Legal aspects of share watering: A comparative study

• Jurisdiction: South Africa
• Date: 30 May 2019
• Pages: 182-191
• Author: Kenneth Kaoma Mwenda
• Published date: 30 May 2019

Legal aspects of share watering: A comparative study

2000 Stell LR 182

Kenneth Kaoma Mwenda*

LLB BCL MBA DBA FCI FRSA

World Bank Washington DC USA

Sandson Schubert Silomba

LLB LLM

Judge in the High Court of Zambia

1. Introduction

“A share is the interest of a shareholder in the company measured by a sum of money,

for the purpose of liability in the first place, and of interest in the seco nd, but also

consisting of a series of mutual covenants entered into by all the shareholders inter se .

. .” 1

From the above definition, it is clear that whereas a share, as an interest, enti tles a

shareholder to a nu mber of rights, such as the right to vote at meetings and to

participate in the profits of the company by way of dividends, a share also attracts

liability on the unpaid-up share capital of the company in the e vent that the

company goes into liqui dation. 2These rights and liabilities represent some of the

contractual relationships between the shareholders inter se 3 and between the

shareholders and the company. 4 As Astbury J observes in the Hickman case:

“An outsider to whom rig hts purport to be given by the articles in his capacity as such

outsider, whether he is or subsequently becomes a member, cannot sue on those

articles, treating them as contracts between himself and the company, to enforce those

rights.” 5

The relati onships between th e sharehol ders inter se, and th e sharehol ders and the

company, are regulated mainly by the arti cles of association. The articles are

contractual rules and can thus be amended . 6However, in a strict commercial sense,

equity interests held by shareholders in the company are commodities. Lite any

other commodity, the allotted shares must be paid for. 7 A share, as a

*The author was a Rhodes Scholar and formerly Lecturer in Corporate Finance Law at the University of

Warwick (UK). Comments from colleagues who read through the earlier drafts of this paper are gratefully

acknowledged. The interpretations and conclusions expressed in the paper are entirely those of the

authors. They do not necessarily represent the views of the World Bank or Zambian judiciary.

2000 Stell LR 183

commodity, has both economic and investment value. 8 Indeed, shares can yield

dividends. 9

In this article, we are not concerned with the legal aspects of payment for shares

purchased from an individual shareholder, but with the legal aspects of payment f or

1 Borland Trustees v Steel Brothers and Co [1901] 1 Ch 279; See also Re Paulin [1935] 1 KB 26; IRC v

Crossman [1937] AC 26.

2 See Sutton's Hospital (1612) 10 Co Rep 1; Tillard v Brown (1668) 1 Lev 237; Salmon v Hamborough

Company (1671) 1 Ch Cas 204 HL.

3 London Sack & Bag Co v Dixon A Lugton [1943] 2 All ER 763 CA.

4 See below.

5 [1915] 1 Ch 881 897.

6 In most common law legal systems, such a procedure is found in company legislation.

7 See Ooregum Gold Mining Co of India Ltd v Roper [1892] AC 125; Re White Star Line [1938] Ch 458;

Tintin Exploration Syndicate v Sandys (1947) 177 LT 412; Re Bradford Investments plc (No 2) [1991]

BCLC 688; Pro-Image Studios v Commonwealth Bank of Australia (1990–1991) 4 ACSR 586; System

Controls plcr v Munro Corporation plc [1990] BCC 386.

8 See infra n 14.

9 On dividend yields, see generally Brealey and Myers Principles of Corporate Finance (1991); Davis &

Pointon Finance and the Firm: An Introduction To Corporate Finance (1994).

(2000) 11 Stell LR 182

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