STUDY UNIT 4

SHARE TRANSACTIONS

 Share cap represents nb item on BS, the procedure applicable to any amendment to share capital is prescribed by
the Companies Act of 1973

SHARE CAPITAL STRUCTURES

 Authorises share capital - maximum amount of shares a company may issue as described in Memorandum and
Articles of Association
 Issued share capital – shares that comp have issued

Increase Share Capital (p & np)

P – Issue 50000 ordinary shares of R1 ea at premium of 0.50 ea

Bank 75000
Share Capital 50000
Share Premium 25000

NP – issue 50000 np ordinary shares at 1.50 ea

Bank 150000
Stated Capital 150000

Increase stated capital (np) by transfer of reserves/profits to stated capital account with/without a distribution of shares

With Distribution – issue np capital increased by 12,500 shares issued at R2 ea

Reserves/Retained Earnings 25,000
Stated Capital 25,000

Without Distribution – transfer a reserve to stated capital without increase in number of np value shares
Reserves/Retained Earnings 25,000
Stated Capital 25,000

Consolidate share capital and reduce number of issued shares in the process

P shares now have larger nominal value and np shares are reduces
Net effect on total share capital is nil, but disclosure of shares will alter as follows:
P shares – nominal value is larger for both authorised and issued share cap, while number of shares is lower iro issued
share capital
NP shares – number of shares is lower iro issued capital

Increase number of issued np shares without an increase in stated capital

Relates to sub-division of existing number of shares

Net result in total share capital for disclosure is nil
Only disclosure of number of shares will b affected

Division of p shares into shares with a lower value than is provided for in the Articles

Share Capital on BS will remain constant in total

But disclosure in note iro authorised and issued share capital would change
Conversion of ordinary/preference shares having p value to stated capital

Comp can convert all of its ordinary/preference share capital having a p value into:
Stated capital comprising np value shares
In accordance with provisions of Act, provided that any share capital not fully paid up cant b converted

Ordinary share capital 50,000

Share premium 25,000
Stated capital – ordinary 75,000

Conversion of stated capital into p value shares

Comp can convert stated capital (either ordinary or preference)

Into share capital comprising shares with a p value
In accordance with provision of the Act

Stated capital – ordinary shares 75,000

Share capital – ordinary shares 75,000

Cancellation of unsubscribed shares

Comp may, at time of passing such a resolution, cancel shares which haven’t been taken up or agreed to b taken up, and
reduce the amount of authorised share capital by the shares so cancelled

SHARE PREMIUM

 If comp issues p value shares at a premium, the total amount of this premium is transferred to the share premium
account and the provisions relating to the reduction of share capital are applicable

Shares Issued in exchange for assets

 If an asset is exchanged for shares issued, the asset must be valued at the times and any amount of this valuation in
excess of p value of the shares must b allocated to the share premium account
Asset 50,000
Share capital 40,000
Share premium 10,000

Application of Share Premium

Share premium account may b used by comp for following purposes:

 A capitalisation issue
Share premium account 50,000
Ordinary Share capital 50,000

 Writing off preliminary expenses

Share premium account 5,000
Preliminary Expenses 5,000

 Writing off share issue expenses

Share premium account 7,000
Share issue expenses 7,000
  Writing off commissions paid and discount allowed on the issue of shares
Share premium account 8,000
Commission paid 8,000
 Writing off a redemption premium arising on the redemption of redeemable preference shares
Share premium 5,000
Preference shareholders/Bank 5,000

 Payment of the premium over the p value of shares acquired in accordance with section 85
Share premium account 10,000
Share capital account 100,000
Bank 110,000
(comp acquire shares themselves)
 Limitations places on the use of the share premium account to do write-offs:
- premium on the redemption of the redeemable preference shares may only b provided out of the share premium
account if the said redemption at a premium was embodied in the issue terms of the shares and embodied in the
affected comp’s Articles
- if ordinary shares are converted to redeemable preference shares, only that portion of the share premium account
which arose on the issue of these ordinary shares may b applied to the provision of the redemption premium on the
redemption of redeemable preference shares

STATED CAPITAL

 Total proceeds on the issue of np value shares are to b treated as share capital and allocated to an account called
“Stated capital”
 Same is applicable where an asset is exchanged for the shares issued, ie the total valuation amount must b allocated
to stated capital
 Bank/Asset at valuation 75,000
Stated Capital 75,000
 Stated capital may only b applied to the following:
 Write off preliminary expenses
Stated Capital 1,500
Preliminary Expenses 1,500
 Write off commissions paid on the issue of np value shares
Stated Capital 7,500
Share issue expense/Commission paid 7,500

VOTING RIGHTS

Section 193 - Voting rights of shareholders

 Ea sharh of a comp having share capital is entitled to one vote for every share held
 In a comp ltd by guarantee, unless articles provide otherwise, ea member has one vote

