Topic 11: Registration and Transfer of shares

Issue v transfer:
A company can ISSUE shares to a person (primary market), or you can buy an issued share
from an existing shareholder and it will be transferred to you (secondary market).
(you can hold, use and sell shares)

Certificated and uncertificated securities:

Certificated shares are those who are evidences by a certificate. Uncertificated securities as
defined as; ‘any securities defined as such in section 29 of the Securities Services Act 2004’.
They are not evidences by a certificate or written instrument and that are transferrable by entry
without a written instrument.
These two types of securities are equal in nature, unless the act expressly provides otherwise.
They are not different solely because of the fact that they are certificated or not.

Uncertificated securities can only be transferred through the Central Securities Depository
(CSD), known as STRATE.
All shares traded on the Johannesburg Stock Exchange (JSE) must be uncertificated (Financial
Markets Act 22 of 2012).
Only public companies may list their shares on the JSE (JSE Listing Rules).
This implies that private companies should not (cannot?) have uncertificated shares
Private companies cannot offer its shares to the public! (Section 8(2)(b) of the Act)

The share certificate is not a negotiable instrument. There are no rights embodied in the share
certificate (s51(1)(c))

Certificated securities:
In terms of the register, a company must maintain a securities register or an equivalent record
holding as required by s50. This is sufficient proof of the far recorded in it – when there is no
evidence to the contrary.
Any person that holds this or has beneficial interest may inspect and copy the information in
the securities register for a profit company, or the members register in a non-profit. They may
do this free of charge or at most the prescribed maximum. Other persons may also inspect
and copy, but must pay the prescribed fee.

A certificate evidencing any certificated securities of a company must state the following:
i. the name of the issuing company;
ii. the name of the person to whom the securities were issued;
iii. the number and class of shares and the designation of the series, if any, evidenced by
that certificate; and
iv. any restriction on the transfer of the securities evidenced by that certificate.

A security certificate must be signed by two persons authorised by the company’s board. This
acts as proof that the named security holder owns the securities, in the absence of evidence to
the contrary.
A signature may be affixed to or placed on the certificate by autographic, mechanical or
electronic means.
Securities in a company can be acquired directly from the company by way of issue and
allotment to the acquirer. They may also be acquired by transfer from the holder thereof.

A contract to acquire securities in a company from the company is not a contract of purchase,
but a contract referred to as a contract of ‘subscription’ or ‘allocation’.

An issue and allotment of securities pursuant to an offer to the public is governed by the Act.
Otherwise, the common-law rules of contract apply, which means that no particular form of
agreement is required, and the contract may be affected in any manner in which a contract
may be concluded. It may be either written or oral and either express or implied.

In accordance with the general principles of contract, the subscriber applies to the company
for securities. This is the offer. The company then allots the securities to the subscriber. The
allotment is the acceptance of the offer and the contract is concluded when the acceptance
comes to the notice of the subscriber, or when the acceptance is posted.

The Act says very little about the transfer of certificated securities. Section 35(1) of the Act says
that ‘[a] share issued by a company is movable property, transferable in any manner provided
for or recognised by this Act or other legislation’. Section 51 of the Act, which is headed
‘Registration and transfer of certificated securities’, simply provides regarding transfer that ‘a
company must enter in its securities register every transfer of any certificated securities’ but
must do so only if the transfer ‘(a) is evidenced by a proper instrument of transfer that has
been delivered to the company; or (b) was effected by operation of law’. Section 51(1)(a)(iv)
also implies that restrictions can be placed on the transfer of the securities.

When a purchaser enters into an agreement with the seller of securities in a company, the
seller ‘cedes’ the rights attached to the securities to the purchaser. The rights are therefore
transferred by cession. A cession is a transfer of a right. Mere agreement is sufficient for a
valid cession of the rights attached to a security. Delivery of the security certificate is not a
requirement for the validity of the cession of rights arising out of securities. Delivery is simply
evidence that the cession has taken place. It is, however, the intention of the parties ‘that
determines when the rights are ceded; and no doubt in most cases that intention is present
when, and only when, the share [security] certificates together with a signed blank transfer
form are delivered by the seller to the purchaser’

Position before registration (and after cession) – when are the rights enforceable by the new
shareholder?
In the case of shares, although cession has taken place, it does not, it appears, make the
purchaser a shareholder in the company. This view is based on the definition of ‘shareholder’
in s 1 of the Act, which provides: ‘shareholder’, subject to section 57(1), means the holder of
a share issued by a company and who is entered as such in the certificated or uncerti ficated
securities register, as the case may be. It appears that it is only once the purchaser is
registered as the shareholder in the company’s securities register that he or she can exercise
the rights attaching to the shares. Until registration it seems that the transferor holds the
shares and the rights deriving from the shares for the exclusive benefit of the transferee. The
transferor will have to act in accordance with the instructions of the transferee as the
beneficial holder and owner of the shares.
The general rule is that shareholders have the right to deal freely with their securities.
However, the Memorandum of Incorporation or the rules of a company may restrict
transferability of its securities (s8(2)(b)). In the case of private companies such restriction is of
course obligatory.

