lesson 5 condensed shares/stakes

shares and stakes

shares and stakes both represent units of a companys share capital but they operate under different legal regimes

• shares are the units of a SA public limited companies capital

• stakes are the units of a SL limited liability companies capital

shares in sa

shares reflect the open market orientated nature of the sa company

• they were traditionally classified as securities

• they are capable of circulating in financial markets like the stock exchange in limited companies

• they represent ownership in the company

• they confer shareholder status ie dividend and voting rights

• they are freely trasnferable with minimal restrictions to encourage investment and liquidity

• usually represented by electronic book entries (required in limited) rather than paper certificates but can be either

stakes in sl

reflect a closed personal company structure (like a private partner ship)

• they cannot be securities ie no free circulation on financial markets reinforcing there non market character

• must be recorded in the companies register (not electronic book entries)

• transfer is restricted by the bylaws of the company

  • intervivos= often requiring approval of existing members by default ie gm shareholders

  • mortis causa= often requiring compliance with pre emption rights

functions of shares and stakes

capital raising

• companies raise finance by issuing units of share capital to investors

• way of obtaining funds without incurring debt ie bank loans

governance and rights

• ownership of shares and stakes confers shareholder status

  • allows holders to exercise political rights ie voting and partiicpaton in corporate decision making

  • allows holders to exercise economic rights ie dividends and profits

trasnfer and ownership

• shares and stakes enable the trasnfer of ownership in the company

  • in sa shares are freely trasnferable promoting liqduity and investment

  • in sl trasnfer is limited reinforcing company personal and controlled nature

legal perspective of shares and stakes

part of share capital= financial asset

• represent a fraction of the companies share capital

• contribute to the financial structure of the company as an asset

expression of shareholder status= legal relationship

• embody the legal position of the shareholder in the company

• includes a bunder of rights and obligations such as voting information and dividends

• represent a legal relationship between the shareholder and the company

nature as assets

• sa= moveable assets

  • status as a trasnferable securities to allow circulation through electronic book entry systems

  • have autonomous economic value separate from the identity of the shareholder

  • Sl= stakes do not have this asset like securities status reinforcing their closed and non market nature

proportionality rule

sa= strict capital proportionality for open

• voting rights are proportional to the nominal value/number of shares held (capital contribution)

  • one share= one vote to preserve equality between shareholders and align control with economic investment

  • EXCEPTION= vote caps may limit the MAXIMUM votes a single shareholder may exercise preventing domination of majority shareholders

• multiple voting rights within the same share class are generally prohibited however companies may create different classes with different rights

  • EXCEPTION= loyalty shares issued to long term shareholders in listed companies may allow them to receive double voting rights to reward stable investment

SL= flexible proportionality for personal company

• because sl companies are personal and contractual governance can be tailored by the bylaws

• the bylaws may allow arrangements separating capital contribution from control

  • multiple voting rights= different voting rights per stake

  • non proportional voting strcutures= more or less votes than n of shares

• there is no formal division into classes or series in SA reflecting personalised nature

participation and control in company decision making

sa= strong proportional relationship between contributions and control

• a larger investment = more company shares= greater voting power in the gm

• reflects the capital based nature of the company

sl= more flexible proportionality principle

• voting rights and profit participation can be adjusted in the bylaws separating contribution from control

  • different voting rights per stake

  • unequal profit distribution to capital cotnrbituion

  • per capita systems= equal votes regardless of investment

  • reflects the personal partnership like nature

values of shares and steaks

nominal value is a fixed value assigned in the companys bylaws upon formation (internal value)

• represents the fraction of share capital attributed to each unit

• must be expressly stated in the bylaws

• can only be changed expressly through formal legal procedures in capital increase/reductions

• serves an accounting and legal certainty function

real/fair value is the actual economic value of the asset at any given time (external value)

• changes depending on the companys performance ie assets and liabilitys

• in sa it can change depending on market conditions due to market orientated open nature as a circulating financial security (demand drops, excess supply so price drops)

• serves an economic/market function

expression of value

the value of shares/stakes mustt be expressed as a fixed monetary amount ie 10£ per share

