12.8 CONSIDERATION FOR SHARES
S 40 deals with the consideration for shares.
a. In terms of Section 40 the board of a company may issue authorised shares only for adequate consideration to the company as determined by the board;
b. In terms of conversion rights associated with previously issued securities of the company;
c. As a capitalization issue as contemplated in Section 47.
Basically, this is the same in the old and new act. When shares were issued under the old Act it generally was a par value share, the nominal amount plus the excess of the value of the share going to the share premium account. The directors used to set the share premium value under the old act. Now it is still up to the directors to set the consideration and s 40 (1) (a) talks about adequate consideration which must be determined by the board.
The adequacy of the issue price cannot be challenged on any other basis than in terms of s 36 which deals with standards of director’s conduct, read with s 77 (2) which deals with in what circumstances the directors can be held liable.
S 41 deals with situations requiring shareholder approval for the issue of shares and these would be to 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 contemplated in paragraph (a) or (b). In these instances, a special resolution is required.
Sub-section 5 deals with the situation when a director can be held liable in certain events if the actual law was not complied with.
Court challenges on share price
To the best of publicly available information, there has been no direct reported South African court decision that squarely sets aside or invalidates a share issue solely on the basis that the directors’ chosen subscription price was incorrect or unfairly low or high. In other words, there is no widely cited authority where the courts have directly substituted their own valuation for the board’s valuation and proceeded to nullify or adjust the share issue price.
That said, the fact that there is no “pure” valuation challenge on record does not mean that share issues (or their pricing) cannot come under judicial scrutiny. They can and do, but typically under broader legal principles, such as:
1. Breach of directors’ fiduciary duties
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Under the Companies Act 71 of 2008 (particularly sections 76 and 77) and under common law, directors must act in the best interests of the company, with due care, skill, and diligence.
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If directors issue shares at a price that appears to be grossly unfair or designed to dilute certain shareholders (thereby advantaging others without justification), a court may find such conduct to be a breach of duty.2. Minority protection / Oppression remedies
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Section 163 of the Companies Act provides that a shareholder (or other eligible party) may seek relief if an act or omission of the company (including decisions of directors) is “oppressive or unfairly prejudicial” or “unfairly disregards” the interests of that shareholder.
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A significantly underpriced issue of shares that dilutes existing shareholders might trigger this provision.
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While the relief sought might not be a direct judicial revaluation of the shares, the court can grant a range of remedies, which could include setting aside the share issue or requiring the company to alter it in some manner.3. Derivative actions
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A shareholder or other stakeholder can institute a derivative action on behalf of the company (section 165 of the Companies Act) if the company has suffered harm as a result of the directors’ conduct. If issuing shares at a suspect price damages the company itself—e.g., by undervaluing the capital injection—the derivative action process can bring the directors’ decision before a court.4. Contractual / shareholder-agreement disputes
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In some companies (particularly private companies), the issue price may be governed by a shareholders’ agreement or other contractual arrangement. A director’s alleged non-compliance with those provisions could open the door to litigation involving valuation.
Because these avenues exist, a challenge to an unreasonably low or high issue price could very well succeed if it is framed under fiduciary breaches, oppression, or related contractual disputes. However, as a narrow matter of valuation alone (“the court thinks the directors simply got the price wrong”), there is no landmark precedent in which a South African court has outright overruled directors for mispricing shares.
Bottom Line
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No famous “pure” valuation-overruling case: Courts have not directly substituted a judicially-determined price for a board-approved share issue price on valuation grounds alone.
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Indirect challenges are possible: Share issues have been (and can be) challenged for broader legal reasons—breach of fiduciary duty, oppression of minority shareholders, or disregard of contractual provisions.
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Relief in practice: Where underpricing (or overpricing) is so egregious that it suggests bad faith, prejudice, or misuse of power, the courts can intervene, but typically under the umbrella of oppression remedies or fiduciary duty breaches rather than a standalone “valuation dispute.”
Should you suspect that a share issue has been improperly priced to dilute or prejudice certain shareholders, it is prudent to seek legal advice regarding potential Section 163 or derivative actions, and to explore fiduciary duty implications under the Companies Act.