How to Sell Your Shares in a Private Company in South Africa?

By Klnam Kurt •  Updated: 10/15/24 •  6 min read

Selling private company shares is unduly cumbersome and bureaucratic in the Republic of South Africa. This is because, unlike in listed companies, where one can quickly sell their shares on the JSE, the shares that are held within private companies are not liquid. It is far more complicated to find a buyer and complete the sale. The process is very complicated, from the legal frameworks and company agreements to valuations.

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How Does An Individual Sell Their Shares in a Private Company?

The mechanism tends to be more complex than that for selling shares of public companies. First, one would verify if there are any restrictions on the disposal of the share under the shareholder agreement or MOI. Specific mechanisms or requirements may be contained within such a document, one example being offering shares to other shareholders first before looking elsewhere for buyers.

Once this is established, the next logical step would be to find a buyer. Private company share sales usually occur to existing shareholders, employees, or other investors. Since private company shares are not quoted in any public market, both the price and the terms are usually a matter of negotiation between the buyer and the seller.

Once an agreement is reached on the terms, an actual transfer must be made using the proper legal documentation. This is usually in the form of a share purchase agreement. After that, the share register of the company has to be updated; it needs to reflect the new ownership. If these steps are completed in line with the company’s policy and South African law, then the sale of the shares will have legal standing.

Can Shares in a Private Company Be Sold?

Yes, it is possible to sell shares in a private company; however, this process is often more restricted compared with those companies that are listed publicly. For example, private companies will mainly place controls on who may become shareholders. This kind of restriction typically falls within the shareholder agreement or within the MOI itself.

Pre-emptive rights may form part of the MOI, in which case existing shareholders would have the first option to buy the shares before those are sold to anybody else. In such a manner, existing shareholders have some control over who else can own a portion of the company. If the company does not restrict the selling of its shares, then shareholders may seek other external buyers – institutional investors or venture capitalists.

Can One Force a Shareholder to Sell Their Shares?

Generally speaking, that’s not allowed unless expressly provided in the shareholders’ agreement or the MOI. That said, of course, sometimes there is an exception to this rule.

For instance, there could be a buyout clause within the shareholders’ agreement, enabling the corporation or other shareholders to force a sale upon certain events taking place, like a dispute arising or if the shareholder wants to leave the company. In addition, there is perhaps a drag-along provision forcing the minority shareholders to sell their shares in case one of the majority shareholders wishes to sell his or hers.

Specific forces of sales occur when a firm goes into insolvency or winding up, where the firm’s assets are liquidated, which also includes shares for settling debts owed. However, all of these legal provisions, without which no forcing of sale is done, and a shareholder retains ownership of his respective shares unless both are agreed upon mutually.

How to Determine the Shares’ Value in a Private Company?

It includes some of the critical methods that help in estimating private company share values. While in public companies, market forces determine the price of shares, in private companies, there is a need to estimate its value internally.

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The primary methods of valuation include the DCF method, whereby the future cash flows of the company are projected and discounted back to present value. This will then give an indication of the worth of the company in its entirety, after which further division into shares will yield a per-share value.

The same occurs in the case of CCA, which consists of analyzing the same industry for similar businesses with the aim of making an approximation of what that company can be worth in relation to the valuations of other similar companies. Typically, multiples of EBITDA are used to estimate the profit basis of value.

Finally, the NAV method estimates that the value of the firm equals its asset value minus the liabilities of the firm. In this manner, it provides one with a more divergent value for the shares. These methods all help in setting a fair price for the shares. However, remember that the final valuation often includes negotiations between the buyer and seller.

What Are the Advantages of Possessing Shares in a Private Business?

Owning private firm shares has numerous pros while living in South Africa. First and foremost, shareholders are owners of interests in the business entity involved. Hence, they have a say in the running of the said company. It may involve voting in shareholder meetings over significant company actions like mergers or acquisitions.

Further returns of investing in private companies are dividends. Not all private companies declare dividends, but those that do distribute a part of their profit among the shareholders may act as extra income. If this company grows and develops to become more profitable over the years, then shareholders may see their dividends rise.

In addition, if the private company is performing well in land growth, the value of the shares could increase. In the event that the company goes on to sell or float in the market, the shareholders can resell their shares at a much higher price compared to the cost of investment with substantial capital gains. Ownership in a private company can be one of the long-term strategies for wealth creation for those participating in promising businesses.

What Documents Are Required to Transfer Shares?

A share transfer in a private South African company requires several crucial documents that must be supplied for the transaction to be valid in law and have a good alliance with the policies of the company and national legislation. First, there must be an agreement in the sale of shares. That is, the sale agreement between buyer and seller contains terms notarized with conditions of sale, specifying, among other agreeable terms, how the price will be determined.

Signing on behalf of the two parties completes the transaction. It needs to fill out the share transfer form to record a change in ownership. The document shall be submitted to the company’s registrar and signed by the seller to confirm that shares have been transferred to the buyer.

The final step would be for the new shareholder to be entered into the stock register. The register of stocks is the statutory record of all the shareholders of the firm, which must be kept. Failure to keep it tends to invalidate the transfer of shares. Where the value transferred by the sale of the shares is more extensive, and depending on whether taxes are due on such a sale, additional requirements by law may be applicable, such as tax clearance certificates.

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