1
‘‘securities’’ means any shares, debentures or other instruments, irrespective of their form or
title, issued or authorised to be issued by a profit company;
‘‘share’’ means one of the units into which the proprietary interest in a profit company is
divided;
Legal nature of company shares and requirement to have shareholders
* Won’t ask a question directly about section 35 however it is important to understand
35.
(1)
(2)
(3)
(4)
(5)
(6)
A share issued by a company is movable property, transferable in any manner
provided for or recognised by this Act or other legislation.
...
A company may not issue shares to itself.
An authorised share of a company has no rights associated with it until it has
been issued.
Shares of a company that have been issued and subsequently—
(a)
acquired by that company, as contemplated in section 48; or
(b)
surrendered to that company in the exercise of appraisal rights in terms of
section 164,
have the same status as shares that have been authorised but not
issued.
Despite the repeal of the Companies Act, 1973 (Act No. 61 of 1973), a share
issued by a pre-existing company, and held by a shareholder immediately before
the effective date, continues to have all of the rights associated with it
immediately before the effective date, irrespective of whether those rights existed
in terms of the company’s Memorandum of Incorporation, or in terms of that Act,
subject only to—
(a)
amendments to that company’s Memorandum of Incorporation after the
effective date;
(b)
the operation of subsection (5); and
(c)
the regulations contemplated in item 6(3) of Schedule 5.
Note:
It is essential to distinguish between authorisation and issue. The authorisation of shares refers to the
creation of those shares in the MOI. As can be seen from s35(4) authorised shares carry no rights. The
issue of shares is the process through which shares are transferred to the holders of those shares, by
sale or other legal means.
The rights that adhere to shares are generally the right to vote (although it is possible that certain classes
of shares have limited rights to vote in certain circumstances), the right t share in dividends (distributions
of profit), the rights of ownership and the right to share in any residue after the liquidation of the company.
Therefore, the rights that adhere to shares only come into existence when they are issued.
2
Authorisation for shares
36.
(1)
A company’s Memorandum of Incorporation—
(a)
must set out the classes of shares, and the number of shares of each
class, that the company is authorised to issue;
(b)
must set out, with respect to each class of shares—
(i)
a distinguishing designation for that class; and
(ii)
the preferences, rights, limitations and other terms associated with
Must be complied with
that class, subject to paragraph (d);
(c)
Optional
(d)
may authorise a stated number of unclassified shares, which are subject
to classification by the board of the company in accordance with
subsection (3)(c); and
may set out a class of shares—
(i)
without specifying the associated preferences, rights, limitations or
other terms of that class;
(ii)
for which the board of the company must determine the
associated preferences, rights, limitations or other terms; and
(iii)
which must not be issued until the board of the company has
determined the associated preferences, rights, limitations or other
terms, as contemplated in subparagraph (ii).
Note:
S36(1) provides for the creation/authorisation of shares in the MOI. This section provides for the creation
of different classes of shares as long as they are designated as such and the rights and conditions are
set out in the MOI.
Note that sub paragraph (c) provides for shares to be created that may later be placed into one of the
EXISTING classes of shares, whereas subparagraph (d) provides for the creation of “blank” shares that
can be placed into a NEW class of shares. Subparagraph (d) share may be useful for the issue of
capitalisation shares where the company wishes to issue shares with conditions and preferences that
are different from any existing class of shares.
(2)
The authorisation and classification of shares, the numbers of authorised shares
of each class, and the preferences, rights, limitations and other terms associated
with each class of shares, as set out in a company’s Memorandum of
Incorporation, may be changed only by—
(a)
an amendment of the Memorandum of Incorporation by special resolution
of the shareholders; or
(b)
the board of the company, in the manner contemplated in subsection (3),
except to the extent that the Memorandum of Incorporation provides
otherwise.
See note after s38.
3
(3)
(4)
Except to the extent that a company’s Memorandum of Incorporation provides
otherwise, the company’s board may—
(a)
increase or decrease the number of authorised shares of any class of
shares;
(b)
reclassify any classified shares that have been authorised but not issued;
(c)
classify any unclassified shares that have been authorised as
contemplated in subsection (1)(c), but are not issued; or
(d)
determine the preferences, rights, limitations or other terms of shares in a
class contemplated in subsection (1)(d).
If the board of a company acts pursuant to its authority contemplated in
subsection (3), the company must file a Notice of Amendment of its
Memorandum of Incorporation, setting out the changes effected by the board.
Preferences, rights, limitations and other share terms
37.
(1)
All of the shares of any particular class authorised by a company have
preferences, rights, limitations and other terms that are identical to those of other
shares of the same class.
(2)
Each issued share of a company, regardless of its class, has associated with it
one general voting right, except to the extent provided otherwise by—
(a)
this Act; or
(b)
the preferences, rights, limitations and other terms determined by or in
terms of the company’s Memorandum of Incorporation in accordance with
section 36.
(3)
Despite anything to the contrary in a company’s Memorandum of Incorporation—
(a)
every share issued by that company has associated with it an irrevocable
right of the shareholder to vote on any proposal to amend the
preferences, rights, limitations and other terms associated with that share;
and
(b)
(4)
(5)
if that company has established only one class of shares—
(i)
those shares have a right to be voted on every matter that may be
decided by shareholders of the company; and
(ii)
the holders of that class of shares are entitled to receive the net
assets of the company upon its liquidation.
If a company’s MOI has established more than one class of shares the
Memorandum of Incorporation, in setting out the preferences, rights, limitations
and other terms of those classes of shares, must provide that—
(a)
for each particular matter that may be submitted for a decision to
shareholders of the company, at least one class of the company’s shares
has voting rights that may be exercised on that matter; and
(b)
the holders of at least one class of the company’s shares, irrespective of
whether it is the same as any class contemplated in paragraph (a), are
entitled to receive the net assets of the company upon its liquidation.
