SHOULD DIFFERENT RULES APPLY TO THE TRANSFER OF OWNERSHIP IN CERTIFICATED AND UNCERTIFICATED SECURITIES?
Rudolph du Plessis
The new Companies Bill, 2007, that was published in February 2007 and is intended to replace the Companies Act, 1973, differentiates between the methods of transfer of ownership of certificated and uncertificated securities. Although this differentiation is necessary for the transfer of membership in a company, there is no reason for such a differentiation where the transfer of ownership is concerned.
South African company law recognises that there is a difference between the registered holder of a share and the beneficial owner of a share (see section 140A of the Companies Act). The registered holder is the person who appears in the share register of the company and who is the member of the company (membership). The registered shareholder can enforce its rights as member or shareholder against the company. The beneficial owner does not appear in the share register but is entitled, ultimately, to the benefits flowing from the share (ownership). The beneficial owner, or the holder of the beneficial interest in the share, has no rights against the company and receives his benefit from the registered shareholder.
The law in South Africa also seems clear on the way in which ownership in shares is transferred and the way in which membership is transferred.
Membership is transferred through giving an instruction to the company to replace the transferor with the transferee in the share register. The instruction is normally given by submitting a share transfer form to the company. If one examines a Form CM42 as an example of a securities transfer form it becomes clear that it merely instructs the company to transfer the securities in the name of the transferor in the share register into the name of the transferee.
The change of membership in the share register does not necessarily mean that there is a change in the beneficial ownership of the shares. Ownership in shares is transferred by way of a cession of the rights in and to the shares. The cession does not have to be in writing and it can even be tacit or inferred from the conduct of the parties (see Botha v Fick 1995 (2) SA 750 (A)). It may very well be that by signing a share transfer form and submitting it to the company, the parties intend to transfer ownership in the shares in addition to transferring membership, but this is not always the case.
The Companies Bill draws a clear distinction between certificated and uncertificated securities (see section 53(1) of the Companies Bill). Different sections of the Companies Bill apply to securities depending on whether they are evidenced by a certificate or are uncertificated. In regard to uncertificated securities the Companies Bill specifically provides that the Bill prevails in the case of any conflict between any provision of the Companies Bill and any other law, the common law, any agreement or the company’s Memorandum of Incorporation (the document that will replace the memorandum and articles of association when the Companies Bill becomes law) (see section 53(1)(b)(iii) of the Companies Bill). In the case of certificated securities, the Companies Bill does not seem to prevail in the case of any conflict with the common law.
If one analyses the provisions of the Companies Bill relating to the transfer of certificated securities and uncertificated securities, especially in light of the fact that in the case of uncertificated securities the Companies Bill will override the common law, it seems that the law regarding the transfer of ownership of certificated and uncertificated securities is different.
Section 55 of the Companies Bill, that deals with the transfer of certificated securities, merely refers to "transfer" of any security and it seems that the current position regarding the transfer of ownership of certificated shares is maintained. In other words, the transfer of membership (as opposed to ownership) is regulated in the Companies Bill and the transfer of ownership of certificated shares continues to be regulated by the common law – ownership in certificated securities is transferred by way of cession of the right in and to the shares. The entry in the share register has nothing to do with the transfer of ownership.
The position in regard to the transfer of ownership in uncertificated securities is different. Whatever the common law position is, transfer of ownership in an uncertificated security must be effected by debiting the account in the uncertificated securities register from which the transfer is effected and crediting the account in the uncertificated securities register to which the transfer is effected, in accordance with the rules of a central securities depository (see sections 53(1) and 57 of the Companies Bill). The uncertificated securities register forms part of the company’s share register (the Companies Bill defines this as the securities register) (see section 1, definition of "uncertificated securities register", of the Companies Bill). The implication of this provision is that whoever is reflected in the securities register of the company is the registered and beneficial owner of that security and that it is not possible to transfer membership without transferring ownership.
The apparent distinction between the transfer of ownership of certificated and uncertificated securities seems to be unnecessary. The transfer of ownership of shares, whether they are certificated or uncertificated, should be effected in the same way and should continue to be governed by the common law. I can think of no reason why the transfer of ownership in a share should be different depending on whether it is evidenced by a certificate or not.
Obviously, where the transfer of membership is concerned a distinction must be made. Certificated shares are evidenced by a certificate, reflecting an entry in a physical securities register and uncertificated securities are evidenced by an entry in an account in an uncertificated securities register.
The confusion of the transfer of ownership and membership is nothing new. Section 91A of the Companies Act states that, upon the transfer of ownership (by debiting and crediting the account in the subregister of the company) the transferee becomes a member of the company. Although the use of the term ownership is confusing, one could argue, based on an interpretation of the section as a whole, that section 91(A) of the Companies Act refers to membership and not to ownership, although the terms seem to be used interchangeably. In the Companies Bill the term transfer of ownership is used consistently and it would be difficult to argue that the use of the term ownership should be a reference to membership.
It is submitted that the Companies Bill should be clarified to state that there is no difference between the transfer of ownership in certificated and uncertificated securities, but that there should be a difference between the transfer of membership depending on whether the security is certificated and uncertificated. Who is a member of a company should not have anything to do with who the beneficial owner of the share is.