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Thread: Original Shares

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    Original Shares

    Hi. I am really struggling to find the answers to the following question regarding the issuing of the authorized shares of a private company (even after literally hundreds of Google searches and reading of hundreds more pages):

    How does a person/persons who starts a business in the form of a (Pty) Ltd. (whether as Incorporators themselves or through another Incorporator) aquires all or some of the authorized shares?

    They will be the Original shareholders I think, and I found that some people refer to the Original Share Certificate as if it has more value than subsequent Share Certificates, but no-one says why.

    I know that subsequent shares must be bought and paid for by the new shareholders according to the Company Law, which is right, but must the real owners of the company (the entrepreneurs who started the business and may have gone through hell to have gotten it established) also BUY the original shares to become shareholders, seeing that it is the shareholders who are the legal owners of the company?

    If so, it just does not feel right.

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    When registered, a company will have an authorised share capital. Depending on whether it was before or after the 2008 Act (sometime in 2012) the shares would be par value shares or if after, no par value shares.

    Normally the original shareholders would acquire some or all of the shares on registration, from the authorised share capital. That would have been for cash or assets. The authorised share capital remains unchanged, but the unissued shares naturally is reduced by the amount of issued shares.

    Subsequent issues to any share holders may be done from the unissued shares, in which case the proceeds would have been for the company.

    Alternatively, the original shareholder could've sold some of his shares and the proceeds would be his.

    There is no difference whatsoever between original shareholders and subsequent shareholders. Both are simply shareholders and if they hold shares of the same class, they have the same rights and obligations.

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    Dave A (26-Jun-19)

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    Hi Andromeda and thanks for answering my question. Perhaps you can also help me with my next question then. After a company is formed and no business has been done yet, the asking price for shares will then be much, much lower than what it may be worth someday - is there any criteria directors can use to determine the price of the original shares to themselves they are buying?

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    Sec 40 of the Companies Act determines that the company may only authorise the issue of shares for adequate compensation, as determined by the board of directors. This determination may also not be challenged (other than in terms of Sec 76 and 77., which basically requires that his actions be arms length and above board and is most frequently intended to prevent material understatement.)

    Assuming the shares are to be sold by an existing shareholder (as distinct from the company), then the seller may sell them for whatever he can get. Or less if he so wishes. It actually is not regulated by anything other than market forces.

    Sec 40 refers to an issue of shares by the company.

    If I understand your question correctly, the initial share issue authorised by the directors takes place at a value determined by the directors (most often one and the same person) but you must remember that the company needs to receive the proceeds. At least that transaction must balance; the equity represented by the share issue must balance with assets received. This value has no bearing on future share dealings.

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    Thank you for your explanation. It helped much.

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