Companies: a few basic concepts


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Companies: a few basic concepts

  1. 1. Legal nature of company shares The capital of a profit company is distributed into units titled shares. The legal nature of company shares is as follows: A share that is issued by a company is transferable property, which can be transferred in any way as provided for or recognized in the Act or any other legislation. Shares do not have a nominal value/par value.
  2. 2.  Shares may not be authorize and issue at a new par value after the effective date of the 2008 Act. Current par value shares on the effective date may however remain in existence and need not be converted. Companies with existing par value shares may continue to issue, authorized but unissued, par value shares up to the authorized share capital amount, if there are shares already in issue at the effective date.
  3. 3.  The MOI must set out the authorized share capital (classes of shares and number). For each class of classified shares, the following must be stated: In this work, only the following classes of shares are dealt with, namely ordinary shares and preference shares. The designation of the two classes of shares can also be called Class A and Class B shares.
  4. 4. Share proportionally in the distribution of the excess assets over liabilities, after the distribution to preference shareholders, in the case of the liquidation of the company.Share proportionally in a dividend distribution by the company
  5. 5.  vote proportionally, but only in respect of an issue that affects the rights of the 6%
  6. 6.  Share proportionally in a dividend distribution of 6% by the company, before a dividend distribution is made to the ordinary shareholders; and Share proportionally in the distribution of the excess assets over liabilities, but limited to the amount of the issued 6% preference share capital, in the case of the liquidation of the company.
  7. 7.  The authorized share capital (class, number and rights) may be changed by: amending the MOI by special resolution (any amendment); or The board (except if the MOI provides otherwise) regarding increasing or decreasing the number of authorized shares of any class; or a notice of amendment (“NOA”) of the memorandum, which sets out the changes effected by the board and which must be filed with the Commission.
  8. 8. Regardless of any restriction Each share has one voting right, on voting in the MOI, all except to the extent otherwise shares issued have an provided in the MOI (for exampleShares of the same class irrevocable right of the preference shares’ voting rights have the same rights shareholder to vote on any can be limited to cases that affect proposal affecting the rights only the rights and preferences of or preferences of that share. preference shares).
  9. 9. • Restricted voting rights for instance inrespect of preference shares;• Preference shares enjoy preference aboveany other class in respect of distributions; and• Only a specific class of shares may shareproportionally in the distribution of the excessof assets over liabilities in the case of theliquidation of the company.An authorised share of a company has norights associated with it until it has beenissued.
  10. 10. Issuing of shares in a private company private company initially obtains share capital by issuing its shares to specific individuals. The board of directors makes an offer to the specific individual to subscribe to a specific number of shares, at the payment of an amount as determined by the board of directors. After the amounts involved have been paid over to the company, the board of directors allots the shares to the individuals involved. (Section 39) A share certificate is issued to the shareholders and a share register is maintained. If a private company proposes a subsequent issue of shares, each shareholder of that private company has a right, before any other person who is not a shareholder of that company, to be offered and, within a reasonable time to subscribe, for a percentage of the shares to be issued, which is equal to the voting power of that shareholder’s general voting rights immediately before the offer was made. (Section 39).
  11. 11. A public company obtains share capital by “selling” its shares to thepublic. The contract, in respect of which a company offers sharesfor subscription, is known as a subscription contract and not as apurchase- and sales contract. The reason for the designationsubscription contract is that the shares are incorporeal andcomprise of rights against the company, which only arise after theshares were issued.A public company may only make a primary offer to the public ifthe offer was made by means of a prospectus. The contents of theprospectus are regulated by the Act and its purpose is to enableprospective shareholders to evaluate the amount of the issue price.The prospective shareholders apply on the application form, whichmust be part of the prospectus, and the relevant amount is paidover to the company. When the application date has elapsed, theboard of directors allots the shares. A share certificate for shares in apublic company is usually not issued, since the share register ismaintained electronically. (Section 39)
  12. 12. Besides an issue price, a share also has a net asset value, whichwill increase as the company is operated in a profitable mannerduring the year, as well as a market value. Net asset value pershare = Equity (assets less liabilities) ÷ the number of issued shares.A public company’s shares trade on the secondary market (onthe JSE in the case of a listed public company) or “over thecounter” (in the case of an unlisted public company). “Over thecounter” is a facility that is created by the relevant publiccompany for the trading of shares in the public company. Themarket value of a public company is determined by demandand supply (market forces). The trading of a share in thesecondary market affects only the share register of the relevantcompany.
