NOTES

Part 1: Introductory Topics ..................................................................................................10

Societal Context of the Corporation ........................................................................................ 10
Legal Status and Juristic Personality ................................................................................10
Why Incorporate a Business? ................................................................................................. 10
What are the Benefits? .......................................................................................................... 10
What to Consider When Incorporating? .................................................................................. 10
Fundamental Concepts ...................................................................................................11
Legal Status ........................................................................................................................... 11
Juristic Personality ................................................................................................................. 11
Principles of Agency ............................................................................................................... 11
Fiduciary Law ......................................................................................................................... 11
Juristic Persons ...............................................................................................................12
Development and History....................................................................................................... 12
Juristic Person.................................................................................................................12
Enabling Legislation ............................................................................................................... 12
Common Law Juristic Persons ................................................................................................. 12
Company as a Juristic Person .................................................................................................. 13
Features of a Separate Juristic Personality .............................................................................. 13
Principles of Agency ........................................................................................................14
Nature of Commercial Agency .........................................................................................15
Implied Terms of the Contract of Agency .........................................................................15
Duties of the Agent ................................................................................................................ 15
Duties of the Principal ............................................................................................................ 15
The Agency Relationship .................................................................................................16
Commercial Agency ........................................................................................................16
Commercial Advantages of Empowered Agents ...................................................................... 16
Authority ........................................................................................................................16
How does an Agent Acquire Authority? .................................................................................. 17
....................................................................................................18
.............................................................................................. 18
Fiduciary Law .................................................................................................................20
What is a Fiduciary? ............................................................................................................... 20
..................................................................................... 20
Establishing a Fiduciary Relationship ...................................................................................... 21
Examples of Fiduciary Duties .................................................................................................. 21

2
 Examples of Fiduciaries .......................................................................................................... 22
Principles of Delict ..........................................................................................................22
.......................................................................................................... 22
...................................................................................................... 22
Part 2: Unincorporated Firms ..........................................................................................25
The Sole Proprietor .........................................................................................................25
The Partnership ..............................................................................................................25
Nature of a Partnership .......................................................................................................... 25
Requirements for a Valid Partnership Agreement ................................................................... 25
Definition of a Partnership: Elements ..................................................................................... 26
Legal Nature of a Partnership ................................................................................................. 27
The Partnership Fund ......................................................................................................27
Rights and Duties of Partners ..........................................................................................28
Rights of the Partners............................................................................................................. 28
Duties of the Partners ............................................................................................................ 28
Rights and Duties of Partners ................................................................................................. 29
Extraordinary Partnerships .............................................................................................30
Incorporated Partnerships ..............................................................................................30
Liability to Third Parties ..................................................................................................31
Incidence ............................................................................................................................... 31
Limitations............................................................................................................................. 31
Liability to Third Parties: Authority..................................................................................31
Implied Authority................................................................................................................... 32
Liability to Third Parties: Variations ................................................................................32
Criminal Liability .................................................................................................................... 32
Civil Proceedings .................................................................................................................... 33
Dissolution of the Partnership .........................................................................................33
Causes of Dissolution ............................................................................................................. 33
Consequences of Dissolution .................................................................................................. 34
Class Exercise: Partnerships ............................................................................................35
Spot Test 1 Answers ........................................................................................................38
Business Trusts ...............................................................................................................38
Legal Nature of a Trust ........................................................................................................... 38
Parties to a Trust.................................................................................................................... 39
Types of Trusts....................................................................................................................... 39

3
 Creation of a Trust ................................................................................................................. 39
Duties of the Trustee.............................................................................................................. 40
Legal Position of the Beneficiary, Generally ............................................................................ 40
The Business Trust ..........................................................................................................40
Part 3: Pre-Incorporation Matters ...................................................................................42
The Promoter ........................................................................................................................ 42
Pre-Incorporation Contracts ............................................................................................42
Pre-Incorporation Contracts: Options ..................................................................................... 43
Section 21: Requirements................................................................................................43
Liability of Promoter Under Section 21 ................................................................................... 44
Entitlements of Promoter Under Section 21 ............................................................................ 44
Class Exercise 2 ...............................................................................................................44
Part 4: Regulatory framework.........................................................................................45
Overview ............................................................................................................................... 45
Defining Corporate Governance ......................................................................................46
Defining Corporate Governance ............................................................................................. 46
Good Corporate Governance is Not an End in Itself ................................................................. 47
................................................................................................47
Pluralist Approach.................................................................................................................. 47
Enlightened Shareholder Value Approach ............................................................................... 47
Relevant Sources of Law .................................................................................................48
The Companies Act 2008: Underlying Principles ...............................................................48
The Companies Act 2008: Structure .................................................................................49
The King Codes: Introduction ..........................................................................................49
Best Principles (and Practices) ................................................................................................ 49
............................................................................................. 50
King IV............................................................................................................................50
The Financial Markets Act ...............................................................................................51
Objects of Act ........................................................................................................................ 51
Offences Under Market Abuse (Chapter X) [penalties: s 109]................................................... 51
1. Insider Trading ........................................................................................................51
What is insider trading? ......................................................................................................... 51
......................................................................52
..........................................................................................52
Liability for Insider Trading ..................................................................................................... 53

4
Market Manipulation .....................................................................................................53
Rationale of Regulating Market Manipulation......................................................................... 53
2. Prohibited Trading Practices Under the FMA ............................................................53
Deemed Prohibited Practices ................................................................................................. 54
Defences Against Market Manipulation .................................................................................. 55
3. False, Misleading or Deceptive Statements, Promises and Forecasts ........................55
Auditor Liability ..............................................................................................................55
Auditing Profession Act .......................................................................................................... 56
Auditor Liability for Negligence .......................................................................................56
Class Exercise 3 ...............................................................................................................57
Regulatory Framework ........................................................................................................... 57
Part 5: Categories & Incorporation of Companies ............................................................59
Categories of Companies ........................................................................................................ 59
Process of Incorporation ........................................................................................................ 59
Types of Companies ........................................................................................................59
- .................................................. 59
......................................................... 60
Share Block Control Act 59 of 1980 ......................................................................................... 60
Profit Companies ............................................................................................................60
Non-Profit Companies .....................................................................................................60
Profit Companies (4) .......................................................................................................61
1. Public Companies ............................................................................................................... 61
2. Private Companies ............................................................................................................. 61
3. Personal Liability Company ....................................................................................... 62
4. State-Owned Companies .................................................................................................... 62
Process of Incorporation .................................................................................................63
Documentation: Notice of Incorporation & Memorandum of Incorporation ............................ 63
Company Names .................................................................................................................... 63
Who May Incorporate? .......................................................................................................... 63
Submission to CIPC................................................................................................................. 63
Consideration of Application by the CIPC ................................................................................ 63
Company Names.............................................................................................................64
Non-Compliance with Regards to Company Names ................................................................. 64
Reservation of Company Name: ............................................................................................. 65
Part 6: Internal Relations ................................................................................................66

5
 Internal Governance .............................................................................................................. 66
Organs of a Company ............................................................................................................. 66
The Memorandum of Incorporation ................................................................................67
Amendments of the MOI........................................................................................................ 67
Rules of the Board of Directors ........................................................................................69
..............................................................................................69
....................................................................................... 69
......................................................................................... 69
Part 7: Validity of Corporate Actions ...............................................................................70
MOI Restrictions on Corporate Capacity ..........................................................................71
Ratification of Contravention ................................................................................................. 73
Sharehol .............................................................. 73
........................................................................................... 74
Validity of Ultra Vires Acts: Summary ..................................................................................... 74
Restrictions on Authority ....................................................................................................... 74
Statutory Constructive Notice ................................................................................................ 75
Statutory Turquand Rule ........................................................................................................ 75
Part 8: Company Organs: Directors and Shareholders ......................................................76
Internal Relations .................................................................................................................. 76
Internal Governance .......................................................................................................76
Separation of Ownership and Control ..................................................................................... 76
Overview ............................................................................................................................... 77
The Board of Directors ....................................................................................................77
Role and function................................................................................................................... 77
Rules of the Board of Directors ............................................................................................... 78
The Board of Directors (Continued) ........................................................................................ 78
Removing Directors................................................................................................................ 79
Number of Directors Needed.................................................................................................. 80
Remuneration of Directors ..................................................................................................... 80
Board Meetings ..............................................................................................................81
Notice of Meetings................................................................................................................. 81
Decision-Making .................................................................................................................... 81
Shareholders ..................................................................................................................82
Nature of Shareholding: Rights .......................................................................................83
Nature of Shareholding: Duties .......................................................................................83

6
 ..................................................................................................83
.......................................................................................... 85
........................................................................................ 85
Decision- ........................................................................... 86
............................................................................ 86
Minority Protection the Act Protects the Minority................................................................ 87
Part 9: Board Accountability and Corporate Abuses .........................................................89
Introduction: Keeping the Board in Check ............................................................................... 89
Qualification Requirements for Directors etc. ......................................................................... 89
Director Duties (s76) .......................................................................................................90
............................................................................................... 91
................................................................................................. 91
Reckless Trading Prohibited ................................................................................................... 92
Personal Financial Interests .................................................................................... 92
...........................................................................................................93
...............................................94
Specific Remedies for Shareholders Against Directors ............................................................. 95
........................................................................96
Restrictions to Indemnifying Directors .................................................................................... 96
Company Records ...........................................................................................................97
Access to Information ............................................................................................................ 97
The Company Secretary ..................................................................................................97
Duties of a Company Secretary ............................................................................................... 98
Financial Reporting/Accounting Records .........................................................................98
Company Offences with Regards to Accounting Records ......................................................... 98
Individual Offences with Regards to Accounting Records ........................................................ 99
Audit and Review of Accounting Records.........................................................................99
Public Interest Score Calculation........................................................................................... 100
The Auditor .................................................................................................................. 100
Rotation Requirements ........................................................................................................ 100
Rights of the Auditor ............................................................................................................ 101
Audit Committee .......................................................................................................... 101
Duties of the Audit Committee ............................................................................................. 102
Separate Legal Personality............................................................................................ 102
The Corporate Veil ........................................................................................................ 102

7
 Piercing the Corporate Veil................................................................................................... 103
Cape Pacific Principals (Modified by Hulse-Reutter) .............................................................. 104
S v De Jager.......................................................................................................................... 105
Subsidiaries, Related Persons and Control ..................................................................... 105
Establishing Control ............................................................................................................. 105
Exercisable Voting Rights ..................................................................................................... 106
Part 10: Capital Regulation ........................................................................................... 107
Capitalisation: Introduction .................................................................................................. 107
Shares ................................................................................................................................. 107
Shareholders ....................................................................................................................... 108
Authorisation of Shares ........................................................................................................ 108
Issuing of Shares .................................................................................................................. 109
Subscription of Shares .......................................................................................................... 109
Options for Subscription of Securities ................................................................................... 111
Securities Other Than Shares ................................................................................................ 111
Registration and Transfer of Securities .......................................................................... 111
Securities Register................................................................................................................ 111
Dealing in Shares ................................................................................................................. 112
Raising Share Capital .................................................................................................... 112
Regulating Offers to the Public ............................................................................................. 113
Definitions ........................................................................................................................... 113
................................................................................. 113
Section 96 Exceptions.................................................................................................... 114
The Offer ............................................................................................................................. 115
The Prospectus .................................................................................................................... 116
The Solvency and Liquidity Test ..................................................................................... 116
Requirements for the Solvency and Liquidity Test ................................................................. 117
Distributions ................................................................................................................. 117
Requirements of a Distribution ............................................................................................ 118
Acquisition by Company of its Own Shares ........................................................................... 118
............................................... 119
Financial Assistance ...................................................................................................... 120
......................................................................................... 120
Provision of Financial Assistance .......................................................................................... 120
The Impoverishment Test ..................................................................................................... 120

8
 Financial Assistance for the Subscription of Shares ............................................................... 121
Loans and Other Financial Assistance to Directors ................................................................. 121
Part 11: Fundamental Transactions ............................................................................... 122
What is a Fundamental Transaction? .................................................................................... 122
Regulation of Fundamental Transactions .............................................................................. 122
Notice Requirements for all Fundamental Transactions......................................................... 122
Disposals s112 .............................................................................................................. 123
Mergers and Amalgamations s113 ................................................................................ 123
Application of Solvency and Liquidity Test under Mergers and Amalgamations ..................... 123
Schemes of Arrangement s114 ...................................................................................... 123
Setting Aside the Special Resolution (s115 Remedies) .................................................... 125
General Requirements for Approval s115 ...................................................................... 125
Takeover Regulation Panel ................................................................................................... 126
Class Exercise 5: Corporate Finance ............................................................................... 139

9
Societal Context of the Corporation

- The company has become an organisation whose significance almost rivals

that of the state.
- It is the primary institution for organising and employing much of our
capital and labour resources and the primary supplier of goods and
services in our community

Legal Status and Juristic Personality

Why Incorporate a Business?

- You acquire certain rights.

- Creates two distinct separate persons; it becomes a separate legal entity.
1. Can institute legal proceedings in its own name
2. Perpetual succession (exist until dissolved by liquidation or
distribution)

What are the Benefits?

- The company and the directors are separate

1. The company can be sued in its own name
- You have the benefits of perpetual succession (company continues to exist
until it is dissolved)

What to Consider When Incorporating?

- Whether the owners understand the separate entities and are not abusing the
fact that the corporation and its owners are separate entities.
- Size of business (as defined by the Companies Act of 2008)
1. S/M/L
2. Group of companies
- Tax implications
- Management & ownership
- Number of shareholders
- Process of incorporation

10
Fundamental Concepts
Legal Status

- 7 - 18 years old
1. If assisted, then the contract is valid and binding
If not assisted it is a limping contract, making it voidable
- 18+ (unassisted)

Juristic Personality

- A company can enter a contract by an agent and/or a representative.

1. Pre-incorporation contracts entered into by an agent become
valid and binding post-incorporation.

Principles of Agency

- Elements of trust (fiduciary relationship)

- Because a juristic person has no physical body/presence it necessarily
relies on human agents to do its bidding; hence an agent is needed.
1. Agency is an important consideration in determining whether the
principal (e.g. the juristic person) is liable on a contract entered into by
the agent with a third party.

Fiduciary Law

- E.g. Agency: when an agent acts on behalf of another person, the latter is
often left vulnerable to abuse.
1. The law must therefore protect the vulnerable party.
A fiduciary is a person (or a business e.g. bank / stock
brokerage) who has the power and obligation to act for
another (often called the beneficiary) under circumstances
which require total trust, good faith and honesty.

standard
o
o The standard is dependent on the nature of the
relationship
- Examples of fiduciaries include: partners in an unincorporated partnership,
trustees of a trust, directors of a company, and members of a close
corporation.

11
Juristic Persons
Development and History

- Corporation derived from Latin word corpus

- Roman Law & the middle ages
- Later developments in England:
1. The British Bubble Act of 1720
2. Joint Stock Companies Act of 1844
3. Limited Liability Act of 1855
4. Salomon v. Salomon & Co
5. United States generally enabling legislation embraced
Example of a general enabling legislation or statute would be
the Companies Act of 1862 and more recently the Companies
Act of 2008

Juristic Person
A juristic person is a collection of many individuals united into one body, having
perpetual succession under an artificial form, and vested, by policy of the law,
with the capacity of acting as an individual.

Juristic persons can:

- Take and grant property
- Contract obligations
o Can contract with its members.
- Sue and be sued
o Sue in its incorporated name.
- Exercise political rights

Enabling Legislation

Legislation that makes it legal for business entities to trade/legalizes business

entities.
- Under Roman Law, you needed a Charter which granted legal capacity to
business entities.

Common Law Juristic Persons

Legislation is passed by parliament whereas common law is not an Act common

law is rules and principles derived from case law.
- A common law juristic person is therefore not incorporated in terms of
enabling legislation they are juristic persons recognized in terms of
common law features.
o This is only permitted in the case of NPOs.
o These entities do not need legislation to be legalized.

12
Company as a Juristic Person

A company is recognised as a juristic person from the date and time that the
incorporation of a company is registered in terms of the Companies Act (s19).

The company:
- Is a juristic person, which exists continuously until its name is removed
from the companies register in accordance with this Act;
- Has all of the legal powers and capacity of an individual, except to the
extent that:
o The juristic person is incapable of exercising any such power, or
having any such capacity; or
o T Memorandum of Incorporation provides otherwise

Common Law Juristic Person:

A common law juristic person can be recognised despite not being registered
in terms of a generally enabling statute or created in terms of a statute
- Common law recognizes juristic persons even when they are not registered.
These entities must act as juristic persons for them to be recognized.
o Hence, the entity must act like a juristic person.
- Then why register at all?
o The common law will not give you that status as a legal person
when this entity is doing business, i.e. pursing profit.
Then it is required to register.
This is due to tax. The law seeks to protect ordinary
individuals who are going to interact with you. When you
pursue profits it is likely that you will put other people at a
disadvantage.
- You need to register so that there are duties assigned to the entity in order
to protect the individuals.
o Basically, to protect the people who interact with you, and also to
collect tax.
- Important proviso that applies to common law is that profit cannot be
distributed to members.

Statutory Juristic Persons Created by Legislation/Statute:

1. Specific legislation creates the juristic person:
a. (Eskom in terms of the electricity act 42 of 1922)
2. Registration in terms of the general enabling statute:
a. (Close corporations Act of 1984 - no new registrations)
b. (Companies Act 71 of 2008)

Features of a Separate Juristic Personality

- Limited liability of members

o Limited to the amount that the shareholder invests.
- Assets are the exclusive property of the company.
o Dadoo Ltd v Krugersdorp Municipal Council 1920 AD 530

13
 o Apartheid legislation prevented Indian persons from owning land. Mr
Dadoo and Mr Dinda set up Dadoo Ltd , which owned property in the
town.
The court said company owned land not the two Indian men. So
it was allowed.
o .
- The company must seek redress where a wrong was committed against it;
hence it becomes the defendant or plaintiff; not its members. (Foss v
Harbottle: the )
- A company can contract with its members.
o i.e. In the case of employment contracts.
- A company can acquire rights and duties separate from its members.
- The owners/shareholders have no automatic right to manage.
- Profits belong to the company.

Example: Salomon v A Salomon & Co Ltd

Mr. Salomon had a sole proprietorship business and was transitioning to a company
(probably because of the benefits that come with a being a company.) He sells his
business to another company. When he sells the business, he also becomes the
majority shareholder, lender and director of Salomon & Co Ltd. The company failed
and was then liquidated. On liquidation, there were several creditors who were owed
money, including Mr. Salomon. (Who had a secured claim) Other creditors, and the
liquidator, said that this was unfair and that Salomon should not benefit from the
liquidation and should not treat him as a separate entity from his company.

The court resolved that there was a veil and the liquidator was out of
king behind the veil
- Corporate veil is the separation of the actions of the business from the
actions of the shareholders.

Principles of Agency
Example: If I sell an iPad through an agent and my agent sold it for R100
be happy and would want some more money. But this all depends on the authority
that was given to the agent.
- ?
o The validity of the contract of sale is dependent on whether the
agent is authorized to act. This is an element of trust.

Example: With regards to an estate agent, the estate agent has no power at all.
People bring offers to purchase which the seller must accept.

Example: Signing a purchase document as an agent where the signature line has

acting as an agent).

14
Nature of Commercial Agency
Agency is a contract in terms of which one person (the agent) is authorised and
usually required by another (the principal) to contract or to negotiate a contract
on the behalf, with a third person the 3rd party to the agency contract.
- The principal and agent enter into an agency contract.
o This contract creates obligations between the principle (P) and the
agent (A).
The agent then concludes another contract with 3rd Party.
- Therefore:
o There is a contract between the principal and the agent (usually a
contract of mandate)
o The agent can be empowered or unempowered - here authority is
important.
E.g. of an unempowered agent would be an estate agent.

Implied Terms of the Contract of Agency

Duties of the Agent

- To perform the mandate

- To be honest and show good faith
o No secret profits
o No conflict of interests
o No delegation of authority
o No disclosure of information
- To exercise due care
o This is not fiduciary.
Negligence is independent of fiduciary duties.
If there is a claim of negligence, this would relate to the duty of
care.
- To act in accordance with the instructions.
- To allow inspection of books and to render an account to the principal.

Duties of the Principal

- To pay the agent the agreed remuneration if the mandate is substantially

performed.
- To reimburse the agent for expenses properly incurred.

15
 - To indemnify (to compensate for harms or losses) the agent for all losses he
or she has suffered as a result of the execution of the mandate.

The Agency Relationship

Requirements for a Principal:
The principal must:
- Be in existence
- Have contractual capacity (to enter into 3rd contract)

The Requirements for an Agent:

The agent must:
- Have (at least) limited contractual capacity
o not necessary that agent has full contractual capacity when
the principal has contractual capacity. I.e. A minor could act as an
agent.
- Have authority to perform
- Make it clear to the 3rd party that she/he acts for a principal, but they
need not disclose the name.
o Remember that the agent may incur liability on the contract where
s/he fails to disclose the existence of a principal.

Commercial Agency
Commercial Advantages of Empowered Agents

- Do not need to enter into a contract personally.

- May authorise a representative to do so.
- Necessary for commercial juristic entities to function.

Some Issues That may Arise:

- Does the agent have authority to conclude the contract?
- What is the position if the agent acts without authority?
- What are the legal consequences where the agent does not disclose that he
is an agent?

Authority
If the agent acted with authority, the parties to the contract will be the principal
and the third party; the contract is not between the agent and the third party.
- The agent incurs no rights or obligations based on the contract with the third
party.
o But, if the agent does not have authority, they cannot bind the
principal, and then, the agent might be liable.

16
Note: if the agent acts outside of his authority, then the principal can sue the agent
under breach of contract of the agent.

How does an Agent Acquire Authority?

There are five (broad) ways for an agent to be authorized:

1. Express authority (just go and do it)
a. define the mandate and give them
the scope in which to operate. All processes after that give them the
right to represent your interest.

2. Implied authority
a. Implied by the surrounding circumstances or facts.
b.
i. There needs to be a bystander who can conclude that the
principal gave the agent this mandate.
1. Eg. Hired a CEO, implied that the CEO has decisions to
hire/fire employees.
2. E.g. Faure v Louw (1880) 1 SC 3

3. Ratification (after the contract)

a. The agent acts without a mandate.
b. For the principal to be able to ratify at the end, the agent must state
that he is acting on behalf of the principal (must be identifiable).
c. Ratification will then provide authority retrospectively and therefore
the contract will be legal and binding.

4. Ostensible authority/apparent authority

a. , he gave the 3rd party the
impression that he had given authority to the agent to act on the
.
i. The conduct of failing to intervene when made aware of the
transaction involving you shows apparent authority.
ii. The difference between implied and ostensible authority:
1. Ostensible = you are aware, but you do not intervene.
2. Implied = you are not aware, therefore you do not have a
chance to intervene. (Give impression or make a person
believe that they had authority. The agent in this case
could be held liable.)
iii. Must be representation of agency by conduct.

5. Authorisation by operation of law

a. E.g. A guardian to act on behalf of a minor.

