With authorized Shares and Share Certificates in a Company, what is really important, is that the number of authorized shares can be substantially higher than the number of shares that were previously issued and trading on the secondary market. This leaves the company with the flexibility to potentially sell more shares at a certain point in the future.
Quick Overview of Authorized Shares and Share Certificates in a Company – A South African Viewpoint
✔️What is an Authorized share of a company?
✔️What is Authorized share Capital?
✔️Features of Authorized shares
May the Authorization and Classification of shares be changed?
The issuance of Authorized shares
Is there a limit to the number of Authorized shares in a company’s share capital?
Authorized shares as Capitalization shares
Authorized shares and options
What is a Share Certificate?
Information on Share Certificates
Requirements concerning Share Certificates
How to obtain a Share Certificate
Lost or destroyed Share Certificates
The number or shares issued or outstanding can either be equal to or less than the number of authorized shares.
What is an Authorized share of a company?
An authorized share refers to one unit of a company’s ownership interest that a company is authorized to issue according to its Memorandum of Incorporation (MOI).
Prior to the issuance of shares, a company has to authorise them. Put differently, authorized shares are shares available to be issued to prospective or current shareholders.
What is Authorized share Capital?
Authorized share capital, which is described in a company’s Memorandum of Incorporation (MOI), refers to the classes of shares and the number of shares of each class that a company is authorized to issue and any specific references, rights, and limitations associated with the shares in terms of its.
Authorized share capital is reflected in one of two ways, depending on the par value of a share, in a company’s MOI.
Shares with a par value, also known as a nominal value. For example: Authorized share capital is R100 000, comprising 1 000 ordinary shares of a par value of R1 each.
A share with a nominal value is an ordinary share that carries a standard par value, typically a significant small amount, like R1.
Usually, a par value share is issued at a premium, implying it is issued at a price that exceeds its par value.
The Companies Act (Act 71 of 2008), hereafter referred to as the Act,[2] allows companies, registered in South Africa before May 1, 2011, to keep their par value shares until they are converted to no par value shares by way of a resolution passed by the directors or a special resolution approved by the shareholders.
Shares with no par value. For example: Authorized share capital is 100 000 ordinary shares with no par value.
According to section 35 of the Act, a share does not have a nominal or par value. They are issued for the full consideration, meaning for the amount as indicated with the issuance.
For example, company SAH issues 100 000 ordinary no par value shares for R20 million. If a prospective buyer needs to determine the value of one share, then the calculation is simply done by dividing the R20 million by 100 000 = R200 per ordinary share.
Contrary to par value shares, there is no premium involved when authorized shares with no par value are issued.
Features of Authorized shares
Section 35 of the Act stipulates that an authorized share of a company has no rights attributed to it until it has been issued.
In addition, section 35 describes the classes of authorized shares and the number of shares of each class.
Hence, not all the authorized shares of a company have the same rights, preferences, or limitations. For example, there is a difference between ordinary and preference shares with regard to voting rights and dividends.
Although, a company’s MOI may authorize a ‘stated number of unclassified shares’ which are subject to classification by the board of directors under certain conditions (section 36 of the Act).
May the Authorization and Classification of shares be changed?
Section 36 regulates as follows:
- The authorization and classification of shares and the numbers of authorized shares of each class, as set out in a company’s MOI, may be changed only by –
- ‘an amendment of the Memorandum of Incorporation by special resolution of the shareholders; or
- the board of the company, in the manner contemplated in subsection (3), except to the extent that the Memorandum of Incorporation provides otherwise.’
- Unless a company’s MOI provides otherwise, the company’s board of directors may –
- increase or decrease the number of authorized shares of any class of shares;
- reclassify any classified shares that have been authorized but not issued;
- classify any unclassified shares that have been authorized under certain conditions but are not issued.
The Issuance of Authorized shares
The requirements with regard to the issue of authorized shares are described in section 38 of the Act.
- The board of directors of a company may decide to issue shares of the company at any time, but only to the extent that the shares have been authorized by or according to the MOI of the company, in agreement of section 36 of the Act.
- When a company issues shares that have not been authorized in line with section 36 or in excess of the number of authorized shares of any particular class, the issuance of those shares may be retroactively authorized, in accordance with section 36.
- If a resolution to retroactively authorize an issue of shares, has failed –
- the share issue is legally void to the degree it exceeds any authorization;
- the company must refund any person in line with the fair value received for the unauthorized issued shares;
- any share certificate evidencing the unauthorized shares and any subsequent entry in a securities register is void;
- any director of a company is liable for ‘any loss, damages, or costs sustained by the company’ (section 77 of the Act) if the director –
- was present at a meeting when the board approved the issue of unauthorized shares or participated in the making of such a decision by ‘written consent of a majority of the directors, given in person, or by electronic communication, provided that each director has received notice of the matter to be decided’ (section 74 of the Act); and
- failed to vote against the issue of the unauthorized shares, although he or she knew that the shares had not been authorized in agreement with section 36.