• expressing values as a percentage of share capital ie 15% is not permitted

  • undermines legal certainty

sa= stricter value rules for market orientated nature

• shares must have the same nominal value within the same class or series

sl= flexible value rules for personalist nature

• stakes may have different nominal values

capital protection rules

to protect creditors and maintain the integrity of share capital

• prohibitions

  • issuing below nominal value (with a less contribution)

  • fictitious contributions ( without a real contribution)

    • ensures the companys capital is represents the real economic contribution made to the company

    • prevents creation of a inflated capital which would mislead creditors about the companys financial position who rely on capital as a financial safeguard

• issue premiums= shares/stakes can be issued above their nominal value

  • ensures new investors pay a fair price that reflects the true economic value of the company at the time of joining

    • particularly when the company has built up assets and profitability beyond its initial incopration capital

shareholder status

ownership of shares/stales creates shareholder status= establishes a legal relationship with the company

• confers rights=

  • political/governance rights =

    • voting in gm

    • participation in gm

    • right to information

    • right to challenge corporate decisions

  • economic=

    • right to dividends and profits

    • right to liquidation quota (profits upon dissolution once debt paid)

    • pre empty subscription rights (first access to new shares)

• creates olbigations= payement of unpaid share capital

right to profits

2 levels exist:

• an abstract right to profits= they have a right to participate in company profits

  • this cannot be excluded by the bylaws

• conditional right to payement= shareholders are not automatically entitled to dividends payements every year

  • the gm decides how profits are allocated

    • disitirubuted dividends to shareholders

    • retain profits for reinvestment

    • retained profits for company reserves (creditors)

• a concrete dividend right arises only when the general meeting declares a dividend for distribution

  • this creates a credit right (enforceable debt) against the company

  • declaration cannot be revoked

  • dividend must be paid within 5 years

creditor protection rule

• dividends can only be disitrubted if

  • the net assets exceed the share capital

  • the legal reserves are satisfied

low dividend rule

• shareholders may exit the company if its fails to distribute at least 25% of legally disitrbutbae profits over 5 years

• prevents majority shareholder in the gm from systematically retaining profits disadvtaging less powerful minority holders

disitrubtion rules

• sa= strictly proportional to shareholding ie capital contribution

• sl= flexiblility determined by the bylaws allowing unequal distribution to contribution

liquidation quota

shareholders have the right to a share of remaining assets when the company is liquidated

• creditors must be paid first

• default= any remaining assets are distributed to shareholders proportionately to their contributions

  • exception= by laws can expressly modify contribution ie preference shares with priority rights to profits

• right can be voluntarily renounced allowing another shareholder to receive their share of remaining assets

• however the right cannot be removed by gm majority decision (involuntarily)

pre emotive subscription rights

gives existing shareholders priority when new shares are issued in capital increases and issues of convertible bonds (SA)

• ensures shareholders can maintain their percentage of ownership/voting power avoiding dilution

• proportional allocation= get access to new shares in proportion to what they already own

  • based on existing shareholdings

• trasnferable= shareholders may sell the rights to other shareholders

• waivable (voluntary)= shareholders may choose not to subscribe to new shares

• strictly controlled exclusion (involuntary)= right can be restricted if approved by the gm

  • must be justified in the companies interests

voting attendance and participation

political rights are exercised through the gm

• ie to attend meetings, partiicpatie in discussions and vote on resolutions

• sa= one share for one vote

• sl= by laws can modify

• voting rights can be excluded when

  • temporarily if shareholder has not fufilled capital contirbution

  • in treasury shares held by the company to prevent manipulating decision making

• restrictions on attendance and voting

  • sl cannot restrict attendance or voting due to personalist nature of each holder

  • sa can impose restrictions such as

    • voting caps per shareholder to prevent majority over influence

    • minimum shareholding requirement due to open nature

right to company information

ensures shareholders have the information necessary to participate effectively in decision making

• before the meeting shareholders may submit written questions

  • if the company violates shareholders may seek annulment of the gm resolution ONLY if the information was essential

• during the meeting shareholders may ask oral questions

  • if the company violates resolutions cannot be annulled but shareholders can claim damages

• shareholder may ask for access to documents including

  • annual accounts

  • bylaw amendments

  • structural changes ie mergers acquisitions

• these rights must be exercised in good faith avoiding unnecessary interference with the company

refusal of information=

• sl =protect only sensitive info

  • information may be refused if discolsure would harm the company ie condifendential client lists

