Introduction:
The issuing of shares is a vital process for companies, enabling them to raise capital and structure ownership. However, if shares are issued in excess of the shares authorised in terms of the memorandum of incorporation of a company (“MOI”), such share issuance may be a nullity. When this occurs, important questions arise about whether the irregularity can be rectified for the share issue to be valid and, if so, whether such rectification can take effect retroactively. This article examines the legal frameworks for rectifying void share issuances in South Africa and considers the relevant provisions of the Companies Act No. 71 of 2008 (“Companies Act”), as well as the amendments brought by the Companies Amendment Act No. 16 of 2024 (“Companies Amendment Act”), to become effective in future.
Legal requirements for shares to be authorised:
The Companies Act requires that shares must be authorised in terms of the MOI of the company before issue. For shares to be authorised in terms of the MOI, section 36 of the Companies Act provides that the MOI must set out the classes of shares and the number of shares in each class that the company is authorised to issue, a distinguishing designation for each class and the preferences, rights, limitations and other terms associated with that class. It is important to note that in order to create a new class of shares, a mere update of the class and number of shares on the website of the Companies and Intellectual Property Commission, is insufficient. The MOI must also set out the distinguishing designation for such new class and the preferences, rights, limitations and other terms associated with that class, for the class of shares to be authorised as contemplated in the Companies Act.
Mechanisms for rectification:
In terms of section 38 of the Companies Act, if shares are issued that have not been authorised in accordance with section 36 of the Companies Act, such issuance may be retroactively authorised within 60 (sixty) business days after the date on which the shares were issued. If the 60 (sixty) business daytime limit has lapsed, the Companies Act provides that such share issue will be a nullity to the extent that it exceeds the authorisation. The court furthermore confirmed in the case of Derby Downs Management Association v Assegaai River Properties (Pty) Ltd and Another 2022 (2) SA 71 (KZP) that it is not possible to retroactively amend an MOI to authorise the shares issued.
However, this strict approach will be relaxed as soon as the relevant provisions of the Companies Amendments Act come into effect. Once the Companies Amendment Act comes into effect, a new section 38A will be inserted into the Companies Act, which provides that the court may validate an invalid issue of shares after satisfying itself that it is just and equitable to do so. Therefore, should the 60 (sixty) business day limit for retroactively authorising issued but unauthorised shares have lapsed, a court of law may be approached for an application to validate such share issue.
Conclusion:
The Companies Act offers mechanisms for rectifying void share issuances where shares were issued in excess of those authorised in the MOI of a company, but only within a limited time period. Once the Companies Amendment Act comes into effect, a court of law may also be approached to validate invalid share issuances, even if the aforementioned limited time period has expired.
VDMA’s team of experts is at your disposal for any assistance that you or your business may require regarding the creation, allotment and issuance of shares.
Published 22 January 2025