- Further, in terms of section 35: Issued shares of a company that have been subsequently acquired by that company or a subsidiary of the company or surrendered to the particular company in the exercise of appraisal rights by dissenting shareholders, are of the same status of shares that have been authorized but not issued.
Is there a limit to the number of Authorized shares in a company’s share capital?
There is no limit to the number of authorized shares in a company’s authorized share capital. Typically, the number of shares authorized depends on the circumstances and the number of shareholders involved.
It is wise and preferable not to issue all the authorized shares immediately but to have authorized shares available when needed to issue to new shareholders/investors.
Authorized shares as Capitalization shares
- Section 47 of the Act regulates that ‘except that a company’s MOI specifies otherwise, the board of that company may approve the issuing of any authorised shares of the company as capitalization shares, on a pro-rata basis to the shareholders of one or more classes of shares.’
Authorized shares and options
The connection between options and authorized shares is described in section 42 of the Act:
- A company may issue options for the allotment or subscription of authorized shares.
- Any director is liable for ‘any loss, damages, or costs sustained by the company’ (section 77 of the Act) if the director –
- was present at a meeting when the board approved the granting of an option or a right as contemplated in this section or participated in the making of such a decision by ‘written consent of a majority of the directors, given in person, or by electronic communication, provided that each director has received notice of the matter to be decided’ (section 74 of the Act); and
- failed to vote against the granting of the option or right, although he or she knew that any shares for which the options could be exercised, or into which any securities could be converted, had not been authorized according to section 36 of the Act.
What is a Share Certificate?
A share certificate is a document that is issued by a company to confirm the ownership of shares in a particular company. Put differently, a share certificate is legal proof or evidence of the number of shares a shareholder owns in a company.
The owner of a share certificate can be an individual or any registered entity.
In terms of section 49(1) and 49(2) of the Act, any securities, such as shares, must be either:
- certificated, meaning evidenced by certificates, or
- uncertificated, implying that certificates are not issued. Instead, the shares are evidenced in electronic form, administered, and kept by a Central Securities Depository Participant (SCDP).
Information on Share Certificates
Share certificates of companies must state the following information:
- Name of the issuing company.
- Number and class of shares issued.
- The par value of the shares, if applicable.
- Full name, ID number, and address of the shareholder.
- Regarding the issuing company: name, registration number, and registered address.
- The certificate number, which must be sequential and unique. Thus, share certificate numbers cannot be repeated.
- Any restriction on the transfer of the shares evidenced by that share certificate.
Requirements concerning Share Certificates
- The share certificate must be signed by two persons authorized by the board of directors, one of which is typically the company secretary, who normally issue the share certificates on behalf of the company. The signed certificate becomes the original certificate.
- The original share certificate must be kept in a safe place.
- At any time, there may only be one original signed share certificate.
- A company must maintain a share register (securities register) in terms of section 50 of the Act.
The register must include the following information in respect of every class of shares that the company has issued:
- the total number of shares that are held in uncertificated form; and
- with regard to certificated shares: the names and addresses of the individuals or entities to whom the shares were issued, and the number of shares issued to the individuals or entities.
The register must be held at the company’s registered address.
How to obtain a Share Certificate
From a public traded company
To obtain a valid share certificate from a company that is listed on a stock exchange, a shareholder will have to contact that company or his or her stockbroker. Make sure the certificate complies with the legal requirements, such as the authorized signatures.
From a private company
Directors or other authorized officials can design a company’s share certificates to be issued to shareholders. Otherwise, there are a variety of websites that provide templates for share certificates at a specific cost.
Lost or destroyed Share Certificates
CSSA[3] provides the following guidelines in respect of a lost or destroyed share certificate:
- The shareholder involved should provide a comprehensive written explanation as to the loss. The explanation should be accompanied by a sworn affidavit and indemnity by the shareholder.
- An annotation should be made in the share register so as to ‘record’ the loss of the share certificate.
- An application to issue a duplicate certificate is then submitted to the board of directors in order to authorise the issue of a duplicate certificate.
- Once approved by the directors, the company secretary may proceed to issue the duplicate share certificate.
- The duplicate certificate should be endorsed ‘Duplicate replacing lost share certificate number _____ and that it has been issued in bona fide substitution without change of ownership.’
- The issue of a duplicate certificate should be recorded in a different colour in the share register of the company.
[1] This article does not intend to provide investment or trading advice. Its aim is solely informative.
[2] Accentuations in citations from the Companies Act (Act 71 of 2008), also referred to as the Act, as well as in other citations are by the article writer.
[3] Chartered Secretaries Southern Africa (CSSA) – Best Practice Guide – Shares. Prepared by Sabrina Paxton (Technical Adviser).
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