Understanding Shares in South African Private Companies: Legal Nature, Rights, and Share Capital

Introduction

When discussing company ownership, investment, or dividends, the term “share” is central. But what exactly does it mean under South African law?

Section 1 of the Companies Act 71 of 2008 defines a share as “one of the units into which the proprietary interest in a profit company is divided”. While technical, this definition underpins the structure of private limited liability companies in South Africa and guides how ownership, control, and profits are allocated.

This article explores what a share is in the context of South African private companies, examining its legal nature, distinctions between authorised and issued share capital, and how these concepts determine shareholder rights and participation.

The Legal Nature of a Share

A share is fundamentally a bundle of personal, incorporeal rights held against a company. Unlike tangible property, shares exist as legal rights enforceable against the company, rather than direct ownership of its assets. Understanding this distinction is crucial for investors, shareholders, founders, and anyone involved in corporate governance.

Key Aspects of a Share:

• Dividend Rights: Shareholders may receive dividends when declared by the board, depending on company profits and board discretion.
• Participation in Assets: Shareholders can claim a share of company assets upon liquidation, after all liabilities are settled.

The court in Cooper v Boyes confirmed that a share is not a debt or consumable item. It is an incorporeal property right—a legal interest in the company rather than direct ownership of company capital.

Importantly, shareholders do not own the company’s assets; the company itself, as a separate legal entity, retains ownership. Shareholders’ rights are limited to participation in profits, dividends, distributions, and exercising any voting powers granted by the share class.

When Are Shareholder Rights Activated?

A critical point under Section 35(4) of the Companies Act states:

“An authorised share of a company has no rights associated with it until it has been issued.”

This means that while a company may have authorised shares, the legal rights only arise once shares are issued, including entitlement to dividends, voting rights, and participation in liquidation proceeds.

Authorised vs Issued Share Capital: The Poker Chips Analogy

Understanding the difference between authorised and issued share capital is fundamental for corporate planning and investor protection. Using a poker chips analogy can make this concept intuitive and memorable.

Authorised Share Capital – The Casino’s Total Chips

Think of authorised share capital as the total number of poker chips the casino possesses. This represents the authorised shares, and accordingly the maximum number of shares a company may legally issue. This limit is set out in the company’s Memorandum of Incorporation (MOI).

These chips include all the chips that the casino has: some chips are actively being held and played, while others are waiting in the vault. For instance, if the casino has 100 chips, that is the total number of chips available and the total number of chips it can hand out to players. Similarly, the authorised shares are the total potential shares a company can issue—they define the ceiling of share capital but do not, on their own, contain any rights.

It is only once an authorised share is issued to a player that the rights are activated.

Issued Share Capital – Chips in Players’ Hands

Issued shares are like the chips actually distributed to players when they buy in at a table. Only once the player has chips can they bet, participate in the game, or cash out.

In corporate terms, once a share is issued and allotted to a shareholder, that person acquires enforceable rights against the company. These include participation rights in profits, and voting rights in company matters.

Two Pools of Chips – Issued and Unissued

This analogy effectively creates two pools of chips:

• Chips held by players: The issued shares, which are active and confer rights.
• Chips still held in reserve: The unissued authorised shares, which remain in the company’s control for future allocation.

By referring to them as the issued pool and the unissued pool, shareholders and corporate planners can easily visualize the distinction and understand how the company allocates these securities while granting enforceable rights to shareholders and investors.

Importance of Understanding Shares in South Africa

Understanding shares, their legal nature, and the distinction between authorised and issued capital is vital for:

• Shareholders: To know when rights arise, including voting power, dividends, and participation in liquidation proceeds.
• Companies: To structure ownership effectively, attract investment, and maintain corporate governance compliance.
• Corporate Planning: Ensuring clarity in capital allocation, investor protection, and flexibility in future financing or equity distribution.

Conclusion

In South African company law, a share represents a legal unit of proprietary interest in a company, granting rights once issued. The distinction between authorised and issued shares is crucial, determining when rights arise and how ownership, voting power, and financial entitlements are allocated.

For shareholders, understanding the legal status of their shares ensures they can enforce rights, participate in dividends, and engage in governance. For companies, properly managing authorised and issued share capital provides clarity, compliance, and flexibility.

Like chips in a casino, authorised shares sit in reserve, ready to be issued, while issued shares are the ones actively “in play,” giving shareholders tangible rights and participation in the company’s “game.”

A clear understanding of shares, their legal status, and the timing of rights is foundational for corporate planning, investor protection, and effective governance in South African private companies.

By: Xander Schoeman
Attorney