Authorised Share Capital and Share Transfers Simplified
When you register a new company, the most important decision you will make; is who will be the shareholders and how many shares each shareholder will get. When starting a business, the shareholders are usually the people who finance the business and risk their own money in order to make future profits.
The shareholders therefore own the business while the directors manage the business.
You need to decide how many shares you would like to create. These shares are then issued to the shareholders. The total number of shares that you decided to create is called the authorised share capital and these shares legally belong to the company. They are dormant as they have no rights associated with them until they are issued to the shareholders. The rights such as voting rights or preferential dividend pay-outs are binding only once the shares are issued to the shareholders.
You can choose any number of shares to make up the authorised share capital. We used 1200 shares as our default amount. This is because you can’t own a fraction of a share. This becomes a problem if your authorised share capital is 1000 and you have three equal shareholders all wanting 1/3 ownership. 1000/3 = 333.33 The problem is the .333 of a share, which is not allowed. So, the 1 share will then either have to be jointly held or remain unallocated with the company.
Therefore 1200 is a more practical number as it is devisable by most numbers. For example, if you are three equal shareholders then each shareholder will get 400 shares. 1200/3 = 400 and there are no factions to complicate the transaction.
Just to complicate matters, you do not have to issue all the authorised share capital to the shareholders as some shares can remain unallocated with the company.
The amount of authorised share capital is stated in the Memorandum of Incorporation or MOI which you will receive when you register your company. It describes the number and types of shares and the rights and limitation associated with each class of shares. We use the standard MOI as drafted by CIPC as it is cheaper and already compliant with the Companies Act. It also only has a single class of ordinary shares to simplify matters. There is no need to concern yourself too much with this document when registering your company as it can always be amended at a future date.
The next concept to get to grips with is the number of authorised shares has nothing to with the value of the company. Many of our clients get confused with this as they feel that the more shares they create when establishing the business, the more valuable their company will be.
This is definitely not the case; this is because the value of a company is completely independent of the number of shares. The value of the of a company is based on many factors, but in the end, it boils down on what a willing buyer and a willing seller agree upon and has nothing to do with the number of shares.
Let me give you an example: Let’s assume the company is valued at R1m. To determine the value of each share you must divide the value of the company by the number of issued shares.
For example, let say we have 100 issued shares in total. The value of each share is therefore calculated by dividing the value of the company by the number of issued shares 1,000,000/100 = R 10,000 per share. If the same company now has a 1000 issued shares then the value of each the share would be 1,000,000/1000 = R1,000
So, the value of the company does not change only the value of the shares this is called non par value shares.
There is a lot of share terminology used in the business world such as issuing shares, transferring shares or allotting shares, but in the case of private companies they all follow the same procedures.
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