Companies owning immovable property and operating a share block scheme
Article written by Erin Gradidge, checked by Divina Naidoo, Associate, and released by Chantelle Gladwin-Wood, Senior Partner at Schindlers Attorneys.
12 August 2022
BODY OF ARTICLE:
Introduction
The Transfer of shares in a company owning immovable property and operating a share block scheme only gives shareholders in the company their rights in terms of the shareholder agreement and does not give them any interest in the immovable other than through that company. The transfer of shares in that company is not regulated by the Alienation of Land Act 68 of 1981 (‘ALA’) or the General Law Amendment Act 68 of 1957 (‘GLAA’).
Background
THE INCORPORATION OF COMPANY
Duin-en-see (Pty) Ltd (‘the company’) was incorporated in or around 1958 to act as a ‘vehicle to acquire and hold certain immovable property’ in Plettenberg Bay. The shareholders were the successors in title to the shares and related rights and obligations. The agreement originally entered consisted of the following terms, including but not limited to, that:
- the company would be registered to acquire and hold for the shareholders’ benefit the property and the rights in respect of same;
- the price for the shareholders’ subscription for the shareholding issued to them would be used to acquire the property;
- each original shareholder and their successors in title would enjoy certain rights and benefits of an allocated portion on the property;
- each shareholder would bear any and all costs pertaining to their portion or a portion of costs pertaining to the property as a whole propionate to their shareholding or costs incurred by the company in relation to that shareholders portion or in safeguarding their rights or costs of administration proportionate to the shareholders’ shareholding;
- if reasonably required to access their property, the shareholder would afford rights of way over their portion to other occupiers of other portions of the property;
- subject to certain conditions set out in the agreement, each shareholder would be entitled to dispose or hand over their shareholding and usage rights associated with their portion;
- subject to the company’s memorandum of incorporation and articles of association, each shareholder is entitled to divide their shareholding and portion of the property;
- the disposal of a shareholder’s shareholding and/or rights to their allocated portion would only be done with their consent;
- the transferee of shares would acquire the rights of the disposing shareholding/transferor to the allocated portion associated with their shareholding and would be bound by the obligations of that shareholder; and
- the company would be a party to the agreement.
TRANSFER OF SHARES
Between 1958 and the present, the shares were transferred, and the transferees assented to the terms of the agreement upon transfer of the shares and became bound by same.
The shares held by one of the original shareholders, H. Scholtz, was, before 1995, divided into two shareholdings which each had their own portion of the original portion allocated to H. Scholtz. One portion was sold to a H. Hunter during 1961 with the knowledge and approval of the company and the other shareholders. H. Hunter subsequently transferred the shares and rights and obligations with the knowledge and approval of all the shareholders and the company itself to the trustees of the Hunter Family Trust in 1995. Their portion of the property became Erf 13009 in or around 2015.
THE CLAIMS
The Plaintiff’s plead that the company intends to dispose of Erf 13009 without the plaintiff’s consent, depriving them of their right to use, occupy and benefit from the erf.
The Plaintiff’s claimed an order declaring that the company is presumed to be operating as a share block scheme in accordance with section 1 and 4 of the Share Block Control Act 59 of 1980 (‘SBC Act’) and the company is a share block company; the shares held by the Plaintiffs confer rights, interest in and exclusive use of Erf 13009; refuse to consent to the transfer of Erf 13009; the company is not entitled to transfer that erf without the Plaintiff’s consent; and the company is required to comply with the provisions of the SBC Act.
Alternatively, the Plaintiffs claim an order declaring they are entitled to exclusive right to benefit, occupy, and use Erf 13009; refuse to consent to the transfer of that erf; and the company is not entitled to dispose of that erf without the Plaintiff’s consent.
SHARE BLOCK CONTROL ACT
The First Defendant states that the allegations pleaded by the Plaintiff in the first claim are ‘insufficient to trigger the presumption in section 4 and/or to satisfy the definition of ‘share block scheme’ in section 1 of the SBC Act as ‘it is necessary for the relevant right or interest in the use of the immovable property to be provided for in the definition of the relevant class of shares in the company’s memorandum of incorporation’ and that is not asserted by the Plaintiff’s in this case.
The Defendant went further to mention section 7(2) of the SBC Act which provides that ‘articles of a share block company shall provide that a member shall be entitled to the use of a specified part of the immovable property in respect of which the company operates the share block scheme, on the terms and conditions contained in the use agreement entered into between the company and such member.’ The Plaintiff’s particulars of claim do not show or maintain that there was compliance with s7(2) of the SBC Act or that there was a signed use agreement. The Defendant relied on this non-compliance to state that the Plaintiff’s first claim could not be sustained.
Despite this non-compliance, however, it does not imply that the company is not a share block company. The conduct of the company of a share block scheme qualifies it as a share block company and the company is still regulated by the SBC Act and remains a share block company within the meaning of same as stipulated in the SBC Act.
GENERAL LAW AMENDMENT ACT AND ALIENATION OF LAND ACT
Section 1(1) of GLAA stipulates that a contract of sale or cession in respect of land or any interest in land would only be of any force or effect if it was reduced to writing and signed by the parties or their agents acting on written authority. However, the Plaintiff’s did not maintain that the transfer in 1961 complied with the aforementioned requirements and both claims could, therefore, not be sustained.
Under section 2(1) of the ALA, no alienation of land or any interest in land shall be of any force or effect unless it is contained in a deed of alienation signed by the parties or by their agents acting on written authority.
The 1995 transfer could not be maintained by the Plaintiff’s that it complied with the requirements of the ALA and their claims could therefore not be sustained.
OUTCOME
The Judge found that the contract that the Plaintiff’s relied upon for their claims is one between shareholders and the company which would be a ‘shareholders agreement’. The instituted action was for the enforcement of rights allegedly attached to the Hunter Family Trust shares in the company. The transfer of shares in 1961 and 1995 were sale of share agreements and not sale of land or cessions of rights in land contracts. The company’s rights in its property were not ceded in those transfers. The sellers of the shares ceded their rights in the shares and not in the company’s property when the shares were transferred.
Conclusion
The company was obligated to conduct its business in respect of the ownership of the land in a manner as stipulated by the shareholders’ agreement. The agreement did not alienate any of the company’s rights and determined that the company was to operate a share block scheme. The shareholders were to exercise their rights against the company but did not give them any interest in the company’s immovable property. The transfer of shares in a company owning property and that operates a share block scheme is not regulated by the provisions of GLAA and ALA.
Value
Shareholders who transfer their shares in a company owning immovable property operating a share block scheme only transfer their rights to be exercised against the company and does not give them any interest in the immovable property other than through the company.
