If you intend to buy shares from an existing shareholder in a
private company, you need to be aware of the restrictions on the
transfer of those shares in the company's Memorandum of
In terms of section 8 of the Companies Act, 2008
("the Act"), the MOI of a private
company must contain provisions restricting the transferability of
its shares. The type of restriction is not prescribed.
Under the Companies Act, 1973, the restriction typically gave
the directors the power to refuse to register the transfer of
shares without giving reasons for the refusal. The current
standard short-form MOI issued by the Companies and Intellectual
Property Commission with which many companies are incorporated,
provides amongst other things that an issued share must not be
transferred to any person other than the company, an existing
shareholder of the company or a third party approved by the company
before the transfer is effected.
The Western Cape High Court recently confirmed the validity of a
provision in a company's MOI allowing the board of a company to
refuse to transfer the shares to a purchaser without giving reasons
for such refusal.
In a share sale, the purchaser only becomes the registered owner
of the sold shares when the company records the transfer of those
shares from the seller to the purchaser in the company's share
register and issues a share certificate to the purchaser to confirm
the transfer. Usually the purchaser has paid for the shares
prior to the date on which this formality takes place.
Depending on the type of restriction on transfer in the
company's MOI, you can avoid a situation where you purchase
shares which cannot be transferred to you by, for example, making
it a suspensive condition of the sale that the seller provides you
with a copy of a resolution passed by the company's board of
directors approving the transfer, or requiring the seller to
deliver a share certificate issued to you by the company against
payment of the purchase price of 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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