lesson 6 shares and stakes condensed

trasnfer of shares in sa

the principle of free transferability= shares in a public limited company are freely trasnferable

• reflecting the open and capital based nature of sa

  • liquidity

  • investment

  • marketability of shares

• no need for company consent

• no need for other shareholder consent

• shareholder status trasnfers automatically with the share

• law is indifferent to shareholder identity unlike SL (fungibility)

statutory restriction on transfer in sa

• pre incorporation restriction= shares cannot be trasnfered before company registration

• capital increase restriction= newly issued shares cannot be transferred before registration of capital increase

  • prevents legal uncertainty and fictitious circulation of rights

company limitations on free transferability sa

restrictions are allowed in the bylaws but transferability cannot be eliminated

• illegal restrictions: against companys structure as open

  • total prohibition of trasnfer

  • clauses that effectively block transfer

  • forcing trasnfer of more shares than intended

  • preventing shareholders from receiving fair value for trasnfer

• valid restrictions

  • pre emption rights= existing shareholders/company may have priority to buy shares first up for trasnfer

  • consent clauses= requires company or directors approval

  • personal clauses= limits trasnfers to specific people/categories

• shareholder agreements= valid only between parties so cannot invalidate trasnfer

  • not enforceable against the company or third parties unless agreement is expressly excluded in the bylaws

  • can be liable for contractual breach= sued by parties of agreement but trasnfer still. stands

    • promotes market efficiency with limited contractual control

method of trasnfer sa certificate shares (paper doc)

bearer shares (unregistered)

• ownership trasnfers via valid contract and delivery (agreement and handing over)

• governed by movable property rules (cash or goods not rights)

• possession is the key factor = he owner is whoever physically holds the share certificate (no name on register)

• if the certificate is not delivered physically transfer cannot operate through possession so is governed as a legal assignment of rights

  • stricter legal rules and formal processes ie written agreement

registered shares (ownership linked to named holder)

• ownership trasnfers via valid contract and delivery (agreement and handing over)

• +entry into the share register

  • not required for legal validity but is required for third party effects

    • recognition by company

    • exercising shareholder rights

• can also be trasnfered via endorsement= trasnfer via signature on the certificate creating a chain of endorsements

  • company must verify:

    • continuity= no gaps in ownership

    • legitimacy= genuine trasnfer

method of trasnfer sa book entry (electronic)

book entry= trasnfer via accounting entry in registry system

• ownership= registered person

• upon registration trasnfer is effective against third parties and the company

• provides high legal certainty and transparency

  • central in listed companies and modern securities markets

method of trasnfer of stakes SL

stakes are not freely trasnferable as SL is a closed personal company

• restrictions are allowed in the bylaws with the law applying as default/supplementary= flexibility

• if the bylaws are silent trasnfer requires general meeting consent

• formalities= notarial deed + registration in the companys share register

  • notarial deed not required for validity but is required for proof and third party effects

    • company recognition

    • shareholder rights

• prioritising control over membership without a complete lock in

intervivios trasnfer sl

• illegal restritions:

  • completely free trasnfers are void

  • forced trasnfer of different number of stakes are void

  • total prohibition of trasnfer

• total prohibition is valid only for 5 years with

  • unanimous shareholder consent

  • a right of withdrawal granted (way out)

• external trasnfer to third parties= protect personal nature of company

  • notification to the company

    • number of stakes being trasnfered

    • the buyers identity

    • the price and conditions

  • general meeting consent required

    • can only refuse if an alternative buyer is proposed

    • if no alternative buyer within 3 months the shareholder is free to trasnfer

  • new buyer must complete purchase within 1 month

mortis causa transfert sl

• default= generally heirs automatically become the new stakeholder

• EXCEPTION= bylaws may grant preemption rights to the stake to shareholders or the company

  • presumption rights must

    • be exercised within 3 months

    • pay fair value for the steak

• balances conintuity of inheritance with the personal controlled nature of the company

forced trasnfer in SL

trasnfer due to seizure or court enforcement

• the authorities must notify the company of the seizure

• company must notify the shareholders

• the stakes are auctioned externally

• temporary suspension of the trasnfer for one month

• shareholders and company can replace the auction buyer for the same price

  • to prevent unwanted third party entry into closed personal company

joint ownership of shares/stakes

shares and stakes are indivisible assets

• co owners act together as a single shareholder= no fragmented rights

• joint owners must appoint one representative to exercise shareholder rights

• all co owners are joint and severally liable for the asset= company can claim full obligations from any co owners

• ensures clarity and enforceability

shares/stakes as security/pledges

shares/stakes can be used as collateral for a debt

• the shareholder retains ownership= right to exercise shareholder rights (voting and dividends)

• the pledgee does not become the owner= cannot interfere with company business ie meetings voting dividends

• if the debtor defaults the pledgee can enforce the security

  • sell the shares to recover the debt

  • use the proceeds to pay what is owed

• creation of the pledge

  • sl= requires notarial deed and entry into the stake register

  • SA=

    • certificate shares

      • unregistered bearer= delivery of the certificate (possession= control)

      • registered shares=

        • delivery of the certificate+ registration in shares register

        • or endorsement (signature on the certificate)

    • book entry shares= electronic registry entry

shares/stakes in seizure

similar rules to pledges apply= doesn’t trasnfer ownership but creates enforcement rights

• a seizure by court or a creditor affects shares as a form of security but arises involuntarily by legal enforcement not agreement

