14 SHARE CAPITAL QUESTIONS
Q. What happens to the share premium account, once you convert your par value shares to no par value shares?
A. The directors can transfer this to the stated share capital account or they can retain it as share premium as it’s much easier to pay back share premium than to buy back shares owing to the additional compliance required.
Q. With reference to the value of shares being transferred. How does market related value play in this and the SARS requirements?
A. As a rule market value is determined by and agreement between a buyer and a seller. If the buyer and seller agree on price than that is the market value and the price of securities transfer tax.
Q. If shares are issued at say R1 per share, can the purchase price for the shares be different i.e. higher?
A. The price of a share or the market value of a share relates to the value of the company. If the company makes profits and the assets grow then the value of the shares goes up. By the same token if the company loses money the share price would go down. Any excess of shares over the par value will go into share premium on allotment and into share capital account on NPV shares.
Q. Is it possible to pay different shareholders of the same class dividends that are not in proportion to one another? Can this be achieved by altering the MOI, or is there a way around it?
A. This can’t be done in respect of the same class of shares as the number of shares held to the total indicates the percentage holding. The MOI says that profits are to be distributed on this basis of this percentage holding. If for some reason the directors want a disproportionate payment of dividends then different share classes must be set up. One could then have preference shares with its own unique class of shares.
Q. It seems there is some confusion on old and new company share knowledge. You need a good understanding of the old companies act on share capital to really follow or understand the new companies act. i.e. what PV, NPV Share Premiums and the basic capital concepts. Perhaps lecture on this later on.
This is true. To really understand the concept of share capital one needs to have a good basic understanding of the accounting principles of share capital. The new companies act does not deal with the basics of share capital but assumes the accounting principles of share capital apply and only really replaces a restriction on having par value shares. There are in fact no definitions of what share capital really is in the act.
Q. Can you issue shares to different people at different values - 1 share for R100 and 1 share for R1000?
A. There is really nothing to say that you can’t. The only reason that this should not be done is how would you justify this to the person who is paying more. Shares are always issued based on the value of the share. In the listed environment this value is determine by agreement between a buyer and a seller on the stock exchange.
Q. For new companies being formed, can the share capital be reflected as R0 in the financial statements?
A. Only If the company is dormant and does not have a bank account and all it has is authorised share capital. However, when a share is issued a value must be assigned to that share so that a share capital account can be opened in the books of the company and shown on the balance sheet. Remember shares are issued to determine the percentage of ownership in the company and who controls the company. Despite the fact that the shares are no par value an amount must be assigned to a share when business starts as you can’t have a zero-value share. It could be 1c or R1 or any amount determined by the directors based on the capital needs of the company. As the company grows and makes profit the value of the shares will grow and new issues of shares will always be at a higher value.
Q. Please advise on the following;
How do you go about issuing various different classes of shares, in particular from a CIPC perspective (completing the CoR15.1 form)? For example, we want to issue
Type A no par value ordinary shares, these shares are only entitled to voting rights, with no participation in any dividends and
Type B, C, D, no par value ordinary shares, these shares are only entitled to participate in dividends, with no voting rights.
A. Summarise the different share classes on the front page of the form CoR 15.1 and indicate the different share classes in the actual MOI. One can set this up as a schedule to the MOI where all the rights and limitations are specified.
Q. What happens to Cumulative Fixed Rate Shares?
A. These are preference shares where in a particular year the agreed dividend is not paid. These dividends are accumulated and paid when the company is in a position to do so.
Q. Please can you explain why they say that a preferential share is equity and debt... why would you want to subscribe for these shares and not ordinary shares?
A. Larger companies who require project finance for large projects take money from investors to finance those projects. In order to encourage investors, they offer a good rate of return which is very secure and is at a fixed rate. In many instances this is more like debt financing and investors never have ownership of the company. There are many large companies with preference shares.
Q. What could one do in a case where there were no proper records kept and resolutions were not updated. When you are now trying to update share registers and there is missing information. What do we as Company Secretaries need to do in such cases?
A. In this case the only valid evidence that you have is the CIPC listing of who the directors are. If possible, I would obtain an affidavit signed by each of them as to who the shareholders are. If there are existing shareholders that you know about include them in the affidavit. If all the parties agree then reconstruct the company secretarial records to the current situation. In regard to share capital there may be movement of share capital paid into the company. The directors should know who the shareholders are. If it’s a pre-existing company there is a record of the issued shares at the CIPC.
Q. On transfer of shares the Capital Gain or Loss is determined on the original base cost and proceeds from the sale value. Question - is the transfer value also not subject to being determined in relation to market value for income tax purposes as STT constantly refers to market related value which the share transfer value is not always.
A. What you have said above is true, however the transfer value is in fact what a buyer is prepared to accept for the shares owned and what a seller has agreed to pay. In effect this is the market price of the shares. Once the market price is determined the capital gain or loss and the SST can be determined.
Q. Is the Securities Transfer Tax payable by the shareholder selling?
A. The STT is payable by the buyer,
Q. What document of evidence is required when transferring shares from one shareholder to another? What restricts director’s transferring shares of shareholders? In the old act this was governed by the CM42. If two directors sign the share certificate this does not prove that the shareholder gave authority?
