In South African corporate law, a fundamental distinction exists between "authorised" and "issued" shares. Authorised shares represent the maximum number of shares a company is permitted to issue, as set out in its memorandum of incorporation (“MOI”). Issued shares are those that have actually been allotted to shareholders of the company through subscription of shares. Section 36 of the Companies Act 71 of 2008, as may be amended (the “Act”) dictates that a company’s MOI must explicitly specify the classes and number of shares it is authorised to issue.

But what happens when a company needs to issue shares, and those shares have not yet been authorised in its MOI?

How to issue shares not yet authorised
Section 38(1) of the Act establishes that the board of directors may resolve to issue shares at any time, but only within the classes, and to the extent, that the shares have been authorised by or in terms of the company’s MOI.

If a company wishes to issue shares that are not currently authorised in its MOI, it can follow one of the two routes:

1. Pre-authorisation (The recommended approach)
The most legally secure route is to amend the MOI before issuing the shares to either increase the number of authorised shares or create a new class of shares. Section 36(2) of the Act permits the amendment of the authorised shares of a company: 

• by special resolution of the shareholders of the company, in accordance with Section 16 of the Act; or
• by resolution of the board of directors, in the manner contemplated in Section 36(3) of the Act, unless the company's MOI provides otherwise. 

In terms of Section 36(3), the board may, amongst other things, increase or decrease the number of authorised shares of any class, or reclassify any classified shares that have been authorised but not yet issued.

The board (or the shareholders, as the case may be) must pass the relevant resolution to amend the MOI to authorise the new shares. Furthermore, the company must then file the relevant Notice of Amendment with the Companies and Intellectual Property Commission (“CIPC”) together with the replacement MOI and/or ancillary resolutions thereto. It should be noted that Section 16(9)(b) of the Act states that the amendment to the MOI takes effect 10 business days after CIPC receives the Notice of Amendment, unless CIPC endorses or rejects it before that period expires, or a later effective date is specified in the Notice of Amendment. The board may only validly allot the new shares once the MOI amendment has come into effect, in accordance with Section 38(1). In practice, clients often negate to first consider whether the CIPC has approved the Notice of Amendment. The issuance of a COR15.2 by the CIPC does not automatically mean the CIPC has accepted the proposed amendments to the MOI or authorised shares, so the detail remains in the fine print. 

2. Retroactive authorisation (The 60-day grace period)
The Act recognises that administrative oversights happen in fast-moving or complex commercial environments. So, if a company inadvertently issues shares that have not been authorised, or issues shares in excess of the number of authorised shares of a particular class, Section 38(2) of the Act provides a statutory remedy for such unfortunate scenarios.

The board (or shareholders, depending on the MOI restrictions) may retroactively authorise the share issue in accordance with Section 36 read together with Section 38(2). This retroactive authorisation must occur within 60 business days after the date on which the shares were issued.

The consequences of lapsing the 60-day period
If a company issues unauthorised shares and fails to retroactively authorise them within the 60-business-day window provided by Section 38(2), the consequences could be significant and far-reaching and could include, but are not limited to, one of the following:

• The unauthorised share issue is void: The share issue becomes a nullity (legally void) to the extent that it exceeds the authorised share capital. The recipient does not obtain valid shareholder status or voting rights for those excess shares.
• The company must repay the consideration received: The company is legally obligated to return the fair value of the consideration received for the void shares, alongside interest calculated in accordance with the Prescribed Rate of Interest Act 55 of 1975, from the date on which the consideration for the shares was received by the company until the date on which the company makes repayment.
• Directors may incur personal liability: A director who was present when the board approved the issue of unauthorised shares, or who participated in a written resolution to that effect under Section 74 of the Act, and who failed to vote against that decision despite knowing that the shares had not been authorised in accordance with Section 36, may be held personally liable under Section 77(3)(e)(i) of the Act for any loss, damages, or costs sustained by the company.

The 60-business-day period provided for in Section 38(2) therefore offers companies a limited opportunity to rectify an otherwise invalid share issue. Once that period has expired without the requisite shareholder approval being obtained, the Companies Act affords no statutory mechanism to validate the issue retrospectively. Companies should therefore ensure that their authorised share capital is carefully reviewed before issuing shares and, where an error has occurred, act promptly to regularise the position within the prescribed period.

The Companies Amendment Act changes
It is worth noting that the Companies Amendment Act 16 of 2024 introduces a new Section 38A. Once the section officially comes into operation, it will empower a court to validate the irregular creation, allotment, or issue of shares if the court determines that it is "just and equitable" to do so. This amendment will provide a valuable remedial mechanism for companies that discover irregular or unauthorised share issues only after the expiry of the 60-business-day period contemplated in Section 38(2). Instead of automatically facing the invalidity of the share issue and the potentially significant commercial and legal consequences that follow, affected companies will be able to seek judicial validation, thereby preserving legitimate commercial transactions where the interests of justice so require.

While the Companies Act offers a 60-day retroactive grace period, relying on it introduces unnecessary commercial and legal risk. The best practice for any company intending to issue new equity is to thoroughly review its MOI, ensure all required authorisations are securely in place, and properly file amendments with the CIPC prior to allotting any shares. Proper corporate governance processes and updated company secretarial records remain essential in avoiding any issuance of shares which are not authorised in terms of the MOI of the Company. If in doubt, feel free to reach out to our corporate and commercial attorneys who can guide on the best route to follow.