A private company registered in accordance with the Companies Act 71 of 2008 (‘the Act‘) must restrict the transferability of its securities. This is required in section 8(2)(b)(ii)(bb) of the Act.
A standard MOI (part of the set of documents issued by CIPC upon a company being formed) may not however suit your requirements and so it is important to read carefully before purchasing shares in a company or incorporating a new company where there will be other shareholders.
The precise mechanism, governing to whom and in what proportions shares in a private company should be sold when a shareholder is no longer going to hold shares, is important for all shareholders to be satisfied with. This could occur for any number of reasons, such as simply wishing no longer to be involved in the company, to death of a shareholder.
How, when and for what value shares in a company will be sold is best provided in a written shareholders’ agreement.
The ‘how’ is probably the least complicated part of the decision. Shareholders can require that they must at least offer their shares to the other shareholders, and in proportion to their existing shareholding, before being able to sell to a third party.
The ‘when’ provision can also be a relatively simple provision. The most common events which could trigger a sale are when shareholders are employees as well, and a forced sale can be aligned to termination of employment. Death of a shareholder, or in the case of a shareholder which is a company, a change in that shareholder company’s shareholding or liquidation of that company, can also be triggers for a forced offer to be made to the remaining shareholders.
The ‘for what value’ is most often a point of contention. How to value a company will depend on what type of company is being considered, for example, whether the company has a source of income which can be predicted with a degree of certainty into the future, or whether it hold assets, such as immovable property, which can easily be determined or ascertained. It may also be a good idea to provide a formula in the shareholders’ agreement which provides at least a minimum value at which a forced sale of shares would occur. Then there is also the consideration of whether a penalty is appropriate, in circumstances where the shareholder who is forced to sell shares is considered a ‘bad leaver’ (such as an employee who commits fraud) which could result in the forced sale value being reduced by an amount agreed to in the shareholders agreement.
The best time to agree on the events of transfer is at incorporation of a company, or when a new shareholder is admitted to a company, or when new sources of funding are being considered for a company. However, it is also important to re-assess the sale trigger provisions of a shareholders’ agreement and re-visit these from time to time.