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MRL 2601
ENTREPRENEURIAL LAW
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UNIVERSITY EXAMINATIONS
October/November 2020
MRL2601
Entrepreneurial Law
100 marks
24 hours (plus additional time for submission)
QUESTION 1
1.1
Ann, Jack and Sam are three friends who wish to start their own
publishing company. While driving one Sunday afternoon, Jack
comes across the perfect office building. He wishes to purchase this
building on behalf of the proposed company. Advise Jack what the
requirements are that would need to be adhered to in terms of the
Companies Act 71 of 2008 in order to conclude a valid and binding
contract on the company’s behalf before its incorporation. Also list
the different common law alternatives that Jack could consider
instead.
(12)
In terms of section 21 of the Companies Act 71 of 2008, any person wishing
to establish a company can enter into a contract with a third party on behalf
of a company that is not yet formed. After that company has been formed,
then the entered contract will be transferred to the company. In this case, as
Jack wishes to purchase the building on behalf of the proposed company, he
can make use of this section.
In terms of section 21 of the Companies Act, the contract will be valid and
binding if:
it is entered by a person wishing to start a company on behalf of a
company that does not exist yet. In this case Jack would be doing so.
the contract is in writing.
the board of the company approves and accepts the terms and conditions
of the contract within a period of three months after its formation.
In terms of common law, it is impossible for any person to enter into a
contract on behalf of a company that does not exist yet. However, there are
other alternatives available under common law Jack could consider. They
are;
Cession and delegation
Nomination
Option
Contract for the benefit of a third party
1.2
Woodinn (Pty) Ltd has two shareholders, Tom and Sue who each hold
50% of the issued share capital. Tom, Sue and Jack are appointed as
the company’s directors.
The Memorandum of Incorporation determines that Woodinn (Pty) Ltd’s
main business is manufacturing furniture. In addition, it stipulates that
Jack may conclude contracts not
exceeding the value of R500 000 on the company’s behalf. For any contract
exceeding this amount, Jack is required to get prior permission from the
board of directors.
The company was registered early in 2018. No annual general meeting
has been held as yet.
Answer the following questions with reference to the Companies Act 71
of 2008 and the facts provided above:
1.2.1
Jack buys a load of timber to the value of R2 million from Xander.
Jack does not seek permission from the board of directors as
required. Xander does not take the trouble to find out what the
company’s Memorandum of Incorporation determines but does not
suspect any irregularity in the agreement. Is the company bound to
the transaction?
(5)
In terms of section 20(1)(a) of the Companies Act, even if the Memorandum
of Incorporation of a company may restrict some powers on the legal
capacity of the company, that will not invalidate any contracts concluded by
the directors of the company. This technically means that any contract that
is concluded contrary to the Memorandum of Incorporation by the directors
of the company is valid. In this case Jack concludes a contract of R2 million
with Xander (contrary to the R500 000 limit imposed by the Memorandum
of Incorporation) without seeking permission from the board of directors.
Consequently, this contract is still valid.
Hence the company is bound to the transaction.
1.2.2
Is the company required to hold an annual general meeting? (3)
“In terms of the Companies Act, only public companies have a statutory
obligation to convene annual general meetings.” Other companies may do
so voluntarily. Since Woodinin (Pty) Ltd is a private company, it is thus
not required to hold an annual general meeting, it may do so voluntarily.
1.2.3
What matters must be discussed at a company’s annual general
meeting?
(4)
In term of section 61(8) of the companies Act the following matters must be
discussed at a company’s annual general meeting:
presentation of the directors’ report
presentation of audited financial statements for the immediately preceding
financial year
presentation of an audit committee report
election of directors to the extent required by the Companies Act or
the company’s Memorandum of Incorporation
appointment of an auditor for the following financial year
appointment of an audit committee
any matter raised by shareholders
1.3
List four (4) grounds on which an application can be brought against a
director for an order declaring him or her delinquent in terms of
section 162 of the Companies Act 71 of 2008.
(4)
In terms of section 162(5) of the Companies Act 71 of 2008, the grounds
for delinquency order are that the person:
served as a director while disqualified, or
acted as a director while under probation in a manner that
contravened the order of probation
grossly abused the position of director
took personal advantage of information or an opportunity, in conflict
with the provisions of section 76(2)(a) of the Act
1.4
Figozo Ltd showed an increase in profits for the 2020 financial year.
At a board meeting, the directors decide that dividends should be
paid out to the company’s shareholders. Indicate what the
requirements are in terms of the Companies Act 71 of 2008 that must
be adhered to before the dividends may be declared and paid. (7)
In terms of section 1 of the companies Act, a distribution includes among
others, a direct or indirect transfer of money or any other property by a
company to its shareholders in the form of a dividend. “However, usually
dividends are paid from the profits of a company.” This is what Figozo Ltd is
applying in this case.
Section 46 of the Companies Act sets the following requirements
before dividends may be declared and paid. Dividends may be paid if:
the distribution is in accordance with an existing legal obligation of
the company, or a court order; or
the distribution is authorised by the board of directors of the company
it reasonably appears that the company will satisfy the solvency and
liquidity test immediately after the distribution; and
the board resolution acknowledges that the board has applied the
solvency and liquidity test and reasonably concluded that the
company will satisfy the test immediately after completing the
proposed distribution
Solvency test shorty means that the company’s assets value is equal to or
greater than the company’s debts. Liquidity test shortly refers the
company’s ability to pay its debts on time.
QUESTION 2
2.1
Mr Schmidt’s (a German citizen), Mr Ells (an English citizen) and Mr
Dube (a South African citizen) are the only shareholders of West
Meets South (Pty) Ltd, a company registered in South Africa with its
head office located in Sandton. Due to the time and financial costs
involved in travelling from Europe to South Africa each time there is
a meeting, especially less important meetings, Mr Schmidt’s and Mr
Ells ask you for advice whether or not it is possible for resolutions of
shareholders to be passed without holding a general meeting of
shareholders. Advise them.
(10)
Under common law, shareholders resolutions can be passed without
holding a general meeting by a way of unanimous assent. In terms of this
rule valid decisions may be taken without a meeting being held, “provided
that all the members are fully aware of the facts and all of them have
assented thereto…” It is not mandatory that this is in writing. In Gohlke and
Schneider v Westies Minerals (Pty) Ltd it was held that “members may
validly appoint a director to the board without any formal meeting being
held, because there was evidence of their unanimous consent.”
In this case Mr Schmidt’s and Mr Ells may use this option in order to save
on financial cost.
Section 60 of the Companies Acts provides another option. A resolution can
be submitted to the shareholders who are entitled to vote to adopt it in
writing. In that way there would not be any need to hold a meeting if the
shareholders adopt the resolution. What is required is that the majority of
the shareholders agrees in writing. Once this is done, then that resolution
will be taken as valid, without actually physically holding a meeting. Hence
Mr Schmitds and Mr Ells may also use this statutory option. However,
section 60 does not apply in case of an annual general meeting.
2.2
Cornelius, a shareholder and director of Axxaro (Pty) Ltd, agrees to
sell his shares in the company to James for R40 000. In order to
enable James to acquire the shares, Axxaro (Pty) Ltd agrees to
purchase a second-hand car from James for the sum of R40 000.
Explain, with reference to case law, whether or not this transaction
qualifies as financial assistance.
(10)
In Lipschitz v UDC Bank Ltd, it was held that the transaction must be
assessed in two phases: First, it must be determined if there was
financial assistance or not. In Gradwell (Pty) Ltd v Rostra Printers Ltd,
the “impoverishment test” was formulated to assist in determining
whether financial assistance was provided. In terms of the
impoverishment test, one considers whether a transaction will have
the effect of leaving the company poorer. If so, then financial
assistance will have been provided. In Lipschitz, the court held that
this is not the only measure of financial assistance, but that exposing
the company to risk will also qualify as financial assistance for
purposes of the Act.
Secondly, it must be determined whether that assistance was for the
purpose of acquiring shares in the company. If the company buys an
asset from the person in order to enable that person to purchase
shares in the company, it will depend on the facts whether there was
financial assistance. Factors such as whether the company needs the
asset in its normal business and whether the company paid a fair
price for it, will determine whether there was in fact financial
assistance.
In this scenario, the second-hand car that Axxaro (Pty) Ltd purchased
from James will in all possibilities be needed by the company, and if a
fair price was paid, then then financial assistance would have not been
provided. If a fair price was not paid, then it passes these two phases.
Then it will have to comply with section 44 of the Companies Act in
order to be valid. This means that the solvency and liquidity
requirements must be met.
2.3 Briefly distinguish between the circumstances in which someone
would be ineligible to be appointed as a director and circumstances
in which someone would be disqualified to be appointed as a
director. Also provide an example of each instance.(5)
In terms of section 69 of the Companies Act, a person who is ineligible to
be appointed as a director is completely restricted from being a director
now and in the near future. Such a person shall never be a director of any
company in any way. Example: a juristic person is ineligible to appointed
as a director.
However, in Ex Parte Barron, the court held that it “could be more lenient in
a case where a private company is affected than where a public company is
affected.”
If a person is disqualified from being a director of a company it means that
there are exceptions. That person can possibly be a director of a company
in the near future, provided something else happens. For instance, if a
court may grant such a person a permission, then he/she can be a director.
Example, a declared delinquent is disqualified from being a director of any
company.
2.4
The Memorandum of Incorporation of ABC (Pty) Ltd contains the
following provisions:
If the company issues new shares, they must first be offered to existing
members.
Directors hold their office for life.
In terms of section 71 of the Companies Act, a director can be removed by
shareholders or even the board of directors. Despite anything in conflict
with a company’s Memorandum of Incorporation, a director may be
removed by an ordinary resolution adopted at a shareholders meeting by
the persons entitled to exercise voting rights in an election of that director.
In this scenario, the fact that the Memorandum of Incorporation of ABC
(Pty) Ltd provides that directors hold their office for life does not prevent a
director from being removed from the office. Hence, Azaria cannot invoke
the provisions in the Memorandum of Incorporation to prevent her
removal.
In terms of section 71(9) of the Companies Act, the removed director from
office may claim compensation or damages resulting from the loss of his/her
office in term of common law or otherwise. Therefore, “contractual claims
based solely on the provisions of the Memorandum of Incorporation may be
possible as the Memorandum of Incorporation is binding between the
company and the directors in the exercise of their functions.” Hence in this
scenario, Azaria could claim damages for her premature removal based solely
on the provisions as contained in the Memorandum of Incorporation.
Azaria is a director of ABC (Pty) Ltd. The board of directors removes
Azaria as director. Indicate whether or not she can invoke the provisions
in the Memorandum of Incorporation to prevent her removal. Also
indicate whether she could claim damages for her premature removal
based solely on the provisions as contained in the Memorandum of
Incorporation.
(6)
2.5
Instead of applying for relief to a court, a person entitled to relief or
to file a complaint may refer it to various other forums in terms of
the Companies Act 71 of 2008.
Name the alternatives provided for in the Companies Act 71 of 2008.
In terms of section 166 of the Companies Act, a person may use
alternative dispute resolution for a relief. A person may refer a complaint
to:
the Companies Tribunal; or
an accredited entity; or
for resolution by mediation, conciliation or arbitration
QUESTION 3
3.1 Following the promulgation of the Companies Act 71 of 2008, the front
page of the business section of a local newspaper contained the
following headline:
"The business judgment rule is a safe harbour for negligent directors
who should be punished for neglecting their duty of care and diligence,
says academic."
With reference to the above statement, discuss what the business
judgment rule entails.
(5)
Section 76(4) of the Companies Act protects directors who in the first sight
may seem to have acted without a degree of care, skill and diligence. This is
what is referred to as a business judgement rule in terms of the Act. Section
76(4) provides that a director will be regarded as having acted in the best
interests of the company and with the required degree of care, skill and
diligence if the director:
took reasonable steps to become informed about the matter
had no material personal financial interest in the subject matter of the
decision or knew of anybody else having a financial interest in the
matter, or disclosed his/her interests, and
made or supported a decision in the belief that it was in the best
interests of the company
This means that if a director tried by all means to perform his/her duties in
good faith, then that director cannot be charged with negligence. Some
things may be beyond the control of the director while performing his/her
duties.
3.2 Peter Black is a registered auditor. Until November 2016 he was a
director of ABC Intellectual Services (Pty) Ltd. During October 2016
he became seriously ill and resigned for health reasons. He has now
recuperated fully. Indicate whether or not Peter can be reinstated
with immediate effect as the auditor of ABC Intellectual Services
(Pty) Ltd. Also explain which people are disqualified to be appointed
as an auditor of a company. (5)
In terms of section 90(2)(b) of the Companies Act, the person appointed as
an auditor of a company must not, at the time of appointment be, or for the
previous five years have been a director of the company. In this scenario,
Peter Black was a director of ABC Intellectual Services (Pty) Ltd in 2016.
Hence, he cannot be reinstated with immediate effect as the auditor of ABC
Intellectual Services (Pty) Ltd since the period of five years has not yet
lapsed.
The following people are disqualified to be appointed as auditors of a
company in terms of section 90(2)(b) of the Companies Act:
a director or prescribed officer of the company
an employee or consultant of the company who was or has been
engaged for more than one year in the maintenance of any of the
company’s financial records or the preparation of any of its financial
statements
a director, officer or employee of a person appointed as company
secretary
a person who, alone or with a partner or employees, habitually or
regularly performs the duties of accountant or bookkeeper, or
performs related secretarial work, for the company
QUESTION 4
4.1
Good Food CC’s main business is catering. The corporation has 5
members: Anthea, Bert-Filandro, Carol, Daniel and Elvis. Each
member holds a 20% member’s interest. The association agreement
determines that only Daniel is authorised to represent the close
corporation. Anthea enters into a contract for the purchase of a
racehorse on behalf of the close corporation with Bert-Filandro. Is
the close corporation bound to the transaction?
(8)
In terms of section 54 of the Close Corporation Act 69 of 1984, “every member [of
a close corporation] has the authority to conclude contracts on behalf of the close
corporation in relation to a person who is not a member.” This means that any
member of a close corporation can conclude contracts on behalf of the
corporation irrespective of the association agreement between/among the other
members. Even if the transaction falls outside of the scope of the main business
of the corporation, the contract will still be valid.
In J&K Timbers (Pty) Ltd v GL&S Furniture Enterprises CC, the court
confirmed that “a member of a close corporation is an agent, even though no
authority, express or implied, has been conferred upon him or her by the
corporation.” However, if the third party knew, or ought to have known of
any restrictions on the members’ performance, any concluded contract
would be invalid.
In this case the close corporation is NOT bound to the transaction because
Bert-Filando knows or he ought to have known that Anthea lacks authority
to conclude the contract on behalf of the close corporation.
4.2
Lesedi and Simphiwe are members of Private Investigators CC. Upon
formation of the corporation they agree that their respective
membership contributions will consist of cash only. Each member
was required to contribute R100 000 and these amounts were duly
recorded in the founding statement. Apart from the monetary
contribution, Lesedi also entered into a lease agreement in terms of
which he rents out a building he privately owns to the close
corporation for use as an office. Simphiwe, who is a part- time
student at UNISA, also enters into an employment contract with the
close corporation. In terms of the contract of service he is required to
be in the office to attend
to the corporation’s day to day business. At a meeting of the
members, Lesedi and Simphiwe decide that due to a lack of profits
generated from sales, the corporation will repay each member 2% of
their respective contributions to enable them to provide for personal
needs. They further agree that the corporation will make some
payments to them in respect of their respective rental and
employment agreements. Advise the members of Private
Investigators CC whether these payments meet the requirements in
terms of the Close Corporations Act 69 of 1984.
(6)
In terms of section 51(1) of the Close Corporation Act, payments to
members in their capacity as members may only be made only if:
after such payment is made, the close corporation’s assets
fairly valued, exceed all its liabilities (solvency test)
the close corporation is able to pay its debts as they become due
in the ordinary course of business (liquidity test)
such payment will in the particular circumstances not in fact
render the corporation unable to pay its debts as they become due
in the ordinary course of its business
In addition to that, all other members must provide their written consent
for such a payment.
In this scenario, Private Investigators CC has not complied with the above
requirements. Solvency and liquidity tests have not been performed.
Therefore, these payments do not meet the requirements in terms of the
Close Corporation Act 69 of 1984.
4.3 Briefly explain, with reference to the relevant paragraph/s of the
decision, the relevance of the decision in Feni v Gxothiwe and another 2014
SA 594 (ECG) in relation to the remedies available to members in a
close corporation.
In terms of section 51(1) of the Close Corporation Act, payments to members in
their capacity as members may only be made only if:
after such payment is made, the close corporation’s assets fairly
valued, exceed all its liabilities (solvency test)
the close corporation is able to pay its debts as they become due in
the ordinary course of business (liquidity test)
such payment will in the particular circumstances not in fact render
the corporation unable to pay its debts as they become due in the
ordinary course of its business
In addition to that, all other members must provide their written consent for
such a payment.
In this scenario, Private Investigators CC has not complied with the above
requirements. Solvency and liquidity tests have not been performed. Therefore,
these payments do not meet the requirements in terms of the Close Corporation
Act 69 of 1984.
In this case Esther Nomvuyo (the applicant) is bringing application to the court for
the termination of her member’s membership, Philip Tommy Gxothiwe (first
respondent). They were both members of Westondale Farming CC (second
respondent).
In terms of paragraph 2, the applicant has applied for a relief in terms of
sections 36 and 39 of the Close Corporation Act 69 of 1984. She seeks an order
terminating Philip Tommy Gxothiwe’s membership of Westondale Farming. In
terms of paragraph 10 Esther Nomvuyo held 40% of the member’s interest
and Philip Tommy Gxothiwe held 60%.
In terms of paragraph 13, Mr Gxothiwe enjoyed the sole access to the bank
account of Westondale Farming. It means he was the only one authorising any
payment. According to paragraph 16 he had the sole signing rights on
Westondale Farming account and access to its money.
In paragraphs 21 the judge quotes section 36 of Close Corporation Act 69 of
1984. In paragraphs 22-23 the judge quotes section 49 of the companies Act
and its application in previous court decisions.
Therefore, this decision is relevant in relation to remedies available to
members of a close corporation because it directly applies the remedies
available in the Close Corporation Act 69 of 1984.
Open Rubric
MAY / JUNE 2020
MRL2601
Entrepreneurial Law
100 marks
24 Hours Portfolio examination
QUESTION 1
The Memorandum of Incorporation of Gangnam’s Tile (Pty) Ltd
provides that the board of directors has the power to conclude
contracts on behalf of the company. Any transaction that exceeds R1
million must first be authorised by the shareholders in a shareholder
‘meeting by way of an ordinary resolution. The board of directors
concludes a contract with Mr Naidoo for the purchase of a beach house
for R3,5 million without the authorisation of the shareholders. Can the
company deny liability in terms of the contract based on its lack of
capacity on the ground that the contract is ultra vires? (5)
Section 19(1)(b) of the Companies Act provides that a company has all the
legal capacity and the powers of a natural person, except to the extent that
a juristic person is incapable of exercising any such power, or the
company’s Memorandum of Incorporation provides otherwise. Therefore,
the capacity of a company is no longer limited by its main or ancillary
objects or business, and these objects need not even be stated in the
Memorandum of Incorporation.
Although the company’s Memorandum of Incorporation may limit, restrict
or qualify the purposes, powers or activities of the company (in other
words, impose restrictions on the legal capacity of the company) in terms
of section 19(1)(b)(ii), any such restrictions would not render any contract
invalid that conflicts with these restrictions (section 20(1)(a)). Therefore,
the contract remains valid and binding on the company and the other party
to the contract even if it is an ultra vires transaction.
QUESTION 2
Aakash is a director working at Gangnam’s Tile Ltd. In terms of the
company’s Memorandum of Incorporation, a shareholders’ meeting
must be held to pass resolutions. However, it is contrary to the lock
down regulations to hold meetings like the one the company would be
required to hold. Advise Aakash of different ways provided for in the
Companies Act 71 of 2008 and the common law to pass the resolutions
without holding a meeting. Briefly set out the requirements to validly
pass a resolution using each of the different methods.
(15)
In English and South African case law, the common law rule of unanimous assent
has been accepted. In terms of this rule, certain decisions may be valid without a
meeting being held, provided that all the members are fully aware of the facts and
all of them have assented thereto, The Companies Act also now provides another
option. In terms of section 60 of the Companies Act, a resolution may be
submitted to shareholders and, if adopted in writing by the required majority, will
have the same effect as if it had been adopted at a meeting without actually holding
a general meeting of shareholders. This means that the unanimous assent (where it
is required that each and every shareholder agrees) is not required under section
60. As long as the required majority agrees in writing, a decision may be validly
passed without convening a shareholders’ meeting. However, any business of a
company that must be conducted at an annual general meeting may not be
conducted by using the section 60 procedure. The appointment of new
directors is a matter that could in terms of section 61 of the Companies Act be
transacted at the company’s annual general meeting, so whether the option is
available would be dependent on what the company’s Memorandum of
Incorporation determines in respect of appointment of directors.
Electronic notice and electronic participation in meetings are allowed unless the
Memorandum of Incorporation prohibits it (section 63(2) of the Companies Act).
QUESTION 3
[10 marks]
Match the term in column A with the correct description in column B.
Please write your answers in the block provided at the bottom section
of column A. e.g. 11. Y
Column A
Column B
1.
Pre-incorporation contract
2.
Ring-fenced company
(H)
3.
A share
(C )
4.
Ultra vires contract
5.
Notice of Incorporation
6.
Founding statement
(A)
7.
Fiduciary duty
(D)
8.
Distribution
9.
Duty of care, skill and diligence
10. Legal or juristic personality
( O)
A. The sole registration document for a
close corporation.
B. Expressed as a percentage.
C. One of the units into which the
proprietary interest in a profit company
is divided.
D. Owed to the close corporation by a
member, but not to other members in a
close corporation.
E. A payment that is made by a company
to a shareholder in his or her capacity as
a shareholder in terms of section 46 of
the Companies Act 71 of 2008.
(I)
(T)
(E)
(L)
(S)
F.A legal fiction that recognises a
company and a close corporation as
bearer of its own rights and duties.
G. A resolution adopted by 75 per cent of
shareholders who are entitled to vote.
H. A company that has an express
limitation on its capacity.
I. A contract that does not appear to
promote the main objective of the
company in any way.
J. A complete codification of the duty that
previously existed only under the
common law.
K. Someone who is authorised to
represent the company.
L. An objective and subjective test is used
to establish liability.
M. Proof of a debt that has been incurred
by a company.
N. A company in which directors are held
personally liable for contractual debts of
the business.
O. A written agreement concluded on
behalf of a company before its formation
with the intention that the company will
be bound by it.
P. The constitution of a company.
Q. An agreement that can be concluded
before the registration of a new close
corporation.
R. An optional agreement that is used to
regulate internal relations in a close
corporation.
S. A legal fiction that recognises a
company and a close corporation as a
bearer of its own rights and duties.
T. A document that has to be lodged in
order to register a company.
U. An agreement that falls within the
scope of a corporation’s capacity.
V. A trait of an attorney or an advocate.
(10)
QUESTION 4
Mmabatho wants to subscribe for shares in Bethal Brooks (Pty) Ltd. She
is not in a financial position to do so without acquiring a loan. She obtains
a loan from FCR Bank Ltd, and Bethal Brooks (Pty) Ltd agrees to stand
surety for this loan. Advise the board of directors of Bethal Brooks (Pty)
Ltd whether the company has provided financial assistance as envisaged
in terms of the Companies Act 71 of 2008. Refer to relevant case law. (10)
One would have to ascertain whether or not the transaction qualifies as financial
assistance. In Lipschitz v UDC Bank Ltd, it was held that the transaction must be
assessed in two phases: Firstly, it must be ascertained whether there was financial
assistance. In Gradwell (Pty) Ltd v Rostra Printers Ltd, the “impoverishment test”
was formulated to assist in determining whether financial assistance was
provided. In terms of the impoverishment test, one considers whether a
transaction will have 4 the effect of leaving the company poorer. If so, financial
assistance will have been provided. In Lipschitz, the court held that this is not the
only measure of financial assistance, but that exposing the company to risk will
also qualify as financial assistance for purposes of the Act. For example, if the
person obtained a loan to purchase shares in the company, and the company stood
surety for that loan, this will count as financial assistance. If the company buys an
asset from the person in order to enable that person to purchase shares in the
company, it will depend on the facts whether there was financial assistance.
Factors that have emerged from case law to assist in this regard are whether the
company needs the asset in its normal business and whether the company paid a
fair price for it. Secondly, it must be determined whether that assistance was for
the purpose of acquiring shares in the company. Suppose Company A is a major
creditor of Company B. Company A acquires most of the shares in Company B.
After the acquisition, Company A causes Company B to grant security over its
movable assets to secure the loans. This will be financial assistance in terms of the
first test, but it is not in connection with the purchase of shares. The assistance is
to secure a loan. When a transaction passes these two phases, it will have to
comply with section 44 of the Companies Act in order to be valid.
QUESTION 5
With reference to the Companies Regulations, 2011 and the
Companies Act 71 of 2008 indicate what factors are considered in
order to determine whether it is necessary for a close corporation to
have its annual financial statements audited by an auditor. (8)
The Companies Regulations of 2011 include a Public Interest Score (PIS)
calculation
which determines what the reporting duties of other categories of companies are.
If a company holds assets in a fiduciary capacity with an aggregate value of over
R5 million, an audit is required. The Companies Regulations of 2011 provide for
both activity and size criteria to determine whether or not companies require
audited financial statements.
The Regulations state that every entity is required to calculate its PIS at the end of
each financial year. The score is calculated as the sum of the following:
a number of points equal to the average number of employees (as determined
by the Labour Relations Act 66 of 1995) of the company during the financial
year;
one point for every R1 million (or portion thereof) in third-party liabilities at
year-end (these exclude shareholder loans and intercompany loans with 5
common shareholdings);
one point for every R1 million (or portion thereof) in turnover during the
financial year; and
one point for every individual who, at the end of the financial year, is known
by the company to directly or indirectly have a beneficial interest in the
business. Furthermore:
For companies with a score below 100, an independent review is required if
such companies are not owner managed.
If the company has a score below 100 and is owner-managed, there is no
requirement for outside professional assistance.
“Owner-managed” means that all shareholders are directors, or, in the case of
a trust, that at least one of the trustees is a director.
If the company is not owner-managed, and obtains a PIS score of 100 to 350,
an audit is required if reports are internally compiled or an independent
review if they are externally compiled
If the company is owner-managed with a score of 100 to 350, no professional
intervention is required if reports are externally compiled, but an audit will be
needed if the reports are internally compiled.
If a company scores over 350 points, an audit is required regardless of
whether the company is owner-managed or not.
A company can subject itself to audits by choice (voluntarily).
QUESTION 6
Read the case of Feni v Gxothiwe & another 2014 (1) SA 594
(ECG) and answer the following questions
Answer the following questions with reference to specific paragraphs in the
case:
6.1
Who was the presiding officer in this matter?
(1)
Plasket J
6.2
What kind of business entity is the second respondent in this matter?
(1)
A close corporation
6.3
Discuss whether the member’s interest in this business was
awarded in terms of the contributions made by the participants.
(2)
No. ‘There was no monetary and/or resource injection that
determined the percentage allocation in the business on the part of
the first respondent. I provided the necessary resources for the
second respondent to get operational.’
6.4
In terms of which section/s of legislation did the applicant apply for
relief?
(2)
Section 36 and 49 of the Close Corporations Act.
6.5
What orders was the applicant seeking?
(4)
Termination of the first respondent’s membership, an order determining
the method for valuation of the member’s interest and an order directing
him to sell the interest to her.
6.6
Briefly summarise the facts that are relevant to the applicant’s
claim that she had been prejudiced unfairly by the first
respondent.(15)
The first respondent gave 500 pregnant ewes to his brother and eight
rams. He refused to listen to the applicant. He also refused to service
the loans from Uvimba Finance He appeared to be unconcerned that
the applicant’s property had been encumbered as security for the
loans and that she was consequently at risk. In the meantime, the
interest on the loans increased. he also failed to pay the telephone and
electricity accounts with the result that these services were
terminated by the respective providers. the first respondent ejected
the applicant from Westondale Farm. Not surprisingly, the applicant
was of the view that by this stage her and the first respondent’s
relationship had broken down completely. Great animosity existed
between them. She had to be accompanied by the police to retrieve
personal belongings from the farm. In January 2013, a property
owned by the applicant was attached and sold in execution in order to
repay part of the loan owed by Westondale Farming to Uvimba
Finance. The first respondent continues to farm, and he keeps the
proceeds of the farming operation for himself. In addition, he has,
from August 2009 to April 2013, made unauthorised withdrawals
from Westondale Farming’s account in excess of R1 600 000. He has
refused to account to the applicant for his withdrawals of cash. The
first respondent made sporadic payments of money into the
applicant’s account in respect of three motor vehicles used by
Westondale Farming but purchased by the applicant. Payments for
the vehicles were, in turn, deducted from the applicant’s account. As a
result of the sporadic nature of the payments, one of the vehicles was
re-possessed and the applicant had to pay R16 684 in order to regain
possession of it. However, he purchased a further three vehicles with
funds of Westondale Farming. He gave these vehicles to a nephew, the
brother of his lover and a second nephew
6.7
Which remedy did the court decide was more appropriate in
these specific circumstances, and why?
(5)
On the facts of this matter either s 36 or s 49 could be applied.
That said, it seems to me that s 49 is the most apposite section to
apply: while the focus of s 36 is on the effect of a member’s capability
or conduct on the business of the close corporation, the focus of s 49 is
on the effect of conduct of either the close corporation or a member or
members on another member. The applicant’s complaint in this
matter is, ultimately, that the first respondent’s conduct – his acts and
omissions – are unfairly prejudicial, unjust or inequitable to her. I
shall, accordingly, deal with the matter in terms of s 49, although I am
of the view that the same result would follow from the application of s
36 and that the cases dealing with s 36 are, by and large, applicable to
s 49 as well.
QUESTION 7
Briefly set out the procedure that must be followed to register a private
company in terms of the Companies Act 71 of 2008. (5) In-order to
incorporate/register a company the following procedure
should be followed;
Application for reservation of name – applicants will
need to apply for available names although name
reservation is not compulsory
Once name has be reserved and it will be shown on the
Notice of Incorporation. The name must not be the same
or confusingly similar to existing names or trademarks.
After receipt of the Notice of Incorporation the CIPC must
assign the
registration number to the company and issue a Certificate
of Registration
The certificate is the conclusive evidence that
requirements for
incorporation have been complied with
The name and the registration number must be
provided to any person on demand and must
appear on all notices and official documents.
7.2
Briefly set out the criteria that are laid down in the Companies
Act 71 of 2008 in regard to the selection of a suitable name for a
new company.
(10)
The Companies Act restricts a company name only as far as it is necessary to ·
protect the public from misleading names which falsely imply an association
that does not exist · protect the interest of the owners of names and other
forms of intellectual property (such as trademarks) from other persons
passing themselves off as such owners or coat-tailing on the owners’
reputation and good standing, and · protect the public from names that would
fall within the ambit of expression that does not enjoy constitutional
protection because of its harmful or other negative nature To avoid deception
of the public, the name of a company may not · be the same as the name of
another company, external company, close corporation or cooperative; or the
name of a business which has already been registered in terms of the Business
Names Act 27 of 1960; or a trademark which has been filed for registration in
terms of the Trade Marks Act 194 of 1993; or a mark, word or expression
protected in terms of the Merchandise Marks Act of 1941 · be confusingly
similar to a name, trademark, mark, word or expression as described above
(subject to a few specific exceptions) · give the false impression that the
company is associated with the government or with a particular person or
government office, etc., and · include any word, expression or symbol that may
constitute propaganda for war, incitement of imminent violence, or advocacy
of hatred based on race, ethnicity, gender or religion, or incitement to cause
harm Also note the following: · The Companies Act does not make provision for
the registration of a shortened or translated name. · A name reservation in a
foreign language must be accompanied by a certified translation and certificate
of translation. · In terms of the Consumer Protection Act 68 of 2008, members
of the public are required to register their business/trading name/sole
proprietorship/partnership names with the Commission. · Where, according to
the Commission, there is a possibility that the name is similar to the name of
another company or another business undertaking or trademark, or that the
name gives the impression that there is a connection between the company
that is applying and another entity or state organ, the Commission may compel
the applicant to inform parties that may be interested by serving them with a
copy of the application and name reservation. If the company’s name is to be
associated with another existing business, the Commission will require proof
from the applicant company that the associated company was made aware
before registration that a similar name would accordingly be allowed.
⤀ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀĀȀ⤀ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀ The Companies
Act also allows any person who has an interest in the name of a company to
apply to the Companies Tribunal for it to determine whether or not the name
is in accordance with the requirements of the Companies Act.
QUESTION 8
Explain what is meant by a “right of pre-emption” on the issue of
shares under the Companies Act 71 of 2008. Also indicate whether
this right applies automatically in respect of all shares and in all
companies
(7)
In terms of section 39 of the Companies Act, every shareholder in a private
company
(and a personal liability company) has the right, before any other person who is
not a
shareholder of the company, to be offered and to subscribe (within a reasonable
time) for a percentage of any shares issued or proposed to be issued equal to the
voting power of that shareholder’s general voting rights immediately before the
offer
was made. However, a company’s Memorandum of Incorporation may limit, negate
or restrict this right with respect to any or all classes of shares of that company
OCTOBER / NOVEMBER 2019
SECTION A
QUESTION 1
Sarah wishes to incorporate a company to raise Funds for wildlife
conservation Advise her on the following
1.1. Considering the purpose of the business, indicate the type of company
she should register. Also mention four distinctive characteristics that are
associated with this type of company
(5)
The most appropriate company is a Non-profit company. This type of
company has the following characteristics:
Not formed with the aim of making a profit for members
Has members, not shareholders
Does not have to have members
Object must relate to social activities, public benefits, cultural or group
activities
Must be formed by at least three persons who will be its first directors
Must have three directors
Directors are not to obtain financial benefits besides reasonable remuneration
The company’s property is not distributable to its incorporators, members,
officers etc.
Upon liquidation of the company its assets must be transferred to
another non-profit company, voluntary association or trust having a
similar purpose.
1.2
Briefly explain the procedure that Sarah must follow to register the
above company.
(5)
In order to register a company, the following process must be followed:
Lodge a Memorandum of Incorporation and a Notice of Incorporation with
the Companies and Intellectual Property Commission together with the
prescribed fee. For this particular type of company, a name reservation must
be done and there must be at least three (3) incorporators who must each
complete and sign the Memorandum of Incorporation. They will also serve
as the company’s first directors
1.3 Sarah has heard that all companies should appoint company
secretaries. Indicate whether this is correct. Also inform Sarah of
three statutory duties of a company secretary (5)
No, it is not correct. Only public companies and state-owned companies are
legally obliged to. A private company, personal liability company or a non-profit
company may appoint a secretary voluntarily.
Duties of company secretaries are:
Providing the directors of the company collectively and individually with
guidance as to their duties, responsibilities and powers
making the directors aware of any law relevant to or affecting the company
reporting, to the company’s board, any failure on the part of the company or
a director to comply with the Companies Act 71 of 2008
ensuring that minutes of all shareholders’ meetings, board meetings and
meetings of any committees of the directors, or of the company’s audit
committee, are properly recorded
certifying, in the company’s annual financial statements, whether the
company has filed required returns and notices in terms of the
Companies Act 71 of 2008, and whether all such returns and notices
appear to be true, correct and up to date
ensuring that a copy of the company’s annual financial statements is
sent, in accordance with the Companies Act 71 of 2008, to every
person who is entitled to it
carrying out the functions of a person designated in terms of section 33(3)
(responsible for filing the company’s annual return)
1.4
While driving to a party, Sarah notices an office building that is 'to let"
She is interested in renting an office, without further delay, for
purposes of her proposed company. Advise Sarah of the formal
requirements to conclude a binding contract on behalf of a company yet
to be formed, in terms of the Companies Act 71 of 2008
(5)
In terms of section 21 of the Companies Act 71 of 2008, a pre-incorporation
contract will be binding on a company if:
it is concluded by a person in the name of, or purporting to act in the name of
or
on behalf of, a company yet to be incorporated in terms of the Companies Act
the contract was concluded in writing, and
the board of that company ratifies the transaction or does not reject the
contract within the stipulated three-month period
(In other words, if the above two formal requirements are complied with, and
after the company’s incorporation, the board “does nothing” about the
transaction (i.e. neither ratifies nor rejects it), the contract will become
binding on the company.)
QUESTION 2
The board of directors of Bramley (Pty) Ltd proposed that the general
meeting should adopt a special resolution containing a general approval
for the repurchase of shares. The company was incorporated using the
standard Memorandum of Incorporation, with the provisions on company
meetings as reflected in the Companies Act, unaltered on the 2nd of
August 2018, the board gave notice of a shareholders' meeting to be held
on the 12th of August 2018. Bramley (Pty) Ltd has 13 shareholders. Only
two people attended the meeting. Lynnette (who is not a shareholder)
attended as a proxy of Celia, who holds l 5% of the votes, and as a proxy of
Simon, who holds 5% of the votes. The only shareholder present in person
was Beauty, who holds 5% of the votes. Voting was conducted by means
of a poll. Lynnette exercised the proxies of Celia and Simon in favour of
the resolution, Beauty voted against the resolution.
2.1.1. Has the company complied with the notice period for
convening the meeting?
(2)
Section 62 of the Companies Act 71 of 2008 is applicable.
At least ten days’ notice must be given. In this set of facts, the difference
between 2 August 2018 and 12 August which is ten (10) days. However, “days”
do not include weekends or public holidays (only business days). So, no,
the prescribed notice period has not been complied with.
2.1.2
Explain whether the quorum requirement to vote on the
approval of the repurchase of shares, has been met
(3)
Section 64 of the Companies Act 71 of 2008 is applicable.
Sufficient persons holding 25 percent of all the voting rights in respect of the
approval of the repurchase of shares must be present in person or by proxy.
In this case there were three people who together held 25 percent of the
voting rights present at the meeting.
So, yes, the quorum requirement was met/ they could vote.
2.2 The board of Gangnam's Tile (Pty) Ltd consists of Lesedi. Sello and two
other directors in terms of the company's Memorandum of
incorporation, the board may appoint a managing director who will be
authorised to conclude contracts on the company's behalf. No formal
appointment of a managing director is made. However, Lesedi has acted
as the managing director with the board's full knowledge Lesedi makes
a purchase of grouting in the amount of R50 000 from Tendai on behalf
of Gangnam's Tile (Pty) Ltd .Two months later, Tendai sues Gangnam’s
Tile (Pty) Ltd for the outstanding amount in respect of the grouting
.Gangnam's Tile (Ply) Ltd denies liability for the payment
Explain what requirements Tendai would have to prove, to hold
Gangnam’s Tile (Pty) Ltd liable to the contract. despite Lesedi's lack of
express authority.
A company may be bound by a contract on the basis of estoppel where the
person purporting to conclude the contract on its behalf lacked actual
authority, express or implied, but the other party to the contract had been
misled by the company into believing that he or she did have authority. This
is referred to as ostensible or apparent authority. A company may be liable to
a bona fide third party if it is represented by someone who does not have
actual authority, and where the company allows such a person to represent
the company as if that person did have authority. It must be proven that the
company misrepresented, intentionally or negligently, that the agent had the
required authority to represent the company. The misrepresentation must
have been made by the company. The third party must have been induced to
deal with the agent due to the misrepresentation and the third party must
have been prejudiced by the misrepresentation.
2.3 Figozo Ltd showed an increase in profits for the 2018 financial year. At
a board meeting, the directors decide that dividends should be paid
out to the company's shareholders. Indicate what requirements, in
terms of the Companies Act 71 of 2008, must be adhered to before the
dividends may be declared and paid to the shareholders
(5)
Section 46 of the Companies Act 71 of 2008 is applicable.
The board of directors must authorise the distribution. It must reasonably
appear that the company will be able to satisfy the solvency and liquidity test
immediately after the distribution is made. Section 4 of the Companies Act 71
of 2008 sets out the solvency and liquidity test. Solvency test: considering all
reasonably foreseeable financial circumstances of the company, the assets,
fairly valued, equal or exceed the liabilities of the company fairly valued.
Liquidity test: considering all reasonably foreseeable financial
circumstances of the company at the time, it appears that the company will be
able to pay its debts as they become due in the ordinary course of business
for a period of 12 months after the distribution. The distribution must be
made within 120 days after the test was applied.
2.4 Phineas was recently appointed as director of Purty Paints (Pty) Ltd, a
company that produces and sells paint. Phineas approved the purchase of
ten thousand litres of a base paint that cannot mix with the paint
colouring that the company sells. As a result, Purty Paints (Pty) Ltd has to
destroy the unmixed paint, and consequently suffers a financial loss of
more than R5 million. The company wants to claim damages from
Phineas, as it is widely known in the paint industry that this base paint is
only used for very specific purposes
Advise Purty Paints (Pty) Ltd on how the court will determine whether
Phineas has breached his duty to act with reasonable care and diligence
(5)
Philotex (Pty) Ltd v Snyman and others; Braitex (Pty) Ltd and others
v Snyman 1998(2) SA 138 (SCA) is relevant.
The test to determine whether duty of care, skill and diligence has been
complied with is an objective test, but it contains subjective elements. The
general knowledge, skill and experience of the particular director in question
are taken into account. Because, on the facts, it is widely known in the industry
how the base paint can be used, the objective assessment points to Phineas’
liability.
QUESTION 3
TRUE OR FALSE.
3.1.1 It is impossible for a close corporation to be converted into a company
(2)
False. Schedule 2 to the Companies Act 71 of 2008 prescribes the procedure
to convert a close corporation into a company. It is no longer possible to
register new close corporations or to convert companies into close
corporations.
3.1.2 Only contracts concluded by a member on its behalf, falling
within the main or ancillary scope of the business of a close
corporation, will be binding on the corporation
(2)
False. Section 54 of the Close Corporations Act 69 of 1984 is applicable.
The doctrine of constructive notice is not applicable to close corporations.
3.1.3 All close corporations must appoint auditors to audit their financial
statements (2)
False. The general rule is that an accounting officer must be appointed in
a close corporation. However, in terms of the Companies Amendment Act,
2011 and the regulations, close corporations must be audited in same
circumstances as private companies.
3.1.4 A close corporation can be incorporated and managed without
concluding an association agreement
(2)
True. Only a founding statement is required. An association agreement is
not compulsory/ is concluded voluntarily to regulate internal relations.
3.1.5 A minor can become a director of a company
(2)
False. An unemancipated minor is ineligible (absolutely prohibited)
from being a director. An emancipated minor can become a director.
3.2 As Aubrey and Barbara no longer get along well with Johan, they wish
to apply to the court to have Johan's membership in the close
corporation terminated Advise them of the grounds that must be
established against a member, before his membership can be
terminated (4)
Section 36 of the Close Corporations Act 69 of 1984 is applicable.
In order to terminate Aubrey’s membership in the close corporation it must
be proven that Aubrey is unable to perform his part of the carrying on of the
business;that his conduct is likely to have a prejudicial effect on the
carrying on of the close corporation’s business; that his conduct has made it
reasonably impossible for the other members to associate with him in the
carrying on of the business; or that it is, in the circumstances, just
and equitable for Aubrey to cease being a member.
3.3 Tax Solutions CC, a close corporation that delivers tax and accounting
services to the public, has five members Annastacia, Dorothy, Michael,
Roger and Edith. The close corporation's association agreement
determines that Edith is authorised to represent the close
corporation. Annastacia without the other members' consent, enters
into a contract
for the purchase of a racehorse on behalf of the close corporation.
Explain whether the close corporation is bound to the contract
(6)
Section 54 of the Close Corporations Act 69 of 1984 is applicable.
Every member of a close corporation has the authority to conclude contract
on behalf of the close corporation in relation to someone who is not a
member. The doctrine of constructive notice is not applicable to close
corporations. The association agreement is not a public document.
Notwithstanding any agreement in the association agreement, the contract
will be binding on the close corporation. Whether the transaction falls within
or outside of the scope of business. Unless the person with whom the contract
was concluded knew or reasonably ought to have known that Annastacia
lacked the required authority.
SECTION B – MULTIPLE CHOICE QUESTIONS
QUESTION ONE
Choose the correct statement
The maximum number of shareholders that Fabrix (Pty) Ltd may have is:
5
20
50
No restriction is applicable
QUESTION 2
Indicate the incorrect statement regarding relief for oppressive or prejudicial
conduct as provided for in section 163 of the Companies Act 71 of 2008
The remedy provides a wide discretion to the court, with regards to the
relief that can be granted
The action can be instituted by directors who are not shareholders of
the company
The remedy is intended to serve as a derivative action used to
protect the companies interest
Companies are bearers of rights and duties in terms of the Constitution of
the Republic of South Africa, 1996
QUESTION 3
Choose the correct option
The doctrine of constructive notice is:
Applicable to all state-owned enterprises
Applicable to ring-fenced and personal liability companies
Applicable to close corporations
Completely abolished by the Companies Act 71 of 2008
QUESTION 4
Choose the correct statement
Zenflex Ltd is a:
Public company
Close corporation
Private Company
State owned enterprise
QUESTION 5
Choose the INCORRECT statement
The statutory duties of directors in the Companies Act 71 of 2008 do
not substitute the common law duties
The Companies Act 71 of 2008 provides a complete codification of
directors’ duties
Even non-executive directors owe a fiduciary duty to the company
in which they serve as directors
The Companies Act 71 of 2008 places a duty on the Board of Directors
to manage the company
QUESTION 6
Choose the INCORRECT statement
Incorporation of a company has various consequences for shareholders and
directors including
Shareholders are generally not held liable for the debts of a private company
Shareholders are generally not held liable for the debts of a public company
Shareholders are generally not held liable for the debts of a state-owned
enterprise
Directors are generally not held liable for the debts of a personal
liability company
QUESTION 7
Choose the INCORRECT statement
The juristic personality of a company can only be disregarded in terms of
section 20(9) of the companies Act 71 of 2008
in exceptional circumstances
to uncover fraud, dishonesty and improper conduct
when there is no alternative remedy available
if there has been an unconscionable abuse of company
QUESTION 8
Indicate which of the following statements regarding a domesticated company is
INCORRECT
They are registered simultaneously in two different jurisdictions,
being a foreign jurisdiction and South Africa
The majority of this company’s assets must be located in South Africa
This is a company that has transferred its registration from a foreign
country to South Africa
This company exists as if it had been originally incorporated in South Africa,
even though it has a foreign origin
QUESTION 9
Indicate the INCORRECT statement regarding the characteristics of a member’s
interest of a close corporation
A member’s interest is expressed as a percentage
A member’s interest must be reflected in the founding statement
A member’s interest in a close corporation can be disposed of if all
the members consent thereto
A member’s interest may be held jointly by two persons
QUESTION 10
Indicate the INCORRECT statement with regards to close corporations as a
business form
In a close corporation all the members are in principle permitted to
participate in management
A close corporation has a share capital which is managed by the
directors
A close corporation may repay its capital to its members, if it maintains the
required solvency and liquidity status
A close corporation may have a maximum of ten members only.
MAY /JUNE 2019
Section A
QUESTION ONE
1.1 Figozo Ltd showed an increase in profits for the 2018 financial year.
At a board meeting, the directors decide to pay dividends to the
company’s shareholders. Indicate the requirements that must be
adhered to in terms of the Companies Act 71 of 2008 before the
dividends may be declared and paid
(5)
Section 46 of the Companies Act regulates distributions. A distribution is any
direct or indirect transfer by a company of money or other property of the
company (except its shares) to one or more of its shareholders or beneficial
holders of shares, whether as the payment of dividends, payment for the
purchase by a company of its previously issued shares, the incurrence of a
debt for the benefit of one or more of the shareholders of the company, or
the forgiveness of a debt owed to the company by one or more of the
shareholders of the company.
A distribution may be made in the following circumstances:
The board of directors must authorise the distribution.
It must reasonably appear that the company will be able to
satisfy the solvency and liquidity tests immediately after the
distribution has been made.
The board must acknowledge by way of a resolution that it has
applied the solvency and liquidity tests and reasonably concluded that
the company will satisfy the tests immediately after completion of the
proposed distribution.
1.2 The main object of ABC (Ply) Ltd is manufacturing furniture. The
Memorandum of Incorporation provides that the board of directors
may enter into contracts on behalf of the company. Should the
contract, however, exceed the amount of R150 000, the prior
consent of the general meeting is required. The board of directors
buys a beach house for R350 000 from Xavier on behalf of ABC (Pty)
Ltd. The consent of the general meeting was never obtained. Can
Xavier, in terms of any provisions in the Companies Act 71 of 2008,
hold the company liable in terms of the contract? (5)
Section 20(7) of the Companies Act now contains a provision that in some
respects resembles the Turquand rule by providing that a person dealing
with a company in good faith is entitled to presume that the company, in
making any decision in the exercise of its powers, has complied with all
the formal and procedural requirements in terms of the Act, the
company’s Memorandum of Incorporation and any rules of the company,
unless the person knew, or reasonably ought to have known, of any failure
by the company to comply with any such requirement.
However, this provision does not replace the Turquand rule, because section
20(8) provides that subsection (7) must be interpreted concurrently with,
and not in substitution for, any relevant common law principle relating to the
presumed validity of the actions of a company.
The exceptions to the application of the statutory rule are not expressed in
exactly the same way as the common law exceptions: section 20(7)
determines that the rule will not apply if the third party knew or reasonably
ought to have known that the internal requirement had not been complied
with.
Thus, Xavier can make use of section 20(7) to hold the company liable
in terms of the contract.
1.3. Peter, an attorney, wishes to incorporate a new company to start his
practice. He has heard about a personal liability company as a type
of company commonly used for this purpose. he is interested in
finding out what this type of company entails.
1.3.1 Advise Peter regarding the distinguishing characteristics of this
type of company
(3)
This is a personal liability company (“Inc” or “Incorporated”):
攀渀搀愀猀栀 ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀᜀ尀攀渀搀愀猀栀 ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀ
t must meet the criteria for a private company.
I
攀渀搀愀猀栀 ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀᜀ尀攀渀搀愀猀栀 ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀ
t is mainly used by professional associations (such as attorneys).
I
攀渀搀愀猀栀 ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀᜀ尀攀渀搀愀猀栀 ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀ
I
ts Memorandum of Incorporation must state that it is a personal
liability company.
攀渀搀愀猀栀 ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀᜀ尀攀渀搀愀猀栀 ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀ
T
he directors are jointly and severally liable along with the company for
debts and liabilities contracted during their term of office.
攀渀搀愀猀栀 ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀᜀ尀攀渀搀愀猀栀 ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀ
t can be formed by one person.
I
攀渀搀愀猀栀 ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀᜀ尀攀渀搀愀猀栀 ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀ
t must have at least one director.
I
攀渀搀愀猀栀 ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀᜀ尀攀渀搀愀猀栀 ĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀĀᜀ
T
he doctrine of constructive notice applies in terms of section 19(5) of
the Companies Act.
Section 19(3) of the Companies Act uses the word “contracted” and not
“incurred”, which was held by the court in Fundtrust (Pty) Ltd (In
Liquidation) v Van Deventer 1997 (1) SA 710 (A) to limit directors’ liability
to contractual debts, and to exclude delictual and statutory liabilities.
1.3.2
Explain the procedure that Peter would have to follow in
order to register a personal liability company
A Notice of Incorporation must be lodged with the Commission
A copy of the Memorandum of Incorporation must be lodged
with the Commission
The prescribed registration fee must be paid to the commission.
1.4 FernastIc (Pty) Ltd convenes a shareholder's meeting to pass a
special resolution. According to the notice, the meeting was scheduled
to be held at 12h00 on 121h of April 2019 in the company boardroom.
At 12h45 only ten per cent (10%) of persons entitled to vote were
present. At 12h50 two people with mandates to vote on behalf of
members together holding four per cent (4%) of the company shares,
arrived at the venue. What requirements must be met in order to pass
the special resolution validly? (4)
Section 64 provides that a meeting may not begin until sufficient persons
holding at least 25% of all the voting rights in respect of at least one matter to
be decided on at the meeting are present. The percentage (25%) may be
increased or reduced in the Memorandum of Incorporation. However, if a
company has more than two shareholders, at least three shareholders must
be present.
If a quorum is not achieved within an hour after the time at which the meeting
was scheduled, the meeting must be postponed for one week. Where a
quorum is not present at the postponed or adjourned meeting, those present
in person or by proxy will be deemed to constitute a quorum.
Question 2
2.1 Explain whether or not all companies with limited capacity are 'Ringfenced' or '(RF) companies' as envisaged in the Companies Act 71 of 2008
(4)
Section 15(2)(b) of the Companies Act determines that a company may
include restrictions and conditions in its Memorandum of Incorporation
pertaining to the company’s capacity. Before a third party dealing with the
company would be required to acquaint themselves with these restrictions
and conditions, certain requirements must be met in terms of the
Companies Act:
There must be a restriction or conditions in the Memorandum of
Incorporation of the particular company.
A prohibition against amendment of the restriction or condition
must be included in the Memorandum of Incorporation.
The company’s name must be followed by “RF” to warn the third party of
the special restrictions or conditions.
The Notice of Incorporation that is lodged together with the Memorandum of
Incorporation must include a provision that draws attention to the fact that
special restrictions or conditions apply to the company.
2.2
With reference to provisions in the Companies Act 71 of 2008, indicate in
what ways third parties contracting with a company, are protected
against the possibility that a company can deny liability for contracts
concluded outside of its main or ancillary objects (4)
Section 19(1)(b) of the Companies Act provides that a company has all
the legal capacity and the powers of a natural person, except to the extent
that a juristic person is incapable of exercising any such power, or the
company’s
Memorandum of Incorporation provides otherwise. Therefore, the capacity
of a company is no longer limited by its main or ancillary objects or business,
and these objects need not even be stated in the Memorandum of
Incorporation.
Although the company’s Memorandum of Incorporation may limit, restrict or
qualify the purposes, powers or activities of the company (in other words,
impose restrictions on the legal capacity of the company) in terms of section
19(1)(b)(ii), any such restrictions would not render any contract invalid that
conflicts with these restrictions (section 20(1)(a)). Therefore, the contract
remains valid and binding on the company and the other party to the
contract even if it is an ultra vires transaction.
2.3 Samson is a director of Tectronics (Pty) Ltd, a company that
manufactures tyres. He obtains information that a limited amount of
rubber, which is used in the manufacture of tyres, is being sold very
cheaply by a foreign company. Samson resigns as director of Tectronics
(Pty) Ltd and incorporates Speedytyres (Pty) Ltd, a company that will
also manufacture tyres. Samson then enters into a contract with the
foreign company on behalf of Speedytyres (Pty) Ltd, for the purchase of
the entire rubber stock
Advise Samson as to whether he acted in breach of his fiduciary duties to
Tectronics (Pty) Ltd. Refer to relevant case law in your answer
In Regal Hastings Ltd v Gulliver, the court held that directors should avoid
placing themselves in a position where their duty to the company conflicts
with their own interests. In this case, a director who had since resigned was
held liable for profits made in the course of his performance of his duties in
the company. The court held that it makes no difference if the profit is made
in good faith with full disclosure and whether or not the company suffered
any loss as a result of the director’s actions. This was also the stance of the
court in the case of Robinson v Randfontein Estate Gold Mining Co Ltd, where
the court held as follows: Where one man stands to another in a position of
confidence involving a duty to protect the interest of that other, he is not
allowed to make a secret profit at the other’s expense or place himself in a
position where his personal interest conflicts with his duty.
With reference to these cases Samson in the scenario is in breach of his duties
because he obtained information by the virtue of that he is a director of
Tectronics Pty Ltd and used it for his own personal benefit which is in conflict
with his fiduciary duties he owes to Tectronics Pty Ltd. Samson is in conflict
of his duties as a direct of the company because he does not act in the
interests of the company. He is further in breach of his duty because he is
competing with a company which he was a director in.
2.4 List four (4) duties of a company secretary
(4)
The company secretary’s duties include, but are not restricted to,
providing the directors of the company collectively and individually
with guidance as to their duties, responsibilities and powers
making the directors aware of any law relevant to or affecting the company
reporting, to the company’s board, any failure on the part of the
company or a director to comply with the Companies Act
ensuring that minutes of all shareholders’ meetings, board meetings
and meetings of any committees of the directors, or of the company’s
audit committee, are properly recorded in accordance with the
Companies Act
certifying, in the company’s annual financial statements, whether the
company has filed required returns and notices in terms of the Companies
Act, and whether all such returns and notices appear to be true, correct
and up to date
ensuring that a copy of the company’s annual financial statements is
sent, in accordance with the Companies Act, to every person who
is entitled to it
carrying out the functions of a person designated in terms of section
33(3) (i.e. a person responsible for filing the company’s annual return)
2.5 Explain what a debenture is, and what type of relationship exists
between a debenture holder and a company
(2)
A debenture is a debt instrument for the acknowledgement by a company
that the company is indebted to the debenture holder for a certain sum of
money, as evidenced by the document. Debenture holders are creditors of
the company by virtue of having extended loans to the company.
Question 3
3.1 Eddie wishes to start his own business. His friend Chari registered a
close corporation in 2007 and wishes to sell his member's interest in
the business. Eddie is unsure whether he should register a private
company or buy Charl’s member’s interest. Advise Eddie of the
characteristics of a close corporation as a business form
(6)
The close corporations acquire their legal personality upon incorporation.
Legal personality is acquired upon registration of the founding document.
Close corporation has a separate legal personality to its members. There are
instances where the court can be called upon to pierce this corporate veil.
Close corporations also enjoy perpetual succession, which means that, unlike
partnerships, they remain in existence even if the members should change.
Close Corporations are a cheaper option for the incorporation of small
enterprises. This form of business is a combination of some of the partnership
attributes and some of the corporate attributes. It provides a simple,
inexpensive and flexible form of incorporation for the enterprise consisting of
a single entrepreneur or small number of participants. A founding statement
is the only constitutive document needed upon incorporation of the close
corporation. Only natural persons can be members of a close corporation.
This means that a company or another close corporation cannot be a member
of the close corporation. No new close corporations can be formed under the
Companies Act. The disposition of member’s interest is controlled by the
members to a large extent. A member’s interest of a member is regarded to be
part of his estate; thus, he can bequeath his interest to his heir or legatee. The
members are limited, they can only be ten
10 because close corporations are intended for small businesses. A minor or
an insolvent or a person under legal disability may become or remain a
member of a close corporation with necessary assistance from a guardian,
trustee or the court. Every member has the authority to conclude contracts on
behalf of the close corporation in relation to a person who is not a member
(an outsider or third party).
3.2 Explain what the concept 'transformative constitutionalism' entails.
Also provide an example of how this concept applies in
Entrepreneurial law (5)
The court has a duty to develop the common law so that the law keeps up and
remains suitable as the needs of the community it aims to serve, change.
Section 39 of the Constitution determines that the court must, when
developing the common law promote the spirit, purport, and objects of the
Bill of Rights. Our common law has evolved through centuries of feudalism,
colonialism, discrimination, sexism, exploitation, and apartheid. In Everfresh
Market Virginia (Pty) Ltd v Shoprite Checkers (Pty) Ltd 2012 (1) SA 256 (CC)
the highest court considered whether the common law should be developed
to require that parties to a contract should be legally required to contract with
each other in good faith and on reasonable terms. Shoprite argued that good
faith is too vague a concept and should not be enforceable (par 22). The court
disagreed. The court noted that the development of our economy and contract
law has predominantly been shaped by colonial legal tradition represented by
English law, Roman law and Roman Dutch law. The common law of contract
regulates the environment within which trade and commerce take place. Its
development must take into account the values of the vast majority of people
who can after democratization of the country participate in trade and
commerce. The approach followed by the majority of South Africans places a
higher value on negotiating in good faith than would have prevailed
under colonial legal tradition (par 24). The adaptation of the
common law by infusion of constitutional values is what is meant by
transformative constitutionalism.
3.3
Annastacia is a member of a close corporation called Trackmor
Trackmor CC entered into an agreement with Kobert (Pty)
Ltd in terms of which It was awarded certain road surfacing
contracts. Initially, and in accordance with the agreement,
certain payments were made by Stanford Bank on behalf of
Kobert (Pty) Ltd to Trackmor CC. However, later several
payments for further work performed in terms of the Agreement
were not paid into Trackmor CC's nominated account. Instead
the money was paid into the personal account of Willem, another
member of Trackmor CC. Annastacia discovered that Willem had
misappropriated the funds that were paid into his account and
she went to the police station where she laid a charge of criminal
fraud against him. After It
was discovered that Willem had misappropriated the funds,
he (Willem) became completely passive in the management of
the business of the close corporation.
Refer to the facts above and answer the following questions
3.3.1
What would Annastacia have to prove in order to use the
remedy in section 36 of the Close Corporations Act 69 of 1984?
(4)
In terms of section 36 of the Close Corporations Act, a member(s) may apply
for the termination of another member’s membership by order of court.
In order to do so, the member(s) will have to prove
that the member is unable to perform his/her part in carrying on
the business
that the member’s conduct is likely to have a prejudicial effect
on the carrying on of the business of the close corporation
that the member’s conduct has made it reasonably impossible for
the other member(s) to associate with him/her in the carrying on
of the business of the close corporation
that, in the circumstances, it is just and equitable that such a person
should cease to be a member of the close corporation
3.3.2
What Is the purpose and the scope of the remedy provided for in
terms of section 49 of the Close Corporations Act 69 of 1984?
(3)
Section 49 is a remedy available to a member where there was a particular
act or omission in the conduct or affairs of the business by the corporation
or other member/s which was unfairly prejudicial to such member. The
court will only intervene if it is just and equitable to do so.
3.3.3
What orders can the court make in terms of section 49 of the
Close Corporations Act 69 of 1984?
(2)
The court may then direct that the aggrieved act or omission be stopped,
may order that the corporation amend its founding statement or
association agreement,
or, in certain cases upon application, make an order to wind-up
the corporation.
Section B
QUESTION 1
Choose the CORRECT option regarding the conclusion of preincorporation contracts
The common law methods of entering into preincorporation contracts are no longer applicable
The Companies Act 71 of 2008 requires that preincorporation contracts must be concluded in writing
A pre-incorporation contract can be concluded on behalf of
an unincorporated close corporation
A person concluding a pre-incorporation contract in terms
of the Companies Act 71 of 2008 stands no risk of being
held personally liable
QUESTION 2
Indicate the CORRECT statement
Two members may be Joint holders of the same
member's interest in a close corporation
A trustee of an inter vivos trust may hold a member's
interest in a close corporation
Insolvents or other legally disabled persons may not
become members of a close corporation
Only natural persons may hold a member's interest
in a close corporation
(2)
QUESTION 3
Indicate the CORRECT statement
An association agreement is not a prerequisite for
the formation and running of a close corporation
The manner in which an insolvent member's estate may
be disposed of can be regulated in an association
agreement
The manner in which members will settle
disputes may not be regulated in the
association agreement
The procedure to be followed at meetings may not be
regulated in the association agreement
(2)
QUESTION 4
Choose the CORRECT answer
The maximum number of shareholders that Helix (Ply) Ltd may have 1s
(1)
20
(2)
10
(3)
50
(4)
No restriction Is
applicable
(2)
QUESTION 5
Dikgang contracts with Quality Computers CC represented by
Thabo, to build a block of holiday apartments on property
owned by the close corporation at a cost of R1 million. The
association agreement of Quality Computers
stipulates that only Mandla, a member of the corporation
who holds a 40 per cent member's interest, has the authority to
enter into contracts over R500 000 on behalf of the corporation.
Dikgang is unaware of this stipulation as he has never read the
association agreement
Indicate the CORRECT statement
The agreement is binding, because every member of a close
corporation has the authority to enter into contracts
on behalf of the corporation
The contract is not binding, because the contract falls outside
the scope of business of the corporation
The contract is not binding, because Thabo breached his
fiduciary duties
The contract is binding, because section 20(7) of the
Companies Act 71 of 2008 is applicable (2)
QUESTION 6
Choose the INCORRECT statement
A close corporation has members, not shareholders
As a general rule, only natural persons may participate in
close corporations
There is a limitation on the number of participants
permitted in a close corporation
Close Corporations are exempted from financial reporting
QUESTION 7
Choose the CORRECT statement.
The doctrine of constructive notice is
Applicable to close corporations only
Abolished completely by the Companies Act 71 of 2008
Applicable to all public companies
Applicable to personal liability companies
QUESTION 8
Indicate which one of the following persons/entities is
disqualified to act as a director, but may be appointed as a
director of a company with the permission of the court
A minor
A person who has been convicted of murder
An unrehabilitated insolvent
A body corporate
QUESTION 9
Choose the INCORRECT statement regarding the relief in section
163 of the Companies Act 71 of 2008 for oppressive and
prejudicial conduct
The action can be instituted by directors who are not also
shareholders of the company
This remedy Is available if the applicant’s interests have
been prejudiced by a single act or omission
The remedy can best be described as a derivative
action as it is instituted on behalf of the company
The court has a wide discretion regarding the relief that it
can grant
QUESTION 10
In terms of the contract of employment that was concluded
between Themba and Thulos Ltd, Themba is appointed as a
director of the company for life. However, after a prolonged
period of poor financial performance by the company, the
shareholders wish to remove Themba from office
Choose the CORRECT option
Themba cannot be removed from office as a result of the
contract of employment
Themba can be removed by means of an ordinary
resolution despite the contract
(3) Themba cannot claim any damages from the c o
mpany
for the premature termination
Themba can be removed without the need to follow any
statutory procedures
OCTOBER/NOVEMBER 2018
QUESTION ONE
1.1 What type of company is Cantabile (Pty) Ltd? Indicate the main
features of this type of company
(3)
A private company.
Its Memorandum of Incorporation prohibits the offering of any securities to
the public and restricts the transferability of its securities.
Private companies are no longer limited to 50 shareholders, as was the case
under the Companies Act of 1973.
In terms of section 8(2)(b) of the Companies Act, a private company’s
Memorandum of Incorporation must contain a prohibition against the offering
of its securities to the public and must restrict the transferability of its
securities.
It can be formed by one person.
It must have at least one director.
1.2 Which stipulation would enjoy preference if there is a contradiction
between a stipulation contained in the Companies Act 71 of 2008 and
a stipulation in the Memorandum of Incorporation, or between a
stipulation in the Memorandum of Incorporation and one of the
company rules? (3)
The companies act will enjoy preference over the companies
memorandum of incorporation because it is a legislative document thus it
is authoritative. The company’s memorandum of incorporation and the
company rules enjoy equal status.
1.3 Annastacia, a director of a company named lntercrush (Pty) Ltd
comes to you for advice. During 2016, lntercrush (Pty) Ltd had entered
into an agreement with Kobert (Pty) Ltd in terms of which lntercrush
(Pty) Ltd was awarded certain contracts .Initially, and in accordance
with the agreement, certain payments were made by Stanford Bank on
behalf of Kobert (Pty) Ltd to lntercrush (Pty) Ltd. However, four
payments for work performed in terms of the agreement were not paid
into lntercrush's nominated account, but were paid into the personal
account of Willem, Annastacia's co-director at lntercrush (Pty) Ltd
instead. Willem and Annastacia are the sole directors and shareholders
of lntercrush (Pty) Ltd. When Annastacia discovered that the payments
were erroneously made into Willem's account, she confronted him.
However, Willem denied having ever received any payments.
Annastacia immediately went to the police station, and instituted fraud
charges against Willem. After the confrontation regarding the
misappropriated funds, Willem became completely passive and refused
to be involved in the running of the company's affairs. He also made it
very clear to Annastasia that he is unwilling to attend any board or
shareholders' meetings. Recently, Annastacia has been informed that
Willem is in the process of selling all of his immovable property in the
Republic of South Africa, and that he has opened several offshore bank
accounts. Annastacia wants to institute action to reclaim the
misappropriated money without delay against Willem, Kobert (Pty) Ltd
and Stanford Bank. She fears that Willem will leave the country 1n
order to avoid liab1l1ty, or that his many contacts could assist him in
avoiding liability. Moreover, she is also concerned that she will not be
able to afford the legal costs.
Explain which of the two remedies provided in sections 163 or 165
would better serve Intercrush (Pty) Ltd id Annastacia wishes to
institute legal proceedings to reclaim the money on behalf of lntercrush
(Pty) Ltd
(4)
In terms of section 163 of the Companies Act, a shareholder or a director
may bring an application for the court to provide relief against oppressive
or unfairly prejudicial conduct by the company.
A derivative action is a lawsuit brought by a corporation shareholder
against the directors, management and/or other shareholders of the
corporation for a failure by management (In effect, the suing shareholder
claims to be acting on behalf of the corporation, because the directors and
management are failing to exercise their authority for the benefit of the
company and all of its shareholders.) This is in terms of section 165 of the
companies act.
The derivative action is the best because the shareholder will be acting
on behalf of the company and since she could not afford to pay the legal
costs the company will pay its costs as juristic person.
1.4 The main object of ABC (Pty) Ltd 1s the manufacturing of
furniture. The company's Memorandum of Incorporation provides
that the board of directors may appoint a managing director who will
be authorised to enter into contracts on behalf of the company
.Should the contract, however, exceed the amount of R150 000, prior
consent of the general meeting is required. The appointed managing
director buys a beach house for R350 000 from Nomagugu on behalf
of ABC (Pty) Ltd
Explain whether or not ABC (Pty) Ltd can raise the restrictions to its
capacity as contained in its Memorandum of Incorporation as
grounds to avoid being bound to the contract
(5)
The Turquand rule was derived from Royal British Bank v Turquand.
According to the common law Turquand rule, if the person acting on
behalf of the company has the authority to do so, but this is subject to an
internal formality, such as approval by the board, an outsider contracting
with the company in good faith is entitled to assume that this internal
requirement has been complied with. The company will be bound by the
contract even if the internal formality has not been complied with. The
exceptions are: if the outsider was aware of the fact that the internal
formality had not been complied with; or if the circumstances in which the
contract was concluded were suspicious. The Turquand rule was
formulated to keep an outsider’s duty to inquire into the affairs of the
company within reasonable bounds. To trigger the protection provided by
the Turquand rule, there must have been an internal requirement present.
Thus, as a result of this rule the outsider is protected against the company
when it denies liability provided that the outsider acted in good faith
when concluding the contract with the company. Thus, the company is
cannot deny liability unless the outsider new that some internal
requirement was not complied with or the contract was concluded under
suspicious conditions.
1.5 With reference to relevant case law list four (4) benefits
associated with the separate legal personality of a company (5)
In Salomon v Salomon & Co Ltd, it was held that the principle of
separate legal personality has various implications:
The estate of the company is assessed apart from the estates of the
individual shareholders or members.
The debts of the company are the company’s debts and are separate
from those of its shareholders or members. They (the shareholders or
members) enjoy limited liability.
Where a company is wronged, the company must itself seek redress.
Companies are the bearers of rights as well as duties in terms of Chapter 2
of the Constitution.
QUESTION 2
2.1 Pro-shift (Pty) Ltd, a black economic empowerment company,
wishes to acquire shares in Cashflex Ltd. Unfortunately, Pro-shift (Pty)
Ltd is not in a financial position to purchase the shares without first
acquiring a loan. Cashflex Ltd wants Pro-shift (Pty) Ltd to become a
shareholder in it as it would be in compliance with the company's
corporate social responsibility goals. Cashflex Ltd intends to assist
Pro-shift (Pty) Ltd in two ways by offering the shares to Pro-shift (Pty)
Ltd at a discounted price, and by extending a loan to Pro-shift (Pty) Ltd
at an interest rate that is lower than any other financial institution.
2.1.1 Discuss the relevant statutory requirements in the Companies
Act 71 of 2008 that must be complied with for Cashflex Ltd to assist
Pro-shift (Pty) Ltd in the manner proposed
(5)
Cash Flex Ltd will be giving Pro-Shift Pty Ltd financial assistance. This is
a form of distribution (section 46 of the companies act regulates
distribution) certain requirements have to be met. These are:
A distribution may be made in the following
circumstances: The board of directors must authorize
the distribution. It must reasonably appear that the
company will be able to satisfy the solvency and liquidity
tests immediately after the distribution has been made.
The board must acknowledge by way of a resolution that
it has applied the solvency and liquidity tests and
reasonably concluded that the company will satisfy the
tests immediately after completion of the proposed
distribution.
The solvency and liquidity tests are set out in section 44 of the Companies
Act:
Solvency test: That, in considering all reasonably foreseeable financial
circumstances of the company at that time, the assets of the company,
fairly valued, equal or exceed the liabilities of the company as fairly valued.
Liquidity test: That, in considering all reasonably foreseeable financial
circumstances of the company at that time, it appears that the company
will be able to pay its debts as they become due in the ordinary course of
business for a period of 12 months after the distribution. If the distribution
was in the form of giving a loan to a shareholder or forgiving a loan made to
a shareholder, the period runs from 12 months after the test was
considered.
Thus, Cash Flex Ltd must satisfy these statutory requirements before it
can assist Pro-Shift Pty Ltd.
2.1.2
In addition to corporate social responsibility, list five (5)
constitutional principles that are important for South
African businesses
(5)
It is a rule in all business enterprises that the chosen name should
not be offensive, racist or impinge negatively on any individual/
legal person’s right to dignity.
The values of ubuntu must inform the manner in which corporate
decisions are taken by directors. Proper, constructive dialogue
requires the infusion of the culture of ubuntu to promote social
cohesion.
Ubuntu and Fairness before the law. The law attaches certain
consequences to misconduct committed in different business
enterprises. This reflects an element of ubuntu and fairness and
supports the principle that one reaps what one sows. It clearly
discourages conduct which would detriment outsiders and
participants in the business.
Ubuntu is also evident in light of the fact that humanness is
promoted in that agreements must be respected and honored by
those who concluded.
The disclosure requirements in the Companies Act reflect the
value of transparency of ubuntu.
2.2 TRUE OF FALSE QUESTIONS
2.2.1 Hamid Is the auditor of Moonblue Ltd. For the audit, Hamid
requests certain company documents from Moonblue Ltd's financial
director, Barney Barney can legally refuse to furnish Hamid with
the requested documents (2)
False. Section 93 of the Companies Act provides that the company auditor
has a right to access, at all times, the accounting records and all books and
documents of the company. The auditor may attend any general meeting
held by the company.
2.2.2 Once a domesticated company is registered in South Africa, it no
longer enjoys registered status in the foreign jurisdiction
(2)
True. It becomes recognized as a South African company. A foreign company
that has transferred its registration will be deemed to have been originally
registered in South Africa. Foreign companies are treated exactly the same
as companies that were originally incorporated in the Republic. They cannot
be identified as being anything other than a South African company.
2.2.3 A proxy may delegate authority to act on behalf of the shareholder
to another person (2)
True. A proxy may delegate authority to act on behalf of the shareholder
to another person.
2.2.4 Not all payments made by a close corporation to, its members are
subject to compliance with the solvency and liquidity criteria (2)
False. In terms of section 51, no payment may be made to members in their
capacities as such if the solvency and liquidity criteria are not complied with
and the other members have not all provided their written consent for such
a payment.
2.2.5 In terms of South African law separate juristic personality is only
associated with companies
(2)
False. Close corporations also have separate juristic
personality. QUESTION 3
3.1 Certain close corporations are in terms of the Companies Act 71 of 2008
and the Companies Regulations, 2011 required to have their annual
financial statements audited. Indicate five of the factors that would be
taken into account in determining whether it would be necessary for a
close corporation to appoint an auditor to audit the corporation's
financial statements
(5)
The Companies Act requires some close corporations to audit their
financial statements in the same circumstances as a private company.
For companies with a score below 100, an independent review is required
if such companies are not owner managed.
If the company has a score below 100 and is owner-managed, there
is no requirement for outside professional assistance.
“Owner-managed” means that all shareholders are directors, or, in the
case of a trust, that at one of the trustees is a director.
If the company is not owner-managed, and obtains a PIS score of 100 to 350,
an audit is required if reports are internally compiled or an independent
review if they are externally compiled
If the company is owner-managed with a score of 100 to 350, no
professional intervention is required if reports are externally compiled,
but an audit will be needed if the reports are internally compiled.
3.2 Griff and Percy met each other during 2014. At the time, Percy was
operating a business, Climatic Air CC, which supplies and installs air
conditioning and refrigeration systems. Percy was the sole member of the
corporation. Percy invited Griff to Join Climatic Air CC as an employee In
2016, Percy offered to sell 20 per cent of the membership interest in
Climatic Air CC to Griff. Griff bought into the business and signed a written
association agreement. Griff worked very hard in the business and built
up a substantial new client base while maintaining the existing client
base. The business grew and strengthened financially. Despite Griff's
interest in the business, Percy dominated him, and made business
decisions without consulting Griff at all. The good business relationship
that existed between Percy and Griff started to deteriorate. Percy had
committed the resources of the close corporation to a huge building
project which made it imposs1ble for the close corporation to properly
service its existing clients, resulting in a decline in customer satisfaction
and orders .Percy did shoddy work on the big projects, and much of the
contracted money had to be offset to rectify the poor quality
workmanship . As Percy had largely excluded Griff from the management
of the business, it became virtually impossible for Griff to monitor his
investments, the financial position of the business and its exposure to
risk .Percy concedes that the personal and business relationship between
himself and Griff has 1rretrievably broken down with no prospect of
reconciliation .Indicate whether Griff who seeks an order for the
cessation of his membership and payment of a fair value for his members'
interest has prospects of success (5)
In terms of section 36 of the Close Corporations Act, a member(s) may apply
for the termination of another member’s membership by order of court.
In order to do so, the member(s) will have to prove
that the member is unable to perform his/her part in carrying on the business
that the member’s conduct is likely to have a prejudicial effect on the
carrying on of the business of the close corporation
that the member’s conduct has made it reasonably impossible for the other
member(s) to associate with him/her in the carrying on of the business of
the close corporation that, in the circumstances, it is just and equitable that
such a person should cease to be a member of the close corporation
Relevant information relating to how the members’ interests in the close
corporation should be adjusted once the person’s membership of the close
corporation ceases should be presented. The court may then order cessation of
a member’s membership and make any order it deems necessary regarding the
disposal of the member’s interest.
3.3. Joseph, Aubrey and Barbara are the members of Pantex CC. The main
business of the corporation is manufacturing and selling of underwear.
Barbara becomes aware of a special elastic that is stronger and much
cheaper than the elastic that the close corporation is currently using. She
tells Joseph and Aubrey about the elastic, but she does not tell them how
cheap, it is. Joseph and Aubrey are very interested and instruct her to
import the elastic from China. Barbara proceeds to buy the elastic in her
personal capacity for R200 000 after which the close corporation buys it
from her for R350 000.
3.3.1.
What
duty
could
Barbara
have
breached
under
the
circumstances and what does this duty entail? (Indicate to whom the
duty is owed and the scope of this duty) (5)
Section 42 of the CC Act. The member(s) of the close corporation have a
fiduciary duty, “duty of good faith”; a duty imposed by law on persons in a
fiduciary position to act in the best interest of the person to whom they owe
the duty.
The Close Corporations Act provides that a member
should act honestly and in good faith, and, in particular,
– exercise powers in order to manage or represent the corporation in the
interest of the corporation
– not act without or exceed such powers
avoid a conflict of interest between his or her own interests and those of
the close corporation, and, in particular,
– not derive any personal financial gain to which he or she is not entitled by
virtue of being a member of the close corporation
– disclose any material interest in a transaction to the other members of a
close corporation as soon as possible
– not compete with the close corporation’s business activities in any way
Barbra breached her fiduciary duty that she has to the close corporation and the
other members. She was not derive any personal financial gain to which she is
not entitled by virtue of being a member of the close corporation.
3.3.2 What possible legal action/s can possibly be instituted against
Barbara and who should institute the action/s? (2)
Section 50 of the Close Corporations Act provides for an action to be
instituted by a member against fellow members on behalf of the close
corporation for liability to the company on the specified grounds, including
a breach of a fiduciary duty or the duty of care and skill. Therefore, this is a
statutory derivative action.
3.4
In terms of the Companies Act 71 of 2008 1t 1s possible to
apply for an order to court to declare a director of a
company or a member of a close corporation delinquent, or
to place him or her under probation Briefly explain the
consequences of a delinquency order (3)
The court may, in a declaration of delinquency, order that the person
undergo remedial education carry out a designated programme of
community service pay compensation
SECTION B
QUESTION 1
Jo is a member of Best Bikes CC. The business of the close corporation
is to manufacture motorcycles. The association agreement provides
that Jo may not enter into contracts on behalf of the close corporation
where the value of the contract exceeds R10 000 Jo, a keen
sportsman, concludes a contract on behalf of
the close corporation with Dina for the purchase of soccer balls to the
value of R12 000
Indicate the CORRECT statement
The contract will bind Best Bikes CC, because Jo Is a
member of the close corporation and Dina was
unaware of the restriction on his authority
The contract will not bind Best Bikes CC, because the contract
falls
outside the close corporation's main business
The contract will bind Best Bikes CC due to the operation of the
Turquand rule
The contract will not bind Best Bikes CC, because Jo's
authority to bind the close corporation is limited by the
association agreement
(2)
(5)
QUESTION 2
Choose the INCORRECT statement regarding member's
interests in a close corporation Close corporations were intended for small businesses,
and the number of members is limited to ten
It is not permitted for more than one person to hold a
members' interest Jointly
Juristic persons are generally allowed to become
members in a close corporation
A minor, or a person under legal disability may become a
member of a close corporation with the necessary assistance
(2)
QUESTION 3
Which of the following is NOT a ground for the disqualification of a
person from being appointed as a company secretary?
A court has prohibited the person from being a director
A court has declared the person a delinquent
The person has been removed from an office for being dishonest
The person is a rehabilitated insolvent (2)
QUESTION 4
Which one of the following persons may be appointed as the external
auditor of Mayibule Ltd?
Felicity, the company's managing director
Bonke, who resigned as director of Mayibule Ltd at the end of
the previous fInancial year
Phindi who was previously the auditor of Mayibule Ltd, who
wishes to return after five years
(4) Herr Grieb, a German citizen (2)
QUESTION 5
Indicate which one of the following statements concerning preincorporation contracts, as contemplated m the Companies Act 71
of 2008, is INCORRECT
Pre-incorporation contracts must be concluded in writing
The intention is for the company to be bound by the
agreement after its incorporation
All common-law methods for the conclusion of preincorporation contracts are repealed
Section 21 of the Companies Act 71 of 2008 regulates preincorporation contracts (2)
QUESTION 6
Indicate which one of the following statements concerning directors'
duties is
INCORRECT
The test to determine whether a director breached his
duty of care and skill is objective with subjective
elements
The Companies Act 71 of 2008 completely codifies
the duties that directors owe to the companies that
they serve
The Companies Act 71 of 2008 has adopted the business
Judgment rule to protect directors in certain instances
The Companies Act 71 of 2008 distinguishes between
the duty of care, skill and diligence and the fiduciary duty
(2)
QUESTION 7
Complete the sentence by choosing the CORRECT statement.
Debenture holders
are creditors of a company by virtue of having made
loans to the company
are creditors of a company by virtue of holding shares in the
company
can only claim payment from the company if it will remain
solvent and liquid
(4)have an unconditional right to vote at all company meetings
(2)
QUESTION 8
Complete the sentence by choosing the CORRECT statement
To incorporate a new company in terms of the Companies Act
71 of 2008, the following documents must be filed. The
Memorandum of Incorporation and the
(1) Association agreement
(2) Founding statement
(3) Notice of Incorporation
(4) Statement of principal business
(2)
QUESTION 9
Choose the INCORRECT statement regarding the conclusion of a
pre- incorporation contract on behalf of a company yet to be
formed
It is possible to conclude a contract on behalf of a
company that is not yet registered in terms of the
Companies Act 71 of 2008
The intention of the person concluding the contract is to
hold the
company liable once it comes into existence
It is possible to conclude this type of contract in
different ways
It is possible to conclude a contract on behalf of
the company by means of common law agency
(2)
QUESTION 10
Choose the INCORRECT
statement Shares are
transferable from one person to another.
incorporeal, movable property
corporeal and embodied in a share certificate
(4) bundles of personal rights
.
(2)
MAY / JUNE 2018
QUESTION ONE
1.1 Although the principle of disregarding a company’s separate juristic
personality has been codified in the Companies Act 71 of 2008, the case
law that has developed around the common-law doctrine of piercing the
corporate veil will still be used by the courts as a guideline when
applying the statutory principle. Name 3 cases in which the courts
explained the common law grounds on which they may be prepared to
disregard the separate corporate personality of a company, and briefly
explain what those grounds were in each case.
In certain cases, the courts have disregarded the separate legal personality
of a company in order to recognize the substance or practical realities of a
situation rather than the form.
Innes CJ in Dadoo Ltd and others v Krugersdorp Municipal Council held:
…This conception of the existence of a company as a separate entity distinct
from its shareholders is not merely artificial and technical thing. It is a matter
of substance; … cases may arise concerning the existence or attributes which
in the nature of things cannot be associated with a purely legal persona. And
then it may be necessary to look behind the company and pay regard to the
personality of the shareholders, who compose it. Before the codification of the
principle of disregard of a company’s separate existence by the Companies Act
of 2008, this matter was regulated by the common law and referred to as
“lifting” or “piercing” the corporate veil. The courts used it to place limitations
on the principle of separate legal personality in order to avoid abuse “Piercing
the corporate veil” refers to those exceptional circumstances where the court
ignores the separate legal existence of the company and treats the
shareholders as if they were the owners of the assets and had conducted the
business of the company in their personal capacities OR attributes certain
rights or obligations of the shareholders to the company. There are no hard
and fast rules regarding the lifting of the corporate veil.
Botha v Van Niekerk & another:
The seller must have suffered an “unconscionable injustice” before the
court could lift the veil.
Cape Pacific v Lubner Controlling Investments (Pty) Ltd & others:
The court confirmed that it has no general discretion simply to disregard
a company’s separate legal personality.
The separate legal personality of a company should not be easily ignored.
However, circumstances do exist for example fraud, dishonesty or other
improper conduct where it would be justifiable to pierce the corporate veil.
Botha v Van Niekerk was too rigid.
The court indicated that it would adopt a more flexible approach namely of
taking all the facts of each case into consideration when determining if the
veil should be pierced.
A balance should also be struck between the need to persevere the
separate legal identity of the company against policy considerations in favor
of piercing the corporate veil. The veil could also be pierced in relation to a
specific transaction.
Hülse-Reutter v Gödde:
Agreed that court has no general discretion simply to disregard a
company’s separate legal personality.
The corporate veil would only be lifted if there was evidence of misuse or
abuse of the distinction between the company and those who control it, and
this has enabled those who control the company to gain an unfair advantage
Therefore, a dual test was introduced: by adding the element of
unfair advantage.
The court further confirmed that much depended on a close analysis of
the facts of each case and considerations of policy.
Die Dros (Pty) Ltd and another v Telefon Beverages CC and others:
Where fraud, dishonesty and other improper conduct is present, the need to
preserve the separate legal personality of a company must be balanced against
policy considerations favoring piercing the corporate veil.
Le’Bergo Fashions CC v Lee and another:
Court will pierce the corporate veil where a natural person, who is subject to a
restraint of trade uses a close corporation or a company to front to engage in
the activity that is prohibited by the agreement
Ex Parte: Gore NO:
These common law principles are still used as a guide to interpretation
of the statutory provision in section 20(9) of the Companies Act.
1.2 Explain whether or not Old Castle (Pty) Ltd can list its shares on
the Johannesburg Stock Exchange Ltd.
No, this is a private company. Its Memorandum of Incorporation prohibits
offering of any securities to the public and restricts the transferability of its
securities.
1.3 Mbali and Sasha want to incorporate a company through which they
will carry on a real estate business. They wish to buy residential stands for
development and resale. Before their company is incorporated, Mbali and
Sasha learn that the Proper T Development Bank is selling new stands and
residential land in a highly sought-after area at discounted prices. They are
concerned that if they wait until after the registration of their company,
they stand to miss out on these lucrative contracts that they can enter into
with the ProperT Development Bank.
1.3.1 Identify the available methods that Mbali and Sasha can use to secure
the contracts with The ProperT Development Bank for their proposed
business?
(5)
Cession and delegation, Nomination, Option, Contract for the benefit of a
third party (stipulatio alter) and Statutory method of conclusion of a preincorporation contract (section 21).
1.3.2
Explain to Mbali and Sasha what method would be the most
appropriate in these circumstances. Provide a reason for your
answer.
(2)
The common law alternatives (except for agency, which is impossible) could be used
more effectively and safely to avoid possible personal liability. The common law
constructions have a major advantage over the statutory method because, in terms
of the common law, the person acting on behalf of the proposed company is not
automatically liable if the company is not incorporated or fails to ratify the contract
completely.
1.4 Sasha is of the view that any person can be appointed as a company
director and that no person is subjected to any additional requirements
before he or she may be appointed as director.
With reference to the Companies Act 71 of 2008, explain whether or not
Sasha’s views are correct
(5)
Section 69(7)(a) to (c), 69(8)(a) and (b)(i)–(iv) of the Companies Act provides
Ineligible person(s) to become director: (May never be) A person who is
ineligible to be a director is absolutely prohibited from becoming a director. The
following are absolutely prohibited from becoming a director: a juristic person,
an unemancipated minor/a person under legal disability, a
person who is ineligible in terms of the provisions of the Memorandum of
Incorporation
Then there are persons disqualified from being a director: A
disqualification from being a director is not absolute.
A court has a discretion to permit a disqualified person to accept appointment as a
director.
The following persons are disqualified from being a director:
a declared delinquent
an unrehabilitated insolvent
a person prohibited from being director in terms of a public regulation
a person removed from an office of trust for misconduct/dishonesty
a person convicted of fraud, dishonesty, theft or a related offence
a person disqualified in terms of the provisions of the MOI
A person will only become a director once he or she has delivered written consent
accepting such a position.
This then proves that Sasha’s views are not correct because the above shows the
persons who are ineligible and disqualified from being directors. A person who is
eligible to become a director becomes a director when he has given written
consent of accepting the position.
Question 2
2.1 The founding statement of EatsAmor CC states its principle business
is “catering and cookie sales” In terms of the close corporation’s
association agreement, only one member, Tumelo is authorised to
contract on behalf of the close corporation. Seymore, one of the
members of the corporation, enters into a contract in terms of which he
purchases a racehorse of behalf of EatsAmor CC. Seymore believes that it
will be beneficial for the close corporation to keep the racehorse and to
participate in races. However, the horse does not perform well in its
first race and the other members of EatsAmor CC reject the contract as
invalid.
Explain whether or not EatsAmor CC is bound by the contract concluded
by Seymore for the purchase of the racehorse?
(5)
Section 54(1) of the Close Corporations Act 69 of 1984 determines that any
member of a close corporation will in relation to a person is not a member,
and is dealing with the close corporation, be an agent of the close corporation.
Section 54(2) of the Close Corporations Act determines that any act of a member
will bind the close corporation whether such act was performed in connection
with the business of the CC or not unless the member has in fact no authority to
act for the corporation in the particular matter and the contracting party has or
ought reasonably to have knowledge of the member’s lack of authority.
The close corporation will not be bound since Seymore cannot act on behalf of
the close corporation. Consequently, the other contracting party cannot rely on s
54 of the Close Corporations Act to hold the close corporation liable.
2.2 You are approached by Victoria, a newly appointed director of
The Hyde (Pty) Ltd for legal advice. She has heard that the
Companies Act 71 of 2008 has increased the potential liability of
company directors. As a director, she is concerned that she
can be held liable for non-compliance with the provisions of the
Companies Act 71 of 2008, identify the remedies that can be
used against directors who have abused their positions.
Section 162 – Application to declare director delinquent of under
probation
Derivative action in terms of s165
Then there are statutory remedies to shareholders:
Relief from oppressive or prejudicial conduct in terms of s163
Dissenting shareholders appraisal rights in terms of s164
Additional remedy to protect rights of security holders in terms of s161
2.3 Chisa Ltd issued partly paid up shares to its shareholders. The issue
price was R100 per share. The shareholders have only paid R75 for each
share issued. As a result, the shareholders still owe the company R25 per
share issued. However, the company wants to write off the outstanding part
of the issue price, i.e. the R25 per share owed to it by each shareholder.
2.3.1 What is the term used in the companies Act 71 of 2008 to describe the
transaction proposed in this scenario?
Distributions (waiver of debt or forgiving of debt).
2.3.2 Advise the directors of Chisa Ltd on the requirements in the
Companies Act 71 of 2008 that must be complied with before the
company can write off the outstanding debt of shareholders as
proposed.
(5)
The requirements as set out in section 46 of the Companies Act 71 of 2008
apply. The board of directors must authorise the distribution. It must
reasonably appear that the company will be able to satisfy the solvency and
liquidity test immediately after the distribution has been made. The board must
acknowledge by means of a resolution that it has applied the solvency and
liquidity test and has reasonably concluded that the company will satisfy
the test immediately after completion of the proposed distribution. Payment must
be made within 120 days after the solvency and liquidity test done otherwise test
needs to be redone.
2.4 In Clause 9.2 of the Memorandum of Incorporation of Tea Garden (Pty)
Ltd provides that, in the event that a shareholder will be represented
by proxy at a meeting, the form appointing the proxy must be
deposited at the company’s registered office no later than 48
hours before the scheduled time of the general meeting , failing which
the proxy will be invalid .
With reference to the provisions of the Companies Act 71 0f
2008 and relevant case law advise the shareholders of Tea
Garden (Pty) Ltd whether Clause 9.2 is valid .
Section 58 of the Companies Act 71 of 2008 determines that a proxy can be
appointed. The appointment must be in writing and will be valid for one year, or
for a specified period of time. The same person may be appointed as a proxy for
more than one shareholder. The proxy can delegate the authority to act on the
shareholder’s behalf to someone else. A copy of the appointment instrument
must be available/ presented before the proxy exercises any rights of the
shareholder at a shareholders meeting. A shareholder can cancel a proxy in
writing or withdraw the appointment in writing.
Question 3
3.1 Wit Deep Ltd, a company that was incorporated 30 days ago, has not yet
appointed a company secretary. Mothibi, the chairman of the Board of
directors, has been approached by Corporate Services, (Pty) Ltd, which has
offered to provide corporate secretarial and administrative services to Wit
Deep Ltd. Advise Mothibi in regard to the following:
3.1.1 When and by wo must the first company secretary of Wit Deep Ltd be
appointed
(2)
The first company secretary of a public company or state-owned company may
be appointed by: The incorporators of the company or Within 40 business days
after incorporation of the company, by either the directors of the company
or ordinary resolution of the company’s shareholders.
3.1.2 What requirements must Corporate Services (Pty) Ltd meet for it to
be appointed as company secretary of Wit Deep Ltd?
(3)
Section 87 provides that a juristic person or partnership may be appointed to hold
the office of company secretary, provided that every employee of that juristic
person, or partner and employee of that partnership, as the case may be, satisfies
the requirements contemplated in section 84(5), and at least one employee of that
juristic person, or one partner or employee of that partnership, as the case may be,
satisfies the requirements contemplated in section 86.
3.2.1 In what circumstances would Wit Deep Ltd be required to appoint
a Social and Ethics Committee in terms of the Companies Act 71 of
2008?
In terms of section 72 the SEC must have at least three directors or prescribed
officers of whom at least one must be a director (not prescribed officer) who is
not involved in the day-to-day management of the company’s business or was
so involved within the previous three financial years. Every SOC, listed public
company and other company with a public interest score (PIS) above 500,
must appoint a SEC.
3.2.2 Outline any 5 main functions that the Social and Ethics Committee
must perform?
(5)
In terms of section 72(8), social and ethics committee of a company is
entitled to –
require from any director or prescribed officer of the company any
information or explanation necessary for the performance of the
committee’s functions;
request from any employee of the company any information or
explanation necessary for the performance of the committee’s functions;
attend any general shareholders meeting;
receive all notices of and other communications relating to any general
shareholders meeting; and
be heard at any general shareholders meeting contemplated in this
paragraph on any part of the business of the meeting that concerns the
committee’s functions.
3.3 Indicate whether the following statements are true or false.
Provide a reason for your answer
3.3.1 The Law regulating South African companies and close corporation
is codified completely in the Companies Act 71 of 2008
False. The Companies Act is not a complete codification of our company law.
Although the common law will continue to develop under the Companies
Act, some important concepts have already been clarified by our courts.
3.3.2 Profit companies are obliged to include in their Memorandum of
Incorporation a statement indicating what their principle business
is. This serves as a restriction on their capacity.
False. Section 19(1)(b) of the Companies Act provides that a company has all
the legal capacity and the powers of a natural person, except to the extent that a
juristic person is incapable of exercising any such power, or the company’s
Memorandum of Incorporation provides otherwise. Therefore, the capacity of a
company is no longer limited by its main or ancillary objects or business, and
these objects need not even be stated in the Memorandum of Incorporation.
Although the company’s Memorandum
3.3.3 A change in membership in a close corporation or a
company does not influence the continued existence of
the enterprise
False. Should the membership of a close corporation change, an
amended founding statement must be lodged for registration.
3.3.4 A member of a close corporation will be liable for a breach of his or
her duty of care and skill irrespective of whether or not the
corporation suffered a financial loss.
False. A member will be liable for a breach of the duty of care and skill only if the
close corporation suffers a loss as a result of the breach of this duty. Also, in this
instance, no liability will be incurred if all the members give their prior or
subsequent approval in writing.
SECTION B
MULTIPLE CHOICE QUESTIONS
QUESTION 1
Choose the incorrect statement pertaining to the implications of the principle of
separate legal personality
1)
The estate of the company is assessed apart from the estates of its
shareholders
Where a company is wronged, the company itself must seek redress
The branches or divisions of a company have their own separate
legal existence
Companies are bearers of rights and duties in terms of the Constitution of
the Republic of South Africa, 1996
QUESTION 2
The following case provides an explanation of the different types of authority that a
director representing a company can possibly have:
Makate v Vodacom (Pty) Ltd 2016 (4) SA 121 (CC)
Feni v Gxothiwe & another 2014 (1) SA 594 (ECG)
Grancy Property (Pty) Ltd v Manala & others 2015 (3) SA 313 (SCA)
Venalex (Pty) Ltd v Vigraha Property CC & Others 2015 (2) All SA 645
(KZD)
QUESTION THREE
Choose the incorrect statement regarding the requirements that must be met
before third parties dealing with a ring-fenced company would be required to
acquaint themselves with the restrictive conditions applicable to such a company:
There must be a restriction in the company’s Memorandum of
Incorporation
The Company’s name must be followed by “RF”
A prohibition against amendment must be included in the Memorandum of
Incorporation
The Notice of Incorporation can be silent on the issue of the
company’s capacity
QUESTION FOUR
Which one of the following is NOT a characteristic of a non-profit company?
It has members and not shareholders
It must be formed by at least 3 persons, it’s first directors
Its objects must relate to social activities, public benefits, cultural activities or
group interests
Upon liquidation, its income and assets must be distributed to its
incorporators or members
QUESTION FIVE
Choose the correct statement
The maximum number of members that EatsAmor CC may have is:
5
10
50
No restriction is applicable
QUESTION SIX
Choose the INCORRECT statement
If all the members of a close corporation have consented in writing, a
close corporation may provide a loan to or security for a member
Someone who knowingly conducts the business of a close corporation in a
reckless or fraudulent manner may be liable for all the debts of the
corporation
Certain smaller close corporations are exempted from financial
reporting
Any provision in the association agreement that is inconsistent with the
provisions of the Close Corporations Act 69 of 1984 will be void
QUESTION 7
The only constitutive document required for registration of a close corporation
is the:
Memorandum of Incorporation
association agreement
founding statement
Notice of Incorporation
QUESTION 8
Choose the CORRECT statement
In the following circumstances, a resolution by the board of directors to
issue shares must be approved by a special resolution of the shareholders.
where the shares are issued in the exercise of pre-emptive rights
where the voting power of the shares will exceed 30% of the voting
power of that class of shares immediately before the issue
where the shares are issued in persuance of an employee share scheme
where the shares are issued in terms of an underwriting agreement
QUESTION 9
Choose the CORRECT statement
The Companies Act 71 of 2008 requires that when a public company
issues new shares, they must be offered to existing shareholders first, prorata to their current shareholdings
A distinction is drawn between executive and non-executive directors in
the Companies Act 71 of 2008
The Companies Act 71 of 2008 places a restriction on the number of
shareholders in a private company
Debenture holders may in terms of the Companies Act 71 of 2008
attend and vote at general meetings and appoint directors
QUESTION 10
Choose the CORRECT statement regarding the rotation requirement for auditors in
section 92 of Companies Act 71 of 2008
The same individual may not serve as the auditor of a company for
more than 5 consecutive financial years
The Company must report on the auditor’s tenure as well as information
regarding the auditor’s rotation
If an individual served as an auditor for two consecutive years and then
resigned, he or she may not be appointed as that company’s auditor
again before 5 years have passed
The same audit firm may not serve as the auditor of a company for more
than ten consecutive financial years
OCTOBER/NOVEMBER 2017
SECTION A
QUESTION 1
1.1
List 3 main differences between profit companies and non-profit
companies (3)
A profit company’s main objective is financial gain for its shareholders,
a profit company may be incorporated by one all more persons and
under Companies Act of 2008 they are no limit to the number of
shareholders it can have. Four different types of company fall under this
category namely; state
owned companies, public companies, personal liability
companies and private company.
On the other hand, a non-profit company is a company whose main object
must relate to social activities, public benefit, cultural activities or group
interests.
1.2 Explain the circumstances in which the name of a company must
be immediately followed by the expression "(RF)", and the legal
consequences of this expression
(3)
The doctrine of constructive notice provides that third parties dealing
with a company are deemed to be fully acquainted with the contents of
the public documents of the company. However, section 19(4) partially
abolishes this doctrine. The exception is that a person is deemed to
have knowledge of any provision of a company’s MOI in terms of
section 15(2) relating to any restrictive or procedural requirement
impeding the amendment of a specific provision of the MOI prohibiting
its amendment. This is subject to the condition that the company’s
name includes the letters “RF” and the Notice of Incorporation
contains a prominent statement drawing attention to such a provision.
1.3
List 3 instances where a company's Memorandum of Incorporation
may be amended
(3)
A company’s Memorandum of Incorporation may be amended
in compliance with a court order (An amendment in terms of a court order is
given effect via a board resolution and there is no need for a shareholders’
special resolution.)
by the board in terms of sections 36(3) and (4) (These allow the board to
amend the authorised share capital of the company, unless the Memorandum of
Incorporation provides otherwise.)
by a special resolution of the shareholders proposed by o the board of
directors, or
shareholders who collectively exercise not less than 10% of the voting rights
1.4
Michael, a newly appointed director of Mineralex (Pty) Ltd, is of
the view that the rules made by the board of directors are binding
between the company and various stakeholders, including the
company's creditors. Whilst reading the rules of the company
concerning corporate governance, he realises that one of the
rules is inconsistent with the company's Memorandum of
Incorporation. He also notices that some of the provisions in the
rules are already addressed in the Companies Act 71 of 2008. He
is concerned about the validity of these rules. Advise Michael
whether these rules are valid or not. Further, explain to him on
which persons or between which parties the rules made by the
board of directors are binding .
(6)
The Memorandum of Incorporation is the founding document of the
company. It sets out the relationship between the company and its
shareholders, the company and its directors, the company and other
parties as well as the company by other third parties. The MOI should
comply with the provisions of the Companies Act. Any rules or
procedure contravening the Companies Act are void to the extent of
the inconsistence. Thus, rules and procedure inconsistent with the Act
are thus void and of no force.
1.5
Masala and Kwena want to open a small truck rental business.
They believe that as they are best friends, they would work well
together They are unsure whether they should register a public
company or a private company through which they will conduct
their business. Advise them, providing reasons, as to which of
these two types of company you believe would be the most
appropriate for them in their business. Indicate the advantages
and disadvantages, if any, of each type of company in your
answer
(6)
A private company is prohibited by the companies Act from offering
its securities to the public and the transferability of its securities is
restricted.
The capital is provided by private individuals who decides how and
who should run the company. On the other hand, a public company
is not a state-owned company but a private company with shares
listed and traded on the stock market. Its major advantage is being
able to source capital from the public and any other investor.
1.6
While driving one Saturday afternoon, Masala and Kwena come
across a perfect office building. They want to purchase this
building on behalf of the proposed company. Advise them on the
benefits of concluding a pre-Incorporation contract under the
common law instead of using section 21 of the Companies Act 71 of
2008?
(2)
Section 1 of the Companies Act describes a pre-incorporation contract
as a written agreement entered into before they incorporation of a
company by a person who purports to act in the name of, or on behalf
of the company with the intention or understanding that the company
will be incorporated, and will thereafter be bound by the agreement. A
person who enters into such a contract is held jointly and severally
liable with any such other person for liabilities emanating from the preincorporation contract if the incorporation does not take place, or the
company does not ratify any party of the agreement after
incorporation. The advantage of pre-incorporation under common law
is that the promoter concludes the contract under his name but after
the company is registered can cede the debt without concurrence of the
debtor. Under section 21 a written agreement is a requirement and the
promoter are bound by the contract for liability in case the company is
not incorporated.
1.7
Explain whether it would be possible for Masala and Kwena to
register a close corporation (1f they wish to do so) in order to
conduct their truck rental business
(2)
Since the coming into effect of the Companies Act 2008 and in
particular section 13 of the Act CC’s can no-longer be incorporated in
South Africa therefore it would not be possible for them to register a
CC
QUESTION 2
2.1 Suppose that Roshni Naidoo registers a company called Roshni Group
(Pty) Ltd. The company is engaged in substantially the same business
activities as a well-known company called Roshni Holdings Ltd, namely
the retailing of clothing and footwear. Roshni Holdings Ltd
immediately approaches the court for an order directing Roshni Group
(Pty) Ltd to change its name. Advise Roshni Naidoo, with reference to
relevant case law, what factors the court will consider in determining
whether the company's name will have to be changed (5)
Peregrine Group (Pty) Ltd & others v Peregrine Holdings Ltd & others:
The activities that the companies engaged in; The similarity in the names
and whether it would cause confusion; The client bases of the respective
companies; whether the name is undesirable and calculated to cause harm
to the other company; The likelihood that members of the public would be
confused in their dealings with the competing companies; The date of
registration of the companies would also play a role.
2.2 The Memorandum of Incorporation of Dagrne (Pty) Ltd provides
that only the board of directors or a person authorised by the board
have the power to conclude contracts on behalf of the company
.Further it states that any transaction of which the value exceeds
the amount of R100 000 must first be authorised by the company at
a general meeting by way of a special resolution .Ugochukwu, one of
the directors of Dagrne (Pty) Ltd who is authorised by the board of
directors to act on behalf of the company, concludes a contract on
behalf of the company to the value of R200 000 with Wiseman for
purchase of storage equipment .The authorisation by the company
in a general meeting was not obtained.
Discuss whether the company is bound by the contract concluded by
Ugochukwu
(5)
The company is bound by the contract concluded by Ugochukwu
because of the operation of section 20(7) of the Companies Act 2008.
The section provides that a person dealing with a company in good
faith is entitled to assume that the company has complied with all of
the internal procedures requirements in terms of its MOI and any rules
unless the person knew or reasonably ought to have known of any
failure by the company with its
formal or procedural requirements. There is no indication from the
that Wiseman knew or reasonably ought to have known that
Ugochukwu failed to comply with procedures and that he had acted
in bad faith.
2.3
The members of the Tshotshotsho community in Mpumalanga
want to buy shares in BusyRite Ltd. Advise them regarding the
following issues
2.3.1 Name the different classes of shares that may be issued by a
company (3)
A company may issue the following shares;
Preference shares
Ordinary shares and
Deferred shares
2.3.2 Identify the rights that shares can confer on their holders
Shares can confer the following rights to its holders;
(3)
The right to vote
The right to information
The right to receive a dividend that has been declared
The right to share in the assets that are left on the winding up of a
company after the company’s creditor’s creditors have been paid up.
2.3.3 Discuss whether it is permissible for BusyRite Ltd to provide
financial assistance to the members of the Tshotshotsho community
to enable them to purchase the shares issued by the company. Also
indicate whether there are any requirements that must be complied
with and, if so, list the requirements
Busy Rite Ltd can provide debt instruments to the public provided three
principles used to determine whether there must be disclosure are present.
The principles are;
There must be an offer
The offer is of securities
The offer is made to the public
2.4 The shareholders of Floral Fantasy Ltd want to institute action
against the company's directors for breach of their duty of care, skill
and diligence. Advise the shareholders on the test the court will use in
order to determine whether or not a director is in breach of the duty.
Refer to relevant case law in your answer (4)
The test applied to determine what a reasonable director would have done
in a particular situation is an objective test. In Fisheries Development
Corporation of SA v Jorgensen, it was stated that the extent of the duty of care
and skill depends to a considerable degree on the nature of the company’s
business and on any particular obligations assumed by or assigned to them.
QUESTION 3
3.1
Megafones Ltd, a recently incorporated company, has not yet
appointed an auditor. Advise the directors of Megafones Ltd
regarding the following.
3.1.1 Is Megafones Ltd required in terms of the Companies Act 71 of
2008 to appoint an auditor? Provide a reason for your answer.
Section 94(2) of the Companies Act 2008 requires is required to that
at each annual general meeting public companies, state owned
companies and any other company is required to have an audit
committee must appoint an audit committee for each financial year.
The audit committee must have three members and consist of nonexecutive directors who are not involved in the day to day running
of the company.
3.1.2 When and by who must the auditor be appointed?
An auditor is appointed by the directors within 40 business days
after in incorporation
3.1.3 What qualifications or requirements must the person/
entity meet in order to be appointed as the company's
auditor in terms of the Companies Act 71 of 2008?
The auditor may be an individual person or a firm and is appointed by a
company by way of a contract. In companies with an audit committee, the
audit committee is required, in terms of section 94(7) of the Companies Act,
to nominate for appointment a registered auditor who is independent of the
company and to determine the auditor’s fees and terms of engagement. Only
a registered auditor may be appointed as auditor of a company. In terms of
section 37 of the Auditing Profession Act, only a person who has complied
with the prescribed education, training and competency requirements, who
has made arrangements regarding his or her continued professional
development where that individual is not a member of an accredited
professional body, who is a “fit and proper person” to act as an auditor, and
who is resident within South Africa, may be registered as an auditor. The
Auditing Profession Act states, further, in section 37(3) that any person who
has been removed from an office of trust as a result of misconduct, who has
been convicted of theft, fraud or forgery or other act of dishonesty or
corruption, or who has been declared by a court to be of unsound mind and
unable to manage his or her own affairs, may not be registered as an auditor.
3.1.4
What rights does an auditor have in terms of the Companies Act
71 of 2008?
Section 93 of the Companies Act provides that the company auditor has
a right to access, at all times, the accounting records and all books and
documents of the company. The auditor may attend any general meeting
held by the company.
3.2
Mashudu, Jaden and Boitumelo are members of Star Properties
('the CC'). The main business of the CC Is buying and selling of
immovable property. Boitumelo is aware that the CC wishes to buy a
certain vacant residential stand for development and resale. She,
however, assists Enjay Properties (Pty) Ltd to purchase the stand for
R600 000, and then to sell it to the CC for R1 000 000 .Boitumelo
does not disclose to the other members of the CC the fact that Enjay
Properties (Pty) Ltd is owned by her husband, Eddie. Briefly explain
what duty Boitumelo has breached, and what this duty entails.
Members of CC owe their fiduciary duties to the CC as a legal persona. In
terms section 42(2) members must act honestly and in good faith and must
exercise their powers to manage and represent the CC in its interests and for
its benefit. A member must avoid a conflict of interest between his interests
and those of the CC, in particular a member may not derive unwarranted
personal economic benefit from the CC nor compete with it in its business
activities.
3.3 Set out the requirements that must be adhered to in terms of the
Close Corporations Act 69 of 1984 before a close corporation
may provide loans and security to its members. Also indicate the
consequences, If any, of non-compliance with these requirements. In
terms of section 44 of the Companies Act, a company may give financial
assistance by way of a loan, guarantee, provision of security, or otherwise to
a person for the purpose of, or in connection with, the acquisition of shares
and other securities in the company, provided that such assistance is not
prohibited by the Memorandum of Incorporation and that certain
requirements are met.
The decision to assist a person to acquire shares in the company rests with
the board of directors, but only where the assistance is in terms of an
employee share scheme or where a special resolution by the shareholders
taken within the previous two years authorised such assistance to a specific
person, or to persons that fall in a specific class or category. In the latter
case, the person to whom the assistance will be given must fall in that class.
Section 44 further requires that the board must be satisfied that the
solvency and liquidity requirements will be satisfied immediately after
providing the financial assistance (see question 1 above), and that the
assistance is given on terms that are fair and reasonable to the company.
The Memorandum of Incorporation may place further restrictions on the
provision of financial assistance, and the board must ensure that these
requirements are also met.
The Close Corporation Act creates personal liability on members for the debts
of the CC in the event of a contravention of important provisions of the Act.
The consequences may be joint and several liability for the debts of the CC in
the event of specific contraventions. Liability in cases of reckless and
fraudulent trading and abuse of corporate juristic persons.
4 State whether TRUE or FALSE.
3.4.1 The so-called "business Judgment rule" in section 76(4) of the
Companies Act 71 of 2008 will protect a director who has allegedly
breached the duty to act in good faith and for a proper purpose
TRUE - The business judgment rule makes the director may escape
liability where he or she had a rational basis for believing and actually
believed that the decision was in the best interest of the company.
3.4.2 The general rule under the Companies Act 71 of 2008 is that when a
private company issues new shares, these shares must be offered to
existing shareholders first, and issued to them pro rata to their
current shareholdings
TRUE
3.4.3 An unrehabilitated insolvent may become a member of a close
corporation
TRUE - requires support from a trustee/liquidator
3.4.4 An association agreement is a prerequisite for the formation and
running of a close corporation.
FALSE - Optional agreement concluded between members in a
close corporation to regulate the internal affairs in the business.
3.4.5 If a member of a close corporation fails to act with the required
degree of care and skill, he/she will incur liability for negligent acts
even if all the other members of the close corporation give their
approval in writing
FALSE - He or she will be liable for the loss caused by his or her actions
SECTION B
QUESTION 1
The following case concerned the application of sections 36 and 49 of
the Close Corporations Act 69 of 1984
Makate v Vodacom (Pty) Ltd 2016 [2016] ZACC 13, 2016 (6) BCLR 709
(CC), 2016 (4)
SA 121 (CC)
Fem v Gxothiwe & another 2014 (1) SA 594 (ECG)
Graney Property (Pty) Ltd v Manala & others 2015 (3) SA 313 (SCA)
Omar v lnhouse Venue Technical Management (Pty) Ltd & others
2015 (3) SA 146 (WCC)
QUESTION 2
The following case provides an explanation of the different types of
authority that a director representing a company can possibly have
Makate v Vodacom (Pty) Ltd [2016] ZACC 13, 2016 (6)
BCLR 709 (CC), 2016 (4) SA 121 (CC)
Fem v Gxothiwe & another 2014 (1) SA 594 (ECG)
Graney Property (Pty) Ltd v Manala & others 2015 (3) SA 313 (SCA)
Vena/ex (Pty) Ltd v Vigraha Property CC & others 2015 (2) All SA
645 (KZD)
QUESTION 3
In this case, the court considered the applicability of section 21 of
the Companies Act 71 of 2008 to conclude pre-incorporation
contracts in respect of a shelf company
(1)
(2)
(3)
(4)
Makate v Vodacom (Pty) Ltd [2016] ZACC 13, 2016 (6) BCLR
709 (CC), 2016 (4) SA 121 (CC)
Venalex (Pty) Ltd v V1graha Property CC & others 2015 (2) All SA 645
(KZD)
Graney Property (Pty) Ltd v Manala & others 2015 (3) SA 313 (SCA)
Omar v lnhouse Venue Technical Management (Pty) Ltd & others 2015
(3) SA 146 (WCC)
QUESTION 4
Indicate the CORRECT statement pertaining to private companies
They may not be converted into a close corporation
They are prohibited from having more than 50 shareholders
They all have to appoint audit committees.
They may list their shares on the Johannesburg Stock Exchange Ltd
QUESTION 5
Indicate the CORRECT statement regarding close corporations as a business
form
A member's interest in a close corporation may be jointly held
For a close corporation to make payments to its members in their capacity as
creditors, then formalities in section 51 of the Close Corporations Act 69 of 1984
must be adhered to
A member's interest in a close corporation can be acquired by
contributing to the close corporation
A close corporation can have shares and a share capital.
QUESTION 6
Indicate the INCORRECT statement regarding close corporations as
a business form
If a member Is declared insolvent or his/her
member's interest Is attached, the close corporation
dissolves automatically
Generally, only natural persons may become members of a close
corporation.
If a member of a close corporation fails to make his/her
contribution as agreed, he/she may incur personal liability for
the debts of the corporation
Close corporations are not exempted from financial reporting duties.
QUESTION 7
The procedures applicable to close corporations for meetings,
voting at meetings and proxy votes may be regulated in the
Memorandum of Incorporation
association agreement
founding statement
Notice of Incorporation
QUESTION 8
Philani was elected as an executive director by the shareholders of Bulk
Haulage Ltd. The company's Memorandum of Incorporation provides
that a director is elected for a period of five years. However, after three
years of poor financial performance by the company for which Philani is
blamed, the shareholders want to remove him as director
Choose the CORRECT statement
Philani cannot be removed because of the provision contained in the
Memorandum of Incorporation
Philani can only be removed by the board of directors by means of
a special resolution
Philani can be removed by an ordinary resolution adopted by the
shareholders
Philani cannot be removed by shareholders or by the board of
directors because he is an executive director, who has an
employment contract with the company
QUESTION 9
Choose the INCORRECT option
The following person/ institution may in certain instances apply to court
to declare a director delinquent
A shareholder of the company
A creditor of the company
A representative of the employees of a company
Any organ of state responsible for the administration of any legislation
QUESTION 10
Choose the INCORRECT statement regarding the rotation requirement that
applies in respect of auditors in terms of section 92 of the Companies Act 71
of 2008
The same firm may not serve as the auditor of a company for
more than five consecutive financial years
If a company has appointed two or more Joint auditors, the company is
obliged to manage the rotation requirement in a manner that all of the
Joint auditors do not stop acting as auditors in the same year.
If an individual served as auditor for two or more consecutive years
and then ceases to be the auditor of a company, he or she may not be
appointed as auditor of the company again before two or more
financial years have passed
The same Individual may not serve as the designated auditor of a
company for more than five consecutive financial years.
MAY / JUNE 2018
SECTION A
QUESTION 1
1.1 Annalize wishes to incorporate a company 1n order to raise funds
for wildlife conservation Advise Annallze regarding the
requirements for non-profit companies
A non-profit company is a company incorporated for a public benefit or
other object such as cultural, social or communal or group interests. A
Non-Profit Company
must apply all of its assets and income however derived, to advance
its stated objects as set out in its MOI and
or subject to the above point may acquire and hold securities issued by
a non-profit company; or directly, alone or with any other person, carry
on any business, trade or undertaking consistent with or ancillary to its
stated objects. Since Annalize wants to raise funds for wildlife
conservation these objects fall within the ambit of a Non-Profit
Company.
1.2 The main object of Nashville (Pty) Ltd is manufacturing furniture. The
Memorandum of Incorporation provides that the board of directors may
appoint a managing director who will be authorised to enter into contracts
on behalf of the company. Should the contract, however, exceed the amount
of R150 000, prior consent of the general meeting is required. Anthea, one
of the directors, buys a beach house for R3,5 million from Bongeka on behalf
of Nashville (Pty) Ltd
With reference to the set of facts above, answer the following questions
1.2.1 Explain whether or not Nashville (Pty) Ltd can raise the
restrictions to its capacity as contained in its Memorandum of
Incorporation as grounds to avoid being bound to the contract
No. Section 19(1)(b) of the Companies Act provides that a company has all
the legal capacity and the powers of a natural person, except to the extent
that a juristic person is incapable of exercising any such power, or the
company’s Memorandum of Incorporation provides otherwise. Therefore,
the capacity of a company is no longer limited by its main or ancillary objects
or business, and these objects need not even be stated in the Memorandum
of Incorporation.
1.2.2 Assume that Anthea had contracted on behalf of Nashville (Pty)
Ltd with Bongeka on previous occasions. What would Bongeka have to
prove if Nashville (Pty) Ltd denies being bound to the contract on the
basis that Anthea lacked express authority to conclude the contract?
Refer to relevant case law in your answer
Estoppel applies only when the agent did not have actual authority to bind
the company. Take particular note of the fact that the misrepresentation
(i.e. that the agent had the necessary authority when, in fact, he or she did
not) must have been made by the company as principal. In Freeman and
Lockyer v Buckhurst Part Properties (Mangal) Ltd, the court decided that
estoppel could not only arise from the Articles (note that this would be the
Memorandum of Incorporation in terms of the current Companies Act), but
also because the company with full knowledge and approval allowed an
ordinary director to act as the managing director and, in this manner,
culpably represented that he was entitled to act. Based on such
misrepresentation, the company will be prevented (estopped) from denying
liability if the third party can prove that
-the company misrepresented, intentionally or negligently, that the
agent concerned had the necessary authority to represent the company
-the misrepresentation was made by the company
-the third party was induced to deal with the agent because of the
misrepresentation
1.3.1 Explain whether or not CBT (Pty) Limited is obliged to hold an
annual general meeting?
In terms of the Companies Act of 1973, every company was compelled
to convene an annual general meeting at the times prescribed by the
Act. In terms of the Companies Act of 2008, only public companies
have a statutory obligation to convene annual general meetings. CBT
Pty Limited as a private company is not obliged to convene an annual
general meeting in terms of the Companies Act.
1.3.2 Indicate the circumstances in which a shareholders' meeting may be
validly postponed or adjourned
A shareholders meeting may validly postponed or adjourned;
if either the vote or the person quorum is not satisfied one hour after
the pointed time at which the meeting is supposed to begin.
If the quorum for a particular matter is not satisfied, but they is other
business on the agenda, that non-quorate matter maybe postponed to
a later time in the meeting without motion or vote.
If they is no other business on the agenda the meeting may be postponed or
adjourned for a week without a motion or vote.
1.3.3 Which matters must be discussed at a company’s annual
general meeting in terms of the Companies Act 71 of 2008?
Matters to be discussed at the annual general meeting in terms of
the Companies Act of 2008 are;
Presentation of the director’s report
Presentation of an audit committee report
Election of directors to the extent required by the Act or the
company’s MOI
Appointment of an auditor for the following financial year
Appointment of an audit committee
Presentation of audited financial statements for the immediately
preceding financial year
Any matters raised by the shareholders
QUESTION 2
2.1
Amanda wishes to enter into a contract for the purchase of
catering equipment on behalf of a company which she intends to
incorporate next year.
Advise Amanda on the requirements of section 21 of the
Companies Act 71 of 2008 that must be complied with for the
contract to be binding on the proposed company
In terms of section 21 of the Companies Act a person may enter into
a written agreement in the name of, or purport to or act in the name
of, or on behalf of an entity that is contemplated or proposed to be
incorporated but does not yet exist at the time of agreement.
Within three months after date of incorporation the board of the
company must completely, partially or conditionally ratify or reject
any pre- incorporation contract an entity that is contemplated
If the board neither ratifies nor rejects the pre-incorporation contract
purported to have been done in the name of the company within three
months after incorporation the company will be regarded as having
ratified that agreement.
This will mean the pre-incorporation contract or agreement is
enforceable
against the company and that the liability of the promoter is discharged.
2.2
List the requirements that must be met by a company to provide
financial assistance for the acquisition of its own shares in terms
of the Companies Act 71 of 2008
In terms of section 44 of the Companies Act, a company may give financial
assistance by way of a loan, guarantee, provision of security, or otherwise to a
person for the purpose of, or in connection with, the acquisition of shares and
other securities in the company, provided that such assistance is not prohibited
by the Memorandum of Incorporation and that certain requirements are met.
The decision to assist a person to acquire shares in the company rests with the
board of directors, but only where the assistance is in terms of an employee
share scheme or where a special resolution by the shareholders taken within
the previous two years authorised such assistance to a specific person, or to
persons that fall in a specific class or category. In the latter case, the person to
whom the assistance will be given must fall in that class. Section 44 further
requires that the board must be satisfied that the solvency and liquidity
requirements will be satisfied immediately after providing the financial
assistance (see question 1 above), and that the assistance is given on terms that
are fair and reasonable to the company. The Memorandum of Incorporation
may place further restrictions on the provision of financial assistance, and the
board must ensure that these requirements are also met.
2.3 Andrew Is a newly appointed director of Cornell Ltd. He has no
previous experience as a director and no special management
qualifications. His son, Mangaliso is a second-year law student.
Mangaliso told Andrew that he need not be concerned about his new
appointment since the business Judgment rule has been adopted
into the South African corporate law. Andrew requires some
additional information regarding the application of
this rule. Briefly explain what this rule entails and what needs to be
proven to rely upon this rule
Section 76(4) of the Companies Act states that a director will be regarded
as having acted in the best interests of the company and with the required
degree of care, skill and diligence if the director
took reasonable steps to become informed about the matter,
had no material personal financial interest in the subject matter of the
decision or knew of anybody else having a financial interest in the matter,
or disclosed his/her interests, and
made or supported a decision in the belief that it was in the best interests
of the company.
A director is also entitled to rely on information provided by certain persons
specified in the Companies Act. In any proceedings against a director, other
than for wilful misconduct or wilful breach of trust, a court may relieve the
director of liability if it appears to the court that the director acted honestly
and reasonably, or it would be fair to excuse the director. A director will also
escape liability where he or she had a rational basis for believing, and
actually believed, that the decision was in the best interests of the company.
2.4 Section 165 of the Companies Act 71 of 2008 expressly abolishes
the common-law derivative action All derivative actions on behalf of a
company will have to be brought under the new statutory prov1s1ons
Discuss the statutory derivative action 1n section 165 of the
Companies Act 71 of 2008 1n respect of
2.4.1 the person or persons who may bring the action
A shareholder, or person entitled to be registered as a shareholder of the
company or related company, or a director or prescribed officer of the
company, or a registered trade union that represents employees or any
other person granted leave by court may bring the action
2.4.2 the ground/s for the application
To protect the legal interests of the company
2.5
List 5 duties of the audit committee in terms of the Companies Act
71 of 2008
Duties of an Audit Committee are to;
To nominate for appointment as auditor of the company a
registered auditor who in the opinion of the committee is
independent of the company
Determine the fees to be paid to the auditor and the auditor’s terms of
engagement
Ensure that the appointment of the auditor complies with the
provisions of the Act and any other legislation relating to the
appointment of auditors
Determine the nature and extent of any non-audit services that the
auditor
may provide to the company
Receive and deal appropriately with any complaints whether from within
or outside the company relating to either accounting practices or
internal audit of the company
Pre-approve any proposed contract with the auditor for the provision of
non-audit services to the company
Perform other functions determined by the board
QUESTION 3
3.1.1 James, a member of Excel CC, wishes to buy a new car. He has been
experiencing personal financial problems and will only be able to pay the
purchase price if he gets a loan from the bank. The bank Is willing to
provide the loan If Excel CC stands surety for the loan .Advise the
members of Excel CC on the requirements of the Close Corporations Act
69 of 1984 that must be adhered to before the security may be provided
and indicate the possible consequences (if any) for not adhering to those
requirements
The Close Corporation Act creates personal liability on members for the debts
of the CC in the event of a contravention of important provisions of the Act. The
consequences may be joint and several liability for the debts of the CC in the
event of specific contraventions. Liability in cases of reckless and fraudulent
trading and abuse of corporate juristic persons.
In terms of section 44 of the Companies Act, a company may give financial
assistance by way of a loan, guarantee, provision of security, or otherwise to a
person for the purpose of, or in connection with, the acquisition of shares and
other securities in the company, provided that such assistance is not prohibited
by the Memorandum of Incorporation and that certain requirements are met.
The decision to assist a person to acquire shares in the company rests with the
board of directors, but only where the assistance is in terms of an employee
share scheme or where a special resolution by the shareholders taken within
the previous two years authorised such assistance to a specific person, or to
persons that fall in a specific class or category. In the latter case, the person to
whom the assistance will be given must fall in that class. Section 44 further
requires that the board must be satisfied that the solvency and liquidity
requirements will be satisfied immediately after providing the financial
assistance (see question 1 above), and that the assistance is given on terms that
are fair and reasonable to the company. The Memorandum of Incorporation
may place further restrictions on the provision of financial assistance, and the
board must ensure that these requirements are also met.
3.1.2 Assume that Excel CC concluded a loan agreement with one of
its members, Thabo, for the amount of R10 000. The amount is
now due and payable. The other members of Excel CC inform you
that the close corporation cannot pay its debts in the normal
course of business at the moment.
Explain whether Excel CC may refuse to repay the R10 000, and
whether Thabo has any legal recourse should the close
corporation be unable to pay
Provided Excell CC followed the laid down requirements such
providing written undertaking by Thabo to be personally liable Excell
CC may refuse to pay. Thabo may cite section 63 that provides for joint
and severally liable for debts of the CC by all members.
3.2 Johan, Aubrey and Barbara are the members of ProperT CC. The
main business of the corporation is buying and selling of immovable
property. The close corporation wishes to buy a certain property for
development and resale. Barbara, being fully aware of the fact that the
close corporation intends to purchase the property, buys it, in her
personal capacity for R2 million. She then sells, it to the close
corporation for R3 million
3.2.1 What duty could Barbara have breached under the circumstances
and what does this duty entail? (Indicate to whom the duty is
owed and the scope of this duty)
Members of CC owe their fiduciary duties to the CC as a legal persona. In
terms section 42(2) members must act honestly and in good faith and
must exercise their powers to manage and represent the CC in its
interests and for its benefit. A member must avoid a conflict of interest
between his interests and those of the CC, in particular a member may
not derive unwarranted personal economic benefit from the CC nor
compete with it in its business activities.
3.2.2 What effect would the breach of this duty have on the validity of
the agreement of sale of the property?
A member who has breached his fiduciary duties is liable to the CC for
any loss suffered by the CC as a result of thereof. Where a member fails
to disclose possible opportunity any material interest in any
contract with the CC, the contract is voidable at the option of the CC.
3.2.3 What possible legal action/s can be instituted against
Barbara and who should institute the action/s?
In the event that the fiduciary duties are breached, a member may be held
personally liable for any loss suffered by the corporation or for debts incurred
as a result of such a transaction (s 42(3)). The member would, in such event,
have to repay any profit made by him or her unless all the members approve
this conduct in writing. Any of the other members can institute the action.
TRUE OR FALSE QUESTIONS
3.1
It is no longer possible for a close corporation to be converted
into a company
FALSE . It is possible in terms of schedule 2 to the Companies Act
3.3.2 In principle, only natural persons are permitted to become
members of close corporations
TRUE
3.3.3 All close corporations are required to audit their financial
statements
TRUE
3.3.4 The court may sometimes pierce the corporate veil to hold a
member of a close corporation liable for losses incurred as a result
of his or her actions
TRUE. In certain cases, the courts have disregarded the separate legal
personality of a company in order to recognise the substance or practical
realities of a situation rather than the form.
3.3.5 An association agreement is a prerequisite for the formation and
running of a close corporation.
FALSE - Optional agreement concluded between members in a close corporation to
regulate the internal affairs in the business.
SECTION B – MCQ – ALREADY COVERED IN QUESTIONS FROM THE
MEMOS FROM PREVIOUS PAPERS ABOVE – (DUPLICATE QUESTIONS)
MRL 2601
COMMON QUESTIONS AND ANSWERS
FOR EACH CHAPTER TAKEN FROM THE
PAST 5 YEARS
Learning unit 1: Legal personality and lifting of the veil
When does a company acquire legal personality?
Once a company is incorporated and a certificate of incorporation is issued,
With reference to case law explain the meaning and effects of separate legal
personality
Salomon v Salomon & Co Ltd:






The estate of the company is assessed apart from the estates of individual
shareholders or members, therefore the debts of the company are the
company’s debts and separate from those of its shareholders or members.
They enjoy limited liability;
The profits of the company belong to the company and not its shareholders and
only after the company has declared a dividend may the shareholders claim
that dividend;
The assets of the company are its exclusive property and the shareholders
have no proportionate proprietary rights therein; and
No one is qualified by virtue of his or her shareholding to act on behalf of the
company. Only those who are appointed as representatives of the company in
accordance with the articles (which has been replaced by the Memorandum of
Incorporation) can bind the company.
Do different branches or divisions of companies have separate legal personality
from one another?
The branches or divisions of a company are part of the company itself and do not
have their own separate legal existence (ABSA Bank Ltd v Blignaut and Another
and Four Similar Cases 1996 (4) SA 100 (O)).
Lifting of the corporate veil
What does lifting the corporate veil entail? What is the purpose and under what
circumstances can it occur?
In certain cases the courts have disregarded the separate legal personality of a
company in order to recognise the substance or practical realities of a situation
rather than the form.
‘Piercing the corporate veil’ refers to those exceptional circumstances where the
court ignores the separate legal existence of the company and treats the
shareholders as if they were the owners of the assets and had conducted the
business of the company in their personal capacities OR attributes certain rights or
obligations of the shareholders to the company.
1
Examples of questions on this learning unit from previous examinations:
Explain the advantages attached to legal personality. Refer to relevant case
law.
(6)
Refer to the benefits as enumerated in Salomon v Salomon & Co Ltd
Under which circumstances may the courts lift the corporate veil and ignore the
separate legal personality of a company? Refer to relevant case law. (6)
There are no hard and fast rules regarding the lifting of the corporate veil.
Botha v Van Niekerk-case:
The seller must have suffered an “unconscionable injustice” before the court could
lift the veil.
Cape Pacific-case:
The court confirmed that it has no general discretion simply to disregard a company’s
separate legal personality. The separate legal personality of a company should not
be easily ignored. However, circumstances do exist for example fraud, dishonesty or
other improper conduct where it would be justifiable to pierce the corporate veil.
Botha v Van Niekerk was too rigid. The court indicated that it would adopt a more
flexible approach namely of taking all the facts of each case into consideration when
determining if the veil should be pierced. A balance must be struck between the need
to persevere the separate legal identity of the company against policy considerations
in favour of piercing the corporate veil. The veil could also be pierced in relation to a
specific transaction.
Hülse-Reutter :-case:
Agreed that court has no general discretion simply to disregard a company’s
separate legal personality.
The corporate veil would only be lifted if there was evidence of misuse or abuse of
the distinction between the company and those who control it and this has enabled
those who control the company to gain an unfair advantage.
Therefore a dual test was introduced: by adding the element of unfair advantage.
The court further confirmed that much depended on a close analysis of the facts of
each case and considerations of policy.
Ex parte Gore NO:
An unconscionable abuse is not as onerous to prove as a gross abuse.
The remedy in s 20(9) can be available if a corporation is used as a sham or device.
Section 20(9) is not available as a remedy of last resort only.
Mention could also have been made to Bargaining Council for the Furniture
Manufacturing Industry KZN and UKD Marketing CC & others and Mohlotsane v
Mobile Telephone Network (Pty) Ltd (available under additional resources on
myUnisa)
Die Dros (Pty) Ltd-case:
Where fraud, dishonesty and other improper conduct is present, the need to
preserve the separate legal personality of a company must be balanced against
policy considerations favouring piercing the corporate veil.
Le’Bergo Fashions CC -case:
2
The Court will pierce the corporate veil where a natural person, who is subject to a
restraint of trade uses a close corporation or a company to front to engage in the
activity that is prohibited by the agreement
The Companies Act 2008: Disregarding the separate legal personality of a
company Section 20(9) of the Companies Act 71 of 2008:
The Companies Act 71 of 2008 follows the example of the Close Corporations Act by
codifying the general principle of piercing the corporate veil. Section 20(9) of the
Companies Act 71 of 2008 provides that if a court finds that the incorporation of a
company or any act by or use of a company constitutes an unconscionable abuse
of its juristic personality, the court may declare that the company will be deemed not
to be a juristic person in respect of rights, liabilities and obligations relating to the
abuse. The wording of the section is a combination of section 65 of the Close
Corporations Act and the judgment in Botha v Van Niekerk. It ignores the view
expressed in Cape Pacific Ltd v Lubner Controlling Investments (Pty) Ltd that
described the test in Botha v van Niekerk as too rigid.
John operated a fast food establishment in Durban under a franchise agreement with
McTucky’s CC. In terms of the agreement, John is not allowed to operate a similar
business in the Durban area within three years after the end of the agreement. John
does not renew the franchise agreement when its term ends, but continues to
operate a fast food restaurant from the same premises that he previously occupied.
McTucky’s CC wants to institute an action against John for breach of the original
franchise agreement. John’s defence is that the new business is owned by a newly
incorporated corporation MacFries CC, which is not a party to the original
agreement. John is the sole member of MacFries CC.
Discuss the possibility that the court may lift the corporate veil in these
circumstances. Refer to relevant case law in your answer.
(5)
Piercing the corporate veil is dealt with under Section 65 of the Close Corporations
Act. In exceptional circumstances the courts have lifted or pierced the corporate veil
to recognize the substance or practical realities of a situation rather than the form.
Piercing the corporate veil means holding persons inside the close corporation
personally responsible
Refer to cases:
Le’Bergo Fashions CC v Lee and another: The court may under these circumstances
pierce the corporate veil. The Court will pierce the corporate veil where a natural
person, who is subject to a restraint of trade uses a close corporation or a company
to front to engage in the activity that is prohibited by the agreement.
Die Dros (Pty) Ltd and another v Telefon Beverages CC and others:
Where fraud, dishonesty and other improper conduct is present, the need to
preserve the separate legal personality of a company must be balanced against
policy considerations favouring piercing the corporate veil.
You could also have referred to the following cases:
Botha v Van Niekerk 1983 (3) SA 513 (W):
Cape Pacific Ltd v Lubner Controlling Investments (Pty) Ltd 1995 (4) SA 790:
Hülse-Reutter:
Ex parte Gore NO:
Bargaining Council for the Furniture Manufacturing Industry KZN and
3
UKD Marketing CC & others and Mohlotsane v Mobile Telephone Network (Pty) Ltd (
Activity 1
In 2005 Pat and Tracy Morgan established NetMedia (Pty) Ltd that offered internetbased news, until June 2011 when the company was liquidated as a result of its
inability to pay its creditors. During the winding-up of the company, the liquidator
discovered that Mr and Mrs Morgan, the only shareholders and directors of
NetMedia (Pty) Ltd, had made a loan of R10 million to the company as a start-up
cash injection. This loan was secured by a mortgage bond over the immovable
property owned by NetMedia. The liquidator argued that there was no real distinction
in law between the Morgans and NetMedia (Pty) Ltd and consequently the proceeds
of the sale of the company’s assets must be utilized to settle all debts owed by the
company to its other ordinary creditors. Mr and Mrs Morgan believed that NetMedia
(Pty) Ltd’s separate legal identity entitled them to have their secured claim against
the company settled first and vowed to take their fight to the highest court. Advise
both parties with regard to their respective positions.
You should have advised Pat and Tracy regarding the company’s separate legal
personality. You could have referred to a number of cases dealing with the rights that
companies enjoy including Dadoo Ltd and others v Krugersdorp Municipality Council,
Salomon v Salomon & Co Ltd, Ngcwase v Terblanche etcetera.
The liquidator should be advised regarding the concept of piercing the corporate veil.
You should therefore have referred to section 20(9) of the Companies Act. In
addition you should indicate that the court will not easily pierce the corporate veil. In
this regard you could refer to the case law discussed above (Botha v Van Niekerk,
Cape Pacific, Hülse Reutter etc as discussed above).
Considering the fact that the loan was made and secured long before the company
was liquidated, it will be very difficult to prove that the Morgans had the intention to
defraud creditors when securing the loan.
Activity 2
Read Bargaining Council for the Furniture Manufacturing Industry KZN and UKD
Marketing CC & others.
PLEASE NOTE THAT THIS CASE IS AVAILABLE UNDER ADDITIONAL
RESOURCES ON MYUNISA IF YOU ARE UNABLE TO ACCESS IT IN THE
LIBRARY
Answer the following questions:
Who is/are the presiding officer/s in this matter?
Davis JA
In what year was this case decided?
2012
What kind of enterprise is the first respondent in this matter?
4
A close corporation
This is an employment law case. What is the importance of this matter in as far
as entrepreneurial (corporate) law is concerned? (Hint: read paragraph [7] of
the case)
‘[7] Notwithstanding this detailed description of het structure, appellant still contends
that the entire ‘setup’ was created as a ‘device, tratagems or sham’ by Premraj to
avoid the consequences of an employment relationship between first respondent and
its employees, being the balance of respondents together with those persons
employed by respondents.
Accordingly, it sought to have the ‘corporate veil’ behind which it contested first
respondent sought to hide its employees pierced or lifted so as to justify a conclusion
that first respondent was in fact and therefore in law the employer of all those who
were members of the close corporations or ‘employees’ thereof. In this, appellant
contended that all were employees of first respondent in the furniture manufacturing
industry. This would mean that all those persons engaged upon the various activities
which created the readymade kitchens, which were the subject of orders procured by
the first respondent, would be regarded as employees of first respondent.”
Did the court consider any section of legislation in making its decision?
No
Did the court apply any particular common law principle in its dictum?
Yes, piercing the corporate veil (see para [21])
What legislation would be most appropriate to apply in this specific case, and
why?
As this matter involves a close corporation (first respondent) section 65 of the Close
Corporations Act would be more appropriate than would section 20(9) of the
Companies Act.
What case/s did the court refer in its dictum regarding the pertinent corporate law
issue?
Cape Pacific Ltd-case
Name two more recent cases to which the court could also have referred.
Le’Bergo Fashions CC v Lee and another and Die Dros (Pty) Ltd and another v
Telefon Beverages CC and others
Activity 3
Read Mohlotsane v Mobile Telephone Network (Pty) Ltd
5
PLEASE NOTE THAT THIS CASE IS AVAILABLE UNDER ADDITIONAL
RESOURCES ON MYUNISA IF YOU ARE UNABLE TO ACCESS IT IN THE
LIBRARY
Answer the following questions:
Who is/are the presiding officer/s in this matter?
Molahleli J
Is it made clear in this case that holding and subsidiary companies are
considered to be legal entities separate from one another? If so, in what
paragraph/s?
Yes. Para [2].
In what court is this matter heard?
In the Labour Court.
d. This is a Labour Law matter. What is the importance of this matter in as far as
entrepreneurial (corporate) law is concerned? (read para [28] and further)
“[28] Before dealing with the general principles governing a fair retrenchment, it is
convenient to deal firstly with the relationship between Group and MTN SA and what
its impact, if any that had on the fairness of the dismissal. The essence of the
applicant’s case in this regard is that the Court should uplift the corporate veil and
find that the fiction in law that the two are separate entities does not apply because
of the manner in which both conducted themselves in.” “[33] The Court further held
that the relief under section 20(9) of the Act may be granted on application by any
interested party or mero motu in any proceedings in which a company is involved.”
e. Which piece of legislation does the court refer to here? Refer to the particular
section which is applied and correct the court’s mistake.
The court refers to section 20(9) of the Company’s Amendment Act 3 of 2011. It
should be section 20(9) of the Companies Act.
f. To which recent cases does the court refer concerning this section/ common law
principle?