A common restriction on transferability is making the right of transfer subject to a right of pre-
emption. Usually this involves a provision that a member who wishes to dispose of his or her
shares must first offer them to the other shareholders pro rata to their existing shareholdings
at a price to be determined in a prescribed way. If the Memorandum of Incorporation
empowers the directors to allocate the shares among such shareholders of the company as
the directors decide, the directors do not have to allocate the shares to the bidding
shareholders in proportion to their shareholding. In fact, a bidding shareholder need not be
allocated any shares.

Visser Sitrus (Pty) Ltd v Goede Hoop Sitrus (Pty) Ltd 2014 (5) SA 179 (WCC):
The power to refuse to register a transfer of shares must thus be exercised in what the directors
consider to be the best interests of the company. More specifically, the clause conferring the
power has in mind that there may be circumstances in which a company’s best interests would
be served by not having the proposed transferee as the holder of the shares in question. The
board might consider that it would be preferable, in the best interests of the company, that the
proposed transferee should not become a shareholder at all or that he should not acquire a
greater stake than he already has. The exercise of the power will often, by its very nature,
result in prejudice to the parties to the proposed transfer (at least one of whom – the transferor
– would be an existing shareholder)

Smuts v Booyens /Markplaas (Edms) Bpk v Booyens 2001 3 All SA 536 [SCA]:
In this case it was held that if a company MOI restricts or places acondition on the
transferability, any attempt to transfer the shares while that requirement hasnot been fulfilled
that transfer will be void.

Shares can be used to secure a debt. This is done by cession in securitatem debiti (cession as
security for a debt), which may be done in two ways:
i. The shareholder can pledge his or her rights to the cessionary (ie the transferee); or
ii. The shareholder can cede them out-and-out to the cessionary subject to the condition
that they will be ceded back to him or her on repayment of the debt.

Whether the cession is a pledge or an out-and-out cession depends on the intention of the
parties. The default position is the pledge construction.

Requirements for Transfer of Certificated Sh ares:

(i) underlying cause for transfer
(ii) Cession
(iii) Delivery of Transfer Form to company
-Transfer must be ‘evidenced by a proper instrument of transfer that has been delivered to the
company (section 51(6)) (Form in 1973 Act)
(iv) Delivery of share certificate to company
- not a statutory requirement, but implied, and it’s good practice.
Company’s obligations after transfer
(i) endorsement of share certificate in terms of section 51(4)(b)
(ii) record transfer (and details of new shareholder) in securities register in terms of section
51(5)
Transferee OR his nominee thus becomes a registered shareholder.

Uncertificated securities:
These only exist in the form of electronic records. The rights and obligations are generally the
same. So far everything that applies to certificated shares, applies to uncertificated. The only
difference now comes to sections that only apply to uncertificated securities.

In order to understand the provisions which, apply to uncertificated securities, it is necessary to

have some general understanding of the electronic settlement system used in the listed trading
environment and the way in which it functions. In 1997 the JSE Limited launched an electronic
settlement system known as STRATE (an acronym for ‘Share Transactions Totally Electronic’)
(‘Strate’) to replace the existing system, which was based on the manual settlement of listed
share transactions. The main components of the Strate system are the Central Securities
Depository (or ‘CSD’) and Central Securities Depository Participants (‘CSDPs’ or
‘participants’). The function of the CSD is to oversee, control and manage the
dematerialisation of securities, Strate and the participants. The CSDPs or participants are
entities (mainly banking institutions) which have met certain qualifications and requirements
laid down by Strate. They keep and manage electronic share accounts for investors or
brokers. Only participants (not brokers or investors) may liaise directly with the CSD.

Registration of uncertificated securities

If a company has issued uncertificated securities or if its issued certificated securities have
become uncertificated because they have been dematerialised, the Act provides that
prescribed details of the securities (including ownership details) must be kept in the company’s
uncertificated securities register. The uncertificated securities register forms part of the
securities register of a company and any information contained therein is presumed to be
correct unless the contrary is proved

Transfer of uncertificated securities

Uncertificated securities are transferred from one person to another without any physi cal scrip
or paper changing hands. The Strate system works as follows: when a trade has been
completed (ie the seller of listed [60] [61] [62] [63] [64] uncertificated securities has agreed to
sell them and a purchaser has agreed to buy those securities at a particular price) brokers
signal - via Strate - the participant for the seller, and the bank, as the CSDP. The seller’s
CSDP checks that it is in possession of the securities and, if so, these are electronically flagged
to indicate that they are to be sold. The bank acting on behalf of the purchaser examines the
purchaser’s account balance to confirm that the funds are available to settle the trade. If so,
the seller’s securities account balance is temporarily frozen. The banks are then electronically
signalled for payment. While the buyer’s bank account balance is debited the seller’s account
will be credited for payment of the transaction. The relevant participants debit the seller’s
securities account and credit the purchaser’s securities account. In this way the trade is settled
finally and irrevocably five working days after it has taken place. It is important to note that a
transfer which takes place in this way occurs despite any fraud, illegality or insolvency that
may affect the uncertificated securities or transaction. Only if a transferee was party to, or had
knowledge of, the fraud, illegality or insolvency is he or she prohibited from relying on this
‘validity’ provision. In all other circumstances the transfer of ownership is valid and cannot be
challenged or reversed. This protection of the good faith transferee is one of the cornerstones
of the Strate system.

