companies Act, every shareholder in a private company (and a
personal liability company) has the right, before any other person who is not a shareholder of
the company, to be offered and to subscribe (within a reasonable time) for a percentage of
any shares issued or proposed to be issued, equal to the voting power of that shareholder’s
 Page 3 of 5

general voting rights immediately before the offer is made. A company’s MoI may, however,
restrict or exclude this right in respect of any or all classes of shares in the company. The
reason why this provision was included in the Companies Act, is to guard against the dilution
of ownership in private companies.
Financial assistance
In terms of section 44 of the Companies Act, a company may provide financial assistance by
way of a loan, guarantee, provision of security, or otherwise to a person for the purpose of, or
in connection with, the acquisition of shares and other securities in the company, provided that
such assistance is not prohibited by the MoI and that certain requirements are met.
Debt instruments
A debenture is an acknowledgement by a company that it owes the debenture holder a certain
sum of money, as evidenced by the document. Debenture holders are creditors of the
company, by virtue of having extended loans to the company.
Securities registration and transfer
A company is required to maintain a securities register which must reflect prescribed
information. Shares and debentures are now regulated together by the same provisions on
the registration and transfer of securities under the Companies Act of 2008. The Act
differentiates between certificated and uncertificated securities. Certificated securities are
those that are evidenced by a certificate, while uncertificated securities are not evidenced by
a certificate or some written instrument. A certificate only serves as proof of ownership and is
not a negotiable instrument with an inherent value. Therefore, delivery of the certificate is not
a requirement for the purpose of transferring rights of ownership from one person to the next.
The information contained in a company’s register of issued securities must include the total
number of uncertificated securities, the names and addresses of the holders to whom
certificated securities were issued and the number of securities issued to each, the number of
shares held in trust, and either the number of certificated debt instruments issued or the names
and addresses of the registered holders and beneficial holders of certificated debt instruments
(s 50(1)–(2)).
Transfer of shares
“Transfer”, in a technical sense, denotes a series of steps comprising an agreement to
transfer, the execution of a deed of transfer, and the registration of transfer. The Companies
Act of 2008 requires a private company to restrict the transferability of its securities. Once
transfer of ownership has taken place, registration of transfer by the company follows. The
purchaser is made to sign a transfer form, which is then submitted by the purchaser to the
company, along with the certificate evidencing the securities. Transfer of ownership of
uncertificated securities is regulated under the Companies Act of 2008.
Public offerings
The reason why the Companies Act of 2008 regulates public offerings is that when company
securities are offered to the public, the offer must be accompanied by enough information to
enable a prospective investor to make an informed decision on whether or not this will be a
good investment. The prescribed information must be contained in a prospectus or, in those
instances allowed by the Act, in a written statement which is not as complicated (or as
expensive) to produce as a prospectus. The prospectus is the document that must accompany
 Page 4 of 5

all initial public offerings and all primary offerings for unlisted securities (primary offerings for
listed securities must comply with the requirements of the relevant exchange).
Section 104 regulates who will be held liable where loss or damage is suffered as a result of
any untrue statement in a prospectus.

Corporate finance -
Copy.pptx

Activity 6.1

Discuss what is meant by a “right of pre-emption” on the issue of shares, and explain the
purpose of the pre-emptive right. Also indicate whether this right applies automatically in
respect of all shares and in all companies.
Activity 6.2
Benjamin is interested in purchasing preference shares in Retail Therapy Investments Ltd. He
has no previous experience or knowledge of preference shares, and approaches you for
general information and advice. With reference to the relevant case law, if applicable, and the
Companies Act 71 of 2008, advise Benjamin on the different types of preference shares that
can be issued by a company as well as the rights, obligations and conditions associated with
the different types of preference shares.
Self-assessment questions
• In which two instances must the solvency and liquidity tests be applied?
• What are the two main sources of capital for a company?
• What is the difference between authorised, unissued and issued shares?
• Explain under what circumstances the issue of shares must be approved by the
shareholders of the company.
• Explain the right of pre-emption of shareholders when a company issues new shares.
• Describe the requirements and conditions set by the Companies Act, if a company
wants to provide financial assistance for the acquisition of its own shares.
• List the transactions that are included in the definition of a “distribution”.
• Describe the difference(s) between a share and a debenture.
• What is the difference between certificated and uncertificated securities?
• Explain the terms “nominee shareholder” and “beneficial interest”.
• What is a public offering and what are the requirements for a public offering?
• Who may be held liable for untrue statements in a prospectus?

Discussion question
Ben, Yaseen and Dorothy are the three shareholders of Textbooks for Law Students (Pty) Ltd.
Ben holds 50 shares, Yaseen 150 and Dorothy 50 shares. Yaseen now proposes that the
company issue 300 more shares to his brother, David. Ben objects to this proposal and argues
 Page 5 of 5

that he and Dorothy should first be afforded an opportunity to subscribe to the new shares.
Advise Ben on whether he is entitled to first be afforded an opportunity to subscribe to the new
shares. Discuss fully, with reference to the relevant sections of the Companies Act 71 of 2008.