Rights and Responsibilities of Shareholders in South African Companies

As explained in the Companies Act

What is a shareholder?

A shareholder is a person, company, corporation, organisation, or institution that owns at least one share of a company’s shares.

Shareholders are also known as stockholders or owners of a company, be it a public company that is listed on a stock exchange, or a private (unlisted) company.

Furthermore, the percentage of shares owned by a shareholder determines whether a shareholder is a majority or minority shareholder. A shareholder owning less than 50% of a company’s outstanding shares is called a minority shareholder.

Contrarily, a shareholder who owns more than 50% of the outstanding shares of a company is referred to as a majority shareholder.

(Outstanding shares refer to all the shares issued by a company and currently held by ordinary shareholders, institutional investors, and company insiders, such as directors, company officers, and employees.)

Types of shareholders

Basically, there are two types of shareholders: ordinary shareholders and preference shareholders.

• Ordinary shareholders

Ordinary shareholders, the vast majority of a company’s shareholders, own a company’s ordinary shares. They are also called common shareholders.

More ordinary shares are issued by a company than preference shares. They are also cheaper than the scarcer preference shares. Hence there are more ordinary shareholders than preference shareholders.

• Preference shareholders, also known as preferred shareholders, own a portion of a company’s preference shares that are scarcer than its ordinary shares.

The rights of the two types of shareholders differ considerably.

The Companies Act of South Africa and the rights and responsibilities of shareholders – some aspects explained

Section 7

The Companies Act of South Africa (Act 71 of 2008), hereafter referred to as the Act, mentions in section 7 that one of the Act’s purposes is ‘to balance the rights and obligations of shareholders and directors within companies.’

Definition of a shareholder

The Act, defines a shareholder as ‘the holder of a share issued by a company[1] and who is entered as such in the certificated or uncertificated securities register, as the case may be.’

Furthermore, the Act states in section 57 (1) that in the part about the governance of companies, ‘a shareholder means a person who is entitled to exercise any voting rights in relation to a company, irrespective of the form, title or nature of the securities to which those voting rights are attached.’

Section 15

Section 15 (6) of the Act states that a company’s Memorandum of Incorporation (MOI) and any rules of the company are binding:

• ‘between the company and each shareholder’, and
• between or among the shareholders of the company.’

In addition, section 15 (7) spells out that shareholders of a company are allowed to ‘enter into any agreement with one another concerning any matter relating to the company.’ However, such an agreement must be consistent with the Act and the company’s MOI.

Furthermore, if any provision of such an agreement is inconsistent with the Act or the company’s MOI, it ‘is void to the extent of the inconsistency.’

Section 16

Section 16 (1) specifies that shareholders may amend the Memorandum of Incorporation of a company under certain circumstances.

The amendment is performed by special resolution by ‘shareholders entitled to exercise at least 10% of the voting rights that may be exercised on such a resolution.’

Section 19

Section 19 (2) of the Act explains that the sole reason of being a shareholder of a company does not make a shareholder ‘liable for any liabilities of the company, except to the extent that this Act or the company’s Memorandum of Incorporation provides otherwise.’

Section 20

According to section 20 (6), each shareholder has the right to claim for damages ‘against any person who fraudulently or due to gross negligence causes the company to do anything inconsistent with:

• this Act, or
• a limitation, restriction or qualification contemplated’ in section 20 concerning the validity of company actions, ‘unless that action has been ratified by the shareholders’ by special resolution.’

Section 32

A shareholder of a company is not authorised, ‘by any act or omission,’ to ‘misrepresent to any person, in any way or to any degree, the true legal status of the company’ (section 32 (6)).

Section 35

Section 35 (6) confirms that a share held by a shareholder of a company that existed before the date the Act came into operation (referred to as the effective date), ‘continues to have all the rights associated with it immediately before the effective date, irrespective whether those rights existed in terms of the company’s Memorandum of Incorporation, or in terms of the Act.’

However, this right is subjected, amongst other conditions, to amendments that have been made to the Memorandum of Incorporation of the specific company after the effective date.

