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Increase of The Authorised Share Capital Of a Pre-existing company

Monday, 02 January 2012   (0 Comments)
Posted by: Author: Mark-affcinsoftware
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Increase of The Authorised Share Capital Of a Pre-existing company 
In the case of a new company under the new act, the authorised share capital of a company can be increased by way of special resolutions as it is a change to the memorandum of incorporation (MOI).It should be noted that if there is a change to the MOI, Form CoR 15.2 has to be filed with the CIPC.

It is very different with a pre-existing company (existing company prior to 1 May 2011) that has par value shares at the effective date of 1 May 2011 and the board of directors wishes to increase the authorised number of the par value shares in existence.The following would be the procedure based on regulation 31 of the Companies Act.

The Law 

Schedule 5, Section 6 (2) deals with this situation and says that par value shares continue to exist after the effective date subject to any regulations made by the minister.I have not seen any regulations to this effect. In my view, this means that in the case of a company that has par value shares as the law is written now, these shares can exist forever. There are formalities where the directors wish to increase the authorised share capital of par value shares as there are not enough shares to issue.  

In this case we then need to look at the Regulation 31 for the procedure.It is important to note that many of the regulations refer to the various sections in the Act. This particular regulation does not. It clearly was added at the last minute. It is also important to note that in terms of section 36(2)(a) of the Act, the change of the authorised share capital is in fact an amendment to the MOI and requires a special resolution.

In terms of Regulation 31 5(b), the directors may issue shares if there are authorised shares available. Regulation 31 5(c) states that an amendment to the MOI may be filed at the CIPC at no charge in order to change a class provided that sub-regulation 6 to 11 are complied with.
It is interesting that sub-regulation 6(a) states that this amendment must not be designed substantially or predominantly to evade the requirements of any applicable tax legislation and 6(b) mentions that such conversion will be approved only by a special resolution adopted by the holders of the shares for each such class and a further resolution adopted by the meeting of the company shareholders called for that purpose.
Report required 

Sub-regulation 7 deals with a report that must go out with the proposed resolution to convert par value to no par value shares.The following items should be dealt with in the report.  
a.The report must state all information that may affect the value of the securities caused by the proposed conversion.
b.The report must identify the class of holders of the company securities affected by the proposed resolution.
c.The report must describe the material effects that the proposed conversion will have on the rights of any holders of shares.
d.The report must evaluate any material adverse effects of the proposed arrangement against any compensation to those persons who receive compensation owing to the conversion.

According to Regulation 31 (8), the company must publish a resolution contemplated in sub-regulation (6) together with the report required by sub-regulation (7) which must be made available to the shareholders before the meeting (and which must have proper notice) at which the resolution is to be considered.

The resolution and the report must be filed with the Commission and the South African Revenue Service by sending an e-mail to Sub-regulations 9 to 11 deal with various instances where applications can be made to court to obtain a declaratory order in regard to this conversion.Clearly this legislation is aimed at bigger companies, but small companies still have to comply.
Special resolution required 
I have set out an example of the kind of wording that should be used in regard to the special resolution of a smaller company and I think it should be made as one special resolution with the following points:

Special resolution 1 
Resolved that the authorised ordinary share capital comprising of one million shares which have a par value of R1 each is converted to one million ordinary shares of no par value, each share to rank pari passu in every respect with the existing shares of the company.  

Special resolutions 2 
The authorised ordinary share capital of one million shares of no par value is increased to 10 million shares of no par value to rank pari passu in every respect with the existing shares of the company.

Ordinary resolution
Resolved that subject to the passing of special resolution number 1, that the ordinary share capital account of R50 000 and the share premium account related to this share capital of R1 000 000, both be transferred to the stated capital account of the company.One can leave the share premium as is and would therefore exclude it from the above ordinary resolution.

Report to to company the special resolution 

An example of the board report in the case of small companies and where shareholders are not affected will be something as follows: ‘Owing to the fact that the board of directors needs to increase the authorised share capital of the company to allot more shares, it is proposed that the ordinary one million shares of no par value be converted to one million ordinary shares of no par value in order  to meet the new requirements of the Companies Act 2008.

Fifty thousand issued shares, details of which are contained in the share register which is available for inspection at the registered address of the company will be affected. The share certificates as indicated in the share register will be cancelled and re-issued under the same certificate number on registration of the special resolution.There are no effects on any of the rights of any shareholder.Owing to the fact that no rights of any shareholder have been affected by this change, no compensation has been paid out.’

Taxation consequences
It is not within the scope of this article to deal with the tax consequences of this conversion, but it is important for secretarial practitioners to seek advice on the future of the shares converted when a distribution takes place in the form of a share buy-back.
Source: By Mark-affcinsoftware (TaxTALK)



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