LML4806 - Study unit 5 2023 with 100% correct questions and answers

The legal definition of a share Under the companies Act 71 of 2008, a share is defined as 'one of the units into which the proprietary interest in a profit company is divided". A share is a unit of the contribution made to the share capital. It is thus property and can be traded granting it incorporeal, moveable property. A share is also seen as a measure of a shareholders interest in a company, the interest consists of certain personal rights of the shareholder, which may be disposed of or transferred to someone else. How can the classes of shares authorized by a company, and the rights attached to those classes of shares be amended? In terms of section 36 of the Companies Act of 2008, the rights attached to a specific class of share are determined by the MOI and the terms of issue of the shares. The MOI must set out the classes of shares that the company is authorized to issue as well as the a number of shares of each class it may issue. Section 36(1)(d) also provides that a companies MOI must further set out the preferences, rights limitations and other terms associated with that class of shares. However, a company could designate a class of shares in the MOI without setting out the preferences, rights or limitations that those shares will confer, and leave it open for the board of directors to decide on these terms at a later stage. Section 36(1) holds, that the MOI also sets out a stated number of unclassified shares that are subject to classification by the board. The board has the power to increase or decrease the authorised shares of the company and to reclassify shares that have not yet been issued. The company must then file a Notice of Amendment to the MOI to set out these changes effected by the board. In terms of the Companies Act of 1973, alterations of share capital could only occur after a special resolution to such effect by the general meeting. This remains an option under the Companies Act of 2008 but will probably rarely occur. The classes of shares most commonly found are preference shares, ordinary shares, and deferred shares. What types of preference shares are used? Section 37 - class of shares whose holders enjoy preference over any other class of shares w.r.t. payment of dividends and sometimes to return of capital on winding up - usually carry only a modest income return and even if MOI provides that preference shareholders do not have the right to vote, the Companies Act provides that they have an irrevocable right to vote on any proposal to amend the preferences, rights, limitations and other terms associated with their shares. - the company can't have preference shares unless it also has ordinary shares or some other class - as a general rule of construction, preference shares do not, on a winding-up, enjoy a right to repayment of their capital in priority to ordinary shareholders In what circumstances will the holder of non-voting shares have the right to vote? Under the Companies Act of 2008, non-voting shares are permitted and they are useful for those who wish tp raise more share capital without wanting to lose control of the company. The disadvantage of non-voting shares is that they enable shareholders holding only a small portion of the shares of the company to exercise effective control of the company. When must the board obtain the approval of the shareholders before issuing shares? where shares are issued to: o directors, including future directors, or to certain prescribed officers of the company o related or inter-related person o nominee of any of the above persons - no special resolution is required where the issue is: o under an underwriting agreement o in the exercise of pre-emptive rights o in proportion to existing shareholders and on the same terms and conditions o in pursuance of an employee share scheme o in pursuance of an offer of shares to the public - where further shares are issued in a transaction or series of integrated transactions and the voting power of the new shares equals or exceeds 30% of the voting power of all the shares of the class held before new issue of shares ⇨ issue must be approved by a special resolution What are pre-emptive rights? Section 39 - the right of pre-emption is a right conferred on shareholders in private companies to subscribe to new shares to be issued by the company in proportion to their voting right - designed to alleviate the effects on existing shareholders of a new issue of shares by the company ⇨ rights should not be diluted without their consent - a shareholder in private companies (and personal liability companies) enjoy pre-emptive rights except for: o shares issued in terms of options or conversion rights o capitalisation shares o allotment or issue of shares for the purposes of an employee share scheme o shares issued by a company that has been placed under business rescue or o where the consideration for shares is not payable immediately - MOI may limit, restrict or negate such pre-emptive rights How is adequate consideration for an issue of shares determined? And on what basis may the determination be challenged? Section 40 - s 40 provides that the board of directors of a company issue authorized shares only for adequate consideration to the company - if the board issues shares for inadequate consideration ⇨ directors would incur liability for breach of their fiduciary duties - shares may now be issued in consideration for future services and even future payment - shares may also be issued in return for a negotiable instrument that is not negotiable by the company at the time - where shares are issued for future services or payment, shares must be issued immediately and held in trust by a third party until the future obligations are fulfilled - voting or appraisal rights are not exercisable unless provided otherwise by the trust agreement Debenture Section 43 - debt instrument defined in s 43: including any security other than the shares of a company, whether issued i.t.o a security document or not, but excluding promissory notes and loans - debenture can take