Share Block Companies: A Viable Option

share block company

A Private Company is now a Viable Option for Share Block Companies

A Share Block is a form of property ownership and is applied in cases where the land is leasehold and not freehold property since the property is either registered in the name of, or leased by a Share Block Company.

The Share Block Company acquires title to property by means of registered title, use or lease and certain occupation and other rights are then conferred in the Memorandum of Incorporation and in the Use Agreement entered into between the Share Block Company and the holders of shares in such a Company.

The purchaser of a unit in the Share Block becomes a Shareholder in the Company and is then entitled to occupy that specific unit in terms of the said Use Agreement. The Memorandum of Incorporation provides that a shareholder shall be entitled to the use of a specified part of the immovable property in respect of which the Company operates the Share Block Scheme on the terms and conditions set out in the said Use Agreement.

The provisions of section 50 of the Companies Act relating to the Securities Register and Numbering of a Company shall mutatis mutandis apply to any Memorandum of Incorporation of a Share Block Company as well as the Use Agreement in terms of the registered owner of the security and any holders of a beneficial interest in the security.

The Memorandum of Incorporation and the Use Agreement to be used by the Company in connection with any Share Block Scheme to be operated by it shall be lodged by the said Company with CIPC in the prescribed manner.

Expenses of the Share Block Company are divided between the shareholders in terms of a monthly or annual levy, which levy funds are created for the proper management and maintenance of the property in the same way as in a Sectional Title development.

In terms of the 1973 Companies Act, a Company which had more than 50 shareholders was compelled to be registered as a Public Company. As this was the only reason why Share Block Companies were categorised as Public Companies, there is no need to proceed in this category as this restriction has been abolished in the 2008 Companies Act.

The classification of a Share Block Company as a Private Limited Company would hold more advantages to the Company.

For instance, a Public Company which has to be audited requires the mandatory appointment of a company secretary and auditor, and is subject to the strict application of Chapter 4 of the 2008 Companies Act, with specific reference to section 99 which deals with general restrictions on offers to the public and section 101 which deals with secondary offers to the public. For example, section 101(4)(viii) which states that if the offer relates to units, particulars of the names and addresses of the persons in whom the securities represented by the units are vested, the date and the parties to any document defining the terms on which those securities are held, and an address in the Republic where that document can be inspected and section 101(2)(a) which demands that a registered prospectus must accompany the primary offering of securities.

In comparison, a Private Limited Company is subject to the Public Interest Score which determines whether the Share Block Company is subject to a statutory audit, non-statutory audit or independent review.

Although the Non-Profit Company would be an additional option to the use of a Private Limited Company, the use of shares would be less problematic than membership in a Non-Profit Company, and there would be less difficulties upon liquidation, whereas upon the winding-up or dissolution of a Non-Profit Company in terms of section 122(c) of Act 3 of 2011 (Companies Amendment Act), no past or present member or director of that Company, or person appointing a director of that Company, is entitled to any part of the net value of the company after its obligations and liabilities have been satisfied, and the entire net value of the company must be distributed to one or more Non-Profit Companies, registered external Non-Profit Companies carrying on activities within the Republic, voluntary associations or Non-Profit Trusts having objects similar to its main object and as determined in terms of the company’s Memorandum of Incorporation, by its members (if any) or its directors, at or immediately before the time of its dissolution or by the Court, if the Memorandum of Incorporation or the members or directors fail to make such a determination.

In terms of section 8(2)(b)(ii) of the 2008 Companies Act, a profit company is a private company if its Memorandum of Incorporation prohibits it from offering any of its securities to the public and restricts the transferability of its securities.

A Share Block Company is offering the Company’s shares to the public, but both the 2008 Companies Act and the Share Blocks Control Act exempt a Share Block Company from the provisions of section 8(2)(b)(ii) of the Act as follows:

Offers that are not Offers to the Public—Section 96, 2008 Companies Act

An offer is not an offer to the public in terms of section 96(1)(c)(i)(ii),if it is a non-renounceable offer made only to existing holders of the Company’s securities, or in terms of section 96(1)(g)(i), if it is an offer or one of a series of offers for subscription made in writing, and no offer in the series is accompanied by or made by means of an advertisement, and no selling expenses are incurred in connection with any offer in the series.

Offer of Shares for Sale—Section 11, Share Blocks Control Act

Notwithstanding anything to the contrary contained in any law: any person may offer shares of a share block company for sale to the public if, in lieu of compliance with any other requirements, such offer is accompanied by a statement that any proposed purchaser of any such shares is required to enter into a contract referred to in section 17 in respect of such shares and that a copy of the contract required to be entered into is available for inspection free of charge at an address indicated in the statement; and no rule of law relating to a prospectus of a company shall apply to a newspaper or other advertisement offering any shares of a share block company for sale to the public or calling attention to any such offer or any intended offer of such shares, if the statement contemplated in paragraph (a) is contained in the advertisement.

Furthermore, in terms of Schedule 4 of the 2008 Companies Act, the Share Blocks Control Act, Act 59 of 1980 prevails in any conflict between the provisions of the Share Blocks Control Act and the 2008 Companies Act.