Company Law: Capital Regulation

Capitalisation of Profit Companies

• Nature of shares
• Authorization and issue
• Registration and Transfer of Securities
• Raising Share Capital
  • Offers to the public
• The Solvency and Liquidity Test
  • Distributions
• Financial Assistance

Introduction to Share Capital

• Share capital: The MOI outlines different classes and associated rights.
• Authorized share capital
  • Certificated vs. uncertificated shares
  • Par value (Nominal value of a share)
    • Archaic concept: Share price upon initial offering; Minimum price
    • Section 35(2) of the new act expressly states: “A share does not have a nominal or par value”.
• Issued share capital
  • Process of issuing
  • Consequences of contravention
  • Consequences of repurchasing

Shares

• Definition of “share” (s 1): One of the units into which the proprietary interest in a profit company is divided.
• A share issued by a company is movable property, transferable as per the Act or other legislation (s 35).
• Borland’s Trustee v Steel Brothers and Company Ltd:
  • “A share is the interest of a shareholder in the company measured by a sum of money, for the purpose of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders inter se.”

Shareholders

• Definition of “shareholder”: The holder of a share issued by a company and entered as such in the certificated or uncertificated securities register.
• Requirement to have shareholders:
  • A company cannot issue shares to itself.
  • There must be shareholders other than the company itself.
  • NPCs (Non-Profit Companies) do not have to have shareholders.

Authorisation for Shares

• The MOI (Memorandum of Incorporation) determines a company’s authorised share capital.
  • Must specify:
    • The classes of shares and the number of shares of each class that the company is authorised to issue.
    • With respect to each class of shares: the preferences, rights, limitations, and other terms associated with that class.
  • May authorise a stated number of unclassified shares.
• How can the authorised share capital be changed or altered?

Issuing Shares

• The board may resolve to issue shares at any time, but only within the classes and to the extent authorised by the company’s MOI and in accordance with the Act.
• A special resolution is required under certain circumstances:
  • If issued to: a director/prescribed officer (PO); a person related to the company/director/PO; or a nominee.
  • If the voting power of the shares to be issued would exceed 30%.
• What happens if the board issues shares in excess of the authorised share capital?
  • Effect on the transaction: nullity, etc.
  • Potential liability: director/PO present at the meeting who voted for or failed to vote against, despite knowing…

Subscription of Shares

• Limited applicability to private companies.
• Section 39: Pre-emptive right of existing shareholders.
  • Arises when a private company proposes to issue shares.
  • Cf: pre-emptive right used to give effect to a secondary market restriction to establish a private company.
• Purpose of s 39(2)?
• Can an offeree subscribe for less than the number offered?
• Can a company provide financial assistance for the subscription of shares (or other securities) in that company?

Options for Subscription of Securities

• Confers the right on the holder to buy a specified quantity of a particular share within a stated time and at a stated price.
• A company may grant options:
  • As payment made
  • As remuneration for services
  • Gratuitously
• The option holder is not a member of the company.
• The board of directors determines the terms on which shares are issued.
• Liability of directors…

Securities Other Than Shares

• Capital can also be obtained through debt instruments/securities other than shares.
• The board may authorise secured/unsecured debt instruments.
  • May give special privileges.
• Appointment of trustee.

Securities Register

• Every profit company must maintain a securities register (or its equivalent) in the prescribed form.
• Must be kept in one of the official languages.
• Must contain various details describing classes of shares and persons to whom the company has issued securities.
• Must also include disclosures relating to beneficial interests.

Dealing in Shares

• Nature of a contract in terms of which shares change hands?
• Transfer of certificated securities:
  • Issue and allotment.
  • Contract to acquire securities (not a contract of purchase).
    • Referred to as contract of ‘subscription’ or ‘allocation’.
  • Issue/allotment pursuant to OTTP regulated by the Act.
  • Otherwise – common law rules of contract apply.
• Transfer of uncertificated securities:
  • Electronic settlement system.
  • Registration of uncertificated securities.
  • Record must be maintained by the CSD (Central Securities Depository) or a participant.
  • Uncertificated securities register (part of the company’s securities register).
  • Must contain certain details.

Raising Share Capital

• Why does the legislation regulate this aspect?
• What is an offer to the public?
  • Broad definition.
  • Certain exceptions.
  • The impact of common law.
• What is a prospectus?
  • Procedural requirements.
  • Consequences of contravention.

Regulating Offers to the Public

• All public offerings of company securities are regulated by chapter 4 of the Companies Act.
• Principal aim: to protect investors by ensuring they are provided with adequate and accurate information relating to the state of affairs and prospects of a company before subscribing for or purchasing its shares.
• Offers to the public are prohibited unless they comply with stringent requirements laid down in the Act.
• Failure to comply – civil and criminal liability!

