A cautionary note on fractional shares

A cautionary note on fractional shares

27 September 2018

What is a fractional share / “shareholder”?

A fractional share is less than one full share. This implies that ownership in a single share is given to more than one person, for example, one share is divided between party A and party B rendering each the holder of 0.3 and 0.7 fractional shares in a profit company, respectively. The Companies Act, 71 of 2008 (as amended) (“the Act“) does not expressly forbid or regulate fractional shares. However, party A and party B cannot qualify as “shareholders” in a company for purposes of the Act. In terms of the Act, a shareholder “means the holder of a share issued by a company”. Such holder of a “share” must hold “one of the units into which the proprietary interest in a profit company is divided”. In other words, for a holder of equity to qualify as a shareholder in terms of the Act, the holder must hold at least one share and not a fractional share. Henochsberg on the Act also notes that a share cannot be divided into fractions.

Voting rights

Shareholders are generally entrusted to vote on any matter to be decided by the company. Such voting rights are defined in the Act as “the rights of any holder of the company’s securities to vote” on the proposed matter. A “share” is included in the definition of “securities”.

However, fractional shares do not enjoy general voting rights in terms of the Act. This means that issued fractional shares risk creating administrative anomalies when having regard to the total votes exercised on a resolution.

Section 37(2) of the Act states that each issued share of a company, has associated with it one general voting right, except to the extent provided otherwise in the Act or the preferences, rights, limitations and other terms determined in terms of the memorandum of incorporation (“MOI“). For our purposes, this section seems to suggest that fractional shares do not enjoy general voting rights given that an “issued share” must be at least one unit. This would result in party A and party B not enjoying general voting rights in matters to be decided by the company. Furthermore, we submit that if 40 holders own 2.5 fractional shares each in a company, they, in terms of section 37(2), are only entitled to vote using the two full shares for their voting rights, resulting in the other 0.5 fractional shares (multiplied by 40), being forfeited. How is the company meant to deal with these anomalies, if not otherwise provided in the MOI?

In addition, section 37(3)(a) of the Act states that every issued share has an irrevocable right of the shareholder to vote on proposals to amend the preferences, rights, limitations and other terms associated with that share. Applying the same logic as above, it would mean that for any proposed changes to the MOI regarding fractional shares, the holders of fractional shares will not be allowed to vote on such changes to their shares, subjecting their rights to the peril of other shareholders (if not otherwise provided for in the MOI).

Rectifying fractional shares issued

The good news is that an existing company which has issued fractional shares may still rectify this position by increasing the number of authorised shares (if needed); cancelling the currently issued fractional shares and issuing such numbers of whole shares to ensure the equivalent shareholding percentages in the company. This can be done by way of capitalisation shares in terms of section 47 of the Act. Alternatively, the company can resolve to make payment considerations instead of issuing fractional shares. This way, parties maintain their whole shares and receive monies instead of their fractional shares entitlement.

It is evident from the above that fractional shares will create a plethora of administrative difficulties for any company, resulting in wasted time and additional legal expenses. These can simply be avoided by issuing whole shares instead of fractional shares. To avoid finding oneself in a situation where fractional shares become an “option”, a company simply needs to authorise enough shares (we normally recommend millions) to enable initial and future issues of whole shares. If your company has existing fractional shares in issue, please don’t hesitate to contact us to help you solve this headache.

Treating customers fairly – a requirement in terms of fais

Treating customers fairly – a requirement in terms of fais

In terms of the Financial Advisory and Intermediary Services Act 37 of 2002 (“FAIS“), The Financial Services Board (“FSB“) published the Treating Customers Fairly (“TCF“) outcomes as the foundation of the FSB’s objectives for consumer protection and market conduct. The need for these outcomes is because of the imbalances previously experienced between financial services consumers and regulated financial entities, rendering consumers vulnerable to market conduct abuse. As financial products are complex, poor decision making and bad advice in respect of these products can lead to unintended consequences being experienced and suffered by a consumer a long time after the transaction was entered into.

The aim of TCF

The TCF outcomes are aimed at reducing market conduct risks and protecting consumers of financial products. The outcomes must be delivered to consumers throughout the product life cycle and at all stages of the relationship with the consumer. The TCF outcomes must be incorporated throughout the company so that everyone understands what TCF is and so that they can apply it.

