Certificate for Preference Share
Shares can typically be divided into three categories namely:
• Preference shares which may be cumulative, non- cumulative,
participating, redeemable and/or convertible.
• Deferred shares which may be founders’ shares, vendors’
shares, promoters’ shares and/or management shares.
• Ordinary shares constitute the usual type of share and generally
form the largest proportion of a company’s share capital and have
the following characteristics:
(a) dependent upon the terms of the ordinary shares, there
is usually no date of maturity that is attached to ordinary shares
and thus they continue to exist indefinitely unless the company
goes into liquidation;
(b) shareholders of ordinary shares may only be entitled to all the
remaining profits of the company after the necessary provision for
taxation has been made and the allocation to reserves as
determined by the directors has been set aside.
An overview of shares:
(c) As an ordinary shareholder, the right exists to purchase more shares
should the company decide to issue more shares.
(d) Should the company not make a profit or go into liquidation or be
deregistered, the liability of an ordinary shareholder is limited to the
amount of capital so invested.
(e) Voting rights attached to ordinary shares are usually in proportion to
the number of shares owned.
Ordinary shares while ranking equally so far as participation in
profits/losses are concerned, may be divided into separate classes with
different voting rights such as low voting shares.
Preference shares usually rank ahead of ordinary shares for
dividend purposes, and though bear characteristics of debt
securities such as a loan, are not debt securities. Preference
shares usually carry no voting rights in a general meeting. But
there are exceptions.
This relates to if the preference share dividend (or any part thereof) or
any redemption payment remains in arrear or unpaid for at least 6
months or where there is proposed resolution that would directly affect
the rights attached to the preference shares. Dividends attached
to preference shares are usually fixed percentages, and payment
thereof is subject to a solvency and liquidity test being applied.
Redeemable preference shares
Preference shares may either be redeemable, whereby the company
would consider buying the shares back at a future date or non-
redeemable, whereby there will be no buy-back of these shares by the
company.
The terms would be contained in the MoI and redemption could be at the
request of the holder thereof. Preference shares are redeemed in
accordance with s46 of the Companies Act, and must thus meet a
solvency and liquidity test imposed by s4 of the Companies Act.
It is also strongly recommended that the accounting and tax treatment is
taken into account before any redemption. Therefore the matter should
be discussed with the accounting and tax team(s). It is possible given
the nature of the issue of the preference share, the tax treatment for
redemption may require a share repurchase process in accordance with
s48 instead.
Participating preference shares
Participating preference shares usually mean that they participate in the
dividend declared to ordinary shareholders, or they also participate in
winding up just like the ordinary shareholders. Again, a solvency and
liquidity test needs to be met prior to any distribution.
Example of a preference share resolution
ABC Limited had issued 100 000 redeemable preference shares of no
par value each to Nedbank Limited in exchange for funding of R10
million. Three years have passed since this issue and in accordance
with the terms of the redeemable preference shares as set out in ABC’s
MoI, ABC is required to redeem the shares in full on 31 May 2019.
IT WAS RESOLVED THAT the company redeem on 31 May 2019
100 000 redeemable preference shares of no par value as issued to
Nedbank Limited on 1 June 2016 at a redemption distribution value of
R10 million and which redemption value would be redeemed out of
profits that would otherwise be available for distribution to shareholders.
IT WAS FURTHER RESOLVED THAT immediately following the
redemption as referred to in the foregoing resolution, the company will
satisfy the solvency and liquidity test as set out in section 4 of the
Companies Act where, in consideration of all reasonably foreseeable
financial circumstances of the company, (a) the company’s assets, fairly
valued, will exceed the company’s liabilities, fairly valued and (b) the
company will be able to pay its debts as they become due for a period of
twelve months following the aforesaid redemption.
All companies have authorised share capital, which refers to the number
of shares decided upon in the company’s MoI. This process of ‘creating’
shares normally occurs at registration of the company and is displayed
on the incorporation applied documents of the company.
