Issuing a company’s first shares

Issuing a company’s first shares

Before issuing the first shares

Q1: How do I organise my company’s share capital at incorporation?

To set up a company limited by shares, you must issue at least one share to at least one person. If you do not, the CIPC will refuse your application to register.

To incorporate your company, you need to decide:

  • how many shares each person will receive, bearing in mind the percentage ownership of your company you want to give them (see Q&A 2 and following);
  • the basic value of those first shares, known as the nominal value (see Q&A 7) which does not have to be related to the value of the company itself;
  • whether you want all your shares to be the same, or to have different types of shares with different rights, known as classes of shares (see Q&A 20); and
  • how and when people will have to pay for their shares if they are needing to (see Q&A 21 and following).

Using bizportal.co.za will provide a clear and accessible means through which you can register your company. 

How many shares to issue for a new company

Q2: How many shares should my company start with?

The law only requires you to have least one share to start your company. There is no maximum number of shares, so when you first set up, you are free to create as many as you like.

See Q&A 3 and Q&A 4 as to how many shares to issue to each person.

Q3: How many shares should I start with per person?

The number of shares you issue depends on the number of people who will be shareholders and how much control you want each person to have. Different percentages of votes are required to pass different types of decisions within your company. Take care to avoid inadvertently giving an individual or small group a power of veto or control. Considerations are different depending on how many shareholders you will have:

One shareholder

You can simply issue one ordinary share. Alternatively, you could give yourself an easily divisible higher number, such as 100, 1000 or 10’000 shares, so that further shares can be issued in easily calculated proportions. Neither approach is right or wrong.

Two shareholders

If you have a business partner in a 50/50 business, you can simply issue one share each. Alternatively, you can issue an easily divisible higher number so that further shares can be issued in easily calculated proportions. If the split is going to be something other than 50/50, see Q&A 4.

Three or more shareholders

It is important that the agreed ownership proportions are reflected in the number of shares each person takes. If you are incorporating a company with the default model articles, the number of shares each person gets will be directly proportionate to their voting rights, dividend entitlement, and right to get capital back if the company is wound up (see Q&A 9).

Q4: What difference does it make how many shares each person has?

Legally, there are four main decision-making thresholds that you should bear in mind when deciding how many shares to offer to each of your company’s subscribers:

75% or more shareholding

A shareholding of 75% or more generally provides full operational control to a shareholder. They can pass an ordinary or special resolution by themselves. Whilst from a financial standpoint, a shift from 75% to 74% might not be material, it does make a significant difference from a voting and decision-making standpoint.

Over 50% shareholding

A shareholding of over 50% will enable a shareholder to pass an ordinary resolution by themselves. This is how all but the most important shareholder decisions are made. Exactly 50% will not allow you to pass an ordinary resolution, you need more than 50% of the shares – deadlock is a risk in 50/50 businesses.

Over 25% and up to 50% shareholding

A shareholding of more than 25% and up to 50% allows a shareholder to block a special resolution but not to pass a resolution by themselves. This is significant – as your company grows, special resolutions will be needed to update the company’s constitution and approve other important matters, eg paying out capital. Be aware of this when offering more than 25% to another shareholder or shareholders.

Under 25% shareholding

A shareholding of less than 25% does not (by itself) hold any voting sway. These minority shareholders will have whatever rights your articles and any shareholders’ agreement grants them. A summary of the rights they will have if your company just uses the model articles is set out at Q&A 9 and following.

For more information on the decision-making process and voting thresholds, see Board and shareholder decisions.

Q5: How do I avoid deadlock in a 50/50 owned company?

You need a shareholding of over 50% to pass an ordinary resolution, so 50/50 owned businesses are at risk of deadlock.

You can include provisions in your company’s constitution to avoid deadlock, e.g. by having a shareholders’ agreement that assigns a casting vote or sends the decision to a committee, senior officer of the company or external expert or arbitrator. Alternatively, you can include a mechanism in a shareholders’ agreement for the forced transfer of some shares in certain circumstances to adjust the percentage shareholdings so that a majority vote can be passed.

