The purpose of this article is targeted at persons purchasing shares in a private company and which private company has elected to evidence its shares by means of share certificates.

When buying shares in a private company, one must be particularly careful to ensure that ownership of the shares is properly acquired before parting with one’s hard earned money.  

In view of the aforementioned, this article will be aimed at discussing firstly, what a “share” and the “transfer” of a share actually entails and secondly, how to ensure that ownership has properly passed before effecting payment.

What is a “Share” actually?

The Companies Act, 2008 (“the Companies Act”) defines a “share” as “one of the units into which the proprietary interest in a profit company is divided.”

Fidelis Oditah once explained the legal nature of shares as “a bundle of intangible property rights shareholders receive from the company in return for their contribution of cash or non-cash assets to the company”. He further went on to add that “Shares are the units into which shareholders’ rights of participation in the company’s cash flow, management and on a return of capital, are divided.” 



How are shares transferred?

Having regards to the nature of “shares” it is clear to see that when dealing with shares it is not as simple as purchasing a tangible object such as a desk or chair. When one buys a tangible object it is clear to see once you have acquired it as you are able to physically take possession of the tangible asset. This is not the case with shares as you are essentially dealing with a “bundle of intangible property rights”.

Section 35(1) of the Companies Act states that “A share issued by a company is movable property, transferrable in any manner provided for or recognised by this Act or other legislation.”

It is generally accepted that that “transfer” includes (i) the cession by the existing shareholder to the new shareholder of his rights in and to the shares, (ii) the registering of the new shareholder in the company’s share register as a shareholder in the company and (iii) the issuing of a share certificate to the new shareholder.

Section 51(6) states that a company may enter a person into its share register only if the transfer is evidenced by a “proper instrument of transfer that has been delivered to the company.”

It is not expressly provided in the Companies Act that the share certificates held by the seller must be delivered together with the transfer form when effecting transfer of company shares, although the requirement that a proper instrument of transfer be delivered implies that this is required. If these two elements are present then in all probability the new shareholder will be capable of being registered in the company’s share register as a shareholder of the company (please take note that it is not the intention of this article to deal with other matters which could affect the transfer of shares such as pre-emptive rights, the directors right to refuse transfer and other factors which restrict the transferability of shares). Furthermore section 51 of the Companies Act does not expressly provide that the company must issue new share certificates to the new shareholder however this too is implied by section 51.

Notwithstanding the aforementioned, when shares are sold, the selling shareholder cedes the rights attached to those securities to the purchaser. The aforementioned cession is a separate aspect to the transfer as discussed above. For cession to take place there must be an intention by the seller to cede his or her rights in and to those shares to the purchaser and for the purchaser to accept such cession.

It must be noted that the delivery of the share certificate is not a requirement for the validity of the cession of rights arising out of shares. Delivery is merely evidence that the cession has taken place. It is the intention of the parties that determines when rights are ceded and in most cases the intention is only present when, and only when, the share certificate together with a signed transfer form are delivered by the seller to the purchaser.

How to ensure that shares have been transferred to you

In addition to a written contract which clearly indicates that the seller wishes to sell, cede and transfer the shares in question to you as the purchaser, ons should further ensure that the following documents are delivered to your posession:

  • share transfer form signed by the exiting shareholder;
  • the original share certificate pertaing to the shares;
  • copy of the board resolution of the company; a certified extract of the share register reflecting that you are a shareholder in the company and the holder of the shares in question;and
    • consenting to the tranfer;
    • undertaking to update the share register of the company; and
    • authorising two individuals to sign a new share certificate in your favour;
  • a certified extract of the share register reflecting that you are a shareholder in the company and the holder of the shares in question; and
  • an orginal share certificate signed by at least two individuals authorised by the persons referred to in the board resolution.