Subject to any other law, a company’s MOI may establish, for any particular class
of shares, preferences, rights, limitations or other terms that—
(a)
confer special, conditional or limited voting rights;
(b)
provide for shares of that class to be redeemable, subject to the
requirements of sections 46 and 48, or convertible, as specified in the
MOI—
4
(i)
(c)
(d)
(6)
(7)
(8)
(9)
at the option of the company, the shareholder, or another person
at any time, or upon the occurrence of any specified contingency;
(ii)
for cash, indebtedness, securities or other property;
(iii)
at prices and in amounts specified, or determined in accordance
with a formula; or
(iv)
subject to any other terms set out in the company’s MOI;
entitle the shareholders to distributions calculated in any manner,
including dividends that may be cumulative, non-cumulative, or partially
cumulative, subject to the requirements of sections 46 and 47; or
provide for shares of that class to have preference over any other class of
shares with respect to distributions, or rights upon the final liquidation of
the company.
The Memorandum of Incorporation of a company may provide for preferences,
rights, limitations or other terms of any class of shares of that company to vary in
response to any objectively ascertainable external fact or facts.
For the purpose of subsection (6)—
(a)
‘‘external fact or facts’’ includes the occurrence of any event, a variation in
any fact, benchmark or other point of reference, a determination or action
by the company, its board, or any other person, an agreement to which
the company is a party, or any other document; and
(b)
the manner in which a fact affects the preferences, rights, limitations or
other terms of shares must be expressly determined by or in terms of the
company’s Memorandum of Incorporation, in accordance with section 36.
If the Memorandum of Incorporation of a company has been amended to
materially and adversely alter the preferences, rights, limitations or other terms of
a class of shares, any holder of those shares is entitled to seek relief in terms of
section 164 if that shareholder—
(a)
notified the company in advance of the intention to oppose the resolution
to amend the Memorandum of Incorporation; and
(b)
was present at the meeting, and voted against that resolution.
A person—
(a)
acquires the rights associated with any particular securities of a
company—
(i)
when that person’s name is entered in the company’s certificated
securities register; or
(ii)
as determined in accordance with rules of the Central Securities
Depository, in the case of uncertificated securities; and
(b)
ceases to have the rights associated with any particular securities of a
company—
(i)
when the transfer to another person, re-acquisition by the
company, or surrender to the company has been entered in the
company’s certificated securities register; or
(ii)
as determined in accordance with the rules of the Central
Securities Depository, in the case of uncertificated securities.
Division of Shares into Various Classes
5
Special, conditional or limited voting rights can be attached to any class of shares in the MOI,
however at least 1 class of shares must have voting rights AND if the resolution is to change
the terms associated with a share, each shareholder has by law a right to vote on this resolution.
1.
Ordinary shares
Ordinary shares get consideration for a dividend only after preference shares.
There is no limit to the amount of dividend payable here (apart from other classes of shares).
All shares have same rights unless stipulation to contrary.
On distribution on liquidation ordinary shareholders are considered ‘residuary heirs’ after
creditors & other preference shareholders.
2.
Preference shares
Gives the shareholder some preferential rights as compared to ordinary shareholders
Preferential rights as to dividends
 Shares offer fixed dividend per annum payable before dividend payable to others.
 Get 1st bite of profits if any – but won’t earn more than fixed dividend.
 Therefore ordinary shareholders may receive more.
Preference shares can be divided into further classes:
2.1 Cumulative preference shares:
There is a presumption that preferential dividends are cumulative, unless the conditions of issue
state otherwise, this means that the preferential shareholder is “entitled” to a dividend each
year. If there are insufficient profits to pay dividend in 1 year, the shareholder can get a dividend
the following year in respect of both years (before ordinary shareholders get anything).
2.2 Participating preference shares:
There is a presumption that preference shares are NON-participating, unless the conditions of
issue state otherwise.
This is a combination of ordinary rights & preferential rights, in that the shareholder will get a
“fixed” dividend, but also will be able to participate in the distribution to ordinary shareholders.
2.3 Convertible preference shares:
This carries the right that it may be converted, usually into ordinary shares, so e.g. if company
performing well, may be better to hold ordinary shares rather than settle for fixed dividend
Voting rights in respect of preference shares:
The Memorandum of Incorporation may provide that the preference shareholders have no right
to vote except in 2 circumstances:
1.
When the preference dividend in arrears, or
2.
If a resolution is proposed which directly affects interests of these shareholders.
3.
Redeemable shares
This is a share which can be redeemed (bought back) by company under certain
circumstances.
All repurchased shares must be cancelled by the company on reacquisition.
AIM: To return capital to members. Dividends would be taxed, while return of capital is taxed
at a lower rate.
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This buy-back will not result in prejudice to creditors, because the payment for these shares
does not result in loss of capital because the money for buying back shares can only come
from:
1.
New capital – raised by fresh issue of shares, or
2.
Divisible profits – then sum equal to nominal value of shares to be redeemed must be
transferred to the capital redemption reserve fund ie a non-distributable reserve
 Therefore capital remains unchanged
4.
Capitalisation shares
If a company makes a profit which it could use to pay out dividends, and is authorised in its
MOI, it could decide not to pay out the dividends and rather convert that profit into share capital
and the shareholders then receive fully paid capitalisation shares. So instead of cash dividends
the shareholders receive more shares in the company.
Issuing shares
38.
