R Jooste and J Yeats in the second edition of Contemporary Company Law states that a company has “almost unlimited freedom to create the capital structure it desires and in so doing to structure the rights of each of its various classes of shares in an almost infinite variety of ways”. This ability of a company to structure its interests and corporate structures plays a crucial part of its success as it allows companies to, inter alia, limit liability, avoid harsh tax legislation, improve their broad-based black economic empowerment score and it allows for ease of doing business on an international scale. The most well-known classes of shares are ordinary shares, preference shares, redeemable shares and deferred shares. While the differences between these shares have been analysed extensively, we will discuss in this article the ability of a company to create various classes of ordinary shares and the rights attached to such classes of shares.
In terms of common law, the doctrine of equality between shares meant that shareholders of the same class of shares should be treated equally. This principle has been codified in section 37 of the Companies Act No.71 of 2008 (the “Companies Act”). However, section 36 of the Companies Act allows a company to create different classes of shares which have different preferences, rights and limitations. Therefore, not all shares in a company need to have equal rights and preferences. In the event that a company only has one class of shares, each of those shares have the right to be voted on every matter that may be decided by the shareholders of the company and the holders of that class are entitled to receive the net assets of the company upon its liquidation.
Section 36 of the Companies Act makes provision for the company’s memorandum of incorporation (“MOI”) to regulate the creation of different classes of shares and the number of shares of each such class that the company is authorised to issue. The MOI must further state, with respect to each class of shares, a distinguishing designation for that class, with extensive leeway being provided as to the manner and form in which the preferences, rights and limitations may be attached to such different classes of shares.
If the MOI has established more than one class of shares, it must further provide that –
- for each particular matter that may be submitted for a decision to shareholders, at least one class of the company’s shares has voting rights that may be exercised on that matter; and
- the holders of at least one class of the company’s shares, irrespective of whether it is the same as any class contemplated above, are entitled to receive the net assets of the company upon its liquidation.
The MOI may establish, for any particular class of shares, preferences, rights, limitations or other terms that –
- confer special, conditional or limited voting rights;
- provide for shares of that class to be redeemable or convertible, as specified in and on the terms of the MOI;
- entitle the shareholders to distributions calculated in any manner, or
- provide for shares of that class to have preference over any other class of shares with respect to distributions, or rights upon final liquidation of the company.
In light of the aforementioned, it is thus clear that a company can create any number of classes of different shares with different rights. For example, a company could designate the following classes of shares with the corresponding rights:
- Class A shares – this class of shares has the right to participate in, speak at and vote on any matter at any meeting of the shareholders save for the declaration of dividends;
- Class B shares – this class of shares’ right to participate in, speak at and vote on any matter at any meeting of the shareholders is limited to the decision of whether or not to declare dividends;
- Class C shares – has no right to vote at any shareholders meeting, however they may attend such meetings and the shareholders of this class of shares shall have the right to receive preferential dividends;
- Class D shares – has no right to vote at any shareholders meeting, however they may attend such meetings and the shareholders of this class of shares shall share in the net assets of the company upon its liquidation; and
- Class E shares – has no right to vote at any shareholders meeting, however they may be converted into Class C shares at a future set date.
From the abovementioned, it is clear that a company may create different classes of shares, each having its own unique preferences, rights and limitations and may determine that the rights associated with a class of shares may vary in response to any objectively ascertainable fact. The ability to customise a MOI to this extent allows a company the necessary freedoms to structure its interests in any way it deems necessary in order to achieve its desired objectives.
VDMA’s team of experts are available to assist you and your business to amend, convert or draft a memorandum of incorporation which caters to your exact shareholding requirements.
Published 8 July 2021