Classes of shares: Something to consider

By Richard Stevens – Director, Commercial Department

The Companies Act 71 of 2008 (“the Act”) provides that a company’s memorandum of incorporation (MoI) must set out the classes of shares and the number of shares in each class.  The Act further provides that the preferences, rights, limitations of each class have to be set out in each class as well.

Should a company only have one class of shares, those shares carry one voting right per share.  If a company, however, has more than one class of shares, the MoI may provide that different rights, including voting rights, would attach to each class.  It is also possible to exclude the voting rights of certain classes in certain matters.  The only condition is that there should always be one class that must be able to vote on a matter.  If an amendment of existing class rights is proposed, the shareholders of that class have to be able to vote on that matter.

The question therefore is whether there is any benefit to create different classes of shares.  Often employers want to provide shares in the employer company to loyal and successful employees but are fearful for losing control over the management of the company, or, in the case of a family business, a parent may wish to provide shares to children but again may be concerned about relinquishing control over the management of the business.  These situations could be ideal to consider the establishment of different classes of shares due to the fact that different rights could be attached to the different classes.  It would therefore be possible to grant the same rights to share in company distributions to all classes but provide for different voting rights.  Should the controlling shareholder wish that certain classes may only share in certain distributions, this would also be possible.  The disadvantage of having different classes, especially in bigger companies with numerous shareholders, is the administrative burden of having to keep record of the different rights of each shareholder.

Any change to the share structure of a company would require an amendment to the MoI which requires a special resolution by the shareholders of the company.  Should you wish to obtain advice on any of the issues raised in this article, you may contact any of the following people:

Richard Stevens – richards@cluvermarkotter.law
Max Loubser – maxl@cluvermarkotter.law
Luzanne Brink – luzanneb@cluvermarkotter.law
Anton Melck – amelck@cluvermarkotter.law
Marieke Wild – mariekew@cluvermarkotter.law

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)