Shares and Debentures

Question 1

What are shares?

Answer 1

A movable incorporeal asset that represents a unit into which the proprietary interest in a profit company is divided.

Question 2

What is taken into consideration when determining the value of a share?

Answer 2

1. Value of the company’s assets
2. Goodwill
3. Dividend yield
4. Present and prospective profitability
5. Possibility of capital appreciation
6. Market value on stock exchange

Question 3

What are the 3 sources from which a company is financed?

Answer 3

1. Shareholders contribute capital
2. Creditors lend money to company
3. Company generates profits

Question 4

What is share capital?

Answer 4

The total amount of money that a company raises by issuing shares to its shareholders. It represents the equity or ownership interest that shareholders have in the company.

Question 5

What are the two forms of share capital?

Answer 5

1. Authorised share capital
2. Issued share capital

Question 6

What is authorised share capital?

Answer 6

This is the maximum amount of capital that a company is allowed to raise through the issuance of shares, as specified in its MOI.

Question 7

What is issued share capital?

Answer 7

This is the actual amount of capital raised by the company through the sale of shares to shareholders. Issued share capital can be less than or equal to the authorized share capital.

Question 8

What is the share capital clause in the MOI?

Answer 8

A clause that sets out the authorised share capital and the types of shares into which the authorised share capital is divided.

Question 9

Why is classification of shares important?

Answer 9

Type shares determines certain rights one holds in the company with regard to:
1. Voting rights
2. Right to information
3. Dividends and participation in distribution upon liquidation

Question 10

What is the general rule regarding the division of shares into various classes?

Answer 10

Special, conditional or limited voting rights can be attached to any class of shares in the MOI, however at least 1 class of shares must have voting rights.

Question 11

What are ordinary shares?

Answer 11

Ordinary shares represent equity ownership in a company and typically come with voting rights that allow shareholders to participate in major company decisions, such as electing directors or approving mergers. Ordinary shareholders are entitled to dividends, but the amount and timing are not guaranteed and depend on the company’s profits and board decisions.

Question 12

What is the risk of being an ordinary shareholder?

Answer 12

Ordinary shareholders bear more risk in the event of liquidation, as they are last to be paid after creditors and preference shareholders

Question 13

What are preference shares?

Answer 13

reference shares, or preferred shares, are a class of shares that provide shareholders with a fixed dividend, typically paid before any dividends are distributed to ordinary shareholders. Preference shareholders usually do not have voting rights in the company, but they have a higher claim on assets and earnings than ordinary shareholders, especially in the event of liquidation.

Question 14

What is the reward for an ordinary shareholder?

Answer 14

They have the potential for higher returns if the company is successful because there is no fixed dividend.

Question 15

What is the reward of being a preference shareholder?

Answer 15

1. Preference shareholders receive a predetermined dividend, which is paid out before ordinary shareholders receive any dividends.
2. In the event of the company being liquidated, preference shareholders are paid before ordinary shareholders but after creditors.

Question 16

What is the risk of being a preference shareholder?

Answer 16

1. Fixed dividend
2. Typically no voting rights

Question 17

What are the types of preference shares?

Answer 17

1. Cumulative
2. Participating
3. Convertible

Question 18

What are cumulative preference shares?

Answer 18

Cumulative preference shares are a type of preference share where the dividends accumulate if the company is unable to pay them in a given year. This means that if a company skips or defers paying dividends in a particular year due to insufficient profits, the unpaid dividends will “accumulate” and must be paid out to the cumulative preference shareholders before any dividends can be distributed to ordinary shareholders in future years.

Question 19

What are participating preference shares?

Answer 19

Participating preference shares entitle shareholders to receive not only a fixed dividend but also an additional dividend if the company performs exceptionally well and exceeds a certain profit level. In addition to their fixed dividend, participating preference shareholders can participate in surplus profits (alongside ordinary shareholders) and may also have a claim on surplus assets in the event of liquidation.

Question 20

What are convertible preference shares?