Chandler v Cape PLC [2012] EWCA Civ 525
Ex parte Gore NO
g. Why did the court find that it would be wrong to hold the Group accountable
despite the fact that the two entities are not clearly distinct from one another?
Group had not been afforded an opportunity to respond as it was not joined (para
[34]).
6
Learning Unit 2: Types of company
What is the difference between profit companies and non-profit companies?
A profit company aims to make a profit which is to be divided between its
shareholders. The purpose for incorporation of a non-profit company is
much different. It must be for a cultural, social or public benefit or other
object than financial gain for its shareholders.
What is an external company?
A foreign company carrying on business or non-profit activities in South Africa.
What is an domesticated company?
A foreign company whose registration has been transferred to South Africa.
Exercise:
o Candy Ltd is a public company.
o Rand Water SOC Ltd is a state-owned enterprise/ company.
o Front End (Pty) Ltd is a private. company.
o Dandala and Associates Inc. is a personal liability company.
o Estcourt View Home Owners' Association NPC is a non-profit company.
Examples of questions from previous exams on this topic:
Name the different types of companies for which the Companies Act 71 of
2008 provides.
(5)
a. Profit companies
public companies, private companies, personal liability companies, state-owned
companies
b. Non-profit companies
Compare the different profit companies for which the Companies Act 71 of
2008 provides.
A public company (‘Ltd’)
Shares may be offered to the public and are freely transferable;
This company can be listed on the JSE Limited;
Can be formed by 1 person
Must have at least 3 directors
Obliged to hold annual general meetings
Obliged to appoint an auditor
Obliged to appoint a company secretary
Obliged to appoint an audit committee
1
(4)
A state-owned company (‘SOC Ltd’)
Registered in terms of the Companies Act and either listed as a public entity in
Schedule 2 or 3 of the Public Finance Management Act, or owned by a municipality;
Examples of state-owned companies: ACSA; Denel; South African Airways.
The majority of the provisions applicable to public companies apply to state-owned
companies except if an exemption has been granted by the Minister. Obliged to
appoint a company secretary
Obliged to appoint an audit committee
Chapter 3 of the Companies Act applies except to the extent that the company has
been exempted by the Minister
A personal liability company (‘Inc’ or ‘Incorporated’)
Must meet the criteria for a private company, mainly used by professional
associations (such as attorneys);
Memorandum of Incorporation must state that it is a personal liability company
Directors are jointly and severally liable along with the company for debts and
liabilities contracted during their term of office.
Section 19(3) uses the word “contracted” and not “i ncurred”, which was held by the
court in Fundtrust (Pty) Ltd (In Liquidation) v Van Deventer 1997 (1) SA 710 (A) to
limit directors’ liability to contractual debts, and to exclude delictual and statutory
liabilities.
A provision that the directors and past directors will be liable jointly and severally,
together with the company, for debts and liabilities of the company that were
contracted during their periods of office must be included in the Memorandum of
Incorporation of a personal liability company. The effect of the inclusion of such a
clause is that creditors would be able to hold the directors jointly and severally liable
for the company’s contractual debts and liabilities. A director who had paid the debts
will have a right of recourse against his or her fellow-directors for their proportionate
share (Sonnenberg McCloughlin Inc v Spiro 2004 (1) SA 90).
Can be formed by 1 person
Must have at least 1 director
The doctrine of constructive notice applies in terms of section 19(5) of the
Companies Act
A private company (‘(Pty) Ltd’)
Its Memorandum of Incorporation prohibits offering of any securities to the public and
restricts the transferability of its securities;
Private companies are no longer limited to 50 shareholders as was the case under
the Companies Act of 1973.
In terms of section 8(2)(b) of the Companies Act, a private company’s Memorandum
of Incorporation must contain a prohibition against offering of its securities to the
public and restrict the transferability of its securities. Can be formed by one person
Must have at least 1 director
2
Sarah wishes to incorporate a company in order to raise funds for wildlife
conservation. Advise Sarah what type of company would be most appropriate, and
on the requirements for this type of company.
(6)
A non-profit company is a company that is not formed with the aim of making a
profit for its members (note that a non-profit company has members and not
shareholders like profit companies). Its objects must relate to social activities, public
benefits, cultural activities or group interests. A non-profit company must be formed
by at least 3 persons who will be the company’s first directors.
It must have at least 3 directors, but they are not allowed to obtain any financial gain
from the company other than remuneration for the work they performed. A non-profit
company does not have to have members. If these companies have members, some
members may enjoy voting rights while others may not. The income and property of
non-profit companies are not distributable to its incorporators, members, directors,
officers or persons related to any of them. Upon liquidation, income and assets must
be paid over to another non-profit company, voluntary association or trust with a
similar purpose.
Explain whether or not Gangnam's Tile (Pty) Ltd can list shares on the
Johannesburg Stock Exchange Ltd.
(3)
No, this is a private company. Its Memorandum of Incorporation prohibits offering of
any securities to the public and restricts the transferability of its securities.
Indicate what type of company Dandala and Associates Inc. is en what makes
this type of company different from other types of company.
(2)
This is a personal liability company. This is a particular type of profit company in
which the directors and previous directors are held personally liable for the
contractual debts of the company.
Explain the main difference between private companies and public
companies.
(3)
Public company
A profit company that can issue its shares to the
public and whose shares can be listed on the
Johannesburg Stock Exchange.
Private company
A profit company that prohibits the issue of shares to
the public and restricts the transfer of shares in its
Memorandum of Incorporation.
3
How would you determine whether or not the doctrine of disclosure is applicable
to a specific company in a set of facts? Provide an example of how
these companies’ names would look.
(3)
The doctrine of constructive notice has been abolished in terms of the Companies
Act 71 of 2008 (section 19(4) save for the exceptions mentioned in section 19(5):
Section 15(2)(b) of the Companies Act determines that a company may include
restrictions and conditions in its Memorandum of Incorporation pertaining to the
company’s capacity. Before a third party dealing with the company would be required
to acquaint themselves with these restrictions and conditions, certain requirements
must be met in terms of the Companies Act:
There must be a restriction or conditions in the Memorandum of Incorporation of
the particular company.
A prohibition against amendment of the restriction or condition must be included
in the Memorandum of Incorporation.
The company’s name must be followed by “RF” to warn the third party of the
Restrictions or conditions.
The Notice of Incorporation that is lodged together with the Memorandum of
Incorporation must include a provision that draws attention to the fact that special
restrictions or conditions apply to the company. The second exception applies to a
personal liability company. A person is also regarded as having received notice
and to have knowledge of the effect of section 19(3) on a personal liability company.
Section 19(3), in turn, provides that the directors and past directors of a personal
liability company are jointly and severally liable, together with the company, for any
debts and liabilities of the company contracted during their respective periods of
office.
The company names should either be followed by ‘RF’or by ‘Inc’ before the doctrine
of constructive notice would apply Examples: Turquand (Pty) Ltd RF or Estoppel
Incorporated.
4
Learning Unit 3: Company formation
Activity 1
Draft a Memorandum of Incorporation in which you include ten issues that may be
included in a Memorandum of Incorporation. Ensure that the provisions of the
Memorandum of Incorporation give clarity on all the different issues.
See section 15 of the Companies Act. This activity is intended to familiarise you with
issues that are usually included in the Memorandum of Incorporation. Did you check
the provisions to ensure that they are consistent with the Companies Act?
Companies may accept or alter the following alterable provisions as long as the
alteration remains consistent with the Companies Act.
Alterable provisions







