8) Capital Regulation Flashcards
What is a share?
A share is one of the units into which the propriety interest in a profit company is divided (s1)
A share issued by a company is movable property, transferable in any manner provided for, or recognized by the act or other legislation
How can the authorized share capital be changed or altered?
Authorized share capital can be changed by way of a special resolution by the shareholders.
The board is also able to amend the number of shareholders in the MOI by filing an amendment to the MOI
- This is in the scope of their power and if the board were to file an amendment to the MOI which changed the number of shareholders, they wouldn’t need ratification of it from shareholders, however, if it is restructuring the firms capital scheme, then the amendment could be deemed a scheme of arrangement and would need special resolution of shareholders.
How are shareholders protected from the changing of the MOI?
The Oppression Remedy
- This results in a court ordering the company to repurchase the shares of the shareholder at a fair price so that the disgruntled shareholder can part ways with the company.
If directors are amending the MOI for any reason other than to raise share capital, then the shareholder can say that the director is acting against their director duties.
What are the principles related to the issuing of shares?
Board may resolve to issue shares of the company at any time but only within the classes and to the extent that the shares have been authorized by the company’s MOI and in accordance with the requirements set out by the Act.
Special resolution will be required under certain circumstances:
- If issues to a director/prescribed officer or person related to the company/director/ prescribed officer or a nominee
- if the voting power of the shares being issued would exceed 30%
What happens if the board issues shares in excess of the authorized share capital?
The transaction is nullified (not valid) to the extent that it exceeds the value of the authorized share capital, and the company must refund the fair value of the over-issued share capital.
There is the potential for liability for a director or prescribed officer that was present at the meeting, who either voted for or failed to vote against it, despite knowing that the issue of the shares in question would exceed the authorized amount.
What is the section 39 pre-emptive right of existing shareholders?
Applies to private companies and is an unalterable provision
Following the proposal to issue new shares, the company must offer existing shareholders a percentage of the shares for shares they hold as a pre-emptive right
- Pre-emptive right used to give effect to secondary market restriction to establish a private company
What are the principles related to the section 39 pre-emptive right in primary and secondary markets?
Primary market- you can buy a percentage of the offer that is made by the company
Secondary market- the shareholder that wishes to sell needs to offer the shares to an existing shareholder first
The shareholders to which the shares are offered either accept or reject the set percentage offered- all or nothing offer
Not mandatory provision in public companies
What is the definition of “offer to the public”?
If there is an offer of securities, a prospectus needs to be issued
Impact of common law- in determining whether or not something is an offer to the public, the following test is conducted:
- There must be a subsisting relationship between the offeree and the offeror
- There must be a rational connection between the group and the offer that is being made
How are offers to the public regulated?
All public offerings of company securities are regulated by chapter 4 of the Companies Act
The principal aim is to protect investors by ensuring they are provided with adequate and accurate information relating to 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 may result in civil and criminal liability
What is the difference between a primary offer and a secondary offer?
A primary offer to the public is made by/on behalf of the company of securities to be issued by that company
A secondary offer for sale to the public of any securities of a company is made by or on behalf of a person other than that company.
What are the exceptions stated in section 96?
An offer is not an offer to the public in the following cases:
The offer is only made to:
- Persons whose ordinary business includes dealing in securities
- The public investment corporation
- A person or entity regulated by the SARB
An authorised financial service provider - Financial institution
The offer involves a total acquisition cost of the securities for any single addressee acting as principal is equal to or greater than R1m, hence an offer to a single person who pays 1m or more, is not an offer to the public
Non-renounceable offer made only to existing holders of the company’s securities or persons related to existing holders of the company’s securities
The offer is made only to a director/PO of the company (or related person) unless offer is renounceable in favor of 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 for subscription:
- Made in writing
- Not advertised and no selling expenses incurred
- Issue of securities finalized within 6 months of the offer being made
- offer/series of offers in aggregate accepted by maximum of 50 persons acting as principals.
What information must a prospectus contain?
All information that an investor may reasonably require to assess assets and liabilities, financial position, profit and loss, cash flow
All information that an investor may reasonably require to assess securities being offered and the rights attached to them
Prospectus must adhere to prescribed specifications
What is considered an untrue statement?
False statements or omission of information which conveys a false idea
- A statement which gives a false impression
What is the Solvency and Liquidity tests?
Assets of company as fairly valued equal or exceed liabilities of the company(solvent)
Appears that the company will be able to pays its debts as they become due in the ordinary course of business(liquidity)
- For a period of 12 months after the date on which the test is considered
- Or in the case of distribution, 12 months following the distribution
What does ‘distribution’ mean?
A direct or indirect transfer by the company or other property of the company (excluding its shares) for the benefit of its shareholders
- Dividends
- Payment in lieu of a capitalization share
- Share repurchases
- Intercompany share dealing
Incurrence of debt for the benefit of shareholders or another company within the same group
Forgiveness by the company of a debt owed to the company by its shareholders or another company within the same group.
But does not include the final liquidation of the company