(1)
The board of a company may resolve to issue shares of the company at any
time, but only within the classes, and to the extent, that the shares have been
authorised by or in terms of the company’s Memorandum of Incorporation, in
accordance with section 36.
(2)
If a company issues shares—
(a)
that have not been authorised in accordance with section 36; or
(b)
in excess of the number of authorised shares of any particular class,
(3)
the issuance of those shares may be retroactively authorised in accordance with
section 36 within 60 business days after the date on which the shares were
issued.
If a resolution seeking to retroactively authorise an issue of shares, as
contemplated in subsection (2), is not adopted when it is put to a vote—
(a)
the share issue is a nullity to the extent that it exceeds any authorisation;
(b)
(c)
(d)
the company must return to any person the fair value of the consideration
received by the company in respect of that share issue to the extent that it
is nullified, together with interest in accordance with the Prescribed Rate
of Interest Act, 1975 (Act No. 55 of 1975), from the date on which the
consideration for the shares was received by the company, until the date
on which the company complies with this paragraph;
any certificate evidencing a share so issued and nullified, and any entry in
a securities register in respect of such an issue, is void; and
a director of the company is liable to the extent set out in section
77(3)(e)(i) if the director—
(i)
was present at a meeting when the board approved the issue of
any unauthorised shares, or participated in the making of such a
decision in terms of section 74; and
(ii)
failed to vote against the issue of those shares, despite knowing
that the shares had not been authorised in accordance with
section 36.
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‘‘knowing’’, ‘‘knowingly’’ or ‘‘knows’’, when used with respect to a person, and in
relation to a particular matter, means that the person either—
(a)
had actual knowledge of the matter; or
(b)
was in a position in which the person reasonably ought to have—
(i)
had actual knowledge;
(ii)
investigated the matter to an extent that would have provided the person
with actual knowledge; or
(iii)
taken other measures which, if taken, would reasonably be expected to
have provided the person with actual knowledge of the matter;
Note:
The authorisation and issue of shares is regulated by sections 36 and 38 of the Act. Shares are
authorised in the Memorandum of Incorporation in accordance with section 36(1) and issued
by a resolution of the board of directors in terms of section 38(1). Section 38(1) of the Act
specifically empowers the board to issue shares without the involvement of the shareholders,
but only insofar as the “shares have been authorised by or in terms of the company’s
Memorandum of Incorporation, in accordance with section 36.” The result is simply that the
incorporators/drafters of the Memorandum of Incorporation will create classes of shares and
that the board, on incorporation, will have the power to issue all or a portion of those shares.
Should the board not have issued all of the authorised shares, it is empowered to do so at any
time thereafter without reference to the shareholders. The fact that the board may issue such
shares in this manner does not result in prejudice to the shareholders in the sense that at the
date of purchase the shares were already authorised. It must, therefore, have been
contemplated by the shareholders that they may be issued at some time in the future and that
said possibility was calculated into their decision to buy the shares. In the premises, any dilution
of their rights as shareholders must have been anticipated and does not give rise to undue
prejudice to the shareholders.
A company may wish to increase the number of shares of a particular class and issue them
where all the shares originally authorised in the Memorandum of Incorporation are already in
issue. Section 36(2) provides two ways in which the number of shares may be increased should
all of the shares already be in issue.. This subsection provides for other possibilities as well, for
example the reclassification and decrease of shares, but for present purposes the increase of
the number of shares will be used to illustrate the point to be made. Subsection (2)(a) provides
for the increase by means of the amendment of the Memorandum of Incorporation by a special
resolution of the shareholders. Subsection (2)((b) as read with subsection (3), however, offers
an alternative method to increase the number of shares in that the board is, inter alia,
empowered to increase the number of authorised shares in so far as the Memorandum of
Incorporation allows. Subsection 4 simply provides that, in either case, the board must file a
Notice of Amendment to its Memorandum of Incorporation with the Companies and Intellectual
Property Commission. Section 16(7) as read with regulation 15(3) determines that such a notice
must be made within 10 business days after the amendment has been effected. Section 16(9)
stipulates that the amendment will be effective from the date of the filing of such a Notice of
Amendment or any later date as set out in the Notice. It is significant that nether the sections
nor the aforementioned regulation provides for the notice to be brought to the attention of the
shareholders.
8
In short then, there are two methods to increase the number of authorised shares of which only
one requires the input of the shareholders of the company. There is nothing controversial about
this procedure since the mere authorising of more shares has little or no impact on the rights
of the shareholders. This is so because section 35 makes it clear that no rights adhere to shares
until they are in issue. As such, the rights exercisable by the shareholders will not be diluted
until the shares are issued. In either case the board has the power, accorded to it by section
36(1), to issue the shares.
Section 38 (2) empowers the board to issue unauthorised shares of the company on condition
that such shares are “retroactively authorised in accordance with section 36 within 60 business
days” of their issue. Initially it appears counterintuitive that the board is capable of issuing
shares that have not yet been issued, but the Act is replete with this kind of process whereby
the board is empowered to make decisions for the company and then seek ratification from the
shareholders after the fact. As an example, section 15(3) makes provision for the board to make
rules relating to issues of governance, which rules have a binding effect on an interim basis
until such rule is ratified by an ordinary resolution of the shareholders. Such a system is
imminently sensible since it allows the board to make decisions, for which time may be material,
without employing the cumbersome process of calling a meeting and then to present those
decisions for ratification once the urgency has passed. Of course, in this case the failure of the
shareholders to ratify leads to the particular rule being void. Similarly, section 38(3) provides
for the nullity of such an issue of shares if the decision is not ratified within 60 business days
and provides for what is essentially restitution of the respective performances.