A company enjoys all the legal powers and capacity of an individual, except to
the extent that a juristic person is incapable of exercising any such powers, or
having any such capacity; or the company’s Memorandum of Incorporation
provides otherwise (e.g. it may determine that the company’s activities will be
limited to a specific business).
Private, non-profit and incorporated companies may elect to comply with the
extended accountability requirements of Chapter 3 (section (2)).
Shares within the same class have the same rights, limitations and terms,
unless the Memorandum of Incorporation provides otherwise (section 37(1)).
The Memorandum of Incorporation may exclude the right of first refusal of
current shareholders of a private company in respect of shares issued by the
company (section 39(3)).
The Memorandum of Incorporation may forbid the board to render financial
assistance to parties wanting to acquire shares in the company (section
45(2)).
The Memorandum of Incorporation may provide for longer minimum notice
periods for meetings.
Electronic notice and electronic participation in meetings are allowed unless
the Memorandum of Incorporation prohibits it (section 63(2)).
Companies may determine a higher number of minimum directors than that
prescribed by the Companies Act (section 66(2)).
Activity 2
Vanitha and Sandra have just moved to a new town. There they meet a mutual
friend, Wilma, from their days in boarding school. The town has many orphans who
are homeless. Vanitha, Sandra and Wilma have decided to form a non-profit
company that will provide food and shelter to the orphans. They have completed
drafting the Memorandum of Incorporation for the company to be registered as
Hayani NPC. They want to start operating before the winter season arrives. The
directors are Vanitha, Sandra and Wilma. A day before filing their documents with
1
the Commission, Vanitha finds out that Sandra has been prohibited by a court of law
from becoming a director. She discusses this with Wilma and together they decide to
proceed with the process of incorporation since looking for someone to replace
Sandra as a director will cause unnecessary delays. They agree that they will look
for someone to replace Sandra after incorporation. They proceed to file a copy of the
Memorandum of Incorporation and the Notice of Incorporation, together with the
prescribed fee with the Commission. How must the Commission deal with this notice
of Incorporation?
Although the Companies Act allows for flexibility, there are circumstances in which
the Commission is compelled to reject the Notice of Incorporation. Read section
13(4) (b) together with section 69(8) of the Companies Act.
Activity 3
You are a member of the board of directors of Regona (Pty) Ltd. At the last meeting
of the board it became clear that the Memorandum of Incorporation was silent
regarding certain issues relating to the governance of the company. After lengthy
discussions three rules concerning the governance of the company were made. They
were filed with the Commission a month ago. The next general shareholders’
meeting has not taken place yet.
You decide to read the rules thoroughly and you realise that one of the rules is
already addressed by the Companies Act. You also realise that another rule is
actually inconsistent with the Memorandum of Incorporation of the company. You
mention this to the other members of the board. You are then requested to find out if
these rules are valid or not. You are further requested to find out when they will
become permanent and on whom they are binding.
The board of directors has the power to make rules concerning the governance of
the company, provided that they are not addressed in the Companies Act or in the
Memorandum of Incorporation. A rule made by the board which is inconsistent with
the Memorandum of Incorporation or with the Companies Act will be void, but only to
the extent of its inconsistency. Although the rule becomes effective 10 business days
after publication, ratification by an ordinary resolution at the next shareholders’
general meeting is important. The Memorandum of Incorporation and the Rules are
binding :
between the company and each shareholder;
between or among the shareholders of the company;
between the company and each director or prescribed officer of the company;
between the company and any other person serving the company as a member
of a committee of the board;
The relationship created in terms of section 15 of the Companies Act seems to be of
a contractual nature.



