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Unforeseen tax impact in amendments to articles of association
- 05 June 2018
- Individuals Tax
- Joon Chong & Daniel Kirk-Cohen
Important:
This article is based on tax law for the tax year ending 28 February 2019.
Authors: Joon Chong & Daniel Kirk-Cohen (Webber Wentzel)
The recent Supreme Court of Appeal judgement of CSARS v The Executors of Estate Late Sidney Ellerine illustrates the importance of obtaining tax advice where rights, privileges or conditions of shares may potentially be affected by amendments to the memorandum of incorporation of a company.
The late Sidney Ellerine held 112,000 ZAR1 preference shares in Sidney Ellerine Trust (Pty) Ltd (the Company). Four family trusts held collectively 600 ordinary shares in the Company. Each preference and ordinary share held one vote. The deceased therefore, had controlled 99.47% of the voting rights in shareholder meetings. The Company held 40% in Ellerines Brothers (Pty) Ltd (EB Co), the investment holding company which owned the bulk of the family investments. The other 60% in EB Co was held by Eric Ellerine Trust (Pty) Ltd (EET), the company controlled by the deceased's brother Eric Ellerine.
Each preference share in the Company carried a 7% preferential coupon with no entitlement to further profits, and a preferential right to repayment of capital paid but with no further right to participate in or receive assets of capital. The preference share could be redeemed by a board resolution on one month's notice. Although the judgement did not specifically mention the terms of the ordinary shares of the Company, we submit that the ordinary shares are unlikely to be limited to a specified ZAR amount in their rights to receive ordinary dividends distributed out of profits and repayments of capital.
The articles of association were amended in 2006 to include special condition 5.8 which provided that article 34 (containing the rights of the redeemable non-cumulative preference shares), could only be amended with the prior written approval of at least 75% of each class of shares in the issued share capital of the Company and EET for as long as EET held any shares in EB. In other words, article 34 could only be amended with 75% approval of the holders of ordinary shares and preference shares in the Company, and 75% approval from each class of shares in issue in EET. The purpose of the amendment was to protect the ordinary shareholders in the Company from amendments to the terms of the preference shares which may impact their rights as shareholders.
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This article first appeared on webberwentzel.com