Illustrations from case law:

- Faure v Louw (1880) 1 SC 3
- Braker and Co v Deiner 1934 TPD 203
- Makete v Vodacom (Pty) Ltd 2016 (4) SA 121 (CC)
- Monzali v Smith 1929 AD 382

17
 - Quinn & Co Ltd v Witwatersrand Military Institute 1953 (1) SA 155 (T)
- NBS Bank Ltd v Cape Produce Company (Pty) Ltd [2002] 2 All SA 262 (A)

Doctrine of Estoppel
This doctrine states that you may not deny the truth of a particular fact or state
of affairs.
- Prevents a person from holding a position that is inconsistent with a position
previously held (i.e. Saying one thing but then changing the story afterwards)
but, if certain requirements can be proven, then you can.

Example: Makate v Vodacom

This case is about the please call me function

Vodacom director had said that him and Makate could talk about remuneration for
the idea (verbal agreement) - but V do
that.
- Did the director have the authority to negotiate some compensation?
o The court dismissed this.
Vodacom created an impression of authority. It is possible for
he/she to be bound by it.
Apparent authority/ostensible authority

Note: Ostensible authority is the power to act as an agent even though the
agent may not have been given authority.
- The director of Vodacom therefore had authority - impression of authority.

Estoppel is the rule that precludes the principal from denying the agent was
given authority.

Example: NBS Bank

A bank manager had a customer that invested in a fixed deposit and he wrote a
receipt acknowledging that they had received the deposit but then deleted it on the
system. The investment was therefore not in the client s name and instead, it was
put into a savings account in the name of an associate. R134 million was lost.
-

He said that NBS had given him an impression (facade of regularity). This case
treated ostensible authority and the estoppel as the same thing.

How does an Estoppel Work?

Essentially, estoppels prevent somebody (e.g. a principal) from denying the

fact that they had given somebody else (e.g. an agent) authority.

18
Estoppel is a concept which prevents a person from holding a position that is
inconsistent with a position previously held, but, if certain requirements can be
proven, then you can.
- By representation through words or conduct by the principal made to
the contracting 3rd party.
o Must have been made by the principal.
o Made to the other contracting party.
- 3rd party must have relied on the contract to his/her detriment.
- It must be reasonable for the 3 rd party to be misled.
o Reasonableness would the principal reasonably expect that the
representation that they made to the contracting 3rd party would create
the impression of authority he answer is yes
o Would it be reasonable to get to the conclusion that the 3rd party got
to? (i.e. Was it reasonable for the 3rd party to get to the conclusion that
they did?)

Example: Monzali vs Smith

Monzali had a lease to work at a particular quarry but then sublet the quarry. 16
months later when the sublessee ordered coal from Smith, Monzali received the
invoice. It looked like they were acting as the sub lessee agent.
- Court ruled that there was some representation by conduct.
o But that it was not reasonable because Smith (coal supplier) sh
checked.

Example: Quinn

- Estoppel was successfully raised.

Hypothetical Example:

A farm decides it will expand its business from apples to both apples and dairy.
Owner of the farm tells representative of construction firm that the farm manager
(who manages the farm completely as the owner is hardly ever there) will meet with
them to speak about building and development on the farm.

Farm manager is told that they need to meet with the construction firm to decide if

be used for the dairy.

- Owner then decides that they do
the construction firm that she/he never gave the go-ahead and that the farm
manager was never authorised.
o Is there implied authority?
o Estoppel:
There was a representation since the farm owner told the
construction firm that the manger was going to meet with them
and negotiate a contract.

19
 The third party (the construction firm) relied on the contract to
their detriment. (Maybe they had already broken ground etc.)
The third party (construction firm) was reasonably misled; the
representation that the farm owner made to them, led them to
reasonably believe that the agent had authority.

urt will look at.

- Court says that the farm owner gave implied authority to the farm manager by
words.
o The farm owner cannot do anything due to the fact that the farm owner
had given implied authority and since there was no breach of the
contract of agency, the principal is bound.
If the agent were to breach the contract then the agent would

Fiduciary Law
What is a Fiduciary?

- , means trust, confidence, or assurance.

o A fiduciary is a person (or a business e.g. bank/stock brokerage)
who has the power and obligation to act for another (often called
the beneficiary) under circumstances which require total trust,
good faith and honesty.
A fiduciary holds a legal or ethical relationship of trust with
one or more other parties.
Typically, a fiduciary prudently takes care of money or
other asset for another person.
- Fiduciary duties of a director of a company are owed to the company and not
to the shareholders.

Why Would This Happen?

- Typically, because this person knows more about something than others.
o They have a specific knowledge, skillset, and expertise about a
subject. This brings along a ton of problems. Fiduciaries are
characterised by being honest, centre of being a director etc.

Nature of a Responsibility

A fiduciary's responsibilities are both ethical and legal.

- A fiduciary is held to a standard of conduct and trust above that of a
stranger or of a casual business person.
o When a party knowingly accepts a fiduciary duty on behalf of another
party, they are required to act in the best interests of the other
party (e.g. whose assets they are managing).

20
 He/she/it must -
in which the potential benefit to the fiduciary is in conflict with
what is best for the person who trusts him/her/it.
E.g. A stockbroker must consider the best investment for
the client and not buy or sell on the basis of what brings
him/her the highest commission.
E.g. Agents, trustees, brokers.

Establishing a Fiduciary Relationship

Fiduciary duties arise when there is a fiduciary relationship. In general, such a

relationship has the following characteristics:
- Scope for the exercise of some discretion or power;
o The fiduciary that is representing the other party must have some kind
of discretion or power.
E.g. The estate agent has discretion as to where they should
advertise and to whom they should advertise; you merely set a
broad mandate.
- That power or discretion can be used unilaterally so as to affect the
;
o i.e. That the person who is the fiduciary has such great power or

interests.
- A peculiar vulnerability to the exercise of that discretion or power.

NB: this is not the be all and end all list and only a general list - there can be
some exceptions.

nature and extent are questions of fact to be adduced from a thorough consideration
of the substance of the relationship and any relevant circumstances which affect the

an indication of such a relatio

Phillips v Fieldstone Africa (Pty) Ltd [2004] 1 All SA 150 (SCA)

Examples of Fiduciary Duties

The Duty to Act in Good Faith

- Must, at all times, be open and honest in his dealings.
- Must avoid a conflict of interest.
o Hargreaves v Anderson 1915 AD 519
o Estate agent (Anderson) had been asked by Hargreaves to sell his
house. Gave him the price he wants. Estate agent found a buyer but
went 50/50 with the buyer. Hargreaves found out and did not give him
commission. The court said that Hargreaves was right because it was a
conflict of interest and the agent s duty was to obtain the highest price
for the seller.

21
 - Must hand over any profit made in the course of carrying out the
mandate/fulfilling duties.
- Must disclose relevant/pertinent information.

The Duty to Account

- Must keep the beneficiary informed of progress.
- Must keep his own property separate.
o A trustee of the trust actually owns the property of the trust - however
he cannot keep that money in his own bank account.
- Must maintain proper records of dealings and transactions.
- Must account for any transactions concluded during mandate.

Examples of Fiduciaries

Fiduciaries that will be dealt with in this course:

- Partner in a partnership;
- Trustee of a trust;
- Director of a company;
- Member of a close corporation

Principles of Delict
The N D

- Civil wrong (delict) vs. criminal wrong (crime)

o It can be both.
- Civil liability (compensation) vs. criminal liability (punishment)
- Civil action (plaintiff = defendant) vs. criminal trial (state = accused)
- Committing a delict creates an obligation to compensate
o
obligat a person could incur a civil obligation to compensate
another in broadly 3 ways:
Entering into an agreement enforceable by law (contract)
Committing a wrong against another (delict)
Forming a

The Definiti D

A delict refers to wrongful and blameworthy conduct which causes harm to a

person.

For conduct to be actionable, it must not only cause harm to another person, but
such act/omission must be blameworthy (the perpetrator must have been at
fault), and wrongful (it must not be unreasonable to impose liability in the
circumstances).

22
Elements of a Delict
1. Fault/blameworthiness
a. Can either be intentional or negligence.
2. Wrongfulness
a. If it is wrongful, then it must be reasonable to impose liability.
3. Causation (factual or legal?)
a.
have occurred?
4. Loss
a. Monetary or non-monetary loss.

NB: Just because an action is neglig

wrongful!

Example:

David is driving down the road and the sun is in his eyes, and the sun visor is
broken. As a result, he the red light and then drives through the red light
and hits B s Car.

Was the driver at fault?

- Yes, he was negligent.
o Test for negligence - would a reasonable person have taken steps
to prevent the action?

Example:

You are an auditor and make a negligent statement. Can you be held liable for the
losses of an investor?

Examples of Delict Are these Delictual?

- Director makes careless decision in expanding company business.
o Yes.
Duty of care has nothing to do for fiduciary duty and therefore
this example would fall under delict.
- Shop employee knocks over a shelf onto a customer.
o Yes.
refers to the liability of the employer
for the conduct of the employee when they are acting within
the course and scope of their employment.
Therefore, can sue the employer/company or the
employee sue whichever has more money.
- Company manufactures fake merchandise and passes it off as the
genuine/original brand. Another company then places an advertisement
exposing corrupt business practices of its competitor.
o Yes.
Defamation is a type of delict
reputation is wrongful.

23
- Company auditor fails to request certain records that s/he notices are missing
because she/he is in a rush to meet the deadline.
o Yes.
If you can establish fault (they were in a rush) then you can
impose liability.
- Director at a board meeting fails to vote against a resolution when she/he
should have realised (but did not realise) that the necessary requirements of
the Act for passing such resolution had not been met.
o Yes.
and

director.

24
Part 2: Unincorporated Firms
1. The sole proprietor
2. The partnership
3. The trust

The Sole Proprietor

A sole proprietorship, also known as the sole trader or simply a proprietorship, is
a type of business entity that is owned and run by one natural person and in
which there is no legal distinction between the owner and the business.
- There is only one estate, the sole proprietor owns all assets in his personal
capacity
- If the sole proprietor dies, .

The Partnership
Nature of a Partnership

A partnership is the legal relationship (not a separate legal person) which arises
from an agreement between at least two people, in terms of which each
contributes towards a business carried on in common with the object of obtaining
mutual material benefit.

Essentialia of partnership contract thus:

- Agreement/contract
o e verbal.
o Court can also infer that, by the way you are acting, you are
intending to run the business as a partnership.
- At least 2 persons
- Contribution
- Mutual benefit

Requirements for a Valid Partnership Agreement

- Each partner must make a contribution;
o Assets, labour etc.
i.e. the use of a
spare car but not the spare car.
like giving R100 000 but
then wanting R10 000 instalments over the next 10 months.
They are not entitled to compensation for their
contribution.
o Even if you undertake to contribute in the future; that is sufficient.
- Business must be carried on for the joint benefit of the partners;
- Objective must be to make a profit;

25
 - Contract between the parties should be a legitimate contract;
- (Other general legal requirements for a valid contract).

Definition of a Partnership: Elements

1. Legal relationship
2. Arising from an agreement
3. Between two or more persons (former limit of 20) - Act used
to say that a partnership with more than 20 people must register to be a
company however this no longer applies.
a. Poppe, Rousseau & Co v Kitching & Others
4. Each to contribute to an enterprise
a. Money, skill, labour, etc.
b. Suretyship
c. Ability to sell goods to the business/partnership at a cost lower than the
market price.
5. With the object of making a profit
a. Co-ownership
i. You inherit a house along with your cousin (co-owners of
house). You jointly let it out. Is this a partnership? No, not
necessarily as you are just co-owners. The court will look at the
overall agreement.
b. Joint transactions
c. Voluntary association
i. Legal relationship that is to achieve a common object but not
aimed at making and dividing profits.
1. E.g. A charitable object.
d. Concurrence of creditors in an assignment
i. Elrich v Rand Cold Storage & Supply Company Ltd 1911 TPD
190
6. And to divide such profits
a.
is not decisive.
b. Compare partnership to other legal relationships:
i. Agency
ii. Loans
iii. Employment
iv. Lease
v. Joint ventures and syndicates

26
Re: Formation of a Partnership:
- Where all of the essentials are present, there is a prima facie (on the face
of it, but not definitely) partnership, unless there is an element showing
that the contract is not an agreement of partnership.
- Court will look at substance, having regard to all circumstances in which the
agreement was made and to the subsequent conduct of the parties.
- It is the
Deary v Deputy Commissioner of
Inland Revenue

Legal Nature of a Partnership

Aggregate Theory vs Entity Theory?

- Entity theory treats the whole partnership as a separate single entity.
- Aggregate theory treats the partnership as the aggregate of the partners
(together in their own right - each one obtains their own separate right).
South African law does not consider a partnership a separate entity, but there
are a few exceptions for practical purposes.

Exceptions to the Aggregate Theory (Instances where the Partnership is not

Treated as a Separate Legal Entity):
Insolvency
When a partnership is insolvent, the creditor is going to sequestrate the partners
personally. Partnership fund is sequestrated separately and simultaneously
with the individual partners.
- (Still not a separate entity - just an exception). Jointly liable for the debts.
Litigation
When you sue the partnership, you would have to sue all the partners.
VAT
The partnership is able to register as a VAT vendor. This does not mean it is a
separate entity. The individual partners pay tax.

The Partnership Fund

- If the partnership is not a juristic person, who owns the partnership
assets?
o Each one of the partners owns each of the assets equally. They
own them jointly and in undivided shares.
This is reflected by means of a so-

27
Rights and Duties of Partners
Rights of the Partners

Duties of the Partners

- Contribution
o Essential requirement is that partners make a contribution and that
contribution becomes an enforceable right.
- Sharing of management
o Can t be excluded from participating in management
- Use of partnership property
o

- Reasonable care
o Must show same degree of care that they would exercise in their own
affairs
- Good faith
- Access to books
- Account
o Annually a partnership must account for any partnership property they
have under their control
- Sharing of profits
- Rendering of accounts

The Duty of Good Faith

- of utmost good faith

- Guy hired a lawyer to monitor his partner but when they found something
it was a breach of good faith.
-
insurance, they must tell the insurance company, otherwise they are in breach
uberrimae fides

28
Four Consequences of the Duty of Good Faith
1.

2.

3.
.
4.

Sharing of Profits

o
o

-
o

-
o

Rights and Duties of Partners

Remedies between partners:

- Specific performance (any of the duties e.g. contribution, management)
o Interdicts
= Authoritative prohibition
- Damages (including loss of profit as a result of a partner breaching duties)
- Interdicts
- Attachment
- Declaration of rights (going to court to declare rights in terms of partnership
agreement)
- Arbitration (saving expenses of litigation by including a clear arbitration
clause)

29
Extraordinary Partnerships
Universal Partnerships
-

Anonymous and Commanditarian Partnerships

Anonymous (Silent/Sleeping Partners)

Commanditarian (En Commandite)

-
-
o
o

Incorporated Partnerships

-
-
-

30
Liability to Third Parties
Incidence

1. Membership of the partnership/valid agreement (there must initially be a

partnership relationship and a valid partnership agreement)
2.
3.

Limitations

1. Anonymous and commanditarian partnerships

2. Second contract with third party must also be valid

- Third party cannot claim against the silent partner, but the silent partner is
liable to the other partners (share in profits and losses)
o Upon insolvency, the silent partner will get sequestrated along with
their fellow partners.
- Commanditarian partners are not liable to third parties and they have
limited their liability to a specific amount to fellow partners.
o If the court sequestrates a partnership, the partnership fund as
well as each and every individual partner, gets sequestrated
except for en commandite partners.

Liability to Third Parties: Authority

-
o
o

31
Mutual mandate is a lot like ostensible authority (thr
third party was given the impression that the principal had given the agent authority);
it is to protect third parties dealing with the partnership.
- Partner contracts with third party without authorization
o The moment that the contract is concluded in the ordinary scope of
the partnership business, it is then binding (within the mutual
mandate of the partnership)
Links back to the rights and duties of partners.

Implied Authority

-
o
o
-
o
o

Liability to Third Parties: Variations

- Essentially, the partnership is liable to third parties, provided that the

obligation is contracted in the name of, or on behalf of, the partnership.
o

Criminal Liability

32
 -

Civil Proceedings

- Citation: individual partners or name of partnership

- Service: place of business of partnership/of a partner
- Evidence: admission of debt of partnership by partner
- Set-off -
o In a claim by the partnership, a third party defendant cannot usually
set off/off-set a debt owing to him by one of the partners individually.
Likewise with a claim by a partner against debt owing to the
defendant by the partnership.
o Defendant partnership cannot set off debts owing by the plaintiff to
individual partners.
o Partner sues as a partner, but not when sued personally, may set off a
debt owing to the partnership.
- Judgment against partnership, not individual partners

Dissolution of the Partnership

Causes of Dissolution

1. Agreement
o Agreement by all the partners to dissolve the partnership.
2. Operation of law
o Frustration
One of the partners cannot fulfil the part they are required
to, in terms of the agreement.
o Death of a partner
o Insolvency
Legal insolvency
o Partner becoming an alien enemy
o Mental disorder or defectiveness
3. Renunciation
o In certain cases, by due notice of dissolution
o Lawful cause

Lawful Cause for Renunciation

- Fulfilment of a condition allowing partner to give notice of dissolution
- Breach of an essential term of the partnership agreement

33
 - Conduct causing loss of confidence
o E.g. Breach of fiduciary duty

Consequences of Dissolution

- Once the partnership is dissolved, there are no contractual rights and

obligations, however there is still a duty of good faith while the
partnership is being dissolved.
- Duties of partners
- Insolvency proceedings
- Accrued rights
- Incurred obligations
o The partnership is still required to fulfil its obligations.

34
Class Exercise: Partnerships
The Partnership Fund: Gigi and Byte decide to start doing business together. Gigi
is a skilled computer programmer and Byte has a business science degree and is an
experienced recruiter. The two enter into a partnership agreement in terms of which:
- Gigi will offer her skills as programmer & Byte offers his business experience
- Gigi also contributes all the computer equipment that they will require (to the
value of R70 000)
- Byte contributes a lump sum of R100 000 to cover rent and expenses during
him with
interest.

At first, the business seems to be doing well, but soon, a big client suffers a loss
when an app, that Gigi developed, malfunctions. The two have to defend against her
action in court and although Gigi is vindicated, the legal costs and the impact on their
reputation, takes its toll. It is soon clear that the partners are no longer able to pay
their debts as they become due.

One of the creditors applies to have the partnership sequestrated. Comment on the
following:
- Requirements of a partnership:
- Contribute something jointly (assets/expertise)
- Objective = profit (not necessarily monetary)
- Valid contract

How would the creditor go about applying to have the partnership

sequestrated? i.e. Who would be the defendant/s?
- Procedurally, according to the rules of court, the creditor can sue in the
name of the partnership. This is basically bringing proceedings against
both of the partners individually, but the procedural requirements are just
easier to sue in the name of the partnership.
- Although a partnership is not a separate legal entity, the rules of the court
make an exception when litigating against or on behalf of a partnership.
o Hence, the partnership would be the defendant. i.e. the partnership
can be sued in its own name.
- Jointly and severally liable hence, sequestrate all estates. Attach
partnership s assets first, then the partner s.
o Individual estates sequestrated separately.

What will be the consequences? i.e. What will the creditors be able to lay claim
to, assuming that the sequestration order is granted?
- Although it is not a separate legal entity, another exception is that upon
sequestration all other partners are simultaneously sequestrated.
o Sequestrate all of the estates separately and simultaneously.
Creditors will first look to the partnership fund and then the personal
estates of the partners.
- In a partnership, while it exists, we say that the partners are jointly liable.
Creditors need to sue all of them according to their pro rata share.

35
 - The alternative (after the partnership terminates): the partners are jointly and
severely liable. Therefore, choose to sue all partners or one for the entire
amount. If a person is held liable, the partner has a right of recourse
against the other partners.

Gigi and Byte manage to stave off the sequestration application because two further
partners see potential in the business and decide to join forces with Gigi and Byte.
Meg and Terra each contribute an amount of R50 000. Terra only enters into the
agreement subject to the condition that he is to remain anonymous and will only ever
be liable up to R50 000 should the partnership ever face legal liability again.

The partners then decide to improve their office space. Gigi comes across a stunning
antique oriental carpet. She explains to the seller that she represents the partnership
and agrees to buy the rug for R250 000. When the others hear about this they are
understandably infuriated. Terra meanwhile has forgotten all about his aims to
remain anonymous and has been actively managing the partnership along with the
others. When the shop owner demands payment, they deny liability on the contract.

What will the effect of the new partners joining be on the partnership between
Gigi and Byte?
- Formation of a new partnership. Old partnership is dissolved and a new
one is formed.
o There is no perpetual succession.

What kind of partnership is this and why?

- , with a commanditarian partner.

Would the contract for the purchase of the rug be binding on the partnership?
- In this particular case, it seems as though there would be no liability. This is
because there was no expressed authority, no implied authority (innocent
bystander test that he did in class), and no mutual mandate.
o However, there could be some liability if ostensible authority or
estoppel is proven by the 3rd party.

Assuming that the partnership agreement makes no provision for it, how will
profits and losses be divided/shared?
- Profits and losses are shared in terms of
rata), if impossible to attach a monetary amount to any of the
contributions then divide up equally. There is no indication in the
partnership, hence it is divided equally.
o Note: interest free loan: interest gained on loan becomes
contribution to partnership.

Assuming that the partnership was liable to the shop owner and became
insolvent again:
1. Will Terra be liable and to what extent?

36
 a. Same extent as other partners if sleeping (commanditarian), then to
the extent of contribution.
2. Could Terra insist on payment of the full amount by Gigi?
a. Each partner has the inherent ability to bind other parties if it was
in the scope of the business.
i. No, joint liability. Creditors can sue all of them

37
Spot Test 1 Answers
1. Actual authority is both implied and expressed authority.
a. Due to the facts of the case it seems as though there was implied
authority. The facts include that he got a bonus for doing something on
his own initiative as well as the fact that he has so much responsibility
on the farm and thus greater authority.
2. Talk about the requirements for estoppel and then apply the facts to the
requirements and conclude whether you think it is reasonable for her to be
estopped.
a. Not all about the conclusion, more that you understand and apply the
principles.
3. Yes, it is a fiduciary relationship.
a. The requirements are met. But this is not the reason why she has a
claim for the discomfort. Negligent.
4. Relationship between parties to jointly share profits after jointly contributing
capital to the partnership.
a. Partnership fund refers to the assets that belong to the
partnership. Jointly owned by the partners in undivided shares

Business Trusts
Legal Nature of a Trust

A trust is a legal relationship that has been created by/in a trust deed and it has
the following key characteristics:
- The relationship is created by a person known as the founder/donor.
o The founder places assets under the control of another person/s
known as the trustee/s.
(inter vivos) or
after his death. (mortis causa)
o The purpose of setting up a trust is to benefit third persons known as
the beneficiaries.
A trust may exist even if it is not in writing, however, in
practice, a trust does not work without it being created in a trust
deed (written).
- Large degree of privacy.
- Separation of ownership and control from the beneficiaries.
- The trustee in fact owns the assets of the trust but in their official
capacity. A representative capacity, not their personal capacity.
o Litigation against the trust is against the trustee, but in their official
capacity - not in their personal capacity.
If the trustee misuses the assets and does not do his duty, he
can be sued in his own personal capacity.

38
Parties to a Trust

1. Founder/settlor
2. Trustee
o At least one but can be more.
3. Beneficiary
o Must be determined or determinable.
o May be a particular person or persons or to children or grandchildren.
o May also be a charitable goal.

*The founder of the trust can also be the trustee and the beneficiary of the
trust that has been created.
- Need an independent outsider to be appointed as trustee as well; 2 trustees.