2
Activity 4
After Exit (Pty) Ltd was incorporated, the Memorandum of Incorporation was
translated into Afrikaans and Tshivenda. The English, Tshivenda and Afrikaans
copies were kept together. There is now confusion regarding the provision that deals
with the frequency of meetings as the three versions state different things. Which
version of the Memorandum of Incorporation should prevail and why?
In the event of a conflict between a provision in the Memorandum of Incorporation
and a provision in the translated version, the provision in the original Memorandum
of Incorporation prevails.
Activity 5
Punch (Pty) Ltd has made alterations to its Memorandum of Incorporation three
times within the past year. The Companies and Intellectual Property Commission is
concerned about the number of documents that have to be handled each time one
has to read Punch (Pty) Ltd’s Memorandum of Incorporation. How can the problem
be addressed?
The Commission may request the company to file a consolidated revision of its
Memorandum of Incorporation. Remember that there is a sworn declaration that
must accompany this.
Activity 6
Exit (Pty) Ltd has had several alterations and translations made to its Memorandum
of Incorporation. Some of the alterations were made in respect of the same
provisions. One of the directors approaches you as he is worried about the fact that
the Memorandum is made up of too many documents. He is already confused and
does not know which version should prevail in the event of a conflict and why. Advise
him.
Where there is a conflict between various versions of the Memorandum of
Incorporation, the latest version that has been endorsed by the Commission prevails.
As you advise the director, you may inform him about the possibility of consolidating
the Memorandum of Incorporation.
Activity 7
Ryno has been appointed as a director of a private company. He becomes aware of
an agreement between the shareholders of the company. As he reads the
agreement he realises that two of the ten provisions contained in the agreement are
not consistent with the company’s Memorandum of Incorporation. He is concerned
about the validity of the agreement. Advise Ryno.
3
Although shareholders are allowed to enter into agreements on matters concerning
the company, such agreements must be consistent with the Companies Act and with
the Memorandum of Incorporation. Provisions that are inconsistent are void to the
extent of the inconsistency.
Examples of questions in previous exams dealing with this topic:
QUESTION 1:
Gangnam’s Tile Ltd has decided to translate its Memorandum of Incorporation. The
document is currently being translated into 9 of the official South African languages.
Consequently, there are some variations in respect of the content. Certain concepts
are difficult to explain in some of the languages, often leaving them open to varying
interpretation. Since the translation has taken such a long time, there are currently 3
different versions of the Memorandum of Incorporation. Explain the procedure that
should be followed in order to give effect to the translation. In addition, indicate how
the problem regarding the different versions will be addressed.
(5)
Translations of the MOI may be in 1 or more of the official languages. A notice of
translation must be filed with the Commission. A copy of the translation/s must be
filed. A sworn statement by the translator indicating that it is a true, accurate and
complete translation must be filed. A filing fee is payable. In the event of a conflict
between versions of the Memorandum of Incorporation, the original prevails. The
company may consolidate the different versions.
QUESTION 2:
Explain the procedure for amending a company’s Memorandum of Incorporation.
(3)
Changes may be made to the Memorandum of Incorporation, unless the amendment
of a provision is prohibited by the Memorandum itself in terms of section 15(2)(c).
Such amendments may be in the form of
 a new Memorandum of Incorporation, or
amendments to the existing provisions of the Memorandum of Incorporation
Note that, if changes are in the form of a new Memorandum of Incorporation,
the new Memorandum of Incorporation will replace the existing Memorandum
of Incorporation.
A company’s Memorandum of Incorporation may be amended
in compliance with a court order (An amendment in terms of a court order is given
effect via a board resolution and there is no need for a shareholders’ special
resolution.)

by the board in terms of sections 36(3) and (4) (These allow the board to
amend the authorised share capital of the company, unless the
Memorandum of Incorporation provides otherwise.)
4
 by a special resolution of the shareholders proposed by
othe
board of directors, or

oshareholders who collectively exercise not less than 10% of the voting rights
There is no need to convene a shareholders’ meeting to adopt this special
resolution. As it is sometimes difficult for some shareholders to attend meetings, the
proposal to amend the Memorandum of Incorporation may be sent or hand-delivered
to the shareholders who are entitled to vote. The proposal will be adopted, if
approved by the required majority who voted in writing, within 20 days after the
resolution was delivered to them (section 60 of the Companies Act).)
in terms of the procedure set out in the company’s Memorandum of
Incorporation
To effect the amendment, a form CoR 15.2 must be filed. Unless the amendment is
made by a company that existed before the Companies Act came into operation, and
the amendment is pursuant to compliance with the Companies Act, a filing fee must
be paid. A copy of the special resolution (if this is required in terms of a company’s
Memorandum of Incorporation), or a copy of the amended Memorandum, must
accompany the notice.
An amendment may result in a profit company no longer meeting the criteria for that
category of profit company. When this happens, the name and the ending expression
must also be amended in such a way that it reflects the new category that the profit
company falls under.
If an amendment to the Memorandum of Incorporation of a personal liability
company has the effect that the company falls into another category of company, the
company must give at least ten days prior notice of the filing of the notice of
amendment to any professional or industry regulatory authority that has jurisdiction
over the business of the company, and to any person who may have relied on the
personal liability of the directors in dealings with the company and who could suffer
prejudice if that liability is terminated.
QUESTION 3:
If there is a contradiction between a stipulation contained in the Companies Act 71 of
2008 and a stipulation in the Memorandum of Incorporation, or between a stipulation
in the Memorandum of Incorporation and one of the rules of the company, which
stipulation would enjoy preference?
(3)
Rules must not be in conflict with the Memorandum of Incorporation of the company
or with the Companies Act. In terms of section 15(4)(a), where there is a conflict
between a rule made by the board of directors and the Companies Act or the
Memorandum of Incorporation, the rule will be void but only to the extent of its
inconsistency. If a stipulation in the Memorandum of Incorporation contradicts the
Companies Act, that stipulation will be void in as far as it contradicts the legislation.
So, the Companies Act enjoys preference over the Memorandum of Incorporation,
which in turn takes preference over the rules.
QUESTION 4:
5
Briefly explain the steps that would need to be taken in order to incorporate a
company.
(5)
To register a company, a Notice of Incorporation and a copy of the Memorandum of
Incorporation must be lodged with the Commission and the prescribed registration
fee must be paid. Section 1 of the Companies Act determines that to “lodge” the
documents means to deliver them to the Commission (CIPC), which is responsible
for registration.
QUESTION 5:
What documents need to be lodged in order to register a company, and where
should they be lodged?
(3)
To register a company, a Notice of Incorporation and a copy of the Memorandum of
Incorporation must be lodged with the Commission.
QUESTION 6:
Explain the restrictions placed on the choice of the company name in terms of the
Companies Act 71 of 2008.
(5)
The Companies Act restricts a company name only as far as it is necessary to
protect the public from misleading names which falsely imply an association that
does not exist and to protect the interest of the owners of names and other forms of
intellectual property (such as trademarks) from other persons passing themselves off
as such owners or coat-tailing on the owners’ reputation and good standing, and
protect the public from names that would fall within the ambit of expression that does
not enjoy constitutional protection because of its harmful or other negative nature
To avoid deception of the public, the name of a company may not be the same as
the name of another company, external company, close corporation or cooperative;
or the name of a business which has already been registered in terms of the
Business Names Act 27 of 1960; or a trademark which has been filed for registration
in terms of the Trade Marks Act 194 of 1993; or a mark, word or expression
protected in terms of the Merchandise Marks Act of 1941;
be confusingly similar to a name, trademark, mark, word or expression as described
above (subject to a few specific exceptions);
give the false impression that the company is associated with the government or with
a particular person or government office, etc., and include any word, expression or
symbol that may constitute propaganda for war, incitement of imminent violence, or
advocacy of hatred based on race, ethnicity, gender or religion, or incitement to
cause harm.
Also note the following:
The Companies Act does not make provision for the registration of a shortened or
translated name. A name reservation in a foreign language must be accompanied by
a certified translation and certificate of translation. In terms of the Consumer
Protection Act 68 of 2008, members of the public are required to register their
business/trading name/sole proprietorship/partnership names with the Commission.
Where, according to the Commission, there is a possibility that the name is similar to
the name of another company or another business undertaking or trademark, or that
6
the name gives the impression that there is a connection between the company that
is applying and another entity or state organ, the Commission may compel the
applicant to inform parties that may be interested by serving them with a copy of the
application and name reservation. If the company’s name is to be associated with
another existing business, the Commission will require proof from the applicant
company that the associated company was made aware before registration that a
similar name would accordingly be allowed. The Companies Act also allows any
person who has an interest in the name of a company to apply to the Companies
Tribunal for it to determine whether or not the name is in accordance with the
requirements of the Companies Act.
QUESTION 7:
Veronica and Precious want to incorporate a public company called Aspex Ltd.
Briefly state the legal requirements that they must comply with in terms of
the Companies Act 71 of 2008 to register the business.
(5)
To register a company, a Notice of Incorporation and a copy of the Memorandum of
Incorporation must be lodged with the Commission and the prescribed registration
fee must be paid. As this is a public company 3 incorporators are required.
How would your answer have been different if Veronica and Precious were
incorporating a company called Aspex (Pty) Ltd instead?
(2)
As this is a private company only one person can now incorporate the company.
QUESTION 8:
List five matters that must be contained in a company’s Memorandum of
Incorporation.
(5)
The Memorandum of Incorporation contains the following information:
details of the incorporators
the number of directors and alternate directors
the share capital (maximum issued)
the content of the Memorandum of Incorporation
Unalterable provisions: provisions of the Companies Act which a company’s
Memorandum of Incorporation may not change, except to impose a higher standard,
greater restriction, longer period of time, or any similar more onerous requirement
than contained in an unalterable provision of the Companies Act. For instance,
directors’ duties and responsibilities, and accountability requirements for public and
state-owned companies, cannot be excluded in the Memorandum of Incorporation.
The Companies Act allows for companies to add provisions to address matters that
are not covered in the Companies Act itself. However, all provisions in the
 Memorandum of Incorporation must be consistent with the Act (section 15(1)(a) and
(b)).




7
Learning Unit 4: Pre-incorporation contracts
How is ‘pre-incorporation contract’ defined in the Companies Act 71 of
2008?
Section 1 of the Companies Act describes a pre-incorporation contract as “a
written agreement entered into before the incorporation of a company by a person
who purports to act in the name of, or on behalf of, the proposed company, with the
intention or understanding that the proposed company will be incorporated, and will
thereafter be bound by the agreement”.
What are the formal requirements for a contract to be binding upon a
company under section 21 of the Companies Act?
In terms of section 21 of the Companies Act, a pre-incorporation contract will be
binding on a company if
it is concluded by a person in the name of, or purporting to act in the name of or
on behalf of, a company yet to be incorporated in terms of the Companies
Act
the contract was concluded in writing, and
the board of that company ratifies the transaction or does not reject the contract
within the stipulated three-month period after its incorporation (In other words,
if the above two formal requirements are complied with, and after the
company’s incorporation, the board “does nothing” about the transaction (i.e.
neither ratifies nor rejects it), the contract will become binding on the
company.)
Who is liable for performance if a pre-incorporation contract is concluded
under section 21 of the Companies Act and the company is subsequently not
registered?
Section 21 provides for joint and several liability of the person or persons who
concluded the contract on behalf of the company for liabilities created in terms of the
pre-incorporation contract if the company is not incorporated. Note, however, that
joint and several liability does not apply where the contract is replaced with another
similar contract after incorporation.
Who is liable for performance in terms of a pre-incorporation contract
concluded under section 21 of the Companies Act if the company
subsequently rejects the contract?
Section 21 provides for joint and several liability of the person or persons who
concluded the contract on behalf of the company for liabilities created in terms of the
pre-incorporation contract if
the board rejects the contract partially or in full (In such a case, the person
who acted on behalf of the company may claim any benefit from the company
that it receives in terms of the contract, but may apparently not claim any
benefit from the other contracting party.)
Note, however, that joint and several liability does not apply where the contract is
replaced with another similar contract after incorporation.
List the common law alternatives to conclude a pre-incorporation contract.


Cession and delegation
Nomination
Option
1
Contract for the benefit of a third party (stipulatio alteri)
Explain the process for the conclusion of a contract to the benefit of a third
party (stipulatio alteri)
A person concludes a contract with another contracting party in terms of which the
last-mentioned will offer certain benefits to the company to be formed. If the
company is formed, it can accept the offer or decline it. The risk is that the company
may not come into existence or may not accept the offer. The person who concluded
the contract will only incur liability under the contract if specifically so provided.
Explain the process of nomination of a company to be bound to terms of an
agreement under the common law.
A person concludes the pre-incorporation contract subject to a term that he or she
will have the option to nominate a third party in his or her place within a specified
period. Upon incorporation of the yet-to-be-formed company, this person then
nominates the company to become a party to the contract in his or her place. The
risk is that the company may refuse the nomination or not be able to comply with the
obligations in terms of the agreement. In such circumstances, the original debtor will
only incur liability if this is specifically agreed on.
Explain what is meant by cession and delegation. What is the risk attached
to this alternative means of conclusion of a pre-incorporation contract?
“Cession” is the transfer of rights and “delegation” means the transfer of duties or
liabilities. When using this cession and delegation method, which is a combination of
the two processes, to conclude a pre-incorporation contract, a person concludes the
contract in his or her own name. After the company is registered, this person cedes
the rights and delegates the obligations under the contract to the company. The risk
associated with this method is that the consent of all three parties is required for
delegation of duties. In other words, the company and the other contracting party
must agree to the substitution of the company as the new debtor. All rights and
duties not accepted by the company will remain with the original person unless it is
specifically agreed otherwise.
What are the benefits of concluding a pre-incorporation contract under the
common law instead of under section 21 of the Companies Act?
The common law alternatives (except for agency, which is impossible) could be used
more effectively and safely to avoid possible personal liability. The common law
constructions have a major advantage over the statutory method because, in terms
of the common law, the person acting on behalf of the proposed company is not
automatically liable if the company is not incorporated or fails to ratify the contract
completely.

Activity 1
John and Jane want to incorporate a catering company, De-lish Pty (Ltd), together.
Before the company is registered Jane sees a delivery vehicle that would be perfect
for use in their catering business.
Advise Jane regarding the formal requirements to conclude a contract on behalf
of the yet to be formed company in terms of section 21 of the Companies Act.
2
To conclude a binding contract under section 21 of the Companies Act the following
formal requirements must be met:
The contract must be concluded in writing;
The person concluding the contract on behalf of the yet to be formed company must
act or profess to be acting as an agent for a company that is not yet registered;
The board of the company must within 3 months of its incorporation ratify the
contract.
If De-lish (Pty) Ltd is never incorporated would Jane incur liability for performance
in terms of the contract?
Section 21 of the Companies Act provides for joint and several liability of the person
or persons who concluded the contract on behalf of the proposed company. In other
words, should the company fail to ratify the contract completely or reject it, or not be
registered this person or persons will incur liability toward the other contracting party
for liabilities created in terms of the agreement.
Advise Jane of alternative common law methods of concluding the contract to
avoid possible personal liability.
To avoid possible personal liability, an option agreement, cession of rights and
delegation of duties, a nomination or a contract to the benefit of a third party could
provide a safer option. The promoter must however ensure that the contract is
properly formulated to specifically exclude personal liability.
Examples of questions in previous exams dealing with this topic:
QUESTION 1:
Busi wishes to conclude a contract for the purchase of a property on behalf of a
company which she intends to incorporate next year. Advise Busi of the
requirements that need to be adhered to in terms of the Companies Act 71 of 2008 in
order for the contract to be binding on the company when it is formed.
(4)
To conclude a binding contract under section 21 of the Companies Act the following
formal requirements must be met:
 The contract must be concluded in writing;
The person concluding the contract on behalf of the yet to be formed company
must act or profess to be acting as an agent for a company that is not yet
registered;

The board of the company must within 3 months of its incorporation ratify the
contract or not reject it.
3
QUESTION 2:
Anne, Jack and Sam are three friends who wish to start their own publishing
company. While driving one Saturday afternoon, Jack comes across the perfect
office building. He wishes to purchase this building on behalf of the proposed
company. Advise Jack of two common law alternatives of concluding a contract that
will bind the company when it is registered. Explain the process of transfer of liability
from him to the company in each instance.?
(6)
Cession and delegation
“Cession” is the transfer of rights and “delegation” means the transfer of duties or
liabilities. When using this cession and delegation method, which is a combination of
the two processes, to conclude a pre-incorporation contract, a person concludes the
contract in his or her own name. After the company is registered, this person cedes
the rights and delegates the obligations under the contract to the company.
The risk associated with this method is that the consent of all three parties is
required for delegation of duties. In other words, the company and the other
contracting party must agree to the substitution of the company as the new debtor.
All rights and duties not accepted by the company will remain with the original
person unless it is specifically agreed otherwise.
Nomination
A person concludes the pre-incorporation contract subject to a term that he or she
will have the option to nominate a third party in his or her place within a specified
period.
Upon incorporation of the yet-to-be-formed company, this person then nominates the
company to become a party to the contract in his or her place. The risk is that the
company may refuse the nomination or not be able to comply with the obligations in
terms of the agreement. In such circumstances, the original debtor will only incur
liability if this is specifically agreed on.
Option
The option granter (offeror) undertakes to keep the substantive offer open for a
period of time. The option is then ceded to the company upon its incorporation.
If the company accepts the offer, a contract comes into being. Otherwise, the person
who concluded the option agreement will only remain personally liable if the option
agreement provides for liability.
Contract for the benefit of a third party (stipulatio alteri)
A person concludes a contract with another contracting party in terms of which the
last-mentioned will offer certain benefits to the company to be formed. If the
company is formed, it can accept the offer or decline it. The risk is that the company
may not come into existence or may not accept the offer. The person who concluded
the contract will only incur liability under the contract if specifically so provided.
--------------------------------------end of unit------------------------------------------------------------
4
Learning Unit 5: Registration of company names
What are the criteria for the names of companies in terms of the
Companies Act 71 of 2008?
The Companies Act restricts a company name only as far as it is necessary to
protect the public from misleading names which falsely imply an
association that does not exist
protect the interest of the owners of names and other forms of intellectual
property (such as trademarks) from other persons passing themselves off
as such owners or coat-tailing on the owners’ reputation and good
standing, and
protect the public from names that would fall within the ambit of expression
that does not enjoy constitutional protection because of its harmful or other
negative nature






