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The following topics will be dealt with in Section/Unit 4 & 5

Legal nature of shares section 35

(I) Shares issued by a company is movable property. Transferable in any manner provided for
or recognized by this act or other legislation.
(II) No nominal or par value shares- item 6 of schedule 5
(III) A company may not issue shares to itself
(IV) An unauthorized share of a company has no rights associated with it until it has been
issued shares of a company that have been issued subsequently:
a. Acquired by that company, as contemplated in section 48, or
b. Surrendered to that company in the exercise of appraisal rights in terms of section 164,
have the same status as shares that have been authorized but not issued.
(V) Shares issued by a pre-existing rate continues to have all the rights associated with it, if
held by a shareholder immediately before the effective date
(VI) The 1973 act was based on the fundamental principle that a company must continuously
maintain its share capital at the level of funding contributed by its shareholders. This was
called “the maintenance of capital rule”. Through section 4 of the Act this rule was
effectively replaced by the solvency and liquidity requirement or test. The “maintenance
of capital rule” was the reason why a share had a par value, why the issue price of a share
had to be paid upfront and in full, why shares could not be issued at a discount and why,
amongst other, any amount received by the company upon the issue of shares had to be
accounted to a special account in its books of account called “share capital”.
(VII) The notion of share capital exists therefore only for accounting purposes but ceased to
exist for purposes of law.
Authorised share capital section
36

(I) A company’s MOI:

a. must set out the classes of shares, and the number of shares of each class, that the
company is authorised to issue
b. Must set out with respect to each other class of shares:
c. A distinguishing designation for that class
d. The preferences, rights, limitations and other terms associated with that class, subject to
paragraph d
(II) May authorise a stated number of unclassified shares, which are subject to classification
by the board of the company in accordance with subsection (3)©
(III) May set out a class of shares:
a. Without specifying the associated preferences, rights, limitations or other terms of that
class
b. For which the board of the company must determine the associated preferences, rights,
enc
c. Which must not be issued until the board of the company has determined it
(IV) 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, as set out in a company’s Memorandum of
Incorporation, may be changed only by:
a. An amendment of the MOI by special resolution of the shareholders
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b. The board of the company, in the manner contemplated in subsection (3) execpt to the
extent that the MOI provides otherwise
(V) Except to the extent that a company’s Memorandum of Incorporation provides
otherwise, the company’s board may
a. Increase or decrease the number of authorised shares of any class of shares
b. Reclassify any classified shares that have been authorised but not issued
c. Classify any unclassified shares that have been authorized as contemplated in section
(1)© but are not issued
d. Determine the preferences, rights, limitations or other terms of shares in a class
contemplated in subsection (1)©
(VI) If the board of a company acts pursuant to its authority contemplated in subsection (3),
the company must file a Notice of Amendment of its Memorandum of Incorporation,
setting out the changes effected by the board.
The authorised share capital is specified in the memorandum.
Amendment of classes:
A. The classification, numbers, class as created can only be amended by amending the
memorandum through a special resolution.

B. Except if the memorandum determines otherwise the board of directors

can Increase/decrease authorised shares OR Exercise the rights listed* above.

Class rights section 37

1. All of the shares of any particular class authorised by a company have

preferences, rights, limitations and other terms that are identical to those of
other shares of the same class, except to the extent that the company’s
Memorandum of Incorporation provides otherwise.
2. Each issued share of a company, regardless of its class, has associated with it
one general voting right, except to the extent provided otherwise by:
a. this Act; or
b. the preferences, rights, limitations and other terms determined by or in terms of the
company’s Memorandum of Incorporation in accordance with section 36.
3. Despite anything to the contrary in a company’s Memorandum of Incorporation
a. every share issued by that company has associated with it an irrevocable right of the
shareholder to vote on any proposal to amend the preferences, rights, limitations and
other terms associated with that share; and
b. if that company has established only one class of shares—
c. those shares have a right to be voted on every matter that may be decided by
shareholders of the company; and
d. the holders of that class of shares are entitled to receive the net assets of the company
upon its liquidation.
4. If a company’s Memorandum of Incorporation has established more than one
class of shares the Memorandum of Incorporation, in setting out the
preferences, rights, limitations and other terms of those classes of shares, must
provide that
a. for each particular matter that may be submitted for a decision to shareholders of the
company, at least one class of the company’s shares has voting rights that may be
exercised on that matter; and
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b. the holders of at least one class of the company’s shares, irrespective of whether it is
the same as any class contemplated in paragraph
c. are entitled to receive the net assets of the company upon its liquidation.
5. Subject to any other law, a company’s Memorandum of Incorporation may
establish, for any particular class of shares, preferences, rights, limitations or
other terms that—
a. confer special, conditional or limited voting rights;
b. provide for shares of that class to be redeemable, subject to the requirements of
sections 46 and 48, or convertible, as specified in the Memorandum of Incorporation—
i. at the option of the company, the shareholder, or another person at any time, or upon
the occurrence of any specified contingency;
ii. for cash, indebtedness, securities or other property;
iii. at prices and in amounts specified, or determined in accordance with a formula; or
iv. subject to any other terms set out in the company’s Memorandum of Incorporation;
 provide for shares of that class to have preference over any other class of shares with
respect to distributions, or rights upon the final liquidation of the company
 entitle the shareholders to distributions calculated in any manner, including dividends that
may be cumulative, non-cumulative, or partially cumulative, subject to the requirements
of sections 46 and 47; or
6. The Memorandum of Incorporation of a company may provide for preferences,
rights, limitations or other terms of any class of shares of that company to vary
in response to any objectively ascertainable external fact or facts.
7. For the purpose of subsection (6)—
a. ‘‘external fact or facts’’ includes the occurrence of any event, a variation in any fact,
benchmark or other point of reference, a determination or action by the company, its
board, or any other person, an agreement to which the company is a party, or any other
document; and
b. the manner in which a fact affects the preferences, rights, limitations or other terms of
shares must be expressly determined by or in terms of the company’s Memorandum of
Incorporation, in accordance with section 36.
8. If the Memorandum of Incorporation of a company has been amended to
materially and adversely alter the preferences, rights, limitations or other terms
of a class of shares, any holder of those shares is entitled to seek relief in terms
of section 164 if that shareholder—
a. notified the company in advance of the intention to oppose the resolution to amend the
Memorandum of Incorporation; and
b. was present at the meeting and voted against that resolution.
All shares have been allocated certain rights. These rights are known as class rights.

