Transacting in new shares vs existing shares
I write to explain the difference between the issue or allotment of new shares compared to the exchange by shareholders of existing shares or shares already issued. I will first explain key terms.
Share Capital
Sections 20 and 95 of the Companies and Other Business Entities Act (Chapter 24:31) (COBE Act or the Act) of Zimbabwe require a company to have members who are also known as shareholders.
There are principally two ways a person (natural or juristic) can acquire shares in a company, namely through:
The issue or allotment of or subscribing to new shares in the company, or Acquiring existing shares from a current or existing shareholder.
The distinction between these two scenarios is not easily understood by many people in Zimbabwe for reasons that are not without basis.
It is a technical area likely to be understood by a few. I advise quite a lot in deal structuring and this aspect on shares is usually a sticking point until all parties are clear on the financial and legal implications thereof.
Authorised share capital
In terms of section 96(1)(a) of the Act — a company’s memorandum must set out the classes of shares, and the number of shares of each class, that the company is authorised to issue.
Put simply, the authorised share capital represents the maximum number of shares a company can issue, for example 2 000 ordinary shares.
Issued share capital
This represents the part of authorised shares that has been issued to members or shareholders usually for financial consideration, for example 500 out of the 2 000 authorised shares.
According to section 98(1) of the Act the board of directors may resolve to issue shares of the company at any time, but only within the classes, and to the extent, that the shares have been authorised by or in terms of the company’s memorandum.
Implications of issuing new shares
When new shares are issued the member or shareholder receiving the shares has an obligation to pay some consideration to the company, usually in the form of money. The consideration goes to the company. Such shares will be issued in terms of section 98 of the Act.
Issuing new shares increases the number of issued shares and may dilute the existing shareholders’ effective shareholding unless done in the form of a rights issue.
Where shares already issued are the same as the authorised shares it is necessary to increase the authorised shares in terms of section 96 of the Act, read together with a company’s constitutive documents ie memorandum and articles of association.
According tosection 100 of the Act the directors may issue authorised shares only:
For adequate consideration to the company, as determined by the board of directors, or In terms of conversion rights associated with previously issued shares or debentures of the company, or As capitalisation shares.
In terms of section 100(3) the consideration may be in money, in other tangible or intangible property, other rights having monetary value, or biding obligation to pay money, or services previously performed.
What is important to understand is that when new shares are issued, allotted or sold by a company the consideration goes to the company.
For example when shares are issued for $10 million, the funds go to the company for use.
That is how companies raise finance through the issue of shares.
Acquisition or sale of existing shares
In this case an existing or current shareholder of a company sells his / her shares to an existing or new shareholder usually for consideration. For example John can sell his 100 shares for $1 million to Lucy.
In this case the funds from Lucy, the new shareholder, go to John the existing shareholder, not the company.
There may be capital gains tax payable on the transaction. The transaction is between shareholders. Transfer of such shares will be done in terms of section 151 of the Act having regard to the company’s Articles of Association which may restrict transfer of such shares.
Takeover of a company
The takeover of a company through shares may involve the following arrangements:
Existing shares being taken over from one shareholder by another through for example a sale, or
New shares being issued to an existing or new shareholder that will dilute existing shareholding proportions, for example a 51 percent acquisition, or A combination of the above two approaches.
Conclusion
An allotment or issue of shares is different from the sale or acquisition of existing shares.
An allotment increases the number of issued shares and the consideration goes to the company. Where existing shares are exchanged this is a transaction between shareholders and the funds go to the selling shareholder, not the company. The issued shares of the company does not change.
Disclaimer
This simplified article is for general information purposes only and does not constitute the writer’s professional advice.
Godknows Hofisi, LLB(UNISA), B.Acc(UZ), CA(Z), MBA(EBS,UK) is a legal practitioner / conveyancer, chartered accountant, corporate rescue practitioner, and consultant in deal structuring and is an experienced director of companies. He writes in his personal capacity. He can be contacted on +263 772 246 900 or gohofisi@gmail.com-The Herald