In terms of the Trust Property Control Act, a trustee must be issued a letter of
authority or certificate authorising him or her to act on behalf of a trust.
- Any contracts concluded by a trustee who has not yet been issued with a
letter of authority by the Master of High Court renders such contracts void.

Types of Trusts

Inter vivos
- While the person is alive; during the

Mortis causa (Testamentary Trusts)

- After the death of the founder.
o E.g. A will.

Bewind Trusts
- Ownership does not sit with the trustee.
o Ownership is with the beneficiaries and the trustee just manages
the trust.

Creation of a Trust

Requirements for Creation of a Valid Trust (Will/Contract):

1. There needs to be an intention by the founder;
2. Expressed in way that is legally binding;
3. There needs to be trust property;
4. The objective of the trust must be certain;
5. It needs to be a lawful objective.
a. Trust deed is invalid if it has an unlawful object.

Section 4 of the Trust Property Control Act 57 of 1988 requires the lodging of the
trust instrument with the Master of the High court what is the practical effect of
this?

39
 - The lodging of the trust instrument with the Master of the High Court
must be in writing and therefore, practically, the trust must be in writing
for it to be effective.
o From a technical perspective it does not need to be in writing but from
a practical perspective it must be, due to the lodging with the Master of
the High Court.

Duties of the Trustee

- Must act with care, diligence and skill

- Must open separate trust account
- Must act with good faith
- Must exercise an independent discretion at all time
- May not expose assets to undue risk
- Must invest the trust property productively
- Must act within the powers granted in the trust deed
o Powers of the trustee to deal with trust assets are limited at common
law: traditionally, the trustee preserved and protected these, as far as
possible, free from risk.

Legal Position of the Beneficiary, Generally

The trust document determines the nature and extent of the rights of a trust
beneficiary.
- The beneficiary acquires the right to benefit from the trust once s/he
accepts the benefit offered in the trust document.
o Before acceptance, the founder can revoke/vary the benefit.
After acceptance, the founder and trustee require the
permission to vary the trust deed.

The right/s of beneficiary (acquired once having accepted the benefit offered in the
trust document) remains subject to:
- Terms of the trust document, and
- An exercise of discretion (if any) by the trustee.

Remedies (for the beneficiary) include:

o Enforcement of rights in the trust document - after acceptance.
o Taking action for damages due to the breach of trust where a financial
loss was suffered.
Trustee may then have to pay damages from his personal
capacity

The Business Trust

A business trust is no more than an ordinary trust in which the trustees have
been given power to carry on business and to trade.

40
 - Beneficiaries are usually able to sell, cede or otherwise deal with their
interests in the trust the way that a shareholder is able to deal with his
shares.
o It is thus possible to structure a trust in a way that resembles a
company or a close corporation.

Powers Otherwise Excluded under Common Law

- To sell trust assets;
- To enter into a loan agreement and to mortgage trust assets;
- To expose trust assets to business risks by conducting a business.

41
Part 3: Pre-Incorporation Matters
(Before the company comes into legal existence)

The Promoter

- Any person who undertakes the task of promoting the company

o Does not include professionals engaged in the promotion
activities (e.g. incorporation and preparing prospectus)
Is not an agent or a trustee.
been
incorporated yet.
- Involvement may be during incorporation or floating
- Thus, in general, to be considered a promoter, there must be:
o Intention to promote the company
o Performance of some act/acts inferable to intention

Role of the Promoter

Tasks that the promoter would typically be involved in include:
- Attending to formalities of incorporation
- Instructing professionals to incorporate, register for tax, set up websites etc.
- Preparing business proposal
- Raising initial finance
- Finding shareholders and directors for the new company
- Negotiating business contracts on behalf of the company

Duties of Promoter
Fiduciary relationship (from promotion to incorporation):
- Duty to act in good faith
- No personal interest/secret profits
- Full and frank disclosure of all interests in any transactions involving the
company.

*See slides.

Pre-Incorporation Contracts
These are contracts between a 3rd party & the company before incorporation.
- A pre-incorporation contract is a contract entered into by a person acting on
(and may not come into
existence).
- Definition in Companies Act 2008 (s1):
o 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

in terms of section 21.

42
Pre-Incorporation Contracts: Options

As a promoter, you are able to contract as principal (in own name) in various ways:
- Cession
- Transfer (transferable option)
o Transferable option = agreement to keep an offer open.
- Outright sale to company
o E.g. Buys machine from supplier and then sells to company at same
price.
- Right to nominate another
- The stipulatio alteri contract (Roman law origin)
o

Stipulatio alteri
- No formal requirements.
- Promoter liaises with the third party to ensure that
the third party then contracts with the company
when it comes into being.
- The onus is on the promoter to enforce the contract.
o But, there is no liability for the promoter if the
company , or if the
company rejects.
Unless specifically stated in the contract.

Contracting as agent (statutory agency)

- Section 21
- Pre-incorporation contract must comply with requirements of Act

Section 21: Requirements

- Pre-incorporation contract must be in writing;
- Entered into before company is incorporated;
- Between third party and promoter (acting as agent on behalf of or in the name
of company);
- Intention is that company will be bound once it comes into existence;
- Company only bound upon ratification
o Company is not automatically bound.
o May reject part or whole agreement
o Option to do so within 3 months of incorporation
o If not rejected within 3 months, it is presumed that the company has
ratified the contract.
Implied ratification by conduct?
i.e. If receiving benefit from the contract and not
expressing any rejection of them, it implies that the
company then has ratified the contract.

43
*Sec 21.2 more than one promoter can incur liability.

Liability of Promoter Under Section 21

Under section 21, the promoter is jointly and severally liable if:
- The company is not subsequently incorporated
- If company is incorporated but rejects any part of the pre-incorporation
contract. (i.e. fails to ratify the contract)
o If the company rejects the contract, then it means that the promoter
becomes liable. If this happens, the promoter can claim back any
benefits that the company derived from the contract.
- Liability of promoter is discharged upon ratification of contract by
company

Entitlements of Promoter Under Section 21

- The promoter is entitled to the benefits of a rejected or unratified

contract; unjustified enrichment.
o Law would not allow this and the promoter would be entitled to the
benefit.
-
incurred?
o Since a company cannot contract before incorporation, promoter
cannot legally claim remuneration and expenses incurred before
incorporation.
Promoter can only make contract for these with company after
incorporation. In practice, however, incorporators are usually the
first directors and therefore in most cases they will approve
payment for promotion services.
Can a promoter be remunerated in shares?
o Yes, promoters can be remunerated in shares if
the company so decides.

Class Exercise 2
QUESTION 1 (7 marks)

On 1 February 2015 Jimmy entered into a contract with Guns & Roses (Pty) Ltd for
the supply of outdoor equipment. At the time of contracting Jimmy, indicated that he
was signing the contract for, and on behalf of, Everglades (Pty) Ltd, a company that
was still to be incorporated. Subsequently, Everglades (Pty) Ltd was incorporated on
27th May 2015. After its incorporation, the directors of Everglades (Pty) Ltd did
nothing about the contract with Guns & Roses (Pty) until January 2016 when they
wrote to Guns & Roses (Pty) Ltd advising that they were not going to ratify the
contract as they thought the terms of the contract were unfair. Prior to its rejecting
the contract the company did receive and use some outdoor equipment from Gun &
Roses (Pty) Ltd pursuant to the contract.

44
Q1: Discuss the essence of the relevant provisions of the Companies Act 2008
governing the above scenario and advise Jimmy whether he will be personally liable
on the contract with Guns & Roses (Pty) Ltd.

Q2: *In your answer you should also discuss what the Act says had Everglades (Pty)
Ltd not come into existence at all. (Note that for the purposes of this question you
are not required to cite the section number. Just discuss what the Act says in relation
to the above scenario and then advise Jimmy regarding his potential liability).

A1: The Act creates a statutory agency as common law agency is impossible due to
the fact that the principal does not yet exist. The promotor is Jimmy in this instance.

One of the requirements for the company to be bound in terms of section 21 is that
the agreement must be in writing
months and hence it is deemed to have ratified the contract due to conduct; implied
ratification by conduct through receiving and using the equipment that had been
delivered. Hence, the company is bound by the contract.

liable. Jimmy will however be entitled to claim from the company the outdoor
equipment that the company used/received.
- Any benefit that the company might already have received in terms of the
contract accrues to the promoter/the promoter is entitled to any benefit that
the company might already have received.

QUESTION 2 (5 marks)

Compare and contrast the pre-incorporation contract provided for in section 21 of the
Companies Act and stipulatio alteri under the common law.

Stipulatio alteri Section 21

Company is at the mercy of the Company is able to ratify the contract.
promotor to enforce the contract.
Promoter is not automatically liable Automatic liability on the part of the
unless specified in the contract. promotor.
Offer is made to the company. Contract to ratify.
Promotor acting as a principal. Promotor acting as a statutory agent
(common law).
Contract for the benefit of a third party. S

Part 4: Regulatory framework

Overview

1.
making available the corporate firm for two primary purposes.

45
 2. In the first place, the purpose is to facilitate and regulate the process of
(corporate
finance),
3. and the second is to impose controls on persons whose power is
derived from the finance that the use of the corporate firm has put at
their disposal (ie regulating organs concerned with the governance of a
company

o This part will consider:

1. The Companies Act
as a generally enabling statute for companies in South Africa
2. King IV
as a code of (stakeholder inclusive) corporate governance
3. Financial market regulation
4. Auditor liability

Defining Corporate Governance

1. the system by which companies are directed and
controlled
2. Exact bounds of what constitutes corporate governance is an open debate
globally.
3. regulating and overseeing corporate
conduct and of balancing the interests of all relevant stakeholders and
to
ensure responsible behaviour by corporations and to achieve the
maximum level of efficiency and profitability for a corporation

Defining Corporate Governance

1.

2. No longer simply linked to corporate

Should include:
Managing long-term risk
Ethical performance
Sustainable business practices

stakeholders
Important aspects
Process of controlling management
Considers interests of all stakeholders
Aims at ensuring responsible behaviour
Ultimate goal = achieve maximum efficiency

46
Good Corporate Governance is Not an End in Itself

1. It is a means to support organisational efficiency, sustainable growth,

and financial stability
2. It facilitates:
access to capital for long-term investment
Fair treatment of shareholders and stakeholders
BOTH contribute to the success of the organisation;
so both should be treated fairly
Sometimes difficult to balance the interests of
3.
within leadership that is both effective and ethical.
4. Recognition of stakeholder interests
King IV (2016, SA) and internationally: ICGN, OECD; Brazil, China,
UK, USA.

Two primary contrasting theories on the role of the various stakeholders in

corporate governance:

Pluralist Approach

Companies should be controlled for the benefit of all

stakeholders

Enlightened Shareholder Value Approach

Companies are entitled to consider the interests of other

stakeholders only to the extent that it would be in the interest
of shareholders to do so.
Theory that is applied by the Companies Act and within the
Common Law.
Consider the interests of other stakeholders, provided that it is
also in the interests of the shareholders to do so.

47
Relevant Sources of Law
1. Companies Act 71 of 2008
- Binding Law
- Hard law
- Mandatory Laws that must be abided by
2. King IV key sources for corporate governance
- Not binding
- Soft law
-
3. Financial Markets Act 19 of 2012
4. Auditing Profession Act 26 of 2005
5. Other legislation protecting stakeholders (not dealt with):
- Banks Act, Competition Act, Consumer Protection Act, Labour Relations Act,
Basic Conditions of Employment Act, Occupational Health & Safety Act,
National Environmental Management Act, Public Finance Management Act,
Promotion of Access to Information Act.

The Companies Act 2008: Underlying Principles

1. Underlying philosophy in Company Law in the 21st Century Guidelines for
Corporate Law Reform (DTI policy paper)
Purposes of Act set out in section 7.
2. Incorporation as right not privilege
The formation of a company is the exercise by a person of a
constitutional right to freedom of association and freedom of
contract.
3. Simplicity
A single-member/ one person can incorporate (private/ public)
A non-profit company requires a minimum of three persons
Only requirement for formation is to file a
plus MOI and payment of the prescribed fee

4. Flexibility
The Companies Act provides for flexibility in the regulation of the internal
affairs of a company through MOI and company rules.
Governing principle: MOI must be consistent with the Act and is void to the
extent that it contravenes the Act e.g. s 15(2)(b): MOI may contain any
special conditions specific to the company.
5. Efficiency
Shift from capital maintenance rule to solvency and liquidity
No par value shares
Introduction of business rescue
6. Transparency

48
 Recognition of director accountability, and appropriate participation of
other stakeholders.
Public announcements, information and prospectuses should be subject
to similar standards for truth and accuracy.
Protection of shareholder rights, shareholder activism, and enhanced
protections for minority shareholders.
Minimum accounting standards required for annual reports.
7. Predictable Regulation
Sanctions should be de-criminalised where possible.
Enforcement through appropriate bodies and mechanisms, either existing or
newly introduced.
Strike a careful balance between adequate disclosure, in the interests of
transparency, and over-regulation.

The Companies Act 2008: Structure

1. Interpretation, Purpose, and Application
2. Formation, Administration and Dissolution of Companies
3. Enhanced Accountability and Transparency
4. Public Offerings of Company Securities
5. Fundamental Transactions, Takeovers and Offers
6. Business Rescue and Compromise with Creditors
7. Remedies and Enforcement
8. Regulatory Agencies and Administration of Act
9. Offences, Miscellaneous Matters and General Provisions

The King Codes: Introduction

- The King Codes are the definitive standard for corporate governance in South Africa.
- There have been 4 King Codes
o King IV is the Code that is applicable at present;
however King III remains relevant
- Key governance outcomes of King IV* (see diagram)
o The development of an ethical culture
o Ensuring performance and value creation for stakeholders
o Ensuring adequate and effective control over the company
o Building trust, reputation and legitimacy

Best Principles (and Practices)

- King III was a code of (75) best practices

o or
o Rules-based approach
o Technical, sometimes difficult to apply, particularly to SMEs
- King IV is a code of (16+1) principles

49
 o and
o Outcomes-based approach
o Principles framed as aspirational outcomes
o
o Simpler, more flexible, applicable to SMEs

Background:
- Cadbury Report & King Committee (1992)
- King I (1994), King II (2002), King III (2009)
- Standards applicable to listed companies
o Compliance with King IV = JSE listing requirement
Therefore is mandatory if you are a listed company.

JSE elevated (practical) governance requirements

- Appointment of directors
- Balance of power
- Board committees
- Company secretary
- Gender diversity

King IV
Wider application than King III:
- Shift away
.
o Will therefore apply to retirement funds, SOCs, and non-
incorporated entities such as trusts, school governing bodies,
government departments, etc.

Key substantive changes:

- Combined Assurance Model
- Definition of Independence of Directors
- Strategy and Performance
- Integrated Thinking and the Integrated Report

Philosophy of King IV
- Sustainable development
- Integrated thinking
- Corporate citizenship
- Stakeholder inclusivity
- Compan

50
Structure of King IV
- Principles
- Practices
- Governance outcomes
- Sector supplements

The Financial Markets Act

Objects of Act

This Act aims to:

- Ensure that the South African financial markets are fair, efficient and
transparent;
- Increase confidence in the South African financial markets by:
o 1) Requiring that securities services be provided in a fair, efficient
and transparent manner; and;
o 2) Contributing to the maintenance of a stable financial market
environment;
- Promote the protection of regulated persons, clients and investors;
- Reduce systemic risk; and;
- Promote the international and domestic competitiveness of the South African
financial markets and of securities services in the Republic.

Offences Under Market Abuse (Chapter X) [penalties: s 109]

1. Insider trading s78

2. Prohibited trading practices s80
3. False, misleading or deceptive statements, promises and forecasts s81

1. Insider Trading
What is insider trading?

by persons associated with the

company, known as insiders, who are -sen
information not generally available and gained as a result of that association.

Why is it outlawed?
- Insiders are in a position of trust
- Harmful to the company
- Insider should not be in a position of ascendancy over outsider
- Trading on inside information deters investors

The FMA governs trading on the strength of inside information; the approach

- The Act considerably broadens scope of offences related to insider trading,

and prohibits three kinds of conduct:
o Dealing

51
 Buying and selling yourself
Or through a broker
o Encouraging or discouraging dealing
o Improper disclosure
- The Act extends liability so as to also apply to juristic persons,
partnerships and trusts

An insider is a person who has inside information

(a) through
(i) being a director, employee or shareholder of an issuer of securities
listed on a regulated market or an issuer of derivative instruments related to
such securities to which the inside information relates (if you are an
employee that overhears something; you are an insider);
or
(ii) having access to such information by virtue of employment, office or
profession (an auditor would be considered an insider because they have
due to profession OR a judge
that is about to pass a judgement on a company whereby they know that the

to sell the shares to profit); or

(b) where such person knows that the direct or indirect source of the
information was a person contemplated in paragraph (a

Inside I (4 Elements)
1. Must be
2. Must not have been made public
3. Must be obtained or learned as an insider
a. If you know that it comes from an insider, then you are a
secondary insider.
4. If it were made public, it would be likely to have a material effect on the
price or value of any security listed on a regulated market (or of related
derivative instrument)

What Information is
1. Published in accordance with rules of relevant regulated market to
inform clients & their advisors.
2. Contained in public records.
3. Can be readily acquired by those likely to deal in any listed securities.
4. Information still public even if it can only be acquired by persons exercising
diligence or observation or having expertise.
a. If somebody has been following the market very closely and find the
trend, that information is still available externally and therefore that
person is not an insider.

52
Liability for Insider Trading

Offences
-
o Deal yourself
- Dealing on behalf of someone else, either
o Being an insider, or
o Knowing that the other person is an insider
-
o When you disclose price sensitive information.
-

Penalty
- Maximum R50 mill fine/prison: 10 years/both
- Civil liability
o For loss caused.

to civil liability.
- Same acts that give rise to criminal liability can give rise to civil liability (except

Market Manipulation
The objective of manipulating the market is to make money dishonestly, either
directly through transactions or by other means.

Rationale of Regulating Market Manipulation

- To maintain an open and free market where natural forces

(i.e. the natural forces;

- To achieve investor confidence in the integrity of the financial markets

and to protect investors from market manipulation

2. Prohibited Trading Practices Under the FMA

- , or on behalf of another
person, knowingly (includes people who reasonably ought to have
known) directly or indirectly use or participate in any practice which has
created or is likely to have the effect of creating a false or deceptive
appearance of the demand for, supply of, or trading activity in connection with;
or an artificial price for, that security.
o Cannot knowingly enter into a practice which may have the effect of
creating false demand/supply of shares or in relation to some kind of
artificial pricing.

53
Deemed Prohibited Practices

Wash sales
No change in the beneficial ownership of that security, with the intention of
creating a false or deceptive appearance of the trading activity.
- Same person is benefitting in the background but is just being held in various
hands.
o Trades are occurring but they are still benefitting the same person in
the end.

Matched orders
Order to buy or sell a security with knowledge that an opposite order or orders at
substantially the same price, have been or will be entered by or for the same or
different persons with the intention of creating a false or deceptive appearance
of trading activity.
- Makes an impression that there is trading but really you are manipulating the
market.

Buy orders at successively higher prices and sell at successively lower prices
- Buy at excessively higher prices so that the price goes up and then you sell at
low prices.

Marking the close

Approving or entering, on a regulated market, an order at or near the close of the
market, the primary purpose of which is to change or maintain the closing price
of a security listed on that market
- Inflate the closing value of a particular security.

Auctioning processes or pre-opening session

- Private auction but you have no intention to buy so you just drive the price up.

Market corner
Maintaining an artificial price
Manipulating devices, schemes or artifices

54
Defences Against Market Manipulation

- Price stabilization
o If you are engaging in this activity to maintain the correct/accurate
price of the security on the market then that is not artificially
inflating it.
- Definitional defences
- Additional defences in other jurisdictions
o Chinese Wall
Literally putting up some kind of wall in the workplace so that
other departments cannot view the information.
Or computers with restricted access etc.

3. False, Misleading or Deceptive Statements, Promises and

Forecasts
Section 81(1): No person may, directly or indirectly, make or publish in respect of
securities traded on a regulated market, or in respect of the past or future
performance of a company whose securities are listed on a regulated market:
a) any statement, promise or forecast which is, at the time and in the light of the
circumstances in which it is made, false or misleading or deceptive in
respect of any material fact and which the person knows, or ought
reasonably to know, is false, misleading or deceptive; or
b) any statement, promise or forecast which is, by reason of the omission of a
material fact, rendered false, misleading or deceptive and which the
person knows, or ought reasonably to know, is rendered false, misleading or
deceptive by reason of the omission of that fact.

Auditor Liability
Relevant law
- Auditing Profession Act 26 of 2005
- Apportionment of Damages Act 34 of 1956
- Common law principles of delict (see introductory topics)

Incidence of liability
- Client damages
- Third parties damages
- Disciplinary sanctions
- Criminal charges

55
Auditing Profession Act

- Establishes Independent Regulatory Board for auditors established to,

amongst other things:
o Promote integrity of auditing profession
o Prescribe standards of professional qualifications, ethics etc
o Protect public in their dealings with auditors
o Final authority on education, training and professional development.

Imposes
- Criminal liability in respect of reportable irregularities as well of failure to
discharge duties set out in section 44 (and others)
- Disciplinary liability

Reportable irregularities & false statements in connection with audits

1) A registered auditor who:
a. fails to report a reportable irregularity in accordance with section 45;
or;
b. for the purposes of, or in connection with, the audit of any financial
statement knowingly or recklessly expresses an opinion or makes
a report or other statement which is false in a material respect, shall
be guilty of an offence.
3) A person convicted of an offence in a court of law under this section is liable
to a fine or to imprisonment for a term not exceeding 10 years or to both
a fine and such imprisonment.

Auditor Liability for Negligence

Liability may be to:
- A client:
o In terms of:
A contract
Delict
- A third party:
o In terms of:
Delict
- Contributory negligence and the Apportionment of Damages Act
- Wrongfulness in cases of pure economic loss
o Cape Empowerment Trust Ltd v Fisher Hoffman Sithole
2013 (5) SA 183 (SCA)

56
Class Exercise 3
Regulatory Framework

Question 1
Discuss the difference between the Companies Act 2008 and King IV in promoting
good corporate governance in South Africa, and the approach that King IV has taken
to ensuring better compliance with its provisions. Explain their nature and their
application.

- King is a voluntary code, a guideline (soft law) while the Companies Act is
legislation and thus is binding (hard law). (Nature)
- How do they promote corporate governance differently ? King follows the apply
and explain rule (which has moved away from a rules-based system (apply or
explain) to a principles-based system) and thus applies to listed companies
(where it is mandatory) as well as to everyone / all organisations. While the
Companies Act applies to just companies that have been incorporated.
(Application)

Question 2

The company has recently decided that it wants to list its shares on the
Johannesburg Stock Exchange (JSE).

While the board is ensuring that the comp

later transpires that one of the directors stole thousands of Rands from the company
over a four year period. Because of the fact that the director was also the head of

director has since disappeared.

Advise Paul of his legal position.

- Question whether the auditor took proper care?

