What is a share subscription agreement?
Is a share subscription agreement legally binding in South Africa?
“The board of a company may resolve to issue shares of the company 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 Memorandum of Incorporation, in accordance with section 36 (s 38(1)). Before a company issues any particular shares, the board must determine the consideration for which, and the terms on which, those shares will be issued (s 40(2)). And an issue of shares or securities convertible into shares … must be approved by a special resolution of the shareholders of a company, if the shares … are issued to a director, future director, prescribed officer, or future prescribed officer of the company; a person related or inter-related to the company, or to a director or prescribed officer of the company; or a nominee of such a person (s 41(1)).”
“If a private company proposes to issue any shares, other than as contemplated in subsection (1)(b), each shareholder of that private company has a right, before any other person who is not a shareholder of that company, to be offered and, within a reasonable time to subscribe for, a percentage of the shares to be issued equal to the voting power of that shareholder’s general voting rights immediately before the offer was made (s 39(2)). A private or personal liability company’s Memorandum of Incorporation may limit, negate, restrict or place conditions upon the right set out in subsection (2) (s 39(3)).”
“Compliance with their fiduciary duty required that the power to increase the authorised shares be exercised in good faith and in the best interests of the company (a subjective test impeachable only on the limited grounds of irrationality) and for a proper purpose (an objective test) … I accordingly find that the round robin resolution signed on 31 March 2014 was invalid.”
When you need a Share Subscription
- An investor, venture-capital fund or strategic partner is putting fresh capital into a company in exchange for newly issued shares, and the money is meant to fund the business rather than buy out an existing owner.
- A founder is raising a seed or growth round and needs to record the valuation, the number and class of new shares, the subscription price, and the conditions on which the money is released to the company.
- A company is recapitalising or converting a shareholder loan or convertible instrument into equity, so that new shares must be authorised, issued and the existing shareholders’ pre-emptive rights addressed.
- New shares are being issued to a director, prescribed officer or a related or inter-related person, triggering the section 41 special-resolution requirement and the need to manage dilution of the other shareholders.
- A subscription is being done alongside an existing-share sale in the same deal (a combined sale-and-subscription), so the agreement must keep the “new shares” and “existing shares” legs and their different tax and Companies Act consequences distinct.
What a Share Subscription should contain
Subscription, allotment and the new shares
The core obligation: the subscriber subscribes for a stated number and class of new shares, and the company undertakes to allot and issue them and update the securities register. Specify whether the shares are ordinary or a preference/special class, and confirm they are (or will be) authorised in the MOI under section 36.
Subscription price, consideration and payment mechanics
Set the subscription price per share and in total, when and how it is paid, and that it constitutes adequate consideration as the board must determine under section 40 before issue. If any part is non-cash or deferred (future services or a deferred-value instrument), build in the section 40(5) trust mechanism so the shares are held in trust until fully paid.
Conditions precedent
List the conditions to be met before the issue completes — board resolution to issue, MOI amendment to create/authorise the shares, any section 41 special resolution, regulatory or Competition Act approval, financier consents, and satisfactory due diligence. State who must fulfil each and the long-stop date if they are not met.
Pre-emptive rights and waivers (section 39)
Address the existing shareholders’ statutory pre-emptive right to be offered the new shares first. Either confirm the right has been complied with or obtain written waivers, and check whether the MOI has limited, varied or excluded section 39 — pre-emption is the most commonly overlooked validity gate on a new issue.
Warranties and representations
The company (and often the founders) warrant the state of the business the investor is paying for — share capital and cap table, authorised and issued shares, financials, tax, litigation, material contracts, compliance and that the shares will be issued free of encumbrances. Warranties on a subscription protect the value of the new money going into the company.
Use of funds and post-completion obligations
Because the subscription money funds the company, investors usually restrict its application (working capital, a specific project, repaying a defined liability) and add reporting, information and milestone covenants. Tie completion to delivery of the updated share certificate, securities register entry and (where relevant) the new MOI and shareholders’ agreement.
Shareholders’ agreement and MOI alignment
The subscription should dovetail with a shareholders’ agreement and the MOI dealing with the new investor’s rights — board representation, reserved matters, anti-dilution, drag/tag, dividend and exit rights. Under section 15(7) the shareholders’ agreement must be consistent with the MOI and the Act, or it is void to the extent of the conflict.
Section 41 special resolution (issues to related persons)
Where the new shares go to a director, prescribed officer, a related or inter-related person, or their nominee, confirm the section 41(1) special resolution has been (or will be) passed — unless an exemption applies (issue under an underwriting contract, in exercise of pre-emptive rights, or pro rata to existing holdings under section 41(2)).
Share subscription agreement vs share sale (purchase) agreement in South Africa
| Feature | Share subscription (new shares) | Share sale / purchase (existing shares) |
|---|---|---|
| What changes hands | The company issues new shares created for the subscriber | A shareholder transfers shares they already own |
| Where the money goes | Into the company as fresh capital | To the selling shareholder |
| Effect on share capital | Increases issued shares; raises capital | No change to issued shares or company capital |
| Effect on existing holders | Dilutes their percentage unless they also subscribe | No dilution — total shares stay the same |
| Key Companies Act gates | ss 36–41: authorise, board issue, consideration, pre-emption, s 41 resolution | MOI transfer restrictions and any contractual pre-emption / right of first refusal |
| Counterparty | The subscriber contracts with the company | The buyer contracts with the selling shareholder |
Common South African pitfalls
- Issuing shares that are not authorised in the MOI. The board can only issue shares within the classes and number authorised under section 36; if the authorised shares are insufficient, the MOI must first be amended by special resolution — or the issue retroactively authorised by the board within 60 business days under section 38(2). In CDH Invest v Petrotank [2019] ZASCA 53 a resolution increasing the authorised shares was struck down because the directors acted for an improper purpose.