What sets the process in section 38(2) apart is that it is silent as to who would be empowered
to retroactively authorise the shares that have already been issued. Section 38(2) refers to the
retroactive authorisation of the issued shares ‘in accordance with s36’. As previously
mentioned, section 36 contains two methods of authorisation; namely by a special resolution
of the shareholders or by the board itself. It is submitted, that no issues arise should the former
method be employed since it provides the shareholders the opportunity to withhold their
approval of a decision that will inevitably dilute their rights with regard to their shares. The
second method of authorisation, that contained in section 36(2)(b), raises the possibility of the
board, unilaterally issuing unauthorised shares and then authorising them retroactively without
the shareholders even getting notice. It will be observed that this gives rise to a strange time
line. If this were indeed to be the case the board could simply approve the issue of shares and
authorise them at the same meeting, thus presenting the shareholders with a fait accompli.
Thus on a plain reading of the text, giving the words their ordinary meanings, the shareholders,
may be subjected to having their rights diluted without any recourse or input at all.
The act is not completely lacking in mechanisms through which shareholder’s rights can be
protected in these circumstances. Section 41(3) provides for the approval by special resolution
of the shareholders if the issue of shares ‘will be equal to or exceed 30% of the voting power
of all the shares of that class held by shareholders immediately before the transaction’. The
subsection refers to the issue of shares in a transaction or ‘series of integrated transactions’.
Section 41 (4) defines and integrated series of transaction as transactions that are made
contingent on the other or are entered into within a 12-month period. This appears to apply to
all circumstance where shares are issued, whether recently created, or merely authorised and
unissued. The result, in terms of the matter at hand, is that an issue of shares in terms of section
38(2) will still have to be authorised by a special resolution if the issue complies with the
requirements as set out above. This, of course will not apply if the issue of shares does not
meet the 30% threshold. Further to this there is the requirements of section 39(2) which obliges
a private company to offer any new issue of shares to its existing shareholders in proportion to
9
their shareholding before selling those shares outside the company. Both of these section
serve to limit the power of the board to unilaterally issue shares, the former by granting the
shareholders a decisive decision-making role and the later by granting a much weaker remedy,
that of the ability to take the shares out of the public domain by purchasing them and thus,
retaining the proportionate power adhering to the shares.
The question remains, however, whether, even in the truncated circumstances as set out
above, the board should have the right to unilaterally issue share and be able to retroactively
authorise them. If this question is to be answered in the positive, no interpretation is necessary.
It does however, mean that the shareholders are in an invidious position in that their power in
the company can be diluted to a degree just less than 30% every 12 months.
If the answer is in the negative, the section, as it stands will need to be interpreted to give effect
to that position. It is submitted that this is the preferable answer.
Subscription of shares
39.
(1)
This section—
(a)
does not apply to a public company or state-owned company, except to
the extent that the company’s Memorandum of Incorporation provides
otherwise; and
(b)
applies to a private company or personal liability company with respect to
any issue of its shares, other than—
(i)
shares issued—
(aa) in terms of options or conversion rights; or
(bb) as in section 40(5) to (7); or
(ii)
capitalisation shares issued as in section 47.
(2)
If a private company proposes to issue any shares, other than as contemplated in
subsection (1)(b), 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 equal to the voting power
of that shareholder’s general voting rights immediately before the offer was made.
Note:
This section provides for a right of pre-emption for existing shareholders in the event of the company
making a new issue of shares. It is not the same as the sale of shares by a shareholders.
(3)
(4)
A private or personal liability company’s Memorandum of Incorporation may limit,
negate, restrict or place conditions upon the right set out in subsection (2), with respect
to any or all classes of shares of that company.
Except to the extent that a private or personal liability company’s Memorandum of
Incorporation provides otherwise—
(a)
in exercising a right in terms of subsection (2), a shareholder may subscribe for
fewer shares than the shareholder would be entitled to subscribe for under that
subsection; and
(b)
shares not subscribed for by a shareholder within the reasonable time
contemplated in subsection (2), may be offered to other persons to the extent
permitted by the Memorandum of Incorporation.
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Consideration for shares
40.
(1)
The board of a company may issue authorised shares only—
(a)
for adequate consideration to the company, as determined by the board;
(b)
in terms of conversion rights associated with previously issued securities
of the company; or
(c)
as a capitalisation share as contemplated in section 47.
‘‘consideration’’ means anything of value given and accepted in exchange for any
property, service, act, omission or forbearance or any other thing of value, including—
(a)
any money, property, negotiable instrument, securities, investment credit facility,
token or ticket;
(b)
any labour, barter or similar exchange of one thing for another; or
(c)
any other thing, undertaking, promise, agreement or assurance, irrespective of
its apparent or intrinsic value, or whether it is transferred directly or indirectly;
(2)
Before a company issues any particular shares, the board must determine the
consideration for which, and the terms on which, those shares will be issued.
(3)
A determination by the board of a company in terms of subsection (2) as to the
adequacy of consideration for any shares may not be challenged on any basis
other than in terms of section 76, read with section 77(2).
(4)
Subject to subsections (5) to (7), when a company has received the
consideration approved by its board for the issuance of any shares—
(a)
those shares are fully paid; and
(b)
the company must issue those shares and cause the name of the holder
to be entered on the company’s securities register in accordance with
Part E of this Chapter.
Shareholder approval for issuing shares in certain cases
41.