• even if the shares are seized the shareholder is still the legal owner= exercises voting rights

  • the creditor does not become the owner so cannot vote or interfere in company management

• creditor right is limited to forcing sale of the shares to use proceeds to satisfy the debt

usufruct of shares/stakes

gives the right to use and enjoy benefits of the asset without ownership

• the bare owner= the legal registered shareholder

  • maintaining political rights= participation and voting

• the usufructary= enjoys the economic rights of the asset without ownership

  • dividends and profits

• separates political control of the asset(shareholder) with the economic benefits of the asset (usufruct)

effects on shareholder rights

• voting rights= by default the bare owners maintains voting rights

  • can be modified by the bylaws

• dividends rights= go to the usufructuary

• retained profits= paid at the end of the usufruct to the usufructuary

• payement obligations= bare owners pays any contribution obligations as owner

  • the usufructuary reimburses the bare owners if they benefit

• subscription rights= if new shares become available these rights ie presumption exercised by the bear owner first as they own the shares

  • if inactive the usufruct may act

• new shares= usufruct agreement extends to any new shares accumulated by the bare owner

• sale of shares= proceeds go to the usufruct as they are the economic rights holders

company dealing in own shares

when a company buys its own shares it uses company money to pay shareholders

• risks

  • reduces the companys net assets= the pool of money available to creditors

    • this reduces the companys financial security and creditor protection in cases of default or insolvency

  • potential abuse= may manipulate the share price to benefit the majority unfairly

    • company may artificially inflate the share price so majority shareholders can exit the company at a favourable price

    • this would disadvantage minority shareholders who cannot afford

• advantages (legitimate uses)

  • employee incentives= can acquire own shares to operate employee sharing/bonus schemes

    • to align employee interests with coproate performance

  • market stablaisation= if a companys share price is dropping ie lots selling it can buy its own shares to increase demand

    • increasing demand reduces circulation to push the price back up/stop it falling further

  • reorganising capital= if a company has too much cash/excess capital than it needs for business operations it can buy its own shares

    • reduces the number of shares in circulation increasing the value of remaining shares ie each remaining holders now owns a bigger portion of the company

companhas aquiiitoion of own shares

original aquiisition is strictly prohibited= company cannot subscribe for its own shares at issuance

• sl acquisition is void= automatically invalid

• sa acquisition must be disposed/cancelled= company must act by selling the shares or cancelling them (reducing capital)

• prevents fake capital creation= ensures capital is genuinely contributed for share (not depleting business assets to buy)

  • this is to protect creditors and investors who may rely on these false capital claims

derivative aquisition= buying back shares that already exist from shareholders

• sa is an open company so has a flexible regime

  • requires approval from the general meeting

    • no approval needed in :

      • a free trasnfer of shares ie donation

      • restructuring ie capital reduction or merger

  • after the purchase the company must still have enough assets to cover share capital + legal reserves

    • protects creditors

  • can only hold up to 20% of its own shares

    • 10 if listed company

  • must dispose (sold/cancelled) within 3 years

• sl follows a strict regime as a private company

  • allowed only in specific legal situations

    • structural changes= merger, capital reduction,

    • a free trasnfer of shares ie donation

    • shareholder exit/exclusiion scenarios

    • forced trasnfer

    • inheritance

  • if rules are breached directors face financial penalties up the the nominal value of the shares involved

treasure shares regime

when a company holds its own shares

• sa= more flexible and market orientated

  • voting rights are suspended= preventing the company from influencing its own decisions

    • however they are still counted for GM meeting quorum requirements even though they cannot vote

  • economic rights are redistributed to benefit shareholders proportionately=dividends and profits are shared among the remaining shareholders

  • must set aside a non distributable restricted reserve equal to the value of the shares= protect creditors when company assets are reduced incase of company insolvency

  • transparency requirement= must declare how many treasury shares It holds

• sl=strictier closed private rules

  • voting rights are suspended like sa

  • economic rights are also suspended= no dividends are paid all or redistributed to other shareholders

  • must set aside a special reserve to cover the value of the treasury shares like sa

financial assistance

restrictions exist surrounding companies providing loans and providing guarantees for loans (ie they ay if debtor defaults) to stop

• capital erosion= using company money/ reducing assets to help someone buy its shares

• manipulation of ownership= acting as security to help friendly buyers gain control unfairly

in sls financial assistance is completely prohibited as a closed personal company

• the company cannot lend money to a buyer or guarantee a loan for their borrowing to help someone buy a share

• the company cannot use its own shares as collateral for a loan for a loan

in sas it is generally prohibited but exceptions exist to reflect its more open nature

• the company cannot lend money or guarantee a loan to help someone buy a share

• the company cannot use its own shares as collateral for a loan for a loan

  • undermines real security and creditor protection

• EXCEPTIONS=

  • employee share schemes and stock options = employees are allowed to buy/recieve company shares at discount or on favourable terms ie bonuses

    • aligns company success with employee interests

  • ordinary banking operations= financial isnitutions can give loans in the normal course of business company as long as it does not put the companys capital at risk

    • ie no securities on company

overall themes

sa= a public company

• promotes liquidity and market efficiency

• increased flexibility in rules

• more focus on transparency and coproate integrity

sl= closed private company

• promotes shareholder control and a personal structure

• stricter rules and restrictions

law balances

• transferability= shareholder rights vs creditor protection