- It s possible that the client can sue him due to breach of contract or through
delict.
- Breach of contract: He should have an implied duty of care towards his client and
thus if we think he is negligence according to industry standards (we not sure) ,
we need to advise him which standard applies.
- In the circumstances, the company placed the director in a position where he
was able to hide the theft (Thoroughbred Breeders vs Price Waterhouse auditor
is expected to be a watch dog not a bloodhound) which means that the
company can be considered to being negligent.
- Then move onto delict: if a 3rd party brought a claim under delict, one thing we
would have to prove is wrongfulness (Cape Empowerment Trust v Fisher
Hoffman Sithole)
- Paul also has duties under the APA, as this is a reportable irregularity and breach
of fiduciary duties.

57
- S214 of Companies Act a person is guilty of an offense if the person is party to
any person that has prepared an untrue statement. Thus Paul, the auditor could
be held liable here.

58
Part 5: Categories & Incorporation of Companies
Categories of Companies

- Types of profit companies

- Non-profit companies

Process of Incorporation

- Procedural requirements
- Formal requirements

Types of Companies
Broad distinction under Companies Act 71 of 2008:

Profit
- Public (Ltd.)
- Private (Pty) Ltd.
- Personal Liability (Inc.)
- State Owned (SOC Ltd.)

Non-Profit
- NPC

A company may also be:

ing- MOI Provisions) Rf

- This makes it difficult to change/amend the MOI provisions.

- .
o Are able to say that a director of more than
R10 000; their authority is limited.
- Doctrine of constructive notice
o States that 3rd parties contracting or dealing with a company were
deemed to have had notice of the public documents of the company
(MOI) - designed to protect the company from unauthorized acts of its
directors.
Hence, the onus is on the parties dealing with the company to
ensure that they have accessed their MOI.
o The 2008 Companies Act abolished this constructive knowledge and
it has been replaced with actual knowledge about the company as a
third party contracting with the company.
So now, companies must ring fence
.

59
 on Business in SA)

- Compelled to register with CIPC (Companies and Intellectual Property

Commission) within 20 business days.
- Not sufficient to just have a bank account.
o But if they have employment agreements within SA then yes, a bank
account is sufficient enough.
Or if there is a course of conduct or patent of activities over 6
months that would lead a person to reasonably conclude that the
company intended to continually engage in SA.
- NB: This will be MCQ.

Share Block Control Act 59 of 1980

- Applicable to share block companies (the activities of which comprise or include

the operation of a share block scheme).
o S means any scheme in terms of which a share, in
any manner whatsoever, confers a right to, or an interest in, the use of
immovable property.
i.e. Any share scheme in which the share has a right in the use of
immovable property or an interest in the use of immovable property.
- Application of Companies Act to share block companies:
o Provisions of the Companies Act apply to a share block company
insofar as such provisions are not in conflict with those of the Share
Blocks Control Act.

Profit Companies
- Purpose is financial gain for shareholders
- One or more incorporators
- Any number of shareholders
- The Companies Act attempts to create a flexible regime which regulates
companies that may impact the broad public, whilst also offering exemptions
and measures to also accommodate small, owner-managed entities.
- Need at least 1 director/member

Non-Profit Companies
- Previously recognized in terms of section 21 of the Companies Act of 1973
- At least one of the objectives must be of public benefit/cultural/social
activities.
o All of the assets and income is used to further their objective.
- May acquire and hold securities;
- May carry on a business/a trade/an undertaking which is consistent with, or
ancillary to, their stated objective(s);
- No financial benefit for company, apart from reasonable remuneration or
compensation for expenses incurred in furthering their objectives;
o If a non-profit company (NPC) is wound up, then no member/director is
entitled to assets etc.

60
- Does not have to have members incorporated by directors
- Must have at least three directors

Profit Companies (4)

1. Public Companies

This is a not:
- A state-owned enterprise;
- A personal liability company;
- Or a private company.

Their Shares
- May be offered to the public
- Are freely transferable
o Key difference between private and public company is that in a private
company, there is a restriction of trade of their shares on the
secondary market in its MOI.

Compliance
- Companies Act
- JSE listing requirements (only applicable to listed, public companies; private
companies cannot be listed):
o Must be in-line with the Companies Act:
More stringent compliance.
E.g. Mandatory to have audit committee (appointed by
shareholders)
o Must have social ethics committee.
o Greater scrutiny on their preparation of financial statements.
o Mandatory to appoint secretary.

2. Private Companies

Memorandum of Incorporation
The MOI prohibits the offering of securities to the public and also, restricts the
transferability of shares.

How is this done?

- For example, you can say that you must get permission from all the shareholders
in order to sell in secondary market.

Pre-Emptive Right:
If you want to sell your shares, you must first offer to sell the shares to the other
members of the company (secondary market) or, if you issue new shares, you
must first offer these to current shareholders. (primary market)
o This restricts transferability of the shares.

61
 o You do not need to restrict through a pre-emptive right; you can use
approval by shareholders as a way in which to restrict the transferability of
the shares.
If a restriction takes the form of a pre-emptive right, where the
sale is in the secondary market, then the provision (pre-emptive
right) the
existing shareholders either accept all the shares or nothing.

shareholders of the company but they do not apply to third

parties.
o If the company wants to offer to anyone other than existing shareholders, it
must first offer shares to existing shareholders in accordance with the
proportion of shares that they own. (i.e. Pro rata) If the shareholders take
up the offer, you cannot proceed to offer the shares to the individual.
- The pre-emptive right is a non-alterable provision; if there is no restriction on
the transferability of shares, then there is no private company.
- Alterable provisions:
o Opt- :
o t- : auditing requirements not applicable for private

3. Personal Liability Company

- Used by professional associations

- Their MOI will state that it is a personal liability company
- Liability of directors:
o Jointly and severally liable during the period that they are in office.
Jointly liable: means that the directors are each liable up to the full
amount of the obligation.
Severally liable: also called proportionate liability; parties are only
liable in respect of their own obligations.
Jointly and severally liable: here, a claimant is able to pursue one
defendant and receive payment. The defendant that paid, must then
pursue the other homies for a contribution to their share of the
liability.

4. State-Owned Companies

- Companies that are either -owned

Public Finance Management Act or are owned by
municipality.
- National government business enterprise
- Juristic person under ownership and control of national executive.
- Goods or services provided.
- Financed fully or substantially from the National Revenue Fund/taxes/levies.

62
Process of Incorporation
Documentation: Notice of Incorporation & Memorandum of Incorporation

Notice of Incorporation
This is a document which contains the details of the directors and the company
name.

Memorandum of Incorporation
The Memorandum of Incorporation is defined as a document that sets out the
rights, duties and responsibilities of shareholders, directors and others within
a company, and by which a company is incorporated in the Act or a pre-existing
company was structured before the date that the Act comes into operation.

This document has:

- Unalterable provisions (may not change as per the Companies Act)
- Alterable provisions
o E.g. You could require 95% of shareholders to agree for a special
resolution; can tweak these provisions from the Companies Act.
- Default provisions
o Default provisions outline the conditions in which one of the parties will
not have fulfilled its obligations under the contract.

Company Names

- Registration and reservation

o It is possible for you to reserve a name before the NOI.
- Criteria and mandatory suffixes (see next page)

Who May Incorporate?

- 1 or more persons may incorporate a profit company, or

- 3 or more persons may incorporate a non-profit company.

Submission to CIPC

- Each must complete and sign an MOI in the prescribed form or in a form unique
to the company.
- The NOI must be filed and it must be accompanied by the MOI, as well as the
prescribed fee.
- The NOI must mention special [ring-fence] requirements.

Consideration of Application by the CIPC

The commission may reject the notice if:

- It is incomplete or improperly completed

63
The commission must reject the notice if:
- Initial directors are fewer than required (1 profit, 3 non-profit) or;
- Reasonably believes that one of initial directors should be/is disqualified in terms
of section 69 and the remaining directors are too few.
- Acceptable company name

As soon as practicable - able to be done or put into practice

successfully) the CIPC must:
- Assign a unique registration number
- Enter the prescribed information into the companies register
- Endorse the NOI and file the MOI with it
- Issue and deliver registration certificate containing date of issue
o A registration certificate is conclusive evidence of incorporation
and date thereof.

Company Names
- Must include suffix indicating type (i.e. SOC (RF) Ltd, etc.)
- May:
o Comprise words in any language as long as you can say it
o Letters, numbers, punctuation marks
o Symbols: +, &, #, %, =
o Any other symbol permitted by regulations
o Round brackets
o
- May not:
o Be the same, or confusingly similar to, the name of another
company, close corporation, etc.
Business Names Act, Trade Marks Act, Merchandise Marks Act
o Suggest that the company
Is part of/associated with entity or person
Is an organ of state or a court
Is owned/managed by person with particular education and
designation
Is owned/operated/sponsored/supported by foreign state, head
of state, government, international organisation, etc.
o Contain a word or symbol:
That is propaganda for war
That incites imminent violence
That advocates hatred based on race/ethnicity/gender/religion/
incitement to cause harm

Non-Compliance with Regards to Company Names

- If the name does not contain the suffix at the end; then, the commission may
alter the name

64
- If the name is the same as the name of another company, CC etc., or is
reserved; then use registration no. as interim name, and invite company to file
amended NOI.
- If the name confuses/misleads people:
o Notify the person(s) possibly affected
o Refer to tribunal
- If the name incites violence, etc.:
o Refer to Human Rights Commission, who may choose to refer it to the
tribunal.

Reservation of Company Name:

It is possible to reserve a name by filing an application together with the prescribed

fee. The commission must reserve name unless:
- The name that has been applied for is already in use
- It is the name of a registered external company
- The name is already reserved in terms of section 12
- The name is inconsistent with Act?

Name reservation continues for 6 months.

- Can be extended for 60 business days at a time
- Reservation may be transferred
- Abuse of name reservation system prohibited
- Defensive name may be registered for period of 2 years

65
Part 6: Internal Relations
Internal Governance

Corporate law must be seen as being essentially concerned with making available
:
- Firstly, to facilitate and regulate the process of raising capital for the
; and
- To impose controls on persons whose power is derived from the finance
that the use of the corporate form has put at their disposal (i.e. regulating organs
concerned with the governance of a company corporate governance).

Organs of a Company

- Separation of ownership and control

o Control vests in the board
o The shareholders are the owners

Internal regulation:

Companies Act/Regulations

MOI

Rules of the Board

All need to be compliant with Companies Act:

- A company is like a tree that produces fruit.
- When it comes to a decision which will affect the company greatly (i.e.
affecting tree like amending the MOI) then the directors will need permission
to do so.
o The board may make a decision to affect income/fruit without
permission. (Board has control)
- When the board passes a resolution, it is making a decision that is going to
greatly affect the company. According to their MOI they may or may not have
to obtain permission from shareholders before doing so.
- If company has an MOI which requires the board to obtain permission from
shareholders before making a specific decision, then there are two types of
resolutions:
o Ordinary - generally 50% +1 of shareholders
o Special - generally 75% of shareholders

66
The Memorandum of Incorporation
- Allows complete flexibility between company and stakeholders may be simple
or detailed.
- Before the 2008 Act, there were two documents - viz. the Memorandum of
Association and Articles of Incorporation.
o Definition in section 1: The document, as amended from time to time,
that sets out rights, duties and responsibilities of shareholders,
directors and others within and in relation to a company, and other

- All provisions in the MOI must be consistent with the Act.

o Provisions that are inconsistent regarded as void to the extent
that it contravenes/is inconsistent.
- Alterable and unalterable provisions:
o Unalterable provisions are actually sometimes alterable;

with the goal of protecting minorities. If I wanted to make it a

60% majority I could as it offers more protection.
You cannot make an unalterable decision less
strenuous, but you can make it more strenuous.
- Restrictive provisions:
o Ring-fenced companies
- Incorporators free to include any provision not covered by Act.

Amendments of the MOI

- An alteration is a correction of an error made by the board in the MOI, an

amendment is a substantive change to the MOI.
o You have to propose an amendment that the board will then have to
propose to shareholders and try and get it passed based on MOI rules.
Who may propose an amendment?
The board of directors can propose an amendment;
It is also possible for shareholders to propose an
amendment, provided they have at least 10% of the
voting rights - either individually or collectively.

Exceptions to the Approval via Special Resolution of Shareholders

- Court can order amendment of MOI;
- Alterations to correct errors;
- Translations of the MOI;
- Consolidation of the MOI;
- Authenticity of versions of the MOI.

67
- Parties to the contract:
o Company Shareholder
o Company Director
o Company Prescribed officer
o Between/among shareholders

- The MOI has contractual force between the members insofar as they relate
to their rights and obligations as members.
o An individual member can always enforce his personal rights as a
member as stipulated under the MOI by means of:
Proceedings for interdict;
Declaration of rights;
Specific performance
(E.g. If
force this through an interdict)
- However, the member remains bound by the decision of the majority of the
members in the general meeting.
o But, special remedies exist for minorities in some instances.
- MOI as such has no contractual force between the company and an
outsider including a member in his personal capacity
o The right (see below) must be conferred on him by reason, or by
virtue, of his membership of the company - must also relate to his
membership of the company.
- This is a general right both to compel the company and its organs to act
within their powers, and to insist on compliance with the conditions specified
for the exercise of those powers.

E.g. A board of directors employs attorney, if they fire the attorney, the attorney has
no power to enforce the MOI. Shareholders enter into contract with company to
abide by their MOI, atto .

Note: the attorney could also be a shareholder no fiduciary duty/conflict of interest

68
Rules of the Board of Directors
Unless the MOI provides otherwise, the board of directors can
make/amend/repeal necessary or incidental rules relating to governance of the
company.
- These rules must be consistent with the MOI and the Act:
o These would be void to the extent of inconsistency with either the MOI
or the Act. (As is the case with provisions of the MOI having to be
consistent with the Act)

Process of Changing of Rules

- Publication + filing
- Effective / binding on interim basis (20 business days / later)
- Permanent on ratification
- Consequences of non-ratification?

The shareholders of a company may enter into any agreement with one another
concerning any matter relating to the company, but any such agreement must be
.
- Any provision of such an agreement that is inconsistent with this Act or the
15(7)).

Nature of Shareholders Agreement

- Agreement between all or some of the shareholders;

o Only binds persons who are parties to it.
- If agreement conflicts with MOI, the MOI will prevail.

Utility of Shareholders Agreement

- and rules
- Confidentiality
- Entrenchment
- Extend scope of remedies
- Compliments the company constitution

69
Part 7: Validity of Corporate Actions
A company is a juristic person and therefore when it contracts, its agents must act on
its behalf.

There are thus two core requirements for valid corporate actions:
1. The juristic person (the company) must have capacity.
o Juristic person - capacity
2. The agent (usually directors) must have authority to represent the juristic
person.
o Agent authority

Concepts to understand:
- Objects clause
- Ultra vires doctrine
- Constructive notice
- The Turquand Rule

(Still need p41-

Objects Clause
- Objects clause of companies is used to state the objective of the company,
since it was an ultra vires document.
o In the past, if the company breached the objects clause, it could be
sued by the shareholders.
Companies then made them incredibly broad as to avoid liability
to shareholders, and hence, the objects clauses became
useless and hence, why the new Act does away with it.
Restricts the capacity of the company

Ultra vires Doctrine

- cannot come into existence because there exists
no legal authority or ability to do this or alter this.
o E.g. Anything that goes against the constitution is ultra vires.
- An act that is outside of the capacity of a company is void.

Constructive Notice
Means that a third party, that is dealing with the company, knows that there is a
procedural requirement, but they are unsure as to whether or not it has been
complied with.

70
The Turquand Rule
States that a third party dealing with a company is entitled to presume that all of the
procedural requirements/formalities have been complied with by the company.
- Can be used by a third party when they are trying to enforce the contract,
but the company is denying liability for the contract due to a lack of
authority.

The rule in Royal British Bank v Turquand (1856) 6 E&B 327

Turquand was the official manager of the bank. There was a provision in the MOI
which stated that only directors had the ability to borrow money up to a specific
amount, and that the specific amount would be approved by resolution of
shareholders, but the

It then came into question whether this was valid. The doctrine of constructive notice
means that 3rd party knows there is this procedural requirement, but they are not
sure whether this has been complied with.
- Internal irregularity, and not due to ignorance of MOI.

This led to the Turquand rule:

- A 3rd party dealing with a company in good faith/general is entitled to presume
that all procedural formalities have been complied with.
o A third party cannot use the Turquand rule against a company that is
ring-fenced due to the fact that a requirement of the Turquand rule is
that (as an act of good faith) you assume that they have complied with
their internal regulations.
If you are a ring-
by the company name indicates that the third party should go
and look at the restriction in the MOI before they contract with
you.

MOI Restrictions on Corporate Capacity

s19. Legal Status of Companies
s19(1): From the date and time that the incorporation of a company is registered,
as stated in its registration certificate, the company
(a) is a juristic person, which exists continuously until its name is
removed from the companies register in accordance with this Act;
(b) has all of the legal powers and capacity of an individual, except to the
extent that
(i) a juristic person is incapable of exercising any such power, or
having any such capacity; or
memorandum of incorporation provides otherwise;

- To establish a company and then make sure that the company follows its

71
s20. Validity of Company Actions
s20(1): If a limits, restricts or qualifies the
purposes, powers or activities of that company, as contemplated in section 19(1)(b)
then -
(a) no action of the company is void by reason only that
(i) the action was prohibited by that limitation, restriction or
qualification; or
(ii) as a consequence of that limitation, restriction or qualification,
the directors had no authority to authorise the action by the
company; and;
(Summary of s20(a)):
action was prohibited by a limitation in the MOI or ii) because the directors lacked
authority to authorise the action in question, due to the limitation.
- An act is no longer void simply because it is ultra vires/simply due to the
fact that there is a lack of capacity.
o Companies Act abolishes the ultra vires principle in relation to
company contracts/the MOI/an internal requirement.

(b) in any legal proceeding, other than proceedings between

(i) the company and its shareholders, directors or prescribed
officers; or;
(ii) the shareholders and directors or prescribed officers of the
company, no person may rely on such limitation, restriction or
qualification to assert that an action contemplated in paragraph
(a) is void.

(Summary of s20(1)(b)): In legal proceedings between i) the company and its

shareholders, directors or prescribed officers as well as ii) legal proceedings
between the shareholders and directors or prescribed officers, these people are
allowed to assert that the action in question is void due to the limitation in the MOI.
- (In these proceedings that occur inside the company, can say an action is void
due to it being limited by the MOI) Otherwise, no!
o Unlike initially where an action that was ultra vires was void, an action
is no longer void because it is ultra vires i.e. the new Companies
Act abolishes the ultra vires principle in relation to company
contracts.

E.g. If a company contracts with a 3rd party when the company is outside of its
capacity, the contract is no longer void when the party attempts to enforce it by virtue
of the ultra vires law.
- It is still a breach of company contract, . (ultra
vires)
o Because there is lack of capacity does not mean there is
automatically breach of authority.

Changing the range of the ultra vires doctrine to not apply externally/to third parties
means that the company will still be liable to shareholders for breaching capacity but
just not to third parties. The doctrine of ultra vires has been abolished externally
by the Act but still has contractual force internally.

72
- Internally this means that the director can be held liable for breach of this
capacity.

Ratification of Contravention

s20(2):
purposes, powers or activities of that company, or limits the authority of the directors
to perform an act on behalf of the company, the shareholders, by special
resolution, may ratify any action by the company or the directors that is
inconsistent with any such limit, restriction or qualification, subject to
subsection (3). (Essentially, the shareholders, by using a special resolution, can
support (ratify) the actions of the company or the directors even if these actions are
contrary to the limitation in the MOI.)

s20(3): An action contemplated in subsection (2) may not be ratified if it is in

contravention of this Act.

What is the effect of ratification in view of subsection 20(1)? (Validity of Company

Actions)
- If the contract is binding and the shareholders then ratify the contract, this
absolves the directors of any liability.
- If the
be liable.
o Shareholders can restrain an action that is against the company
MOI. They can apply to the High Court for a restraint to do anything
that is against the MOI.
o The company would be forced to breach its contract with the third
party contract that was binding.
The c
and if shareholders reject the contract, it will be forced to breach
the contract and the third party may have a damages claim,
provided they were unaware of this lack of capacity.

Right to Restrain an Unauthorised Act

s20(4): One or more shareholders, directors or prescribed officers of a company, or

a trade union representing employees of the company, may apply to the High
Court for an appropriate order to restrain the company from doing anything
inconsistent with this Act.

s20(5): One or more shareholders, directors or prescribed officers of a company may

apply to the High Court for an appropriate order to restrain the company or the
directors from doing anything inconsistent with any limitation, restriction or
qualification contemplated in subsection (2) [MOI] , but any such proceedings
are without prejudice to any rights to damages of a third party who
(a) obtained those rights in good faith; and [protection of bona fide 3rd
Party]
(b) did not have actual knowledge of the limit, restriction or qualification.

73
 Claim for Damages

s20(6): Each shareholder of a company has a claim for damages against any
person who intentionally, fraudulently or due to gross negligence, causes the
company to do anything inconsistent with
(a) this Act; or
(b) a limitation, restriction or qualification contemplated in this section, unless
that action has been ratified by the shareholders in terms of subsection (2)

(Essentially, each shareholder can claim damages from any person who caused
(intentionally, fraudulently or negligently) the company to act inconsistent with i) the
Act or ii) the limitation as stipulated in the MOI.)

Validity of Ultra Vires Acts: Summary

- In terms of the Companies Act, a company has the same capacity that a natural
person has except where it is incapable of performing the act in question or the
MOI restricts capacity.
o This is where the ultra vires doctrine operated or might be relevant (so,
technically if the MOI restricts capacity by including an objects clause,
the company technically does not have capacity to perform the act and
in terms of the ultra vires doctrine, the transaction would be void)
- But, the Act says that no act/agreement is void simply due to a lack of
capacity. (s20(1)(a))
- Shareholders may now ratify an ultra vires act. (s20(2))
- Shareholders may now take action to prevent directors from acting ultra vires or
to hold them liable for doing so. (s20(4&5))
- The doctrine thus now effectively has only internal application.

Restrictions on Authority

- The board of directors (as a default) has authority implied by law to represent
and contract on behalf of the company, but;
o T
- If a director acts outside of the confines of his authority, the company
cannot be bound by the agreement. (cf. partnerships)
o If a company denies liability due to lack of authority, a third party
may seek to enforce the contract on the basis of:
1) The Turquand rule:
Assume that proper internal procedures were followed to
obtain authority/presume that the company you are
dealing with, has complied with procedural
formalities/requirements.
o E.g. Shareholder resolution to enter into this
contract, assume this has been obtained if
entering into contract.
2) Estoppel or ostensible authority

When could company raise constructive notice in response?

74
- Constructive notice means that a third party, that is dealing with the company,
knows that there is a procedural requirement, but they are unsure as to
whether or not it has been complied with.
o Constructive notice can only be used as a defence against a third party
in ring-fenced companies.
o Ring-fenced means that the company that is ring-fenced has some sort
of restriction in their MOI and hence the third party should have gone to
look at the MOI after having seen that the company was ring-fenced.

the new Act.

If the company is not ring-
anymore as the third party requires actual knowledge as
opposed to implied knowledge about the MOI.

Statutory Constructive Notice

(The constructive notice above was common law)

Statutory Turquand Rule

- Statutory indoor management rule = s20(7)

s20(7): A person dealing with a company in good faith, other than a director,
prescribed officer or shareholder of the company, is entitled to presume that the
company, in making any decision in the exercise of its powers, has complied with
all of the formal and procedural requirements in terms of this Act, its
Memorandum of Incorporation and any rules of the company unless, in the
circumstances, the person knew or reasonably ought to have known of any
failure by the company to comply with any such requirement.

s20(8): Subsection (7) must be construed (interpreted) concurrently with, and

not in substitution for, any relevant common law principle relating to the
presumed validity of the actions of a company in the exercise of its powers.
- Modifications in statutory form create a murky overlap with common law.