For further guidance, see Shareholders’ agreement which includes a template Shareholders’ agreement that contains provisions to avoid deadlock.

The nominal value of shares in a new company

Q6: What is the nominal value of shares?

The nominal value of a share is its fixed base value. It is not the same as the real or market value of the shares which relates to how much your company is worth, so can change over time.

No share can ever be issued at a price less than its nominal value. So, if the nominal value of a share is R10, a shareholder must pay the company at least R10 for it. If the nominal value is not paid when shares are issued, it remains owing from the shareholder to the company.

For guidance on deciding the nominal value of your shares at incorporation, see Q&A 7.

Q7: How do I decide the nominal value of shares at incorporation?

R10 per share is common. It provides flexibility to your company and reduces outlay for your first shareholders. Any figure can equally be used if preferred.

Choose a sum that can be easily divided and is not too high. This is because further shares of the same type (or class) cannot be issued to future investors at a price lower than their nominal value, although you can choose to charge a premium above the nominal value for them (see Q8). For example if, when you set up your company, you issue 25 shares of R10 each, additional shares of the same type cannot be issued for a price less than R10 in future.

It is sensible to have an initial meeting with your accountant before you incorporate your company. They can help you decide the best nominal value for your shares, and whether it is appropriate for your business to issue any shares at a premium above their nominal value at that stage.

Q8: When might I want to issue shares at a premium over their nominal value?

In some circumstances, you may want to issue shares at a premium above their nominal value (see Q&A 6) when first incorporating.

For example, if you agree to incorporate a 90/10 company with a silent partner who has agreed to invest R10,000 for their 10% share with you investing only R900, you will not want to issue 10,000 shares of R10.00 each to the silent partner as you would have to commit R90,000 to the business for your own 90% share at incorporation. In such circumstances, one option is having the silent partner take a much smaller number of R10.00 shares, such as 10 shares, and having them pay more than the nominal value for each share (in this case, R1,000 per share). This is known as issuing shares at a premium. You would then only have to commit R90 to the company to take your 90% share (as you would be paying the nominal value, ie R10 per share).

Issuing shares at a premium does not change the rights of the shares. In the example above, you will own 90% of your company and the silent partner 10%.

In practice, whether shares are issued at a premium, and if so for what premium, will depend on what is agreed commercially between your shareholders and what advice you receive. It is suggested you speak to an accountant before using this method to get cash into your business.

Rights of the first shareholders

Q9: What rights will my first shareholders have if I use the model articles?

The first shareholders of your company (also known as the subscribers) will get ordinary shares if you use the model articles.

The model articles give each ordinary share equal rights, the most notable of which are:

  • the right to attend general meetings and vote (see Q 10);
  • (usually) the right to any dividends allocated on a per share basis (see Q 11);
  • the right to be offered any new shares before they are offered to anyone else, and to transfer their own shares (see Q 12);
  • he right to bring three main types of legal claim for or on behalf of your company (see Q 13);
  • free access certain information on your company (see Q 14); and
  • the right to receive a share of any surplus assets if the company gets wound-up (see Q 15).

Beyond this, the number of shares each shareholder has will dictate their power or right to take certain actions. For further guidance, see Q 3.

Q10: What voting rights will my first shareholders have under the model articles?

Each shareholder has one vote in respect of each share they hold (or simply one vote each on a show of hands vote), and can appoint a proxy to vote on their behalf.

Any shareholder can ask the court to order a general meeting be held, and if a shareholder or group of shareholders have more than 5% of the voting rights in your company, they can demand the directors call a general meeting.

Each shareholder has a right to be notified of any general meeting or to be sent a copy of any written resolution on which they can vote.

For guidance on how to call and run a general meeting, see Shareholders’ meetings.

Q11: What rights will my first shareholders have under the model articles to receive dividends?