To avoid deception of the public, the name of a company may not
be the same as the name of another company, external company, close
corporation or cooperative; or the name of a business which has already
been registered in terms of the Business Names Act 27 of 1960; or a
trademark which has been filed for registration in terms of the Trade Marks
Act 194 of 1993; or a mark, word or expression protected in terms of the
Merchandise Marks Act of 1941
be confusingly similar to a name, trademark, mark, word or expression as
described above (subject to a few specific exceptions)
give the false impression that the company is associated with the
government or with a particular person or government office, etc., and
include any word, expression or symbol that may constitute propaganda for
war, incitement of imminent violence, or advocacy of hatred based on race,
ethnicity, gender or religion, or incitement to cause harm
The Companies Act does not make provision for the registration of a
shortened or translated name.
A name reservation in a foreign language must be accompanied by a
certified translation and certificate of translation.
In terms of the Consumer Protection Act 68 of 2008, members of the
public are required to register their business/trading name/sole
proprietorship/partnership names with the Commission.
Where, according to the Commission, there is a possibility that the name is
similar to the name of another company or another business undertaking or
trademark, or that the name gives the impression that there is a connection
between the company that is applying and another entity or state organ, the
Commission may compel the applicant to inform parties that may be
interested by serving them with a copy of the application and name
reservation. If the company’s name is to be associated with another
existing business, the Commission will require proof from the applicant
company that the associated company was made aware before registration
that a similar name would accordingly be allowed.
The Companies Act also allows any person who has an interest in the name of a
company to apply to the Companies Tribunal for it to determine whether or not the
name is in accordance with the requirements of the Companies Act.
Is it always necessary for a company to reserve a name before registration?
No. If a proposed name is rejected, the company may usually still be registered and
the registration number then becomes the name of the company at incorporation
until an appropriate name has been reserved or approved.
Is it possible to reserve a company name for future use?
Yes. In order to reserve a name, a form CoR 9.1 must be completed and a filing fee
is payable. A name reservation is valid for six months. It is possible to apply for an
extension of a name reservation for an additional 60 business days by lodging a form
CoR 9.2 and paying a filing fee.In terms of section 12 of the Companies Act, a name
may be reserved for use at a later stage, to be used for a newly incorporated
company, or to be used as a replacement for an existing name of a company.
Would it be possible for one company to transfer a name to a different company?
Yes. Someone who has applied for the reservation of a name may transfer the
reserved name to another person by lodging a form CoR 11.1.
Which types of companies cannot function without an acceptable name (cannot
be registered under a registration number only by the Commission?)
Non-profit companies are not allowed to have registration numbers as their names.
Who can order a name change where a name to be registered is similar to an
existent company’s name?
The High Court can make an order to change a name if the matter is referred to it
and passing-off is successfully proven. Disputes regarding names may also be
referred to the Companies Tribunal or the Human Rights Commission in terms of
section 160 of the Companies Act.
What factors are considered in order to ascertain whether or not a name is
objectionable?
Peregrine Group (Pty) Ltd & others v Peregrine Holdings Ltd & others:
The activities that the companies engaged in;
The similarity in the names and whether it would cause
confusion; The client bases of the respective companies;
whether the name is undesirable and calculated to cause harm to the other
company;
The likelihood that members of the public would be confused in their dealings
with the competing companies;
The date of registration of the companies would also play a role
How should the name and registration number of a company be used?
Section 32 of the Companies Act 71 of 2008 requires that a company furnish its full
name or registration number to any person on demand. It further prohibits the
misstating of the name or registration number, and the stating of the name in such a
way that it may mislead or deceive a person. A company must use its registered
name at all times, and not a modified version of such name. In the case of a profit
company, the name may consist of a registration number only, followed by the words
“South Africa”. If the Registration Certificate is issued with an interim name by the
Commission, the company is obliged to use its interim name. The interim name is
used until the company’s name has been amended.
What happens when the name and registration number of a company is not
reflected properly on its stationery etc?
Such a contravention would constitute an offence. In terms of section 32 (6) and 32(7) of the
Companies Act:”A company, or incorporator, shareholder or director of a company, or a
person acting with the authority or on behalf of the company, must not, by any act or
omission, misrepresent to any person, in any way or to any degree, the true legal status of
the company. If a person contravenes subsection (6), a court, on application by any person
affected by that failure, may impose personal liability on any shareholder, director or
incorporator of the company for any liability or obligation of the company, to the extent that
the court determines to be just and equitable in the circumstances”.
Activity 1
Suppose that John, who was previously a franchisee of McTucky’s Ltd, wants to
incorporate a company with the name MacTuckies Ltd. The new company will run
substantially the same business as McTucky’s Ltd, namely selling fried chicken.
Consider whether or not McTucky’s Ltd has grounds to object to the registration of
the name.
(3)
See the answer provided in 7 above. Remember to apply the factors enumerated in
Peregrine to the facts provided in the question and then reach a conclusion that
answers the question.
Examples of questions from previous exams dealing with this topic:
QUESTION 1:
What factors would the court consider to ascertain whether or not a proposed name
is undesirable? Refer to relevant case law in your answer.
(5)
See the answer provided in 7. above Peregrine Group (Pty) Ltd & others v
Peregrine Holdings Ltd & others:
The activities that the companies engaged in;
The similarity in the names and whether it would cause
confusion; The client bases of the respective companies;
whether the name is undesirable and calculated to cause harm to the other
company;
The likelihood that members of the public would be confused in their dealings
with the competing companies;
The date of registration of the companies would also play a role.
Learning Unit 6: Capacity and Representation of a Company
1. What is meant by the capacity of a company?
A company’s capacity is determined by the sphere of actions that it may legally
perform.
In terms of our common law, a contract is ultra vires the company when the
conclusion of the transaction is beyond its legal capacity. In other words, if a
company’s principal business is, for instance, catering, it would be outside the
company’s capacity to buy an expensive yacht on behalf of the company. The ultra
vires doctrine is based on the understanding that a company exists in law only for
the purpose for which it was incorporated. According to the ultra vires doctrine, when
an act on behalf of the company falls outside its main and ancillary objects, the
company does not exist in law and, consequently, such an act is not binding on the
company. Such an act is described as an ultra vires act. In the catering example
mentioned above, it would be within the scope of the principal business (intra vires)
for the company to purchase a refrigerator that it needs for catering.
BUT…
Section 19(1)(b) of the Companies Act provides that a company has all the legal
capacity and the powers of a natural person, except to the extent that a juristic
person is incapable of exercising any such power, or the company’s Memorandum of
Incorporation provides otherwise. Therefore, the capacity of a company is no longer
limited by its main or ancillary objects or business, and these objects need not even
be stated in the Memorandum of Incorporation.
What is the ultra vires doctrine?
In terms of our common law, a contract is ultra vires the company when the
conclusion of the transaction is beyond its legal capacity. In other words, if a
company’s principal business is, for instance, catering, it would be outside the
company’s capacity to buy an expensive yacht on behalf of the company. The ultra
vires doctrine is based on the understanding that a company exists in law only for
the purpose for which it was incorporated. According to the ultra vires doctrine, when
an act on behalf of the company falls outside its main and ancillary objects, the
company does not exist in law and, consequently, such an act is not binding on the
company.
Under which circumstances does a person have the authority to represent a
company and bind it to an agreement?
Representation relates to a person acting under the company’s authority.
Authority can be given expressly (in writing or orally) or by implication. Whether
authority has been conferred is a question of fact.
If a company gives an agent authority to act on its behalf, the agent possesses
actual authority and will bind the company in acts which fall within the scope of the
mandate given to him or her. A company may also be bound by a contract on the
basis of estoppel where the person purporting to conclude the contract on its behalf
lacked actual authority, express or implied, but the other party to the contract had
been misled by the company into believing that he or she did have authority. This is
referred to as ostensible or apparent authority.
1
In other words, a company may be liable to a bona fide third party if it is represented
by someone who does not have actual authority, and where the company allows
such a person to represent the company as if that person did have authority.
What is the purpose of the Turquand rule and how does it operate under the
Companies Act?
The Turquand rule was formulated to keep an outsider’s duty to inquire into the
affairs of the company within reasonable bounds. The Turquand rule was derived
from Royal British Bank v Turquand. According to the common law Turquand rule, if
the person acting on behalf of the company has the authority to do so, but this is
subject to an internal formality, such as approval by the board, an outsider
contracting with the company in good faith is entitled to assume that this internal
requirement has been complied with. The company will be bound by the contract
even if the internal formality has not been complied with. The exceptions are: if the
outsider was aware of the fact that the internal formality had not been complied with;
or if the circumstances in which the contract was concluded were suspicious.
Section 20(7) of the Companies Act now contains a provision that in some respects
resembles the Turquand rule by providing that a person dealing with a company in
good faith is entitled to presume that the company, in making any decision in the
exercise of its powers, has complied with all the formal and procedural
requirements in terms of the Act, the company’s Memorandum of Incorporation and
any rules of the company, unless the person knew, or reasonably ought to have
known, of any failure by the company to comply with any such requirement.
However, this provision does not replace the Turquand rule, because section 20(8)
provides that subsection (7) must be interpreted concurrently with, and not in
substitution for, any relevant common law principle relating to the presumed validity
of the actions of a company.
The exceptions to the application of the statutory rule are not expressed in exactly
the same way as the common law exceptions: section 20(7) determines that the rule
will not apply if the third party knew or reasonably ought to have known that the
internal requirement had not been complied with.
Activity 1
The Memorandum of Incorporation of ToyZ Ltd states that the company only has the
power to sell toys. The board of directors of ToyZ Ltd decides to buy a luxury yacht
on behalf of the company.
Will the contract of purchase and sale be valid?
Yes. Section 19(1)(b) of the Companies Act provides that a company has all the
legal capacity and the powers of a natural person, except to the extent that a juristic
person is incapable of exercising any such power, or the company’s Memorandum of
Incorporation provides otherwise. Therefore, the capacity of a company is no longer
limited by its main or ancillary objects or business, and these objects need not even
be stated in the Memorandum of Incorporation.
Do the shareholders have any remedies against the board of directors? Even
though an ultra vires transaction will be binding on the company, the shareholders
are provided with recourse to claim back their losses from the person who acted
beyond the scope of the company’s capacity. Section 20(6) of the
2
Companies Act provides that each shareholder has a claim for damages against
any person who fraudulently, or due to gross negligence, causes the company to do
anything inconsistent with the Companies Act or a limitation, restriction or
qualification on the powers of the company as stated in its Memorandum of
Incorporation, unless ratified by special resolution in terms of section 20(2). This is in
addition to the remedy provided in section 165.
If the company or directors have not as yet performed the planned action (e.g.
concluded the contract) that is inconsistent with a limitation or qualification of the
company’s powers contained in the Memorandum of Incorporation, one or more
shareholders may obtain a court order restraining (i.e. preventing) the company or
directors from doing so. (section 20(4)).
Activity 2
Steelbelts Railway Carriages (Pty) Ltd’s Memorandum of Incorporation provides that
only the board of directors, or any person authorised by the board, has the power to
conclude contracts on behalf of the company. In addition, any transaction that
exceeds R100 000 must first be authorised by the company in general meeting by
way of ordinary resolution.
Mr Buckley, one of the directors, is authorised by the board of directors to act on
behalf of the company. Mr Buckley concludes a contact with Mr Matthews for the
purchase of equipment that will be used in the process of manufacturing railway
carriages to the value of R150 000 without the authorisation of the company in
general meeting. Mr Matthews knows about this provision because he has dealt with
the company before.
He however assumes that the approval of the general meeting has been obtained
since it had always been obtained for previous transactions. Is the company bound
by the contract concluded by Mr Buckley?
The company is bound by the contract concluded because of the operation of
section 20(7) of the Companies Act. It provides that a person dealing with a
company in good faith is entitled to assume that the company has complied with all
of the formal and procedural requirements in terms of the Companies Act and the
company’s Memorandum of Incorporation and rules unless the person knew or
reasonably ought to have known of any failure by the company to comply with its
formal and procedural requirements. There is no indication from the facts that Mr
Matthews knew or reasonably ought to have known that Mr Buckley failed to comply
with the procedural requirement in terms of the Memorandum of Incorporation. There
is also no indication that Mr Matthews was aware of the fact that Mr Buckley did not
comply with procedural requirement and had acted in bad faith. Based on these
facts, the company is bound by the contract.
The contract will also be binding because of the common-law Turquand rule since Mr
Buckley is authorised to act on behalf of the company but this is subject to an
internal formality. Although Mr Mathews knew about the internal formality, he was
entitled to presume that it had been complied with and there is no evidence that he
knew it had not been complied with or that there was anything to raise his suspicion.
In some instances both the Turquand rule and section 20(7) of the Companies Act
will apply, as in this case. This is however not always the case. PLEASE READ
QUESTIONS CAREFULLY IN THE EXAM AS WE MAY RESTRICT THE SCOPE
3
OF THE CORRECT ANSWER BY INDICATING EITHER IN TERMS OF THE
COMPANIES ACT OR IN TERMS OF THE COMMON LAW
Activity 3
The Memorandum of Incorporation of Concord Ceramics (Pty) Ltd (RF) provides that
the board of directors have authority to contract on behalf of the company subject to
the condition that if the value of a contract exceeds R1 million the approval of
shareholders by special resolution is required. The Memorandum of Incorporation
further provides that this last-mentioned provision may only be amended by
unanimous approval of all the shareholders.
Are third parties deemed to be aware that the consent of the general meeting is
required for transactions in excess of R1 million?
Yes, as this is a RF-company. Section 19(5) of the Companies Act determines that
a person is deemed to have knowledge of any provision of a company’s
Memorandum of Incorporation in terms of section 15(2)(b) (relating to special
conditions applicable to the company and additional requirements regarding their
amendment). This is subject to the condition that the name of the company includes
the ending “RF” and that the company’s Notice of Incorporation contains a prominent
statement drawing attention to such a provision as required by section 13(3).
To what extent is the doctrine of constructive notice still applicable to this
company?
Section 15(2)(b) of the Companies Act determines that a company may include
restrictions and conditions in its Memorandum of Incorporation pertaining to the
company’s capacity. Before a third party dealing with the company would be
required to acquaint themselves with these restrictions and conditions, certain
requirements must be met in terms of the Companies Act:
There must be a restriction or conditions in the Memorandum of Incorporation of
the particular company.
A prohibition against amendment of the restriction or condition must be included
in the Memorandum of Incorporation.
The company’s name must be followed by “RF” to warn the third party of the
special restrictions or conditions.
The Notice of Incorporation that is lodged together with the Memorandum of
Incorporation must include a provision that draws attention to the fact that special
restrictions or conditions apply to the company.
Suppose that Mike, a site manager on one of the company’s plants, regularly
contracts on behalf of the company without having a mandate to do so. The
board of directors takes note of this behaviour, but never takes any steps to
caution Mike against contracting on behalf of the company. Mike enters into a
contract with Timothy for the purchase of raw materials. The company now
argues that Mike did not have authority to enter into the contract and that it is
not bound to the contract. Advise Timothy on whether the company can be
held bound to the contract.
Estoppel applies only when the agent did not have actual authority to bind the
company. Take particular note of the fact that the misrepresentation (i.e. that the
agent had the necessary authority when, in fact, he or she did not) must have been
made by the company as principal. In Freeman and Lockyer v Buckhurst Part
Properties (Mangal) Ltd, the court decided that estoppel could not only arise from the
4
Articles (note that this would be the Memorandum of Incorporation in terms of the
current Companies Act), but also because the company with full knowledge and
approval allowed an ordinary director to act as the managing director and, in this
manner, culpably represented that he was entitled to act.
Based on such misrepresentation, the company will be prevented (estopped) from
denying liability if the third party can prove that
-the company misrepresented, intentionally or negligently, that the agent concerned
had the necessary authority to represent the company -the misrepresentation was
made by the company
-the third party was induced to deal with the agent because of the misrepresentation
Example of questions from previous exams dealing with this topic:
QUESTION 1:
By means of an example, explain the operation of the provision similar to the
Turquand Rule that has been included in the Companies Act 71 of 2008,
(4)
To trigger the protection provided by the Turquand rule, there must have been an
internal requirement present.
A company’s Memorandum of Incorporation determines who has authority to act
on behalf of the company.
The Turquand rule applies where the authority is subject to an internal
requirement.
Example: Company A’s Memorandum of Incorporation determines that the board of
directors has authority to conclude all contracts on behalf of the company. If the
amount of the transaction exceeds R50 000, consent must be obtained from the
shareholders at a general meeting.
The underlined part in the block above contains an internal requirement. Even
though the Memorandum of Incorporation is registered and available to the public, a
third party contracting with the company would have to conduct a further
investigation to ascertain whether or not consent was obtained from the
shareholders.
The Turquand rule makes this unnecessary, as, in terms of this rule, third parties
who act in good faith may assume that such internal requirement has been complied
with.
QUESTION 2:
Read the following statement and explain whether or not it is correct:
“In terms of the Companies Act 71 of 2008 companies have all the legal capacity and
powers of a natural person, and such capacity cannot be restricted”.
No, the statement is not completely accurate. Section 19(1)(b) of the
Companies Act provides that a company has all the legal capacity and the powers
5
of a natural person, except to the extent that a juristic person is incapable of
exercising any such power, or the company’s Memorandum of Incorporation
provides otherwise. Although, the capacity of a company is no longer limited by its
main or ancillary objects or business, and these objects need not even be stated in
the Memorandum of Incorporation, it is still possible to restrict the company’s
capacity and companies can still not perform all acts that a natural person can, for
instance getting married.
QUESTION 3:
The main object of ABC (Pty) Ltd is manufacturing furniture. The Memorandum of
Incorporation provides that the board of directors may appoint a managing director
who will be authorised to enter into contracts on behalf of the company. Should the
contract, however, exceed the amount of R150 000, prior consent of the general
meeting is required. Godfried, one of the directors, buys a beach house for R3,5
million from Nomagugu on behalf of ABC (Pty) Ltd.
With reference to the set of facts above, answer the following questions:
Explain whether or not ABC (Pty) Ltd can raise the restrictions to its capacity as
contained in its Memorandum of Incorporation as grounds to avoid being
bound to the contract.
(5)
No. Section 19(1)(b) of the Companies Act provides that a company has all the
legal capacity and the powers of a natural person, except to the extent that a juristic
person is incapable of exercising any such power, or the company’s Memorandum of
Incorporation provides otherwise. Therefore, the capacity of a company is no longer
limited by its main or ancillary objects or business, and these objects need not even
be stated in the Memorandum of Incorporation.
Assume that Godfried had contracted on behalf of ABC (Pty) Ltd with Nomagugu
on previous occasions. What would Nomagugu have to prove if ABC (Pty) Ltd
denies being bound to the contract on the basis that Godfried lacked express
authority to conclude the contract? Refer to relevant case law
in your answer.
(5)
Estoppel applies only when the agent did not have actual authority to bind the
company. Take particular note of the fact that the misrepresentation (i.e. that the
agent had the necessary authority when, in fact, he or she did not) must have been
made by the company as principal.
In Freeman and Lockyer v Buckhurst Part Properties (Mangal) Ltd, the court decided
that estoppel could not only arise from the Articles (note that this would be the
Memorandum of Incorporation in terms of the current Companies Act), but also
because the company with full knowledge and approval allowed an ordinary director
to act as the managing director and, in this manner, culpably represented that he
was entitled to act.
Based on such misrepresentation, the company will be prevented (estopped) from
denying liability if the third party can prove that
-the company misrepresented, intentionally or negligently, that the agent concerned
had the necessary authority to represent the company -the misrepresentation was
made by the company
6
-the third party was induced to deal with the agent because of the misrepresentation
QUESTION 4:
The Memorandum of Incorporation of ABC Learning (Pty) Ltd states that the main
object of the company is to provide books, learning services and computers to
students. The Memorandum of Incorporation also provides that any contract which is
to be concluded by the managing director on behalf the company which exceeds the
amount of R10 000, must first be authorised by the general meeting by means of an
ordinary resolution. Gideon, the managing director of the company concludes a
contract on behalf of the company with Dewald of Books 4 U (Pty) Ltd without the
authorisation of the general meeting. The contract is for the purchase of textbooks to
the value of R12 000. Discuss whether or not this contract will bind ABC Learning
(Pty) Ltd.
(5)
The company is bound by the contract concluded because of the operation of
section 20(7) of the Companies Act. It provides that a person dealing with a
company in good faith is entitled to assume that the company has complied with all
of the formal and procedural requirements in terms of the Companies Act and the
company’s Memorandum of Incorporation and rules unless the person knew or
reasonably ought to have known of any failure by the company to comply with its
formal and procedural requirements. There is no indication from the facts that Mr
Matthews knew or reasonably ought to have known that Dewald was aware of the
fact that Gideon did not comply with procedural requirement and had acted in bad
faith. Based on these facts, the company is bound by the contract.
The contract will also be binding because of the common-law Turquand rule.
PLEASE READ QUESTIONS CAREFULLY IN THE EXAM AS WE MAY RESTRICT
THE SCOPE OF THE CORRECT ANSWER BY INDICATING EITHER IN TERMS
OF THE COMPANIES ACT OR IN TERMS OF THE COMMON LAW
QUESTION 5:
Indicate what a third party would need to prove in order to rely on the doctrine of
estoppel in order to hold a company liable for performance in terms of a contract
concluded on its behalf. Refer to relevant case law in your answer.
(5)
Refer to the answer in 3(b) above The third party must prove that
-the company misrepresented, intentionally or negligently, that the agent concerned
had the necessary authority to represent the company -the misrepresentation was
made by the company
-the third party was induced to deal with the agent because of the misrepresentation
Freeman and Lockyer v Buckhurst Part Properties (Mangal) Ltd
QUESTION 6:
7
The Memorandum of Propco (Pty) Ltd states that the company’s principle business is
“the delivery of estate agent services”. One of the directors purchases a racing horse
on behalf of the company at a racing horse auction.
With reference to the set of facts above, answer the following questions:
What would the common-law consequences of concluding a contract such as
the one in the set of facts have been?
(2)
In terms of our common law, a contract is ultra vires the company when the
conclusion of the transaction is beyond its legal capacity. In other words, if a
company’s principal business is, for instance, catering, it would be outside the
company’s capacity to buy an expensive yacht on behalf of the company. The ultra
vires doctrine is based on the understanding that a company exists in law only for
the purpose for which it was incorporated. According to the ultra vires doctrine, when
an act on behalf of the company falls outside its main and ancillary objects, the
company does not exist in law and, consequently, such an act is not binding on the
company.
How has the common-law position been changed by the Companies Act 71 of
2008?
(5)
Section 19(1)(b) of the Companies Act provides that a company has all the legal
capacity and the powers of a natural person, except to the extent that a juristic
person is incapable of exercising any such power, or the company’s Memorandum of
Incorporation provides otherwise. Therefore, the capacity of a company is no longer
limited by its main or ancillary objects or business, and these objects need not even
be stated in the Memorandum of Incorporation.
---------------------------------------end of unit-----------------------------------------------------------
8
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
LEARNING UNIT 7: CORPORATE FINANCE, SHARES, DEBENTURES AND
DISTRIBUTIONS
What is the legal definition of a share?
The Companies Act in section 1 defines a “share” as “one of the units into which the
proprietary interest in a profit company is divided”
What types of preference shares may be issued by a company?
Cumulative preference shares: Holders enjoy a right of priority in respect of both
arrear dividends and current dividends. If a dividend is not declared in a specific
year, the shareholder’s right to a dividend is carried over to the next year. When a
dividend is declared the next year, the preference shareholder will have to be paid
two years’ dividends before the ordinary shareholders can receive their dividends.
Participating preference shares: After receiving their preference dividends,
preference shareholders may be given the right to also receive normal dividends
along with the ordinary shareholders or just after the ordinary shareholders.
Preferential right to capital on winding-up: Preference shareholders could be given
the preferential right to receive repayment of the capital they contributed to the
company on its winding-up. Additionally, they can be given the right to share in any
surplus assets of the company upon its winding-up after receiving their capital
contributions, but this is the exception rather than the rule.
Convertible preference shares: The right to convert the preference shares to shares
of another class after a certain date attaches to the preference shares.
When must the board of directors obtain the approval of the shareholders
before issuing shares?
where the shares are issued to a current or future director or prescribed officer of the
company (A “future director” or “future prescribed officer” does not include a person
who becomes a director or officer more than six months after the shares were
issued.)
where the shares are issued to a person related or interrelated to the company,
a director, or a prescribed officer of the company
where the shares are issued to a nominee of a director of prescribed officer
where the shares are issued to a nominee of any of the persons mentioned above
where the voting power of the shares to be issued will exceed 30% of the voting
power of the shares of that class held immediately before the issue
What are the differences between shares and debentures?
A shareholder of a company has the right to a share in the profits of that company
(provided that a dividend is declared by the company), and a right to a share in the
net assets of the company if it is wound up. However, a shareholder is also under a
duty to abide by the company’s Memorandum of Incorporation.
As a debenture is a debt instrument, the holder of a debenture has effectively loaned
a sum of money to the company on certain terms.
Accordingly, the debenture holder is entitled to repayment of the sum of money
loaned to the company and is, therefore, a creditor of the company. A debenture is a
document issued by a company acknowledging that it is indebted to the debenture
holder in the amount stated therein (Coetzee v Rand Sporting Club 1918 WLD 74).
Debenture holders may have a right to attend and vote at general meetings and to
appoint directors, and have special privileges regarding the allotment of securities,
unless the Memorandum of Incorporation provides otherwise (section 43(3)). This
1
was, however, not previously the case under the Companies Act 61 of 1973.
What is meant by the pre-emptive rights of shareholders in private companies?
The general rule is that shareholders of private companies have a right of preemption to new shares issued by the company. This means that, when the company
issues new shares, these shares must be offered to existing shareholders first, pro
rata to their current shareholdings. However, the right of pre-emption will not apply if
the shares are issued in terms of options or conversion rights as capitalisation
shares or if the shares are issued for future consideration. The reason why this
provision was included in the Companies Act is to guard against the dilution of
ownership in private companies.
Activity 1.
The directors of Rainbow (Pty) Ltd want to issue shares to Fred. Fred is not currently
a shareholder of Rainbow (Pty) Ltd, but he has agreed to become the managing
director of Rainbow (Pty) Ltd in a month’s time. Fred has entered into a service
agreement with Rainbow (Pty) Ltd and is required to hold qualification shares in the
company before he can become a director.
Advise the directors on whether they may take the decision to issue the shares to
Fred without shareholder approval. Further consider whether the current
shareholders’ right of pre-emption applies.
Before the board can issue new shares, approval must be acquired in certain
circumstances, including where the shares are issued to a current or future director
or prescribed officer of the company (A “future director” or “future prescribed officer”
does not include a person who becomes a director or officer more than six months
after the shares were issued.) Fred is a future director of the company and therefore
shareholder approval is required by way of a special resolution.
In terms of section 39 of the Companies Act, every shareholder in a private company
(and a personal liability company) has the right, before any other person who is not a
shareholder of the company, to be offered and to subscribe (within a reasonable
time) for a percentage of any shares issued or proposed to be issued equal to the
voting power of that shareholder’s general voting rights immediately before the offer
was made. However, the right of pre-emption will not apply if the shares are issued
in terms of options or conversion rights as capitalisation shares or if the shares are
issued for future consideration.
Activity 2
Prosperity Ltd wants to decrease its issued share capital by a repurchase of shares.
Advise the board of directors of Prosperity Ltd of the requirements before they may
proceed with this transaction.
A company is allowed to repurchase its shares. This is considered a distribution,
which means that the solvency and liquidity tests must be met. A company may
make distributions out of profits or share capital as long as solvency and liquidity is
maintained.
2
After the company has purchased its shares, there must be shares left other than
convertible or redeemable shares. Some shares must be held by shareholders other
than the company’s subsidiaries.
Suppose that it emerges after the transaction is approved by the board of directors
that one of the company’s main debtors is insolvent and will not be able to pay its
debts to the company. This means in turn that Prosperity Ltd will not be able to pay
its debts after the repurchase of the shares. Advise Prosperity Ltd on possible steps
it may take to remedy the situation.
If the company agreed to repurchase shares and it emerges that the company will
not be able to meet its obligations in terms of the agreement because it will not meet
the requirements of section 48(2) and (3), which includes the requirements set by
section 46 for a distribution and thus the solvency and liquidity tests, the agreement
between the shareholder and the company in terms of which the company would
repurchase his shares, remains enforceable. The company must apply for a court
order to suspend the repurchase of the shares.
The company bears the burden of proof that it cannot meet the requirements of the
Companies Act. The court may make any order it deems just and equitable and that
ensures that the person from whom the shares are bought will be paid at the earliest
possible time that the company will also be able to fulfil its other financial obligations
as they fall due and payable.
If the repurchase has been completed but it now appears that the acquisition was in
contravention of the requirements of sections 46 or 48, the company must within two
years after the acquisition, apply for a court order to have the repurchase reversed:
The person from whom the shares were bought will then be required to return the
consideration received. The company will have to issue the same number and class
of shares as those it acquired to that person in return.
Directors who approved a repurchase of shares in contravention of the requirements
relating to distributions are liable in the same manner.
Activity 3
David wants to subscribe for shares in Free-4-All (Pty) Ltd. He does not have money
available, but he offers to sell some computer equipment left over from a previously
unsuccessful business to the company. He will then use this money to pay for the
shares in Free-4-All (Pty) Ltd. Advise the board of directors of Free-4-All (Pty) Ltd
whether the company must comply with the requirements of section 44 of the
Companies Act before they may enter into this agreement with David.
One would have to ascertain whether or not the transaction qualifies as financial
assistance. In Lipschitz v UDC Bank Ltd, it was held that the transaction must be
assessed in two phases: Firstly, it must be ascertained whether there was financial
assistance. In Gradwell (Pty) Ltd v Rostra Printers Ltd, the “impoverishment test”
was formulated to assist in determining whether financial assistance was provided.
In terms of the impoverishment test, one considers whether a transaction will have
3
the effect of leaving the company poorer. If so, financial assistance will have been
provided. In Lipschitz, the court held that this is not the only measure of financial
assistance, but that exposing the company to risk will also qualify as financial
assistance for purposes of the Act. For example, if the person obtained a loan to
purchase shares in the company, and the company stood surety for that loan, this
will count as financial assistance. If the company buys an asset from the person in
order to enable that person to purchase shares in the company, it will depend on the
facts whether there was financial assistance. Factors that have emerged from case
law to assist in this regard are whether the company needs the asset in its normal
business and whether the company paid a fair price for it.Secondly, it must be
determined whether that assistance was for the purpose of acquiring shares in the
company. Suppose Company A is a major creditor of Company B. Company A
acquires most of the shares in Company B. After the acquisition, Company A causes
Company B to grant security over its movable assets to secure the loans. This will be
financial assistance in terms of the first test, but it is not in connection with the
purchase of shares. The assistance is to secure a loan. When a transaction passes
these two phases, it will have to comply with section 44 of the Companies Act in
order to be valid.
Activity 4
Vusi, a shareholder and director of Securities (Pty) Ltd agrees to sell his shares in
the company to Jonathan for R20 000. To enable Jonathan to acquire the shares,
Securities (Pty) Ltd agrees to lend Jonathan the sum of R20 000. Explain whether
this transaction amounts to financial assistance and if so, what requirements have to
be satisfied in order for it to be a valid transaction.
In Lipschitz v UDC Bank Ltd, it was held that the transaction must be assessed in
two phases: Firstly, it must be ascertained whether there was financial assistance. In
Gradwell (Pty) Ltd v Rostra Printers Ltd, the “impoverishment test” was formulated to
assist in determining whether financial assistance was provided. In terms of the
impoverishment test, one considers whether a transaction will have the effect of
leaving the company poorer. If so, financial assistance will have been provided. In
Lipschitz, the court held that this is not the only measure of financial assistance, but
that exposing the company to risk will also qualify as financial assistance for
purposes of the Act. For example, if the person obtained a loan to purchase shares
in the company, and the company stood surety for that loan, this will count as
financial assistance. If the company buys an asset from the person in order to enable
that person to purchase shares in the company, it will depend on the facts whether
there was financial assistance. Factors that have emerged from case law to assist in
this regard are whether the company needs the asset in its normal business and
whether the company paid a fair price for it.
Secondly, it must be determined whether that assistance was for the purpose of
acquiring shares in the company. Suppose Company A is a major creditor of
Company B. Company A acquires most of the shares in Company B. After the
acquisition, Company A causes Company B to grant security over its movable assets
to secure the loans. This will be financial assistance in terms of the first test, but it is
not in connection with the purchase of shares. The assistance is to secure a loan.
This transaction appears to pass both these phases and it will have to comply with
section 44 of the Companies Act in order to be valid.
4
In terms of section 44 of the Companies Act, a company may give financial
assistance by way of a loan, guarantee, provision of security, or otherwise to a
person for the purpose of, or in connection with, the acquisition of shares and other
securities in the company, provided that such assistance is not prohibited by the
Memorandum of Incorporation and that certain requirements are met.
The decision to assist a person to acquire shares in the company rests with the
board of directors, but only where the assistance is in terms of an employee share
scheme or where a special resolution by the shareholders taken within the
previous two years authorised such assistance to a specific person, or to persons
that fall in a specific class or category. In the latter case, the person to whom the
assistance will be given must fall in that class.
Section 44 further requires that the board must be satisfied that the solvency and
liquidity requirements will be satisfied immediately after providing the financial
assistance (see question 1 above), and that the assistance is given on terms that are
fair and reasonable to the company. The Memorandum of Incorporation may place
further restrictions on the provision of financial assistance, and the board must
ensure that these requirements are also met.
Examples of questions from previous exams dealing with this topic:
QUESTION 1:
Under which circumstances may a company declare dividends and what procedure
must be followed to declare dividends?
(5)
A distribution may be made in the following circumstances:
 The board of directors must authorise the distribution.
It must reasonably appear that the company will be able to satisfy the
solvency and liquidity tests immediately after the distribution has been made.
The board must acknowledge by way of a resolution that it has applied the
solvency and liquidity tests and reasonably concluded that the company will
satisfy
the tests immediately after completion of the proposed distribution.

The solvency and liquidity tests are set out in section 4 of the Companies Act:
Solvency test: That, in considering all reasonably foreseeable financial
circumstances of the company at that time, the assets of the company, fairly valued,
equal or exceed the liabilities of the company as fairly valued.
Liquidity test: That, in considering all reasonably foreseeable financial circumstances
of the company at that time, it appears that the company will be able to pay its debts
as they become due in the ordinary course of business for a period of 12 months
after the distribution. If the distribution was in the form of giving a loan to a
shareholder or forgiving a loan made to a shareholder, the period runs from 12
months after the test was considered. The distribution must be made within 120 days
after the test was applied, otherwise the resolution by the board must be taken again
and the test must be applied again.
5
QUESTION 2:
Explain what the legal concept “share” means. Refer to relevant case law.
(3)
The Companies Act in section 1 defines a “share” as “one of the units into which the
proprietary interest in a profit company is divided” It is incorporeal, movable property
transferable in the manner provided for by the Companies Act. In Standard Bank of
SA Ltd v Ocean Commodities Inc, the court held that a share usually entitles its
holder to vote at a shareholders’ meeting, to share in dividends if declared by the
board, and to share in any assets of the company after it has been wound up.
Therefore, it is clear that there are personal rights attached to shares. The extent of
these rights depends on the class of shares held.
QUESTION 3:
What types of preference shares can a company’s Memorandum of Incorporation
provide for?
(3)
Cumulative preference shares: Holders enjoy a right of priority in respect of both
arrear dividends and current dividends. If a dividend is not declared in a specific
year, the shareholder’s right to a dividend is carried over to the next year. When a
dividend is declared the next year, the preference shareholder will have to be paid
two years’ dividends before the ordinary shareholders can receive their dividends.
Participating preference shares: After receiving their preference dividends,
preference shareholders may be given the right to also receive normal dividends
along with the ordinary shareholders or just after the ordinary shareholders.
Preferential right to capital on winding-up: Preference shareholders could be given
the preferential right to receive repayment of the capital they contributed to the
company on its winding-up. Additionally, they can be given the right to share in any
surplus assets of the company upon its winding-up after receiving their capital
contributions, but this is the exception rather than the rule.
Convertible preference shares: The right to convert the preference shares to shares
of another class after a certain date attaches to the preference shares.
QUESTION 4:
Anthony, Brett, Carl and Daniel are employees of Beta Ltd. Beta Ltd makes loans to
them in order to allow them to acquire shares in the company. What requirements
must be complied with in terms of the Companies Act 71 of 2008 to provide valid
financial assistance?
(5)
In terms of section 44 of the Companies Act, a company may give financial
assistance by way of a loan, guarantee, provision of security, or otherwise to a
person for the purpose of, or in connection with, the acquisition of shares and other
securities in the company, provided that such assistance is not prohibited by the
Memorandum of Incorporation and that certain requirements are met.
The decision to assist a person to acquire shares in the company rests with the
board of directors, but only where the assistance is in terms of an employee share
scheme or where a special resolution by the shareholders taken within the
6
previous two years authorised such assistance to a specific person, or to persons
that fall in a specific class or category. In the latter case, the person to whom the
assistance will be given must fall in that class.
Section 44 further requires that the board must be satisfied that the solvency and
liquidity requirements will be satisfied immediately after providing the financial
assistance (see question 1 above), and that the assistance is given on terms that are
fair and reasonable to the company. The Memorandum of Incorporation may place
further restrictions on the provision of financial assistance, and the board must
ensure that these requirements are also met.
QUESTION 5:
Vusi, a shareholder and director of Securities (Pty) Ltd, agrees to sell his shares in
the company to Jonathan for R20 000. In order to enable Jonathan to acquire the
shares, Securities (Pty) Ltd agrees to loan Jonathan the amount of R20 000. Explain
how one would determine whether or not this transaction qualifies as financial
assistance.
(5)
In Lipschitz v UDC Bank Ltd, it was held that the transaction must be assessed in
two phases: Firstly, it must be ascertained whether there was financial assistance. In
Gradwell (Pty) Ltd v Rostra Printers Ltd, the “impoverishment test” was formulated to
assist in determining whether financial assistance was provided. In terms of the
impoverishment test, one considers whether a transaction will have the effect of
leaving the company poorer. If so, financial assistance will have been provided. In
Lipschitz, the court held that this is not the only measure of financial assistance, but
that exposing the company to risk will also qualify as financial assistance for
purposes of the Act. For example, if the person obtained a loan to purchase shares
in the company, and the company stood surety for that loan, this will count as
financial assistance. If the company buys an asset from the person in order to enable
that person to purchase shares in the company, it will depend on the facts whether
there was financial assistance. Factors that have emerged from case law to assist in
this regard are whether the company needs the asset in its normal business and
whether the company paid a fair price for it.
Secondly, it must be determined whether that assistance was for the purpose of
acquiring shares in the company. Suppose Company A is a major creditor of
Company B. Company A acquires most of the shares in Company B. After the
acquisition, Company A causes Company B to grant security over its movable assets
to secure the loans. This will be financial assistance in terms of the first test, but it is
not in connection with the purchase of shares. The assistance is to secure a loan.
This transaction appears to pass both these phases and it will have to comply with
section 44 of the Companies Act in order to be valid.
QUESTION 6:
Explain the main differences between shares and debentures.
(3)
A shareholder of a company has the right to a share in the profits of that company
(provided that a dividend is declared by the company), and a right to a share in the
7
net assets of the company if it is wound up. However, a shareholder is also under a
duty to abide by the company’s Memorandum of Incorporation.
As a debenture is a debt instrument, the holder of a debenture has effectively loaned
a sum of money to the company on certain terms.
Accordingly, the debenture holder is entitled to repayment of the sum of money
loaned to the company and is, therefore, a creditor of the company. A debenture is a
document issued by a company acknowledging that it is indebted to the debenture
holder in the amount stated therein (Coetzee v Rand Sporting Club 1918 WLD 74).
Debenture holders may have a right to attend and vote at general meetings and to
appoint directors, and have special privileges regarding the allotment of securities,
unless the Memorandum of Incorporation provides otherwise (section 43(3)). This
was, however, not previously the case under the Companies Act 61 of 1973.
QUESTION 7:
Figozo Ltd showed an increase in profits for the 2015 financial year. At a board
meeting, the directors decide that dividends should be paid out to the company’s
shareholders. Indicate what the requirements are in terms of the Companies Act 71
of 2008 that must be complied with before dividends may be declared and paid.
(6)
Section 46 of the Companies Act regulates distributions. A distribution is any direct
or indirect transfer by a company of money or other property of the company (except
its shares) to one or more of its shareholders or beneficial holders of shares, whether
as the payment of dividends, payment for the purchase by a company of its
previously issued shares, the incurrence of a debt for the benefit of one or more of
the shareholders of the company, or the forgiveness of a debt owed to the company
by one or more of the shareholders of the company.
A distribution may be made in the following circumstances:
 The board of directors must authorise the distribution.
It must reasonably appear that the company will be able to satisfy the
solvency
and liquidity tests immediately after the distribution has been made.