75
Part 8: Company Organs: Directors and Shareholders
Internal Relations

Separation of ownership and control (see Part 9)

- Control vests in the board
- The shareholders are the owners

Internal regulation:

Companies Act/Regulations

MOI

Rules of the Board

Access to company records:

- Role of company secretary?

Internal Governance
Corporate law must be seen as being essentially concerned with making available
:
- Firstly, to facilitate and regulate the process of raising capital for the
; and
- To impose controls on persons whose power is derived from the finance
that the use of the corporate form has put at their disposal (i.e. regulating organs
concerned with the governance of a company corporate governance).

Separation of Ownership and Control

- Shareholders own the company; the board must manage it.

- Smaller companies :
o i.e. Where separation between ownership and control is less
pronounced or entirely absent; we deal with such companies on a
slightly different basis.
- Directors
present and future shareholders).
o What does that mean?
Fiduciary duty.
- How the company is governed is determined largely by the Act and the MOI
(also called the company constitution).
o The MOI is an example of how the Companies Act of 2008 attempts to
to just regulate.
- Separation of control may be absent in smaller companies (although there is still
legally a distinction).

76
 o Exceptions built-in for smaller companies .

Overview

Internal governance
- Company organs
- Company contract
- Directors and officers

Accountability measures (see Part 9)

- Access to company records
- External scrutiny of financial records
- Auditor

The Board of Directors

Role and function

The agents of the company

- Human functionary (a person who has to perform official functions or
duties) that gives life to a juristic person and when they (the humans) act,
they bind the principal the principal being the company.
o Must act in best interest of company.

Directors as opposed to managers

- Directors not involved in day-to-day decisions
- Executive directors/managers are employees and are involved in the
management of the company.
- Non-executive directors would only go to board meetings

Board meetings
- Quorum
o Majority of directors - for the board to validly pass a resolution, there
must be a certain amount of directors present.
Minimum of 50% of the directors need to be present.
- Participation

77
Rules of the Board of Directors

Board committees (board can delegate certain tasks to committees)

- Compulsory committees
- Role and responsibilities of committees
- May or may not make day-to-day decisions
o Board delegates tasks to these committees. However, the board
remains ultimately responsible for the actions and work of the
committee.
- MOI specifies how many seats on board and the number of directors that sit on
the board.
- Board is ultimately still responsible for the work of the committee
- Committee may include persons who are not members of the board but
must not be ineligible/disqualified
o Does not have a vote on a matter decided by committee
- Committee may consult with or receive advice from any person
- Committee has full authority of the board in respect of the matter referred
to it.
-
required in section 67 of the Act.
- Minister may require ethics committee for company/category if in public interest in
light of:
o Annual turnover
o Size of workforce
o Nature and extent of activities
Calculate public interest score.

The Board of Directors (Continued)

The business and affairs of a company must be managed by or under the direction
of its board. The directors act as agents of the company.
- cf. Directors/managers/employees
o

The board has the authority to exercise all of the powers and perform any of
the functions of the company except to the extent that the Act or the MOI
provides otherwise.

Who are Directors?

broadly:
- There is no distinction between executive and non-executive directors
- Includes de facto directors
o d y fact, whether by right or not.
o Member of a board of a company or alternative director of company
(who sits on board on occasion) and includes any person occupying
position of director or alternate director by whatever name designated.
E.g. Family business, you and your cousin sit on the board and
your uncle (with good business sense) comes to all your

78
 business meetings and gives advice. The uncle would also be
liable for breach due to the fact that he occupies the position of
the director and so is a de facto director.
Highlighting that all directors are jointly and severally
liable.
- P
o A prescribed officer is a person that exercises or regularly
participates, to a material degree, in the exercise of general
executive control over, and management of, the whole or a significant
portion of the business and activities of the company.
i.e. Someone with substantial control over business even if
not on board (e.g. CEO, company secretary, etc.)

Directors may be
- Elected:
o Elected by the shareholders
o Must be at least 50% of board
- Appointed:
o Appointed by a person designated in the MOI
- Ex officio:
o Ex officio: holds the position by virtue of another position that they
hold/due to their status
Director because they are something else (other than director)
o This person needs to have a role in overall management of
company
Must be established in MOI

Removing Directors

The directors may be removed by the following:

The Shareholders
This can happen in a general meeting where the shareholders act and exercise
their duty.
- Need a simple majority +1 (i.e. more than 50%) to remove the director.

Grounds for removal?

- Any ground for removal; shareholders have interests in themselves only and

o Note the possibility of unfair dismissal.

79
Procedural requirements:
- Director must be given notice of the meeting and;
o Notice can be determined by the MOI
- The director must be aware that his/her removal will be voted on and;
- The director must be given an opportunity to address the meeting.

The Board
- Under what circumstances/grounds for removal?
o Director is incapacitated
o Derelict in performance of their duty (not abiding by their duties)
Breach of fiduciary duties
Breach of the MOI
Not coming to meetings, not interested, etc.
o Director has become disqualified

Procedural requirements:
- Director must be given notice that their removal is being considered and;
- Given a chance to address the board and;
- A chance to take it to the companies tribunal on review.

The Companies Tribunal

- Circumstances/grounds/procedure?
o The tribunal can only remove a director if there are less than 3
directors, then it has to be through the companies tribunal and not
through the board.
If there are more than 3 directors, then the company can do
the removal of the director by itself and the tribunal then
cannot remove a director.

Number of Directors Needed

- Private/personal liability company = at least 1

o Unalterable provision.
- Public/non-profit = at least 3
- The MOI may specify a higher number in substitution for the minimum
requirement in the Act.
Remuneration of Directors

- Except to extent that the MOI provides otherwise the company may pay
remuneration to directors.
o The remuneration may only be paid in accordance with a special
resolution that has been approved by shareholders within the
previous two years.
- remuneration is on their own.

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Board Meetings
Calling of meetings
- An authorized director may call a meeting at any time.
- Must call if required by:
o At least 25% of the directors if there are more than 12;
o 2 directors in any other case
o (MOI may specify higher percentage)
- The meeting may be conducted by electronic communication/the directors
can participate through electronic communication.
o The facility must enable all persons to participate without
intermediary and to participate effectively.
Skype calls
Cellphone on table
Not voice notes
Notice of Meetings

- Board may determine what the notice requirement is.

- Must comply with requirements in MOI or rules of the company.
- No meeting may be convened without notice to all directors
o Exception: if all directors acknowledge receipt of the meeting invitation,
are all present at the meeting, and waive the notice of meeting, the
meeting may proceed.
E.g. The company gives 2 days notice for a meeting which is
urgent; we waive the requirement to have been given a week
notice, specified by the board, and all directors are present
then this is fine.

Decision-Making

- Quorum: majority of directors must be present before vote may be called.

o Each director has one vote.
o Majority of votes is sufficient to approve resolution.
- In the case of a tied vote, (if the chair did not initially have a vote), the chair has
deciding vote, otherwise the matter fails

Resolution may be adopted in writing or electronically

- Must still have written consent of majority of directors.
- Consent may be in person or by electronic communication.
- Consent or vote can be made in sequence like in an email chain.
- Each director must receive notice.
- A decision made in this way will have the same effect as if it had been approved
by voting at a meeting.
- Note that the directors with personal financial interests, are not entitled to
vote.
- Minutes of meetings and decisions must be taken and kept in the company
records.

81
Shareholders
means one of the units into which the proprietary interest in a profit company
is divided/unit of ownership. Shares are also units of liability. It is essentially a
moveable and incorporeal piece of property.

means the holder of a share issued by a company and who is entered

as such in the certificated (evidence of the shareholding; share is incorporeal) or
uncertificated (no certificates just entered straight into the share register)
securities register, as the case may be.

Authorised share capital: authorised in terms of the MOI but are not yet sitting in the
hands of shareholders.
- If company buys shares back, then they become part of the authorised share
capital again.
Issued share capital: sitting in the hands of shareholders.

The .
- Resolutions taken in general meetings
- May be general or special resolutions

There are certain powers that only the shareholders are allowed to exercise and they
fulfil an oversight function where appropriate.

Distinguish between:
- Securities
o Term that refers to both of the below instruments as well as hybrid
instruments with both debt and equity.
- Shares
o Holders of shares own equity.
- Debentures
o Holders of debentures own debt and are hence, creditors, not
shareholders.

l Brothers and Company Ltd

- A share is the interest of a shareholder in the company measured by a sum of
money, for the purpose of liability in the first place, and of interest in the second,
but also consisting of a series of mutual covenants entered into by all the

82
Nature of Shareholding: Rights
The MOI may:
- Confer special, conditional or limited voting rights;
- Entitle the shareholders to distributions calculated in any manner, including
dividends that may be cumulative, non-cumulative; and
- Provide for shares of a class to have preference over any other class of shares.

Rights Generally Attached to a Share

- The right to vote;
- The right to information;
- The right to share in the profits of a company that have been declared as
dividend; and;
o Only have right to dividend once they have been declared; do not have
an automatic right to a share in the profits of the company.
- The right to share in the net surplus capital of a company on
its winding-up.

Nature of Shareholding: Duties

Duties Generally Attached to a Share
- Comply with MOI and rules, and shareholders agreement, if any;
- Pay for shares;
- Participate in meetings and vote; and
o Quorum is only 25% for shareholders.
- Notify company of any changes that need to be made in register (e.g. change of
address).

These are held to provide shareholders with an opportunity to debate and vote on
matters affecting the company.
- The
meetings etc.

A a meeting of those holders of that

ghts in relation to

- If there was a meeting that only affected ordinary shareholders, then only
ordinary shareholders will meet.
- Certain substantive decisions regarding the management of the company
are reserved for the shareholders focus of
decision making by the shareholders.

The Companies
substantive constitutional and managerial powers. Powers reserved for
shareholders in general meeting:
- Power to amend MOI;

83
- Power to approve rules made by board of directors;
- Power to remove directors.
o Only elected directors.

Calling of meetings
Who may convene a meeting?
- Board of directors or any other person specified in MOI (e.g. company
secretary)
- Shareholders that hold at least 10% of the voting rights (MOI may require less,
but not more)
o Unalterable provision can only increase protection.

Who may attend?

The shareholders that are entitled to vote or their representative (their proxy).
- The record date (date before the meeting which determines who the
shareholders are) may not be more 10 business days before meeting. On this
date, those are the shareholders which are able to attend the meeting and those
are the shareholders which are able to exercise voting rights.

Notice of meetings
- 15 business days prior for public company/10 business days for private
company.
o MOI may provide for longer/shorter minimum notice period.
- Notice must be in writing and include amongst other things:
o Date, time and place
o General purpose of meeting
o Copy of any proposed resolutions to be tabled

If there is a non-compliance with formalities, the meeting may be held if:

- Unanimous assent at common law
o
- Companies with one shareholder
- Every shareholder is also a director

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Proxies

A proxy is an agent of the shareholder; a shareholder is not obliged to attend a

, can send a proxy to attend. The proxy will
attend, vote and speak
- Persons who may be appointed as proxies
o Any person can be appointed as proxies.
- Procedures:
o The appointment of the proxy must be in writing;
o Has to be dated and signed;
o A copy has to be delivered to the company.

Proxies are referred to the people that represent the shareholders or the way in
which the person exercises their voting rights; voting by proxy.
- You can give the proxy your own discretion. E.g. Go, /only vote
against or abstain etc.

Quorum

Measured by the proportion of shares owned; determined by ownership of shares.

(E.g. if a shareholder has 25% ownership, their presence is enough for quorum)

This is the minimum number of qualified persons whose presence at a meeting

is necessary before any business may be validly transacted.
- The Act distinguishes two quorum requirements viz.: videlicet which

o Requirements for a meeting to commence

o Requirements for a matter at a meeting to be considered
This can vary depending on the matter at hand; if pertaining to
preference shareholders, and if 25% of preference shareholders
there then all Gucci.
- If you do not have quorum, then the meeting cannot commence.
- Must have 25% of shareholders there in order to make a decision. If you
need to have a majority of shareholders present at the meeting in order to pass
an ordinary resolution, the quorum for shareholders is 25%.
o The minimum number of persons/shareholders of a company that has
100 shares that need to be at the meeting, is 25.
The majority needed to pass the resolution is then 13
people (more than 50% of shareholders) the majority of
the 25 shareholders that are present.
Even if the other 75 shareholders disagree, it is their
issue for not being present.

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Decision-Making

Voting
- By a show of hands:
o ;
o Easy to count;
o Usually used for uncontroversial issues so heavy consensus.
- By poll:
o If 10% of the shareholders insist that they must have voting by poll.
o Used for more controversial issues.

Resolutions
- Ordinary resolution (50% + 1)
- Special resolution (75%)

- The resolutions can be altered.

o The special resolution threshold can be lowered but the ordinary
resolution can only be increased as it has to be a majority (over
50%).
- There also needs to be a 10% difference between ordinary resolutions and
special resolutions i.e. If the MOI increases ordinary resolution to 60% then
the special resolution can only be lowered to 70% - hence ensuring the 10%
difference between the two.

The Annual General Meeting

This is a s once a year, where particular business is

required to be conducted.
- Public companies are required to have an AGM.

Minimum Business to be Transacted at the AGM

There needs to be a presentation of:
- ;
- Audited financial statements for the preceding financial year;
- Audit committee report;
- Election of directors;
- Appointment of auditor and audit committee and;
- Matters raised by shareholders.

The Majority Rules

- When a person becomes a shareholder, she/he agrees to be bound by the
decisions of the majority subject to the MOI.
o Shareholders are also bound by the supremacy of the majority

run the company.

- But, the Companies Act also recognizes that the
power in a company, and provides for this.

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 o The Companies Act, therefore, also contains several provisions aimed
at protecting minority shareholders.

Majority decisions made in a lawful manner will prevail.

- How does the majority act?
o By means of resolutions at general meetings:
Either through an ordinary resolution or a special resolution
depending on the nature of the decision (requiring a special
resolution is actually one of the first protective mechanisms for
the minority).

Minority Protection the Act Protects the Minority

There are several remedies in the Act aimed at protecting stakeholders in general
and minority shareholders in particular. Specific remedies covered:
- Declaration of rights
- Relief from oppressive and prejudicial conduct
- The appraisal remedy
- The derivative action

Declaration of Rights
Holder of securities may apply to court for declaratory order regarding rights in terms
of:
- The Act
- The MOI
- Any rules of the company
- Any applicable debt instrument
-

Relief from Oppressive and Prejudicial Conduct (Oppression Remedy)

If an act/omission of a company, or if business is being conducted or if the powers of
a director or a prescribed officer are being exercised in a way that has a result that
is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of,
the applicant then use the oppression remedy.
- This results in a court ordering the company to repurchase the shares of the
shareholder at a fair price so that the disgruntled shareholder can part ways with
the company.

Appraisal Rights
In corporate law, the appraisal remedy is the right of shareholders who dissent or
oppose some extraordinary corporate action, for example a merger, to have their
shares judicially appraised (assessed) and to demand that the corporation buy
back their shares at the appraised value.

When may a shareholder use this remedy?

- When there is a resolution to amend the MOI which alters rights or terms
attached to shares in manner which is materially adverse to the rights or

87
 interests of that shareholder. (E.g. If you amend the MOI and, as a result, the
shares are worth less); or
- Where company undertakes a fundamental transaction. (E.g. Merger)

Procedural requirements :
- Entitled to the value of the shares at the time immediately before resolution
was adopted.
- Must give written notice of objection before resolution put to vote.
- Must attend meeting and vote against resolution
- Must notify company that he/she will rely on appraisal rights after meeting
o Make use of appraisal rights on the basis of this decision. This notifies
directors that shareholders are unhappy.
- This means the company must buy the shares back from you if the
transaction goes through.
- The company needs to investigate whether to take up the cause, they have 60
days from serving of _____ ????

Derivative Action
- Who has standing?
o Shareholders, directors and the representatives of the
employees.
- Foss v Harbottle
o Directors commit fraud and the shareholders tried to sue the director.
Court ruled that the company and its directors had been wronged
and so the company needed to sue directors in its own capacity.
(Wrong done to company can only be vindicated by company)

Statutory derivative action, steps to proceed:

- Serve a demand on the company.
- Independent person or committee appointed to investigate the demand and
decide whether or not this should be sued.
- Company either: initiates proceedings/refuses to comply:
o Following refusal may now approach court
o If company refuses to comply, then the shareholder can approach the
court to bring the action or take action on behalf of the company.
- What must be shown for court to grant leave?
o The company has failed to take action/operate or comply.

Following this refusal, the shareholder can now approach the court and must
show:
- The action is interests.
- The shareholder is acting in good faith.
- The proposed or continued proceedings involves the trial of a serious
proceeding of a material consequence for the company.

This essentially (derivative action) enables a representative (not a director) to pursue

a wrong done against the company as a representative of/in the capacity of the
company; hence, acting as an agent for the company.

88
Part 9: Board Accountability and Corporate Abuses
Introduction: Keeping the Board in Check

governance is generally understood to mean the way or systems by

which companies are directed and controlled. The systems of corporate
governance exist for the purpose of effectively restricting and monitoring the
powers vested in decision-makers Tshepo Mongalo

powers of management are vested in the directors, they and they alone can
exercise these powers. The shareholders cannot themselves usurp the powers
which, by the company constitution, are vested in the directors any more than the
directors can usurp the powers vested by the company constitution in the general
John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113
(CA)
- The law must therefore seek to protect the interests of the owners whose
control does not extend to the day to day management of the company by
holding accountable those in control.
o Essentially, the law must provide for the protection of owners of the
company who are unable to get involved in the day-to-day
management of the company due to the MOI.
Need to hold the directors accountable.

Qualification Requirements for Directors etc.

The Act does not specify any minimum qualifications required to act as a
director (an MOI may do so), but:
- A director may not be ineligible/disqualified:
o A person is ineligible if they:
Are a juristic person;
Are an unemancipated minor (or under similar legal disability);
Do not satisfy any qualifications set out in the MOI.
o A person is disqualified if:
The court has prohibited the person to be a director or
declared the person to be delinquent in terms of the
Companies Act/CCs Act;
They are an unrehabilitated insolvent.

Disqualified People
A person is disqualified if:
- They are prohibited to be a director in terms of any public regulation;
- They are removed from office of trust on grounds of misconduct involving
dishonesty;
- Convicted and imprisoned without option of a fine/fined more than
prescribed amount for theft, fraud, perjury or, an offence:
o Involving fraud, misrepresentation, dishonesty;
o In connection with promotion, formation or management of a company,
or [prohibitions in relation to acting as director/etc];

89
 o Under the Companies Act, Insolvency Act, CCs Act, Competition Act,
Financial Intelligence Centre Act, Securities Services Act, or Chapter 2
of the Prevention and Combating of Corrupt Activities Act.

Director Duties (s76)

s76(2): A company director:
- Must not use position of director or information obtained, by being a director, to
gain an advantage for himself or for anyone else than the company or a
wholly owned subsidiary (fiduciary duty);
- May not do anything to knowingly cause harm to the company or a subsidiary;
- Must communicate to board any practicable information unless he
reasonably believes that the information is immaterial/generally available to
the public/known by the other directors (broad duty of disclosure).
- Rule against corporate opportunity. (i.e. If you become aware of an opportunity
through your role as a director, you cannot then fail to disclose the fact that this
opportunity exists and then go and take the opportunity)
- Rule not to make a secret profit;
- Not to compete against the company.

s76(3): A company director must exercise all powers and functions of a director:
- In good faith for proper purpose;
- In best interests of company;
o If there is a hostile takeover and the director then issues shares to
avoid the takeover by diluting ownership and would rather get a friendly
buyer, although this seems to , it is
actually a breach of director duties as the share issue was not for
proper purpose which is to raise share capital.
- With a degree of care (delictual duty), skill and diligence that may reasonably
be expected of person carrying out the same functions and having the general
knowledge, skill and experience of a director*
o Minimum objective level of care in a role, but there is a subjective
element to level of care. (i.e. If a person, with no degree, runs a finance
department, they would have less of a degree of care expected from
them than that of a person running the department who has a PhD in
finance)

*s76(4) Business Judgement Rule (see below) is applicable:

- This is only in relation to delictual duty of care, skill and diligence.
- It is a defence that a director can raise against liability.

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The Business Judgment Rule

This is used as a defence

liability in a certain situation.

As far as any matter is concerned, a director will not be liable for a breach if that
director:
1. Has taken reasonably diligent steps to become informed about the matter;
2. Has either:
o No material financial interest in the subject matter of decision or;
o Has disclosed any financial interest in terms of the Act; (i.e. Rule will
not apply if the above is true)
3. Believes that decision was in the best interests of the company and has a
rational basis (research/reasonable steps for becoming informed) for holding
such a belief.
o Rational basis: back up decision with some information i.e. Decision is
following from information. Lower standard than reasonable. Helps
protect directors who are making managerial decisions.

Reliance on Others

Directors can rely on others opinions and advice (rational and reasonable basis)
such as the following:
- That employees are reasonably believed to be reliable and competent in
functions performed or information/opinions provided;
- Legal council, accountants or other professional persons retained by company for
matters involving skills ence or as
to which the particular person merits confidence;
- Committee of the board of which the director is not a member unless there is
reason to believe the committee does not merit confidence.

In certain instances, directors are allowed to rely on others opinions to make

decisions. (E.g. Committee that they are not part of or persons they have
reasonably delegated to, employee the director believes to be reliable and
competent in what they are doing as an employee, or someone who has professional
merit)
- (E.g. Ask your accountant accounting information)
- (E.g. Accounting problem in business, director phones friend who is an
accounting professor and gets advice. Makes a bad decision off of this advice
and the board finds The board wants to sue
her as reasonable director would have read report. To avoid liability, the director
would have had to show (business judgement rule) that they had no financial
interest and a reasonable and rational basis for following the advice that their
friend gave them. Could the director rely on his friend?)

91
Reckless Trading Prohibited

A company must not carry on its business recklessly, with gross negligence,
with intent to defraud any person or for any other fraudulent purpose.
- If the Commission has reasonable grounds to believe that a company is (a)
engaging in such conduct, or (b) unable to pay its debts as they become
due and payable in the normal course of business, it may issue a notice to the
company which requires the company to show why it should be permitted to
continue to carry on its business/to trade.
o The company then has 20 business days to provide evidence that
either (a) or (b) is not the case.
Failing to do this within 20 business days may result in the
Commission may then issuing a compliance notice to the
company requiring it to cease carrying on business/trading,
as the case may be.
- Reckless trading prohibition is aimed at the company.
- If a director is involved in reckless trading, the business judgement rule
(which ensures that
gross negligence and one of the duties of a director is to act with a degree of care
that would be reasonably expected from a person carrying out the same activities
etc.
o Director can in fact be declared to be a delinquent if engaging in this
and barred from directorship for 7 years.

If a director has any personal financial interest in respect of a matter to be

considered at a meeting, he must disclose the interest and its general nature
before matter is considered. In addition, such director:
- Must disclose any material information relating to matter;
- May disclose any observations or pertinent insights if requested;
- Must then leave meeting immediately;
- Must not take part in consideration of matter.

