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Holding shares through a nominee

The Companies Act, No. 71 of 2008 (“the New Act”) allows that shares in a company may be held by a nominee on behalf of a beneficial owner. A nominee essentially acts as an agent for the true owner of the shares, but the nominee is registered as owner of those shares.

There are various benefits to such a relationship, such as the administrative advantages of nominees attending Annual General Meetings (acting on the beneficial owner’s instruction) and being able to make changes to the structure of a company without the beneficial owner having to be administratively involved. However, there are also certain implications to consider before opting for nominee shareholding.

One implication is that certain remedies available to company members are not available to persons holding shares through nominees, as illustrated by the case of Smyth and Others v Investec Bank Ltd and Another 2018 (1) SA 494 (SCA) (“Smyth”) which dealt with Section 252(1) of the old Companies Act, No. 61 of 1973 (“the Old Act”). Section 252(1) provided that: “Any member of a company who complains that any particular act or omission of a company is unfairly prejudicial, unjust or inequitable, or that the affairs of the company are being conducted in a manner unfairly prejudicial, unjust or inequitable to him or some part of the members of the company, may … make an application to the Court for an order under the section.”

In Smyth the appellants asked the court to find that two agreements concluded by the company concerned (Randgold) were unfairly prejudicial, unjust or inequitable to members, as contemplated in Section 252. The problem was that the appellants were not registered members of Randgold, but beneficial owners of the shares. The shares were registered in the name of nominees. They pursued their case to the Supreme Court of Appeal (SCA), which eventually decided that, for a person to be a member of a company, the name of that person must be entered in the register of members of the company. A company is only supposed to concern itself with the registered owners of the shares. The remedy provided for in Section 252 was clearly only for members, so the appellants could not use this remedy, nor could they be joined as co-applicants in the matter.

The SCA said that if the appellants wanted to use the remedy in Section 252 they could just terminate the nomination and procure that their names be entered into the register of members.

The Smyth case was decided under the Old Act. Section 252 of the Old Act has been replaced by Section 163 of the New Act. This section now provides that:

“A shareholder or a director of a company may apply to a court for relief if—
(a) any act or omission of the company, or a related person, has had a result that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of, the applicant;
(b) the business of the company, or a related person, is being or has been carried on or conducted in a manner that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of, the applicant; or
(c) the powers of a director or prescribed officer of the company, or a person related to the company, are being or have been exercised in a manner that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of, the applicant.” [own emphasis]

The wording in this section has been changed so that a “shareholder” can apply for relief, and no longer just a “member” of a company.

“Shareholder” is, however, defined in the Act as:

“shareholder”, subject to section 57 (1), means the holder of a share issued by a company and who is entered as such in the certificated or uncertificated securities register, as the case may be;

So, even though the New Act now provides that a shareholder can apply for relief, arguably the same principles as in Smyth will still apply, so that only the registered owner of the shares can make use of the remedies available to shareholders who feel they are the victims of oppressive or unfairly prejudicial treatment by the company.

The relationship between a beneficial owner and nominee is governed by Section 56 of the New Act, which provides for a duty to disclose the identity of persons on whose behalf the shares are held and also provides that beneficial owners may vote at a meeting of shareholders through a proxy appointment by the nominee.

For further information or advice on shareholding through a nominee, please contact our Commercial Department.