Answer 20

Convertible preference shares are preference shares that give the holder the option to convert them into a predetermined number of ordinary shares after a specified period or upon meeting certain conditions. The conversion can be beneficial to the shareholder if the ordinary shares’ market value has increased over time.

Question 21

What are the voting rights in respect of preference shares?

Answer 21

MOI may provide that preference shareholders have no right to vote except in 2 circumstances:
1. When the preference dividend is in arrears
2. If a resolution is proposed which directly affects interests of these shareholders.

Question 22

What are deferred shares?

Answer 22

Deferred shares are a type of share where the shareholder’s rights to dividends and repayment of capital are postponed until certain conditions are met, often after other classes of shareholders (such as ordinary or preference shareholders) have been paid.

Question 23

What are redeemable shares?

Answer 23

Redeemable shares are shares that the issuing company has the right (or sometimes the obligation) to buy back (redeem) from shareholders after a certain period or under specified conditions.

Question 24

What are deferred shares typically used for?

Answer 24

Deferred shares are sometimes issued to company founders or key employees to give them equity participation but delay their rights to profits until the company becomes more profitable.

Question 25

What is the aim of redeemable shares?

Answer 25

To return capital to members as return of capital is taxed at a lower rate.

Question 26

How does share buy-back not prejudice creditors?

Answer 26

Payment for these shares may only be made if the solvency and liquidity requirements are met.

Question 27

What are capitalisation shares?

Answer 27

Capitalisation shares, also known as bonus shares, are additional shares issued to existing shareholders, typically for free, based on the number of shares they already own. This is usually done by converting the company’s reserves (such as retained earnings or capital reserves) into equity, increasing the total number of shares without raising new capital.

Question 28

When can a company issue capitalisation shares?

Answer 28

If it has made a profit which it could use to pay out dividends and is authorised in its MOI.

Question 29

What is the effect of converting profits into share capital?

Answer 29

Instead of cash dividends the shareholders receive more shares in the company.

Question 30

What are the five types of shares?

Answer 30

1. Ordinary
2. Preference
3. Redeemable
4. Deferred
5. Capitalisation

Question 31

What are the ways of financing a company?

Answer 31

1. Shares
2. Debentures.

Question 32

What is a debenture?

Answer 32

A debenture is a type of debt instrument or loan agreement issued by a company to raise capital. It is a form of long-term borrowing where the company promises to pay the debenture holders a fixed rate of interest over a specified period, and to repay the principal amount at the end of the loan term.

Question 33

What is the relevance of debentures?

Answer 33

1. Debentures allow companies to raise funds without diluting ownership or equity, as they are a form of debt rather than shares.
2. Convertible debentures give the holder the option to convert the debenture into shares of the company at a later date. This can be an attractive feature for investors, as it offers potential equity ownership if the company’s value increases.

Question 34

What are securities?

Answer 34

Any shares, debentures or other instruments, irrespective of their form or title, issued or authorised to be issued by a profit company.

Question 35

What is stock?

Answer 35

A group of shares.

Question 36

What are debt instruments?

Answer 36

An instrument that is an acknowledgement of debt to debenture holder.

Question 37

When does a shareholder become a member of the company?

Answer 37

When name is incorporated into CIPC register.

Question 38

When does variation of rights occur?

Answer 38

1. When company varies fixed percentage dividend of preferent shareholders
2. Where it varies the voting rights of ordinary shareholders.

Question 39

What are the requirements for variation of rights?

Answer 39

1. Class meeting with only shareholders to be affected
2. Only vary if not in conflict with MOI
3. Approval by those classes to be affected.

Question 40

What if the resolution to vary rights is unfairly unjust or inequitable?

Answer 40

Make an application to the court for relief.

Question 41

What can be proof of ownership of shares?

Answer 41

1. Register of member
2. Share certificate

Question 42

How are shares transferred?

Answer 42

Cession

Question 43

What are the requirements for transfer of shares?

Answer 43

1. Agreement between parties
2. Transfer deed drawn up
3. Transfer captured on companies share register