South Africa: Partly paid-up shares: Companies Act, 1973 versus the new Companies Act

Last Updated: 6 July 2010
Article by Ashleigh Hale

The new Companies Act proposes an approach to partly paid-up shares that is somewhat different to its 1973 predecessor.

Consider a scenario in which the founding shareholders of a new BEE company agree to subscribe for shares in the company at a predetermined subscription price. All of the shareholders except one pay the full subscription price on the date agreed for the subscription. One of the shareholders (X) only pays half of the subscription price on the subscription date but the company purports to allot and issue to that shareholder its agreed percentage of shares.

For several subsequent months, the company requests that X pay the balance of the subscription price. The money is not forthcoming and the company, while continuing with its day-to-day business, makes representations to its customers and potential customers about its BEE status and about the percentage of shares purportedly held by each shareholder in the company, including X, who is a BEE shareholder.

This continues for at least a year following the subscription date until a dispute arises between X and the other shareholders of the company, at which stage the realisation dawns that the purported allotment and issue of the shares in the company to X was invalid in terms of section 92 (1) of the Companies Act, 1973, on the basis that the full subscription price was never paid.

Section 92 (1) provides that a company shall not allot or issue any shares unless the full issue price of or other consideration for such shares has been paid to and received by the company. According to case law, a purported allotment in contravention of this section is void.

The company and the other shareholders then face a dilemma. At that stage they would rather X had not been a shareholder, but removing X from the register of members retrospectively to the date of subscription would affect the company's BEE status and would impact on its existing contractual arrangements and the possibility of it being awarded a large tender.

If X is to remain a shareholder of the company, two alternatives are available.

The first would be to give X another opportunity to subscribe and pay in full for its shares, the effect of which would be that X would only become a shareholder of the company from the date of the second subscription.

The second alternative would be to make an application to the High Court in terms of section 97(1) of the Companies Act to validate the void allotment with effect from the date of the first subscription, subject, of course, to payment of the subscription price in full. The court has a discretionary power to do this if it is satisfied in all the circumstances that it is just and equitable to do so. This alternative would cost time and money.

The situation is altered in terms of section 40(1) – (3) of the new Companies Act, whereby the board of directors must determine the consideration for and the terms on which shares will be issued. The board's determination as to the adequacy of consideration for any shares cannot be challenged, other than on the basis that there has been a breach of fiduciary duties, as contained in section 77(2) read with section 76 of the new Act.

The Act's section 40(4) provides that when a company receives the consideration approved by its board for the issuance of shares, the shares are regarded as being fully paid, and the company must issue those shares and cause the name of the subscriber to be entered on its securities register as the owner of those shares.

The board will, in terms of section 40(5), be permitted to issue new shares in consideration for "an instrument that is not negotiable by the company at the time the shares are issued" or for "an agreement for future services, future benefits or future payment by the subscribing party". In other words, a company will be permitted to issue partly paid shares, but these will need to be held in trust by a third party and can only be transferred to the subscribing party in accordance with a trust agreement and once the shares are paid for in full.

Section 40(6) provides that if the subscribing party fails to fulfill its obligations under the agreement with the company, or the instrument tendered as payment for the shares is dishonored after becoming negotiable, the issued shares held in trust must be returned to the company on demand and cancelled.

Section 40's effect is that a company is now permitted to allot and issue partly paid up shares, subject to the conditions set out in section 40(5).

In addition, it would seem that an allotment and issue of shares by a company without it receiving the full agreed subscription price would not necessarily be void. Indeed, section 40(4) permits the company to call for payment of the outstanding subscription price and, on receipt thereof, the company could record the subscriber as the owner of the shares in its securities register.

If the subscriber failed to pay the balance of the agreed subscription price, the company could terminate the subscription agreement, return any partly paid subscription price and cancel the shares.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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