Definitions

• “Initial public offering” (IPO):
  • Offer to the public of securities of a company if:
    • No securities of that company have previously been subject of an offer to the public.
    • All of the securities of that company have been re-acquired after previously having been subject of an offer.
• “Primary offer”:
  • Offer to the public, made by/on behalf of a company, of securities to be issued by that company or another company within a group of companies of which the first company is a member…
• “Secondary offer”:
  • An offer for sale to the public of any securities of a company or its subsidiary made by or on behalf of a person other than that company or its subsidiary.

Definition of “Offer to the Public”

• Offer: in relation to securities, means an offer made in any way by any person with respect to the acquisition, for consideration, of any securities in a company.
  • Includes an offer of securities to be issued by a company to any section of the public, whether selected as holders of that company’s securities, as clients of the person issuing the prospectus, as holders of any particular class of property, or in any other manner.
  • Does not include an offer made in any of the circumstances contemplated in section 96 or a secondary offer effected through an exchange.

Section 96 Exceptions

An offer is not an offer to the public in the following cases:

• The offer is made only to:
  • Persons whose ordinary business (or part thereof) includes dealing in securities (whether as principals or agents).
  • The Public Investment Corporation.
  • A person or entity regulated by the Reserve Bank of SA.
  • An authorised financial service provider; or
  • A financial institution
• The offer involves a total contemplated acquisition cost of the securities for any single addressee acting as principal that is equal to or greater than an amount prescribed.
• Non-renounceable offer made only to existing holders of the company’s securities or persons related to existing holders of the company’s securities.
• Rights offer in respect of securities where an exchange has agreed to grant a listing, and the rights offer complies with the relevant requirements of that exchange.
• The offer is made only to a director/PO of the company (or related person) unless the offer is renounceable in favour of a person who is not a director/PO (or related person).
• The offer pertains to an employee share scheme that satisfies the requirements of section 97.
• Offer (or one of a series of offers) for subscription:
  1. Made in writing
  2. Not accompanied by/made by advertisement, and no selling expenses incurred
  3. Issue of securities under any one offer in a series is finalised within 6 months after the offer was first made
  4. Offer/series of offers are in aggregate accepted by a maximum of 50 persons acting as principals
  5. The subscription price does not exceed in aggregate the amount prescribed
  6. No similar offer/offer in a series of offers is made by the company within the period prescribed immediately before the offer/first of the series of offers, as the case may be.

Requirement to Have Prospectus/Written Statement

• Except with regard to securities that are subject of a company’s initial offering, a person must not make a primary offer to the public of any:
  • Listed securities otherwise than in accordance with requirements of relevant exchange.
  • Unlisted securities of a company unless the offer is accompanied by a registered prospectus that satisfies the requirements of the Act.
• Except with regard to securities that are subject of a company’s initial offering, a person must not make a secondary offer to the public of any securities of a company unless:
  • Unless accompanied by a written statement that satisfies the requirements of section 101 and bears on its face the date on which the prospectus was filed.

The Prospectus

• What information must a prospectus contain?
  • All information that an investor may reasonably require to assess assets & liabilities, financial position, profits & losses, and cash flow.
  • All information that an investor may reasonably require to assess the securities being offered and rights attached to them.
  • The prospectus must adhere to prescribed specifications.
• Mistakes contained in a prospectus?
• Liability for ‘untrue statements’
  • What is considered an untrue statement?
  • Who is liable, and what defence/s can be raised?
• Liability of experts
  • When might an expert be liable?
  • Are there any defences?

The Solvency and Liquidity Test

• Replaces regulation based on ‘capital maintenance’…
• The test has two components: solvency + liquidity.
• Where and when is the test used?
  • Do not confuse it with the test for financial distress.
• Justification?
  • Solvency element: advance recognition to the ultimate priority that creditors enjoy over shareholders upon dissolution.
  • Liquidity element: addresses the fundamental expectation of creditors to be paid on time.

Solvency & Liquidity Test Requirements

Considering all reasonably foreseeable financial circumstances of the company at that time:

• Assets of the company as fairly valued equal or exceed liabilities of the company.
• Appears that the company will be able to pay its debts as they become due in the ordinary course of business:
  • For a period of 12 months after the date on which the test is considered.
  • Or, in the case of a distribution, 12 months following the distribution.
• Financial information to be considered must be based on:
  • Accounting records that satisfy the requirements of s 28.
  • Financial statements that satisfy the requirements of s 29.
• Must consider a fair valuation of assets and liabilities including any reasonably foreseeable contingent assets and liabilities.
• May consider any other valuation of the company’s assets and liabilities that is reasonable in the circumstances.

