A shareholder’s entitlement to the company’s profits and an obligation to participate in the company’s debts and losses is through its holding of shares in a company. A “share” is the proprietary interest that a person holds in a company. The purpose of this article is to briefly look at the different ways of acquiring shares in a private company.
Although there are a number of ways in which shares can be acquired in a private company, this article is only limited to the following methods of acquisition of shares:
• subscription of new shares (“Subscription”); and
• acquisition through sale of shares from an existing shareholder to a third party (“Sale”).
Shares can be acquired directly from the company by way of an issue of shares to the acquirer by the company.
The board of directors of a company can issue shares provided that such shares have been authorised by or in terms of a company’s Memorandum of Incorporation (“MOI”) and consideration (as determined by the board) is received by the company before the shares are issued. The MOI of a company may in certain circumstances require that shareholder approval is necessary before any shares are issued by the company.
The authorised share capital in a company refers to the maximum number of shares which a company can issue. Authorised share capital is often not all issued by a company for several reasons. One such reason could be to provide for future issues of shares by the company should the company need to raise further capital. Issued share capital on the other hand refers to share capital which has been issued to and in the hands of shareholders of a company.
Before the company issues any shares in the company, it is required to first offer the shares to its existing shareholders. This right can be removed in the MOI.
Shares may also be acquired by a third party through purchasing them from the holder of such shares. This is normally regulated by an agreement titled a Sale of Shares Agreement or Share Purchase Agreement (“SPA”). The selling shareholder will transfer the shares to the purchaser pursuant to the Sale.
The agreement relating to the sale and transfer of shares may be either written or oral and either expressed or implied. It is certainly advisable to have the agreement in writing for legal certainty and to avoid any disputes between the parties.
When a purchaser concludes an SPA with the seller, the seller is obliged in terms of the SPA to cede the rights attached to the shares to the purchaser.
Therefore, in order for a transfer of shares to take place pursuant to the SPA, a series of steps has to be followed, namely:
(a) an agreement to sell and to transfer the shares;
(b) payment of the necessary purchase consideration for the shares;
(c) the execution of the deed of transfer (the SPA should suffice as a transfer deed, however a company’s MOI may provide for an additional method of transfer of shares, ie. for example the conclusion of a Share Transfer Form); and
(d) the registration of the transfer in the securities register of the company.
Overview of General Aspects Relating to Acquisition of Shares
Simultaneously with the Sale and similarly with an issue of shares pursuant to a Subscription, the company should:
• register such transfer or issue of shares in the securities register of the company; and
• issue the holder of the shares with a certificate as evidence of such holder’s shareholding in the company.
Notwithstanding the issuance of a share certificate, full title to the shares i.e. all rights and duties of the shareholder as embodied in the MOI and the Companies Act, 2008 are conferred only upon the registration of the transfer or subscription in the securities register of the company.
In addition to the above, Securities Transfer Tax (“STT”) is levied on every transfer of shares in terms of the Securities Transfer Tax Act 25 of 2007. The tax rate is 0,25%, to be applied to the purchase consideration in respect of any transfer of shares. Where there is no consideration given or the consideration is less than the market value of the shares, the STT payable is calculated on the basis of the market value of the shares. There is no STT payable in respect of any Subscription of Shares.