What shares are best for you?

2016-07-06 06:00
DAMIAN VIVIERS

DAMIAN VIVIERS

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Question:

I WANT to set up a private company for my business and have an investor interested in providing seed capital, but he asked for preference shares in return. I am not sure what the difference between a preference share and an ordinary share is.

Can I lose control over the company if I give him preference shares?

Answer:

It is important to understand what is denoted by a “share”.

Simply put, a share represents the measure of a shareholder’s interest in a company and consists of a collection of personal rights and obligations which the shareholder may transfer and dispose of.

The Companies Act 71 of 2008 (the Act) provides for the authorisation and issue of various classes of shares by a company.

Although shares can hold many different descriptions, shares can basically be divided into two categories, ordinary shares and preference shares.

Different rights and obligations are attached to these categories of shares, ranging from voting rights, preferential status in relation to the payment of dividends and the return of capital, and an obligation to comply with the provisions of a company’s memorandum of incorporation (MOI).

The class of shares to be employed and preferred by shareholders will depend on the particular circumstances, concerns and needs of each shareholder.

The Act makes provision for a company’s founding document, the MOI, to regulate the number and different classes of shares that may be authorised and issued by a company.

Preference shares typically entitle the holder thereof to preference over any other class of shares in relation to, for example, the payment of dividends and the return of capital upon the winding-up of the company.

The rights attached to these shares are primarily determined by a company’s Moi and usually entail that these shareholders are paid their dividends before ordinary shareholders.

A company cannot only have preference shares and must have another class of shares as well. Preference shares generally enjoy no voting rights.

Ordinary shares are the primary class of shares. The dividends paid to the shareholders who hold ordinary shares are not secured amounts and fluctuate in accordance with the profits of the company.

However, the holders of ordinary shares are generally entitled to vote at general meetings of shareholders.

The selection of the different classes of shares for a particular company will accordingly depend on the nature and needs of the company, the shareholders and the purpose for which the shares are to be distributed.

Ordinary shares will be preferable if the intention is to extend or control voting power, since preference shares usually carry none of these rights.

Preference shares on the other hand tend to be a useful mechanism for providing a return on investment without handing over control of the company.

We would recommend that you seek the assistance of a commercial attorney to help with the correct structuring of your company’s share classes.
Z
Damian Viviers, candidate attorney, Phatshoane Henney Attorneys

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