many forms, at its most basic form is a document issued by a company acknowledging that it is indebted to the debenture holder in the amount stated therein - may be secured or unsecured - the negotiable instrument is not a debenture or vice versa - debenture holder or holder of a debt instrument is a creditor of the company - such debt instruments may carry with them the right to attend and vote at general meetings and to appoint directors, as well as special privileges regarding the allotment of securities unless MOI provides otherwise How to determine whether a security is a share or a debenture? The holder of a debenture is a creditor of the company. The duties of the company towards debenture holders can be secured or unsecured. A trustee will usually be appointed to hold security on behalf of the debenture holders. The trustee must be unrelated to the company or its officers and must be a person who, in the board's opinion, has the requisite knowledge and experience to carry out the duties of a trustee. If the company defaults on its commitments to the debenture holders, the trustee will be able to enforce the security on their behalf, without the need for every debenture holder to institute action individually. Whereas the holder of a share is essentially one of the contributors to the fund that sets up a company. This fund is the share capital of the company. A share is the unit of the contribution made to the share capital. It is property in itself and can be traded. Certificated vs uncertificated securities? The Companies Act of 2008 makes a distinction between certificated and uncertificated securities. Certificated securities are those that are evidenced by a certificate, while uncertificated securities are not evidenced by a certificate or some written instrument. The latter are held and transferred electronically and only they can be traded on the JSE Ltd, with the exception of the instance where they are held in certificated form in collective custody by the participant or the JSE Ltd (s 49(6)). The bona fide transferee of uncertificated securities is protected in the case of fraud, illegality or insolvency of which he or she had no knowledge (s 53(4)-(5)). Nominee shareholder Is a person that acts as the registered holder of securities or an interest in securities on behalf of other persons, therefore a nominee is an agent with limited authority and must act on the instructions of the owner. What is a beneficial interest? The holder of the beneficial interest is the person, usually, the owner, who is entitled to participate in any distribution, exercises the rights attached to the securities and disposes of those securities. What are public offerings? -companies may raise cash for their businesses by offering securities to the public⇨ company law regulates this process closely to avoid abuse - offer of securities to the public must be accompanied by a prospectus, the contents of which are prescribed - a prospectus: an invitation to the public inviting members of the public to invest in a company and provide the prospective investor with information on which to make an informed decision. Requirements for a public offering - Act imposes a nr of restrictions on the offering of securities to the public: o only securities of a company may be offered to the public o no person may make an initial public offering unless the offer is accompanied by a registered prospectus o A primary offering to the public of any listed securities must be in accordance with the requirements of the relevant exchange o Primary offering of any unlisted securities must be accompanied by a prospectus o secondary offering to the public of unlisted securities must normally either be accompanied by a registered prospectus or by a written statement that complies with requirements of s 101 o also restrictions on the distribution of application forms for securities unless accompanied by a registered prospectus - Act distinguishes between 3 types of public offerings: o primary offering: offer to the public, made by or on behalf of a company, of securities to be issued by that company. The purpose is the acquisition of funds by the company o secondary offering: offer for sale of any securities of a company or its subsidiary, made by or on behalf of a person other than that company or its subsidiary. Maker of a secondary offering is selling for his own account o initial public offering: offer if no securities of that company have previously been offered to the public or if all the securities that had previously been the subject of an offer have subsequently been reacquired by the company - an offer to the public includes an offer of securities issued by a company to any section of the public - however, that section may be selected - a secondary offer of listed securities made through an exchange is excluded from the definition of an offer to the public - a rights offer: offer for subscription of a company's securities, made to any existing holders of the company's securities - a rights offer is made by way of a document known as a letter of allocation - 7 exceptions in s 96 for actions that are not regarded as offers to the public o offer made only to specified share dealers or institutional investors like stockbrokers authorised FSP and financial institutions o the sophisticated investor exception ⇨ total acquisition cost of the securities for each investor acting as principal is at least the prescribed amount (may not be less than R100k o a non-renounceable offer made only to existing holders of the company's securities or related persons o rights offer i.r.o. listed securities o offer made only to directors or prescribed officers, or to related persons unless the offer is renounceable in favour of a person outside that group o an offer that pertains to an employee share scheme o the small issue or seed capital exception ⇨ offer or series of offers for subscription, accepted by a maximum of 50 persons acting as principals, where the subscription price doesn't exceed prescribed amount Debenture an unsecured debt, usually with a maturity of 10 years or more