THE IMPORTANCE OF COSEC – SHARES AND THE SECURITIES REGISTER

THE IMPORTANCE OF COSEC – SHARES AND THE SECURITIES REGISTER

Company secretarial matters (or more commonly referred to as “CoSec“) are not overly exciting but do play a very important role when looking at any commercial transaction. Various matters can fall under the CoSec stable, but this article will focus exclusively on share issuances and updating the securities register (or more commonly referred to as the share register) following such issuances.

Background

In the haste of getting started or in the excitement of closing that first deal, many investors and entrepreneurs do not consider CoSec matters as a priority and often end up not properly implementing the investment. Most often, this leads to investors ending up without any share certificates evidencing their investment. Furthermore, their investments are not reflected in the securities register, which may prove detrimental to both the investor and the company as described below. First things first, however…

What is a share issuance?

In terms of section 38(1) of the Companies Act 71 of 2008, as amended (“the Act“), the board of directors of the company (“the Board“) may resolve to issue shares of the company at any time, subject to the conditions of such section being met. In addition to this, further conditions may regulate the issue of shares in certain instances, most notably when there is a subscription of shares (section 39), where consideration requirements must be considered (section 40) and where shareholder approval is required (section 41).

If the investment is successfully concluded and the relevant sections of the Act (as mentioned above) are complied with, the investment can be implemented. This means that the company can proceed to issue the shares that the Board has resolved to issue. This share issuance can then be evidenced by way of a certificate (some securities may also be uncertificated in certain instances). A share certificate is a commonly found example of a certificated security, and as such, must adhere to the provisions of section 51 of the Act, which include the fact that the certificate must state the name of the issuing company, the name of the person to whom the shares are being issued, the number and class of shares being issued, and any restriction on the transfer of such shares. The share certificate must furthermore be signed by two persons authorised by the Board, and serves as proof of ownership of the shares (in the absence of evidence to the contrary).

If the Board issues a share certificate which complies with the above, only one leg of the share issuance is complete. A very important secondary leg is the act of entering the investor’s details into the securities register as required in terms of section 50 of the Act (each company is obliged to have a securities register – even for uncertificated securities).

The importance of the securities register

Why is this second leg so important? Well, in terms of section 37(9) of the Act, only once the subscriber’s name is entered into the securities register, does he actually acquire the rights associated with the particular securities issued to him. As such, although there are contractual rights and obligations between the parties (in terms of the subscription and/or sale of shares agreement), for all intents and purposes, the investor does not acquire, and therefore cannot exercise, the rights awarded to him as proprietary holder in the company until the securities register has been updated.

Regrettably, in our experience, various investors are comfortable when they receive their issued share certificate (sometimes not even validly issued) and therefore do not request a copy of the updated securities register evidencing their investment. Especially where larger transactions are contemplated, parties require an accurate reflection of the shareholding position of the company to determine how the investment should proceed. Where the securities register has not been kept up to date and accurate, and when this is discovered during the due diligence investigations, such CoSec matters may cause unnecessary and costly delays for the company. Other matters may also be more difficult to administer post-transaction (especially where shareholder disputes are present).

Conclusion

Considering the above, it is advised that all CoSec matters are done accurately, diligently and kept in good order at all times to ensure that all parties’ rights are adequately protected, and that good corporate governance is maintained by the company. If you feel you might require any assistance with this, please do not hesitate to contact us.

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