The board must acknowledge by way of a resolution that it has applied the
solvency and liquidity tests and reasonably concluded that the company will
satisfy the tests immediately after completion of the proposed distribution.
The solvency and liquidity tests are set out in section 4 of the Companies Act:
Solvency test: That, in considering all reasonably foreseeable financial
circumstances of the company at that time, the assets of the company, fairly valued,
equal or exceed the liabilities of the company as fairly valued.
Liquidity test: That, in considering all reasonably foreseeable financial circumstances
of the company at that time, it appears that the company will be able to pay its debts
as they become due in the ordinary course of business for a period of 12 months
after the distribution. If the distribution was in the form of giving a loan to a
shareholder or forgiving a loan made to a shareholder, the period runs from 12
months after the test was considered. The distribution must be made within 120 days
after the test was applied, otherwise the resolution by the board must be taken again
and the test must be applied again.
8
QUESTION 8:
A company’s Memorandum of Incorporation may confer different rights to
shareholders, particularly regarding the payment of dividends. Name the different
classes if shares that a company may issue. Do not discuss the various categories of
these classes of shares in your answer.
(3)
Preference shares, ordinary shares and deferred shares.
------------------------------------------end of unit--------------------------------------------------------
9
LEARNIING UNIT 8: SHAREHOLDERS AND COMPANY MEETINGS
1. Why and how are meetings convened?
Decisions are taken (resolutions passed) by companies in meetings. A shareholders’
meeting may be called by the board of directors or any person authorised to do so by
the Memorandum of Incorporation. A meeting must be convened if required by the
Companies Act or the Memorandum of Incorporation, or if demanded by
shareholders holding at least 10% of the voting rights that may be exercised at that
meeting. If a company cannot convene a meeting because it has no directors, or all
its directors are incapacitated, section 61(11) of the Companies Act applies. In terms
of this section, it is possible to authorise another person in terms of the
Memorandum of Incorporation to convene a meeting in these circumstances. Should
it happen that no provision is made in the Memorandum of Incorporation, any
shareholder may request the Companies Tribunal to convene a meeting. Section
61(12) of the Companies Act applies to the situation where, for reasons other than
the lack of or incapacity of directors, a company fails to convene its annual general
meeting or a meeting required by its Memorandum of Incorporation or shareholders.
In these circumstances, any shareholder may apply to court for an order to convene
a meeting.
2. Under which circumstances must a company hold a meeting?
A meeting must be convened if required by the Companies Act or the Memorandum
of Incorporation, or if demanded by shareholders holding at least 10% of the voting
rights that may be exercised at that meeting.
What is the effect of a company’s failure to hold a meeting when it is required to
do so?
A failure by the company to hold a meeting would not affect the existence of the
company or the validity of any action by the company.
4. What is the quorum requirement under the Companies Act?
Section 64 of the Companies Act provides that a meeting may not begin until
sufficient persons holding at least 25% of all the voting rights in respect of at least
one matter to be decided on at the meeting are present. The percentage (25%) may
be increased or reduced in the Memorandum of Incorporation. However, if a
company has more than two shareholders, at least three shareholders must be
present.
What are the requirements for valid notice of a meeting under section 62 of the
Companies Act?
A section 62 notice of a meeting must
be in writing
indicate the date, time and place of the meeting
indicate the general purpose of the meeting
contain a statement that a shareholder is entitled to appoint a proxy who may
participate in the meeting and vote on his or her behalf
indicate that participants in the meeting have to provide proof of identification
be accompanied by a copy of any proposed resolution to be discusses at the
1
meeting
be given at least ten days prior to the meeting (15 days for public companies and
non-profit companies with members)
6. What is representation by proxy?
A shareholder may appoint someone (including someone who is not a shareholder)
to act, speak or vote on his or her behalf at a shareholders’ meeting or provide or
withhold consent in terms of section 60.
7. What is the difference between an ordinary and a special resolution?
Section 65(7) and (9) of the Companies Act provides for two types of resolution that
may be taken by shareholders: an ordinary resolution, requiring more than 50% of
the votes exercised, and a special resolution, requiring at least 75% of the voting
rights exercised. A company is allowed to stipulate a higher percentage for approval
of an ordinary resolution (except for the removal of a director) or a different
percentage (i.e. higher or lower) for special resolutions in its Memorandum of
Incorporation, on condition that there must always be a difference of at least 10%
between the highest percentage required for an ordinary resolution and the
lowest percentage required for any special resolution.
8. Is it possible to pass a resolution without holding a formal meeting?
Yes, by unanimous assent or in terms of section 60 of the Companies Act 71 of
2008.
9.What matters must be dealt with in the annual general meeting?
Section 61 of the Companies Act stipulates that at least the following matters must
be transacted at the AGM:
election of directors to the extent required by the Companies Act or the
company’s Memorandum of Incorporation

appointment
of an auditor for the following financial year

appointment
of an audit committee

 presentation of the directors’ report
presentation of audited financial statements for the immediately preceding
financial year

presentation
of an audit committee report

any matter raised by shareholders
10.When must a meeting be postponed or adjourned?
If, after one hour of the appointed time of a meeting, a quorum is not present, the
meeting must be postponed for one week. In exceptional circumstances, it is
possible to extend the one-hour period. A company’s Memorandum of Incorporation
or rules may specify other time limits. No new notice needs to be issued regarding
the meeting that has been postponed for one week, unless the venue changes.
The shareholders entitled to vote may, despite achieving a quorum, at any time
decide to adjourn a meeting and set a date for a subsequent meeting at any agreedupon time, as long as it is not later than 120 business days after the date of the
original adjourned meeting.
2
Activity 1
The shareholders of Zithulele (Pty) Ltd want to pass a resolution regarding directors’
remuneration. Advise the shareholders regarding a possible alternative to holding a
formal meeting as provided for under common law and in terms of the Companies
Act to appoint the new director.
In English and South African case law, the common law rule of unanimous assent
has been accepted. In terms of this rule, certain decisions may be valid without a
meeting being held, provided that all the members are fully aware of the facts and all
of them have assented thereto, The Companies Act also now provides another
option. In terms of section 60 of the Companies Act, a resolution may be submitted
to shareholders and, if adopted in writing by the required majority, will have the same
effect as if it had been adopted at a meeting without actually holding a general
meeting of shareholders. This means that the unanimous assent (where it is required
that each and every shareholder agrees) is not required under section 60. As long
as the required majority agrees in writing, a decision may be validly passed without
convening a shareholders’ meeting. However, any business of a company that must
be conducted at an annual general meeting may not be conducted by using the
section 60 procedure. The appointment of new directors is a matter that could in
terms of section 61 of the Companies Act be transacted at the company’s annual
general meeting, so whether the option is available would be dependent on what the
company’s Memorandum of Incorporation determines in respect of appointment of
directors.
Electronic notice and electronic participation in meetings are allowed unless the
Memorandum of Incorporation prohibits it (section 63(2) of the Companies Act).
Activity 2
Every shareholder of Zithulele (Pty) Ltd is also a director of the company. Advise
them on whether they have to convene a formal meeting of shareholders to consider
matters that have to be referred to shareholders.
Zithulele (Pty) Ltd is a private company. Where every shareholder is also a director
of the company (except in the case of a state-owned company), they can decide on
any matter that must be referred to the shareholders by the board without having to
give notice or comply with any other internal formalities, except as provided
otherwise in the Memorandum of Incorporation (section 57(4)). Every director must
be present at the board meeting at which the matter is referred to them in their
capacity as shareholders. Both the quorum requirements for the meeting and the
requirements pertaining to the taking of the decision must be complied with,
irrespective of whether it is an ordinary or a special resolution.
Activity 3
At the shareholders’ meeting of Zithulele (Pty) Ltd, the chairperson, Mr Phakathi
wants to adjourn the meeting because there are not enough shareholders to form a
quorum. Advise the shareholders whether the meeting may be validly adjourned.
3
If, after one hour of the appointed time of a meeting, a quorum is not present, the
meeting must be postponed for one week. In exceptional circumstances, it is
possible to extend the one-hour period. A company’s Memorandum of Incorporation
or rules may specify other time limits. No new notice needs to be issued regarding
the meeting that has been postponed for one week, unless the venue changes.
The shareholders entitled to vote may, despite achieving a quorum, at any time
decide to adjourn a meeting and set a date for a subsequent meeting at any agreedupon time, as long as it is not later than 120 business days after the date of the
original adjourned meeting.
Examples of questions from previous exams dealing with this topic:
QUESTION 1:
Explain whether or not it is possible for a resolution of shareholders to be passed
without holding a general meeting of shareholders. Refer to the position in terms of
the common law as well as the Companies Act 71 of 2008.
(6)
In English and South African case law, the common law rule of unanimous assent
has been accepted. In terms of this rule, certain decisions may be valid without a
meeting being held, provided that all the members are fully aware of the facts and all
of them have assented thereto, although this need not be in writing. In Gohlke and
Schneider v Westies Minerals (Pty) Ltd, the court held that members may validly
appoint a director to the board without any formal meeting being held, because there
was evidence of their unanimous consent.
The court, in In re Duomatic Ltd, held that the unanimous approval of directors’
remuneration by the two directors holding all the voting shares in a company could
be regarded as a resolution of a general meeting approving the payment.
Although it is still possible to apply the common law principle of unanimous assent,
the Companies Act now provides another option. The general principle still remains
that shareholders exercise their rights through resolutions at meetings. However, in
terms of section 60 of the Companies Act, a resolution may be submitted to
shareholders and, if adopted in writing by the required majority, will have the same
effect as if it had been adopted at a meeting without actually holding a general
meeting of shareholders. This means that the unanimous assent (where it is required
that each and every shareholder agrees) is not required under section 60. As long
as the required majority agrees in writing, a decision may be validly passed without
convening a shareholders’ meeting. However, any business of a company that must
be conducted at an annual general meeting may not be conducted by using the
section 60 procedure.
If there are dissenting shareholders (i.e. some shareholders who are not in
agreement), it may be possible to use the procedure as prescribed in section 60 of
the Companies Act, as long as the required majority agrees and it is not a matter
reserved for the annual general meeting in terms of the Companies Act (see list
below). The shareholders may by written polling of all shareholders entitled to vote
on the election, pass the resolution. The company must deliver a statement within
4
ten business days after adopting the resolution, describing the results of the vote,
consent process or election to every shareholder entitled to vote on the resolution.
QUESTION 2:
In terms of the company’s Memorandum of Incorporation, the preference
shareholders do not enjoy voting rights at the general meeting. Ten per cent of the
shareholders of Antlax Ltd are preference shareholders. A general meeting is called
to decide on a proposed resolution that will materially alter the class rights of the
preference shareholders. Tony, a preference shareholder, is very upset about the
situation. He is convinced that the resolution forms part of a campaign of the other
shareholders to get rid of the preference shareholders. Are the preference
shareholders entitled to vote at the meeting?
(2)
In return for the preferential rights to dividends, the right of preference shareholders
to vote is usually curtailed in the Memorandum of Incorporation. However, even if the
Memorandum of Incorporation provides that preference shareholders do not have
the right to vote, the Companies Act provides that they have an irrevocable right to
vote on any proposal to amend the preferences, rights, limitations, and other terms
associated with their shares.
QUESTION 3:
WoodInn (Pty) Ltd has two shareholders, Tom and Sue, each holding 50% of the
issued share capital. Tom, Sue and Jack are the appointed directors of the company.
Advise them regarding the following:
(a)
Is the company required to hold an Annual General Meeting?
(2)
In terms of the Companies Act, only public companies have a statutory obligation to convene
annual general meetings. However, other companies may voluntarily hold such meetings.
WoodInn (Pty) Ltd is a private company.
What matters must be discussed at a company’s annual general meeting?
(4)
Section 61 of the Companies Act stipulates that at least the following matters must
be transacted at the AGM:
election of directors to the extent required by the Companies Act or the
company’s Memorandum of Incorporation

appointment
of an auditor for the following financial year

 appointment of an audit committee
 presentation of the directors’ report
presentation of audited financial statements for the immediately preceding
financial year

 presentation of an audit committee report
any matter raised by shareholders
5
QUESTION 4:
Explain what is meant by a “right of pre-emption” on issue of shares.
(2)
In terms of section 39 of the Companies Act, every shareholder in a private company
(and a personal liability company) has the right, before any other person who is not a
shareholder of the company, to be offered and to subscribe (within a reasonable
time) for a percentage of any shares issued or proposed to be issued equal to the
voting power of that shareholder’s general voting rights immediately before the offer
was made. However, a company’s Memorandum of Incorporation may limit, negate
or restrict this right with respect to any or all classes of shares of that company.
QUESTION 5:
Briefly discuss the different resolutions that can be taken in companies. Also indicate
the quorum and majority requirements for passing different types of company
resolutions.
(6)
Section 64 of the Companies Act provides that a meeting may not begin until
sufficient persons holding at least 25% of all the voting rights in respect of at least
one matter to be decided on at the meeting are present. The percentage (25%) may
be increased or reduced in the Memorandum of Incorporation. However, if a
company has more than two shareholders, at least three shareholders must be
present.
Section 65(7) and (9) of the Companies Act provides for two types of resolution that
may be taken by shareholders: an ordinary resolution, requiring more than 50% of
the votes exercised, and a special resolution, requiring at least 75% of the voting
rights exercised. A company is allowed to stipulate a higher percentage for approval
of an ordinary resolution (except for the removal of a director) or a different
percentage (i.e. higher or lower) for special resolutions in its Memorandum of
Incorporation, on condition that there must always be a difference of at least 10%
between the highest percentage required for an ordinary resolution and the
lowest percentage required for any special resolution.
QUESTION 6:
The Memorandum of Incorporation of Lynton (Pty) Ltd is silent on the issue of
resolutions and the quorum requirements for meetings. In a general meeting it was
proposed that Lynton (Pty) Ltd should enter into a joint venture with another
company to tender for the building of a new railway. A special meeting was
convened at which this matter would be voted on. Mr Khumalo, who holds 5% of the
votes, Mr Selepe also holding 5%, Mr Moleke who holds 20% of the votes and Mrs
Mbatha who holds 15% of the votes were in attendance. Mr Phiri, attending as a
representative of Lincol Ltd that holds 40% of the votes and Mr Moloi as proxy for Mr
Hurter who holds 5% of the votes were also present. On a vote by poll, Mr Moloi, Mrs
Mbatha, Mr Moleke and Mr Selepe voted in favour of the resolution, whiel all the
other persons in attendance voted against the resolution, except for Mr Khumalo
who abstained from voting.
6
Indicate by considering the votes on this matter, what type of resolution could have
been passed. Also explain the quorum requirements and the different majority
requirements for the different types of resolutions that may be passed in companies.
(6)
Ordinary resolution: 50% plus 1 of exercised voting rights.Special resolution: 75% of
exercised voting rights.MOI may indicate a different percentage of voting rights to approve
any special resolution .Difference between ordinary and special resolution must remain at
least 10% An ordinary resolution was passed here.
QUESTION 7:
Bernadette is a shareholder of Sevenster Ltd. She is going to be overseas at the
time that the company’s annual general meeting is to be held. She would have liked
to vote on some of the matters that are going to be discussed at the meeting. Advise
her regarding the possibility of appointing someone else to vote on her behalf at the
meeting and set out the requirements that must be adhered to in terms of the
Companies Act 71 of 2008
(4)
Section 58 of the Companies Act 71 of 2008 determines that a proxy can be
appointed. The appointment must be in writing and will be valid for one year, or for a
specified period of time. The same person may be appointed as a proxy for more
than one shareholder The proxy can delegate the authority to act on the
shareholder’s behalf to someone else. A copy of the appointment instrument must be
available/ presented at the meeting. A shareholder can cancel a proxy in writing or
withdraw the appointment in writing.
QUESTION 8:
The board of directors of Speedy (Pty) Ltd proposed that a shareholders’ meeting be
convened in order to discuss the liquidation on the company. Some of the
shareholders received an agenda of the meeting, while others were not informed at
all of the meeting or about what would be discussed at the meeting. With reference
to the relevant provisions of the Companies Act 71 of 2008, discuss whether or not
the statutory notice requirements for this meeting has been complied with.
(4)
A section 62 notice of a meeting must
be in writing
indicate the date, time and place of the meeting
indicate the general purpose of the meeting
contain a statement that a shareholder is entitled to appoint a proxy who may
participate in the meeting and vote on his or her behalf
indicate that participants in the meeting have to provide proof of identification
be accompanied by a copy of any proposed resolution to be discusses at the
meeting
be given at least ten days prior to the meeting (15 days for public companies and
non-profit companies with members)
Speedy (Pty) Ltd is a private company and at least 10 days notice should have been
given to all the shareholders in writing. The requirements have clearly not been
complied with.
7
Learning Unit 9: Directors
What are the different type of directors recognised in the Companies Act and the
King Code?
executive directors
non-executive directors
independent directors
How many directors do there have to be in a private company?
One
How many directors do there have to be in a public company?
Three
Who are ineligible to become a director?


a juristic person
an unemancipated minor/a person under legal disability
a person who is ineligible in terms of the provisions of the Memorandum of
Incorporation
Who are disqualified from becoming directors?





a declared delinquent
an unrehabilitated insolvent
a person prohibited from being director in terms of a public regulation
a person removed from an office of trust for misconduct/dishonesty
a person convicted of fraud, dishonesty, theft or a related offence
a person disqualified in terms of the provisions of the Memorandum of Incorporation
How are directors appointed and removed?
Upon incorporation of a new company, every incorporator is deemed to be a director
of such company until sufficient directors have been appointed to meet the required
minimum number of directors.
A person becomes a director of a company when that person
has been appointed or elected as a director in terms of the Companies Act or
Memorandum
of Incorporation, or

holds an office, title, designation or similar status entitling that person to be an ex
officio
director of the company

A person will only become a director once he or she has delivered written consent
accepting such a position.
A director can be removed by shareholders and, in some circumstances, by the
board of directors. Despite any provision contained in the company’s Memorandum
of Incorporation or any agreement between the company and the director, removal
may be affected by an ordinary resolution. The director must receive notice of the
contemplated removal and be afforded the opportunity to make representations
before the resolution to remove him/her is put to the vote.
A director who has been removed from office may apply to a court to review the
determination of the board. This application must be brought within 20 business days
from the date of a decision taken by the board. The court has a discretion whether to
confirm the determination of the board.
A removal in terms of section 71 does not detract from any right that the director
so removed has to claim compensation or damages resulting from the loss of
his/her office.
What are the duties of directors under the Companies Act?
1
The Companies Act of 2008 introduced a partially codified regime of directors’ duties,
which includes the common law fiduciary duties and the duty to perform their functions with
reasonable care and skill. The common law is not excluded by the statutory provisions and
will continue to apply, except insofar as it is specifically amended by the Companies Act or is
in conflict with its provisions.
Briefly summarised, the partly codified (statutory) duties of directors in the
Companies Act entail the following:
For the first time, the Companies Act places a specific duty on the board of

directors to manage the company (section 66(1)).
To disclose to the board any personal financial interest in matters of the company
(section 75).

Not to use the position of director or information obtained as director to gain an
advantage for himself/herself or another person, or to cause harm to the company or a
subsidiary (section 76(2)(a)).

To
disclose to the board of directors any material information (section 76(2)(b)).

To
act in good faith and for a proper purpose (section 76(3)(a)).

 To act in the best interests of the company (section 76(3)(b)).
To act with reasonable care, skill and diligence (section 76(3)(c)).
The provisions in the Companies Act are subject to, and not in substitution of, any of the
duties of directors under the common law.
What does the business judgment rule entail?
Section 76(4) of the Companies Act states that a director will be regarded as having acted in
the best interests of the company and with the required degree of care, skill and diligence if
the director
 took reasonable steps to become informed about the matter,
had no material personal financial interest in the subject matter of the decision or knew
of anybody else having a financial interest in the matter, or disclosed his/her
interests, and

made or supported a decision in the belief that it was in the best interests of the
company
A director is also entitled to rely on information provided by certain persons specified in the
Companies Act.
In any proceedings against a director, other than for wilful misconduct or wilful breach of
trust, a court may relieve the director of liability if it appears to the court that the director
acted honestly and reasonably or it would be fair to excuse the director. A director will also
escape liability where he or she had a rational basis for believing, and actually believed, that
the decision was in the best interests of the company.
Activity 1
Sam is appointed as a director in ABC Ltd subsidiary FAB Ltd. Sam has a separate
employment contract with the company and is engaged in the day-to day operations
of the company.
Linda was elected as a director by the shareholders. However, he does not
participate in the management of ABC Ltd or any of its subsidiaries. He does not
have a separate contract of employment with ABC Ltd.
In the company’s annual report it is states that ABC Ltd’s Head of Department will by
virtue of holding this office be a director. Jack is appointed as the Chief Executive
Officer, but was never appointed as a director by the shareholders at any meeting.
2
Calvin was appointed by the directors of ABC Ltd to stand in for Sandra, an
executive director of the company while she is on maternity leave.
Distinguish between the different types of directors as recognised in the Companies
Act and the King Code. Indicate which types of directors Sam, Linda, Jack and
Calvin would be classified as.
You should have indicated that:



Sam is an executive director.
Linda is an elected director. Due to the fact that he does not participate in the daily
running of the business he is also a non-executive director.
Jack is an ex officio director, because he is only a director due to his other appointment
in the company and was not elected as such.
Calvin is a temporary director and an executive director.
Activity 2
Gary is a director of Centro Pharmaceuticals (Pty) Ltd. Centro has found a new cure
for pneumonia. Gary gives the formula to the senior scientist of Acerbic
Pharmaceuticals (Pty) Ltd against payment of a fee. Centro Pharmaceuticals (Pty)
Ltd is very upset about this. Explain whether Centro Pharmaceuticals (Pty) Ltd will
be able to lodge an application to have Gary declared as delinquent. If so, also
explain what the effect of such an order will be.
In order to answer the question you will have to know and understand the following:



Who may make an application?
The grounds for an application.
The relevant order sought.
The effect of an order.
Your answer should reflect the following:



A company (Centro Pharmaceuticals (Pty) Ltd) can apply to a court of law for an
order to have a director declared as delinquent;
Garry grossly abused his position as director and acted in a manner that amounted to a
breach of trust;
A declaration of delinquency may be made;
This declaration may be subject to any conditions the court consider appropriate and
will be for at least seven years from the date of the order.
Activity 3
Steven was a director of Hamilton (Pty) Ltd but in 2015 the court declared him
delinquent because he used information obtained as a director for his personal
advantage. He feels that he has now rehabilitated himself and has met all the
conditions of his court order. He would like to serve as director of Hamilton (Pty) Ltd
once again. Explain whether Steven will be able to apply to a court to suspend the
order of delinquency.
Steven will be able to apply for the suspension of the order of delinquency as 3 years have
passed since the order of delinquency was made and the order was not based on one of the
two grounds which would have resulted in an unconditional declaration subsisting for his
3
lifetime. He will, however, have to satisfy the court that he has rehabilitated himself and has
met all the conditions of his court order.
Activity 4
Mrs Slot is one of the directors of Middlestone (Pty) Ltd. The company manufactures
and sells oak products. Mrs Slot prefers working for herself and intends resigning as
a director of the company to start a similar business. She is unsure whether she may
use the company's client list compiled over a number of years, to inform potential
clients of her new business. Advise Mrs Slot on whether she is allowed to make use
of the company's client list. Substantiate your answer.
In your answer you should include the following points:
A director should not abuse his or her position as director or misuse any information
obtained as director. He or she must prevent a conflict arising between his or her
own interests and those of the company. This means that a director may not for
personal gain make use of any information he or she has acquired in his or her
capacity as a director. You should then deal with the prescribed case law. You
should also note that a director may be in breach of the duties owed by him or her to
the company despite termination of his or her office. In the Sibex Construction- case
the directors resigned from their office to form a close corporation which competed
directly with the business of the company. The court found that the knowledge they
had gained whilst employed by the company could not be used to the advantage of a
rival before or after they had left the employ of the company.
Activity 5
Tinyiko is a non-executive director of Verytaste (Pty) Ltd. She attended a meeting
where she became aware of the fact that the company defaulted on certain
payments due to Distribo (Pty) Ltd who is responsible for the distribution of the
company’s products. Distribo (Pty) Ltd had threatened to cancel the contract.
However, Verytaste (Pty) Ltd’s chief financial officer assured the board that this was
only due to a temporary cash flow problem. Tinyiko relied on this assurance. Tinyiko
does not attend the next two board meetings. At a subsequent board meeting Tinyiko
learns that Distribo (Pty) Ltd cancelled the contract as a result of continual nonpayments by Verytaste (Pty) Ltd. As a result of the interruption in distribution,
Verytaste suffered a loss in excess of R5 million to the company. As a result,
Verytaste (Pty) Ltd is placed in liquidation.
Answer the following questions relating to the set of facts provided above:
On what basis can the liquidator possibly hold the directors liable for the loss that
the company had suffered?
If a company fails as a result of decisions made or lack of proper decision making by the
directors, the directors may under certain circumstances be held liable for breach of their
duty to act with reasonable care, skill and diligence.
4
How will the court determine whether or not the directors are liable for the loss?
Refer to relevant case law in your answer.
In determining whether or not a director has breached the duty of care, skill and diligence
Fisheries Development Corporation of SA v Jorgenson is of relevance. In this case it was
held that:


The extent of the director’s duty of care and skill depends to a considerable degree on
the nature of the company’s business and on any particular obligations assumed by or
assigned to him.
The law does not require of a director to have special business acumen and that
directors may assume that officials will perform their duties honestly.
The fact that someone is a non-executive director does not exclude assumption of
liability as section 76(1) of the Companies Act does not distinguish between a director
and a non-executive director.
Explain the defence that could possibly be raised by Tinyiko in terms of the
Companies Act to avoid liability.
The Companies Act introduces the business judgment rule as a defence for directors. It is
possible to escape liability despite having failed to act with the required degree of care, skill
and diligence if the director took reasonable steps to become informed about the matter; had
no material personal financial interest in the subject matter of the decision or knew of
anybody else having a financial interest in the matter, or disclosed his interests; and made or
supported a decision in the belief that it was in the best interests of the company.
In the set of facts in the question, the liquidator may try to hold the directors accountable for
not performing their functions with reasonable care and skill. Because the common law
remains despite the enactment of the Companies Act, the courts would look at decisions like
Fisheries Development Corporation of SA. The Companies Act has a new defence that
could be raised by directors who allegedly breached their duties. Whether or not Tinyiko
would be able to rely on this defence must be determined on the facts of the specific matter.
Perhaps you could also argue that she could escape liability because in terms of the
Companies Act directors are allowed to rely upon information acquired from specific
persons.
Activity 6
Clause 12 of the Memorandum of Incorporation of De Beers Construction Ltd
provides that: “the company undertakes to indemnify and absolve from liability all
directors in all transactions concluded by them on behalf of the company, provided
that the directors have not been grossly negligent when conducting such
transactions”. Explain whether clause 12 of the Memorandum of Incorporation of De
Beers Construction Ltd is a valid clause in terms of the Companies Act.
The Companies Act makes it impossible to exempt directors from personal liability for
negligence, default, breach of duty or breach of trust. The Memorandum of Incorporation
may not conflict with any statutory rule. Thus the board of directors of De Beers Construction
Ltd should be advised that the provisions purporting to exempt directors from liability in all
instances except where gross negligence was present, are void.
Examples of questions from previous exams dealing with this topic:
5
QUESTION 1:
Tim is a director of Kenza Ltd. A meeting is held where a decision has to be taken
regarding the provision of financial assistance to one of Tim’s close friends, Jerry.
Tim, knowing that the transaction would render it impossible for the company to pay
its debts as they become due in the ordinary course of business, allows the decision
to be passed.
With reference to the facts above, explain the procedure that must be followed
against Tim in terms of section 162 of the Companies Act 71 of 2008. In your
answer, you must discuss the following:
(a)




Who can bring such an application.
(3)
Any one of the following may apply for a delinquency order:
a company
a shareholder
a director
a company secretary or prescribed officer
a registered trade union/other employee representative
The Commission or Takeover Regulation Panel or a state organ may also in
certain circumstances apply to declare a director delinquent.
(b)
The grounds upon which such an order can be brought.
(3)
Grounds for the order:
The person
served as a director while disqualified, or
acted as a director while under probation in a manner that contravened the
order of probation
grossly abused the position of director
took personal advantage of information/an opportunity
intentionally/ as a result of gross negligence inflicted harm on the
company/subsidiary
acted in a manner that amounts to gross negligence, wilful misconduct or
breach of trust
(c)
The relevant order sought.
(1)
The court may, in a declaration of delinquency, order that the person


undergo remedial education
carry out a designated programme of community service
pay compensation
(d) The consequences of such an order.
(3)
The person wil not be allowed to serve as a director for a specific period of time. Note
that this application may be made only in those cases where the declaration was not
made unconditional and for the lifetime of the person declared delinquent. Also note that
6
the applicant first has to apply for a suspension of the order and then, after a further two
years, may apply for it to be set aside.
QUESTION 2:
List the different types of directors provided for under the Companies Act 71 of 2008.
(4)
 an ex officio director
 a director appointed in terms of the Memorandum of Incorporation
 an alternate director
 an elected director
 a temporary director who is appointed in order to fill a vacancy
QUESTION 3:
Andile is a director of Oldco Ltd. The company’s Memorandum of Incorporation
determines that the directors are appointed for a period of two years. Six months
after Andile’s appointment as director, the shareholders want to remove Andile from
his post as director. Advise Oldco Ltd regarding the following:
(a) What type of resolution is required to remove a director from his position as
director?
(1)
Ordinary resolution
(b) Will Andile be able to claim damages from the company if he had not concluded a
separate contract of employment with the company?
(2)
Yes. In terms of section 15(6) of the Companies Act 71 of 2008 the Memorandum of
Incorporation is binding between the company and each director . Section 71 of the
Companies Act 71 of 2008 determines that a director may claim based on breach of
contract.
QUESTION 4:
List the duties of directors in terms of the common law, and the Companies Act 71 of
2008.
(5)
Briefly summarised, the partly codified (statutory) duties of directors in the
Companies Act entail the following:






For the first time, the Companies Act places a specific duty on the board of
directors to manage the company (section 66(1)).
To disclose to the board any personal financial interest in matters of the
company (section 75).
Not to use the position of director or information obtained as director to gain an
advantage for himself/herself or another person, or to cause harm to the
company or a subsidiary (section 76(2)(a)).
To disclose to the board of directors any material information (section
76(2)(b)).
To act in good faith and for a proper purpose (section 76(3)(a)).
To act in the best interests of the company (section 76(3)(b)).
To act with reasonable care, skill and diligence (section 76(3)(c)).
7
------------------------------------------------------------------------------------------------------At common law, directors also have a duty of care and skill and a fiduciary duty.
QUESTION 5:
List three grounds on which an application can be brought against a director for an
order declaring him or her delinquent in terms of section 162 of the Companies Act
71 of 2008.
(3)
The person
served as a director while disqualified, or
acted as a director while under probation in a manner that contravened the
order of probation
grossly abused the position of director
took personal advantage of information/an opportunity
intentionally/ as a result of gross negligence inflicted harm on the
company/subsidiary
acted in a manner that amounts to gross negligence, wilful misconduct or
breach of trust
QUESTION 6:
The Memorandum of Incorporation of ABC (Pty) Ltd contains the following
provisions:
If the company issues new shares, it must first be offered to existing
shareholders.
Directors hold their office for life.
Azaria is a director of ABC (Pty) Ltd. The board of directors want to remove Azaria
as director. Can she invoke the provisions in the Memorandum of Incorporation to
prevent her removal, or to claim damages for her premature removal?
(4)
Azaria cannot prevent her removal. However, in terms of section 15(6) of the
Companies Act 71 of 2008 the Memorandum of Incorporation is binding between the
company and each director. Section 71 of the Companies Act 71 of 2008 determines
that a director may claim based on breach of contract. So, she will be able to claim
damages under the Memorandum of Incorporation even if she does not have a
separate contract of employment.
QUESTION 7:
Phumudzo is a newly appointed director of Teebo Ltd. He has no previous
experience as a director, and no special management qualifications. His son,
Siphiso, is a second-year law student. Siphiso told Phumudzo that he need not be
concerned about his new appointment, as the business judgment rule has been
adopted into the South African corporate law. Siphiso requires some additional
information regarding the application of this rule. Briefly explain what the business
judgment rule entails and what must be proven in order to rely upon the rule.
(6)
The Companies Act introduces the business judgment rule as a defence for directors. It is
possible to escape liability despite having failed to act with the required degree of care, skill
8
and diligence if the director took reasonable steps to become informed about the matter; had
no material personal financial interest in the subject matter of the decision or knew of
anybody else having a financial interest in the matter, or disclosed his interests; and made or
supported a decision in the belief that it was in the best interests of the company.
QUESTION 8:
Phumudzo is a non-executive director of Rubberz (Pty) Ltd, a company that
manufactures tyres. Phumudzo in his capacity as a director obtains information that
a limited amount of rubber, which is used for the manufacture of tyres, is being sold
very cheaply by a foreign company. Phumudzo resigns as a director of Rubberz
(Pty) Ltd and incorporates Greatyears (Pty) Ltd. His company also manufactures
tyres. Phumudzo then enters into a contract with the foreign company on behalf of
Greatyears (Pty) Ltd for the purchase of the entire rubber stock.
Advise the directors of Rubberz (Pty) Ltd whether or not Phumudzo has acted in
breach of his duties towards the company. Refer to relevant case law.
(6)
There was a conflict between the directors’ interests and the interests of the
company. When this is the case, it is indicative of a potential breach of fiduciary
duties. A director should not abuse his or her position as director or misuse any
information obtained as director. He or she must prevent a conflict arising between
his or her own interests and those of the company. This means that a director may
not for personal gain make use of any information he or she has acquired in his or
her capacity as a director. You should then deal with the prescribed case law. You
should also note that a director may be in breach of the duties owed by him or her to
the company despite termination of his or her office. In the Sibex Construction- case
the directors resigned from their office to form a close corporation which competed
directly with the business of the company. The court found that the knowledge they
had gained whilst employed by the company could not be used to the advantage of a
rival before or after they had left the employ of the company.
In your answer you should deal with the prescribed case law. You should also note
that a director may be in breach of the duties owed by him or her to the company
despite termination of his or her office. In the Sibex Construction case the directors
resigned from their office to form a close corporation which competed directly with
the business of the company. The court found that the knowledge they had gained
whilst employed by the company could not be used to the advantage of a rival before
or after they had left the employ of the company.
QUESTION 9:
Capricorn Construction (Pty) Ltd wishes to purchase a crane. Michael, one of the
company’s directors, is instructed to buy the crane on behalf of the company.
However, he fails to reach an agreement with the owner of the crane on behalf of the
company. He resigns as a director of Capricorn Construction (Pty) Ltd and then
concludes an agreement with the owner of the crane in his personal capacity. He
purchases the crane for R50 000, and then sells it to Capricorn Constructions (Pty)
Ltd at a fair price of R70 000. Discuss whether or not Michael’s conduct would qualify
as a breach of his duties towards Capricorn Constructions (Pty) Ltd.
(6)
9
There was a conflict between the directors’ interests and the interests of the company. When
this is the case, it is indicative of a potential breach of fiduciary duties. A director should
not abuse his or her position as director or misuse any information obtained as
director. He or she must prevent a conflict arising between his or her own interests
and those of the company. This means that a director may not for personal gain
make use of any information he or she has acquired in his or her capacity as a
director. You should then deal with the prescribed case law. You should also note
that a director may be in breach of the duties owed by him or her to the company
despite termination of his or her office. In the Sibex Construction- case the directors
resigned from their office to form a close corporation which competed directly with
the business of the company. The court found that the knowledge they had gained
whilst employed by the company could not be used to the advantage of a rival before
or after they had left the employ of the company.
When answering a question concerning the duties of directors, you should keep in
mind that the standards of conduct as laid down in section 76 of the Companies Act,
is only a partial codification of the common law duties. In other words, the cases
decided before the enactment of the new legislation remains relevant. In the second
activity you are asked specifically to refer to the cases. Let the wording of the
question and the mark allocation to guide you in the exam.
QUESTION 10:
Identify the different types of directors in the following scenario’s:
Thandi is a director of Clean Ltd, and is also employed in terms of a contract
of employment concluded with the company.
(1)
Busi was elected as director by Clean Ltd’s shareholders. However, he is not
employed by the company, and he only attends meetings and participates in
the company’s business on an intermittent basis.
(1)
Charl was elected as a director by the shareholders to stand in for Anna while
she is on maternity leave.
(1)
The Memorandum of Incorporation of Clean Ltd determines that the Chief
Executive Officer (CEO) of Clean Ltd will also be a director. Percival has
recently been appointed as the CEO.
(1)
The Memorandum of Incorporation of Clean Ltd determines that the debenture
holders of the company may appoint a director in order to promote
their interests. They appoint Themba.
(1)




Thandi is an executive director
Busi is a non-executive director
Charl is a temporary director
Percival is an ex officio director
Themba is a Memorandum of incorporation (appointed) director
QUESTION 11:
Herman is an experienced quantity surveyor. He has extensive knowledge on the
valuation of immovable property. Herman is approached to serve as a director of
PropSite (Pty) Ltd, a small company that deals in property speculation. He agrees
10
to serve as a director on the understanding that he will not be involved in the dayto-day running of the company. After two years, Herman has made a significant
contribution to the company in terms of property valuation advice, but only when
he was specifically asked, and on an intermittent basis. He never attended the
board meetings and he has trusted the rest of the board to take all the other
decisions.
Herman is informed by the managing director that it was decided at the previous
evening’s board meeting that PropSite (Pty) Ltd should invest in a new property
development. The development site is in a rural area. Herman is aware of the fact
that potential losses are always higher in rural areas. However, he agrees that
the company should take the risk ad invest in the development. PropSite (Pty) Ltd
proceeds with the development. After six months it becomes apparent that the
development is a failure. The company suffers a loss of R5 million. The
shareholders want to institute legal action on behalf of the company against the
board for breach of their duty of care and skill. Herman has heard that the
Companies Act 71 of 2008 has introduced the business judgment rule, which
apparently affects directors’ liability. Explain to Herman what the business
judgment rule entails. Also advise him whether or not it could protect him in these
particular circumstances.
(5)






You should have mentioned that the court would use an objective test to
determine whether Herman had acted like a director would usually have acted
in the same situation. The court will also take into consideration objective
elements, such as Herman’s experience and qualification as a quantity
surveyor.
Section 76(4) of the Companies Act states that a director will be regarded as having
acted in the best interests of the company and with the required degree of care, skill
and diligence if the director
took reasonable steps to become informed about the matter,
had no material personal financial interest in the subject matter of the decision or
knew of anybody else having a financial interest in the matter, or disclosed
his/her interests, and
made or supported a decision in the belief that it was in the best interests of the
company
A director is also entitled to rely on information provided by certain persons specified in
the Companies Act.
In any proceedings against a director, other than for wilful misconduct or wilful breach of
trust, a court may relieve the director of liability if it appears to the court that the director
acted honestly and reasonably or it would be fair to excuse the director. A director will
also escape liability where he or she had a rational basis for believing, and actually
believed, that the decision was in the best interests of the company.
QUESTION 12:
Tshepo and Phineas are the directors of Dino (Pty) Ltd. The company’s liabilities
exceed its assets. Tshepo and Phineas are aware of the company’s financial
problems, but continue running the business in the hope that the company will
become profitable again. Dino (Pty) Ltd borrows R4 million from HelpU Bank Ltd.
Consider whether Tshepo and Phineas can be held personally liable in terms of
the Companies Act 71 of 2008 if the loan amount cannot be repaid.
(3)
11
Section 22(1) of the Companies Act 71 of 2008 regulates reckless and
fraudulent trading. If directors continued running business knowing that company
is insolvent with the intention to defraud creditor they can incur personal liability
in terms of section 77 of the Companies Act 71 of 2008. (1)
QUESTION 13:
Indicate which groups of people are ineligible to be appointed as directors of
companies in terms of the Companies Act 71 of 2008.
(3)



a juristic person
an unemancipated minor/a person under legal disability
a person who is ineligible in terms of the provisions of the Memorandum of
Incorporation
QUESTION 14:
Which groups of persons may only become directors with the consent of the
court, but are disqualified otherwise?





