Financial Distributions

Question 1

What section of the companies Act regulates financial distributions

Answer 1

S46

Question 2

what are we looking at in this topic

Answer 2

financial distributions of capital or profits to people who are already shareholders

Question 3

what is the broad definition of a distribution in S1 of the companies act

Answer 3

1. a direct or indirect transfer
2. of money or property ( anything of value not including shares)
3. for the benefit of a s/h in the company or a s/h another company in the same group

Question 4

What distributions does S1 not regulate

Answer 4

Giving away money or property to outsiders

Question 5

what kind of forms can a distribution take

Answer 5

1. dividend
2. payment in lieu of capitalisation shares
3. consideration for acquisition of own shares
4. other transfers of money or property
5. incurrence of debt or obligation
6. forgiveness of debt or obligation

Question 6

What is a capitalisation share

Answer 6

The shareholder is given additional shares instead of money as a form of dividend. Usually there is an option to get a pay out or extra shares. If you choose pay out then S46 applies.

Question 7

what are the general requirements for a distribution under S46

Answer 7

1. authorisation by board resolution unless pursuant to an existing obligation or court order
2. Reasonably appears company will satisfy the S&L test immediately after the distribution
3. Board has acknowledged that by a board resolution and reasonably concluded that the test will be satisfied after distribution

Question 8

what are the main differences between S44 and S46

Answer 8

1. Shareholders do not need to authorize the distribution
2. There are 2 references to the S&L test –> board must confirm it by way of a resolution
3. No ref to MOI because S46 is unalterable

Question 9

what are examples of an existing legal obligation

Answer 9

1. a term in an agreement

2. redeemable share

Question 10

what does S48 not apply to

Answer 10

1. making of demands
2. tendering shares
3. payment of s/h appraisal rights in s164
4. redeemable securities

Question 11

How is a redeemable share different to share buy back

Answer 11

A redeemable share is inherently part of the share and is in the MOI. A buy back is a separate agreement from the share to buy back the shares.

Question 12

what does solvency give advance recognition to

Answer 12

the priorities that creditors hold over shareholders upon dissolution of the company by preventing the company from favouring its shareholders through partial liquidation

Question 13

what does liquidity address

Answer 13

the fundamental expectation of creditors to be paid on time and to reasonably expect a company to pay its debt fully when it becomes due

Question 14

what information is the solvency and liquidity enquiry based on

Answer 14

1. accounting and financial records
2. fair valuation of assets of the company
3. other reasonable valuations of the company’s assets

Question 15

Is the solvency and liquidity test subjective or objective

Answer 15

1. Objective = “reasonably concluded” - hypothetical reasonable board will knowledge and skill
2. Blackburn = subjective element where you consider the board in question (based on duty of care and skill)

Question 16

dividends: Under the capital maintenance rule, what funds could be used to pay dividends to s/h?

Answer 16

dividends could only be paid from profits

Question 17

dividends: what are the current rules surrounding dividends and profits under the act

Answer 17

dividends do not have to be paid from profits, the company can choose to make this a requirement in their MOI, this is allowed despite the provision being unalterable

Question 18

dividends: what can we use to demarcate the concept of profit

Answer 18

common law cases

Question 19

dividends: who decided whether profits should be paid out or reinvested

Answer 19

directors

Question 20

Dividends: what happens if the board acknowledges that the S & L test is successful

Answer 20

S46 (2) says the distribution must be fully carried out

Question 21

Dividends: What is the only exception to the rule in s46 (2) that says that after the S & L test is satisfied the distribution must be fully carried out?

Answer 21

S46 (3) The 120 rule - if more than 120 days have lapsed since the S&L test, the test must be done again with respect to the remaining distribution and the board must adopt another resolution to say it is satisfied. No limit to how many times this can be done.

Question 22

dividends: what happens when a company has agreed to make a distribution in terms of a court order but finds it will not comply with a S&L test if it proceeds?

Answer 22

S46 (5) The company can apply to the court to have the original order varied, the court can then make an order that is just and equitable to the company and ensure that the person is paid out at the earliest possible date

Question 23

Share buy backs: why would a company want to buy back its own shares?