At such a meeting, the director is regarded as:

- Being present for purposes of determining quorum to vote on the decision.
(Quorum to commence)
- Not being present for purposes of determining whether there is sufficient
support to pass the resolution; quorum to make the decision.
o E.g. If there are 5 directors, need 3 for quorum and financially
interested director counts but then only need 2 instead of 3 to pass
resolution.
- If there is a related person who the director knows has a financial interest, the
director must also disclose this.
o Knows when used with respect to a person or a matter, either had
actual knowledge of the matter or ought to have reasonably
known the information or ought to have taken measures to inform
themselves on the matter.
Constructive knowledge - knew or ought to have known.

92
What if the agreement or matter has already been approved?
- The director must then immediately disclose to the board/shareholders
nature and extent of their interest and material circumstances relating to
acquisition of interest.
- The court may declare the transaction valid on application even if requirements
have not been met.
- If the person is only a director, but does not hold all issued securities:
o Then they may not approve/enter into an agreement in which he or
a related person has a financial interest.
o May not, as a director, determine any other matter in which he or a
related person has personal financial interest.
Unless approved by ordinary resolution of shareholders after
nature of interest is disclosed.

Exclusions: Requirements do not apply:

- To a director in respect of a decision that may generally affect:
o All of the directors in their capacity as such (i.e. Directors get
performance bonuses) or;
o A class of persons where director happens to be a member of such
(i.e. Directors have shares in company)
- In respect of proposal to remove director from office;
- One-man company;
- To company or director if one person holds all beneficial interests of all issued
securities and is the only director.

The Companies Act has partially codified common law duties for directors.

A director may be liable for:

- For loss, damages or costs sustained:
o Based on a breach of fiduciary duty;
o Based on negligence (failing to act with reasonable care)
- For costs sustained where the director:
o Acted on behalf of and bound the company without authority. (Director
was aware of the lack of authority actual knowledge or
reasonably expected to know);
o Carried on business prohibited by section 22(1);
o Was party to an act/omission by the company despite knowing that it
was calculated to defraud;
o Signed/consented to/authorised:
Publication of misleading financial statements
P

Directors also liable for being present at a meeting and participating in or failing
to vote against the following decisions:
- Issuing of unauthorised shares in terms of s36.

93
 o Also granting options, in terms of 42(2), for such shares.
- Issuing of authorised securities in terms of s44 regarding financial assistance.
- Provision of financial assistance contrary to the Act or MOI:
o Either to director or for the acquisition of securities;
o To the extent that the resolution of agreement has been declared void.
- Authorising distribution contrary to s46.
- Acquisition by company of its shares/shares in holding company contrary to
s46/s48.
- Allotment by company contrary to Chapter 4 to the extent that allotment has been
declared void.

- Standards of conduct imposed by the Act also apply to prescribed officers,

alternate directors and members of committees s76(1)
o This includes provisions dealing with disclosure of personal financial
interests
- Companies Act uses constructive form of knowledge
o Knowledge required on the part of director
- Coexisting duties at common law taken into account when giving effect
to/interpreting statutory duties due to the Act only partially codif
law duties for directors.

Introduction to Remedies Against Directors

The 2008 Companies Act largely decriminalized company law, although some
criminal sanctions still exist. (e.g. Not providing company records where required)
The Act instead aims to provide effective private-law remedies to discourage abuse
of power and gross mismanagement.
- There is a shift to holding parties accountable in terms of statute, not just
common law.

Remedies are Available to Shareholders in Three Broad Situations

- Where there has been an abuse of position by director etc;
- In order for shareholders to protect their own rights;
- Where there has been an
personality.

94
Specific Remedies for Shareholders Against Directors

There are two remedies:

- Delinquency
- Probation

Delinquency
Who has standing to bring the application?
- The company, directors, shareholders, representatives of employees (trade
unions) and the commission itself.

How long does delinquency last?

- Conditional delinquency: 7 years
- Unconditional delinquency: life

When must
- When the person in question has consented to act as director, even when
ineligible/disqualified or;
- When the person in question is acting in manner that amounts to gross
negligence, wilful misconduct or breach of trust.

Probation
Who has standing to bring the application?
- The company, directors, shareholders, representatives of employees (trade
unions) but not the commission.

How long does probation last?

- 5 years maximum

When may the court make an order?

- When the person in question is acting in manner which is materially
inconsistent with the duties of a director.
- When the person in question is present at a meeting but fails to vote against a
resolution, despite knowing that the company fails to satisfy the solvency and
liquidity test.
o Court can order stuff such as community service
- Removal of the director is also possible by following the requisite (extra-judicial)
procedure; who would have standing?
- Probation is a less-serious version of delinquency.
o Under delinquency, you are unable to become a director again but
under probation, you are able to.

95
Indemnification and
If a company is able to indemnify a director, it means that they have an insurable
interest.
- If a person is suing the director, then, if the director is indemnified, the
company will be liable for the damages.

The company may:

- Advance expenses (pay for the legal costs/litigation) to the director in order to
defend themselves through litigation in proceedings arising out of service to the
company if:
o Proceedings are abandoned or director is exculpated (declared not
guilty) or;
o Proceedings relate to a matter for which the director is indemnified;
unless the MOI provides otherwise.
- Indemnify the director against any liability that arises (i.e. pay for personal
liability), unless it relates to:
o Wilful misconduct (knowingly did something wrong; indicates intent);
o Wilful breach of trust;
o Payment of a fine.

Restrictions to Indemnifying Directors

General Limitation
- Any provision in the agreement/MOI/rules/resolution is void to the extent that
it:
o Purports to relieve a director of his duties in terms of sections 75 or
76;
This
o Purports to relieve a director of his liability in terms of section 77;
o Negates/limits/restricts the legal consequences arising from an
act or omission which constitutes a wilful breach of trust/wilful
misconduct.
Also, remember that a company cannot indemnify a director
against a liability that arises due to wilful misconduct, wilful
breach of trust or the payment of a fine.

Criminal Liability Excluded from Indemnification

The company may not pay a fine that was imposed on a director, on his behalf.
- E.g. The director approves a prospectus with false information the company
cannot indemnify the director.

The company may insure itself against the risk of expenses which may be validly
incurred in terms of above.

96
Company Records
is defined as any information contemplated in s24.
- Section 24 includes:
o MOI;
o Amendments or alterations to the MOI;
o Copy of any rules made by directors;
o ;
o Copies of all reports presented at AGM;
o Copies of all annual financial statements;
o Accounting records required by the Act;
The type of accounting records which have to be kept depend
on the type of company and the purpose of the company.
o All resolutions adopted by shareholders;
Shareholders agreements are not included as these are
private contracts between some or all of the shareholders.
o Any document made available to shareholders in relation to
;
o Copies of any written communications sent to any class of
shareholders;
o Minutes of all meetings and resolutions of directors;
o Minutes of committee meetings including those of audit
committee;
o Profit company securities register.

Access to Information

- All companies are required to have a registered address in South Africa.

o The records, in terms of section 24, must be maintained at that
office.
- Details of the registered office must be given in the notice of incorporation;
changes must be filed.
- All records are required to be kept in written/electronic form, or other that
allows info to be converted into written form within reasonable time.

The Company Secretary

- Chief administrative officer of the company.
o Public companies/state-owned enterprises must have a company
secretary.

They are a prescribed officer

97
Every Company Secretary Must
- Have requisite knowledge of, or experience in, relevant laws, and;
- Be a permanent resident of the Republic, and remain so while serving in that
capacity.

Duties of a Company Secretary

- Providing directors with guidance as to their duties;

- Making directors aware of any law relevant to/affecting the company;
- Reporting any failure on part of company/director to comply with the Act to
the board and;
- Certifying annual financial statements.

A person who is disqualified to serve as a director of a company, even if not

required by law, may not be appointed or continue to serve that company as their
company secretary; irrespective of whether that appointment is required or
voluntarily made.

- A company secretary can be a juristic person or a partnership, provided that:

o Every employee of that juristic person who provides company
secretary services, or partner and employee of that partnership, as the
case may be is not disqualified to serve as a director;
o At least one employee of that juristic person, or one partner or
employee of that partnership, as the case may be, satisfies the
mandatory requirements.

Financial Reporting/Accounting Records

- Why is financial reporting regulated/standardised?
o In order to have more accurate and transparent records.
- A company must keep accurate and complete accounting records in one of the
official languages of the Republic.
- e kept at or be accessible from, the
registered office of the company.

Company Offences with Regards to Accounting Records

It is an offence for a company, with the intention to deceive or mislead any person:
- To fail to keep accurate or complete accounting records;
- To keep records other than in the prescribed manner and form, if any;
- To falsify any of its accounting records or permit any person to do so.
o This is a criminal liability and so is tampering with company records.

98
Individual Offences with Regards to Accounting Records

It is an offence for any person:

- T

Financial statements must present fairly, the state of affairs and business of
the company, and explain the transactions and financial position of the business of
the company.
- Must comply with relevant financial reporting standards applicable to company
IFRS;
- Must contain certain prescribed information, including:
o Assets, liabilities and equity, income, expenses etc.;
o A prominent notice (on first page) indicating whether statements
have been audited and if not, if they have been independently
reviewed (lower standard);
o Ad and
profit/loss.

It is an offence for the company to frustrate the right of access in terms of s31.
- Right of access to financial statements must be facilitated.

Audit and Review of Accounting Records

- Any public company (larger social impact ), and;

- A private company, if:
o They are required to have statements audited in terms of
regulations or;
o They voluntarily choose to have statements audited or;
A private company with a public interest score of 350 or
more must be audited.
Must also be audited in certain circumstances if the score
is between 100 and 350; this is if your financial
statements are internally compiled.
o If externally compiled do not need to be audited.
If company has a public interest score of 500 or more, the
company is required to have a social and ethics committee.
o If the MOI of the company states that the company must be audited.

- If an audit is not necessary, the

a manner which satisfies regulations.
- Private companies exempt from review: every person who is a holder of/has
beneficial interest in securities issued is also director.

99
Public Interest Score Calculation

The Auditor
- Must be appointed every year at the AGM.
o To be appointed, person must be a registered auditor.
- The p
independent of the company.

Rotation Requirements

The same person may not serve as the auditor of the same company for more
than 5 consecutive financial years.
- If the person has served as an auditor for 2 or more consecutive financial years,
then that person may not be appointed again until the expiry of at least 2 further
financial years.
o From 1 April 2023, public interest entities must comply with mandatory
audit firm rotation.

Who Cannot be Appointed as an Auditor?

- Director/secretary/prescribed officer;
- Employee or consultant of the company engaged for more than one year in
maintenance of financial records or preparation of financial statements; or
- A person who habitually performs duties of an accountant or bookkeeper or
related secretarial work for the company, or
o A person who has acted in any such capacity for five years
immediately preceding date of appointment.

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Re-Appointment of Auditor
The auditor may be automatically re-appointed at the AGM without any
resolution being passed unless:
- The retiring auditor is no longer qualified for a re-appointment;
- No longer willing to accept appointment;
- Required to cease serving as auditor due to rotation;
- Requirements of section 92;
- Audit committee objects to re-appointment;
- Company has notice of intended resolution to appoint some other person in
place.

Rights of the Auditor

- Right to access, at all times, the accounting records/books/documents of

the company.
- May require, from the directors, any information necessary for the performance of
duties.
- A holding has the right to current and former financial
statements of any subsidiary and may require, from the directors of the holding
company, or subsidiary, any information and explanations necessary to fulfil
duties.
- Entitled to attend any gen
of and communications relating to such meetings.
- Entitled to be heard at a meeting.
- May apply to court for appropriate order to enforce rights of the auditor.

May not perform any services for company that would place auditor in conflict
of interest.

Audit Committee
At each AGM, a public company, state-owned company or any other companies
that are required by their MOIs to have an audit committee, must elect an audit
committee comprising at least three members, unless:
- The company is a subsidiary of another company that has an audit committee
and;
- The audit committee of that other company will perform the functions required
under this section on behalf of that subsidiary company.

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Duties of the Audit Committee

- Nominate an independent person for the appointment as auditor;

- Determine fees to be paid to auditor and terms of engagement;
- Ensure that appointment complies with legislation;
- Determine nature and extent of non-audit services provided;
- Pre-approve proposed agreements with auditor for above;
- Prepare a report to include in annual financial statements:
o Describing how committee carried out its functions;
o Stating whether the audit committee is satisfied with the auditors
independence;
o Commenting, as considered appropriate on:
Financial statements;
Accounting practices;
Internal financial control of the company.
- Receive and deal with concerns/complaints regarding the above;
- Make submissions to board on relevant matters;
- Perform any other oversight functions determined by board.

Separate Legal Personality

Salomon v Salomon & Co Ltd [1897] AC 22 (HL)

memorandum; and, though it may be that after incorporation the business is

precisely the same as it was before, and the same persons are managers, and the
same hands receive the profits, the company is not in law the agent of the
subscribers or a trustee fo Lord Justice Macnaghten

Dadoo Ltd v Krugersdorp Municipal Council 1920 AD 530

shareholders is no merely artificial and technical thing. It is a matter of s

Chief Justice Innes

The Corporate Veil

- This is a metaphorical veil drawn between the company and its
shareholders/directors once it is incorporated.
o It is p .
- Ebrahim v Airports Cold Storage (Pty) Ltd 2008 (6) SA 585 (SCA)
o

Cameron JA

102
Piercing the Corporate Veil

- In certain circumstances, the law will withdraw the right of separate legal

separate existence.
- May also be an inversion of the principle agent relationship

o Using the company as an agent and you are the principal (other way
around) - way that the court may hold the director liable instead of
piercing the corporate veil.
o The court should avoid piercing the corporate veil and they can do
this through the alter ego doctrine.

Two Types of Veil Piercing

- Common law
- Statutory (Companies Act 2008)

Common Law Principles on Veil Piercing

- The separate legal personality of a company is to be recognized and upheld
except in the most unusual circumstances.
- A court has no general discretion simply to disregard the existence of a
separate corporate identity whenever it considers it just or convenient to do so.
(Hülse-Reutter v Gödde)
- Courts look at substance over form.
- Measure of last resort other remedies?
o Much will depend on a close analysis of the facts of each case,
considerations of policy and judicial judgment.

When Would the Court Pierce the Veil?

- The circumstances in which a court will disregard the distinction between a
corporate entity and those who control it are far from settled
o The Cape Pacific case sets out a number of general principles/factors
that a court must take into account when exercising discretion.

- Examples of the abuse of the separate legal personality:

o Separate legal personality was used as a device by a director to evade
his or her fiduciary duties.
o Separate legal personality used to overcome a contractual duty.
Fraud is relevant, but not essential for the abuse of the
separate legal personality.

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Statutory Veil Piercing s20(9)
Whenever a court, on application by an interested person, or in any proceedings in
which a company is involved, finds that the incorporation of, or any act by or on
behalf of, or any use of, that company constitutes an unconscionable abuse of
the juristic personality of the company as a separate entity, the court may
declare that the company is to be deemed not to be a juristic person in respect
of such rights, obligations or liabilities of the company
give such further order or orders as it may deem fit in order to give effect to such

Difference between common law and statutory form?

- The court will be able to pierce the corporate veil more easily instead of seeing it
as a remedy of last resort as per the common law; the common law still applies.

- Unconscionable injustice vs unconscionable abuse

o Unconscionable injustice - looking at plaintiff. (person bringing case
to court)
o Unconscionable abuse - looking at the defendant.

- Case law/common law

- Statute you must prove the unconscionable abuse (not defined therefore
must look at the circumstances of the case)
- Where there is fraud, dishonesty and improper conduct, then other considerations
come in to play. There must be a close analysis of facts of each case.

What are the reasons to pierce the veil?

- There must be some sort of misuse or abuse of the distinction between
personalities.
- Calculated to benefit themselves (director) unfairly as individuals if they engage in
fraud etc.
o E.g. If you want to overcome contractual obligations by abusing
separate legal form - want to overcome restraint of trade you have.

Cape Pacific Principals (Modified by Hulse-Reutter)

- No general discretion;
o Case by case basis - no definite categories
- Should avoid piercing wherever possible;
o If there are alternative remedies, then don't pierce corporate veil
- In the case of improper conduct; weigh principals for and against piercing the
corporate veil need to look at the substance of the case.
- Fraud is not necessary, although may be relevant
- U
- Unfair advantage created by the misuse/abuse of the principal of a
company = pierce corporate veil

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S v De Jager

- Abuse of the separate legal personality involved absolving the accuser from his
fiduciary duties; court considered substance over form and found theft to have
been committed.

Subsidiaries, Related Persons and Control

One individual is related to another if:
- Married (or live together in similar relationship), or
- Separated by no more than two degrees of natural or adopted consanguinity
(blood) or affinity (marriage).

An individual is related to a juristic person if they directly or indirectly control the

juristic person.
- Control:
o Look at:
Board or;
General meeting (shareholder level).

A juristic person is related to another juristic person, if they directly or indirectly

control the juristic person or its business.

Establishing Control

Control between a person or entity may be established through:

- Subsidiary and holding relationships;
- The concept of related persons.

Group of Companies'
Two or more companies that share a holding company or subsidiary
relationship.

Holding C
In relation to a subsidiary, means a juristic person or undertaking that controls
that subsidiary.

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X is a subsidiary of Y if Y, or its subsidiaries or nominees (when somebody holds
shares as an agent for somebody else):
- Directly or indirectly control or are able to control the majority of the issued
in terms of
(number of shares not criterion) or;
- Has or have the right to appoint or elect, or control the appointment or election
of, directors of that company who control a majority of the votes at a meeting
of the board.

*Insert diagrams from slide

Exercisable Voting Rights

- Voting rights that are exercisable in certain circumstances are taken into
account only when those circumstances have arisen or when circumstances
under control of person holding the voting rights.
- Voting rights that are exercisable only on the instructions or with the consent
or concurrence (exercising voting rights along with somebody else) of another
person are to be treated as being held by a nominee for that other person.
o Voting rights held by a nominee.
- Voting rights that are held by a person as nominee for another person are to be
treated as held by that other person.
o E.g. A needs consent of B to exercise voting rights.

; company B is the
principal holder of the shares.
- Voting rights that are held by a person in a fiduciary capacity are to be treated
as held by the beneficiary of those voting rights.

(Diagrams)

- X is a wholly-owned subsidiary of Y if all of the general VR associated with

issued securities of X are held or controlled, alone or in any combination, by Y, its
subsidiaries or nominees.

(Diagrams)

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Part 10: Capital Regulation
Capitalisation: Introduction

Share Capital
- Legal nature of a share.
- The MOI sets out different classes of shares and the various rights attached to
them.

Authorised Share Capital

- Certificated vs uncertificated shares
o Certificated shares: there is evidence of shareholding by way of a
certificate.
o Uncertificated shares: there are no share certificates; the shareholding
is simply entered straight into the share register.
- Par value: nominal value of a share.
o There is no par value anymore
Somewhat archaic concept.
Share price upon initial offering
Minimum price
- The new Act does away with the concept of a par value; s35(2) expressly states:
a .

Issued Share Capital

- Process of issuing
- Consequences of contravention
- Consequences of repurchasing
o When repurchasing shares, the company in itself;
treasury shares .
These treasury shares become authorized and are not
issued share capital.
Share buyback.

Shares

What is a Share?
- A share is one of the units into which the proprietary interest in a profit
company is divided (s1)
o A share issued by a company is movable property, transferable in
any manner provided for, or recognised by the Act, or other legislation.
(s35)
- A share is the interest of a shareholder in the company measured by a sum of
money, for the purpose of liability in the first place, and of interest in the
second, but also consisting of a series of mutual covenants [agreements]
entered into by all the Bo
and Company Ltd.

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Shareholders

What is a Shareholder?
- A shareholder is the holder of a share which has been issued by a company, and
has been entered into the certificated or uncertificated securities register.
- There is a requirement to have shareholders due to the fact that a company may
not issue shares to itself.
o There has to be shareholders other than the company itself
Remember that non-profit companies do not have to have
shareholders.

Authorisation of Shares

The s authorised share capital, and it must set out

the following:
1. The classes of shares, as well as the number of shares of each class that
the company is authorised to issue and;
2. Then, with regards to each individual class of shares, the preferences, rights,
limitations and other terms associated with that class of shares.
o It is also possible for there not to be different classes of shares. In the
case where different share classes exist, the MOI must explain what
rights etc are attached to each share class and what differentiates
them.
Ordinary shares: have a right to a share in the declared dividend
in relation to shareholding.
Preference shares: provide a guarantee of sort not as a result of
profit making, participating ordinary and preference share
combined.
- The MOI may authorise a stated number of unclassified shares which can be
made authorized.

How to Change/Alter the Authorised Share Capital

- Authorised share capital can be changed by way of:
o A special resolution by the shareholders or;
o The board is able to amend the number of shareholders in the MOI
by filing an amendment to the MOI.
This is in the scope of their power and, if the board were to file
an amendment to the MOI which changed the number of
need ratification of it from
shareholders.
However, if it is a restructuring of the firm s capital
scheme (e.g. a huge share buyback), then the
amendment could be deemed to be a scheme of
arrangement and would need special resolution of
shareholders.
o The shareholders could also make use of the
appraisal remedy.
The appraisal remedy is used when a
shareholder opposes an action of the

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 company, and can demand that their shares
be appraised (assessed) and bought-back
by the company at their appraised value.

How are shareholders protected from the changing of the MOI?

- The oppression remedy.
o Protect interests of shareholders.
This results in a court ordering the company to repurchase the
shares of the shareholder at a fair price so that the disgruntled
shareholder can part ways with the company.
- If directors are amending the MOI for any reason other than to raise share capital,
then the shareholder can say that the director is acting against their director
duties.
o E.g. If the amendment was for the purposes of diluting the
shareholding.

Issuing of Shares

- The board may resolve to issue shares of the company at any time, but only
within the classes, and to the extent that the shares have been authorised by
, and in accordance with the requirements set out by the Act.

A special resolution with regards to the issuing of shares will be required

under certain circumstances:
1. If the shares are being issued to:
o A director or a prescribed officer or;
o A person related to the company/director/prescribed offer or;
o A nominee.
2. If the voting power of the shares that are being issued, would exceed 30%.

What Happens if the Board Issues Shares in Excess of the Authorised Share
Capital?
- Effect on the transaction:
o The transaction is nullified (not valid) to the extent that it exceeds the
value of the authorised share capital, and the company must refund
the fair value of the over-issued share capital.
- Potential liability:
o There is the potential for liability for a director or prescribed officer that
was present at the meeting, who either voted for, or failed to vote,
against it, despite knowing that the issue of the shares in question
would exceed the authorised amount.
The director or prescribed officer would have had constructive
knowledge.

Subscription of Shares

Deal with 2:

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The subscription of shares is limited and applicable to private companies.
- s8(2) States that there must be some restriction on the transferability of shares
and a restriction in the secondary market. One of the ways the transferability
of shares is restricted, is through pre-emptive rights.

s39 Pre-emptive Right of Existing Shareholders

This applies to private companies only, and is an unalterable provision.
- The pre-emptive right arises when a private company proposes to issue new
shares. Following the proposal to issue new shares, the company must offer
existing shareholders a percentage of the shares for shares they hold as a pre-
emptive right.
o For a private company in a primary and a secondary market.
Compare the pre-emptive right used to give effect to secondary
market restriction to establish a private company.

s39 Pre-emptive Right in Primary and Secondary Markets

- Primary market: you can buy a percentage of the offer that is made by the
company.
o i.e. 1 share for every 5 held.
If I own 100 shares, I can choose to only take 10 instead of 20.
- Secondary market: the shareholder that wishes to sell needs to offer the shares
to an existing shareholder first.
o The shareholders to which the shares are offered either accept or
reject the set percentage offered all or nothing offer.

