Online Reporter
Godknows Hofisi
Business Law
In the business world, there are times when an investor wants to increase or reduce shareholding.
There is nothing wrong. It’s business. In this article, I look at some of the ways a shareholder may increase his or her effective shareholding.
Increasing effective shareholding or diluting other shareholders
There are several ways this can be done, including through those summarised below.
Acquiring existing shares from shareholders.
Share buy-back.
Redemption of shares.
Acquiring new shares.
Debt-to-equity conversion
Bonus shares.
I will explain the options below.
Dilution through acquiring existing shares
This is a common approach where an existing shareholder in a company, subject to internal formalities such as the right of first refusal, buys existing shares from fellow shareholders. The buying shareholder uses his or her own funds to pay the selling shareholder. The selling shareholder will be diluted.
Share buyback
Subject to a company’s articles of association, the shareholders of a company may pass a resolution to buy back some of the company’s issued shares. According to section 128 of the Companies and Other Business Entities Act (Chapter 24:31) or “the COBE Act,” a company may, if authorised by its articles of association, purchase its own shares, including redeemable shares.
According to section 129 of the COBE Act a company shall not purchase its own shares unless the purchase has been authorised by the company in a general meeting.
The company has to retain some issued shares. When shares are bought back by the company, it is the company that pays the existing shareholders. The shares are then cancelled, thereby reducing the total issued shares.
Redemption of shares
Subject to the company’s articles, a company may issue redeemable shares, which it may then redeem at a later date. The issuing of redeemable shares and their redemption are covered under sections 126 and 127 of the COBE Act.
The redemption of shares has the same effect as a share buy-back in that the redeemed shares will be cancelled after the selling shareholder has been paid.
Acquiring new shares
A shareholder may also purchase new shares, thereby increasing their number of shares. Increased effective shareholding may be attained if fellow existing shareholders do not purchase corresponding proportionate shares, for example, by not following their rights in a rights issue of shares.
In a rights issue of shares, existing shareholders purchase shares in the proportion of their existing shareholding. A shareholder who fails to follow his or her rights will be diluted.
This is a strategy normally used by daring and liquid shareholders who may have information that fellow shareholders will be unable or unwilling to pay for new shares.
Debt-to-equity conversion
Some shareholders are calculating. They may offer loans to the company as shareholders’ loans, with the option to convert such debt into equity in the event of default by the company. In the event of default, the shareholder gets new shares in lieu of the debt and dilutes the other existing shareholders.
Bonus shares
A bonus issue of shares involves a company issuing additional shares to existing shareholders, at no payment, but for example, out of profits or retained earnings. In other words, shareholders forego a cash dividend in favour of additional shares.
This may work, for example, in small to medium enterprises where a shareholder is also an executive director and can live off earnings from employment and can forgo dividends.
Some daring shareholders in small to medium enterprises may take advantage of their fellow shareholders’ situations. They may opt for additional shares instead of a cash dividend, while those in need of cash get a cash dividend from the company.
Over time, if this is done repeatedly, the one foregoing the cash dividend increases his or her shareholding while the one taking the cash dividend will be diluted.
Conclusion
There are many ways to increase one’s effective shareholding or dilute other shareholders.
Disclaimer
This simplified article is for general information purposes only and does not constitute the writer’s professional advice.
Godknows (GK) Hofisi, LLB(UNISA), B.Acc(UZ), Hons B.Compt (UNISA), CA(Z), ACCA (Business Valuations) MBA(EBS, Heriot- Watt, UK) is the Managing Partner of Hofisi & Partners Commercial Attorneys, a chartered accountant, insolvency practitioner, commercial arbitrator, registered tax accountant and advises on deals and transactions. He has extensive experience from industry and commerce and is a former World Bank staffer in the Resource/Management Unit. He was recently appointed to sit on the Council of Estate Administrators in Zimbabwe./He writes in his personal capacity. He can be contacted on +263 772 246 900 or ghofisi@ hofisilaw.com or gohofisi@ gmail.com. Visit www//:hofisilaw.com for more articles.
