An issue of shares that falls within section 41(1) requires approval by way of a special resolution of the company’s shareholders. However, in a scenario where a board has gone rogue, what happens if no approval is given prior to the issue? Can the issue of shares be ratified? Is the issue automatically void?

Can the issue of shares be ratified after the fact?

Section 41 does not contain any language that suggests the issue may be ratified and accordingly, prior approval of the shareholders is most probably required. While the starting point in law is that ratification is generally as good as prior approval, the particular statutory provision needs to be considered in context. If ratification were allowed under section 41, it would raise the conundrum as to whether the subscriber (the director) could vote as shareholder on that resolution. It follows that it is unlikely that the legislature’s intention was to allow ratification.

Are the shares actually issued if shareholder approval was not obtained?

The more intriguing question is whether an issue of shares in the circumstances contemplated in section 41(1), without shareholder approval or subsequent unanimous assent, are in fact issued or whether the entire transaction would be void from the outset. Certain sections of the Companies Act, such as those relating to financial assistance, specifically provide that the action of the board is void if the approval of the shareholders is not obtained beforehand. However, that is not the case with section 41 and, moreover, section 218(1) states that unless the Companies Act specifically renders an action void, no agreement or resolution that is prohibited, voidable or unlawful in terms of the Companies Act may be declared as void unless a court has made a declaration to that effect. Accordingly, the issue of shares would not automatically be void but would need to be declared as void by a court.

The question then becomes whether the court would declare the issue of shares void or whether it would award other remedies to the affected shareholders. Lessons may be learned from case law regarding contraventions of section 41(3) (i.e. the voting power of the shares issued equals or exceeds the voting power of the same shares that were held by the shareholder immediately before the transaction or series of transactions).

A contravention of section 41(3) renders the issuance void for the following reasons:

• section 41(3) protects shareholders from excessive dilution without their consent by limiting the power of directors to issue shares without approval of the shareholders beyond the 30% limitation;
• section 41(3) thereby gives effect to section 7(i) by balancing the rights and obligations of shareholders and directors within companies;
• an issue of shares in contravention of section 41(3) ought to be deemed void so that the section can serve its purpose of protecting shareholders;
• the remedies set out in section 41(5) and section 218(2) (personal liability of directors) provide inadequate relief in instances of a breach of section 41(3);
• damages are also an inadequate form of remedy for shareholders where a person’s shareholding is unlawfully diluted; and
• non-compliance with section 41(3) would also not be discouraged if shareholders were only allowed to claim damages in such instances.

Section 41(1) serves a different purpose as it – together with section 75 (which requires disclosures of personal financial interests by directors) – protects shareholders from issues of shares that favour directors or controlling shareholders, which could tilt the balance of power towards the board and away from certain shareholders (particularly minority shareholders). Nevertheless, for section 41(1) to serve its purpose of protecting shareholders in different circumstances to section 41(3), an issue in contravention of that section also ought to be declared void by a court for similar reasons as those above. Neither the remedies set out in section 41(5) and section 218(2) nor damages would provide adequate relief to the shareholders affected, and damages would not be a sufficient deterrence to prevent the board from acting in non-compliance.