- In public companies this is not a mandatory provision

Purpose of s39(2)?
- The purpose of s39(2) is to prevent the company from diluting shareholding.

Can an Offeree Subscribe for Less Shares than those Offered?

- Can the offeree (person who buys) of shares subscribe for less than number
offered?
o Only in secondary market

- Can a company provide financial assistance for the subscription of shares (or
other securities) in that company?

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Options for Subscription of Securities

The effect of an option contract is to keep open a valid offer/to make a valid offer
irrevocable for a certain period. If the option holder exercises the option, they
bring the main agreement into effect.

- Options for subscriptions of shares confer a right on the holder of the

shares to buy a specified quantity of particular shares, within a stated time,
and at a stated price.
o If you are an option holder, you have the right to be issued shares, but
vote at meetings etc.
- A company may grant options:
o As payment made;
o As remuneration for services;
o Gratuitously.
- Option holders are not members of the company.
- Board of directors determine terms on which shares are issued.
- Liability of directors:
o If a director grants more options than there are authorized shares, and,
if a loss is suffered, then the director would be liable.

Securities Other Than Shares

A company can also obtain capital by means of debt instruments or securities, other
than shares of a company. (i.e. Other instruments or securities that are not
dependent on the profits)
- Board may authorize secured/unsecured debt instruments
o May give special privileges
- Appointment of trustee
o Way to get around scheme of arrangement.
A scheme of arrangement is a binding agreement entered into
between a company and its shareholders as a legal
mechanism to effect structural change within a company or to
achieve change of corporate control of a target company.

Registration and Transfer of Securities

Securities Register

- Every profit company must maintain a securities register or its equivalent in

the prescribed form
o Must also provide adequate protection with regards to the loss of
these records.
- Must be kept in one of the official languages;
- Must contain various details describing classes of shares and persons to
whom the company has issued securities;
- Must also include disclosures relating to beneficial interests.

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Dealing in Shares

Nature of a contract in terms of which, shares change hands?

Transfer of Certificated Securities

- Issue and allotment
- Contract to acquire securities (not a contract of purchase)
o
- Issue/allotment pursuant (in accordance with) to OTTP regulated by Act
- Otherwise common law rules of contract apply

Dematerializing Certificated Securities

- Use CSD (Centralised Securities Depository)
o Called STRATE in South Africa
Electronic settlement system which handles the transfer of
shares.

Transfer of Uncertificated Securities

- Electronic settlement system
- Registration of uncertificated securities
- Record must be maintained by the CSD or a participant
- Uncertificated securitie
- Must contain certain details
- Dematerialisation of shares:
o Process of converting shares from paper to electronic form (STRATE)
to use a central securities depository.

Raising Share Capital

Why does the Legislation Regulate this Aspect?
- Protecting potential investors of the company.

Offers to the Public

- If there is an offer of securities, a prospectus needs to be issued.
- Impact of common law on offers to the public in determining whether or
not something is an offer to the public, the following test is conducted:
o There must be a subsisting relationship between the offeree and
the offeror or;
o There must be a rational connection between the group and the
offer that is being made.
Other considerations are taken into account.
This distinguishes between private and public offerings.
o If these conditions are met, then it means that
this is a private offer.

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Regulating Offers to the Public

- All public offerings of company securities are regulated by chapter 4 of the

Companies Act.
- The principal aim is to protect investors by ensuring they are provided with
adequate and accurate information relating to state of affairs and prospects of a
company before subscribing for or purchasing its shares.
- Offers to the public are prohibited unless they comply with stringent requirements
laid down in the Act.
o Failure to comply civil and criminal liability to promote compliance.

Definitions

An offer is an offer to the public of securities of a company if:

- No securities of that company have previously been the subject of an offer
to the public or
- All of the securities of that company have been re-acquired after previously
having been subject of an offer.

- Offer to the public, made by/on behalf of company, of securities, to be issued

by that company, or another company within a group of companies, of which
the first company is a member.

- An offer for sale to the public of any securities of a company or its subsidiary
made by or on behalf of a person other than that company or its subsidiary.

An offer, in relation to securities, means an offer made in any way by any person
with respect to the acquisition, for consideration
consideration), of any securities in a company;
- Includes an offer of securities to be issued by a company to any section of the
public a client of
the person issuing the prospectus, as holders of any particular class of property,
or in any other manner.
- Does not include:
o An offer made in any of the circumstances contemplated in section 96
or;
Section 96 exceptions are classified into three groups:
Insiders;
Sophisticated investors;
A minor [small] transaction or series of transactions.
o A secondary offer effected through an exchange.

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Section 96 Exceptions
An offer is not an offer to the public in the following cases:

(Sophisticated Investors Exceptions)

An offer is not an offer to the public if the offer is made only to:
- Persons whose ordinary business (or part thereof) includes dealing in
securities (whether as principals or agents);
- The Public Investment Corporation;
- A person or entity regulated by the Reserve Bank of South Africa;
- An authorised financial service provider;
- A financial institution.

An offer is also not an offer to the public if the offer involves a total contemplated
acquisition cost of the securities, for any single addressee acting as a principal,
that is equal to, or greater than, amount prescribed.
o The prescribed amount is R1m.
Hence, an offer to a single person who pays R1m or more, is not
an offer to the public.

Insider Exceptions (Group of Insiders)

(In the case of shareholders, directors and employees)
An offer is not an offer to the public if:
- A non-renounceable offer is made only to existing holders
securities or persons related to existing holders
o Non-
renounce an offer made to somebody else in order to acquire those
shares that have been offered.
- A rights offer (a rights offer is an offer made which allows shareholders to
purchase shares in proportion to existing shareholding s39) in respect of
securities where an exchange has agreed to grant a listing, and the rights offer
complies with the relevant requirements of that exchange.
o Compliance with exchange regulations rights could be renounceable
in this case.
- The offer is made to a director/prescribed officer of the company only, or a
related person.
o However, an offer made to a director/prescribed officer/related person
is an offer to the public if the offer is renounceable in favour of a
person who is not a director/prescribed officer or related person.
i.e. If the offer is renounceable (somebody is able to renounce
the offer to the director/prescribed officer or related person, in
order to acquire the shares for themselves) and the person that
is able to renounce the offer, is not a director/prescribed officer
or a related person. (Hence, outside the scope of people)
- The offer pertains to an employee share scheme that satisfies the
requirements of section 97.
o Employee share scheme: company tries to get the employees to own
shares in the company.

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The Offer

The requirements for an offer (or one of a series of offers) for subscription:
- Must be made in writing;
- Not accompanied by/made by an advertisement, and no selling expenses
incurred;
- Issue of securities under any one offer in a series must be finalized within 6
months after the offer was first made;
- Offer/series of offers, in aggregate accepted by maximum of 50 persons acting
as principals;
- Subscription price does not exceed in aggregate amount prescribed;
- No similar offer/offer in series of offers made by company within period
prescribed immediately before the offer/first of a series of offers, as the case may
be.

Requirement to have prospectus/written statement

A written statement is required when shareholders offer their individual shares

to the public; a secondary offering to the public.
- Made by somebody other than the company.

Exceptions to the requirement of needing a prospectus/written statement

(1) A written statement is required when shareholders offer their shares to the public
(secondary offering), except in respect of securities that are part of a
.
o In the case where shareholders offer their shares to the public and
thes that person
must not make a primary offer to the public of any:
Listed securities of the company otherwise than in accordance
with requirements of relevant exchange or;
Unlisted securities of the company unless the offer is
accompanied by registered prospectus that satisfies
requirements of the Act.
(2) A written statement is required when shareholders offer their shares to the public
(secondary offering), except in respect of securities that are part of a

o In the case where shareholders offer their shares to the public and
public offering, that person
must not make a secondary offer to the public of any securities of
a company unless:
Unless accompanied by written statement that satisfies
requirements of section 101 and bears, on the face of it, the
date on which prospectus was filed.

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The Prospectus

What information must a prospectus contain?

- All information that an investor may reasonably require to assess assets,
liabilities, financial position, profits and losses, as well as cash flow.
- All information that an investor may reasonably require to assess securities
being offered and the rights attached to them.
- Prospectus must adhere to prescribed specifications.

Mistakes contained in prospectus?

- Can correct, shareholder may withdraw. If honest mistake you cannot be
criminally liable.

- What is considered an untrue statement?

o False statements or omission of information which conveys a false
investment/idea is also a false statement or a statement which gives a
false impression.
- Who is liable, and what defence/s can be raised?
o Directors and someone who becomes a director between issuing of
prospectus and incorporation, those named in prospectus.

Liability of experts
- When might an expert be liable?
- Are there any defences?

The Solvency and Liquidity Test

The solvency and liquidity test replaces the capital
maintenance .

The solvency and liquidity test has two components (obviously):

- Solvency
- Liquidity

Where and when is the test used?

(Do not confuse it with the test for financial distress)

What is the justification for doing the solvency and liquidity test?
- Solvency element: advance recognition to ultimate priority that creditors enjoy
over shareholders upon dissolution.
- Liquidity element: addresses the fundamental expectation of creditors to be paid
on time.

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Requirements for the Solvency and Liquidity Test

Considering all reasonably foreseeable financial circumstances of the company

at that time:
- The assets of the company, that are fairly-valued, equal or exceed the
liabilities of the company (solvent).
- It appears that the company will be able to pay its debts as they become due
in the ordinary course of business (liquidity).
o For a period of 12 months after the date on which the test is
considered or;
o In the case of a distribution, 12 months following the distribution.
- Financial information to be considered must be based on:
o Accounting records that satisfy the requirements of s28.
o Financial statements that satisfy the requirements of s29.
- Must consider a fair valuation of assets and liabilities including any
reasonably foreseeable contingent assets and liabilities.
-
reasonable in the circumstances.

Distributions
We first need to know whether something is financial assistance or a distribution.
Once we know whether something is financial assistance or a distribution, we then
follow the requirements.

A distribution is a direct or indirect

(1) transfer by the company of money or other property of the company,

other than its own shares, to, or for the benefit of, one or more holders
of any of the shares, or to the holder of a beneficial interest in any such
shares, of that company or of another company within the same group of
companies, whether (for the purpose of) (i) in the form of a dividend; (ii)
as payment in lieu of a capitalisation share; (iii) as consideration for an
acquisition:
i. [An acquisition] By the company of any of its own shares (share
repurchase/buyback), or
a) i.e. You can use a distribution as a form of consideration for the
acquisition of your own shares as a company.
ii. [An acquisition] By any company within the same group of companies,
of any shares of a company within that group of companies;

or otherwise, in respect of any shares of that the

company, or another company within the same group of companies.

(2) Incurrence of a debt or other obligation by the company for the benefit of
one or more holders of any of the shares of that company or of another
company within the same group of companies; or

117
 (3) Forgiveness or waiver by a company of a debt or other obligation owed to the
company by one or more holders of any of the shares of that company or of
another company within the same group of companies,

But does not include any such action taken upon the final liquidation of the company.

Distributions (Generally)
- May be from profit or from capital.
- Distributions are a board decision; there is no shareholder participation.

Requirements of a Distribution

- Grounds for making a distribution:

o Must be pursuant (in accordance with) to an existing legal
obligation or;
o The board of the company must have authorised the distribution by
way of a resolution (distribution made within 120 days of making the
resolution);
- It reasonably appears that company will satisfy the solvency and liquidity
test immediately after completing the proposed distribution;
- Board, by resolution, acknowledges that it has applied the solvency and
liquidity test, and the board has reasonably concluded that company will
satisfy the test immediately after completing distribution.

Non-compliance with dividend declaration is not void and is enforceable in court.

Consequences of non-compliance?
-
- For directors/prescribed officers, there may be potential liability if:
o Present at meeting
o Failed to vote against/voted in favour of
o

Acquisition by Company of its Own Shares

- A company may acquire its own shares if the requirements of s46 are met.
- An agreement with the company, which provides for the acquisition of its own
shares, is valid.
- If the company cannot fulfil its obligations, then it must approach the court for an
order.
- The directors will need a special resolution in order to acquire its own shares
if:
o It is a buyback from directors/prescribed officer/related person or;
o If it is a buyback of more than 5% of class shares as this
significantly rearranges capital structure.

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Acquisition by a Subsidiary, of the Holding Co Shares

A subsidiary may acquire shares in the holding company if the requirements of s46
are met.
- But, in acquiring the shares in the holding company:
o No more than 10% of the number of issued shares of any one
class held by/for all subsidiaries can be taken together. (These may
already be held by subsidiaries)
o No voting rights attached while the shares are held by the
subsidiary, and the subsidiary remains a subsidiary; i.e. the subsidiary

quorum, as quorum only effects those that can vote.

Basis/grounds for making a Authorised by board resolution; or

distribution Pursuant to existing legal obligation.

Must pass solvency and liquidity test; and

Safeguards Board acknowledges (by resolution) that the
test has been applied and is satisfied.

Must comply with any further requirements in

Additional requirements?
the MOI.

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Financial Assistance

The Act distinguishes between financial assistance for the subscription of securities
and financial assistance given to directors.
- There is no definition in the Act as to what ing means.
- e

Essentially, to give financial assistance is to provide another with the financial

means to enable him to achieve his purposes or ends direct objective of the
transaction or act is to assist another financially.
- Enable the receiver to achieve their purposes or ends.

Provision of Financial Assistance

The Companies Act allows financial assistance to be granted in the following

instances, subject to the requirements being met:

Financial assistance for the subscription of shares

- What is financial assistance for the subscription of shares?
o This is when money is given in order to put in the required
amount/make an offer on the shares.
- What are the requirements?
- What are the consequences of contravention?
o Those at the the resolution, ought to
have known. (Constructive knowledge)
The director is liable, and the transaction is void as it is an illegal
transaction.

Financial assistance to directors

- Need a special resolution to loan money to a director.

The Impoverishment Test

Has the company become poorer as a result of what it did for the purpose of, or in
connection with,
- What is the role/status of this test today?
o It is a useful guide in determining whether there has, in fact, been
financial assistance.
If the test is satisfied, i.e. the company becomes poorer, then
financial assistance has taken place.
If the test is not satisfied

that.

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Financial Assistance for the Subscription of Shares

This is when money is given in order to put in the required amount for the shares or
to make an offer on the shares.

Here, financial assistance may be:

- By way of a loan, guarantee, provision of security or otherwise;
- To any person (i.e. Not only directors)
- For the purpose of, or in connection with, the subscription of any option, or
any securities, issued or to be issued by the company or a related or inter-
related company.
- The Act expressly includes this which makes it financial assistance. This is the

- Financial assistance excludes lending money in the ordinary course of

business by a company whose primary business is the lending of money.

Loans and Other Financial Assistance to Directors

Financial assistance to directors includes:

- Lending money, guaranteeing a loan or other obligation, and securing any debtor
obligation.
o Not in ordinary course of business. (i.e. Bank lending money to its
director is not in the ordinary course of business)
But if the director wanted to buy shares in its own business
(which is a bank), and then took out a loan through the bank to
buy the shares; that is not financial assistance.
In the ordinary course of business and hence, is not
financial assistance.

Financial assistance to directors excludes:

- Lending money in the ordinary course of business by a company whose
primary business is the lending of money;
- An accountable advance to meet:
o Legal expenses in relation to a matter concerning the company, or
o Anticipated expenses to be incurred by the person on behalf of
the company; or
- An amount to defray (provide money to pay a cost or an expense)

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Part 11: Fundamental Transactions
What is a Fundamental Transaction?

- Disposing of a greater , or an undertaking to do

so.
- Entering into a scheme of arrangement:
o A scheme of arrangement is a binding agreement entered into
between a company and its shareholders as a legal mechanism to
effect structural change within a company or to achieve change of
corporate control of a target company.
- Entering into an amalgamation/merger

For all of the fundamental transactions, you need a special resolution.

- Shareholders need to be given certain information so that they are able to make
the necessary decision.

Regulation of Fundamental Transactions

Mechanisms which regulate fundamental transactions:

Procedural requirements
- What is set out in the board.
- Special resolution, when you call a meeting of shareholders for this resolution,
there are specific details and notices that you need to give shareholders.
- A fundamental transaction triggers the use of the appraisal right which is why all
information is needed prior to the fundamental transaction.
- Appoint an independent expert to inform how this scheme is going to affect rights
as a shareholder.

Minority Protection in the Form of a Special Resolution and an Appraisal Remedy

- They are also able to take this transaction to court, if the shareholder has voted
against this transaction, and have this resolution set aside. This right to approach
the court is only to set the resolution aside on narrow grounds.

The Takeover Regulation Panel

- Panel may want oversight over the transaction to make sure that there are no sort
of competition commission issues.

Notice Requirements for all Fundamental Transactions

- Need to be notified of the meeting.

o Shareholders also need to be informed of their disposal rights with
regards to the meeting.
i.e. The Appraisal Remedy.

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Disposals s112
Of all or a greater part of the assets or an undertaking to do so.

Refers to either:
- More than 50% of the gross assets measured at fair value or;
- More than 50% of the business measured as a going concern.

For all of the fundamental transactions, you need a special resolution.

- Shareholders need to be given certain information so that they are able to make
the necessary decision.

Notice to Shareholder: Written Summary of Terms ss(3)(b)

- A written summary of the terms of the disposal needs to be provided to
shareholders before the special resolution is taken, in the case of a
disposal.
- Need to be notified of the meeting.
o Shareholders also need to be informed of their disposal rights with
regards to the meeting.
i.e. The Appraisal Remedy.

Mergers and Amalgamations s113

Parties must enter into a written agreement;
- Must set out the terms and means of effecting the merger or amalgamation;
- Amongst other things, it must contain the proposed Memorandum of
Incorporation of the company to be formed by the amalgamation or merger.
o Other things could be details of directors etc.

Application of Solvency and Liquidity Test under Mergers and

Amalgamations

- Test must be applied by each board of directors (in both companies) and
they must be satisfied that the new company being formed will be solvent
and liquid.
- Copy/summary of the agreement and summary of the MOI of the new company
detailing who the directors are, how the shares are going to be structured, how
assets are to be shared (all in merger agreement) - ss(5)(a)
o A copy of this must be provided to shareholders.

Schemes of Arrangement s114

A scheme of arrangement is a binding agreement entered into between a company
and its shareholders as a legal mechanism to effect structural change within a
company or to achieve change of corporate control of a target company.

123
This refers to any arrangement between the company and holders of any class
of its securities.
- May not be initiated by the board if the company is subject to business
rescue proceedings or if the company is in liquidation.

Included in Schemes of Arrangement

- The consolidation of securities of different classes;
o
o Or, changing classes.
For example, making all class B shareholders, class A
shareholders.
- A division of securities into different classes;
- An expropriation of securities from holders
o Taking shares back.
- Exchanging any of its securities for other securities;
- A re-acquisition by the company of its securities or;
- A combination of these methods.

Provision:
- A share buy-back of more than 5% of a class of shares is treated as a
scheme of arrangement.
o Hence will need to meet the requirements of a scheme of arrangement.

Notice to Shareholder: Report by Independent Expert ss(3)

- A copy or a summary of the report is required and needs to be provided to
shareholders before the special resolution occurs, in the case of schemes
of arrangement.
o Evaluate effect it will have on the current holders of securities.
o They must analyse scheme of arrangement. The expert must be
proficient and qualified enough to understand the impact of the scheme
of the arrangement for the shareholders and inform them of this.

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Setting Aside the Special Resolution (s115 Remedies)
Once the special resolution is passed, the shareholder (or any person that voted
against the resolution) can apply to court for the transaction to be set aside.
The grounds for the transaction to be set aside:
- If the resolution was manifestly unfair to any class of shareholders/security
holders or;
- If the vote was materially tainted by a conflict of interest or if there was non-
compliance with the notice requirements or the MOI or if there is some other
material procedural irregularity.

General Requirements for Approval s115

The Notice Requirements Must:
- Contain prescribed information, detailing nature of the transaction;
- Alert shareholders of their right to approach the court if they dissent;
- Alert shareholders of their appraisal rights if they dissent.

Special Resolution
- At least 25% of all voting rights that are entitled to be exercised on the
matter have to be present in order to form a quorum.
o The voting rights of a party who may be acquiring assets from the
company (has an interest in the company) is not to be included when
calculating whether the proper quorum was present, nor are the rights
of such a person taken into account to calculate the percentage of
votes in favour of the resolution.

Court Approval in terms of ss(3)

The right of the shareholder to obtain court approval for the transaction.

Apart from obtaining a special resolution, court approval is required before the
fundamental transaction can proceed if:

(1) Holders of at least 15% of voting rights oppose the resolution and the
company is required to seek court approval of the fundamental transaction,
or;
o After the resolution, people that hold at least 15% of the voting rights,
that voted against the resolution, are able to tell the company that
they must go to the court to get the approval of the transaction.
(2) A single shareholder approaches the court and meets the requirements
(requirements are as follows):
o Shareholders are in good faith
o They must appear to be prepared and able to sustain the
proceedings;
Do they have the time and finances to take the matter to court?
o They must be alleging facts which, on the face of it, would be serious
enough to set the transaction aside.
i.e. Manifestly unfair or vote materially tainted.

125
Takeover Regulation Panel

Certain transactions are monitored closely and overseen by the Takeover Regulation
Panel. The Panel must regulate the affected transactions (fundamental
transactions) to achieve certain aims.
- The integrity of the marketplace must be protected and fairness to holders of
securities must be ensured.
- The necessary information must be provided to holders of securities to allow
them to make fair and informed decisions.
- Adequate time must be given for regulated companies and their securities
holders to obtain advice.

The Takeover Regulation Panel o

:
- A regulated company is:
o A public company;
o A state-owned company;
o A private company in which more than 10% of the securities of the
company have been traded in the past 24 months prior to the
transaction, then it would be a regulated company.
- An affected transaction includes:
o The fundamental transactions discussed above.

126
Company Failures and Winding Up
Overview

Business Rescue & Compromise with Creditors

Business Rescue
The Business Rescue Practitioner
Compromise with Creditors (s 155) cf. ss 114 & 150
Winding Up
Voluntary winding up
Winding up by court order
The liquidator

Business Rescue

included as a goal of the Act

- Interests of all relevant stakeholders must be considered
- Replacement for Judicial Management
o Cheaper, more accessible, better employee protection
o New broom sweeps clean?
o Aligns with global trends towards striking a balance between
rescue and liquidation
- Similarities and differences
- Negative stigma around corporate bankruptcy and financial distress in
South Africa in America bankruptcy is seen as a sport -> part of
game co. plays as then no one can sue co. and you stay in control
o Moritorium on claims against the co./ freeze on being sued

The s 155 compromise can be seen as a business rescue plan, without the
involvement of an external third party (the practitioner)
Nothing novel; similar procedure available in 1973 Act, but now grouped with
business rescue in Chapter 6.
This used to just be deemed scheme of arrangement -> new act has split
this, now scheme of arrangement with shareholder is under fundamental
transactions and creditor scheme of arrangement is under business rescue.

Business rescue practioner must go in, assess the company and formulate a
plan to save the company. This plan must be approved by 75% of creditors ,
which is why it is also a scheme of arrangement with creditors.

What is Business Rescue?