Definition of “Distribution”

A direct or indirect –

a) transfer by the company of money or other property of the company, other than its own shares, to or for the benefit of one or more holders of any of the shares, or to the holder of a beneficial interest in any such shares, of that company or of another company within the same group of companies, whether –

(i) in the form of a dividend;

(ii) as payment in lieu of a capitalisation share;

(iii) as consideration for the acquisition –

a) by the company of any of its shares (share repurchase), or

b) by any company within the same group of companies, of any shares of a company within that group of companies; or otherwise in respect of any shares of that company or another company within the same group of companies;

b) Incurrence of a debt or other obligation by the company for the benefit of one or more holders of any of the shares of that company or of another company within the same group of companies; or

c) Forgiveness or waiver by a company of a debt or other obligation owed to the company by one or more holders of any of the shares of that company or of another company within the same group of companies, but does not include any such action taken upon the final liquidation of the company.

Distributions (generally)

• May be from profit or from capital.
• Board decision – no shareholder participation.
• Requirements
  • Must be pursuant to an existing legal obligation or the board of the company must have authorised by resolution;
  • It must reasonably appear that the company will satisfy the Solvency & Liquidity (S&L) test immediately after completing the proposed distribution;
  • The board, by resolution, acknowledges that it has applied the S&L test and reasonably concluded that the company will satisfy the test immediately after completing the distribution.

Acquisition by Company of Its Own Shares

• A company may acquire its own shares if the requirements of section 46 are met.
• An agreement with the company providing for the acquisition of its own shares is valid.
• If the company cannot fulfill its obligations – it must approach the court for an order.

Acquisition by Subsidiary of Holding Company’s Shares

• A subsidiary may acquire shares in its holding company if the requirements of section 46 are met.
• But:
  • Not more than 10% of the number of issued shares of any one class held by/for all subsidiaries taken together.
  • No voting rights attached while held by the subsidiary, and the subsidiary remains such.

Additional Distribution Safeguards

• Authorised by board resolution; or
• Pursuant to an existing legal obligation.
• Must pass the solvency & liquidity test; and
• Board acknowledgement (by resolution) that the test has been applied & is satisfied.
• Must comply with any further/additional restrictions/requirements in the MOI.

Distribution: Repurchase of Own Shares

• A special resolution is required if:
  • From a director/related person
  • Greater than 5% of the class repurchased
• Consequence: shares acquired have the same status as authorized but unissued shares.

Distribution: Acquisition of Shares in Holding Company (H-Co)

• Restrictions apply
  • Max 10% of issued shares in class may be held by/for all subsidiaries taken together
  • No voting rights exercisable while held by the sub and the sub remains such

Distributions (generally): Consequences of Non-Compliance

• On the transaction: approach the court…
• For directors/prescribed officers:
  • Potential liability if:
    • Present at the meeting
    • Failed to vote against/voted in favour of
    • Despite knowing…

Provision of Financial Assistance

The Companies Act allows financial assistance to be granted in the following instances, subject to requirements being met:

• Financial assistance for subscription of shares
  • What is financial assistance for subscription of shares?
  • Why was it previously prohibited, and how does the 2008 Act now deal with the issue?
  • What are the requirements set out?
  • What are the consequences of contravention?
• Financial assistance to directors…

Meaning of ‘Financial Assistance’

• The Act distinguishes financial assistance for the subscription of securities and financial assistance given to directors.
• No definition in the Act of what it means to “give financial assistance”.
• The words have no technical meaning, and “their frame of reference is the language of ordinary commerce”.
• Essentially, to provide another with the financial means to enable him to achieve his purposes or ends – the direct object of the transaction or act is to assist another financially.
• The ‘Impoverishment Test’
  • “Has the company become poorer as a result of what it did for the purpose of or in connection with the purchases of its shares?”
  • What is the role/status of this test today?

Financial Assistance for Subscription…

• Here, ‘financial assistance’ may be:
  • By way of: a loan, guarantee, provision of security or otherwise
  • To any person
  • For the purpose of, or in connection with, the subscription of any option, or any securities, issued or to be issued by the company or a related or inter-related company.
• Excludes lending money in the ordinary course of business by a company whose primary business is the lending of money.

Loans & Other Financial Assistance to Directors

• Inclusions:
  • Lending money, guaranteeing a loan or other obligation, and securing any debt or obligation.
• Exclusions:
  • Lending money in the ordinary course of business by a company whose primary business is the lending of money.
  • An accountable advance to meet:
    • Legal expenses in relation to a matter concerning the company, or
    • Anticipated expenses to be incurred by the person on behalf of the company; or
  • An amount to defray the person’s expenses for removal at the company’s request.

Additional Financial Assistance Safeguards

• Special resolution not older than 2 years; or
• Part of employee share scheme.
• Must pass the solvency & liquidity test; and
• Terms must be fair and reasonable to the company.
• Must comply with any further/ additional restrictions/ requirements in the MOI.

Financial Assistance (generally): Consequences of Non-Compliance

• On the transaction: void
• For directors/prescribed officers: potential liability if:
  • Present at the meeting
  • Failed to vote against/voted in favour of
  • Despite knowing…