(1)
Subject to subsection (2), an issue of shares or securities convertible into shares,
or a grant of options contemplated in section 42, or a grant of any other rights
exercisable for securities, must be approved by a special resolution of the
shareholders of a company, if the shares, securities, options or rights are issued
to a—
(a)
director, future director, prescribed officer, or future prescribed officer of
the company;
(b)
person related or inter-related to the company, or to a director or
prescribed officer of the company; or
(c)
nominee of a person contemplated in paragraph (a) or (b).
(2)
Subsection (1) does not apply if the issue of shares, securities or rights is—
(a)
under an agreement underwriting the shares, securities or rights;
(b)
in the exercise of a pre-emptive right to be offered and to subscribe
shares, as contemplated in section 39;
(c)
in proportion to existing holdings, and on the same terms and conditions
as have been offered to all the shareholders of the company or to all the
shareholders of the class or classes of shares being issued;
(d)
pursuant to an employee share scheme that satisfies the requirements of
section 97; or
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(e)
(3)
pursuant to an offer to the public, as defined in section 95(1)(h), read with
section 96.
An issue of shares, securities convertible into shares, or rights exercisable for
shares in a transaction, or a series of integrated transactions, requires approval
of the shareholders by special resolution if the voting power of the class of
shares that are issued or issuable as a result of the transaction or series of
integrated transactions will be equal to or exceed 30% of the voting power of all
the shares of that class held by shareholders immediately before the transaction
or series of transactions.
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(4)
(5)
(6)
In subsection (3)—
(a)
for purposes of determining the voting power of shares issued and
issuable as a result of a transaction or series of integrated transactions,
the voting power of shares is the greater of—
(i)
the voting power of the shares to be issued; or
(ii)
the voting power of the shares that would be issued after giving
effect to the conversion of convertible shares and other securities
and the exercise of rights to be issued;
(b)
a series of transactions is integrated if—
(i)
consummation of one transaction is made contingent on
consummation of one or more of the other transactions; or
(ii)
the transactions are entered into within a 12-month period, and
involve the same parties, or related persons; and—
(aa) they involve the acquisition or disposal of an interest in one
particular company or asset; or
(bb) taken together, they lead to substantial involvement in a
business activity that did not previously form part of the
company’s principal activity.
A director of a company is liable to the extent set out in section 77(3)(e)(ii) if the
director—
(a)
was present at a meeting when the board approved the issue of any
securities as contemplated in this section, or participated in the making of
such a decision in terms of section 74; and
(b)
failed to vote against the issue of those securities, despite knowing that
the issue of those securities was inconsistent with this section.
In this section, ‘future director’ or ‘future prescribed officer’ does not include a
person who becomes a director or prescribed officer of the company more than
six months after acquiring a particular option or right.
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Solvency and liquidity test
4.
(1)
For any purpose of this Act, a company satisfies the solvency and liquidity test
at a particular time if, considering all reasonably foreseeable financial
circumstances of the company at that time—
(a)
the assets of the company, as fairly valued, equal or exceed the liabilities
of the company as fairly valued; and
(b)
it appears that the company will be able to pay its debts as they become
due in the ordinary course of business for a period of—
(i)
12 months after the date on which the test is considered; or
(ii)
in the case of a distribution contemplated in paragraph (a) of the
definition of ‘distribution’ in section 1, 12 months following that
distribution.
(2)
For the purposes contemplated in subsection (1)—
(a)
any financial information to be considered concerning the company must
be based on—
(i)
accounting records that satisfy the requirements of section 28;
and
(ii)
financial statements that satisfy the requirements of section 29;
(b)
subject to paragraph (c), the board or any other person applying the
solvency and liquidity test to a company—
(i)
must consider a fair valuation of the company’s assets and
liabilities, including any reasonably foreseeable contingent
assets and liabilities, irrespective of whether or not arising as a
result of the proposed
distribution, or otherwise; and
(ii)
may consider any other valuation of the company’s assets and
liabilities that is reasonable in the circumstances; and
(c)
unless the Memorandum of Incorporation of the company provides
otherwise, when applying the test in respect of a distribution
contemplated in paragraph (a) of the definition of ‘distribution’ in section
1, a person is not to include as a liability any amount that would be
required, if the company were to be liquidated at the time of the
distribution, to satisfy the preferential rights upon liquidation of
shareholders whose preferential rights upon liquidation are superior to
the preferential rights upon liquidation of those receiving the distribution.
14
See separate notes on Capital Maintenance
Financial assistance for subscription of securities
44.
(1)
In this section, ‘‘financial assistance’’ does not include lending money in the
ordinary course of business by a company whose primary business is the lending
of money.
(2)
Except to the extent that the Memorandum of Incorporation of a company
provides otherwise, the board may authorise the company to provide financial
assistance by way of a loan, guarantee, the provision of security or otherwise to
any person for the purpose of, or in connection with, the subscription of any
option, or any securities, issued or to be issued by the company or a related or
inter-related company, or for the purchase of any securities of the company or a
related or inter-related company, subject to subsections (3) and (4).
(3)
Despite any provision of a company’s MOI to the contrary, the board may not authorise
any financial assistance contemplated in subsection (2), unless—
(a)
the particular provision of financial assistance is—
(i)
pursuant to an employee share scheme that satisfies the requirements of
section 97; or
(ii)
pursuant to a special resolution of the shareholders, adopted within the
previous two years, which approved such assistance either for the
specific recipient, or generally for a category of potential recipients, and
the specific recipient falls within that category; and
(b)
the board is satisfied that—
(i)
immediately after providing the financial assistance, the company would
satisfy the solvency and liquidity test; and
(ii)
the terms under which the financial assistance is proposed to be given
are fair and reasonable to the company.
(4)
In addition to satisfying the requirements of subsection (3), the board must ensure that
any conditions or restrictions respecting the granting of financial assistance set out in the
company’s MOI have been satisfied.