Section 194 – Voting rights of preference shareholders

Articles of a comp may exclude the voting rights of pref shareh subject to the following:
 If pref dividends are in arrears(6+months), the pref sharh are entitled to vote
 If any part of redemption payments are outstanding, pref sharh are entitled to vote
 If resolution is proposed and it directly/indirectly affects the rights of pref sharh, including the winding up of comp
or capital reduction, the pref sharh are entitled to vote

Section 195 – Determination of voting rights

 Member of a public comp with p value shares is entitled to same % of votes as the proportion that his shares bear to
total number of shares issued
 Ea np value share carries one vote
  Voting rights of pvt comp is determined by its Articles, but may not be a provision whereby certain shares don’t
have voting rights
 Articles of a comp may provide that:
- a chairman of a meeting has a casting vote
- number of votes to which a member is entitled above a certain number, doesn’t increase in direct rlshp to total
number of shares held, but in a lower proportion.
- may provide that number of votes are limited to a certain number

TYPES OF SHARES

Ordinary Shares (Equity Shareh)

 Don’t bear fixed dividend and payment of div on ordinary shares is considered only after provision has been made
for pref divs
 Depending on availability of profits, theres no limit to share of the profits a comp can b apportioned to ordinary
shares
 But subject to div that is recommended and approved for payment

Preference Shares

 Bear a fixed div %

 If sufficient profits are available, these shares enjoy preferential right iro divs
 Investor who buys pref shares in comp is more or less assured of a fixed income and a high degree of security
 Divs payable annually are calculated as follows:

Issued
10,000 8% pref shares of R1 ea

Dividends Payable
10,000 × R1 × 8% = R800

Cumulative Preference Shares

 Fixed pref dividend accumulates if its not paid out annually

 Comp is thus obliged to pay these divs as soon as funds become available
 Cumulative pref dividends not recognised should b disclosed

Participating Preference Shares

 These pref shares, share in profit of comp after the payment of preference dividend.

Convertible Preference Shares

 Are converted to ordinary shares at a specific date in future

Redeemable Preference Shares

 Pref shares may b issued with various rights

 In classifying pref share as a liability or equity, a buss assesses particular rights attaching to the share to determine
if exhibits characteristic of liability
 If pref share provides for redemption on specific date or at option of holder, it meets def of liability if issuer has an
obligation to transfer assets to holder of the share
 An option of issuer to redeem share doesn’t satisfy def of liability, coz issuer doesn’t have present obligation to
transfer the assets to shareh. Redemption is solely at discretion of issuer
  When pref shares are non-redeemable, appropriate classification is determined by other rights that may attaché to
them
 When distributions to holders of pref shares are at the discretion of issuer, then shares are equity instruments
 Companies Act states that if pref shares are not redeemed from the proceeds of new issue, an amount equal to the
nominal value of the shares must b transferred to the Capital Redemption Reserve Fund (CRRF).
 CRRF may b used to issue capitalisation shares

ISSUE OF CAPITALISATION SHARES

 Sometimes comp build up large reserves from profits

 For whatever reason, may not b desirable to distribute these reserves in form of dividends, as could affect cash
position of comp
 So that sharh can derive some tangible benefits from these reserves, comp may decide to capitalise reserves and
distribute them among shareh in form of capitalisation shares
 No cash is paid out, but ea shareh receives his rightful share of the reserves in form of capitalisation shares
 Cap issue is frequently referred to as a bonus issue since no payment received from sharh for an issue of this kind
 Shares are issue din same proportion as existing shareholding and merely a book entry which converts reserves into
share capital
 Investor gets cap shares without paying anything for them
 Number of shares held will increase, but total value of share portfolio will remain the same
 Value per share drops, but total value of share portfolio remains constant
 Only entry investor will make in its acc records, Investment Account, is increase # shares and reduce value per
share
 In issuing these shares, issuer will convert reserves into share capital. Companies Act permits use of share
premium acc for this and allows use of capital redemption reserve fund
 In absence of these reserves, reserves available for distribution of divs could b used
 Dt. Relevant reserve account. Ct. Share Capital account
 Capital Redemption reserve fund 25,000
Share premium 20,000
Retained Earnings 5,000
Issued ordinary share capital 50,000

RIGHTS ISSUES AND OPTIONS

 One way comp can raise cash funds is to have a rights issue
 Rights/options to new shares are offered to existing shareh based on their existing shareh
 To ensure that options/rights to acquire new shares are exercised by existing shareh, the issue price of new shares
usually set at a price below current market prices
 New shares at lower price can usually b sold at higher price just after acquired and existing sharh can thus make a
quick profit
 If existing sharh don’t wish to get the new shares, can sell their right to other investors and also make a further
profit
 Comp also thus expands its sharh base
 Issue price must b carefully considered. High enough to get enough cash, but low enough for sharh to exercise their
right to obtain them
 When new shares are subscribed for, then sharh has exercised his right, thus why its called an rights issue

Procedure for rights issue is as follows:

 Comp announces that it intends to have a rights issue
 Rights issue then takes place which means that the rights certificates are issued to existing shareholders
 Right with a value separated from the shares which produces that right usually exists and it is traded separately on
the securities exchange
  Sharh can then do the following:
- exercise right by paying the rights issue price and acquire the new shares
- sell right to member of public, who can then acquire shares in comp by converting rights into shares

General
 Before rights certificates are issued, shares are traded cum rights (share and right are inseparable)
 Cum right value of shares that shareh held on date of announcement is divided into a rights value and on ex-rights
share value on date on which the rights certificates are issued
 The right obtained can b traded on its own and share will then trade without the right (ex-right)
 Value of ex-right share is lower than value of share on the date on which the rights are announced
 Right to buy new shares at rights issue price applies only for a certain period of time as was determined by comp,
following which the rights expire and cant b exercises

UNDERWRITING OF SHARE ISSUES

 If comp gets funds form public, such funds are obtained by means of a shares issue
 Comp would normally avail themselves of the services of a financial institution to handle the issue
 Finan institutions frequently underwrite such issues
 Underwriter guarantees that if whole issue of shares isn’t taken up by the public, the finan inst will itself take up the
remainder
 The underwriter’s commission is the commission the underwriter received in return for furnishing a guarantee that
the whole issue will b taken up
 Commission is stipulated in the underwriting agreem and is payable in the form of either cash or paid-up shares in
the company concerned
 Commission is calculated on the portion being underwritten, irrespective of whether the entire issue is taken up or
not.
 Comp may pay remuneration to underwriter for his underwriting or his undertaking to subscribe for shares in the
comp provided that commission doesn’t exceed 10% of price at which the shares are issued, or a lower rate
provided in the articles of association
 Commission and discount, iro shares which have not yet been written off, must b shown under a separate heading in
the BS
Example 1.
Broker ltd underwrites an issue of 50,000 ordinary shares of R2 each . underwriting commission is 7%. Public takes up
45,000 shares.

Commission = 50,000 × R2 × 7%
= R 7,000

Example 2
If underwriter guaranteed for full issue, then he is liable for the remainder 5,000 shares of R2 each

DIVIDENDS

 Profit of a comp is divided amongst sharh in form of dividends

 Div can b defined as that portion of profit of comp which is divided among the sharh
 When divs are declared, the rights of minority sharh should always b taken into account
 If fixed % has been determined for them, divs for these people should always b declared at the fixed tariff
 No restriction on ordinary shares ad declaration of divs will depend on available profit
 If profit is large, a large div will also b possible
 If profit is small, div will b small
 Pref sharh have pref over ordinary sharh as far as div go
 If ordinary div is declared or paid, board of directors are obliged to recommend a pref div and sharh are obliged to
approve it
 Any div declared must b proportionate, thus all sharh holding same class of shares, must get same div
  Divs can b in form of capitalisation shares
 If profit available, divs still have to b declared at annual general meeting
 Only then do divs become a liability in comp books in that they have not been paid yet over to shareh and shareh
have the right to demand payment
 General procedure when divs are declared is that the directors recommend a % as a basis for declaring divs
 Shareh have the final say in this matter, however, and they are quite free to declare a lower div than the directors
recommended
 Doubtful whether shareh have the right to declare a higher div, since this could have a very unhealthy finance
effect on the comp
 In any event the shareh are always bound by amount of available profit, thus they cant declare a larger amount in
divs than the available profit allows
 Once divs been declared, comp is expected to pay them out to shareh in cash.
 Always necessary to bear cash reserves of comp in mind when determining the amount of the divs, coz if all
available cash is absorbed by this item it means comp might experience shortage of operating capital during next
financial period and consequently b unable to realise the same high profit
 Dividends may not b paid from capital, but only form realised profit
 Availability of profit for dividends has been subject of many court cases. In many its not easy to determine the
available profit, but at present we can mainly assume that the profit is that amount that remains of operating result
after provision has been made for all outstanding expenses, for unforeseen expenses and for the depreciation of
assets
 Provision has been made for all losses or possible losses, so that amount which is eventually shown as profit is pure
and accurate and doesn’t include a portion of capital or capital profits
 Pref sharh have a pref right to divs. Before ordinary div can b declared, pref sharh have to receive their div, which
is a fixed %
 If no distributable reserves are available in year to declare div, both ordinary and pref sharh forego their right to div
 Cumulative pref sharh retains his right to div even if no div are declared
 Since pref divs make up fixed % of pref share capital, the calc of divs is done on same basis as calculation of
interest
 For calc of ordinary divs, it makes no difference how long the holder of a share certificate has held the shares

Interim Dividends
 Declared before end of year
 Declaration of interim divs is subject to same req regarding available profit as is the declaration of annual divs
 Right to declare interim divs is usually reserved for directors of comp
 No interim divs can b paid by comp before all outstanding declared divs from previous years have been paid

Annual Dividends (final)

 Declared end of year from available profit
 When amount of final div is determined, the amount of interim divs which have already been taken from profit
should b duly taken into account
 Dt. Retained Earnings
Ct. Dividends payable
 Dt. Dividend Payable
Ct. Bank