Section 36

An amendment of the MOI of a company by special resolution of the shareholders, is allowed in section 36 (2) as one of only two ways to change the following aspects concerning the shares of a company set out in a company’s MOI:

• 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.

Section 37

As stated in section 37 (3) of the Act, every share issued by a specific company ‘has associated with it an irrevocable right of the shareholder to vote on any proposal to amend the preference, rights, limitations, and other terms associated with that share.’ This right exists notwithstanding anything to the contrary in the company’s MOI.

Further, if the company has introduced only one class of shares, the holders of those shares:

• have the right to vote ‘on every matter that may be decided by shareholders of the company,’ and
• ‘are entitled to receive the net assets of the company’ when it is liquidated.

‘Subject to any other law’, section 37 (5) allows that a company’s MOI establishes, for ‘any particular class of shares, preferences, rights, limitations, or other terms that’ inter alia, ‘entitle the shareholders to distributions calculated in any manner, including dividends that may be cumulative, non-cumulative, or partially cumulative.’

Although, section 37 (5) is subjected to the requirements of section 46 (distributions must authorised by the board of directors) and section 47 (capitalisation shares).

Also, section 37 (8) provides relief for a shareholder who is negatively affected by an amendment in the MOI of a company that ‘materially and adversely alter the preferences, rights, limitations, or other terms of a class of shares.’

Although, the relief is only available if the particular shareholder:

• notified the company beforehand of the intention to challenge the resolution to amend the MOI, and
• was present at the meeting and voted against the specific resolution.

Section 39

Concerning shares issued by a private company, other than shares issued in terms of options or conversion rights, and the issuance of capitalisation shares, section 39 (2) stipulates that ‘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.’

Section 39 (4) allows a shareholder to subscribe for fewer shares that he/she/it is entitled to.

Section 41

Regarding ‘shareholder approval for issuing shares in certain cases,’ section 41 (1) specifies that if shares or securities convertible into shares, or certain grants are issued to specific persons, the issuance ‘must be approved by a special resolution of the shareholders of a company.’

The specific persons indicated in the section are:

• 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 a person mentioned above.

Section 45

Section 45 (5) requires that if the board of a company passes a resolution to provide loans and other financial assistance to a director or prescribed officer of a company, or to related or inter-related companies or corporations, the company is required to provide written notice of the resolution to all shareholders unless every shareholder is also a director of the company:

• within 10 business days after adoption of the resolution, if the sum of all the loans and assistance ‘exceeds one-tenth of 1% of the company’s net worth at the time of the resolution,’ or
• ‘within 30 business days after the end of the financial year, in any other case.’

Section 57

According to section 57 (2), if a profit company, excluding a state-owned company, has only one shareholder, that shareholder is permitted to ‘exercise any or all of the voting rights pertaining to that company on any matter, at any time, without notice or compliance with any other internal formalities,’ unless the MOI of the company states otherwise.

(A company is considered a profit company when its main purpose is to generate financial gain for its shareholders.)

Section 58

Regarding a shareholder’s right to be represented by proxy, section 58 (1) regulates as follows:

a shareholder of a company is allowed to appoint any individual (including an individual who is not a shareholder of the particular company), at any time, as a proxy to:

• act and vote on behalf of the shareholder, or
• ‘give or withhold written consent on behalf of the shareholder to a decision,’ made by shareholders other than at a meeting.

Concerning a proxy appointment, it must be done in writing, dated, and signed by the shareholder (section 58 (2)).

Furthermore, a shareholder of a company has the right to appoint two or more persons concurrently as proxies, unless the MOI of the company provides differently (section 58 (3)).

Section 61

Section 61 (1) states that the board of a company, or any other person specified in the MOI or rules of the company, ‘may call a shareholders meeting at any time.’

Reasons why shareholders meetings must be held are, amongst others:

• ‘any time that the board is required by this Act or the Memorandum of Incorporation to refer a matter to shareholders for decision,’
• to fill a vacancy on the board, or
• an annual general meeting (AGM) of shareholders.

