When people buy shares in a company, it is important to understand not only what ownership means, but also how shares can be transferred to someone else. Under the Companies Act 71 of 2008 (“the Act”), shares and other securities can generally be held in either certificated or uncertificated form. The rules for transferring shares are different, so understanding the distinction is important for shareholders, companies and investors.
What are securities?
The Act defines “securities” to mean any shares, debentures or other financial instruments issued or authorised to be issued by a profit company.[1] Although the Act’s definition of “securities” extends beyond shares, this article focuses on primarily the transfer of shares.
In terms of section 49 of the Act, a company can issue shares in two forms: certificated or uncertificated.[2]
A certificated share is represented by a physical document, such as a share certificate. The certificate provides evidence that a person owns the shares.[3] On the other hand, an uncertificated share does not have a physical certificate. Instead, ownership is recorded electronically through the relevant securities system.[4] These shares are held through a central securities depository (“CSD”), which in South Africa is Strate Ltd, and can be transferred electronically by making the necessary entries in the relevant accounts.[5]
Shares can also be changed from one form to the other. However, if shares are to be traded on the Johannesburg Stock Exchange (“JSE”), they must be held in uncertificated form.[6]
How are certificated shares transferred?
A share is movable property and can generally be transferred from one person to another. However, there may be restrictions on the transfer, particularly in the case of a private company.[7] For example, existing shareholders may be given the first opportunity to buy the shares, known as a right of pre-emption, or may require the board’s approval before the shares can be transferred.
When transferring certificated shares, it is important to understand that simply handing over a share certificate does not, by itself, transfer ownership. The transfer of ownership is governed largely by the common law rules relating to cession. In simple terms, cession is the process by which one person transfers a personal right to another person.
There are two crucial elements to this process. First, there must be an agreement or other legal reason for the transfer. For example, the parties have agreed that the shares will be sold. Second, there must be an intention by the current owner to transfer the right and an intention by the new owner (the purchaser) to receive it. Both parties must therefore agree to the transfer.[8] These two elements must be met for a valid transfer to take place.
Although it is common practice to deliver the share certificate to the company, this is not necessarily a legal requirement for the transfer to be valid. This was confirmed in Botha v Fick[9], where the court held that a share is not a negotiable instrument and that delivery of the share certificate is therefore not required to validly transfer the share or the right attached to it. A more recent case, Dixon v Luristax (Pty) Ltd and Others[10], reaffirmed the principles in Botha v Fick; the court confirmed that ownership of shares can pass by cession and that delivery of the share certificate is not a requirement for the validity of cession.
How are uncertificated shares transferred?
The process is different when shares are uncertificated. Section 53 of the Act sets out specific rules for transferring uncertificated shares. The transfer must generally be carried out by a CSD participant like a bank, or central securities depository after receiving either a properly authenticated instruction or an order of court.[11]
There is no physical share certificate to hand over. Instead, ownership is transferred electronically by debiting the account of the person transferring the shares and crediting the account of the person receiving them.[12]
What happens when shares are held by a nominee?
Things can become slightly more complicated when shares are held through a nominee. A nominee is someone who holds shares in their own name on behalf of another person, known as the beneficial owner.[13] For example, a broker may be registered as the shareholder even though the shares actually belong economically to the investor.
The nominee and the beneficial owner have an agency relationship. The relationship is echoed in Oakland Nominees (Pty) Ltd v Gelria Mining & Investment Co (Pty) Ltd[14], where the court described a nominee as essentially an agent with limited authority who holds shares in name only. He does this on behalf of his nominator or principal, from whom he takes his instructions. This means that the nominee acts on behalf of the beneficial owner and must generally follow the authority and instructions given by that owner. For example, if an investor instructs a broker to sell certain shares, the broker has authority to carry out that sale. However, if the broker attempts to sell the investor’s shares without the necessary authority, the transaction may be invalid.
In conclusion, the law provides for various ways of transferring share ownership depending on whether the shares are certificated or uncertificated. Certificated shares are associated with physical share certificates and are transferred primarily through agreement and cession, while uncertificated shares are transferred electronically through the securities registration system. Understanding these differences is particularly important when buying and selling shares, dealing with a private company’s transfer restrictions, or dealing with shares held through a broker or nominee.
[1] The Companies Act 71 of 2008 s 1. [2] The Companies Act 71 of 2008 s 49. [3] Dennis D (ed), Geach W (ed) & Mongalo T Companies and other Business Structures in South Africa 3 ed (2013) ch 8 284. [4] Dennis D (ed), Geach W (ed) & Mongalo T Companies and other Business Structures in South Africa 3 ed (2013) ch 8 284. [5] Dennis D (ed), Geach W (ed) & Mongalo T Companies and other Business Structures in South Africa 3 ed (2013) ch 8 284. [6] Dennis D (ed), Geach W (ed) & Mongalo T Companies and other Business Structures in South Africa 3 ed (2013) ch 8 284. [7] Dennis D (ed), Geach W (ed) & Mongalo T Companies and other Business Structures in South Africa 3 ed (2013) ch 8 290-291. [8] Dennis D (ed), Geach W (ed) & Mongalo T Companies and other Business Structures in South Africa 3 ed (2013) ch 8 291-292. [9] 1995 (2) SA 750 (A) par 778 C-D. [10] (AR214/24; D8328/2021) [2026] ZAKZPHC 26 par 31-32. [11] The Companies Act 71 of 2008 s 53. [12] Dennis D (ed), Geach W (ed) & Mongalo T Companies and other Business Structures in South Africa 3 ed (2013) ch 8 292. [13] Dennis D (ed), Geach W (ed) & Mongalo T Companies and other Business Structures in South Africa 3 ed (2013) ch 8 288. [14] 1976 (1) SA 441 (A) par 453.Associate
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