How do I know I'm a shareholder? Is a verbal shareholding agreement valid? How to prove shareholding? What is the difference between shareholding and profit share? What documents are required to ensure my shareholding in a company? Answers to some of the most common shareholder questions here.
How do I know I'm a shareholder?
Picture this.
You join the founder of a startup and help them build their startup. Your founding partner assures you you’re a shareholder, and you roll your sleeves up and get to work.
Weeks and months go by, and you don’t have time to think about the paperwork. There's no time for such admin things - you have work to do. But you remember the conversation with your partner well – you have shares.
As the months turn into years, financial year ends come and go, and no dividends are allocated to you, you start wondering: when will I actually benefit from this shareholding?
You raise the topic again, but your partner keeps dismissing the issue with verbal promises, never reducing anything to paper.
Eventually, when you insist on some sort of paperwork to solidify your shareholding, your partner suddenly remembers the conversation differently. He doesn’t recall you being a shareholder. He claims you only had a profit share – which is different. There’s nothing on paper proving you’re a shareholder. You leave the startup you helped build into a thriving business, with nothing but your last paycheck.
Sound unlikely? This nightmare scenario has happened to several clients who unfortunately approached us only after the damage had been done.
What's the difference between shareholding and profit share?
If you've been promised a "profit share", note that this is not the same as shareholding. A profit share grants you a share of profit from revenue, but does not grant any ownership in the company. Shareholding grants you ownership of a portion of the company.
Key Differences:
Ownership: Shareholding represents ownership in the company; profit share does not.
Rights: Shareholders have voting rights and claims on assets, while profit sharing participants typically have no ownership rights.
Relationship: Shareholders might receive a profit share through dividends, but profit sharing can also apply to non-shareholders.
Is a verbal shareholders agreement valid?
In that initial conversation with the founding partner, he did promise you shareholding. But as is so often the case in law, being right is not enough. You need to be able to PROVE your claim - so, unless you recorded that conversation, it's your word against his. That's why it's critical to record all important agreements in writing. There is a list of documents you must implement to secure your claim to shareholding.
Additionally, some contracts are only recognised in law if they are in writing. The transfer of immovable property is a well-known one, and shareholding is another. The Companies Act 71 of 2008 defines a shareholder as:
"shareholder", subject to section 57(1), means the holder of a share issued by a company and who is entered as such in the certificated or uncertificated securities register, as the case may be.
Additionally, Section 50(1) requires that “every company must maintain its securities register in accordance with the prescribed standards.” The Act clearly envisions a shareholder as being a person whose name is entered on the company's Securities Register.
One of the most important cases dealing with proof of shareholding was S v Veldthuizen 1982 (3) SA 413 (A). In this case, the Court held that a share certificate is prima facie proof of ownership of the shares, in the absence of evidence to the contrary it will become conclusive proof of shareholding.
It is therefore critical to ensure that your shareholding is properly reflected in both a genuine share certificate and in the company's Securities Register.
If you find yourself in this situation, all might not be lost. Sometimes a case can be proven using other context - like whatsapp conversations, emails, or financial records.
Contact us to discuss your options in proving your shareholding - it could mean the difference between securing or losing significant future earnings in the company.
What documents do I need to ensure my shareholding in a company?
To secure your shareholding, ensure you have the following documents:
The company's Shareholders Agreement - this contract forms the basis of the agreement between shareholders and with the company. It should contain rules providing for protection of both majority and minority shareholders, and mechanisms for making decisions, sales and adding or removing shareholders.
Copy of the company's Securities Register - When the company adds you as a shareholder, it must update its Securities Register reflecting your name, contact details, number of shares allocated to you and reflect whether it is a transfer from another owner, or allocation of authorised (but not yet issued) shares. See an example of a Securities Register below.
Share Certificate - this certificate, along with the updating of the Securities Register, is your essential proof of ownership of shares. It should correctly reflect your name, details, and the information should correspond with the information in the Securities Register (number of authorised shares in the company, number of issues shares, your certificate number, date of transfer, etc.) See an example of a Share Certificate below.
Contact us for help in drafting and reviewing these documents, or for guidance in a dispute concerning shareholding.
Download sample shareholder's documents here:
Remember, a shareholders agreement is also an essential document to protect your rights as a shareholder. Contact us for help in drafting and reviewing these and other contracts.
Disclaimer: The above information is provided for informational purposes only. Please note that the law is constantly developing, and regulations and newly decided cases cause changes in the law. The information does not take into account your unique circumstances, and therefore should not be considered legal advice. Please contact us to arrange a consultation for comprehensive legal advice.
The names of companies and persons used in examples and templates in this scenario are purely demonstrative and do not reflect any company or person, living or not. As these documents are used outside of our control, Maybery Inc. does not accept any liability for their use. Please contact us for valid, up-to-date documents to secure your shareholding.
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