A General Overview of Public Company Shares in South Africa

What is a share?

A share is a corporeal movable property, representing one equal portion into which a company’s equity is divided.

The Companies Act (Act 71 of 2008) (the Act) defines a share as ‘one of the units into which the proprietary interest in a profit company is divided.’

Why do companies issue shares?

Simply put, a new company, public or private, needs money to start its operations and put its goals explained in the mission statement into practice.

Typically, funding is obtained through,

• debt, such as debt instruments, loans, or overdraft facilities from banks, and
• equity, issuing shares to people and legal entities.

Hence, issuing shares is one of the ways a company utilises to acquire capital for its business operations. It is crucial that a company has sufficient capital for all its needs.

The financial leverage of a company is important, implying that a company maintains a healthy proportion of debt to equity. The balance between a company’s shareholder equity and debt is calculated by the debt-to-equity ratio (D/E ratio) of which the formula is:

D/E ratio = Total debt/Total equity.

Depending on the industry, a good debt-to-equity ratio is around 1 to 1.5. Generally, a high D/E ratio is an indication that a company is a higher risk to investors and lenders, suggesting that the company is financing a significant amount of its operations through debt.

Terms pertaining to a company’s shares

Shareholder

A shareholder is defined by the Act as ‘the holder of a share issued by a company and who is entered as such in the certificated or uncertificated securities register, as the case may be.’

The rights of a shareholder

According to the Act, the ‘Memorandum of Incorporation’ of a company ‘sets out the rights, duties, and responsibilities of shareholders.’

The rights of a shareholder are, among others:

• The right to vote on an annual general meeting (AGM) of the company. (However, holders of preference shares are not granted voting rights.)
• In addition, the right of voting on matters affecting shareholders.
• The right to share in the profits of a company. This right materialises when shareholders receive dividends from the company. (Preference shareholders have preference above ordinary shareholders regarding dividends.)
• A shareholder may have the right to share in the surplus funds of a company at liquidation.
• The right to receive and access information of the company.
• The right to attend and vote on shareholders meetings.
• According to section 59 (1) (a) of the Companies Act, a shareholder has the right to ‘appoint any individual, including an individual who is not a shareholder of that company, as a proxy to participate in, and speak and vote at, a shareholders meeting on behalf of the shareholder.’
• The right to receive a notice of each shareholder’s meeting in the prescribed manner and form and within the prescribed time period.
• The right to amend the Memorandum of Incorporation by way of special resolution.

Duties and responsibilities of shareholders

Duties and responsibilities of shareholders include, inter alia:

• To present ‘reasonably satisfactory identification’ before attending or participating in a shareholders meeting. (Section 63 (1) (a) of the Companies Act.)
• The right to vote on AGMs and shareholders meetings, entrust shareholders with responsibilities such as: appoint auditors, appoint and remove directors from office, decide on the remuneration of directors, and approve the financial statements of a company.
• Generally, shareholders of any company have a responsibility to ensure that the company is well-governed, managed, and administered by the board of directors.

Authorised share capital

Authorised share capital refers to the classes of shares and the number of shares of each class that a company is authorised to issue in terms of its Memorandum of Incorporation (MOI). Put differently, it is the maximum number of shares a company is allowed to issue.

Depending on the par value of a share, the authorised share capital is described in one of two ways:

• Shares having a nominal value (par value) – R10 000 made up of 10 000 ordinary shares of a par value of R1 each.
• Shares with no par value – 10 000 ordinary shares of no par value.

An authorised share of a company has no right associated with it until it has been issued.

Issued share capital

Issued share capital is the number of shares that have been issued to and taken up by shareholders. Shares issued cannot exceed the number of shares authorised.

Express differently, issued and paid-up shares represent the amount of investment made in a company by shareholders.

With issuing, authorised shares, that have no rights, are converted to issued shares, granting certain rights.

Issued shares are involved in the calculation of the market capitalisation, commonly referred to as market cap, of a public company listed on a stock exchange.

A company’s market capitalisation is calculated by multiplying the current market price of one of its shares with the company’s total outstanding shares, which is all the company’s shares currently held by its shareholders.

Unissued share capital

Unissued share capital represents the number, if any, of the authorised shares that have not yet been issued.

Par value shares

A par value share is an ordinary share to which a standard nominal value is attached. Usually, the par value is quite a small amount, such as R1. The par value would be refelcted in the MOI, share register, and any share certificate issued in this regard.

Due to its low par value, a par value share is typically issued at a premium, meaning it is issued at a price higher than its par value.

According to the Companies Act of 2008, companies registered in South Africa before May 1, 2011, are allowed 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.

