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A dematerialised principle

May 2014

Under the old Companies Act it became settled law that shares had become "dematerialised" – that is, that ownership of shares could be lawfully transferred without the necessity of delivering an instrument of title.  This article considers whether the new Companies Act may constitute a retrogressive step on the path of dematerialisation.

The manner in which ownership of incorporeal rights is transferred and the requirements for a valid cession of such rights became settled law as a result of the decision in Botha vs Fick 1995 (2) SA 750 (AD).  In the Botha case, it was held that ownership in shares can pass from the cedent to the cessionary without any form of delivery of the instrument, which in the case of shares is a share certificate, recording the rights of the cessionary.
The case of Botha was more recently confirmed in the South Gauteng High Court in the matter between Gomes-Sebastiao v Quarry Cats (Pty) Ltd 2010 ZAGPJHC 103.

In Quarry Cats, the Appellant (the First Respondent in the court a quo) appealed against a judgment wherein the court a quo declared Quarry Cats to be the owner of all the ordinary shares in the Respondent, and ordering the rectification of the registrar of members in terms of section 115 of the Companies Act, 61 of 1973 (the Old Act).  The court further ordered that the First Respondent's share certificates be cancelled and that the Second Respondent (the company in which the ownership of shares was disputed) was directed to issue a share certificate in respect of the shares to the Applicant.  Gerardus Gomes-Sebastiao had previously entered into an agreement with Bitflow Investments 195 (Pty) Ltd and effectively transferred the ownership of the shares in Laezonia and passed all the benefit and risk in and to the shares to Bitflow on the effective date.  The agreement, however, did not place an obligation on Sebastio to transfer the shares into the name of Bitflow by delivering a signed transfer form in respect of those shares, nor did it stipulate that the share register in Laezonia was to be corrected.

Subsequent Bitflow concluded a sale of shares agreement with Quarry Cats in terms of which Bitflow sold all the shares in Laezonia to Quarry Cats.  The Quarry Cats agreement did make provision for the delivery of certificates, transfer forms, resolutions and written proof of the cession in order to formally transfer the ownership of the shares.

The Quarry Cats agreement also contained a clause that stated ownership of and the risk in and benefit of the shares shall pass to the purchaser (Quarry Cats) on the effective date against delivery of the documents of title to the purchaser.  Sebastiao, up until this point, had refused to deliver the documents of title to Bitflow and/or Quarry Cats.  However, according to the decision of Botha vs Fick, on which the court relied, the ownership and benefit, as well as the risk of the shares, had passed to Quarry Cats, notwithstanding that there were no formal documents prepared in this regard.

The Companies Act, 71 of 2008 (the New Act) does not contain a provision similar to that of section 115 Old Act, which allows for the simple rectification of the members’ register.  The New Act defines a "Shareholder" as a person who holds a share issued by that company and who is recorded as such in the members register.  In terms of section 50(1) of the New Act every company is required to have a register of its shares and to maintain it.  Such register must record the name and address of the members to whom shares have been issued. 

Thus, on reading the New Act, it seems as if a person whose name is not on the members' register, cannot exercise any rights as a shareholder.  This appears to conflict with the position under the Old Act where, notwithstanding that the ownership and benefit of the shares transferred had not been formally recorded in the members’ register, the actual owner of the shares could still act as a shareholder while the registered holder of the shares was in a fiduciary position, holding those shares on behalf of the new owner.

These principles were central to the dispute in the recent decision of the Supreme Court of Appeal in Gaffoor NO vs Vanagtes Investments (Proprietary) Limited Ltd (2012) ZASCA 52.  Although the case was decided after the Old Act was repealed, it was nevertheless decided under the Old Act, in view of the transitional provisions under section 11 of schedule 5 to the New Act.  These provide that accrued rights and obligations under the Old Act would remain despite its repeal.

The company concerned was a property development company and, after issuing certain shares, there were problems with the developments.  Within a short time, the company was technically insolvent.  Gaffoor, the shareholder bringing the action, died and his shareholding in the company passed to the executors of his deceased estate.  The executors and the shareholders then began to argue.  Consequently the company found a backer and the proposed project was able to go ahead.  The argument between the executor and the shareholders was that the existing shareholders drafted a new shareholders’ agreement, which was never signed, in terms of which the other shareholders were allowed to take up the shares of the deceased shareholder.  The deceased's shares were then transferred without the consent of the executor to the other shareholders.  The executor then relied on the provisions of section 115 of the Old Act to rectify the register of members.  The shareholders agreement was found to be invalid and the SCA also rejected the notion that since more than three years had gone by since the shares were transferred, the deceased's estate's right to claim the shares had prescribed.  The court ruled that "although the purported share transfers had been registered in the Company's register of member, the Court was entitled to go behind the register to ascertain the identity of the true owner".

Thus, the principles confirmed in Botha remain in effect, and the provisions of the Old Act still allow for the rectification of the members' register.  What remains unclear is what rights a shareholder has in terms of the New Act should he or she not be recorded as a shareholder in the members’ register.  The New Act has yet to be tested.

The team

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