The Basics: Ownership of a private company and the concept of shares

Shares are the units into which a company is divided, giving the holder of those shares various rights and entitlements in the company in respect of which these shares are held. In this Legal Insight we will discuss the basic concept of ordinary shares, which give ownership in a company to the holder of those shares.

A share is a whole unit and cannot be held in fractions. Accordingly, if there are various shareholders in a company, rather than dividing all of the authorised shares in equal parts and sometimes ending up with a fraction of shares, business owners can issue the required number of shares to enable each shareholder to hold an equal number of shares. These issued shares will constitute 100% of the issued shares in a company – with each shareholder holding a percentage of that company’s share capital.

To take a step back, what are issued shares and how are they different from authorised shares? Authorised shares are the number of shares that a company is legally allowed to issue. As an example, when a company is registered with the Companies and Intellectual Properties Commission (CIPC) – a certain number of shares, i.e. one thousand (1000) shares, will be authorised by notice to the CIPC. The authorised share capital (this can be any number) must then be reflected in the company’s memorandum of incorporation.

To continue with the example – of those 1000 shares, the company can issue any number of those shares to its shareholders in exchange for funds, which will constitute the issued share capital of the company. i.e. the company can issue 100 shares to the shareholders or 1000 shares to the shareholders. It is important to note that a company can never issue more than the authorised number of shares. As an example, of the 1000 authorised shares, a company can never issue 1100 shares, because only 1000 shares are authorised or “allowed” to be issued.

Should a company wish to increase its number of authorised shares it will need to do so by amending its memorandum of incorporation and providing notice to the CIPC.

In practice, a company will usually only issue a percentage of its authorised shares for various commercial reasons. One of the biggest reasons why business owners do not issue and hold 100% of the authorised shares in a company, is to leave the option open for further shares to be issued to an incoming shareholder or for further subscriptions by existing shareholders (where an investor or existing shareholder pays for some of the authorised shares in the company, this usually results in the dilution of the issued shares).

Keeping some of the authorised shares in reserve would be especially helpful for small business owners looking to bring in an investor at a later stage of their business. Rather than selling the shares that they currently hold in their business for a profit (which sale can have its own tax implications for the small business owner), small businesses can have the investor subscribe for new shares in the Company.

This is a basic overview of the concept of shares with basic examples of how they can be used as a commercial tool. Contact us for a more in depth discussion about structuring your company’s share capital to maximise your business’ potential.