Under the model articles, any end of financial year final dividend is recommended by the directors and then approved by an ordinary resolution of the shareholders before it is paid. We can walk you through this process should you need any resolutions drafted.

  • An interim dividend (which can be declared at any point during the financial year) can be approved by the directors without the need for separate shareholder approval.

In both cases, unless either shareholders decide otherwise or any shares have special rights, each dividend will be divided proportionately among all ordinary shareholders in accordance with their percentage shareholding.

Q12: What rights to new shares will my first shareholders have under the model articles?

Under the model articles, each shareholder has pre-emption rights on the issue of new shares (see Issuing new shares). A pre-emption right means existing shareholders have the right to be offered shares first before they are offered to new investors.

Q13: What rights will my first shareholders have to bring legal action if you use the model articles?

Your company’s shareholders have the right to bring three main types of legal claim if your company uses the model articles:

  • if they think your company is being operated in an unfair way, they can bring a claim to stop it known as an unfair prejudice claim;
  • they can ask the court to wind up the company if it is agreed by special resolution; and
  • they can bring a claim on behalf of your company in some limited circumstances, known as a derivative claim, such as if a director has been negligent or done something in breach of their duties.

Q14: What rights to information will my first shareholders have under the model articles?

Your company’s ordinary shareholders under the default model articles have the right to access some information about the company, without charge:

  • a copy of the company’s annual accounts;
  • the right to see the minutes of any general meeting; and
  • the right to see the company’s register of members and register of directors (see Dealing with requests to inspect company records for how to deal with requests to see your registers).

Q15: What rights to capital will my first shareholders have under the model articles?

If your company is wound up, any assets left over after creditors have been paid will be shared between your shareholders in proportion to their own share of the company’s share capital.

Q16: If I do not use the model articles, what legal rights will my company’s shareholders have?

The rights of your company’s shareholders are set out in its articles of association and (if you have them) any shareholders’ agreement or terms of issue of those shares. If you have not used the model articles, check these documents for your shareholders’ rights.

How to issue shares on incorporation

Q17: How do I issue shares in my company on incorporation?

To issue shares as part of setting up your company, you must:

  • Decide on your company’s share structure and include the details in your application to incorporate. Our legalflows will guide you through this process in your own time.
  • Fill in details of the shareholders in your company’s register of members, unless you have elected to keep your register of members at the CIPC on the central register (in which case it will be created automatically based on your application to set up a company). 
  • If you fail to set up your register of members, your company and every officer who is at fault will commit a criminal offence and may be fined. Failing to keep your register of members up to date can also create confusion and lead to disputes over who is the legal owner of the shares in your company. It is therefore crucial to keep it up to date.
  • Give a share certificate to each subscriber within two months of the allotment of shares to them. The share certificate must contain certain information and must be signed either by two directors or by one director in the presence of a witness.

If you fail to arrange share certificates in time, any officer of your company who is responsible commits an offence and can be fined.

Q18: What do I need to do to issue more shares after incorporation?

There is a specific legal procedure to follow when issuing more shares after your company is up and running. It is significantly more complicated than issuing your first shares as part of setting up. You can find a walk through of this within our resources.

The precise procedure to follow will depend on the terms of your company’s articles of association, the number of existing shareholders and the class of shares you are issuing. 

Q19: Should I issue more than one class of shares at incorporation?

When setting up your company, it is usually enough to just be aware that different classes of shares can exist. If you incorporate your company using the default model articles, each share will be the same; they are called ordinary shares.

Having different classes of shares can sometimes be useful from the outset. For example, in a very small family company they can enable you to declare different dividends for different shareholders which may have tax advantages. Speak with your accountant before attempting to set up your business in this way. Accountancy and tax advice is outside the scope of our service unfortunately.

Q20: What are the different classes of shares?

Typical examples of different classes of shares include:

Ordinary shares

These rank equally in all respects; they do not carry special rights. If you have only one type of share, they will, by definition, be ordinary shares.