Business rescue entails:
- the temporary supervision of the company
- a temporary moratorium on the rights of claimants against the
company
Essential element creditors cannot enforce their claims

127
 - development and implementation of a plan to rescue the company by
restructuring its affairs
Restructuring undertaken in a manner that maximizes likelihood of the
company continuing in existence on a solvent basis (Primary goal of business
recue)
-
creditors and shareholders than would result from immediate
liquidation of the company. This is still a successful rescue

recovery of financially distressed companies, in a manner that balances

the rights and interests of all relevant

/close corporation?
A company or close corporation is financially distressed if

It appears to be reasonably unlikely that the company will

be able to pay all of its debts as they become due and payable within the
immediately ensuing 6 months;
or
It appears to be reasonably likely that the company will become insolvent within the
immediately ensuing 6 months
** cf: solvency and liquidity test
Accessible to other entities?
(Comparable to solvency and liquidity which is where co. appears reasonably likely
healthy financial company)

Initiating Business Rescue Proceedings

Two ways for a business to go into business rescue
- Board resolution
Co. places itself under business rescue, this has to be filed to show
moratorium.
- Court order
o
o Or on its own initiative

- Shareholder of the company

- Creditor of the company
- Trade union representing employees of the company
(where no trade union, individual employees/representatives)
- this is defined in the act.

Commencement by Board Resolution

Requirements:
Board must have reasonable grounds to believe that:
a) and
b)
+ liquidation proceedings must not have been initiated.
* Resolution must be filed to have any force or effect.

Objections to resolution (by affected persons) if:

128
 a) No reas. basis for believing that co. is financially distressed
b) No reasonable prospect of rescuing the company
c) Company has not complied with procedure
The above attempt to stop co. being placed under BR

Commencement by Court Order

Court application:
Affected person/s must show that:
(i) Company is financially distressed;
(ii) Company has failed to pay over any amount relating to an
obligation under or in terms of a public regulation, or a
contract, with respect to employment-related matters (ground
instead of showing co. is financially distressed) ; OR
(iii)
AND there appears to be a reasonable prospect of rescue.
On own initiative:
During the course of liquidation proceedings, or proceedings to enforce a
security interest, may make an order placing the co. under supervision.

If the co. has a liquidation proceeding brought against them, they cannot now place
themselves optionally under BR.

The Business Rescue Practitioner

Appointment
- Company if commencement by board resolution
- Otherwise, affected person who obtained BR order
Duties
- Formal duties
- Fiduciary duties (act as an agent good faith for co. etc.)
Powers
- Full management control, incl. power to delegate
- Remove/replace/appoint directors/management
- Suspend contractual obligations that the company was party to at
commencement, that would become due during business rescue; or
apply to court to cancel such agreements.
o Exceptions: employment contracts (employee interest
protection) and Insolvency Act
Removal
- Objection to company resolution on grounds that (object to
appointment of practitioner):
o does not satisfy s 138 requirements
o is not independent of the company or its management; or
o
circumstances.
- Court must appoint new BRP satisfactory to body of creditors

- Application to court by affected person on certain grounds:

o incompetence or failure to perform the duties of a business
rescue practitioner of the particular company;

129
 o failure to exercise the proper degree of care in the performance

o engaging in illegal acts or conduct;

o if the practitioner no longer satisfies the [minimum qualifications
requirements set out in section 138 (1)
o conflict of interest or lack of independence; or
o the practitioner is incapacitated and unable to perform the
functions of that office, and is unlikely to regain that capacity
within a reasonable time.

Overview of Business Rescue Procedure

1. Investigation of affairs
2. Development & approval of business rescue plan
Proposed business rescue plan will be approved if
- plan supported by the holders of more than 75% of the
creditors
- the votes in support of the proposed plan included at least 50%
of the independent creditors
If a proposed plan alters the rights of any class of holders of the
, the plan must further be approved by the
majority of the holders of the securities or classes of securities.

s claim can be purchased for its liquidation value.

Moratorium on Legal Proceedings

General mortarium (s 133): no legal proceeding, including enforcement
action, against the company, or in relation to any property belonging to the
company, or lawfully in its possession, may be commenced or proceeded with
in any forum, except:
- with the written consent of the supervisor (business rescue
practitioner);
- with the leave of the court;
- as a set-off against any claim made by the co. in any legal proceedings
(E.g. If Co. owes X R100 and X owes co. R200 co. can claim R100
from X and then claim falls away);
- criminal proceedings against the company or any of its
directors/officers ;
or
- proceedings concerning any property or right over which the company
exercises the powers of a trustee.

Moratorium on Disposals by Company

Protection of property interests (s 134): in general, the company may
dispose, or agree to dispose, of property only
- in the ordinary course of its business;
-
advance and in writing by the practitioner; or
- in a transaction contemplated within, and undertaken as part of the
implementation of, [an approved] business rescue plan

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Implications of Business Rescue
Management displacement / debtor-in-possession?
Position of:
- Directors?
Can be fairly removed
- Employees?
Technically creditors as well. As an incentive to keep employees
around, any money owing to employees arises during business rescue
is treated as a higher ranked creditor. This is treated as post-
commencement finance.
- Creditors?
Cannot enforce rights due to moratorium but are still protected through
Business Rescue Plan approval

Termination of Business Rescue Proceedings

Court sets aside commencement resolution or converts BR to liquidation
proceedings (after affected persons objection)
Practitioner has filed with the Commission a notice of the termination (not
possible or not working)
Business rescue plan has been:
- proposed and rejected (rejected by creditors)
- adopted and the practitioner has subsequently filed a notice of
substantial implementation

Compromise with Creditors (s155)

Similar to provisions for schemes of arrangement under Companies Act 1973

Why are such legislative mechanisms used?
erent in s 155?
Must be between company and creditors/ class
- Creditors not defined, but must be understood in widest sense of
persons with pecuniary claims
- Class determined in terms of rights held
May be used to appoint a receiver.
Section 155 available to any co unless under BR
- Co does NOT have to be financially distressed
Initiated by board or liquidator of company

to:
-all of its creditors; or
-all of the members of any class of its creditors (75% of secured, 75% of
unsecured etc.)
Difference between s155 and BRP
moratorium

Proposal and Approval of Compromise

How?

131
 - By delivering a copy of the proposal, and notice of meeting to consider
the proposal, to
o every creditor of the company, or every member of the relevant
class of creditors whose name or address is known to, or can
reasonably be obtained by, the company; and
o the Commission
- May apply to court for order approving the proposal
o Court must consider it just and equitable to do so
o (question of substantial compliance with formalities and possible
prejudice to existing legal rights)
o Provision says that the proposal is final and binding on the
creditors and co. on the date that it is filed at the court <-
therefore quite necessary.
If supported by a majority in number, representing at least 75% in value of the
creditors or class, as the case may be, present and voting in person or by
proxy, at a meeting called for that purpose.
If approved by court ito s 155(7)(a)

members of the relevant class of creditors as from date of filing (of court
order).

132
Close Corporations

Introduction
A CC is a hybrid form of a business structure that borrows from principles of
company law and partnership.
Unique features that are foreign to companies and partnerships.
Why was a new type of legal structure created?
- Desire to encourage small business
- Private co. structure regarded as unsuitable for small business
- Less complicated, less formal and inexpensive than a company
Governed by Close Corporations Act 69 of 1984
Companies Act 2008 promotes simplicity & flexibility (also c
companies)
- No longer possible to form a new CC
- An existing CC may convert to company, but not the other way round.
No requirement to convert, can stay as they are if they choose so.
Ownership and Management
Because it is a small co. no division between these 2. No shareholders and
managers more like partners they are members. These members has
interest and make decisions,
Members in principle both own and manage a CC
CC has no share capital merely
Member holds an interest, not shares ( interest is out of 100)
-
expressed as a percentage and shall be moveable property which shall
like holding
shares but are fundamentally different
Distributions determined by liquidity and solvency requirements

Overview
Constitution (how it is constituted)
The founding statement
Only necessary doc to found a CC

in which the CC must run. Rules are all set out in the act.
Founding statement is more who are members, member
interests etc.
Association agreement, other rules not in contravention of the
act, can also be filed.

Membership
Distributions, financial assistance & repurchases
Conversion
Management and Control
Source of rules: CCs Act & the association agreement

133
 Power to bind CC
Abuse of juristic personality

Characteristics of Close Corporations

Separate juristic person:
provisions of this Act is on registration in terms of those provisions a juristic
person and continues, subject to the provisions of this Act, to exist as a juristic
person notwithstanding changes in its membership until it is in terms of this

If gross abuse can lift corporate veil. More abuse necessary than that of
companies.
Members not liable for CC debts: since a CC is a separate legal person
capable of having its own assets and liabilities, its members are generally not
liable for its debts.
Perpetual succession:
Limited membership (Simplicity?)
- Only natural persons can be members of a CC
- A CC may have only 1 member; number of members limited to 10
Founding Statement
atement contains:
- Full name of the corporation, principal business (in order to change
need permission from members) to be carried on
- Postal address and address that is the office of the corporation
- Full name of each member, ID number and residential address
-
- Amounts of money and description and fair value of any property or
services contributed
- Name of person consented to appointment as accounting officer
- Date of end of financial year of corporation
** Everything else regarding how it is run is in Close Corporations act
Amendment
- If any change is made in respect of any matter, the particulars of which
are stated in a founding statement of a corporation, the corporation
must lodge amended founding statement with the Registrar
- Signed by or on behalf of every member of the corporation and by or
on behalf of any person who will become a member (unanimous
agreement)
Inspection
- Corporation must keep copy of founding statement and proof of
registration at registered office of CC
No constructive notice: No person deemed to have knowledge of any
particulars merely because such particulars are stated in founding statement
or other document regarding a corporation registered by the Registrar or kept
at registered office of corporation.

Contribution
- Every person who is to become a member of a corporation upon its
registration, shall make to the corporation an initial contribution of

134
 money, of property (whether corporeal or incorporeal), or of services
rendered.
- Contribution must be included in founding statement.
Interest
- Intangible moveable property giving rise to a bundle of rights
(distributions & voting) and obligations (fiduciary duties)
- Interest expressed in % (must always be 100%).
- Two or more persons shall not be joint holders of the same member's
interest in a corporation.
Membership
Limit on number of members
- A corporation may at its incorporation have one or more members, but
at no time shall the number of members exceed ten.
Who may be a member?
- Only natural persons.
- Juristic persons (Co or CC) cannot hold interest in CC directly or
indirectly representative capacity?
- Trusts (inter vivos or mortis causa) provided:
o Trustee who is a NP can be a member of CC in capacity of
trustee, with 2 restrictions:
juristic person not beneficiary of such trust; and
total number of members including trust beneficiaries
does not exceed 10. ons
and 1 trustee member but trustee is for trust with 2
beneficiaries)

General position:
- In accordance with the association agreement (if any); or
- With the consent of every other member of the corporation
Court will order membership to cease if:
- Member permanently incapable, because of unsound mind or any
other reason, of performing part in the carrying on of the business of
the CC;
-
business) likely to have prejudicial effect on carrying on of the
business;
- Member so conducts him/herself in matters relating to the corporation's
business that it is not reasonably practicable for the other member or
members to carry on the business of the corporation with him/her; or
- Circumstances have arisen which render it just and equitable that such
member should cease to be a member of the corporation.
Distributions to Members
Any payment by a CC to any member by reason only of his or her
membership, may be made only if
- after such payment is made, the cc's assets, fairly valued, exceed all
its liabilities;
- the CC is able to pay its debts as they become due in the ordinary
course of its business; and

135
 - such payment will in the particular circumstances not in fact render the
CC unable to pay its debts as they become due in the ordinary course
of its business.
** Majority of members must just agree to give distribution

A
- Previously obtained written consent of every member (unanimous)
other than member whose interest is being acquired;
- After payment made assets fairly valued exceed liabilities;
- CC able to pay debts as due in ordinary course of business; and
- Payment will in the particular circumstances not in fact render the cc
unable to pay its debts as they become due in the ordinary course of its
business
Financial Assistance
CC may give financial assistance for the purpose of acquisition of a member's
interest in that CC by any person, only if:
- Previously obtained written consent of every member other than
member whose interest is being acquired;
- After payment made assets fairly valued exceed liabilities;
- CC able to pay debts as due in ordinary course of business; and
- 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.
Conversion of Close Corporations
A CC may convert to a company
Notice of conversion
- Written statement of conversion
-
- MOI
Effect of conversion
- Juristic personality continues
- All assets, liabilities, rights of CC vest in Co
- Any legal proceedings before conversion may be continued against the
new company
Management and Control
The members of a CC having two or more members may at any time enter
into a written association agreement signed by or on behalf of each
member, which regulates
- any matter which in terms of this Act may be set out or agreed upon in
an association agreement; and
- any other matter relating to the internal relationship between the
members, or the members and the corporation, in a manner not
inconsistent with the provisions of the Act.

- Every member shall be entitled to participate in the carrying on of the

business of the corporation. (no distinction between ownership and
management)
- Members shall have equal rights in regard to the management of the
business of the corporation and in regard to the power to represent the

136
 corporation in the carrying on of its business. (however, not decision-
making)
Apply in so far as the Act or an association agreement in respect of the
corporation does not provide otherwise.
BUT fundamenta
- Consent in writing of at least 75 per cent shall be required for
a change in the principal business carried on by the
corporation
a disposal of the whole, or substantially the whole,
undertaking of the CC
a disposal of all, or the greater portion of, the assets of the CC
any acquisition or disposal of immovable property by the CC
Management and Control: Decision-making
Differences between members as to matters connected with a corporation's
business shall be decided by majority vote at a meeting of members of the
corporation.
At any meeting of members of a corporation each member shall have the
number of votes that corresponds with the percentage of his or her interest in
the corporation.

Liability For Negligence

- A member of a CC shall be liable to the CC for loss caused by his or
her failure in the carrying on of the business of the CC to act with the
degree of care and skill that may reasonably be expected from a
person of his or her knowledge and experience.
- Written approval?
Fiduciary duties (general)
- Each member of a CC stands in a fiduciary relationship to the CC.
- Implies that member must act honestly and in good faith i.r.t. the CC.
- Exercise powers as he or she may have to manage or represent the
CC in the interest and for the benefit of the CC
Duty to avoid conflicts of interest
- must avoid:
any material conflict between own interests and those of the CC;
personal economic benefit to which he or she is not entitled by
reason of his or her membership of or service to the CC;
- must notify every other member, at the earliest opportunity, of the
nature and extent of any direct or indirect material interest;
- must not compete in any way with the CC in its business activities
Any particular conduct of a member shall not constitute a breach of a duty
arising from his/her fiduciary relationship to the CC, if such conduct was
preceded or followed by the written approval of all the members where such
members were or are cognisant of all the material facts. (if conflict of interest,
just need written consent)
Power to Bind Close Corporation
Any member acts as an agent
An act of a member shall bind a CC whether or not such act is performed for
the carrying on of the business of the CC,

137
 - unless the member so acting has no power to act for the corporation in
the particular matter and the person with whom the member deals has,
or ought reasonably to have, knowledge of the fact that the member
has no such power.
Abuse of Juristic Personality
Whenever a court on application by an interested person, or in any
proceedings in which a CC is involved, finds that the incorporation of, or any
act by or on behalf of, that CC, constitutes a gross abuse of the juristic
personality of the CC as a separate entity, the Court may declare that the CC
is to be deemed not to be a juristic person in respect of such rights,
obligations or liabilities of the CC, and the court may give such further order or
orders as it may deem fit in order to give effect to such declaration.
Summary of consent needed by members for business transactions
Majority 75% Unanimous
Agree to give distributions Conversion to company Amendment of founding
statement
General decision making Change in principal Disposal or transfer of
(no. of votes held related business carried on interests (If association
to member interest) agreement provides for
another way then this
would be fine)
Disposals of CC itself Buyback of members
interest
Acquisition OR disposals Financial assistance
of immovable property

138
Class Exercise 5: Corporate Finance
Question 1 Financial Assistance

In terms of a BEE deal, Zen Ltd proposes bringing in three new shareholders, Mr A,
Mr B and Mr C. To enable A, B, and C to acquire their shares, they are each going to
acquire a loan from UB Bank and each of the loans is to be secured by mortgage
bonds ove
assisted in acquiring the shares by an undertaking by Zen that immediately on their
acquiring the shares, Zen will declare a dividend.

It is also part of the deal that Zen will sell 90% of its shares in its subsidiary, Bud
(Pty) Ltd to A, B and C. Zen is to make a loan to A, B and C to enable them to
purchase the shares in Bud.

You are required to advise Zen on the legality of the above, what requirements of the
Companies Act must be complied with if it is to be legal, and what the consequences
are of any of the transactions are in contravention of the Act.

Notes

The loan is not financial assistance.

Loan secured by mortgage bonds = financial assistance.

- Just because there
financial assistance.
- Granting of securities is deemed to be financial assistance.

Sell 90% shares to subsidiary:

- Is financial assistance for A, B and C:
o Due to company being impoverished
And, due to the fact that the subsidiary is a part of the company
and hence, since financial assistance provided to the company
also applies to the subsidiary.

Answer

The terms on which the financial assistance was granted must be fair and
reasonable to the company.

Question 2 Distributions

Rand Ltd is an investment holding company with two classes of shares, Class A and
Class B. Class A shares are ordinary shares and Class B shares are cumulative
participating preference shares. There are 10 million Class A shares which were
issued at R1 each and 5 million Class B shares which were issued at R2 each.
There are ten (10) Class A shareholders and five (5) Class B shareholders. All the
shareholders are natural persons and they all hold an equal number of shares. Each
of the shares carries one vote.

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Rand Ltd has two wholly-owned subsidiaries, A (Pty) Ltd and B (Pty) Ltd.

In January 2012, Rand Ltd decides to embark on a capital restructuring in terms of

which Rand Ltd is to purchase from its shareholders 1 million Class A shares for R3
each and 1 million Class B shares for R5 each. It is then to sell the Class A shares
that it has purchased to A (Pty) Ltd for R2 each and the Class B shares that it has
purchased to B (Pty) Ltd for R4 each. At the end of 2008, A (Pty) Ltd is to pay a
dividend of R1 million, half out of revenue reserves and half out of share capital.

You are required to advise Rand Ltd and its two subsidiaries on the legal
implications of what is proposed, including the legal requirements, if any, that have to
be complied with, and the legal consequences that flow if the legal requirements are
not complied with.

Notes

(Buyback) This is about a subsidiary buying shares in the holding company.

- This is a distribution.
o Solvency and liquidity test
Need to be solvent and liquid after the distribution.
o Board resolution
Board needs to authorise it.
Within 120 days of making the resolution.
o It is also a scheme of arrangement due to the fact that it [share
buyback] is over 5% of the shares.
Therefore, need a special resolution.
Must also appoint an independent expert and they must compile
a report which explains the effect that the transaction will have
on the holders of the specific class of shares.
The notice must include a copy of this report.

A and B acquiring shares in holding company:

- Distribution
o Distribution requirements

If company suffers a loss

- Distribution carried out/valid
o Can be reversed by application for it to be reversed

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CLASS EXERCISE 4: VALIDITY OF
CORPORATE ACTIONS & BOARD
ACCOUNTABILITY

Remember the format.

F : Facts
I : Issue
R : Relevant legal principles
A : Application
C : Conclusion

Bala Ltd is a company that was formed some ten years ago. At the time, the founders
were inspired by the possibilities that the then imminent 2010 World Cup would bring
to South Africa. The company was founded specifically to purchase and repurpose
commercial property, to use these properties as either restaurants or hotels, and to
take its place within the tourism industry and find a firm foothold in time for the descent
of the tourists in 2010.

The founders felt firmly that they did not wish for the company to pursue any other
business strategies and that the directors should be limited, and all transactions should
fall within the confines of its initial stated aims and specifically to do business only in
Gauteng and the Western Cape. To this effect, the MOI includes an objects clause

of the MOI. One such example is Clause 10.4 which states that the directors may not
purchase any property situated outside the Western Cape or Gauteng without first

The company turned out to be very successful. The three founding members each
holds 25% of the shares in the company and five further minority shareholders each
hold 5
directors. As time has gone by, the directors have all felt that they could afford to be
more adventurous. This year, the directors decide to buy a game farm in the Limpopo
province with a view to turning this farm into a lodge. One of the minority shareholders
is furious about this development. He consults you for advice:

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QUESTION 1 VALIDITY OF CORPORATE ACTIONS

1. Assuming that the directors go ahead and conclude the agreement with the
current owner of the game farm (Mr X), would this contract be enforceable
against the company?
o The company would be bound. There is a restriction on authority as
well as a restriction on capacity (Objects Clause) - this question is
specifically related to restriction on authority.
o This is a matter of internal management and therefore the turquand
rule applies. A third party dealing with a company may assume that all
the internal management requirements have been complied with.
o Note: There may have been an ordinary resolution that was passed by
the directors since they each hold 25%.
o You may also argue capacity here since it is outside of the ordinary
course of business (Objects Cause) which relates to commercial
property and this property they purchased was a farm. Relate to ultra
vires doctrine etc ...

2.
authority to purchase property outside of the noted two provinces subject to
shareholder approval, but prohibited it outright?
o
whether there was representation. Generally, a company is not bound
ws representation is
relatively easy (Estoppel and possibly bound).

3. Would your answer be any different if Clause 10.4 included the following

the company name was followed by the abb

that the Notice of Incorporation will make reference to Clause 10.4).
o Doctrine of constructive notice applies. This means that 3rd party is
assumed to have knowledge of the prohibition. BUT THIS IS ALSO AN
INTERNAL PROCEDURE, SO THE TURQUAND RULE APPLIES.
STILL BOUND.
o
to internal procedures.

4. What steps might the minority shareholder be able to take either preceding or
following the transaction?
o The shareholder has a right to restrain an unauthorised act (contrary to

o Following the transaction. They may claim for damages under Subsec
6. However, there may be ratification from the majority of the
shareholders and therefore be internally bound.

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QUESTION 2 BOARD ACCOUNTABILITY

Following from the above, the directors disagree about this latest transaction as well.
One of the three is adamant that the company should not proceed. They have a
grave difference of opinion. When the dissenting director arrives at company
headquarters the morning after a particularly heated telephone conference, he finds
that his access has been restricted. When he queries this, he is told that he has
been removed as a director by the other two majority shareholders.

1. Discuss a remedy that might assist the dissenting director. In your answer,

o The remedy for the director is the oppressive remedy.

o A bit of abuse of the separation of the shareholders and directors.

It later comes to light that the owner of the game farm is a juristic person that is a
wholly owned subsidiary of a company under the control of one of the remaining
directors. What is more, the sale proves to be a grave miscalculation as the airport
that was supposed to be constructed nearby is never built. The game farm is a
lemon and attracts very few tourists. It is a massive loss for the company as
substantial amounts of money were spent on renovations and refurbishments.

2. The minority shareholders are understandably irate and want to institute

action to sue the directors. Will these shareholders be successful?
o Breach of fiduciary duty- there is a conflict of interests.
o Breach of duty of care, skill and diligence.
The director will not be liable under the business judgement rule
if it applies due to it being within the scope of the business

the business judgement rule because the director did not

disclose his financial interest
Can the shareholders sue? Have they suffered loss? The
company has suffered a loss and is the proper plaintiff.
The court ultimately looks at whether it is in the best interest of the company and if
they have acted in good faith in order to decide to grant leave.

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