    • smaller private company so a request is generally considered reasonable so refusal is limited to protecting legitimate company interests

• sa = refuse all unnecessary info

  • information may be refused if

    • information is unnecessary to shareholder rights

    • there is a risk of misuse for extra commercial purposes

      • larger public company so broader company discretion to refuse requests for info that isn’t needed

• information cannot be refused if the shareholder hold 25% or more of capital (more contribution more right)

other shareholder rights

strength of rights

• shareholders have strong clearly enforceable rights

• shareholders have more restricted rights due to personalist control nature

examples

• right to challenge gm resolutions= requires 1%

• obtaining certificates of the resolutions of the gm

• exit/withdrawal rights= allowed in certain circumstances

  • mergers

  • bylaw changes

• transfer rights= free in sa; restricted in sl

minority rights

• designed to protect small shareholders against controlling shareholders

• requires 5% of capital

  • 3 in listed companies

• all companies include

  • calling a general meeting

  • challenging resolutions requiring 1 %

  • appointing directors using proportional representation

  • liability against directors

  • requesting audits

  • requiring a notary at the gm to write up the minutes 1 % in sa or 5 in sl

• sa only= add items to the gm agenda

• sl only= examine company accounts (personalist)

special classes/types

there are special shares/stakes used to modify rights of ordinary shareholders

• privellaged shares provide additional rights to shareholders ie higher dividends/ priority in liquidation

  • does not guarantee payement like interest on a loan= there is no legal obligation for the company to pay every year

    • preferrential= you get paid before ordinary shareholder but only if the company decides or is able to pay

  • restrictions

    • cannot remove the preemptive rights of other shareholders in share subscription

    • in sa= cannot break proportionality of voting right within the same class

• non voting shares= no political voting rights in the GM but strong financial/economic protection

  • cannot represent more than 50% of the share capital

  • must receive compensation for giving up political rights of a minimum preferential dividend (paid before ordinary shareholders)

    • if the dividend is unpaid the voting rights are temporarily regained

    • unpaid dividends can accumulate for up to 5 years meaning the company must pay all those missed amount before ordinary shareholders receive dividends

  • receive priority in dsiitrubthion upon liquidation

• redeemable shares in SA only= company can buy back shares under pre agreed conditions as a flexible financing tool

  • maximum of 25% of share capital

  • redemption terms ie pricing timing methods must be predetermined

  • must be fully paid on issuance no 25% rule

  • redemption reduces share capital affecting proportional ownership for other shareholders

representation of shares in sa

shares may be represented by

• paper securities ie physical certificates

• electronic book entries ie dematerialised shares recorded electronically

  • listed companies must use electronic representation

shares as securities

a perfect security is a doc where possession automatically gives all the rights attached to it

• shares are considered securities as they are trasnferable instruments that represent membership rights in the company

  • they provide voting rights dividends and participation in liquidation proceeds

• however sa shares are imperfect because

  • acquiring a share trasnfers both rights and possible obligations ie unpaid capital contributions from previous holder

  • the legal position of the shareholder does not depend on possession alone

    • may depend on the company bylaws

    • may depend on company registration ie registered shares and book entry shares not possession alone

shares as book entries

dematerialised shares existing only electronically

• ownership trasnfers via accounting entries rather than physical delivery of a certificate

• provides faster settlement, efficient trading and reduced risk of loss/theft/forgery

  • liquidity efficiency and legal certainty

• ownership is proven through registry entries managed by

  • banks

  • brokers

  • custodians

  • central depositories in listed companies for transparency

• the registered person is considered the lawful owner allowing

  • pledging shares as collateral

  • creation of usufruct rights (third party receives economic rights ie dividends without owning the share)

types of shares

• bearer shares= ownership determined by possession of the certificate

  • no owner is physically registered

  • facilitates circulation= easy to trasnfer because the share moves with the document

  • reduces transparency since the company doesn’t know who the shareholder is

• registered shares= owner name is recorded in the company register

  • provides traceability and legal certainty

representation in sl

stakes must be registered in the companies register

• they cannot be paper securities

• they cannot be electronic book entries

• reflects the personal and closed nature of an SL where ownership is more controlled and less market oeriented