The board of a company generally has authority to issue authorised shares by board resolution alone. Section 41(1)(a) of the Companies Act, 2008 (Companies Act) qualifies this by requiring a special resolution before shares, convertible securities, or rights may be issued to a director, prescribed officer, future director, or future prescribed officer of the company or a person related or inter-related to a director or prescribed officer (unless one of the exemptions in section 41(2) applies). The exemptions broadly cover underwriting arrangements, issues made in the exercise of pre-emptive subscription rights as contemplated in section 39, pro-rata issues to shareholders on the same terms, qualifying employee share schemes, and offers to the public.
A point frequently overlooked is that the special resolution requirement applies equally to issuances to a future director or future prescribed officer, ie in terms of section 41(6): a person who is appointed to the position within six months after the issue of shares.
Two practical points follow. First, where shares are issued to a non-director (or non-prescribed officer), ensure that the recipient is not appointed to the position within six months as any such appointment would mean a special resolution was required but absent, placing the issuance in breach of section 41(1). Second, where appointment is anticipated, pass the special resolution upfront. This is critical in M&A transactions where a subscriber is the individual being appointed as director or prescribed officer on closing. If the provision referring to persons related or inter-related is extended to also apply to a future director, the same consequences would follow if the new director or prescribed officer is related or inter-related to the subscriber.
The company's memorandum of incorporation should also be checked, as it may impose additional or different shareholder approval requirements beyond those in section 41.
A director who approves a non-compliant issuance, or who, knowing (which is widely defined under the Companies Act) of the non-compliance, fails to vote against it, faces personal liability.
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