- Ignoring existing shareholders’ pre-emptive rights. Section 39 gives existing shareholders a first right to subscribe pro rata for a new issue (the default for private companies under s 39(2)), unless the MOI varies it. Issuing to an outside investor without offering or obtaining waivers from existing holders exposes the issue to challenge and the directors to a proper-purpose attack.
- Missing the section 41 special resolution. Where new shares are issued to a director, prescribed officer, a related or inter-related person, or their nominee, a 75% special resolution is required under section 41(1) unless an exemption in s 41(2) applies. A missing s 41 resolution is a recurring defect in founder and management share issues.
- Treating the share issue as automatically void on non-compliance. Unlike financial assistance under ss 44–45 (which the Act expressly makes void), a defective share issue is not automatically void — under section 218(1) it stands until a court declares it void, so an aggrieved shareholder must actually litigate. Conversely, do not assume an irregular issue is safe; it remains vulnerable to being set aside.
- Confusing a subscription with a sale of shares — or with financial assistance. A subscription raises new capital and dilutes; a sale transfers existing shares with no dilution. And if the company itself funds the subscriber’s acquisition of shares (a loan, guarantee or security), section 44 financial-assistance requirements (special resolution, solvency and liquidity test, fair-and-reasonable terms) are triggered and non-compliance is void to that extent.
- Leaving consideration and completion mechanics loose. The board must determine adequate consideration before issue (section 40), and where the price is non-cash or deferred the section 40(5) trust must hold the shares until fully paid. Failing to align payment, the securities-register entry, the share certificate and the updated MOI/shareholders’ agreement leaves the investor without clean title to the new shares.
Frequently asked questions
What is the difference between a share subscription and a share sale in South Africa?
In a share subscription, the company issues new shares to the subscriber and the money goes into the company as fresh capital, diluting existing shareholders. In a share sale, an existing shareholder transfers shares they already own and the money goes to that seller, with no change to the company’s share capital. Subscriptions raise capital; sales change ownership.
Is a share subscription agreement legally binding without being notarised or registered?
Yes. A share subscription agreement is binding as an ordinary written contract — South African law imposes no notarisation or registration requirement for it to be valid. What must be done is the corporate issue itself: the board must resolve to issue the shares, the shares must be authorised in the MOI, and the securities register must be updated under the Companies Act 71 of 2008.
Do existing shareholders have to be offered the new shares first?
Usually yes. Section 39 of the Companies Act gives each existing shareholder of a private company a pre-emptive right to be offered, before outsiders, a pro-rata share of any new issue equal to their existing voting power. The MOI can limit, vary or exclude this right, so it must be checked — and where it applies, existing shareholders should be offered the shares or sign waivers.
When does a share subscription need a special resolution of shareholders?
A special resolution (75%) is required under section 41(1) when the new shares are issued to a director, prescribed officer, a person related or inter-related to the company or a director, or a nominee of any of them. Exemptions in section 41(2) include issues under an underwriting contract, in exercise of pre-emptive rights, or in proportion to existing holdings. Amending the MOI to create new authorised shares also needs a special resolution.
Who has to approve the issue of new shares — the board or the shareholders?
The board approves and resolves to issue shares under section 38, but only within the classes and number authorised in the MOI under section 36. Shareholders are involved where the authorised shares must be increased (a special resolution to amend the MOI) or where section 41 requires a special resolution because the shares go to a director, prescribed officer or related person.
What consideration can a company accept for new shares?
Under section 40, the board must determine adequate consideration before the shares are issued — it may be cash, assets, services or other value the board judges adequate. Where the consideration is a deferred-value instrument or future services, section 40(5) requires the shares to be issued into a trust and released to the subscriber only once they are fully paid up.
Are shares void if the company does not follow sections 38 to 41?
Not automatically. Section 218(1) of the Companies Act provides that an act that may be unlawful or voidable under the Act is not void unless and until a court declares it void. So a defective share issue stands until challenged and set aside by a court — which is different from financial assistance under sections 44 and 45, which the Act renders void to the extent of non-compliance.
Does a share subscription dilute the existing shareholders?
Yes, unless they also subscribe. Because a subscription creates and issues new shares, the total number of shares increases, so each existing shareholder’s percentage falls unless they take up their pro-rata pre-emptive entitlement under section 39. Investors and founders often deal with this through anti-dilution and pre-emption provisions in the subscription and shareholders’ agreement.
Sources & authority
- Companies Act 71 of 2008, ss 36–41 (authorised shares, issue of shares, consideration, pre-emption, shareholder approval)
- Companies Act 71 of 2008, s 44 (financial assistance for the subscription of securities)
- CDH Invest NV v Petrotank South Africa (Pty) Ltd and Others (483/2018) [2019] ZASCA 53; 2019 (4) SA 436 (SCA)
This guide is general information, not legal advice. It reflects the law as at June 2026.