The TCF outcomes address certain issues that are common in all industries. The outcomes may assist companies and consumers in instances where consumers have unrealistic expectations about the financial products/services being offered by companies even where the consumer was treated fairly; and on the other hand, where a consumer with a low level of understanding about the product/service is satisfied with the service received from the company but is unaware that he/she has been treated unfairly.

The key principles

TCF focuses on two key principles:

  1. ensuring that consumers understand the risks and benefits of the financial products/services they are investing in; and
  2. minimising the sale of unsuitable products/services to consumers.

What TCF is not

TCF is not about creating satisfied consumers at all costs. A satisfied consumer can still be treated unfairly and not know that he/she was treated unfairly.

TCF does not absolve consumers from making decisions and taking responsibility for such decisions – consumers still have a responsibility to know what they are getting into and to take responsibility for their decisions.

It also does not mean that all companies must do business in an identical manner – as long as business is done fairly and transparently, TCF requirements will be met.

The 6 TCF outcomes

  1. Culture: consumers should be confident that they are dealing with companies where TCF is central to the corporate culture;
  2. Products and services: products and services marketed and sold in the retail market should be designed to meet the needs of identified consumer groups and should be targeted according to such identified groups;
  3. Clear and appropriate information: consumers must be provided with clear information and kept appropriately informed before, during and after point of sale (i.e. throughout the product/service’s life-cycle);
  4. Consumer advice: where advice is given, it must be suitable and should take account of the consumer’s circumstances;
  5. Product performance expectations: products should perform in the way that consumers have been led to expect and service must similarly be of an expected acceptable standard; and
  6. Post-sale barriers: consumers must not face unreasonable post-sale barriers imposed by companies when they want to change products, switch providers, submit a claim or make a complaint.


The TCF outcomes were created to ensure that the fair treatment of consumers is imbedded in the culture of companies operating in the financial services industry. The outcomes must be implemented throughout the life-cycle of the product/service, meaning that financial service providers have a duty to continuously ensure that consumers are treated accordingly.

Enforcement of the TCF outcomes will occur through a range of deterrents with the objective of preventing unfair treatment of consumers, and may be penalised through mechanisms such as intensive and intrusive supervision, naming and shaming of offenders, and financial penalties.

Essentially, the ultimate goal of TCF is to ensure that the financial needs of consumers are suitably met through a sustainable industry. If a financial services provider aims to achieve the outcomes, the direct effects should be appropriate financial products and services and heightened transparency in the industry.

Observations on company names

Observations on company names


Registered vs trading names:





What you need to know and the CPA’S requirements

In terms of section 79 of the CPA:


  • the person’s full name as:






Possible difficulties


Going forward


What is the deal with preference shares? Part 1: liquidation and dividend preference


(This post is the first in a series, giving practical information to start-up founders to gain a better understanding of the mechanics of preference shares. This post will focus on liquidation and dividend preferences.)

Venture capital investors are almost always aiming to invest in start-ups through “preferred” equity, typically referred to as preference shares. Preference shares trump ordinary shares, as the holders of preference shares normally receive preferential treatment in the event of a liquidation of the business. (For these purposes, a liquidation event can be the insolvency, a dissolution or a sale of the company.)

When start-ups enter funding stages, the good and/or lucky ones may end up with a few term sheets from an array of interested investors. These term sheets often come with an abundance of terms regarding the structure of the preference shares. As an inexperienced founder, this can be an overwhelming experience and it can be a daunting task to understand which terms are “standard” and which are particularly important. Venture capital investors have the upper hand due to their experience in this area – this is where professional advisors, such as start-up lawyers, come in handy in assisting the start-up and its founders.

The purpose of this series of articles is not to cover all aspects of term sheets, but to give you, a start-up founder, a better understanding of what preference shares really are, what to look out for and how they are typically structured during a series seed or series A investment.

What are preference shares?

When early-stage start-ups issue shares, there are generally two classes of people receiving shares: founders and investors. Founders typically receive ordinary shares and investors generally receive preference shares in return for their investment and risk taken.

The main characteristic of preference shares is that they provide for the preferential treatment of their holders and rank above ordinary shares in the event of a liquidation event. This means that if a company is unable to pay its debts or its business is sold, the investor will have a first claim on the company’s assets or sale proceeds over ordinary shareholders i.e. the founders. This is a protection mechanism given to the investor in return for the risk incurred when investing in the company.

Preference shares may further entitle the holder to preferential dividends, based on the profits of the company. Preference dividends are normally fixed at a certain annual percentage. As a preference shareholder, the investor will receive dividends ahead of ordinary shareholders when dividends are declared by the board of the company.