Section 53 - Uncertificated shares can only be transferred via ‘properly authenticated

instruction’, in terms of a court order, or by operation of law.
Procedure for transfer via instruction:
(i) Voluntary transfer begins with instruction from client, to broker, to CSD participant
(ii) Effected by the CSD or a CSDP
(iii) Transfer completed by debiting and crediting relevant securities registers

Security by cession in securitatem debiti

As was explained previously, shares can be used to secure a debt. However, when one is
dealing with uncertificated securities there is no physical certificate that can be delivered to
affect the cession. Although not vital to secure the cession, delivery of a certificate may be very
important evidence that cession has in fact taken place. To address this issue the legislation
provides that a pledge or cession to secure a debt must be reflected by an entry in the
(electronic) account of the pledgor or cedent indicating that the securities have been pledged
or ceded. The interest in those securities may then not be transferred except with the written
consent of the pledgee or cessionary.
Practice questions:
Assume that Roosknop, for purposes of this question, is a public company (Roosknop Ltd.)
and that the shares are listed on the JSE. Nthombi’s shares in Roosknop are held by her
broker’s (Shares Secure’s) nominee company in an uncertificated securities register
administered by Computershare.
Half of Nthombi’s shares are sold on the securities exchange to Zolly and after
Computershare received a properly authenticated instruction in terms of the applicable rules,
the shares are transferred into the name of Zolly in the uncertificated securities register. The
employee of Shares Secure who sent the instruction was however not authorised by Nthombi
to sell her shares. When Shares Secure received the purchase price, it was paid over by the
employee to the bank account of a close corporation controlled by the wife of the employee.
1) Did a valid transfer of the shares to Zolly take place, despite the absence of authority on
the side of Shares Secure to sell the shares?
2) Can Nthombi claim the shares from Zolly or demand the correction of the uncertificated
securities register due to the theft of her shares?

Answer:
Uncertificated shares will be transferred if a participant received a properly authenticated
instruction ito rules of CSD (s 53(1)(b)).
Transfer occurs through debiting and crediting of the respective accounts in the uncertificated
securities registers (s 53(2)).
Transfer of ownership takes place despite fraud or illegality, provided that the transferee acted
in good faith (s 53(4)).
Court may not order removal of name of transferee from securities register unless he was a
party to, or knew of the fraud (s 53(5)).

Application and conclusion:

Computershare is a participant and received a proper authenticated instruction ito rules of
CSD.
It also seems that that the debiting and crediting of respective uncertificated securities registers
took place in accordance with the Act.
Zolly also acted in good faith. At least, there is no evidence that Zolly acted in bad faith.
The shares were thus validly transferred to Zolly, despite the broker’s lack of authority.
Accordingly, Ntombi cannot reclaim the shares.
A court can also not ordered the removal of Zolly’s name from the uncertificated securities
register.
Side note: Nthombi does have a claim for damages against her broker for the removal of her
name from the securities register, in terms of section 55(1) of the Act.
Practice Question
Assume that the shares are not listed and that Nthombi holds the 1000 shares in terms of a
share certificate, which is kept by her broker (Shares Secure) for safekeeping, and that an
employee of the broker, without Nthombi’s authority, sells her shares to Zolly in a private
transaction.
Assume that a share certificate and registration document was delivered to Zolly by the
employee after he forged Nthombi’s signature on the registration document and that the
shares are registered in Zolly’s name.
1 Did a valid transfer of the shares to Zolly take place?
2 Can Nthombi claim the shares from Zolly or demand the correction of the certificated
securities register due to the theft of her shares?
Discuss both questions and provide reasons for your answers.

Rule:
A cession is required for a valid transfer of certificated shares. Cession requires consensus
(that transfer takes place) between the transferor and transferee.
In terms of the law of agency, a principal can only contract on behalf of a principal if the
agent has the authority to do so.
The broker is an agent of Nthombi, and can thus only validly cede her rights if she has
authorised the cession.
If a broker sells shares without the authority of the owner, there is no consensus, and thus no
cession (unless estoppel or ratification), between the owner of the shares and the purchaser.
Section 161: Application to protect rights of securities holders

Application and conclusion:

On the facts, the broker did not have Ntombi’s authority to sell the shares.
Accordingly, no valid cession and no transfer of the shares took place.
There is no indication that Ntombi created any impression that the broker had authority and
estoppel does not apply, therefore estoppel is not applicable.
Nthombi clearly does not want to ratify the contract, but she could if she wanted to.
Conclusion: The cession and the transfer are void.
If Zolly’s name was already recorded in the securities register of the company, the register can
be rectified (corrected) in terms of s 161).