GPMVUBU

Companies Basic concepts

Capitalization of a profit company

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.

Par value shares

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.

Authorized shares 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.

The designation ordinary share is used in this work in respect of shares which entitle the owners (ordinary shareholders) thereof to:

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

The designation 6% Preference shares is used in this work for shares in respect of which the owners (6% Preference shareholders) are entitled to:

vote proportionally, but only in respect of an issue that affects the rights of the 6%

Preference share class

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.

The authorized share capital (class, number and rights) may be changed by:

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.

Rights of shares

Shares of the same class have the same rights

Regardless of any restriction on voting in the MOI, all

shares issued have an irrevocable right of the

shareholder to vote on any proposal affecting the rights or preferences of that share.

Each share has one voting right, except to the extent otherwise

provided in the MOI (for example preference shares’ voting rights

can be limited to cases that affect only the rights and preferences of

preference shares).

The MOI may for any class of shares state the following provisions:

• Restricted voting rights for instance in respect of preference shares;• Preference shares enjoy preference above any other class in respect of distributions; and• Only a specific class of shares may share proportionally in the distribution of the excess of assets over liabilities in the case of the liquidation of the company.An authorised share of a company has no rights associated with it until it has been issued.

Issuing of shares

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).

Issuing of shares in a public company

A public company obtains share capital by “selling” its shares to the public. The contract, in respect of which a company offers shares for subscription, is known as a subscription contract and not as a purchase- and sales contract. The reason for the designation subscription contract is that the shares are incorporeal and comprise of rights against the company, which only arise after the shares were issued.A public company may only make a primary offer to the public if the offer was made by means of a prospectus. The contents of the prospectus are regulated by the Act and its purpose is to enable prospective shareholders to evaluate the amount of the issue price. The prospective shareholders apply on the application form, which must be part of the prospectus, and the relevant amount is paid over to the company. When the application date has elapsed, the board of directors allots the shares. A share certificate for shares in a public company is usually not issued, since the share register is maintained electronically. (Section 39)

Besides an issue price, a share also has a net asset value, which will increase as the company is operated in a profitable manner during the year, as well as a market value. Net asset value per share = Equity (assets less liabilities) ÷ the number of issued shares. A public company’s shares trade on the secondary market (on the JSE in the case of a listed public company) or “over the counter” (in the case of an unlisted public company). “Over the counter” is a facility that is created by the relevant public company for the trading of shares in the public company. The market value of a public company is determined by demand and supply (market forces). The trading of a share in the secondary market affects only the share register of the relevant company.

The subscription contract 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) 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)

Debentures issued by a public company

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)

Shareholders

Shareholders meeting

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)

A public company need to arrange an annual general meeting (AGM) of its shareholders:

• 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)

The AGM must, at a minimum, provide for the following business to be transacted:

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

Quorum for a shareholders’ meeting

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)

A special resolution is required for:

• amending the MOI;

• approving the winding up or

liquidation of the company;

• authorisation of directors’ loans,

and loans to related and inter-

related companies

• (intercompany loans);• authorisation of

the provision of financial

assistance for the purchase of

companyshares;

• ratifying a consolidated version of the

MOI;

• approving the issue of shares or options to

directors, or to the others if it represents

more than 30% of the votes;• ratifying actions

of directors in excess of their

capacity;

• authorisation of directors’ remuneratio

n;

• any other matter as

required by the MOI.

(Section 64)

Shareholders’ resolutions

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)

Board of directors

Manage the company

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)

Composition of the board

The minimum number of directors required (except if the MOI specifies 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 same powers, functions, duties and liabilities of any other director (except where the MOI restricts certain

powers). (Section 66)

Election of directors

The MOI must provide for at least 50% of the directors to be appointed by the shareholders.

The election of a director is a nullity if the person is ineligible or disqualified. (Section 66)The following persons are, amongst others, ineligible: a juristic person, a minor incapable of contracting or a person otherwise incapable of contracting.

The following persons, amongst others, are disqualified: a person prohibited by the court to be a director or declared a delinquent, an un-rehabilitated insolvent and a person dismissed out of a position of trust based on misconduct, which includes dishonesty. (Section 69)

Directors’ resolutions

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 lower percentage or number.) (Section 73)

A majority of the directors must be present at a meeting before a vote may be called at a meeting of the directors. Each director has one vote on a matter before the board and a majority of the votes cast on a resolution is sufficient to approve that resolution. (Section 73)

Directors’ remuneration

Except to the extent that the MOI of a company provides otherwise, the company may pay remuneration to its directors for their service as directors. Directors’ remuneration can however only be paid in accordance with a special resolution approved by the shareholders within the previous two years.

Removal of directors

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)

Liabilities of a director

A director may be held accountable in accordance with the principles of the common law relating to a breach of fiduciary duties or relating to delict (conflict of interest, care, skill and diligence) for loss, damage or costs sustained by the company.

A director can be held liable in terms of the Companies Act for:

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)

Indemnity and directors’ insurance

Any provision of the MOI, agreement, or rules of the company is void if it relieves a directorfrom the fiduciary and statutory duties, or limits a director’s liability.

A company may not pay a fine imposed on a director of the company or related company.The company may advance expenses to a director to defend litigation, or indemnify a director of expenses if the litigation is abandoned or the director is exculpated. The company may take out insurance to protect the director or company against liability or costs.(Section 78)

References

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).