LU 3 - Primary & Secondary Markets and Shares

Question 1

On what is the division of shares into various classes based?

Answer 1

On the nature of the rights afforded to them iro dividends and participation in a distribution on liquidation.

Question 2

What are ordinary shares?

Answer 2

Shares that only come into consideration fo a dividend after provision for the dividend on preference shares has already been made.
- There is no limit on the amount of the dividend other than the availability of divisible profit and the rights conferred by other classes of shares

Question 3

What are preferential shares?

Answer 3

Shares that can only be found where another class of shares exists irt which they carry some preferential rights. 
- Usually enjoys a preferential right to dividends

Question 4

What are cumulative preference shares?

Answer 4

Entails that if in a given year or years no dividends are declared, the arrear and current preference dividends have priority at a subsequent dividend distribution.

Question 5

What are ‘securities’?

Answer 5

Shares, debentures or other instruments issued by a Co for profit

Question 6

If securities are issued to an investor (first time sold) on which market is it?

Answer 6

The sale takes place on the primary market

Question 7

If an investor sells his securities, on which market is it?

Answer 7

The secondary market

Question 8

What two types of secondary markets are there?

Answer 8

Informal: private transaction between buyer and seller

Formal: on JSE where regulated by legislation

Question 9

When is disclosure necessary?

Answer 9

On both markets

Question 10

What are the 3 principles of disclosure?

Answer 10

1. There must be an offer
2. It must be an offer of securities
3. The offer must be made to the public

Question 11

Discuss primary market

Answer 11

1. Primary offering to the public of listed securities MUST be in accordance with requirements of the relevant exchange, or unlisted securities must be accompanied by a prospectus
2. An application form for securities must be attached to a prospectus of written statement
3. The prospectus may not be issued 3 months after date of registration
4. Offer includes advertisements that satisfy all the requirements of a registered prospectus

Question 12

Discuss ‘advertisements’

Answer 12

1. Can draw attention of the public to a prospectus, but advertisement must include a statement that it is not a prospectus
2. Advert may not contain an untrue statement
3. Adverts may not reasonably mislead a person by express statement, mission or reasonable implication
4. Ss 102 to 111 deal with adverts

Question 13

Discuss the content of the prospectus

Answer 13

1. Must comply with the reqs of the Act for registration
2. Must contain (s100):
   a. Prescribed specifications
   b. All information an investor may reasonably require to assess the assets, liabilities, profits, losses, financial position, cash flow and prospects of the Co
   c. Securities offered and rights attached to them
3. NOT reasonable investor, test more subjective than objective = what investor would reasonably require

Question 14

Discuss ‘liability’

Answer 14

1. Person responsible for info in prospectus must correct/change prospectus as soon as he becomes aware of error in prospectus
2. Untrue statements = misleading in form and context; omission
3. Person who authorised issue of prospectus liable (not the Co)
4. Liability for loss/damage sustained by person who required securities on the strength of the prospectus
5. Delictual liability remains = innocent party can claim rescission and/or damages

Question 15

Discuss ‘secondary market’

Answer 15

1. Offer must comply with reqs of s101
2. Sale of securities by a person other than Co
3. Secondary offerings must be accompanied by a registered prospectus (within 4 months) thereafter a written statement
4. Written statement must be registered
5. Written statement information is less than that in a prospectus
6. Untrue statement in written statement is an offence

Question 16

What are ‘related or interrelated persons’?

Answer 16

Individuals who are married, live together (similar to marriage), family (not more than 2 degrees), and with juristic persons where an individual controls the juristic person, or the juristic person controls another juristic person.

Question 17

What is equity?

Answer 17

Shares and retained income

Question 18

What type of property are shares?

Answer 18

Incorporeal moveable property with a complex personal rights.

Question 19

What is retained income?

Answer 19

Retain all or part of profits instead of dividend (depending on rights of classes of shares)

Question 20

What are the 2 types of debentures?

