EACG2708
Question 2.12 (20 Marks, 30 Minutes)
MediTech Supplies (Pty) Ltd (MediTech) is a wholesaler of medical supplies serving
hospitals and clinics in the Free State. The company has experienced sustained business
growth due to contracts with the Free State Department of Health. These contracts involve
supplying medical supplies to state hospitals. In response to this growth, the directors
have proposed to issue additional shares amounting to R10 million (Resolution 1). This
capital will fund the proposed expansion of the business into the Northern Cape province.
The directors have explored various financing options and have concluded that issuing
shares is the most suitable approach. James Bester, the financial director, has
approached you for some initial advice on the issue and provided you with the following
information:
Memorandum of Incorporation (MOI):
According to the Memorandum of Incorporation (MOI), MediTech has 400 000 authorised
ordinary shares and 150 000 authorised preference shares. Of these, 350 000 ordinary
shares and 100 000 preference shares have already been issued.
The MOI does not limit, negate (render null or void), restrict or place conditions on any
pre-emptive right as determined by the Companies Act. However, the MOI prohibits the
board from altering the number of shares specified in the MOI.
Shareholders:
The current shareholders of MediTech are as follows:
Ordinary Preference
Shareholder:
Shares: Shares:
Med Supply (Pty) Ltd 140 000 55 000
MediTech Employee Share Scheme 70 000 15 000
Mr David Scope (director)* 35 000 10 000
Mrs Su-ann Sterilizer (director)* 42 000 10 000
Mr James Bester (director)* 28 000 -
A private investor (one person) 35 000 10 000
350 000 shares 100 000 shares
*MediTech’s board of directors consists of five directors, two executives and three non-
executives. Two of the non-executive directors, Mr Ambe Bandage and Mrs Thando
Plaster, do not hold any shares in MediTech.
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EACG2708
Resolution 1: Issue of shares:
To raise the necessary capital for the expansion, the board has decided to issue 150 000
ordinary shares at R40 per share and 50 000 preference shares at R80 per share. Of the
ordinary shares, 54 000 will be offered to the MediTech Employee Share Scheme (a
separate entity), with the remaining shares equally divided among the existing five
directors and a private investor. No shares will be offered to Med Supply as the board
feels that the company, a supplier, already has too much power.
Sub- Total
Required:
total Marks
(a) Regarding Resolution 1, determine, in terms of the Companies
Act, whether the board may issue the 150 000 ordinary and
3x1 3
50 000 preference shares.
Note: Show all calculations where relevant.
(b) Assume that the board may not issue all the ordinary shares as
proposed in Resolution 1. Discuss, in terms of the Companies
6x1 6
Act, what steps or actions the board may take to issue the
150 000 ordinary shares.
(c) Regarding Resolution 1, discuss whether the allocation of the
ordinary shares to the MediTech Employee Share Scheme, the
existing five directors and the private Investor in equal quantities 10 x ½ 11
is within the requirements of the Companies Act. 6x1
Support your answer by referencing the specific Companies Act
requirement(s) and showing all calculations where relevant.
Total Marks 20 20
Graded Questions on Auditing Adapted
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