Understanding the Key Differences between a Subscription and Sale of shares in South Africa
When it comes to acquiring ownership in a South African company, two common methods are the sale of shares and the subscription of shares.
Each method has its own implications and considerations. This article explains the differences between selling shares and buying shares in South Africa. It provides useful information for people and companies who want to understand these concepts better.
Understanding Subscription of Shares
A subscription of shares means giving new shares to people or groups who want to be shareholders. In this case, the company offers shares for purchase to potential shareholders who subscribe to them. The company creates and issues new shares, increasing its share capital and bringing in new owners.
Understanding Sale of Shares
A sale of shares involves the transfer of existing shares from one shareholder to another. In this scenario, the seller already owns and is selling the existing shares. The buyer buys the shares from the current owner, which changes who owns them.
Legal Implications and Procedures for the Sale of Shares
In South Africa, selling shares means transferring ownership without affecting the company's share capital.
The process typically involves:
- Negotiating and Agreeing on Terms: The buyer and seller negotiate the terms of the sale, including the purchase price, conditions, and warranties.
- Drafting a Share Sale Agreement: Once the terms are agreed upon, a share sale agreement is drafted to formalize the transaction. This document outlines the rights and obligations of both parties and includes provisions related to warranties, representations, and indemnities.
- Transfer of Ownership: To transfer the shares, the parties must execute the necessary documentation, such as a share transfer form. The company updates its share register to reflect the change in ownership.
Legal Implications and Procedures for the Subscription of Shares
When subscribing to shares in South Africa, there are specific legal procedures to follow:
- Offer and Acceptance: The company makes an offer to potential shareholders, inviting them to subscribe to new shares. The interested parties accept the offer and agree to purchase the shares at the specified price.
- Memorandum of Incorporation (MOI) and Shareholders' Agreement: The MOI is amended to include the details of the new shares being issued. You can also draft a shareholders' agreement to define the rights and obligations of the new shareholders.
- Issue of Shares: The company issues the new shares to the subscribing shareholders, resulting in an increase in the company's share capital. Typically, investors pay for the shares in cash or through other agreed-upon methods.
Considerations for Buyers and Sellers
- Control and Voting Rights: In a sale of shares, the buyer acquires the existing shares along with the associated voting rights. In a subscription of shares, the buyer becomes a new shareholder and may or may not have immediate control or voting rights, depending on the terms of the subscription.
- Dilution and Capitalization: When new shares are issued through a subscription, existing shareholders may experience dilution of their ownership percentage. In a sale of shares, there is no dilution since the shares already exist.
- Due Diligence: Buyers should conduct due diligence on the company's financials, legal compliance, and other relevant aspects before purchasing existing shares. Subscribers should assess the company's potential for growth and future prospects before subscribing to new shares.
Conclusion
Knowing the distinction between selling and buying shares in South Africa is important for people and companies involved in ownership deals. Knowing the legal implications, procedures, and considerations associated with each method enables parties to a contract to make informed decisions.
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