Learning Unit 3: Primary and Secondary Markets, Shares and Debentures

Overview of corporate finance focusing on shares, debentures, distributions, financial assistance, and buy-back of shares.

Defined as a combination of shares and retained income.
Shares: Units representing proprietary interest in a company, determining profit allocation among owners.
Shares are considered incorporeal moveable property granting complex personal rights.
Retained Income: Profits retained within the company rather than distributed as dividends.

The primary methods for raising capital for a company include:
- Issuing equity securities.
- Issuing debt instruments, with debentures being the most common form.
Debt Instrument Definition (S 43 of Co Act 2008): Encompasses any security (excluding promissory notes and loans) other than shares issued under a security document.
Holders of debt securities are creditors who receive interest payments instead of dividends.

Defined as documents acknowledging corporate indebtedness to debenture holders. Key Case: Coetzee v Rand Sporting Club 1918 WLD 74.
Debentures may be secured or unsecured and can include voting rights at company meetings.
Directors generally have the authority to issue debentures unless restricted by the MOI (Memorandum of Incorporation).

A share represents an ownership unit in a company.
- Example: If a company is worth R100,000, and subdivided into 10,000 shares at R10 each, individuals can buy portions reflecting that value.
Definition from S 1 of Co Act 2008: A share is a unit of proprietary interest in a profit company.
Shares are movable property under S 35 of Co Act 2008, transferable as provided by law.
Judicial definition by Borland’s Trustee: A share reflects a shareholder's interest, liability limitations, and mutual covenants among shareholders.

Kuttel v Master of the High Court 2023: A share is considered movable property, emphasizing the separation between a company’s assets and shareholders' interests. The company's assets belong to the company, not the shareholders.
Intongo Property Investment (Pty) Ltd v Groenewald et al.: Highlights the principle that a company’s property is separate from that of its shareholders; only the company can sue for property loss.
Johnson v Gore Wood & Co: Reinforces that claims for losses by shareholders resulting from company actions must be made by the company itself, not individual shareholders.

Two primary types of share capital exist:
- Authorised Share Capital: The maximum amount of share capital a company can issue.
- Issued Share Capital: The portion of authorised capital that has been issued to shareholders.
The 2008 Act does not prescribe a minimum share capital, but mandates at least one authorised and issued share.
The MOI outlines share classes, rights, and limitations.

Under the 2008 Act, share issuance power rests with the board, albeit with possible restrictions from the MOI.
Special resolutions are required for share issues to directors, related parties, or those resulting in significant voting power changes.

Shareholders in private companies have pre-emptive rights to subscribe for new shares proportionate to their existing holdings, which may not apply to public companies unless explicitly stated in the MOI.

Defined under section 44 of the 2008 Act, allowing financial support for share purchases contingent on shareholder and solvency tests.
Authorization must come from the board, ensuring fair terms and compliance with restrictions in the MOI.

Formerly, the concept required companies to maintain issued share capital as a secure fund for creditors.
The 2008 Act has abolished this concept, shifting towards a solvency and liquidity-focused framework.

Governed by section 48 of the Act, which stipulates conditions for companies acquiring their shares, including resolution authorization and solvency tests.
Subsidiaries are restricted from acquiring shares, and companies must cancel shares upon acquisition.

The SCA (Supreme Court of Appeal) in CDH Invest NV v Petrotank South Africa (Pty) Ltd 2019 analyzed directors' authority to increase share capital without the company’s general meeting approval under previous acts,
New provisions under the 2008 Act allow boards to manage share capital changes, pending MOI restrictions.