The Sale of shares agreement consists of a written contract for selling shares includes reference to confidentiality and restraints, amongst other detailed provisions. The Agreement caters for more than one Shareholder selling their shares, if applicable.
Choose your quick section of our Sale of shares agreement in South Africa review below.
A Quick Overview of our sale of shares agreement in South Africa Review:
- ✔️What is a sale of shares agreement?
- ✔️What does it mean to own shares in a company?
- ✔️What are the different types of shares?
- Why do people buy shares?
- What happens when a shareholder sells their shares?
- Drafting a Sale of Shares Agreement
What is a sale of shares agreement?
A Sale of Shares Agreement is a contract, normally in writing, that sets out all terms and conditions which regulate the sale of shares in a company.
A Sale of Shares Agreement may be used when a shareholder sells all the shares that they own in a Company to a purchaser, where the purchaser is already an existing shareholder of the Company.
A written contract for selling shares includes reference to confidentiality and restraints, amongst other detailed provisions. The Agreement caters for more than one Shareholder selling their shares, if applicable.
A number of issues need to be negotiated during a Company’s sale of equity, such as the purchase price, the handover process, confidentiality, and restraints.
A written contract for selling shares in a company sets out the terms of the sale of a shareholder’s shares to an existing shareholder in the company.
These issues need to be included in the Sale of Shares Agreement to eliminate uncertainty and ensure that both sellers and the purchaser understand their respective rights and obligations during the sale.
What does it mean to own shares in a company?
Shares are units of equity ownership interest in a corporation that exist as a financial asset providing for an equal distribution in any residual profits, if any are declared, in the form of dividends. Shareholders may also enjoy capital gains if the value of the company rises.
When establishing a corporation, owners may choose to issue common stock or preferred shares to investors. Companies issue equity shares to investors in return for capital, which is used to grow and operate the firm.
Unlike debt capital, obtained through a loan or bond issue, equity has no legal mandate to be repaid to investors, and shares, while they may pay dividends as a distribution of profits, do not pay interest.
Nearly all companies, from small partnerships or LLCs to multinational corporations, issue shares of some kind. Shares of privately held companies or partnerships are owned by the founders or partners.
As small companies grow, shares are sold to outside investors in the primary market. These may include friends or family, and then angel or venture (VC) investors.
If the company continues to grow, it may seek to raise additional equity capital by selling shares to the public on the secondary market via an initial share offering (IPO). After an IPO, a company’s shares are said to be publically traded and become listed on a stock exchange.
What are the different types of shares?
Most companies issue common shares. These provide shareholders with a residual claim on the company and its profits, providing potential investment growth through both capital gains and dividends.
Common shares also come with voting rights, giving shareholders more control over the business.
These rights allow shareholders of record in a company to vote on certain corporate actions, elect members to the board of directors, and approve issuing new securities or payment of dividends.
In addition, certain common stock comes with pre-emptive rights, ensuring that shareholders may buy new shares and retain their percentage of ownership when the corporation issues new stock.
In comparison, preferred shares typically do not offer much market appreciation in value or voting rights in the corporation.
However, this type of stock typically has set payment criteria, a dividend that is paid out regularly, making the stock less risky than common stock.
Because preferred stock takes priority over common stock if the business files for bankruptcy and is forced to repay its lenders, preferred shareholders receive payment before common shareholders but after bondholders.
Because preferred shareholders have priority in repayment upon bankruptcy, they are less risky than common shares. That said, preferred shares typically do not come with any voting rights.
Why do people buy shares?
People have been buying shares and investing in the stock market since 1792, when the New York Stock Exchange was first established.
The rich history of the stock market is loaded with highs and lows, and, through it all, investors have continued to regard it as a primary investment destination.
The endurance of the stock market can easily be attributed to the many benefits afforded to those who continue to buy shares of companies.
To make a profit
The primary reason that people buy shares of companies is to make money. The idea is to buy low and sell high. For instance, if you buy 100 shares of Company B stock valued at R25 each, you will have made an initial investment totalling R2, 500.
If in the next few months those shares increase to $50 per share, you can sell them for a total of R5, 000, thus doubling your investment. Of course, the amount of money you can make depends on the performance of the stocks.
To take ownership
When you buy shares of a company, you are taking ownership, a perk that allows you to share in the successes and failures of the company. Your ownership is equivalent to the percentage of stocks you own.
For instance, if the 100 shares of Company B that you own make up only .01 percent of the company’s total number of shares, then that is how much of Company B you actually own.
As partial owners in the company, shareholders are kept informed of company news and are often invited to attend shareholder meetings.
To diversify the investment portfolio
The primary goal of investing is to make money, and by creating a diverse investment portfolio, you will reduce your chances of losing money.