 Different rights can be created in the memorandum [section 37(1)].

 In principle all shares have equal voting rights, except if determined otherwise in the
memorandum (see section 36).

 Members have an irrevocable voting right with regard to amendments of all class rights
that affect their shares and, if only one class is shareholders, then in all matters. Different
class rights can be created in the memorandum.

 This entails that voting rights and dividends can differ within a class, which allows
subclasses.

Issuing of shares section 38

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1. The board of a company may resolve to issue shares of the company at any
time, but only within the classes, and to the extent, that the shares have been
authorised by or in terms of the company’s Memorandum of Incorporation, in
accordance with section 36.
2. If a company issues shares—
a. that have not been authorised in accordance with section 36; or
b. in excess of the number of authorised shares of any particular class, the issuance of
those shares may be retroactively authorised in accordance with section 36.
3. If a resolution seeking to retroactively authorise an issue of shares, as
contemplated in subsection (2), is not adopted when it is put to a vote—
a. the share issue is a nullity to the extent that it exceeds any authorisation;
b. the company must return to any person the fair value of the consideration received by
the company in respect of that share issue to the extent that it is nullified, together with
interest in accordance with the Prescribed Rate of Interest Act, 1975 (Act No. 55 of
1975), from the date on which the consideration for the shares was received by the
company, until the date on which the company complies with this paragraph;
c. any certificate evidencing a share so issued and nullified, and any entry in a securities
register in respect of such an issue, is void; and
d. a director of the company is liable to the extent set out in section 77(3)
i. if the director—
ii. was present at a meeting when the board approved the issue of any unauthorised
shares, or participated in the making of such a decision in terms of section 74; and
iii. failed to vote against the issue of those shares, despite knowing that the shares had
not been authorised in accordance with section 36.
The extension of financial
support for the subscribing
of own shares section 44

1. In this section, ‘‘financial assistance’’ does not include lending money in the ordinary course
of business by a company whose primary business is the lending of money.
2. To the extent that the Memorandum of Incorporation of a company provides otherwise, the
board may authorise the company to provide financial assistance by way of a loan,
guarantee, the provision of security or otherwise to any person for the purpose of, or in
connection with, the subscription of any option, or any securities, issued or to be issued by
the company or a related or inter-related company, or for the purchase of any securities of
the company or a related or inter-related company, subject to subsections (3) and (4).
3. Despite any provision of a company’s Memorandum of Incorporation to the contrary, the
board may not authorise any financial assistance contemplated in subsection (2), unless—
a. the particular provision of financial assistance is—
i. pursuant to an employee share scheme that satisfies the requirements of section 97; or
ii. pursuant to a special resolution of the shareholders, adopted within the previous two
years, which approved such assistance either for the specific recipient, or generally for a
category of potential recipients, and the specific recipient falls within that category; and
b. the board is satisfied that—
i. immediately after providing the financial assistance, the company would satisfy the
solvency and liquidity test; and
ii. the terms under which the financial assistance is proposed to be given are fair and
reasonable to the company.
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4. In addition to satisfying the requirements of subsection (3), the board must ensure that any
conditions or restrictions respecting the granting of financial assistance set out in the
company’s Memorandum of Incorporation have been satisfied.
5. A decision by the board of a company to provide financial assistance contemplated in
subsection (2), or an agreement with respect to the provision of any such assistance, is void
to the extent that the provision of that assistance would be inconsistent with—
a. this section; or
b. a prohibition, condition or requirement contemplated in subsection (4).
6. If a resolution or an agreement has been declared void in terms of subsection (5) read with
section 218(1), a director of a company is liable to the extent set out in section 77(3)(e)(iv) if
the director
a. was present at the meeting when the board approved the resolution or agreement, or
participated in the making of such a decision in terms of section 74; and
b. failed to vote against the resolution or agreement, despite knowing that the provision of
financial assistance was inconsistent with this section or a prohibition, condition or
requirement contemplated in subsection (4).

