Lelethu Hala (2424385)
I.
QUESTION ONE
To determine what type of company is best suited for Shakti and her two friends, we must
identify the content required in a memorandum of incorporation (MOI) according to the
Companies Act 71 of 2008.1 An (MOI) is required to establish the nature of the company
and the rights and duties of the directors. Section 8(2) (b)2 requires an (MOI) to have a
provision that restricts the transferability of securities. Airport Cold Storage (Pty) Ltd v
Ebrahim3 established that a company will become ‘a separate and distinct legal entity from
its incorporators,’ when registered. Therefore, by default a company has its own juristic
personality and is capable of being liable for the debts it will incur in the course of business
as a large-scale printing and photocopying service.4
Sindler NO v Gees5 expressed that the concept of imposing a limitation provision on
a shareholder’s right to transfer their securities in the company is not unorthodox. As a
shareholder is ordinarily a stranger to the company in its affairs with third parties.6 In Visser
Sitrus (Pty) Ltd v Goede Hoop,7 the court detailed that an (MOI) gives power to the board
of directors to act on behalf of the company to reach their strategic objectives. Thus, a
company is not obligated to give reasons for declining a request to register a share transfer
because disclosure of such information may hamper the best interests of the company. 8
Therefore, an (MOI) must stipulate how a restriction of transferability will materialise to
incorporate a private company.
Accordingly, Shakti and her two friends’ best option is to incorporate as a private
company. Their company will provide large-scale printing and photocopying services in
the Western Cape. As a private company, the directors will not be liable for the debts of
1
Section 8(1)(b) of Act 71 of 2008.
Act 71 of 2008.
3 Airport Cold Storage (Pty) Limited v Ebrahim & Others 2008 (2) SA 303.
4 Ibid.
5 Sindler NO v Gees and Six Other Cases 2006 (5) SA 501 (CC)
6 Letseng Diamonds Limited v JCI Limited and Others 2007 (5) SA 564.
2
7
Visser Sitrus (Pty) Ltd v Goede Hoop Sitrus (Pty) Ltd and Others 2014 (5) SA 179 (WCC).
8
Ibid.
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the company, by default. Further, their (MOI) must contain a provision that restricts the
transferability of shares through a pre-emptive clause that will ensure existing shareholders
have priority when another’s shares within the company are being sold.9 Thus, they will
have a right to discretion over the control and management of the company shares.
9
Ibid at 7.
2
II.
QUESTION TWO
For Magic Marketing Ltd (MM) to have any possible remedy for the breach of terms within
the restraint of trade contract with Mike Todd (MT), (MM) will have to prove that Instant
Marketing Solutions (Pty) Ltd (IMS) is not conducting its business affairs as a ‘separate
and distinct legal entity.’10
South African courts have been faced with cases where a company is perceived to be
operating independently in its own capacity. 11 However, once the veil is pierced, one
discovers that the actions of the company were controlled by a majority shareholder in a
manner that contravenes the Act12. Section 20(9) states that the court can intervene when
the use of a company shows ‘an unconscionable abuse of the juristic personality of the
company as a separate entity.’ 13 The courts adjudicate these matters on a case-to-case basis
based on the objective and subjective factors that indicate a link between the intention of
the use of the securities and the impropriety conduct of a majority shareholder. 14
We can infer that (IMS) was instructed by (MT) to enter into agreements with the
two clients from (MM) on the basis that they would have personally known (MT) and his
quality of work from his previous employment at (MM). Thus, (MT) used the good
reputation of (MM) to divert competition to his new company (IMS).
Our jurisprudence is hesitant to ‘pierce the corporate veil’15 of companies because
the justifications needed to do so are uncertain.16 In Ex parte Gore and Others NNO 2013,17
the court had to find, on a balance of probabilities, that the wrongdoer had control of the
company and used the company as a device to conceal improper conduct like fraud,
misrepresentation, or malice to avoid contractual liability.18
10
Supra note at 3.
Section 19(1)(b)(i) of the Act 71 of 2008.
12 Act 71 of 2008.
13 Section 20(9) of the Act 71 of 2008.
14 Cape Pacific Limited v Lubner Controlling Investments (Pty) Limited and Others [1995] 2 ALL SA 543 (A).
15 Ex parte: Gore NO and Others [2013] 2 ALL SA 437 (WCC).
16 Ibid.
17 Ibid at 15.
18 Ibid at 15.
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It is clear that (MT) had control of the affairs relating to (IMS) and third parties
because he holds 80% of the shares in the company. Thus, there is a link between (MT)’s
control over the company and the use of the company as a façade to conceal the fraud
executed by (MT) to avoid contractual liability with (MM). As the court would find (MT)
to be a party of the agreements with (MM)’s two clients and not (IMS). Thus, contractual
liability would not fall on (IMS) the juristic personality but on (MT) as the controller of
the company. Therefore, those agreements would amount to a breach of the restraint of
trade contract with (MM) for 3 years. Based on the above, (MM) can establish a prima
facie case of a breach of contract against (MT) as the courts will most likely ‘pierce the
corporate veil’19 and the liabilities will fall onto (MT) as the true control of the company
(IMS).
19
4
Ibid at 15.
III.
QUESTION THREE
The issue is whether the loan agreement between Willy Wonker (Pty) Ltd and the Charlie
Chocolate Bank Limited is valid and enforceable according to the Willy Wonker’s (MOI).
The memorandum of incorporation (MOI) is a companies’ foundational document that
governs the nature of a company and the rights and duties of the board of directors and
shareholders.20 In section 15(6)(a),21 a company’s (MOI) and any rules of the company are
binding between the company and each shareholder. When a company violates a provision
in its (MOI) through conduct or agreement, the action will be void to the extent of its
inconsistency.22 Based on the provisions in Willy Wonker’s (MOI), there is a greater
accountability and transparency imposed onto the board of directors’ decisions. This is inline the Companies’ Act expansion on the definition of a company structure where a
company’s strategic objective must expand past profit maximisation and include
stakeholders in decisions. 23 Therefore, the board of directors acting on behalf of Willy
Wonker (Pty) Ltd have failed to conform to the provisions in its (MOI). They concluded a
loan agreement amounting to R3 million with Charlie Chocolate Bank without
communicating with their shareholders who may have rights to participate in the company
through receiving agendas of board meetings. The provision is an indication of the
company safeguarding the rights of its shareholders to hold the board of directors
accountable for acting on behalf of the company. Thus, increasing the level of transparency
in the company’s affairs. Accordingly, the agreement between Willy Wonker (Pty) Ltd
and Charlie Chocolate Bank Limited is not binding and void to Willy Wonker (Pty) Ltd
because the manner in which the agreement was concluded did not comply with the
provisions set out in their (MOI).
20
Section 1 of the Act 71 0f 2008.
Section 15(6)(a) of the Act 71 0f 2008.
22 Section 19(1) (b)(ii) of the Act 71 of 2008.
23 Chapter 1 of the Act 71 of 2008.
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