Chapter 4

• Debt

  Money or assets obtained by a company when it does any of the following: issues debt instruments, such as (but not limited to) debentures, obtains long-term and/or short-term loans, enters into lease agreements, obtains credit terms from its suppliers, effectively allowing the company to pay in the future for goods or services already received, obtains overdraft facilities from banks
• The Companies Act, 2008 specifically deals with 'debt instruments'
• The Companies Act, 2008 indirectly deals with the incurrence of other types of debt
• Reckless trading


  Prohibited by the Companies Act, 2008
• Assets and operations of a company are largely financed by borrowings

  Company may fall foul of certain provisions of the Companies Act, 2008, such as the prohibition against reckless trading
• The extent to which assets will be financed by debt and/or equity is a very important part of corporate finance, company law and the provisions of the Companies Act, 2008
• Pre-emptive rights


  Any company's MOI can provide that, if the company proposes to issue any shares, each shareholder has the right to be offered and subscribe for a percentage of the shares to be issued equal to the voting power of that shareholder's general voting rights immediately before the offer was made
• Pre-emptive rights are known as a pre-emptive right
• Companies Act, 2008


  Makes a distinction between public (including state-owned) companies and private companies with regard to pre-emptive rights
• In the case of a private company, the right of pre-emption is a default position unless changed or abolished by the company's MOI
• For public and state-owned companies, the default position is that shareholders do not have an automatic pre-emptive right
• Pre-emptive rights do not apply to shares issued in terms of options or conversion rights, shares issued for future services or benefits, or during a capitalisation issue
• Exercising the pre-emptive right

  A shareholder of a private company may subscribe for fewer shares than entitled to, and shares not subscribed for may be offered to other persons as permitted by the company's MOI
• Financial assistance


  Section 44 of the Companies Act, 2008 sets out the requirements if a company provides financial assistance in connection with the issue of any of its securities
• Compliance with financial assistance requirements is not necessary if the company is a moneylender as part of its ordinary and primary business
• Board of directors authorisation for financial assistance


  The board may authorise the company to provide financial assistance subject to specific requirements including being pursuant to an employee share scheme or a special resolution of the shareholders, the company satisfying the solvency and liquidity test, and the terms being fair and reasonable to the company
• Securities issued by a company must be either certificated or uncertificated
• A certificated security is evidenced by a certificate, whereas uncertificated securities are defined as 'securities'
• Conditions or restrictions respecting the granting of financial assistance set out in the company's MOI have been satisfied
• Any securities issued by a company must be either certificated or uncertificated
• Certificated security


  Evidenced by a certificate
• Uncertificated securities


  Securities that are not evidenced by a certificate or written instrument and are transferable by entry without a certificate or a written instrument
• Securities that are held and transferred electronically can only be traded on the Johannesburg Stock Exchange (JSE) if they are uncertificated
• Section 49(3)(a) of the Companies Act, 2008 states that the rights and obligations of security holders are not different according to whether they are certificated or uncertificated
• Certificated securities can be converted into uncertificated securities and vice versa
• If the company issues uncertificated securities or converts certificated shares into uncertificated securities, a record of these securities must be kept in the prescribed form as the company's uncertificated securities register by a participant or central securities depository
• A central securities depository (CSD) is licensed to operate the electronic system for the holding and transfer of uncertificated securities. The current licensee is Strate Ltd
• Only 'participants' can liaise with Strate directly. Persons trading in uncertificated securities and their brokers must work through a participant
• A participant is a person who administers securities and has been accepted as a participant by a central securities depository
• Currently, six CSD participants have been accepted by Strate. Five of them are banks and the other is Computershare. Computershare currently offers investors the option of holding the securities in their own name
• In terms of s 54, a person can withdraw all or part of the uncertificated securities held by that person in an uncertificated securities register and obtain a certificate in respect of those withdrawn securities by notifying the relevant participant or CSD
• Case Study: The right to obtain a share certificate
• Section 24 of the Companies Act, 2008 requires every company to maintain certain specific records
• All of a company's accounting records must be kept at, or be accessible from, the registered office
• A company must notify the Commission of the location of, or any change in the location of, any company records that are not located at its registered office
• Maintaining records of issued shares

  A company must maintain a securities register or its equivalent for profit companies, or a member's register for non-profit companies with members, reflecting the names of the current holders of shares and other securities
• In practice, there is extensive use of nominees in holding shares, where the registered holder may not be the beneficial holder of the rights pertaining to the securities
• Details of the beneficial owner must be disclosed by the nominee holding shares in a public company
• The total number of securities held in uncertificated form must be entered in the securities register
• The securities register is proof of the facts recorded in it, in the absence of evidence to the contrary