- We know that the two most important organs in a company are the shareholders
and the board
o Shareholders have certain rights, but they are fairly limited – amend MOI and
dismiss directors
o This is pretty much their role in the governance of the company. However,
they have other rights and roles due to the fact that they hold shares.
- Role of shares and shareholding
o Shares are issued by the company in exchange for counter-performance
§ This counter-performance must have some value attached to it – does
not have to be money as the board can determine what consideration
is adequate for shares issued but they usually prefer money.
o Why do companies issue shares?
§ Companies need money for business operations which can be
obtained in two ways:
a) Borrow money from creditors (such as a bank)
b) Issue shares to investors
§ Which one is better?
• From the company’s perspective, it is more advantageous to
issue shares because it does not affect the company’s
creditworthiness.
o The money a shareholder pays for shares is not a loan
to the company that has to be paid back. It is an
investment when means the company can keep it as an
asset. The shareholders will only be entitled to a
portion of it at liquidation if there is a surplus.
o Also, when creditors see that the company has been
funded through shares, it shows them that the
shareholders see long term value in the company.
• To make a loan is therefore safer from the lender’s perspective
because there is a fixed interest rate, and you know you will
get a certain amount back.
• From a shareholder’s perspective they will invest money to
acquire shares in a company and then hope that they get most
of their money back through dividends. High risk but can
potentially obtain a very high reward as the it is not restricted
to any fixed rate. However, there is also the chance that the
shareholder will get nothing in return, especially where the
company is insolvent.
, § Distinguish between the situation in small private companies and
public companies:
• In larger companies you would buy shares on the stock
exchange and if you do not get a return on those investments
in the form of dividends, you sell your shares. You are not
really bothered with the governance of the company.
• However, in smaller private companies, shareholders will
generally fund the company with loans so that they will be on
the same footing as creditors at insolvency.
The legal nature of shares
- What is a share according to the Companies Act?
o Section 1: “One of the units into which the proprietary interest in a profit
company is divided”
o Section 35(1): “A share… is movable property transferable in any manner
provided for or recognised by this Act or other legislation”
o This does not really help in telling us what a share is.
- What is a share according to the common law?
o A share is a bundle of personal rights.
o In both section 1 and 35 there is a reference to property, so is a share
property?
§ The problem is that property usually provides you with a real right
(enforceable against the entire world) but shares, in terms of the
common law, is viewed as a bundle of personal rights (only
enforceable against a specific person).
§ Shares are therefore an abstract form of property (incorporeal and
cannot be immovable) and share the characteristics of other personal
rights. Furthermore, it is transferred by means of cession.
o Shares can also be given as security for a debt; bequeathed in a will and given
as a usufruct (you are the owner, but the dividends are given to someone
else).
- Standard Bank of SA Ltd v Ocean Commodities Inc 1983 1 SA 276 (A) 288
o If you hold shares in a SA company which is incorporated in SA with the share
register located with the borders of SA, your property is in SA. This means
that the creditors can attach those shares even if you move to another
country.
- Botha v Fick 1995 2 SA 750 (A) 762
o Confirms that personal rights are transferred through cession.
o Furthermore, the share certification is not conclusive proof of ownership but
where there is a dispute in respect of who the owner of the shares is, the
person with the share certification will probably be in the best position to
prove ownership.
,- What rights form part of this “bundle of personal rights”?
o Most basic share have three rights:
§ Income
• The right to income (form of distribution) is a mere hope/spes
until the board decides that it is in the best interest of the
company to distribute the profits in the form of dividends to
its shareholders.
• Right therefore only activated when the board decides to
exercise its rights to make distributions.
§ Capital
• If the company goes into liquidation, the shareholders will
have the right to share in the surplus after all the creditors
have been paid.
§ Participation
• Shareholders have the right to participate in shareholder
meetings and vote in those meetings
o Once again have to distinguish between private
companies and listed companies because this will
determine how important this right is.
§ In private companies you will place more focus
on this right as you right to income. Your main
income will in any event be your salary (you are
a creditor and an employee because
shareholders are mostly also employees in
these companies).
§ In listed companies you will place more focus
on your right to income rather than your right
to participation.
• Right to information arguably the most important participation
right
o Section 26(1): Sets out what information a beneficial
interest holder is entitled to.
o Section 26(3): MOI may establish additional
information rights.
o Section 26(4): Sets out the procedure to obtain such
information
o Section 26(5): Obliges the company to comply.
o Section 26(6): Open to inspection during business
hours
o Section 26(7): Confirms that these rights to information
operate in addition to the rights under the Constitution
and the rights in terms of PAIA.
§ The MOI cannot limit the right of a shareholder
to obtain access to information that can be
obtained via PAIA.
, Clutcho v Davis
Facts
Clutcho is a small private company and 70% of the shares were held by the Davis Family
Trust. Mr Davis is the sole director of the company and he had two sons: Andrew and
Gordon. Andrew is the respondent in this case.
Gordon was appointed as the general manager, and he attended to the admin of the
company and its business. Andrew joined the company in 1999 and bought 30% of the
shareholding from the family trust. Andrew was then made a director of the company and
was appointed as the workshop manager.
A fallout between the members of the family then occurred and Andrew wanted to sell his
shares and get out. Mr Davis and Gordon wanted to buy Andrew’s shares. A dispute then
arose about the valuation of the shares and the company gives Andrew the AFS. However,
Andrew wants the accounting records of the company, so he submits a formal request in
terms of section 50(1) of PAIA which is allowed in the case of a private body where the
record is required for the exercise or protection of a right.
Ratio decidendi
The court held that the underlying right that Andrew asserts is his right as a shareholder to
value his shareholding in order for him to be able to fix an appropriate selling price. The
court assumed, without deciding the matter, that it is a right that falls within the definition
of a “right” in PAIA.
The court further held that “required for the exercise or protection of a right” conveys an
element of need. The information does not have to be essential but must be more than just
useful.
Companies Act says that a shareholder in entitled to receive copies of the company’s AFS
and minutes of general meetings but a shareholder is not entitled to minutes of director and
manager meetings.
The court held that unless the MOI (in terms of section 26(3)) provides otherwise, the
shareholder is not entitled to inspect the accounting records of the company. This right is
reserved for the directors.
The position is therefore that the Act does not afford the respondent the right of inspection
or right to information which he seeks. It follows that the respondent can invoke part 3 of
PAIA provided that the circumstances warrant such a course.
The machinery established by legislation and the common law for the protection of
shareholders is, in the court’s opinion, not lightly to be disregarded. In enacting PAIA,
Parliament could not have intended that the books of a company, great or small, should be
thrown open to members on a whiff of impropriety or on the grounds that relatively minor
errors or irregularities have occurred. A far more substantial foundation would be required.
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