A. There is no reason why you can’t use the old CM42 as the transfer deed. In our systems we have converted this form into a transfer deed which must be signed by the transferor (seller) and the transferee (buyer). Directors should never sign the share certificate unless they have an agreement in place or the transfer deed is properly signed. In law the transfer becomes effective when the transaction is entered into the share register.
Q. Can an incorporated company have different classes of shares?
A. There is no reason as to why it should not. They must be defined in the MOI.
Q. Once the CIPC have approved the conversion of par value shares to no par value shares, does a new share certificate need to be issued to the shareholder?
A. There must definitely be new share certificates issued. I would recommend that they are issued with the same share certificate number so that they can be traced back to the old class. I would recommend doing this when all the paper work has been produced so that the share certificates can be signed at the same time as the resolutions. Remember this is a formality that the CIPC must eventually approve.
Q. I had a case where a company was incorporated on 20 April and the shares certificates were only issued on 30 May. Is this wrong? What about the period where no shares were issued?
A. I assume that this was a company that was incorporated. The first thing here is that there are in fact incorporators who are the equivalent of directors. From a practical point this may very well happen often. There is also no reason to backdate the issue of the share certificates. As this situation has a gap I don’t think anything turns on it.
Q. How do you convert ordinary shares to preference shares or can you?
A. Preference shares are normally issued by agreement; the terms can even be contained in the MOI. There may be an option to convert them into ordinary shares. If there is agreement up front as to how then there is no issue with this. If there is no agreement up front I don’t see why this can’t be done by special resolution taking into account the pre-emption rights as specified in the act.
Q. Is it fine to only furnish clients with share certificates and meeting minutes allocating shares to shareholders? They can then sign the templates to confirm shareholding status. Or must a share register and any other documents accompany this?
A. If one is using an electronic system then all the paperwork including the registers are produced at the same time. The shareholding really only comes into effect when all the paperwork is signed and the share register is updated. It is not necessary to give the new shareholders the register unless they request it. The registers should always be available at the registered office for inspection by anyone.
Q. Is it possible to change the MOI once the Shareholders have changed an old Company to a standard MOI as per the new Companies Act and realised it is not appropriate?
A. Yes, the shareholders can change an MOI as many times as they like provided they carry out the compliance procedures and pay the CIPC fee. A special resolution is required.
Q. I registered an incorporated company. During the process I completed the long form MOI, but did not make provision for any restrictions?
A. It is not necessary to have restrictions as the act and the MOI will determine the rules.
Q. What is the Serial Number on the share certificate?
A. It is the unique number that is used to keep track of each share certificate. With NPV shares on the Shares Certificates you need to insert a value on the Share Cert the Shareholders to advise value
Q. I have read/heard somewhere some time ago that when it comes to transferring or selling your shares, there could be potential technical issues when the shares are not fully paid up. Is it a potential pitfall if the shares are not paid up?
A. All shares in RSA must in fact be paid up. The law does not allow non-paid up shares. Shares should not be issued unless they are paid up.
Q. When transferring 'No Par Value' shares of an existing company, does the company need to be valued by the Auditors to determine the value of the Shares? Or how is the value of the No Par Value shares determined?
A. The rules are the same for a par value share. If the buyer and the seller want to determine a proper value then the auditor can value the shares as a guide, but as a rule is not necessary. The price is in effect an agreed price between the buyer and seller. If we were to compare the PV to NPV situation on an allotment it would be as follows NPV = PV + Share premium
Q. So in essence the value of the NPV shares should equal the shareholders’ investment in the company i.e. loan accounts.
A. Not necessarily. It should be remembered that Shareholders loans are in affect a liability and can be repaid.
Q. Can a subdivision of shares still be done under the new Act?
A. Yes, it can, subject to the various technicalities.
Q. So if I register a new company for a client, Can I be the incorporator and sign all the original documentation and as soon as the company is registered do a CoR39?
A. Yes you can.
Q. According to a lawyer, who is an expert in Co Law, a company MUST have a class of ordinary shares (general) before other classes with more specific rights may be created. I don't agree with this. What is your opinion?
A. The ordinary class are in effect the owners of the company so it is necessary to have them. Where different rights are required then we can have different classes of shares.
Q. Can you not have ordinary PV shares and once you increase the share capital the additional shares are then issued as a new Share Class and have 2 classes of Shares?
A. You can do this but the MOI must differentiate the new class and the rights and in the long run this becomes messy. If money above par is paid this will go into the share premium account. Share Premium belongs to all the shareholders in equal shares.
Q. As a standard I issue e.g. 100 ordinary no par value shares at an issue price of R1.00 or such issue price as the board determines.
A. This is correct right at the start of operations. Once the company starts to build operations the price should reflect the value of the shares then it would be the stated share capital.
Q. What is the transfer date where you have a Share Sale Agreement that stipulates a current effective date but everything is subject to suspensive conditions that needs to be complied with at a future date? Do you perhaps consider the effective date as the transfer date for accounting purposes and only transfer the shares when the suspensive conditions have been complied with?
A. When the suspensive conditions have been met that is the time to do the paper work with everything dated at the effective date.
Q. In the event where there was no proper record keeping regarding shareholding and issued shares, how does one go about establishing who the actual shareholders are or were?
A. This is difficult. Its best to get a resolution where everyone agrees. The directors should know this.
Q. Does it become a litigation matter or is there another way to resolve this?
Whichever way it goes it has to be based on facts that everyone agrees to.