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THE SHARE CAPITAL OF A COMPANY
INTRODUCTION
The word capital is an economic concept that is used connote those man made
resources that are utilised in the process of production. In the accounting sense
Capital or Equity consists of the excess of assets over liabilities in the business. In
company law the word is used mostly to connote the share capital of a company.
Under the old Act the then CIPRO was most concerned with the authorised and issued
share capital of a company. Each time there was a change in the authorised or new
shares were issued various forms had to be submitted together with a special
resolution to CIPRO. We called this the share capital maintenance regime. The
concern was that companies had to retain their share capital.
Under the Old Act a company could have either shares of a par value or no par value,
but not both. Par Value shares are where a value is allocated to the authorised share,
we call this a nominal value or par value. A no par value share is a share where a
value is established on the issue of the share. We will talk about this later on. Under
the old Act a company could not have both. They had to select one. There were very
few companies that had no par value shares, in fact I never ever came across one.
In Company Law there were strict requirements in regards to share capital. Many of
these requirements have been removed in the new Act. The maintenance of the share
capital was very important because once the share capital in a company has been
lost, in other words the accumulated losses of a company have wiped out all the profits
then share capital is lost.
Under the old Act what usually happened in regard to a company and for that matter
in a close corporation is that share or members capital was established at a nominal
value and 100 shares were issued at R1 each making the share capital of R100. The
balance of the capital that the business required to start or to operate were supplied
by way of shareholder loans under various terms and conditions. The problem with
this is that as soon as the shareholders, and one would assume that these
shareholders were in control of the business saw that things were not going according
to plan as they controlled everything, they could easily whip out the loan account to
the detriment of creditors. However if the money went in as share capital it would have
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been much harder for the company to take a repayment of share capital as there are
all kinds of rules which we will deal with later.
The new Act does away with share capital maintenance regime and brings in a new
concept of solvency and liquidity. However under the new Act one could still establish
a company with small share capital which could be shares of no par value together
with loan accounts and what would stop the shareholders or directors from taking the
capital before creditors?
Yes there are other laws that may be applicable like
insolvency law.
Terms used in regard to share capital
Authorised Capital
The authorised capital is essentially the number of shares of a particular share class
that the company may issue to shareholders. As a rule one cannot use more shares
than the authorised share capital. The authorised share capital has to be specified in
the MOI or Memorandum of Incorporation. This will include the types of share, what
rights are attached to each share etcetera.
Issued Capital
This means shares that have been issued and actually held by shareholder. The
issued shares may constitute portion or the whole of the authorised share capital but
cannot exceed it.
Unissued Shares
This represents the shares that are not being issued, the number of authorised shares
minus the issued shares would mean unissued shares.
Classes of Shares
Some notes in regard to authorised, Regulation 31(2) provides that a pre-existing
company cannot authorise any new par value shares or shares that have a nominal
value. If there are any shares of par value with no shares in issue these shares may
not be used and would need to be converted in terms of Regulation 31(3) by
completing form CoR 31.
The MOI must set out with respect to each class of share.
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a. A distinguishing designation for that class; and
b. The preferences, rights, limitations and other terms associated with that class,
unless these will determined later by the board.
The capital of a company may consist of one type of share like an ordinary share or of
several classes of shares, each with rights as regards voting, sharing in profits
etcetera.
Different type of shares
The most common shares that we know are ordinary shares
Preference shares which may be, accumulative, non-accumulative, participating,
redeemable, a convertible.
Unclassified shares
There is a new concept introduced by the companies Act called unclassified company
shares which must be stipulated in the MOI – Section 36(3)(c). The purpose of having
unclassified shares is to allow the directors to set up the requirements of the company
when they wish to raise more share capital. As a rule it is very unlikely that smaller
owner managed companies will ever make use of unclassified shares.
Large
companies may need to do this if they come across an opportunity and they have to
change share capital and raise cash quickly.
The authorisation and classification of shares, the change of rights and preference
rights etcetera, as set out in a company’s MOI, may be changed only
a. By an amendment of the MOI by special resolution of the shareholders; or
b. By the Board of Directors unless the companies prohibits or restricts the board
from doing so, except to the extent that the MOI does not allow it, the
Companies Board may increase or decrease the number of authorised shares
of any class of shares or re-classify any classify shares that have been
authorised but not issued or re-classify any unclassified any unclassified shares
that have been authorised but not issued.
If a Board acts in terms of its authority, the company must file a notice of amendment
of its MOI by using a form CoR 15.2 setting up the changes effective by the Board.
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This is a very interesting point as we are now seen that if the Directors have the
authority such authority which has been given to them by the MOI they can change
the share capital by filing an appropriate Directors Resolution and the necessary
paperwork to the CIPC. When we discuss the MOI in more detail we will go through
some of these clauses.
The issuing of shares
In the old Act had to be approved by the shareholders, as we have noted above the
Directors may have the power to issue shares if the MOI allows it. In the situation
where the Directors issue shares that they are not authorised to issue or such issuing
of shares is in excess of the authorised number, those shares maybe retroactively
authorised in accordance with the Company’s MOI – See Section 36 within 60
business days after the date of which the shares were issued.
If they are not retroactively authorised then the share issue is an nullity to the extent
that exceeds any authorisation. The company must return to the person the fair value
of the consideration received, and cancel the share certificates.
Ordinary shares.
The ordinary shares are the usual type of shares in virtually all companies and are in
fact the equity shares of the company. The holders of these shares are the ones who
take the risk and are entitled to the profits of the company in the event of winding up
and for surplus distribution of assets after all claims have been made in regard liability
preference shares etcetera.
Ordinary shares while ranking equally may be set up in such a way that participation
in profits and voting rights might be different, we have all come across the situation of
a-class, b-class etcetera and nowadays there is another class called n-class. The nclass shares is a device that has been adopted to prevent the thread of take overs and
enables control to be held by a small number of shares. For example let us assume
that a company has 200 ordinary shares and each share has one voting right, it then
issues another 300 000 which we call n-class ordinary shares and these shares carry
a voting right of one vote for every 100 shares. The purpose of this is that the company
wish to raise more capital and could even be trading on the stock exchange and the
founding shareholders wish to retain control. In this example the voting rights are 200
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voting rights which the founders hold and the outsiders invested money only hold 3000
voting rights, so in fact the founding members have control of this company. If not the
founding members would have found below 50 000.
Off course these rights in regard to the end shares must be set up clearly in the MOI.
Provided these shares are set out in the MOI the company is completely free to create
such categories of shares and to attach such rights to each category as it deems fit.
Preference Shares
There are different kinds of preference shares which could be accumulative, noncumulative, participating and or redeemable. They are all alike in that their dividend
distribution must take place before any other profits of the company takes places.
Where holders of cumulative preference shares they are entitled to their dividend each
year before the holders of ordinary shares gets their dividend. If a company is unable
to make this payment then they will be paid first out of the next year’s profits.
Where the shares are non-cumulative, if a dividend is not paid there is no right to have
arrears made good.
There are all kinds of terms and conditions that go with preference shares. If you have
an interest in this kind of shares, please look at examples on the web. Most of the
banks have issued preference shares.
Redeemable Preference shares
Another type of preference shares are redeemable, this means that the company can
repay those shares based on the terms and conditions when they were issued. It
might be that originally the preference shares were issued at a very high rate of interest
so therefore it would be in the interest of the company to redeem it and then issue a
new set of redeemable preference shares at a lower rate. All the terms and conditions
must be contained in the MOI.
Capital Structures
The Capital Structure of larger companies can become very complicated and when
comp