Must a company issue shares?
I love this one. I revisited it when someone asked me pretty much this question in a comment to one of my articles.
I decided to ask my AI friend, Perplexity.ai, to tell me specifically where in the Companies Act does it state that a company must issue shares, because I have been unable to find such a requirement.
The AI responded with various “expert opinions”, all of which said that a company must issue shares. But the AI could not give me a reference in the Companies Act.
So, here’s how I responded to the person who posted the comment question:
The Companies Act does not specifically state that a company must issue shares, but various “opinions”, including that of your accountant apparently, state that at least one share must be issued. This is, in my view, rubbish – just someone’s opinion based on someone esle’s opinion, based on someone else’s opinion and is not based on law.
However, bear in mind that it is the shareholder(s) who appoint the director(s) so, without a shareholder, there can be no director to run the company, so the company cannot operate. In my view, that wouldn’t matter until you want3ed it to start trading.
Now the big one. When registering a new company at CIPC they require the details of at least one (presumably future) director. CIPC then “appoints” the director with no reference to (or respect for) the shareholder(s). So, now we have a company with a director who can run the company for a shareholder that doesn’t exist. Crazy stuff!
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On a different issue:
Some years ago a local community organization was established as a company.
It established a service agreement with a security company and received subscriptions from locals in the area. Part of the subscription went towards paying for other services (helping escalate utility disruptions, clean-up of streets, beautification of neglected areas).
The person leading this venture, who was also the sole shareholder) died unexpectedly leaving a bit of a financial mess (unpaid VAT & PAYE) in the company. One of the issues was the claim that a company must have at least 3 directors.
Absent other directors there was no one in authority to step in to run the company & no appetite for anyone to want to step in.
Is the requirement for a company to have more than one director correct?
Hi David,
Absolutely not the case. I think either you or someone else is mixing (Pty) Ltd company requirements with NPC requirements. The latter must have 3 Directors.
If there are no shareholders, then who gets the economic benefit of owning the company?
How do you capitalize the company?
Presumably you do not need to be a shareholder to have a loan account but that raises some interesting questions about the “connectedness” between the person making the loan & the company.
Clearly, someone must own the company, but the question is when? The reason that it is important to us is that we often register a company and a trust to own it. The company registration takes about 24 hours and the trust about 6 weeks. If we first issue the shares to the Founder of the trust and only later transfer them to the trust, then technically that involves two Beneficial Ownership returns and also a share transfer. So, we tend to delay the share issue until the trust is registered.