For private companies, there must be at least one share and one
shareholder, and there is no limit to the number of shares a private
company may create in its MoI. Authorised shares bear no rights until
they have been issued by the company. Issued shares are those issued
to the shareholders, which then bear certain rights as specified in the
company’s MoI.
The Companies Act has changed the basis on which companies are
capitalised. Shares issued in terms of the 2008 Act have no nominal or
par value, and as such a pre- existing company may not authorise any
new par value shares, authorise any shares having a nominal value, or
do any subdivision thereof. Companies that had par value shares
as at the effective date (1 May 2011) of the Companies Act may retain
such existing shares.
Where more shares are issued than are authorised, the board may
retroactively authorise such an issue within 60 business days of issue,
but this is not recommended. Failure to obtain authorisation renders the
share issue void to the extent that it exceeds the authorised share
capital.
In such circumstances, the company must return to the relevant
person the fair value of the consideration received in terms of such
share issue, with interest, and the directors could be held liable for any
loss, damage or costs sustained by the company as a consequence of
knowingly issuing unauthorised shares.
Lost share certificates
As per s49 of the Companies Act, securities (which includes shares)
issued by a company must be either:
• evidenced by certificates; or
• uncertificated where certificates are not issued but the shares are
held in electronic form evidenced through a record administered by
CSDP in the prescribed form.
Where the company has certificated shares, a share certificate is
evidence of the number of shares the shareholder owns in the company.
Share certificates are normally issued through the company secretary
and must include the following information:
• the name of the issuing company;
• the name of the person to whom the shares were issued;
• the number and class of shares;
• any restriction on the transfer of the shares evidenced by that
certificate.
The share certificate must be signed by two persons authorised by the
board of the company, one of whom is normally the company secretary.
Share transfers
The Companies Act states that a share issued by a company is
moveable property, transferable in any manner provided for.
“A shareholder who wishes to dispose of his or her shares must first
offer the shares to the other shareholders of the company pro rata to
their existing shareholdings at a price to be determined in a prescribed
way. Transfer in terms of the MOI shall include the cession of
shareholders right.”
Share transfer duty tax known as a Securities Transfer Tax (STT) is a
tax payable on all transfers of shares at a rate of 0.25% on the transfer
of all shares in companies incorporated in South Africa. If Company A
sells 100 shares to Company B for R5 million, the STT payable will be
as follows:
R5 000 000 x 0.25% = R12 500.
The duties and responsibilities of a company secretary in matters
involving shares and the share register, particularly the transfer of
shares can be considered to be among the most demanding and
complicated within the role of the company secretary. There is a certain
amount of statute and case law on the subject together with the
complexity of how corporate transactions can at times be structured.
A private company is prohibited from offering its shares to the public and
must restrict transferability of its shares in its MoI. An example of a
restriction on transferability is making the right of transfer subject to a
right of pre-emption.
In today’s digital age, most companies have a software secretarial
package that would also include the share register. For those companies
who have not yet acquired a software package, the share register would
still be manually processed via a “book” commonly referred to as the
“red book”.
Listed companies, due to the sheer volume and high values involved,
are required to appoint a specialist company known as a transfer
secretary to manage the share register of the listed company. The two
main transfer secretaries in South Africa are Computershare Investor
Services and Link Market Services.
Sections 49 to 56 of the Companies Act must be noted as well as the
terms and requirements as set out in the company’s MoI. Failure to
comply with the regulatory requirements can invalid a share transaction
and such mistakes or omission could be costly for the company.
Also what is equally important is that the agreement between the parties
must be fully understood and the company secretary should have a copy
or access to a copy of this agreement. A company secretary that does
not take the necessary care around this and blindly takes an instruction
to process a share transaction without supporting documents and the
relevant board resolution can be accused of negligence and gross
misconduct later.
Also important with share transfers is the need to observe exchange
control regulations where either of the transferor or transferee is a non-
resident. A share certificate issued to a non-resident would need to be
endorsed accordingly. This is usually done through an authorised bank.
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