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 Incorporation ("MOI").

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.