Unit 13 - Corporate finance

Question 1

What is the difference between authorised and issued shares ?

Answer 1

• Authorised shares are ready to sell but not sold.
• Issued shares are already sold.

Question 2

What are par-value shares ?

Answer 2

Par Value shares were shares with a Par-Value indicator, which meant that they could only be sold for a minimum value.

Question 3

Discuss authorised but unissued par-value shares immediately prior to date.

Answer 3

• Pre-existing companies that immediately prior to the effective date have authorised but unissued par value shares, may not issue them; board can convert the shares.
• Section 31(3) deals with the instance in which all the shares of a class are unissued.
• This is different to section 31(5) because in that case it is where you have perhaps issued half of the par value shares of a certain class, and the other half remain unissued.
• In that instance you can keep issuing until you convert.
• However, if you re-acquire all the par value shares in a class, it doesn’t matter that you issued some of them before, and section 31(3) applies, meaning you cannot issue them.

Question 4

What is the problem with par-value shares ?

Answer 4

It essentially allows companies to cheat, because the minimum value for which the shares might end up being sold, may be
higher than their true value.

Question 5

Discuss the process of converting par-value shares to no par-value shares.

Answer 5

• Step 1: It may be proposed to the board at any time and must not be designed to substantially or predominantly evade applicable tax laws.
• Step 2: Board must prepare a report in respect of the proposed resolution.
• Step 3: Resolution and report must be published to the Shareholders before the meeting.
• Step 4: Resolution and report to be filed with SARS and the CIPC.
• Step 5: Proposed resolution will be considered as being adopted if approved by: a special resolution by the holders of each class of shares; and afurther special resolution adopted by meeting of company
  shareholders.

Question 6

Who may approach the court ?

Answer 6

• The company.
• An affected shareholder.
• CIPC or SARS.

Question 7

What if the court decides the proposed resolution compliant or non-compliant ?

Answer 7

• If court decides that the proposed resolution is compliant it can be put to a vote and the shareholders can still vote against it
• If court decides the proposed resolution is not compliant, the company cannot put the proposed resolution to a vote unless the court order provides otherwise.

Question 8

Discuss the issuing of shares.

Answer 8

• Company can only issue the amount of shares authorised in the MOI and determined by the board.
• Where unauthorised shares have been issued, those shares can be ratified in 60 business days otherwise nullity.

Question 9

Discuss the power to issue shares.

Answer 9

• The power to issue shares is subject to fiduciary duties of directors.
• Where the issuance of shares is to a director or prescribed officer/related person it must be approved by a shareholder (special resolution).

Question 10

What is pro rata offer ?

Answer 10

• Shareholders in a private company have the right to be offered; and subscribe (within a reasonable time) to shares issued or to be issued equal to that person’s general voting power in the company.
• This right is not applicable to shares issued as options, convertion rights, consideration, capatilisation shares, business rescue.
• This right can also be limited/restricted by the MOI.

Question 11

Discuss consideration for shares.

Answer 11

• Shares can only be issued as capitalization shares in terms of section 47.
• For adequate consideration as determined by the board; or converrsion rights that are associated with previously issued securities of the company.
• Upon receipt of consideration, shares are issued and fully paid and the company must ensure that the holder’s name be entered into the securities register.

Question 12

What are the two common classes of shares ?

Answer 12

• Ordinary shares.
• Preference shares.

Question 13

Discuss class rights.

Answer 13

• Usually, every share has a voting right, subject to the Act and the MOI.
• The rights attached to shares will be set out in the MOI.

Question 14

Which steps must be followed to successfully transfer shares ?

Answer 14

• There must be an agreement to transfer.
• There ought to be execution of the deed of transfer.
• There must be a registration of transfer.

Question 15

What happens if step 3 isn’t followed and it remains unregistered ?

Answer 15

With unregistered transfers, the buyer becomes a “beneficial owner”; whilst the seller remains the “registered shareholder”.

Question 16

Discuss nominal/beneficial holdings.

Answer 16

• Unless the MOI provides otherwise, the issued shares of a company can be held by; and registered in the name of one person for the benefit of another person.
• If the company is a public company, it is subject to the applicable disclosure obligations.

Question 17

What are the disclosure obligations ?

Answer 17

• Maintain a register of disclosures.
• Maintain a register of persons who hold a beneficial interest 5% or more of the issued securities and extent of the interests (and keep up to date).
• Disclose holdings of more than 5% of issued securities where they are required to publish annual financial statements.

Question 18

When can beneficial interest holders vote at the shareholders meeting ?

Answer 18

• Beneficial interest includes right to vote.
• Name on the company’s register of disclosures.
• Has proxy appointment.

Question 19

Discuss debt instruments and trustees.

Answer 19

• Company can appoint anyone as holders of debt instruments.
• Instead of individual, can be held by trustees (olders become beneficiaries).
• Trustee cannot be a director, prescribed officer, or interrelated person.
• Board must be satisfied that they have requisite knowledge and skill to carry out.
• Approved by 75% of debt instrument holders.

Question 20

In terms of security offers, what are the three principles that are usually used to determine whether there must be disclosure ?

Answer 20

• There must be an offer;
• Of securities; and
• That is made to the public.

Question 21

Who can offer securities ?

Answer 21

Can only be offered by a public company or a foreign company.

Question 22

Discuss listed and unlisted securities.

Answer 22

• Listed securities must be made in terms of the requirements of the relevant securities exchange.
• Unlisted securities must be accompanied by a prospectus that satisfies the requirements.

Question 23

Discuss advertisements.

Answer 23

After publishing a prospectus, an advertisement may be released to draw the attention of the public to the prospectus but the advertisement must:

• Clearly state that it is not a prospectus.
• Where/how people can obtain a full copy of the prospectus.
• Not contain any untrue statements.
• Not mislead a person into reading the advertisement.
• Be in compliance with the Act.

Question 24

Discuss the content and liability of a prospectus.

Answer 24

• Once compliant must be registered with the CIPC.
• A prospectus must contain prescribed specifications and all the information that an investor may reasonably require.
• A prospectus must also provide all material information relating to the securities being offered.
• In terms of the Act, persons authorized to release the prospectus (not the company) may be held liable for untrue statements in the prospectus, report or memorandum.