The stock market offers plenty of companies to choose from, allowing you to spread your money around and invest in multiple companies. If your shares of Company B happen to decrease in value, the loss might be offset if shares of Company C are on the rise.
If you’re already investing in other investment options, such as certificates of deposit (CDs) and mutual funds, venturing into the stock market will further enhance your portfolio diversity.
It affords easy access to your investment
Buying shares of stock rather than other investments — such as CDs, which require a long-term commitment — allows you easier access to your money. You can buy and sell shares whenever you need to without penalty.
What happens when a shareholder sells their shares?
There are many valid reasons to sell all or part of a business. Selling shares in a business can generate significant cash, which can pay down debts or be used for investments or charitable donations.
That cash can also go back into the business, where it can fund expansion. Likewise, selling part of a business can reduce the owner’s risk and allow them to diversify their personal assets.
Business owners may have several other reasons to sell shares. Selling shares over time can be a means of preparing for eventual succession and transferring ownership in a way that minimizes the tax shock to the eventual new owners.
Finally, selling shares in a business can be the end result of burnout or an unwillingness to grow the business further.
In general, shareholders can only be forced to give up or sell shares if the articles of association or some contractual agreement include this requirement.
In practice, private companies often have suitable articles or contracts so that the remaining owner-managers retain control if an individual leaves the company.
A basic part of creating a business is choosing a legal structure for the company that determines how owners pay taxes and manage the company.
Although many small businesses start as sole proprietorships, which are companies that have only one owner, some companies decide to sell shares of stock to investors or the public to raise money.
When a company sells stock, its shareholders become the owners. The impact of a shareholder leaving a company depends on whether the company is publicly or privately owned.
If a shareholder in a privately held company leaves the company and the bushiness has no buyout agreement in place, it can lead to several negative consequences.
The other shareholders may disagree about who gets to buy out the leaving shareholder’s ownership or how to value the shares.
This could potentially lead to costly legal proceedings or damage to personal relationships that may ultimately affect the management of the business.
When a Sale of Shares Agreement has been set up between the seller and the purchaser within the shareholder group, it is a clear sign that transfer of shares will be conducted in a manner that does not leave a negative impact on the company as a whole.
Drafting a Sale of Shares Agreement
A share in a company consists of a bundle of personal incorporeal rights against the company.
These bundles of rights are “transferred” by way of cession and it is possible for rights against the company to “transfer” at different stages between the Seller and the Purchaser.
Possible restrictions
Section 8 (2) (b) (ii) (bb) of the Companies Act, 2008 determines that a profit company is a private company if its MOI restricts the transferability of its securities.
If the Seller has a properly drafted MOI, there will usually be a pre-emptive right in favour of the other shareholders contained in the MOI.
At the very least there will be an article that provides that any shareholder to whom a transferor wants to transfer shares must be approved by the other shareholders.
As such, pre-emptive rights and restrictions can become complex.
Before you start drafting your Sale of Share Agreement, ensure that you examine the latest MOI of the Company in which the shares are held and ensure that there are no shareholder or other agreements that may restrict the transfer of shares.
If there are any restrictions that may apply and these restrictions have not been dealt with, ensure that you incorporate the applicable conditions that may relate to this matter.
Considering the matrimonial property act
If the Seller is a natural person, it is important to determine the marital status of the Seller. If the Seller is married in community of property, section 15 of the Matrimonial Property Act may apply.
Section 15 (2) (c) of the Matrimonial Property Act, 1984, determines that a spouse married in community of property shall not without the written consent of the other spouse alienate, cede or pledge any shares forming part of the joint estate.
Section 15 (6) Matrimonial Property Act, 1984, however, determines that the provisions of section 15 (2) (c) shall not apply where a spouse performs an act contemplated in section 15 (2) (c) in the ordinary course of his profession, trade or business.
When approval is required
If the Seller is a Company, you will need to establish if the Seller is disposing of all or the greater part of its assets or undertakings.
Section 1 of the Companies Act, 2008, provides the following in this regard:
“all or the greater part of the assets or undertaking”, when used in respect of a company, means—
(a) in the case of the company’s assets, more than 50% of its gross assets fairly valued, irrespective of its liabilities; or
(b) in the case of the company’s undertaking, more than 50% of the value of its entire undertaking, fairly valued;”
If one of the exclusions stipulated in section 112 (1) of the Companies Act 2008 does not apply, the shareholders of the Seller will need to approve the transaction if the Seller is selling all or greater part of its assets or undertakings.
It is also important to take into consideration whether the Seller is a subsidiary of a holding company.
If so, one must then consider whether the disposal by the Seller (being the subsidiary), constitutes disposal of all or the greater part of the assets or undertakings of the holding company with regard to the consolidated financial statements of the holding company.