Loans to directors

The definition of a “loan” is broad [section 45(1)(a1)]. There also exists specific exclusions
[section 45(1)(b)].
45. (1) In this section, ‘‘financial assistance’’—
1. includes lending money, guaranteeing a loan or other obligation, and securing any debt or
obligation; but
2. does not include—
a. lending money in the ordinary course of business by a company whose primary business
is the lending of money;
b. an accountable advance to meet
i. legal expenses in relation to a matter concerning the company; or
ii. anticipated expenses to be incurred by the person on behalf of the company; or
iii. an amount to defray the person’s expenses for removal at the company’s request.
These terms/exclusions largely correspond with those discussed above (section 44).
A company may, if authorised by the MOI, and subject to specific conditions therein, grant a loan
to, or secure a debt or obligation of, or otherwise provide direct or indirect financial “assistance”
to a director of the company or of a related or interrelated company or corporation, if the board
is satisfied that: Immediately after giving the assistance, the company would be in compliance
with the solvency and liquidity test; and the terms under which the assistance is proposed to be
given are fair and reasonable to the company. The financial assistance must be pursuant to
either:

 An employee share scheme, or

 A special resolution of the shareholders within the previous two years that had approved
such assistance, either for the specific recipient, or generally for a category of potential
recipients, and the specific recipient falls within that category.
A resolution by the board to provide financial assistance, or an agreement with respect to the
provision of any such assistance, is void to the extent that the provision of that assistance is
inconsistent with section 45 or with a provision of the MOI.
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Any splits must either be authorised by the board of directors or result from a legal obligation
due to a court order [section 46(1)].
46. (1) A company must not make any proposed distribution unless—
1. the distribution—
a. is pursuant to an existing legal obligation of the company, or a court order; or
b. the board of the company, by resolution, has authorised the distribution;
c. it reasonably appears that the company will satisfy the solvency and liquidity test
immediately after completing the proposed distribution; and
d. the board of the company, by resolution, has acknowledged that it has applied the
solvency and liquidity test, as set out in section 4, and reasonably concluded that the
company will satisfy the solvency and liquidity test immediately after completing the
proposed distribution.
Furthermore normal solvability and liquidity requirements are also set.
These requirements also applies if a company wants to obtain its own shares [see section 48(2)
(a)].
(2) Subject to subsection (3)— (a) a company may acquire its own shares, if the decision to do so
satisfies the requirements of section 46; and

Obtaining of shares in the holder

through the subsidiary

Unlike in the past where a confusing distinction was made between a “for sale offer” (by
shareholders) and offers for underwriting (by a company of its own authorised shares) the new
dispensation (with regard to disclosure obligations) no longer makes such a distinction. The
result is clear and simple instructions.
Certain definitions are of cardinal importance, namely:

 initial public offering

 offer to the public

 primary offering

 rights offer

 secondary offering
Make sure that you understand exactly what is meant by each of these expressions.
According to section 99(2) an initial public offering must be accompanied by a prospectus and a
secondary offering by a written statement.

Offer of shares: Initial public

offering
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here we have to do with the offering of shares by a company of authorised shares or shares that
have already been issued that have been bought back by the company (and are once again
regarded as authorised shares).
Such an offering may not be made directly to the public or even a part of the public except if
accompanied by a prospectus. “Offering” and “offering to the public” are broadly discussed in
the descriptions in section 95.
Study these descriptions.
Section 96 now includes a list of offers that are not regarded as an offer to the public and
therefore aren’t accompanied by a prospectus.
It is important that you will know these “exceptions”.

Offer of shares: Secondary

offering

According to section 99(3)(b) a secondary offering must be accompanied by either a prospectus

or a written statement. Section 101(1) excludes listed shares. This requirement does not
apply is certain cases – subsection (3).

The prospectus: form and

content

According to section 100 a prospectus must in general contain all information needed in all
reason to determine a company’s financial condition in order to properly consider an investment.
Appendix 3 of the act contains detailed information on what must be recorded in the prospectus.

A written statement and

other/further measures

The requirements with regard to the form and content of a written statement are discussed in
section 101(4 to 6).
After studying this section you should be able to list cases where the document is not needed as
well as give should content requirements of the statement. Example is seen at -