No par value shares

Section 35(2) of the Act specifies that a share does not have a nominal or par value. However, this regulation excludes banks, as defined in the Banks Act of 1993.

Par value shares do not have a nominal value. They are issued for the amount as indicated (for full consideration). In other words, contrary to par value shares, there is no split between nominal value and share premium.

For example, company JBB issues 10 000 ordinary no par value shares for R10 million. If an investor wants to determine the value of one share, then the calculation is simply done by dividing the R10 million by 1 000 =  R1 000 per ordinary share.

Classes of shares

Typically, shares in South African registered companies can be categorised into three classes:

• Ordinary shares – also called common shares, is the familiar type of share, representing the largest proportion of a company’s share capital. (Refer ‘Ordinary Shares Explained’ for a detailed explanation.)
• Preference shares – comprise five different types:
  • Cumulative.
  • Non-cumulative.
  • Participating.
  • Redeemable.
  • Convertible.

(Refer ‘Preference Shares Explained’ for a detailed explanation.)

• Deferred shares – which are allowed in terms of section 40(5) of the 2008 Companies Act, determining that shares can be issued for future payment, future services, or future benefits. Such shares are held in trust until the occurrence of such a future event. While kept in trust, no voting right or valuation is attached to the shares, unless the trust agreement expresses otherwise.

There is also another type of share with regard to companies in South Africa, namely the treasury share. In the South African company context, the financial term, treasury shares, refers to the shares of a holding company held by its subsidiary.

According to South African law, an issuing company cannot hold any treasury shares because all shares are automatically and immediately cancelled once repurchased.

Creation of shares

Shares of a company are brought into existence in terms of section 36 of the Act which regulates that a company’s MOI must set out the following detail with regard to shares that the company is authorised to issue, namely the classes of shares, the number of shares of each class, and any specific preferences, rights, and limitations associated with the shares.

Therefore, the created shares are reflected in the MOI, which is actually a public document, available from the Companies and Intellectual Properties Commission (CIPC).

When a company wants to create more shares, section 36(2) of the Act applies, which cites that the authorisation, classification, the number of authorised shares of each class, and preferences, rights, limitations, and other terms associated with the shares, as set out in the company’s MOI, may only be changed by an amendment of the MOI.

Such an amendment, depending on which method is authorised by the MOI, can be approved by one of the following two methods,

• a resolution by the board of directors of the company, or

a special resolution by the shareholders, except to the extent that the MOI provides otherwise.

Keep in mind, an amendment of the MOI must be submitted to the Companies and Intellectual Property Commission (CIPC) for acceptance and registration.

Issue of shares

Section 38 of the Companies Act of 2008 authorises the board of directors of a company to issue shares of the company as authorised in the MOI in accordance with section 36 of the Act.

Contrary to the Companies Act of 1973, directors are allowed to issue shares without a shareholders’ resolution, provided that the directors’ decision is in line with the requirements of the MOI and shareholders’ agreements, where applicable.

However, the Companies Act of 2008 requires a special resolution by shareholders to approve the issue of shares to the following individuals:

• a director, future director, prescribed officer, or future prescribed officer of the company,
• a person related or inter-related to the company, or to a director or prescribed officer of the company, or
• a nominee of one of the individuals contemplated above.

(Section 41(1)).

In addition, when the shares to be issued will constitute 30% or more of the voting rights in that specific class of shares. (Section 41(3)

Share certificates

In terms of section 49(1) and (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).

Regarding certificated shares, a share certificate is evidence of the number of shares a shareholder owns in a company.

Share certificates contain the following information:

• Name of the issuing company.
• Number and class of shares.
• Name and address of the shareholder.
• Regarding the issuing company: name, registration number, and registered address.
• The certificate number, which must be sequential and unique.
• Any restriction on the transfer of the shares evidenced by that share certificate.

The share certificate must be signed by two persons authorised by the board of directors, one of which is typically the company secretary, who normally issue the share certificates on behalf of the company.

Share register

In terms of section 50 of the Act, every company is obliged to ‘establish or cause to be established a register of its issued securities in the prescribed form.’ This regulation implies that a company is required to keep a share register, the reason a share being a type of security.

In addition, a company is required to maintain the register in accordance with the prescribed standards.

The share register comprise, inter alia, the following information:

• The total number of shares that are held in uncertificated form.
• With regard to certificated securities –
• the number of shares issued to each shareholder,
• the names and addresses of the persons to whom the shares were issued, and
• the number of, and prescribed circumstances relating to any shares that have been placed in trust or whose transfer has been restricted.

Note: Accentuations in citations from the Companies Act (Act 71 of 2008), also referred to as the Act, are by the article writer.