Whether you are a savvy investor, a young entrepreneur, a joint venture capitalist or the owner of a thriving business, you may already be the holder of shares in a private limited liability company. However, many persons do not have a basic of understanding of what a share represents, how you obtain it and how you may transfer it. Below is a “101” on shares.
A share is an interest in an incorporated company. A share in essence gives the holder a collection of contractual and statutory rights against a company. These rights generally include the right to vote, to participate in dividends and to share in the company’s assets on a winding up. There may also be specific rights assigned to specific types of shares. A shareholder generally acquires this interest via an allotment, transfer or the transmission of shares.
An allotment is the acquisition of previously unissued shares in a private company in exchange for a contribution to the company. This contribution will form part of the company’s capital. Many persons assume that shares must be paid for by cash, particularly in the case of an allotment. The Companies Act specifically states that a share may be paid for in money, in property or past service rendered for value. However, a company is prohibited from making an allotment of shares for consideration other than cash unless there is a contract in writing duly stamped and the directors of the company have passed a resolution regarding that transaction.
The resolution should state, among other things, the nature of the consideration and its value and should state that the directors have previously, in the case of services, had a qualified accountant estimate the value of the services to the company in money terms.
The Companies Act states that a share in a company is a personal estate, transferable in the manner provided by the Articles of Incorporation (the “Articles”) i.e. the governing documents of the company. A transfer of shares takes place once there is a transaction resulting in a change of share ownership. This usually involves a contract to sell the shares, their transfer by the execution of a share transfer and the entry of the transferee’s name on the register of members of the company.
A company cannot register a transfer of shares unless it has received a proper instrument of transfer. Transfers of shares attract transfer tax and stamp duty at the rates of 5% and 1% respectively. Further, the Transfer Tax Act specifically provides that where no transfer tax has been paid with respect to a transfer of shares, such a transfer cannot be registered or recorded and “no effect shall otherwise be given by the company to any such transfer”.
The Articles of a company may also place certain restrictions on the issue and transfer of shares. For example, the articles may give the shareholders pre-emption rights. This is the right of existing shareholders to be offered new shares issued by the company before they can be offered to the public. The Articles may also provide or the shareholders may agree in a shareholders agreement that no shareholder may offer his shares for sale before first offering the shares to the existing shareholders.
The Articles of a company also often state that the directors may decline to register a transfer of shares to a person whom they do not approve. The Companies Act also gives a company 3 months after which a transfer is lodged with the company to send a notice to the transferee indicating its refusal to register the transfer.