Liquidation preference

The liquidation preference determines how the pie is shared on a liquidation event. Preference shares almost always come with a liquidation preference, but the amount of the liquidation preference can differ. For example, the investor’s preference shares may come with a multiple of 1x purchase price. This means that upon a liquidation event, the investor will be paid 1x the issue price of his shares before the ordinary shareholders get anything. (For example, if the investor invested R1 million into the company, the investor wants R1 million paid back to him before the founders receive anything.) Similarly, if the investor’s liquidation preference is 2x purchase price, the investor will receive a multiple of 2x the issue price of his shares before the ordinary shareholders get anything.

As a start-up founder, you need to know what you are promising the investor. You might realise a few months down the line, when it’s too late, that you have given the investor a preference of 10x return on liquidation, leaving you and your co-founders with nothing. How a liquidation preference is structured can make a significant difference when the proceeds from a sale are split between the shareholders. Start-up founders should pay particular attention to this term.

Participating and non-participating

Generally, as seen above, the preference shareholders receive preferential returns. This means that they are paid back their initial investment plus some preferential payment (the liquidation preference multiple) before any other proceeds are disbursed. The extent to which additional funds, beyond this preference, are disbursed to investors depends on whether the equity is participating or non-participating preference shares. Participating preference shares take a share of the additional proceeds, along with ordinary shareholders, after receiving their preferential returns. For example, the preference shareholder participates in the equity apportionment in addition to receiving his liquidation preference. Holders of non-participating preference shares, however, only receive the preference plus any accrued dividends.

For example, an investor invests R2 million into a company at a 2x liquidation preference and at a post money valuation of R10 million (giving the investor a 20% stake in the company). The company is sold for a net sale price of R20 million. Therefore, the investor receives his 2x R2 million liquidation preference (receiving R4 million) and a R16 million surplus remains. If the preference shares are participating preference shares, the investor will receive an additional 20% of the surplus amount (a further R3.2 million). Alternatively, if the shares are non-participating preference shares, the other shareholders, i.e. the founders, will distribute the surplus among themselves according to their shareholding percentages.

An important point to note is that “participation” in venture capital deals generally refers to capital, however, it may also refer to a participation in pro rata dividends beyond the fixed preference dividend. As a founder, you must have clarity on this from the start.

Dividend preference: cumulative and non-cumulative

Preference shares often provide for a preferential dividend as well – investors with preference shares are entitled to receive dividends before ordinary shareholders.

Dividends increase the total return for the investors and decrease the total return for ordinary shareholders. Dividends are often stated as a percentage of the share issue price for the preference shares (for example, 8% of the total share issue price). There are at least three general ways dividends are structured in venture capital deals: (i) cumulative dividends; (ii) non-cumulative dividends; and (iii) dividends on preference shares only when paid on the ordinary shares.

Dividend structures (i) and (ii): If a company does not declare a dividend in respect of a particular year, then preference shareholders with a right to non-cumulative dividends would lose the right to receive a dividend for that year. However, preference shareholders with a right to cumulative dividends would be able to carry over their right to receive a dividend for that year, entitling them to receive that dividend in the future, together with the dividend declared in that next year (before any dividends are payable to ordinary shareholders). Clearly, cumulative dividends are the most beneficial to the investor and the most burdensome on the founders (being ordinary shareholders).

Dividend structure (iii): Where dividends are paid on the preference shares only if paid on the ordinary shares, the preference shares are treated as if they had been converted into ordinary shares at the time the dividend is declared. This is the least beneficial to the investor and the most beneficial to the founders.

If not clearly understood, agreeing to a cumulative dividend can lead to significant and unexpected monetary burdens on the available and distributable profits for you and your co-founders. As a start-up founder, you must understand the different ways in which dividends can be structured. You need to consider the company’s projected cashflow from now until the expected exit and the impact the dividend preference has on shareholders.

Concluding remarks

We trust that the issues highlighted above will give you some insight and guidance as to why it is so important to have a good understanding of the preference share terms you are likely to find in a term sheet. If you would like to discuss any of these topics in more detail, please feel free to contact our Start-up Law team and we’ll gladly assist.

Service agreements: why they are necessary and what they should cover

Service agreements: why they are necessary and what they should cover



Some key considerations for a service agreement are as follows:

  1. Description of your services:


  1. Duration of the agreement:


  1. Risk provisions:


