Companies Act, 71 of 2008 Series Part 6: Share capital – what to consider?

The monies raised by a company through the issue of shares is commonly referred to as the share capital of that company. The Companies Act, 71 of 2008 (as amended) (“Companies Act“) regulates certain aspects regarding share capital, which every director, shareholder and potential investor should be aware of. Set out below are 8 of the most important things you should know in order to manage your company’s share capital and to help you make informed decisions about potential equity investments.

  1. Where is the share capital recorded?

A company’s memorandum of incorporation (“MOI“) must set out the classes of shares, the number of shares of each class that the company is authorised to issue and any specific preferences, rights, limitations and other terms associated with the shares. The share capital is therefore located in the MOI, which is theoretically a public document available for inspection from the Companies and Intellectual Property Commission (“CIPC“).

  1. The distinction between the authorised and issued shares of a company

The authorised shares are the shares which the company is entitled to issue in terms of its MOI. Authorised shares have no rights associated with them until they have been issued. The issued shares are shares that are authorised and issued to shareholders, and to which certain rights are then attached.

  1. Basic rights attaching to every share

Save as provided otherwise in the MOI of the company, a share affords every holder of such share the right to certain dividends when declared, the return of capital on the winding up of the company and the right to attend and vote at meetings of shareholders. These rights can, however, be limited, for example, dividend preferences or liquidation preferences may attach to one class of shares but not the others. Non-voting rights may also attach to a class of share. However, every share issued gives that shareholder an irrevocable right to vote on any proposal to amend the preferences, rights, limitations and other terms associated with that share. This is an unalterable right under the Companies Act.

  1. How many authorised shares is appropriate?

This of course depends on the circumstances, but there is no limit to the number of authorised shares a company can have in its share capital. When starting a business an entrepreneur will often acquire a “shelf company”, which typically has an authorised share capital of 1 000 shares. This is suitable if there are only one or two shareholders. If more shareholders are anticipated, the authorised share capital will need to be increased. It is advisable to have enough authorised shares to avoid having to create further shares (and go through the process set out in point 5 below) every time the company needs to issue further shares.

  1. Amendment of the share capital – how is the CIPC involved?

The authorisation, classification, number of authorised shares, and preferences, rights, limitations and other terms associated with the shares, as set out in the company’s MOI, may only be changed by way of an amendment of the MOI. Such amendment can be approved by resolution of the board of the company, or by special resolution of the shareholders of the company, depending on which method is provided for in the MOI. It is common practice to restrict the board’s powers in this regard and reserve such matters for approval by the shareholders (in the MOI).

Any amendment of the MOI must be submitted to the CIPC for acceptance and registration. This process could take anywhere between 1 – 3 months, depending on the CIPC’s capacity and any backlogs.

  1. What happens if shares are issued in excess of the authorised share capital?

In the event that more shares are issued than are authorised (or shares are issued that have not yet been authorised), the board may retroactively authorise such an issue within 60 business days of “issue” – otherwise the share issue is void to the extent that it exceeds the authorised share capital. In such circumstances, the company must return to the relevant person the fair value of the consideration received in terms of such share “issue” (plus interest) and the directors could be held liable for any loss, damage or costs sustained by the company as a consequence of knowingly issuing unauthorised shares.

While these consequences can be severe, the potential costs and damages to the company (and its board) can be limited in the event that all the shareholders are willing to participate in rectification steps that would need to be taken and simultaneously waive their rights to claim any return of consideration and damages, where such actions were not taken knowingly and not timeously retroactively authorised.

  1. Share capital may comprise of different classes of shares

Not all shares in a company need have equal rights and preferences. Some shares may have preferential rights as to capital and/or dividends, privileges in the matter of voting or in other respects. A company may, for example, create one class of shares for the founders of the company, another class of shares for its investors and a third class of shares for its employees, with each class having its terms tailored for specific purposes. Note that the preferences, rights, limitations and other terms of shares distinguish the different classes, but are always identical to those of other shares of the same class.

  1. Shares in a company incorporated under the “old” Companies Act, 61 of 1973 (as amended) (“1973 Companies Act”)

Any issued shares held in a company that was incorporated under the 1973 Companies Act and were issued before 1 May 2011, being the effective date of the Companies Act (“Effective Date“), continue to have all the rights associated with it immediately before the Effective Date. Those rights may only be changed by means of an amendment to the MOI of the company.

All shares of companies incorporated under the Companies Act are no par-value shares. Under the 1973 Companies Act, however, a company could have a par-value share capital. If par-value shares had been issued as at the Effective Date, such company may still issue further authorised but unissued par-value shares, but the authorised par-value share capital itself may not be increased. In the event that such a company wishes to increase its authorised share capital, it can either convert its existing par-value shares to no par-value shares and then increase such number of authorised shares, or alternatively, create a further class of no par-value shares thereby also increased the total number of authorised shares.

