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Company groups beware – are the transferability of securities sufficiently restricted?

Necessary restrictions on the transferability of securities to maintain status as a private company

Many private companies are at risk of falling outside of the definition of private company in the new Companies Act because the transferability of securities is not restricted sufficiently in it memorandum of incorporation. For a company to be private company in terms of the new Companies Act, the company’s memorandum of incorporation must restrict the transferability of securities. Under the old Companies Act one of the requirements for a company to be a private company was that its articles of association restricted the transferability of its shares.

“Securities”, as defined by the new Companies Act is a wider concept than shares. Shares are securities, but so are debentures and other debt instruments, no matter what form they exist in or what they are named, and whether or not they are issued or merely authorised.

Restricting the transferability of debt instruments in the Memorandum of incorporation

Recently there has been a flurry of activity as Companies have sought to comply with the changes brought about by the new Companies Act. Many companies have opted to amend their memoranda of incorporation with the standard form memorandum of incorporation. We have seen a number of these standard form memoranda; although the transferability of shares is restricted by means of pre-emptive rights, the transferability of debt instruments, whether the company is financed by debt or not, are transferability of securitiesnot similarly restricted. This means that the transferability of securities is not restricted, and therefore the company actually falls short of the definition of a private company as the investors in the company may sell their debt instruments against the company to any member of the public, unrestricted by provisions in the memorandum of incorporation.

Companies which are not private companies are by default public companies  and must therefore comply with the onerous requirements for public companies set out in the new Companies Act. Therefore all companies,  must ensure that their memoranda of incorporation are amended to restrict the transferability of all securities, including debt instruments and not only shares.

For further information or assistance contact Garth Watson at 021 702 7763 or garth@gunstons.com

Garth Watson

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