Sky Software
Help and User guide
 
×
Menu
Index

Conversion of Par to No Par Value Shares - Co Law

REGULATION 31 CONVERSION OF PAR VALUE SHARES
 
INTRODUCTION
Where a pre-existing company (a company that was formed under the old companies act) has par value shares at the effective date (the date the Companies Act 2008 came into existence) on 1 May 2011 and the board of directors wish to increase the authorised number of the par value shares then they have to adopt the procedure as set out in terms of Regulation 31 of the Companies Act 2008.
THE LAW
Schedule 5, Section 6 (2) says that par value shares may continue to exist forever after the effective date subject to any regulations made by the minister.
Where directors wish to increase the authorised share capital as there are not enough shares to issue the formalities of Regulation 31 must be carried out.
It is important to note that many of the Companies Act Regulations refer to the various sections in the act on how to carry out the procedures.  This particular regulation 31 does not appear to be based on the act as it appears to be an afterthought actually extending the requirements of the law with even SARS having some input in regard to some tax issues. 
 
In terms of section 36(2)(a) of the act a change of the authorised share capital is in fact an amendment to the MOI and requires a special resolution and submission of form CoR 15.2 together with the special resolution.
 
Form CoR 31 and regulation 31 (3) appear to be in conflict with this section as the regulation says that when a company has par value shares for which no shares are in issue a director’s resolution and form CoR 31 will be sufficient to request the CIPC to change the share class from par value to no par value. It appears Form CoR 31 is in conflict with the act as even though no shares are in issue this is a change to the MOI and it would seem to be necessary to file a special resolution and form CoR 15.2 to make this change. This regulation specifically allows a director’s resolution in place of a shareholder’s resolution, where you have the situation of a share class where no shares are in issue as no shareholders are affected by this. It is necessary to file the CoR 31 and CoR 15.2 and the director’s resolution changing the MOI.
 
Please also note that in terms of Regulation 31 (5) (b) the directors may issue par value shares if there are sufficient authorised shares available. Where no changes in the share capital is envisaged par value shares can remain in existence forever as there is no minister’s regulation to this affect.
Regulation 31 (5) (c) says that an amendment to the MOI may be filed at no charge in order to change a class provided that sub-regulations 6 to 11 are complied with.  This regulation kicks in when a company wishes to increase its authorised share capital.
 
SARS
It is interesting that sub-regulation 6(a) says that this amendment must not be designed substantially or predominantly to evade the requirements of any applicable tax legislation and 6(b) says that such conversion will only be approved by a special resolution adopted by the holders of the shares for each such class and a further resolution adopted by a meeting of the company shareholders called for that purpose. 
 
BOARD REPORT
Sub-regulation 7 deals with the board report that must be sent out with the proposed special resolution to convert par value shares to no par value shares. The following items should be dealt with in the board report. 
a.     The report must state all information that may affect the value of the securities caused by the proposed conversion; and
b.     The report must identify the class of holders of the company securities affected by the proposed resolution and;
c.     The report must describe the material effects that the proposed conversion will have on the rights of any holders of shares, and;
d.     The report must evaluate any material adverse effects of the proposed arrangement against any compensation to those persons who receive compensation owing to the conversion.
 
It appears that the board report is designed to indicate if there is a change to any of the rights of shareholders which may trigger a capital gains event as the board report and the special resolution must be filed at SARS.
Regulation 31 (8) says that the company must publish a special resolution contemplated in sub-regulation (6) together with the report required by sub regulation (7) which must be made available to the shareholders before the meeting (which must have proper notice) at which the resolution is to be considered. It appears that the notice cannot be waived in this instance.
The special resolution and the report must be filed with the CIPC as well as the South African Revenue Service by emailing the special resolution and board report to regulation31@sars.gov.za. We suggest that a certified copy of the email proving submission to SARS or a copy of the documents with the SARS official stamp will reduce the chance of rejection by the CIPC.
Sub Regulations 9 to 11 deals with various instances where applications can be made to court to obtain a declaratory order in regard to this conversion.
 
SPECIAL RESOLUTION
I have set out an example of the kind of wording that should be used in regard to the Special Resolution of a smaller company. Perhaps one should put in a preamble as to the reasons why the special resolution needs to be taken.
 
REASON FOR THE SPECIAL RESOLUTION
The Companies Act 2008 regulations do not allow the increase of authorised par value shares where there are no further authorised par value shares to issue. The directors have decided that in order to comply with the requirements of the act that the share capital of the company must be converted from par value to no par value shares.
 
SPECIAL RESOLUTION 1
Resolved that the authorised Ordinary Share Capital comprising of 10,000 shares which have a par value of R1 each is converted to 10,000 Ordinary Shares of no par value, each share to rank pari passu in every respect with the existing shares of the company. 
Comment – it’s important to show that all the rights and limitations remain the same on the conversion. SARS are looking for a capital gain event.
 
SPECIAL RESOLUTION 2
The authorised Ordinary Share Capital of 10,000 shares of no par value be increased to 100,000 shares of no par value to rank pari passu in every respect with the existing shares of the company.
Comment – it’s a good idea to increase the authorised number at the same time.
 
ORDINARY RESOLUTION
3.     Resolved that subject to the passing of special resolution number 1 that the Ordinary Share Capital account of R10,000 and the Share Premium account related to this share capital of R40,000 both be transferred to the stated capital account of the company.
Comment; It may be that the company wishes to retain the share premium account as they may want to repay this to shareholders at a later time. Consider this in relation to an actual buy back of shares. It will be much easier to just pay back the share premium as opposed to buying back shares because of the compliance issues in a share buyback. There is no reason why the share premium account cannot be retained.
 
REPORT TO ACCOMPANY THE SPECIAL RESOLUTION
An example of the board report in the case of companies which are small companies and where shareholders rights are not affected will be as follows: 
“Owing to the fact that the board of directors need to increase the authorized share capital of the company to allot more shares it is proposed that the ordinary 10,000 shares of par value be converted to 10,000 ordinary shares of no par value in order to meet the requirements of the Companies Act 2008.
10,000 issued ordinary shares of par value, details of which are contained in the share register which is available for inspection at the registered address of the company will be affected. The share certificates of par value as indicated in the share register will all be cancelled and a new class of shares of no par value will be created and the shares will be re-issued under the same certificate numbers on registration of the special resolution.
There is no effect on any of the rights of any shareholder.
 
Owing to the fact that no rights of any shareholder have been affected by this conversion no compensation has been paid out.”
 
17 May 2023