A decision by the board of a company to provide financial assistance contemplated in
subsection (2), or an agreement with respect to the provision of any such assistance, is
void to the extent that the provision of that assistance would be inconsistent with—
(a)
this section; or
(b)
a prohibition, condition or requirement contemplated in subsection (4).
If a resolution or an agreement is void in terms of subsection (5) a director of a company
is liable to the extent set out in section 77(3)(e)(iv) if the director—
(a)
was present at the meeting when the board approved the resolution or
agreement, or participated in the making of such a decision in terms of section
74; and
(b)
failed to vote against the resolution or agreement, despite knowing that the
provision of financial assistance was inconsistent with this section or a
prohibition, condition or requirement contemplated in subsection (4).
(5)
(6)
15
What does “Financial Assistance” mean?
Charterhouse Investments v Tempest Diesel [1986] 1 BCLC 1:
“There is no definition of giving financial assistance in the section, although some
examples are given. The words have no technical meaning and their frame of reference
is in my judgment the language of ordinary commerce. One must examine the
commercial realities of the transaction and decide whether it can properly be described
as giving financial assistance by the company…”
Lipschitz NO v U D C Bank Ltd 1979(1) S A 789 (A):
1. The prohibition against the giving of financial assistance is couched in very wide terms.
It relates to "any" financial assistance, whether given "directly or indirectly", and it relates
to such assistance not only when it is given for the purpose of the purchase of or
subscription for any shares in the company, but also when it is given "in connection
with" such purchase or subscription.
2. The prohibition contains two main elements - the giving of financial assistance, and the
purpose for which it is given.
3. There is no comprehensive definition of "financial assistance" in the section or
elsewhere in the Act.
4. "impoverishment test", which asks the question, has the company become poorer as a
result of what it did for the purpose of or in connection with the purchase of its shares ?
5. The application of the impoverishment test is not always appropriate. In some cases the
test may be a helpful guide and may often yield a clear and decisive answer to the
problem. In other cases it may be not only unhelpful but irrelevant.
6. The section provides in terms that the giving of a guarantee or the provision of security
constitutes the giving of financial assistance. In such cases, if the giving of the
guarantee or the providing of the security is shown to be for the purpose of or in
connection with the purchase of the company's shares, the section would be
contravened, whether or not such guarantee or security actually renders or is likely to
render the company poorer.
7. Although the section does not in terms prohibit the conclusion of a contract for the sale
of shares in which there is provision for the giving of financial assistance, if a contract
provides for future financial assistance which if actually given would be in contravention
of the section, it is invalid and unenforceable.
Lewis v Oneanate (Pty) Ltd 1992 (4) SA 811 (A):
 All the share in the co were sold
 Purchase price partly paid in cash and partly to be paid off over 3 to 5 years.
 Outstanding amount secured by the passing of a mortgage bond by the company in favour
of the seller.
 The bond was to be passed over a piece of land to be transferred to the company.
 object of a provision such as s 38(1) is the protection of creditors of a company, who have
a right to look to its paid-up capital as the fund out of which their debts are to be discharged.
 purpose of the legislature was to avoid that fund being employed or depleted or exposed to
possible risk in consequence of transactions concluded for the purpose of or in connection
with the purchase of its shares .
16


If the course outlined above should be adopted, there will not result a giving of
financial assistance in contravention of s 38(1).
Although the passing of a bond constitutes the provision of security, it will not in
the special circumstances of this case amount to the giving of financial assistance.
It will not bind any of the assets which will be held by the company at the moment
immediately prior to the passing of the bond.
There is no financial assistance if the person is entitled to the whatever is transferred; so the
payment of a debt is not financial assistance, nor is the payment of a dividend once it has been
declared. Even if a debt was paid specifically to facilitate the purchase of the shares it is still
not financial assistance within the meaning of the Act.
Gardner v Margo 2006 (6) SA 33 (SCA):
[T]his court appears to have accepted the distinction … between the ‘ultimate goal’ of
the transaction in question and its ‘direct object, and to accept that it is only the direct
object of the transaction that is relevant. If the direct object is not the provision of
financial assistance by the company for the purpose of or in connection with a purchase
of its shares, then it is irrelevant that the ultimate goal of the transaction was to enable
a person to purchase such shares. Moreover, financial assistance within the meaning
of s 38(1) is given only when the direct object of the transaction is to assist another
financially – the s 38 prohibition is not contravened when the direct object of the
transaction is merely to give another that to which he or she is already entitled.
As was submitted by Margo’s counsel, the guarantee given by OTR to Joubert was not
intended to provide financial assistance to anyone in respect of the purchase of OTR
shares. The direct object of the guarantee was to provide Joubert with some security
for that to which he was entitled in terms of the mandate, ie part of the proceeds of the
shares to be sold on his behalf by Gardner. In my view, the guarantee does not fall foul
of s 38(1) of the Companies Act and counsel for the appellants (once again, wisely) did
not press this point at all.
17
Loans or other financial assistance to directors
45.
(1)
In this section, ‘‘financial assistance’’—
(a)
includes lending money, guaranteeing a loan or other obligation, and
securing any debt or obligation; but
(b)
does not include—
(i)
lending money in the ordinary course of business by a company
whose primary business is the lending of money;
(ii)
an accountable advance to meet—
(aa) legal expenses in relation to a matter
concerning the company; or
(bb) anticipated expenses to be incurred by the person on
behalf of the company; or
(iii)
an amount to defray the person’s expenses for removal at the
company’s request.
(2)
(3)
(4)
Except to the extent that the MOI of a company provides otherwise, the board
may authorise the company to provide direct or indirect financial assistance to a
director or prescribed officer of the company or of a related or inter-related
company, or to a related or inter-related company or corporation, or to a member
of a related or inter-related corporation, or to a person related to any such
company, corporation, director, prescribed officer or member, subject to
subsections (3) and (4).
Despite any provision of a company’s MOI to the contrary, the board may not
authorise any financial assistance contemplated in subsection (2), unless—
(a)
the particular provision of financial assistance is—
(i)
pursuant to an employee share scheme that satisfies the
requirements of section 97; or
(ii)
pursuant to a special resolution of the shareholders, adopted
within the previous two years, which approved such assistance
either for the specific recipient, or generally for a category of
potential recipients, and the specific recipient falls within that
category; and
(b) the board is satisfied that—
(i)
immediately after providing the financial assistance, the company
would satisfy the solvency and liquidity test; and
(ii)
the terms under which the financial assistance is proposed to be
given are fair and reasonable to the company.
In addition to satisfying the requirements of subsection (3), the board must
ensure that any conditions or restrictions respecting the granting of financial
assistance set out in the company’s MOI have been satisfied.
18
(5)
(6)
(7)
If the board of a company adopts a resolution to do anything contemplated in
subsection (2), the company must provide written notice of that resolution to all
shareholders, unless every shareholder is also a director of the company, and to
any trade union representing its employees—
(a)
within 10 business days after the board adopts the resolution, if the total
value of all loans, debts, obligations or assistance contemplated in that
resolution, together with any previous such resolution during the financial
year, exceeds one-tenth of 1% of the company’s net worth at the time of
the resolution; or
(b)
within 30 business days after the end of the financial year, in any other
case.
A resolution by the board of a company to provide financial assistance
contemplated in subsection (2), or an agreement with respect to the provision of
any such assistance, is void to the extent that the provision of that assistance
would be inconsistent with—
(a)
this section; or
(b)
a prohibition, condition or requirement contemplated in subsection (4).
If a resolution or agreement is void in terms of subsection (6) a director of a
company is liable to the extent set out in section 77(3)(e)(v) if the director—
(a)
was present at the meeting when the board approved the resolution or
agreement, or participated in the making of such a decision in terms of
section 74; and
(b)
failed to vote against the resolution or agreement, despite knowing that
the provision of financial assistance was inconsistent with this section or a
prohibition, condition or requirement contemplated in subsection (4).
19
Distributions must be authorised by board
‘‘distribution’’ means a direct or indirect—
(a)
transfer by a company of money or other property of the company, other than its own
shares, to or for the benefit of one or more holders of any of the shares, or to the holder of a
beneficial interest in any such shares, of that company or of another company within the same
group of companies, whether—
(i)
in the form of a dividend;
(ii)
as a payment in lieu of a capitalisation share, as contemplated in section 47;
(iii)
as consideration for the acquisition—
(aa) by the company of any of its shares, as contemplated in section 48; or
(bb) by any company within the same group of companies, of any shares of
a company within that group of companies; or
(iv)
otherwise in respect of any of the shares of that company or of another company
within the same group of companies, subject to section 164(19);
(b)
incurrence of a debt or other obligation by a company for the benefit of one or more
holders of any of the shares of that company or of another company within the same group of
companies; or
(c)
forgiveness or waiver by a company of a debt or other obligation owed to the company
by one or more holders of any of the shares of that company or of another company within the
same group of companies,
but does not include any such action taken upon the final liquidation of the company;
20
Distributions must be authorised by board
46.
(1)
A company must not make any proposed distribution unless—
(a)
the distribution—
(i)
is pursuant to an existing legal obligation of the company, or a
court order; or
(ii)
the board of the company, by resolution, has authorised the
distribution;
(b)
it reasonably appears that the company will satisfy the solvency and
liquidity test immediately after completing the proposed distribution; and
(c)
the board of the company, by resolution, has acknowledged that it has
applied the solvency and liquidity test, as set out in section 4, and
reasonably concluded that the company will satisfy the solvency and
liquidity test immediately after completing the proposed distribution.
(2)
When the board of a company has adopted a resolution contemplated in
subsection (1)(c), the relevant distribution must be fully carried out, subject only
to subsection (3).
(3)
If the distribution contemplated in a particular board resolution, court order or
existing legal obligation has not been completed within 120 business days after
the board made the acknowledgement required by subsection (1)(c), or after a
fresh acknowledgement being made in terms of this subsection, as the case may
be—
(a)
the board must reconsider the solvency and liquidity test with respect to
the remaining distribution to be made pursuant to the original resolution,
order or obligation; and
(b)
despite any law, order or agreement to the contrary, the company must
not proceed with or continue with any such distribution unless the board
adopts a further resolution as contemplated in subsection (1)(c).
(4)
If a distribution takes the form of the incurrence of a debt or other obligation by
the company, as contemplated in paragraph (b) of the definition of ‘distribution’
set out in section 1, the requirements of this section—
(a)
apply at the time that the board resolves that the company may incur that
debt or obligation; and
(b)
do not apply to any subsequent action of the company in satisfaction of
that debt or obligation, except to the extent that the resolution, or the
terms and conditions of the debt or obligation, provide otherwise.
If, after considering the solvency and liquidity test as required by this section, it
appears to the company that the section prohibits its immediate compliance with
a court order contemplated in subsection (1)(a)(i)—
(a)
the company may apply to a court for an order varying the original order;
and
(b)
the court may make an order that—
(i)
is just and equitable, having regard to the financial circumstances
of the company; and
(ii)
ensures that the person to whom the company is required to make
a payment in terms of the original order is paid at the earliest
possible date compatible with the company satisfying its other
financial obligations as they fall due and payable.
(5)
21
77.
(6)
A director of a company is liable to the extent set out in section 77(3)(e)(vi) if the
director—
(a)
was present at the meeting when the board approved a distribution as
contemplated in this section, or participated in the making of such a
decision in terms of section 74; and
(b)
failed to vote against the distribution, despite knowing that the distribution
was contrary to this section.
(e)
been present at a meeting, or participated in the making of a decision in terms of section 74, and
failed to vote against—
(vi)
a resolution approving a distribution, despite knowing that the distribution was
contrary to section 46, subject to subsection (4);
(4)
The liability of a director in terms of subsection (3)(e)(vi) as a consequence of the director having
failed to vote against a distribution in contravention of section 46—
(a)
arises only if—
(i)
immediately after making all of the distribution contemplated in a resolution in
terms of section 46, the company does not satisfy the solvency and liquidity
test; and
(ii)
it was unreasonable at the time of the decision to conclude that the company
would satisfy the solvency and liquidity test after making the relevant
distribution; and
(b)
does not exceed, in aggregate, the difference between—
(i)
the amount by which the value of the distribution exceeded the amount that
could have been distributed without causing the company to fail to satisfy the
solvency and liquidity test; and
(ii)
the amount, if any, recovered by the company from persons to whom the
distribution was made.
Capitalisation shares
47.
(1)
Except to the extent that a company’s Memorandum of Incorporation provides
otherwise—
(a)
the board of that company, by resolution, may approve the issuing of any
authorised shares of the company, as capitalisation shares, on a pro rata
basis to the shareholders of one or more classes of shares;
(b)
shares of one class may be issued as a capitalisation share in respect of
shares of another class; and
(c)
subject to subsection (2), when resolving to award a capitalisation share,
the board may at the same time resolve to permit any shareholder entitled
to receive such an award to elect instead to receive a cash payment, at a
value determined by the board.
22
(2)
The board of a company may not resolve to offer a cash payment in lieu of
awarding a capitalisation share, as contemplated in subsection (1)(c), unless the
board—
(a)
has considered the solvency and liquidity test, as required by section 46,
on the assumption that every such shareholder would elect to receive
cash; and
(b)
is satisfied that the company would satisfy the solvency and liquidity test
immediately upon the completion of the distribution.
23
Company or subsidiary acquiring company’s shares
48.
(1)
This section does not apply to—
(a)
the making of a demand, tendering of shares and payment by a company
to a shareholder in terms of a shareholder’s appraisal rights set out in
section 164; or
(b)
the redemption by the company of any redeemable securities in
accordance with the terms and conditions of those securities.
(2)
Subject to subsections (3) and (8), and if the decision to do so satisfies the
requirements of section 46—
(a)
the board of a company may determine that the company will acquire a
number of its own shares ; and
(b)
the board of a subsidiary company may determine that it will acquire
shares of its holding company, but—
(i)
not more than 10%, in aggregate, of the number of issued shares
of any class of shares of a company may be held by, or for the
benefit of, all of the subsidiaries of that company, taken together;
and
(ii)
no voting rights attached to those shares may be exercised while
the shares are held by the subsidiary, and it remains a subsidiary
of the company whose shares it holds.
(3)
Despite any provision of any law, agreement, order or the Memorandum of
Incorporation of a company, the company may not acquire its own shares, and a
subsidiary of a company may not acquire shares of that company, if, as a result
of that acquisition, there would no longer be any shares of the company in issue
other than—
(a)
shares held by one or more subsidiaries of the company; or
(b)
convertible or redeemable shares.
(4)
An agreement with a company providing for the acquisition by the company of
shares issued by it is enforceable against the company, subject to subsections
(2) and (3).
(5)
If a company alleges that, as a result of the operation of subsection (2) or (3), it is
unable to fulfil its obligations in terms of an agreement contemplated in
subsection (4)—
(a)
the company must apply to a court for an order in terms of paragraph (c);
(b)
the company has the burden of proving that fulfilment of its obligations
would put it in breach of subsections (2) or (3); and
(c)
if the court is satisfied that the company is prevented from fulfilling its
obligations pursuant to the agreement, the court may make an order
that—
(i)
is just and equitable, having regard to the financial circumstances
of the company; and
(ii)
ensures that the person to whom the company is required to make
a payment in terms of the agreement is paid at the earliest
possible date compatible with the company satisfying its other
financial obligations as they fall due and payable.
24
(6)
(7)
If a company acquires any shares contrary to section 46, or this section, the
company must, not more than two years after the acquisition, apply to a court for
an order reversing the acquisition, and the court may order—
(a)
the person from whom the shares were acquired to return the amount
paid by the company; and
(b)
the company to issue to that person an equivalent number of shares of
the same class as those acquired.
A director of a company is liable to the extent set out in section 77(3)(e)(vii) if the
director—
(a)
was present at the meeting when the board approved an acquisition of
shares contemplated in this section, or participated in the making of such
a decision in terms of section 74; and
(b)
failed to vote against the acquisition of shares, despite knowing that the
acquisition was contrary to this section or section 46.
25
(8)
A decision by the board of a company contemplated in subsection (2)(a)––
(a)
must be approved by a special resolution of the shareholders of the
company if any shares are to be acquired by the company from a director
or prescribed officer of the company, or a person related to a director or
prescribed officer of the company; and
(b)
is subject to the requirements of sections 114 and 115 if, considered
alone, or together with other transactions in an integrated series of
transactions, it involves the acquisition by the company of more than 5%
of the issued shares of any particular class of the company's shares.