a declared delinquent
an unrehabilitated insolvent
a person prohibited from being director in terms of a public regulation
a person removed from an office of trust for misconduct/dishonesty
a person convicted of fraud, dishonesty, theft or a related offence
a person disqualified in terms of the provisions of the Memorandum of Incorporation
12
(3)
Learning Unit 10: Auditors and audit committees
Which companies are obliged to appoint an auditor?
Public companies and state-owned companies have to. Other companies such as
private companies, personal liability companies or non-profit companies need not
comply with the extensive accounting requirements set out in Chapter 3, except to
the extent that the company’s Memorandum of Incorporation provides otherwise
(section 34 of the Companies Act).
Who may be appointed as an auditor?
The auditor may be an individual person or a firm and is appointed by a company by way of
a contract. In companies with an audit committee, the audit committee is required, in terms
of section 94(7) of the Companies Act, to nominate for appointment a registered auditor who
is independent of the company and to determine the auditor’s fees and terms of
engagement. Only a registered auditor may be appointed as auditor of a company. In terms
of section 37 of the Auditing Profession Act, only a person who has complied with the
prescribed education, training and competency requirements, who has made arrangements
regarding his or her continued professional development where that individual is not a
member of an accredited professional body, who is a “fit and proper person” to act as an
auditor, and who is resident within South Africa, may be registered as an auditor.
The Auditing Profession Act states, further, in section 37(3) that any person who has been
removed from an office of trust as a result of misconduct, who has been convicted of theft,
fraud or forgery or other act of dishonesty or corruption, or who has been declared by a court
to be of unsound mind and unable to manage his or her own affairs, may not be registered
as an auditor.
Which people are disqualified from becoming an auditor?
section 90(2) of the Companies Act disqualifies certain persons from being appointed as the
auditor of a company. Such persons include: a director or prescribed officer of the company;
an employee or consultant of the company who was or has been engaged for more than one
year in the maintenance of any of the company’s financial records or the preparation of any
of its financial statements; a director, officer or employee of a person appointed as company
secretary; a person who, alone or with a partner or employees, habitually or regularly
performs the duties of accountant or bookkeeper, or performs related secretarial work, for
the company; a person who, at any time during the five financial years immediately
preceding the date of appointment, was a person contemplated above or is a person related
to a person contemplated above.
At which meeting must an auditor be appointed?
At the annual general meeting
How often must an auditor be appointed?
Section 92 of the Companies Act makes provision for the rotation of auditors. In terms of this
section, the same individual may not serve as the auditor or designated auditor of a
company for more than five consecutive financial years. This rotation requirement applies to
individual auditors only and not to firms, and also does not apply to private companies. If a
company appointed two or more joint auditors, the company is obliged to manage the
rotation requirement in a way so as to ensure that all of the auditors do not stop acting as
auditors within the same year.
If an auditor has served for two or more consecutive years and then ceases to be an auditor
of the company, he or she will not be permitted to return before the expiry of at least another
two financial years.
An auditor may resign at any time during his or her period of office. The resignation is
1
effective when the notice of resignation is filed. A new auditor must be appointed to replace
an auditor who resigns within 40 business days after the filing of his or her resignation.
Which companies are obliged to appoint an audit committee?
Public and state-owned companies are required to have an audit committee.
For how long may the position of auditor remain vacant in a company?
A new auditor must be appointed to replace an auditor who resigns within 40 business days
after the filing of his or her resignation.
Explain the procedure for the appointment of an auditor to fill a vacancy.
Before making an appointment, the board must propose to the audit committee, within 15
business days after the vacancy occurs, the name of at least one registered auditor to be
considered to replace the auditor who resigned. The board of directors may appoint the
person proposed if, within five business days of making the proposal, the audit committee
does not give notice in writing to the board rejecting the proposed auditor.
For how many consecutive years may the same auditor compile a company’s
financial statements?
Section 92 of the Companies Act makes provision for the rotation of auditors. In terms of this
section, the same individual may not serve as the auditor or designated auditor of a
company for more than five consecutive financial years.
What rights do company auditors enjoy?
Section 93 of the Companies Act provides that the company auditor has a right to access, at
all times, the accounting records and all books and documents of the company. The auditor
may attend any general meeting held by the company.
How is the audit committee appointed?
Section 94 of the Companies Act requires that, at each annual general meeting, a public
company, a state-owned enterprise, and any other company which has voluntarily decided
to have an audit committee, must appoint an audit committee for every financial year.
What are the duties of the auditing committee?
The audit committee must, for the year it is appointed, perform the following
functions:
nominate and appoint a registered, independent auditor
determine the fees to be paid to the auditor and the auditor’s terms of
engagement
ensure that the appointment of the auditor complies with the Companies Act and
other legislation
determine the nature and extent of non-audit services that the auditor may
provide or must not provide
pre-approve any proposed agreement with the auditor for the provision of nonaudit services
prepare a report to be included in the annual financial statements
describing how the audit committee has performed its functions
indicating that the audit committee is satisfied that the auditor was
independent of the company
stating that accounting practices have been complied with in the company and
that internal financial control has been exercised by the company
receive and deal with complaints pertaining to the accounting practices and
internal audit of the company or related matters
make submissions to the board on accounting policies, financial control,
2
records and reporting
perform other functions as determined by the board, including the development of
policy in order to improve governance
consider whether the auditor’s independence may have been prejudiced
consider compliance with other criteria relating to independence or conflict of
interest as prescribed by the IRBA
Activity 1
Suppose that Given is appointed as auditor of Moonblue Ltd to replace Daniel.
Having served as auditor of Moonblue Ltd for three consecutive years, Given
decides to take a six month holiday through Europe and resigns from his position as
auditor. On his return from Europe, Given re-applies for the position as auditor of
Moonblue Ltd. Can Given be reappointed?
The Companies Act provides that if an individual has served as an auditor of a company for
two or more consecutive financial years and then ceases to be the auditor, that individual
may not be re-appointed as auditor of that company until after the expiry of at least two
further financial years. Given would therefore not be able to be re-appointed as auditor of
Moonblue Ltd after a six month period.
Activity 2
Suppose Hamid is appointed as auditor of Moonblue Ltd after Given resigns. For the
purpose of preparing the audit report, Hamid requests certain company documents
from Barney the financial director of Moonblue Ltd. Barney refuses to furnish Hamid
with the documents. Advise Hamid of his legal rights, as auditor, under the
Companies Act.
Section 93 of the Companies Act provides that the company auditor has a right to access, at
all times, the accounting records and all books and documents of the company. An auditor
may require from the directors or officers such information and explanations as are
necessary for the performance of his or her duties.
The auditor is further entitled to apply to court for an order to enforce the above rights and
the court may make any order that is just and reasonable to prevent frustration of the
auditor’s duties by the company, directors, prescribed officers or employees (section 93(2)).
The court may further make a costs order against any director or prescribed officer whom
the court has found to have wilfully and knowingly frustrated, or attempted to frustrate, the
performance of the auditor’s functions (section 93(2)(b)).
Hamid is therefore entitled to have access to the documents requested from Barney, and
may apply to court if necessary for an order that the documents be furnished to him. The
court may make a costs order against Barney in his personal capacity.
Examples of questions from a previous exams dealing with this topic:
QUESTION 1:
The Companies Act 71 of 2008 provides for the establishment of certain committees
in companies, one of which is the audit committee.
(a) Which companies are obliged to appoint an audit committee?
3
(2)
Public and state-owned companies are required to have an audit committee.
(b) List three of the duties of the audit committee.
(3)
The audit committee must, for the year it is appointed, perform the following
functions:
nominate and appoint a registered, independent auditor
determine the fees to be paid to the auditor and the auditor’s terms of
engagement
ensure that the appointment of the auditor complies with the Companies Act and
other legislation
determine the nature and extent of non-audit services that the auditor may
provide or must not provide
pre-approve any proposed agreement with the auditor for the provision of nonaudit services
prepare a report to be included in the annual financial statements
describing how the audit committee has performed its functions
indicating that the audit committee is satisfied that the auditor was
independent of the company
stating that accounting practices have been complied with in the company and
that internal financial control has been exercised by the company
receive and deal with complaints pertaining to the accounting practices and
internal audit of the company or related matters
make submissions to the board on accounting policies, financial control, records
and reporting
perform other functions as determined by the board, including the development of
policy in order to improve governance
consider whether the auditor’s independence may have been prejudiced
consider compliance with other criteria relating to independence or conflict of
interest as prescribed by the IRBA
QUESTION 2:
Explain how it is determined whether a corporation is required to audit its financial
statements. Indicate four of the factors that are considered in doing so.
(5)
The Companies Regulations of 2011 include a Public Interest Score (PIS) calculation
which determines what the reporting duties of other categories of companies are. If a
company holds assets in a fiduciary capacity with an aggregate value of over R5
million, an audit is required. The Companies Regulations of 2011 provide for both
activity and size criteria to determine whether or not companies require audited
financial statements.
The Regulations state that every entity is required to calculate its PIS at the end of
each financial year. The score is calculated as the sum of the following:

a number of points equal to the average number of employees (as determined by
the Labour Relations Act 66 of 1995) of the company during the financial year;
one point for every R1 million (or portion thereof) in third-party liabilities at
year-end (these exclude shareholder loans and intercompany loans with
4

common shareholdings);
one point for every R1 million (or portion thereof) in turnover during the
financial year; and
one point for every individual who, at the end of the financial year, is known by
the company to directly or indirectly have a beneficial interest in the business.
Furthermore:






For companies with a score below 100, an independent review is required if
such companies are not owner-managed.
If the company has a score below 100 and is owner-managed, there is no
requirement for outside professional assistance.
“Owner-managed” means that all shareholders are directors, or, in the case of a
trust, that at least one of the trustees is a director.
If the company is not owner-managed, and obtains a PIS score of 100 to 350, an
audit is required if reports are internally compiled or an independent review if
they are externally compiled
If the company is owner-managed with a score of 100 to 350, no professional
intervention is required if reports are externally compiled, but an audit will be
needed if the reports are internally compiled.
If a company scores over 350 points, an audit is required regardless of
whether the company is owner-managed or not.
A company can subject itself to audits by choice (voluntarily).
5
Learning Unit 11: The company secretary
What types of company must appoint a company secretary?
Every public company or state-owned enterprise must appoint a company secretary
who is knowledgeable about, or experienced in, the relevant laws. A private
company, personal liability company or a non-profit company may voluntarily appoint
a company secretary.
Who is disqualified from appointment as a company secretary?
A person is disqualified from being appointed as a company secretary if he or she
has been prohibited from being a director or has been declared to be delinquent by a
court order;
is an unrehabilitated insolvent;
is prohibited in terms of any public regulation from being a director of the company;
has been removed from an office of trust on the grounds of misconduct involving
dishonesty; or
has been convicted, in the Republic or elsewhere, and imprisoned without the option
of a fine, or fined more than the prescribed amount, for theft, fraud, forgery, perjury,
or an offence (i) involving fraud, misrepresentation or dishonesty; (ii) in connection
with the promotion, formation or management of a company; or (iii) under the
Companies Act or some other Acts listed in the section.
What are the duties of a company secretary?
Section 33(3) of the Companies Act provides that every company must, in its annual
return, designate a director, employee or other person as the company’s compliance
officer. Therefore, in the case of a company having a company secretary, the
company secretary will automatically be the compliance officer. Section 88 of the
Companies Act provides that a company secretary is accountable to the company’s
board.
The company secretary’s duties include, but are not restricted to,
providing the directors of the company collectively and individually with guidance
as to their duties, responsibilities and powers

making
the directors aware of any law relevant to or affecting the company

reporting, to the company’s board, any failure on the part of the company or a
director to comply with the Companies Act

ensuring that minutes of all shareholders’ meetings, board meetings and
meetings of any committees of the directors, or of the company’s audit
committee, are properly recorded in accordance with the Companies Act

certifying, in the company’s annual financial statements, whether the company
has filed required returns and notices in terms of the Companies Act, and
whether all such returns and notices appear to be true, correct and up to date

ensuring that a copy of the company’s annual financial statements is sent, in
accordance with the Companies Act, to every person who is entitled to it

carrying out the functions of a person designated in terms of section 33(3) (i.e. a
person responsible for filing the company’s annual return)
How can a company secretary be removed?
A company secretary can be removed from office by the company’s board, the
company secretary may require the company to include a statement in its annual
financial statements relating to that financial year setting out the company secretary’s
contention as to the circumstances that resulted in the removal.
1
Activity 1
Mike is one of the directors of Oak Ridge Ltd. The company wants to appoint a
company secretary. The position has been vacant since the incorporation of Oak
Ridge Ltd. He wants to know whether Oak Ridge Ltd is obliged to appoint a company
secretary, what the duties of the company secretary are, and by whom this company
officer should be appointed. Advise Mike.
You should advise Mike that, under section 86 of the Companies Act, a public company is
obliged to appoint a company secretary. Since it is apparent that Oak Ridge Ltd is a public
company, a secretary must be appointed. The duties of a company secretary as set out in
section 88 must be explained, and you should also explain that this is not a comprehensive
list. The secretary is usually the chief administrative officer of the company, but is not
involved in the management of the company.
His or her specific duties will vary in scope and nature according to the size of the company,
the nature of its activities and the function assigned to the secretary by the directors. The
secretary should be appointed by the directors of an existing company. The first secretary
(i.e. of a new company) should be appointed as provided in section 86.
Examples of questions from previous exams dealing with this topic:
QUESTION 1:
Gontra Ltd, a company that was incorporated two days ago by Wendy, Tim and
Nomagugu, does not have a company secretary. Explain whether or not it is
necessary to appoint a company secretary. Also indicate what the duties of company
secretaries entail.
(6)
Gontra Ltd is a public company. In terms of the Companies Act 71 of 2008, a public
company is obliged to appoint a company secretary. Yes, it is necessary to appoint a
company secretary.
Duties of secretaries include:
Providing the directors collectively and individually with guidance as to their
duties, responsibilities and powers;

 Making the directors aware of any law relevant to or affecting the company;
Reporting to the company’s board any failure on the part of the company or a
director to comply with the Companies Act;

Ensuring that minutes of all shareholders’ meeting, board meetings and the
meetings of committees or the directors or audit committee are properly
recorded in accordance with the Companies Act;

Certifying in the company’s annual financial statements whether the company
has filed required returns and notices in terms of the Act and whether such
returns and notices appear to be true, correct and up to date;

Ensuring that a copy of the company’s annual financial statements is sent, in
accordance with the Companies Act to every person who is entitled thereto;
and

Carrying out the functions of a person designated in terms of s 33(3) of the
Companies Act 2008 (person designated to ensure that the company
complies with the record-keeping and disclosure requirements in the Act).
2
QUESTION 2:
Dunkelfinger Ltd wish to appoint Mulalo as the company secretary, but the directors
are uncertain whether or not Mulalo is suitably qualified. List three circumstances
under which a person will be disqualified from being appointed as a company
secretary in terms of the Companies Act 71 of 2008.
(3)
A person is disqualified from being appointed as a company secretary if he or she
has been prohibited from being a director or has been declared to be delinquent by a
court order;
is an unrehabilitated insolvent;
is prohibited in terms of any public regulation from being a director of the company;
has been removed from an office of trust on the grounds of misconduct involving
dishonesty; or
has been convicted, in the Republic or elsewhere, and imprisoned without the option
of a fine, or fined more than the prescribed amount, for theft, fraud, forgery, perjury,
or an offence (i) involving fraud, misrepresentation or dishonesty; (ii) in connection
with the promotion, formation or management of a company; or (iii) under the
Companies Act or some other Acts listed in the section.
3
LEARNING UNIT 12: REMEDIES AND ENFORCEMENT
QUESTIONS AND ACTIVITIES
What legal remedies are available against directors who have abused their
positions?
Section 162: declare him or her delinquent/ place him or her on probation.
Section 165: derivative action.
Section 71: Removal of director.
Section 77: to recover all financial losses/ costs suffered.
Who may make application for a director to be declared delinquent or be placed
under probation?
 a company
 a shareholder
 a director
 a company secretary or prescribed officer
a registered trade union/other employee representative
The Commission or Takeover Regulation Panel may also in certain
circumstances bring an application.
What are the consequences for directors who have been declared delinquent?
The person may not serve as a director for the period for which he is declared
disqualified/ until the order is suspended or set aside. In addition The court may, in a
declaration of delinquency, order that the person undergo remedial education, carry
out a designated programme of community service, and/or pay compensation.
When may a court place a director under probation?
A person may be placed under probation on the same grounds as for delinquency,
and, in addition, on the following grounds:
while serving as a director, the person was present at a meeting and failed to
vote against a resolution despite the inability of the company to satisfy the
solvency and liquidity tests

while serving as a director, the person acted in a manner materially inconsistent
with the duties of a director

while serving as a director, the person acted in a way that had a result that was
oppressive or unfairly prejudicial to a shareholder or another director, or that
unfairly disregarded the interests of a shareholder or another director

while serving as a director, the person acted in a way that had a result that the
business of the company, or a related person, was being or had been carried on
or conducted in a manner that was oppressive or unfairly prejudicial to a
shareholder or another director, or that unfairly disregarded the interests of a
shareholder or another director

while serving as a director, the person exercised his or her powers in a manner
that was oppressive or unfairly prejudicial to a shareholder or another director, or
that unfairly disregarded the interests of a shareholder or another director

within any period of ten years after the effective date, the person has been a
director of more than one company, or a managing member of more than one
close corporation, irrespective of whether concurrently, sequentially or at
unrelated times; and during this time two or more of those companies or close
corporations each failed to fully pay all of their creditors or meet all of their
1
obligations, except in terms of a business rescue plan
Discuss the derivative action in terms of section 165 of the Companies Act.
A derivative action is a lawsuit brought by a corporation shareholder against the
directors, management and/or other shareholders of the corporation for a failure by
management (In effect, the suing shareholder claims to be acting on behalf of the
corporation, because the directors and management are failing to exercise their
authority for the benefit of the company and all of its shareholders.)
Specific steps must be taken to institute an action in terms of section 165. The
procedure provides for the appointment of an independent and impartial person or
committee by the company to investigate the demand and report back to the board.
Demand (notice) to company:
A person can deliver a notice to a company demanding that it institute legal
proceedings or take other steps to protect the company’s legal interests.
A demand may be delivered by
 a shareholder/person entitled to be registered as a shareholder
 a director
 a prescribed officer
a registered trade union that represents employees, or another representative of
the
 employees
any person who is granted leave by the court to do so
The company may apply to court within 15 days of receipt of a demand to have the
demand set aside if it is frivolous, vexatious or without merit. If the demand is not set
aside, the company must appoint an independent person or committee to investigate
the demand. This person or committee must report to the board. Within 60 days (or
as long a court permits), action must be instituted or a refusal notice must be served
on the person who made the demand.
Personal derivative action
The person who made the demand may apply to the court for leave to continue with
proceedings in the name of or on behalf of the company if
 the company failed to take steps as required;
 the company appointed a person or committee that is not independent;
 the company accepted an inadequate report;
the company acted in a way inconsistent with the reasonable report of an
independent,
impartial investigator; or

the company has served a refusal notice.
What remedies are available to shareholders in order to protect their own rights?
Relief from oppressive or prejudicial conduct (section 163 of the Companies Act),
Dissenting shareholders’ appraisal rights (section 164 of the Companies Act), and
Application in terms of section 161 - declaration of rights.
Discuss the remedy of relief from oppressive or prejudicial conduct in terms of
section 163 of the Companies Act.
In terms of section 163 of the Companies Act, a shareholder or a director may bring
an application for the court to provide relief against oppressive or unfairly prejudicial
conduct by the company.
2
The court enjoys a wide discretion to provide such relief. The order may include
 restraining the conduct complained of;
 appointing a liquidator if the company appears to be insolvent;
placing the company under supervision and commencing business rescue
proceedings;

regulating the company affairs by amending the Memorandum of Incorporation or
amending a shareholders’ agreement;

 directing an issue or exchange of shares;
appointing directors in place of, or in addition to, all directors in office, or
declaring any person delinquent or under probation;

directing the company or any other person to repay the consideration that the
securities holder paid for shares with or without conditions;

 varying or setting aside a transaction/contract;
requiring the company to produce financial statements for the court or an
interested person;

ordering
payment of compensation to an aggrieved person;

 directing rectification of the registers or records of the company; or
an order for the trial of any issue as determined by the court.
What procedure must be followed in order to implement a dissenting shareholder’s
appraisal right in terms of section 164 of the Companies Act?
Dissenting shareholders may, before the meeting, lodge a written objection to the
resolution of the company.
Within ten business days after adoption of the resolution, the company must send a
notice that the resolution has been adopted to each security holder who filed an
objection and has not withdrawn the objection, or who voted in favour of the
resolution. The shareholder may then demand payment of a fair value for the
shares held by him or her.
The demand must be sent within 20 business days after receiving notice from the
company that the resolution has been adopted, or, if no notice is received, within 20
business days after learning that the resolution has been adopted. The company
must then, within five business days, make a written offer to pay an amount
considered by the company’s directors to be a fair value, accompanied by a
statement showing how the value was determined.
The offers made by the company to dissenting shareholders must all be on the same
terms. The offer must be accepted within 30 business days after it was made.
The company must pay the agreed amount within ten business days after the
shareholder accepted the offer and tendered the share certificates or transferred the
shares to the company or the company’s transfer agent. If the company fails to make
an offer, or the offer is considered to be inadequate, the shareholder may apply to
court to determine a fair value and for an order requiring the company to pay the
shareholder that fair value.
If compliance with a court order would result in a company being unable to pay its
debts as they fall due and are payable for the next 12 months, the company may
apply to court for an order varying its obligations.
Which body is responsible for enforcement of the Companies Act?
The Companies and Intellectual Property Commission.
3
Name four alternatives envisaged in the Companies Act for addressing suspected
contraventions of the Companies Act.
 Refer the dispute to the court.
Refer the dispute for resolution by mediation, conciliation or arbitration to either
the

Companies and Intellectual Property Commission, the Companies Tribunal, or to
an accredited entity.
What are the functions of the Companies and Intellectual Property Commission?
Once it has received a complaint regarding an alleged contravention of the
Companies Act 71 of 2008, the Commission must decide whether or not to issue a
compliance notice in respect of that complaint. It will decide whether or not to issue
such a notice after conducting an investigation into the complaint. However, the
Commission has other objects and functions, including promoting the use of
alternative dispute resolution (“ADR”) procedures by companies in resolving
internal disputes, promoting the reliability of financial statements, establishing a
register of companies, advising the Minister Finance on company law matters,
issuing guidance to the public regarding the 2008 Act, and carrying out research
relevant to the Companies Act 71 of 2008.
How may the Companies and Intellectual Property Commission respond to a
complaint that has been lodged?
It can refuse to investigate because the complaint is frivolous or vexatious (except
 for ministerial complaints);
 Refer the complaint to the Companies Tribunal or other ADR agent or
Direct an investigator to investigate the complaint.
 Excuse any person as a respondent;
Refer the complaint to the Companies Tribunal, or take-over regulation panel (as
 the case may be)
Issue a notice of non-referral, with a statement advising the complainant of any
 rights he or she may have to seek a remedy in court;
Can purpose that the person meets with the Companies Tribunal or CIPC to
 resolve the matter by consent order
 Commence proceedings in court in the name of the complainant or
Report the matter to the National Prosecuting Authority if the person committed an
 offence under other legislation or
It may issue a compliance notice.
What are the functions of the Companies Tribunal?
It serves as a forum for voluntary ADR in any matter arising under the Companies
Act and carries out reviews of administrative decisions made by the Commission.
The Companies Act also allows any person who has an interest in the name of a company
to apply to the Companies Tribunal for it to determine whether or not the name is in
accordance with the requirements of the Companies Act.
What is alternative dispute resolution?
It is an alternative dispute resolution process than the normal court process.
Disputes are resolved through mediation/ conciliation and arbitration. This procedure
must be agreed upon by the parties, and the less formal process may exclude the
necessity for legal representation.
4
LEARNING UNIT 15 CLOSE CORPORATIONS
QUESTIONS AND ACTIVITIES
Veronica and Precious intend starting a business together. They are unsure
about what type of enterprise would be the most suitable for their
business.
1.1
Explain the advantages attached to legal personality to them;
(5)
The business is a separate legal entity distinct from its members. It can enter
into contracts in its own name and sue and be sued. Its members are not
liable for its debts and enjoy limited liability.
1.2 Explain whether it is possible to register a new close corporation.
(2)
It is no longer possible to register new close corporations.
Existing companies are prohibited from converting into close corporations.
Already existent close corporations are permitted to continue and the
Close Corporations Act 69 of 1984 is not repealed.
Provision is however made for close corporations to convert into
companies.
1.3
Is it possible to convert a close corporation into a company?
(3)
Yes, it is possible in terms of schedule 2 to the Companies Act
2
Briefly explain whether the doctrine of constructive notice applies to
close corporations.
(3)
No. Third parties dealing with close corporations are not deemed to
know the contents of the registration documents of a company. All
members are agents of the close corporation and unless one of the
exceptions apply in the circumstances members can conclude binding
contracts on behalf of the close corporation, whether or not they fall in
the scope of the close corporation’s business (section 54 of the Close
Corporations Act)
Briefly define the following terms or concepts:
1 Association agreement
Optional agreement concluded between members in a close corporation to
regulate the internal affairs in the business.
3.2
Member’s interest
Member’s interest is an incorporeal, moveable thing that is transferrable in
the way prescribed by the Close Corporations Act.
3.3
Founding statement
Form CK 1) The only constitutive document required for registration of a close
corporation
3.4
Contribution
A contribution must be made by each member (It can consist of money, a thing or
services contributing to the business of the close corporation.)
1
Set out the requirements that must be adhered to in terms of the Close
Corporations Act for a close corporation to make a payment to its
members in their capacities as members.
(3)
Section 51 of the Close Corporations Act applies to payments made to
members in their capacity as members. Solvency and liquidity must be
maintained. Written consent of all the members is required.
Three friends, Sello, Khomiso and Bonang run a catering business, Mnandi
CC, together. They have decided that it would be beneficial to involve
more people in the running of the business. Indicate whether or not the
following persons can become a member of a close corporation. Also in
each case note what (if any) further requirements need to be adhered
to in order for them to become a member.
5.1
A minor.
(2)
Yes. Must be supported by a parent/ guardian.
5.2
A close corporation .
(2)
No. Only natural persons may become members of close corporations.
5.3
An unrehabilitated insolvent .
(2)
Yes. Requires support from a trustee/ liquidator
5.4
A person under legal disability .
(2)
Yes, but requires support from his/ her curator or the court
5.5
A trustee of a trust.
(2)
Yes. A natural or juristic person in the capacity of a trustee of a testamentary
or inter vivos trust may become a member of a close corporation subject to
conditions set out in the Close Corporations Act. However, the restriction in
membership to the maximum of ten members still applies.
Johan, Aubrey and Barbara are the members of ProperT CC. The main
business of the corporation is buying and selling of immovable
property. The close corporation wishes to buy a certain property for
development and resale. Barbara, being fully aware of the fact that the
close corporation wishes to purchase the property, buys it in her
personal capacity for R2 million. She then sells it to the close
corporation for R3 million.
6.1 What duty could Barbara have breached under the circumstances and
what does this duty entail? (Indicate to whom the duty is owed and the
scope of this duty)
(6)
The fiduciary duty. This duty is owed by members of the close corporation to
the close corporation. The Close Corporations Act provides that a member
should
act honestly and in good faith, and, in particular,
o exercise powers in order to manage or represent the corporation in the
interest of the corporation
o not act without or exceed such powers
avoid a conflict of interest between his or her own interests and those of the
close corporation, and, in particular,
2
o not derive any personal financial gain to which he or she is not entitled by
virtue of being a member of the close corporation
o disclose any material interest in a transaction to the other members of a
close corporation as soon as possible
o not compete with the close corporation’s business activities in any way.
6.2
What effect would the breach of this duty have on the validity of the
agreement of sale of the property? (2)The contract will be voidable at the
option of the close corporation. Application can, however, be made to the
court to declare the contract as binding on the parties despite the failure to
disclose.
6.3 What possible legal action/s can possibly be instituted against Barbara
and who should institute the action/s?
(2)
In the event that the fiduciary duties are breached, a member may be held
personally liable for any loss suffered by the corporation or for debts incurred
as a result of such a transaction (s 42(3)). The member would, in such event,
have to repay any profit made by him or her unless all the members approve
this conduct in writing. Any of the other members can institute the action.
TRUE OR FALSE
Indicate whether the following statements are true or false. Please
substantiate each of your answers.
If one of the members of a close corporation’s estate is sequestrated,
the close corporation terminates automatically.
(2)
False. A close corporation, like a company, has legal personality. One of the
benefits is that a close corporation’s estate is separate from the estates of the
composing members.
7.1
7.2 The Companies Act 71 of 2008 makes it impossible for new members
to join a close corporation.
(2)
False. In terms of the Companies Act, it is no longer possible for new close
corporations to be incorporated, but it is possible for new members to join
existing close corporations. Member’s interest can be acquired by
acquiring member’s interest from existing members
making a contribution to the close corporation
7.3 If a member of a close corporation fails to make his initial contribution to
the close corporation, the only resulting disadvantage for him is that
he will not be allowed to vote.
(2)
False. A member who fails to make his or her agreed upon contribution can
be held personally liable for the debts of the close corporation.
QUESTION 8
Indicate the CORRECT statement:
An association agreement is not a prerequisite for the formation and running
of a close corporation.
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The manner in which an insolvent member’s estate may be disposed of can
be regulated in an association agreement.
The manner in which members will settle disputes may not be regulated in the
association agreement.
The procedure to be followed at meetings may not be regulated in the
association agreement.
(2)
QUESTION 9
Choose the CORRECT statement:
If a member of a close corporation fails to act with the required degree of care
and skill…
He or she will be liable for all the corporation’s debts.
He or she will be liable even if the corporation did not incur a loss.
He or she will be liable for the loss caused by his or her actions.
He or she will incur liability for negligent acts even if all the other
members had approved in writing.
(2)
QUESTION 10
Jo is a member of Best Bikes CC. The business of the close corporation is to
manufacture motorcycles. The association agreement provides that Jo may
not enter into contracts on behalf of the close corporation where the value of
the contract exceeds R10 000. Jo, a keen sportsman, concludes a contract on
behalf of the close corporation with Dina for the purchase of soccer balls to
the value of R12 000.
Indicate the CORRECT statement:
The contract will bind Best Bikes CC, because Jo is a member of the close
corporation and Dina was unaware of the restriction on his authority.
The contract will not bind Best Bikes CC, because the contract falls outside
the close corporation’s main business.
The contract will bind Best Bikes CC due to the operation of the Turquand
rule.
The contract will not bind Best Bikes CC, because Jo’s authority to bind
the close corporation is limited by the association agreement.
(2)
QUESTION 11
Indicate the CORRECT statement:
There is a division between the providers of capital and the management of a
close corporation.
Under certain circumstances a close corporation may repay capital amounts
to its members.
The aim of a close corporation must be to generate a profit.
(4)
A close corporation can have shares and share capital.
(2)
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READ FENI V GXOTHIWE AND WESTONDALE FARMING CC CASE NO:
2369/2013 (Reportable) AND THEN ANSWER THE FOLLOWING
QUESTIONS:
Please note that if you are unable to find the case yourself, it is
available under Additional Resources on myUnisa.
1. Who was the presiding officer in this matter?
Plasket J
What kind of business is the 2nd respondent in this
matter? A close corporation
Was the member’s interest in this business awarded in terms of the
members’ contributions? (para [10])
No. ‘There was no monetary and/or resource injection that determined the
percentage allocation
in the business on the part of the first respondent. I provided the necessary
resources for the second respondent to get operational.’
In terms of which two sections of legislation did the applicant apply for
relief? (refer to para [2])
Section 36 and 49 of the Close Corporations Act.
5. What orders is the applicant seeking? (paras [2], [21] – [22])
Termination of the first respondent’s membership, an order determining
the method for valuation of the member’s interest and an order directing
him to sell the interest to her.
Briefly summarise the facts that are relevant to the applicant’s claim
that she had been prejudiced unfairly by the first respondent.
The first respondent gave 500 pregnant ewes to his brother and eight rams.
He refused to listen to the applicant. He also refused to service the loans from
Uvimba FinanceHe appeared to be unconcerned that the applicant’s property
had been encumbered as security for the loans and that she was
consequently at risk. In the meantime, the interest on the loans increased. he
also failed to pay the telephone and electricity accounts with the result that
these services were terminated by the respective providers. the first
respondent ejected the applicant from Westondale Farm. Not surprisingly, the
applicant was of the view that by this stage her and the first respondent’s
relationship had broken down completely. Great animosity existed between
them. She had to be accompanied by the police to retrieve personal
belongings from the farm. In January 2013, a property owned by the applicant
was attached and sold in execution in order to repay part of the loan owed by
Westondale Farming to Uvimba Finance. The first respondent continues to
farm and he keeps the proceeds of the farming operation for himself. In
addition, he has, from August 2009 to April 2013, made unauthorised
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withdrawals from Westondale Farming’s account in excess of R1 600 000. He
has refused to account to the applicant for his withdrawals of cash. The first
respondent made sporadic payments of money into the applicant’s account in
respect of three motor vehicles used by Westondale Farming but purchased
by the applicant. Payments for the vehicles were, in turn, deducted from the
applicant’s account. As a result of the sporadic nature of the payments, one of
the vehicles was re-possessed and the applicant had to pay R16 684 in order
to regain possession of it. However, he purchased a further three vehicles
with funds of Westondale Farming. He gave these vehicles to a nephew, the
brother of his lover and a second nephew.
How did the court in De Franca v Exhaust Pro CC (De Franca Intervening)
explain when section 36 of the Close Corporations Act would apply and
when section 49 would apply (para [25]).[25]
In De Franca v Exhaust Pro CC (De Franca Intervening)7 Nepgen J dealt
with both s 49 and s 36 and their respective requirements in the context of a
breakdown in the relationship between the two members of a close
corporation. He said:
‘Section 49 deals with the situation where conduct (an act or an omission) of the
close corporation or of one or more of its members, or where the manner in which
the affairs of the close corporation are being conducted, is unfairly prejudicial, unjust
or inequitable to a member of the close corporation. When this occurs such member
may make application to the Court for an order that will have the effect of “settling the
dispute” (s 252 of Act 61 of 1973 provides for an order having the effect of “bringing
to an end the matters complained of”) . . . The Court has a wide discretion with
regard to the order that it decides to make to bring about the required result . . . Such
order can, however, only be made “if the Court considers it just and equitable” to do
so. Section 36 of the Act also deals with an application to Court by a member of a
close corporation, but such member is not required to establish conduct of the nature
referred to above when discussing s 49 of the Act, namely conduct affecting him. It is
the carrying on of the business of the close corporation that must be affected, either
by the existence of circumstances envisaged by ss (1)(a) or by conduct as described
in ss (1)(b) and (1)(c).
Subsection (1)(d), however, gives wide and virtually unlimited scope for the
application of s 36 of the Act, the only limitation being the “just and equitable”
requirement. The order that a Court can make in terms of s 36(1) of the Act is
circumscribed, namely an order that a member shall cease to be a member of the
close corporation. Once a Court decides that an order for such cessation of
membership should be made, it has a discretion to make further
orders as referred to in s 36(2) of the Act. While a Court could, applying the
provisions of s 49 of the Act, make an order compelling one member to purchase the
interest of another, which would have the effect of such member's membership in the
close corporation ceasing, that which would have to be established before this is
done is quite different to what would have to be established under s 36 of the Act.’
What section of the legislation does the court decide is more appropriate in
these specific circumstances, and why? (paras [26] and further)
On the facts of this matter either s 36 or s 49 could be applied. That said, it
seems to me that s 49 is the most apposite section to apply: while the focus of
s 36 is on the effect of a member’s capability or conduct on the business of
the close corporation, the focus of s 49 is on the effect of conduct of either the
close corporation or a member or members on another member. The
applicant’s complaint in this matter is, ultimately, that the first respondent’s
6
conduct – his acts and omissions – are unfairly prejudicial, unjust or
inequitable to her. I shall, accordingly, deal with the matter in terms of s 49,
although I am of the view that the same result would follow from the
application of s 36 and that the cases dealing with s 36 are, by and large,
applicable to s 49 as well.
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