If the disposal also constitutes disposal of all or the greater part of the assets of the holding company, then the shareholders of the holding company will also need to approve the transaction by way of a special resolution.
If approval by the shareholders of the Seller (and, if applicable, the shareholders of the Seller’s holding company) is uncertain, then the appropriate conditions precedent clauses relating to the matter will need to be incorporated in the agreement.
A panel will need to regulate the takeover
Takeover Regulation Panel (TRP) approval is sometimes overlooked because parties take the wrong assumptions that because it is not a high-value transaction, there is no need for TRP approval.
Small and medium companies seldom expressly stipulate in their MOI that Part B, C and the Takeover Regulations must apply to it. This, however, does not mean that part B, C and the Takeover Regulations will not apply.
If the transaction constitutes disposal of all or the greater part of the Sellers assets, then it is also important to consider whether 10% or more of the issued securities of the Seller have been transferred within the last 24 months.
Should there have been a transfer as stipulated above, then the Seller will be regarded as a “regulated company” that is entering into an “affected transaction”.
The Companies Act, 2008, stipulates that the Seller may not dispose or give effect an agreement to dispose of all or the greater part of its assets or undertakings unless the TRP has issued a compliance certificate or exempted the transaction.
There may need to be competition authority approval
Firstly, you will need to establish whether there will be an acquisition or establishment of control over the whole or part of the business of the Company as outlined in the Competition Act.
If there is an acquisition or establishment of control as described in the Act, then you will need to consider the thresholds and categories of mergers to determine whether approval from the Competition Authorities is required.
It is important to include tax considerations
Security Transfer Tax (STT) is on which is often overlooked, and in a fast-paced business environment trouble in obtaining a tax clearance certificate due to something like STT can have serious consequences for the company and its advisers.
STT is levied on every transfer of a security and was implemented from 1 July 2008 under the Securities Transfer Tax Act (STT Act), together with the Securities Transfer Tax Administration Act, No. 26 of 2007.
STT is levied at the rate of 0, 25% on, generally, the value of shares transferred. There are various exemptions listed under section 8 of the STT Act.
The most notable exemptions would be where the amount of STT payable is less than R100 (or in other words where the value of the shares transferred is less than R40,000) or where the shares are sold in terms of the corporate restructuring rules.
With the transfer of an unlisted security, the company which issued the unlisted security is liable for the STT. The company may however, recover the STT payable from the person to whom the security is transferred.
For unlisted securities: Securities transfer tax must be paid within two months from the end of the month in which the transfer of the unlisted security took place.
Another tax that is often missed is transfer duty that is payable by the purchaser that purchases the shares in a residential property-owning company and not the immovable property itself.
The Taxation Law Amendment Act of 2001 provided that there is transfer duty payable on the sale of shares in residential property-owning companies.
Transfer duty is payable at the standard rate based on the market value of the property. This excludes commercial / agricultural property-owning companies. The test here is the zoning of the property (not the use).
Conclusion
If you want to sell your shares in a company – for example, because you work for the company but are retiring or leaving, or you have had a dispute with other shareholders – selling them back to the company may be your best option.
For example, you may not be able to find a third party buyer who is acceptable to the company, or existing shareholders might not be able to afford to purchase your shares (or you may simply not want to deal with each other).
As far as the company is concerned, purchasing its own shares may be a sensible way of using spare cash or of adjusting its gearing (the level of its borrowings compared to its shareholders’ funds).
Public or larger private companies may also wish to purchase shares to increase the value of the remaining shares, to increase the dividends each remaining share gets, and to help maintain a healthy market in the shares.
Another situation when a company may buy its own shares back is when it operates an employees’ share scheme which requires employees to give up their shares when they leave – for example, because they have been dismissed or have resigned to join a competitor.
If you are purchasing shares out of capital, special rules apply to protect creditors. Unless the shares are being bought back for the purposes of or pursuant to an employees’ share scheme, you must notify your creditors of your intention to buy back shares out of capital.
Your creditors will have five weeks after the resolution authorising the share purchase is passed to apply to the court to cancel the resolution and prevent the purchase.
A Sale of Shares Agreement is a contract, normally in writing, that sets out all terms and conditions which regulate the sale of shares in a company.
A Sale of Shares Agreement may be used when a shareholder sells all the shares that they own in a Company to a purchaser, where the purchaser is already an existing shareholder of the Company.
A written contract for selling shares includes reference to confidentiality and restraints, amongst other detailed provisions. The Agreement caters for more than one Shareholder selling their shares, if applicable.
Knowing your client and related parties is crucial when drafting Sale of Share Agreements. Even low-value transactions between SMMEs can trigger, for example, a mandatory offer or may require shareholder approval in some way.
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