Preference shares

These may have fewer voting rights than ordinary shares, but a right to receive a fixed dividend or amount of capital on the company winding up, which is paid before any payment to the ordinary shareholders.

Non-voting shares

These have no voting rights at all, but the same rights as ordinary shareholders to receive dividend and capital on the company winding up.

Redeemable shares

The company can buy these back on agreed terms at an agreed date in the future. They are often used for employee share schemes so that the company can buy back the shares if the employee leaves.

This is not an exhaustive list, just the most common classes of shares. Remember that, legally, just giving a share a different name does not automatically make it part of a new class – it must have different rights attached to it, described in your articles of association.

Having different classes of shares can be beneficial for a company. For example, in a very small family company they can enable you to declare different dividends for different shareholders which may have tax advantages. You should speak with an accountant before attempting to structure your business in this way, however. Accountancy and tax advice is outside the scope of this service.

Q21: Should I insist my company’s first shares are paid for in full?

It is usually good practice to insist that your company’s first shares are paid for in full, even if you are not legally required to do so.

If you are using the model articles of association, they require all shares issued after incorporation to be paid for in full, but have a specific exemption for the original shares. If you have bespoke articles of association, you can check them to see whether they require your shares to be fully paid for at the outset.

Having unpaid founder shares is unusual, and could create question marks for any banks, investors or customers in future. It does not look good to people outside the business if your shareholders are not willing to even advance the nominal value of your shares to your company.

So long as you choose a low nominal value for your shares (see Q 7), it should not present any practical difficulties for all your initial shareholders to pay up.

Q22: Can my shareholders pay for their shares in cash or kind?

Yes, either. The nominal value of your company’s first shares can be paid for either in cash or money’s worth e.g. by contributing goodwill or know-how to your company.

Q23: Should I allow shareholders to pay for their shares in kind?

For new companies, the ability to offer shares to individuals who provide services, support or other assets to the business at start-up can be an attractive way of avoiding cash outgoings. 

For example, a new business might offer shares to someone who allows them to use their office space or vehicles, someone who designs their website and marketing material, or to someone who provides ad-hoc consultancy, legal or accountancy support. However, new business owners should always be cautious about giving up too many shares and surrendering control of their company (see Q 2).

Q24: How and when should my company’s first shareholders pay for their shares?

If any shares are unpaid, your company has the right to collect and the individual is liable for that sum as a debt.

The most straightforward way of clearly demonstrating that a subscriber has paid is to have them transfer the nominal value of the shares to your company’s bank account. This necessarily will need to happen after incorporation, as your company cannot open a bank account until it is incorporated.

If shares are issued for money’s worth, your company will need to form its own view as to the value of the individual’s contribution and be satisfied that it is at least equal to the nominal value of the shares issued to the subscriber (and any premium). Their contribution can take any form; see Q 22.

Shareholders’ responsibilities and liabilities

Q25: Are my shareholders free to do what they want?

To an extent. Your company’s shareholders do not have any duties e.g. to act in good faith like directors do when exercising their right to vote. There can be consequences, however, if majority shareholders act unfairly towards the minority; see Q 26.

Q26: What happens if my shareholders act unfairly?

Majority shareholders should beware that the minority can mount a legal challenge against them and potentially the company in some circumstances. For example, if your majority shareholders act unfairly towards the minority e.g. in breach of a shareholders’ agreement or your articles of association, and cause them commercial harm in doing so, the minority can make a court claim against them.

In a worst-case scenario, a disgruntled minority can apply to wind up the company altogether, although this is a last resort and rare in practice.

Q27: Do my shareholders have to contribute to my company’s debts?

If your company is a private company limited by shares, your shareholders’ liability for your company’s debts is limited to any amount unpaid for their shares (including any premium payable). There is no extra liability during the lifespan of the company simply because someone is a shareholder.

Your company’s shareholders can, of course, be liable to your company in a different capacity, for example if they do business with the company. 

The primary risk for any shareholder is therefore that your business fails and they do not receive back their initial investment.