How to become a shareholder in a company
An investor becomes a shareholder or member in a company normally through share allotment or share transfer.
Section 95 of the Companies and Other Business Entities Act (Chapter 24:31) or (“the Act”) requires a company to have members or shareholders. In the case of a private company the limit is fifty members.
An allotment, in simple terms, means the allocation of new shares to a shareholder or member, by the company, usually for consideration paid by the member to the company. So a member is allotted shares and the company receives funds from the member as investor. Such funds are called share capital.
In the case of share transfer, an existing shareholder, who becomes the transferor, transfers his or her shares to the new shareholder, who becomes the transferee. The new investor pays the existing or outgoing investor a purchase price for the shares being transferred. Unlike in a share allotment, the proceeds of the share sale in a transfer go to the existing shareholder, not the company. Shares may also be transferred pursuant to other causes such as a distribution in a deceased estate or by operation of the law.
Return of Allotment
This is regulated by Section 121 of the Act. The Act requires a company to keep a register of allotment of its shares. Further, whenever a company makes any allotment of its shares it shall, within one month thereafter, lodge with the Registrar of Companies, a return of allotment.
A return of allotment of shares, known as CR11, formerly CR2, includes the following information:
- Period of return
- Authorised share capital
- Number of shares previously allotted
- Number of shares allotted per the new allotment
- Total number of shares allotted
Names and address of the allottees (recipients) of the newly allotted shares. This includes date of allotment, full names, addresses, ID numbers and number of shares allotted.
The return of allotment is signed by the company secretary or director of the company.
This is regulated by Section 151 of the Act. The salient features of the section are that:
A proper instrument (document) of share transfer has to be completed and delivered to the company for such shares to be transferred.
Upon application by the transferor (existing shareholder) a company shall enter the new shareholder (transferee) in its register of members or shareholders. If the company refuses it must inform the transferor and transferee within two months of the refusal.
A quick review of a share transfer instrument or document shows that the transferor transfers to the transferee rights associated with the shares. The transferor and transferee sign the transfer document together.
Share certificates, which are a requirement in terms of Section 153 of the Act, are prepared and issued by the company based on the share allotments or share transfers. According to Section 153(3) a share certificate is prima evidence of title of the member to such shares. Its importance therefore cannot be overemphasized.
Companies, especially small to medium ones, are advised to always check compliance with legal requirements of their company secretarial affairs. Where there are no internal skills or resource to deal with the matters it is advisable to outsource the service. The cost of doing things right is worthwhile.
This simplified article is for general information purposes only and does not constitute the writer’s professional advice.
Godknows Hofisi is a legal practitioner, chartered accountant, corporate rescue practitioner, and consultant in deal structuring and tax. He writes in his personal capacity. He can be contacted on +263 772 246 900 or [email protected]