Answer 20

Secured; and

Unsecured

Question 21

Debentures may be issued with …

Answer 21

the right to attend and vote at general meetings
and to appoint directors,
unless the MOI provides otherwise

Question 22

Who may authorise the issue of debentures?

Answer 22

Directors (to the extent allowed in the MOI)

Question 23

Define ‘debenture’

Answer 23

A debenture is a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified amount with interest.

• Issue of a certificate
• Under its seal, acknowledgement of debt taken by the company

Question 24

Money raised by debentures become part of?

Answer 24

The company’s capital structure, but does not become share capital.

Question 25

Discuss ‘share capital’

Answer 25

• No minimum share capital is prescribed by the Act
• MOI must set out classes and numbers of shares, including preferences, rights, limitations and other terms of each class
• MOI may authorise unclassified shares or designate a class without these preferences, rights or limitations, leaving it to board to decide at later stage
• Board may increase or decrease authorised share capital unless MOI provides otherwise, shareholders may by special resolution
• Board may also reclassify unissued shares or classify unclassified shares

Question 26

Discuss ‘issue of shares’

Answer 26

• The power to issue shares is exercisable by the board of directors
• MOI may impose limits on this authority
• Certain issues of shares MUST be APPROVED by special resolution
• Voting power of class of shares to be issued equal to or exceeding 30% of voting power of current shareholders of that class

Question 27

What are ‘unclassified shares’?

Answer 27

MOI authorised, where the board can reclassify to existing class

Question 28

List the types of preference shares

Answer 28

• Cumulative (arrear dividends)
• Non-cumulative
• Redeemable (repurchase)
• Convertible (change to ordinary shares)
• Blank shares (issued only when board determined preferences, rights, limitations and terms)
• Capitalisation shares (profit convert to shares to shareholders instead of dividend)

Question 29

Discuss pre-emptive rights (s39(2))

Answer 29

1. This is a right conferred on shareholders to subscribe for new shares issued by the company pro rate to their existing shareholders
2. The general principle is that shareholders in private companies enjoy pre-emptive rights to new shares to be issued by the company
3. The MOI may limit, restrict or negate such pre-emptive rights
4. Shares issued ito options or conversion rights are excluded, as well as for future consideration

Question 30

Discuss ‘consideration for shares’

Answer 30

1. . Board must determine adequate consideration
2. Negotiable instruments, future services, future benefits, future payments are all allowed
3. Issued but held in trust until paid, services delivered, transferred on quarterly basis
4. Voting rights may not be exercised while intrust, distributions credited against consideration still payable

Question 31

Define ‘distributions’ (s1)

Answer 31

A direct or indirect transfer
of money or other property of the company,
(except its own shares)
whether out of capital or profits
to shareholders in their capacity as shareholders

Question 32

Discuss ‘distributions’

Answer 32

1. A distribution must comply with the solvency and liquidity test immediately after transaction, and board must acknowledge application
2. The board of directors must authorise a distribution if not ito court order
3. Must be completed within 120 business days after acknowledgement by board

Question 33

Discuss the solvency and liquidity test (s4)

Answer 33

1. A company satisfies the solvency and liquidity test if,
   considering all the reasonably foreseeable financial circumstances of the company at that time:
   a. The company’s assets fairly value equal or exceed its total liabilities fairly valued; and
   b. It appears that the company will be able to pay its debts as they become due in the ordinary course of business:
   i) For a period of 12 months after the date on which the test is considered; or
   ii) Within 12 months of the date of the distribution.

Question 34

Discuss the acquisition of own shares by a company

Answer 34

1. Section 48
2. Must meet requirements of distribution (i.e. board must authorise by resolution), solvency and liquidity test, acknowledgement by board
3. Subsidiaries may not acquire more than 10% total of all issued shares in class and may not vote on those shares
4. Shares other than convertible or redeemable shares must be left
5. Shareholders other than subsidiaries must be left
6. Shares acquired by company must be cancelled