Concluding remarks

Although at first glance the exact composition and structure of a company’s authorised and issued share capital may not be considered a top priority for busy entrepreneurs to worry about, we trust that the issues highlighted above will give you some insight and guidance into how and why your company’s share capital should be of great importance to your shareholders and any potential investors. If you would like to discuss any of these topics in more detail, please feel free to contact our commercial department and we will gladly assist you.

16 thoughts on “Companies Act, 71 of 2008 Series Part 6: Share capital – what to consider?

  1. I’m currently studying advanced company law and I just felt like I should let you know that the explanations are phrased well.
    It helps one to understand the true concepts behind the subsections of our companies act.
    Thanks Chad

  2. Hi,
    We have a CC with 3 members. We now wish to convert the CC into a Company. The CC owns agricultural land hower has the right or at least a reasonable expectancy to purchase a piece of land that was previously expropriated from the CC’s land. We wish to create two or maybe three classes of shares with the conversion of the CC so that we can invite investors to purchase shares in the company. The idea is to use the classes of shares to raize capital for the purchase of the previously expropriated land and to destinguish between shareholders who will partake in the acquisition of the previously expropriated land with the view of commercializing or optimizing the land so acquired and those who wish to only benefit from the agricultural land that currently forms part of the CC’s assets.
    I presume that share capital created in the MOI on conversion of the CC to a company will be no par value shares. Is this assumption correct and could you please comment on the scenario depicted above.

    Thanking you in anticipation.

    1. Hi A.S Kotze,

      Thank you for your query. A private limited liability company would definitely be the most suitable structure for the purposes of seeking investment in return for equity. This is because a CC has no share capital so to speak and therefore no shareholders. The owners of a CC are the members of the CC and those members have a membership interest in the CC.

      Upon application for the CC to be converted into a private company, an MOI will need to be filed with the CIPC, which shall have the effect of, amongst other things, establishing the necessary authorised share capital, which then creates the units in terms of which an ownership interest in the company can be subscribed for and divided.

      In terms of the Companies Act, 71 of 2008, shares authorised in terms of the MOI can only be no par value shares. Any issue of such shares have no par value and the board of directors must determine the price or other adequate consideration at which such shares may be issued.

      You are welcome to contact us should you need further assistance.

  3. How the payment for these shares is to be ascertained in a private company?
    can employees and a newly appointed ceo be issued shares without shareholders approval?

    1. Hi Lisa,
      Thank you for your query. Share issues are approved by the board of directors of a company in terms of section 38 of the Companies Act. Then in terms of section 40 of the Companies Act, shares must be issued for adequate consideration, as determined by the board. The shares are usually issued at nominal value in the case of a start-up company, and in the case of a more established business, the valuation would be determined by an auditor or some other method set out in the MOI.
      Please do not hesitate to contact us should you require further assistance.

    1. Hi Damilola,
      Thank you for your query. In terms of the current Companies Act 71, of 2008 (“the New Act”) a company cannot issue “par value shares” as was allowed under the old Companies Act 61, 1973 (“the Old Act”) and has since been disallowed under the New Act. In addition, several changes have been made under the New Act, ranging from limiting the scope of financial assistance under section 45 to clarifying when a Memorandum of Incorporation takes effect and so on, amongst others changes.
      Please feel free to consult with us about proposed changes and how they might impact your business.

  4. Is it acceptable to advertise shares is socila media as per companies act? If not what are consequences?

    1. Hi Phindile,
      Thank you for your query. The advertising of shares to the public would effectively constitute a public offering. A private company is prohibited from offering any of its shares to the public and the MOI of a private company must contain a restriction on the transferability of its securities to the public. A public company on the other hand, by its nature, is allowed to offer its shares to the public for sale. In the case of a public company such shares may only be offered if it registers a prospectus that complies with the Companies Act.
      You are welcome to contact us should you require further assistance.

  5. Hello!
    I admire the explanation made. I came across this case and wanted help if possible…a certain company was incorporated in 2000 with authorized share capital of 10000 class A ordinary shares with par value of 200 cents each. For an empowerment deal the company must issue 1000 ordinary shares to its new partners. The company has 1000 unissued class A ordinary shares that the board intends to issue.The memorandum of incorporation of the company has never been amended. Can the board issue shares with out approval by special resolution of shareholders and to issue par value shares.

    1. Hi Dawit,
      Due to the fact that the company concerned was incorporated in terms of the old Companies Act, the shares that have been authorised by the MOI, still refers to shares being of par value. The new Companies Act also does not allow further authorisation of par value shares. To get around this, you would first need to amend the authorised share capital of the company and convert the remaining unissued authorised share capital to shares of no par value. Once the MOI has been accepted by the CIPC, you may then proceed to issue the further shares.
      The amendment of the authorised shares of a company is not something that falls within the directors’ powers and will most likely require a special resolution of the shareholders (i.e. 75% approval). You can just check the MOI to confirm this point.
      Please feel free to contact us for assistance with your share restructure. We will be happy to assist.

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