  13. 13.  A financial instrument is a contract between two parties which is such that in the one party’s records a financial asset arises and in the other party’s records a financial liability arises. (IAS 32.11) There is however another financial instrument, namely a contract which is such that in the one party’s records an asset (investment) arises and in another party’s records equity (share capital) arises.(IAS 32.11)
  14. 14.  The MOI of a company can authorise the company to issue, besides shares, also secured and non-secured debt instruments. The debt instrument dealt with in this work is limited to a debenture. The detail of the debentures presented for entry, is contained in a security document which contains the provisions and requirements of the debt instrument.(Section 43) The debenture is a financial instrument. A financial instrument is a contract between two parties which is such that in the one party’s records a financial asset arises and in the other party’s records a financial liability arises. (IAS 32.11)
  15. 15.  The shareholders of a company can be a natural person as well as a company. If a shareholder is a company, the company must appoint a natural person as representative to act on behalf of the company at shareholders’ meetings. The Board must call a shareholders’ meeting if so requested by the holders of at least 10% of the voting rights (the MOI may specify a lower percentage). (Section 61)
  16. 16. • initially, no more than 18 months after the company’s date of incorporation; and • thereafter, once in every calendar year, but no more than 15 months after the date of the previous annual general meeting. (Section 61)
  17. 17.  Presentation of the: directors’ report; audited financial statements for the immediately preceding financial year. audit committee report Election of directors appointment of: an auditor for the ensuing financial year an audit committee and any matters raised by shareholders
  18. 18.  The quorum for a shareholders’ meeting is as follows: at the time a matter is called on the agenda, sufficient persons must be present at the meeting to exercise, in aggregate, at least 25% of all of the voting rights that are entitled to be exercised on that matter. (Section 64)
  19. 19. • authorisation of • approving the • amending the directors’ loans, winding up or MOI; and loans to liquidation of the related and inter- company; related companies • (intercompany• authorisation of loans); the provision of financial assistance for • ratifying a the purchase of consolidated company version of the • approving the issue shares; • any other MOI; of shares or options matter as to directors, or to required by the others if it the MOI. represents • authorisation (Section 64) more than 30% of the of directors’ votes; remuneration • ratifying actions ; of directors in excess of their capacity;
  20. 20.  Shareholders’ resolutions can be an ordinary resolution or a special resolution. An ordinary resolution requires more than 50% of the voting rights exercised on the matter, and a special resolution 75% of the voting rights exercised on the matter. The MOI can increase the percentage to more than 50% (except for the removal of a director), and lower the percentage to less than 75% for a special resolution but a 10% differential should always exist between the two. (Section 64)
  21. 21.  The business and affairs of a company must be managed by or under the direction of its board, which has the authority to exercise all of the powers and perform any of the functions of the company, except to the extent that the Act or the company’s MOI provides otherwise.(Section 66)
  22. 22. The minimum number of directors required (except if the MOIspecifies a higher number) is: a private company: at least one director; and a public company: at least six, which includes the audit committee of at least three directors. (Sections 66 and 72)The MOI may provide for: ex-officio directors; and the appointment of alternate directors. (Section 66)An ex-officio director (executive director) has the samepowers, functions, duties and liabilities of any other director (except where the MOI restricts certain powers). (Section 66)
  23. 23. The MOI must provide for at least 50% of the directors tobe appointed by the shareholders.The election of a director is a nullity if the person isineligible or disqualified. (Section 66)The following persons are, amongst others, ineligible: ajuristic person, a minor incapable of contracting or aperson otherwise incapable of contracting.The following persons, amongst others, are disqualified:a person prohibited by the court to be a director ordeclared a delinquent, an un-rehabilitated insolventand a person dismissed out of a position of trust basedon misconduct, which includes dishonesty. (Section 69)
  24. 24. A director authorised by the board of a company: may call a meeting of the board at any time; and must call such a meeting if required to do so by at least: 25% of the directors, in the case of a board that has at least 12 members; or two directors, in any other case.(A company’s MOI may specify a higher or lowerpercentage or number.) (Section 73)A majority of the directors must be present at a meetingbefore a vote may be called at a meeting of the directors.Each director has one vote on a matter before the boardand a majority of the votes cast on a resolution is sufficient toapprove that resolution. (Section 73)
  25. 25. Except to the extent that the MOI of acompany provides otherwise, the companymay pay remuneration to its directors for theirservice as directors. Directors’ remunerationcan however only be paid in accordancewith a special resolution approved by theshareholders within the previous two years.
  26. 26.  Despite anything to the contrary in a company’s MOI or rules, or any agreement between a company and a director, or between any shareholders and a director, a director may be removed by an ordinary resolution adopted at a shareholders’ meeting. The director concerned must be given notice of the meeting and the proposed resolution. The director must be afforded a reasonable opportunity to make a presentation, in person or through a representative, to the meeting, before the resolution is put to a vote. (Section 71)
  27. 27. A director may be held accountable inaccordance with the principles of thecommon law relating to a breach offiduciary duties or relating to delict(conflict of interest, care, skill anddiligence) for loss, damage or costssustained by the company.
  28. 28.  acting in the name of the company without the authority to do so; taking part in the carrying on of the business being conducted recklessly or under insolvent conditions; being a party to an act or omission of the company intended to defraud a payable, employee or shareholders, or for fraudulent purposes; signing, consenting to or authorising the publication of financial statements that are false or misleading in a material respect, or a prospectus containing untrue statements; and being present at a meeting and failing to vote against:- the issuing of unauthorised shares (Section 36); the issuing of shares to directors without approval of a special resolution (Section 41); providing loans to directors not approved by a special resolution (Section 45(6)); the approval of a distribution when the liquidity and solvency test has not been met (Section 46(4)); and the acquisition of company shares when the liquidity and solvency test has not been met. (Sections 46 and 48)
  29. 29. Any provision of the MOI, agreement, or rules of the company isvoid if it relieves a directorfrom the fiduciary and statutory duties, or limits a director’sliability.A company may not pay a fine imposed on a director of thecompany or related company.The company may advance expenses to a director to defendlitigation, or indemnify a director of expenses if the litigation isabandoned or the director is exculpated. The company maytake out insurance to protect the director or company againstliability or costs.(Section 78)
  30. 30.  Companies Act (71 of 2008) Marx, Van der Watt and Bourne (2012) Dynamic Auditing, Chapter 2, Tenth Edition (Durban LexisNexis) Delport P (2011) The new Companies Act Manual Including Close Corporations and Partnerships, Second Edition (Durban LexisNexis).