Maximising Exit Value Through Strategic Corporate Structure

The Exit That Isn’t a Full Sale

Most conversations about exit planning assume the endpoint is a full sale. In practice, many business owners want something more staged, extracting value now, bringing in growth capital, or handing over part of the business while retaining a role and a stake in what happens next. A full disposal isn’t always the goal, and structuring a business only for that scenario can leave better options on the table.

Preference shares are one of the more flexible tools for this kind of staged exit, and they’re often underused simply because business owners don’t know the mechanics well enough to ask for them. See how our corporate structuring enhances exit readiness, including the securities structuring that makes options like this possible.

What a Preference Share Actually Does Here

A preference share gives its holder a defined, usually fixed, return ahead of ordinary shareholders, along with a set redemption arrangement rather than an open-ended equity stake. This makes it a useful instrument for an investor who wants a defined return without taking full ownership risk, and equally useful for a founder who wants to extract value from the business without selling ordinary equity or handing over control.

Structured well, a preference share arrangement can let a business owner draw a return today, keep the ordinary shares that carry voting control, and set the terms for a further transaction later, whether that’s a full sale, a buy-back, or bringing in a new investor down the line.

The Detail That Decides Whether It Works: Section 8E

Here’s where the structuring has to be precise. Section 8E of the Income Tax Act 58 of 1962 is an anti-avoidance provision aimed at preference shares that function more like debt than equity. If a share qualifies as a “hybrid equity instrument,” typically because the issuer is obliged to redeem it within three years of the date of issue, any dividend paid on it is deemed to be income in the hands of the holder rather than an exempt dividend. The company paying it also doesn’t get a deduction for the payment either way.

In practice, this means a preference share structured with a redemption date inside that three-year window can turn what looked like a tax-efficient dividend into ordinary taxable income for the recipient, with no compensating benefit for the paying company. Section 8EA applies a similar recharacterisation to “third-party backed shares,” where a third party effectively guarantees the return. Getting these provisions wrong doesn’t just create an unexpected tax bill, it can undermine the entire rationale for using preference shares in the first place.

Where Preference Shares Also Show Up: BBBEE Transactions

Preference share funding isn’t only a tool for investor exits. It’s also a well-established mechanism in BBBEE transaction structuring, where a BEE shareholder’s stake is often funded through preference shares held by a funding vehicle, with dividends servicing the funding over time as the underlying business generates returns. A business preparing for investment or exit that also carries BEE ownership considerations needs both structures to work together, rather than treating them as separate exercises handled by different advisors at different times.

Why This Needs to Survive Due Diligence, Not Just Work on Paper

None of this matters if the documentation doesn’t hold up. Investors reviewing a business ahead of a transaction will look closely at how preference shares are drafted into the Memorandum of Incorporation and shareholders’ agreements, whether the redemption terms are internally consistent, and whether the securities classification matches what was actually intended commercially. A preference share structure that’s commercially sound but poorly documented creates exactly the kind of due diligence friction that slows transactions down or gives a buyer room to renegotiate terms late in the process.

Frequently Asked Questions

What makes a preference share a “hybrid equity instrument”? Broadly, a preference share becomes a hybrid equity instrument under section 8E if the issuer is obliged to redeem it, in whole or in part, within three years of its date of issue.

Does structuring the redemption term beyond three years always avoid section 8E? It addresses the most common trigger, but the classification depends on the specific terms of the instrument, which is why the drafting needs proper legal input rather than a template.

Can preference shares be used for both an investor exit and a BEE transaction at the same time? Yes, and in practice they often need to be, since both structures typically need to work within the same overall capital structure without undermining each other.

Will a reclassified dividend under section 8E cost the company money too? The company doesn’t gain a deduction for the payment either way, so the reclassification affects the recipient’s tax position without offering the issuer any offsetting benefit.

Building the Structure Before You Need It

A business preparing for investment or exit has more options than a straightforward sale, but only if the underlying structure is built to support them. Preference shares can be part of that flexibility, provided the redemption terms, tax treatment, and documentation are aligned from the outset rather than patched together under transaction pressure.

Contact OAK Law to review your corporate structure ahead of an investment round or exit.