Answer 23

1. could be buying shares back from an employee who was part of an employee share scheme when they leave the company
2. Buy out a dissident shareholder
3. Avert a hostile takeover

Question 24

share buybacks: what is a dissident shareholder?

Answer 24

A shareholder who opposed management or management policy

Question 25

share buy backs : what sections regulate share buy backs

Answer 25

1. The requirements in S46 +

2. The additional requirements in S48

Question 26

share buy backs: what additional requirements does S48 add to S46

Answer 26

the company must not buy back shares to the extent that the only shares left are shares held by subsidiaries or convertible or redeemable shares

Question 27

share buy backs: what are two exceptions to S48

Answer 27

1. when a company buys back shares from a director must be a s/h special resolution
2. if company acquires more than 5% of issued shares in any particular class of shares - fundamental transaction sections apply

Question 28

share buy backs: Are agreements to buy back shares enforceable?

Answer 28

Yes, it is possible to conclude a contract where the company agrees to buy back shares from you

Question 29

share buy backs: what if at the agreed time of repurchase, after applying the S&L test, the company is not able to comply with the test and proceed with the buy back process?

Answer 29

S48 (5) - the court can make an order that is just and equitable with regards to the company’s financial position and ensure that the payment is made at the earliest possible time.

Question 30

share buy backs: what happens when the company “acquires” the shares back

Answer 30

S35 (5) , the shares must be cancelled as issued shares and go back to being authorized shares

Question 31

what is buying shares in a holding company often referred to as?

Answer 31

indirect share repurchase

Question 32

Indirect share repurchase: what sections apply?

Answer 32

1. S46 requirements +

2. S48 requirements

Question 33

indirect share repurchase: s48 requirements

Answer 33

1. 10% rule
2. No voting rights will be attached to the shares bought
3. Cannot only be shares left that are held by subsidiaries or are redeemable

Question 34

indirect share repurchase: what is the 10% rule?

Answer 34

subsidiaries altogether may not hold more than 10% in aggregate of the number of issued shares in any class of shares of a company

Question 35

what are the two issues that arise for non compliance with S46 and S48

Answer 35

1. impact of non compliance on the transaction

2. liability for failure to comply and subsequent losses

Question 36

what are the consequences regarding the status of the transaction for non compliance with only S46 i.e in the case of a dividend

Answer 36

1. It will not automatically be rendered void (S218)

2. S20 (4) allows for the company to be restrained from doing anything inconsistent with the act

Question 37

what are the consequences regarding liability when only S46 applies i.e in the case of a dividend

Answer 37

1. S 77 = director could be liable
2. read w S46 = if they failed to vote against despite knowing inconsistent
3. S77 limits liability = only liable if the company does not satisfy S & L test
4. director cannot be liable for more than the loss suffered

Question 38

what are the consequences regarding the status of the transaction when S46 and S48 apply (repurchase of shares)?

Answer 38

1. company must apply to have the transaction reversed within 2 years
2. court may order person to return money
3. company must issue to that person the shares back
4. not void by default
5. could prevent using S20 (4)

Question 39

what are the consequences regarding the liability of directors for repurchase and indirect repurchase of shares?

Answer 39

S 77 (3) (e) with S 48 (7) = director is liable for loss if failed to vote against acquisition while knowing it was inconsistent. 
There is no limit to the liability here.

Question 40

what is the main concern surrounding a subsidiary acquiring shares in a holding company?

Answer 40

There is no financial benefit for the holding company - they get no extra income. The subsidiary and holding company end up distributing to each other. This gives no investment advantage to the holding company.

Question 41

What is a treasury share?

Answer 41

A treasury share is a share that has been issued as fully paid and thereafter has been acquired by the company by purchase, donation or otherwise but has not been retired/ cancelled or restored to unissued shares.

Question 42

What are the main concerns with treasury shares?

Answer 42

They appear to be corporate assets but they are not issued shares and carry no voting rights. They cannot be taken into account when calculating the net assets of the company. When the company goes into decline they are almost impossible to sell.