Section 62

With regard to notices of shareholders meetings in section 62 (1), a company is required to deliver ‘a notice of each shareholders meeting in the prescribed manner and form to all the shareholders of the company’ as identified on the record date for the particular meeting. (The record date is defined by the Act as ‘the date on which a company determines the identity of its shareholders and their shareholdings.’)

The notice must be delivered at least:

• 15 business days prior to the start of the meeting, in the case of a public or a non-profit company, or
• 10 business days before the shareholders meeting is to begin, in any other case.

However, section 62 (2) allows that a company’s MOI may provide for notice periods longer than required in section 62 (1).

In addition, section 62 (3) states that a notice of a shareholders meeting must be in writing, allowing a shareholder to be well-informed about the following aspects concerning the specific meeting:

• the date,
• time and place,
• the record date for the meeting,
• the general purpose of the meeting.

Further, the following information is to accompany the notice:

• ‘a copy of any proposed resolution of which the company has received notice, and which is to be considered at the meeting, and
• a notice of the percentage of voting rights that will be required for the resolution to be adopted.’

With reference to an annual general meeting (AGM) of a company, section 62 (3) requires a notice has to include:

• ‘a summarised form of the financial statements to be presented,
• directions for obtaining a copy of the complete annual financial statements for the preceding financial year, and
• the rights concerning a proxy for a shareholder that qualifies to attend and vote at the meeting.

Section 62 (7) determines that a shareholder who is present at a meeting has a right to:

• ‘allege a material defect in the form of a notice for a particular item on the agenda for the meeting, and
• participate in the determination whether to waive the requirements for notice or ratify a defective notice.’

Section 63

Section 63 (3) instructs that if a company makes it possible for shareholders to participate in a meeting via electronic communication, the company is required to:

• inform shareholders in the notice of the availability of electric communication, and
• make any necessary information available ‘to enable shareholders or their proxies to access the available medium or means of electronic communication.’

Section 65

According to section 65 (3), any two shareholders are allowed to submit a resolution (ordinary or special) regarding ‘any matter in respect of which they are each entitled to exercise voting rights.’

In addition, the two shareholders ‘may require that the resolution be submitted to shareholders for consideration’:

• at a meeting demanded by one or two written and signed demands,
• at the next shareholders meeting, or
• by written vote.

Section 68

As stated in section 68 (1), with a few exceptions, each director of a company ‘must be elected by the persons entitled to exercise voting rights in such an election.’

Section 71

Notwithstanding anything to the contrary in a company’s MOI, or any agreement between a company and a director, or between any shareholders and a director, shareholders may remove a director ‘by an ordinary resolution’ approved at a shareholders meeting by the shareholders ‘entitled to exercise voting rights in an election of that director’ subject to certain conditions (section 71 (1)).

Typically, a director can be removed for reasons mentioned in section 71 (3), such as:

• ineligible to serve as a director,
• incapacitated, meaning unable to perform the duties of a director, and is unlikely to regain that capacity within a reasonable period of time, or
• negligence, failing to perform the functions of a director.

Section 81

According to section 81 (1) (e), a shareholder may apply for a court order to wind up a company on the grounds that:

• ‘the directors, prescribed officers or other persons in control of the company are acting’ in a fraudulent or otherwise illegal manner, or
• ‘the company’s assets are being misapplied or wasted.’

However, section 81 (2) mentions that a shareholder is only allowed to apply for a court order in this regard when he/she/it:

• has been a shareholder ‘continuously for at least six months immediately before the date of application’, or
• ‘became a shareholder as a result of:

acquiring another shareholder, or

the distribution of the estate of a former shareholder.’

Section 112

Basically, a company ‘may not dispose of all or the greater part of its assets unless the disposal has been approved by a special resolution of the shareholders’ (section 112 (2)).

Section 162

Section 162 (2) allows a shareholder, among other stakeholders, to apply to a court for an order declaring a director delinquent or under probation.

[1] Accentuations in quotations from the Companies Act are by the article writer.