Company law – adequate consideration

Section 40 of the Companies Act No. 71 of 2008 requires that the board of directors of a company issue authorized shares only for adequate consideration to the company, as determined by the board. It is therefore the board, who decides on the terms of the issue as well as the consideration payable.

Consideration will include the provision of services, any value and exchange of property as long as the consideration is of adequate value.

If shares are issued in lieu of future services to be provided, the shares must be held in escrow until such time as the services are indeed provided, before it is issued to the subscriber.

If the board issues shares for a lesser value than the adequate value then the directors will be personally liable to the company for breach of their fiduciary duties to act in good faith and in the best interest of the company.It is important that a proper determination of the value of the shares are made before issue and that there is a proper recordal of the calculation methodology.


18 January 2012