Company Law CML2001F University of Cape Town

PROBLEM SCENARIOS

(1) ‘LAME LTD’

Lame Ltd is an industrial design company that produces parts for a range of electronic
and mechanical equipment. Lame Ltd has four classes of shares (A-, B-, C- and D-
shares). There are one thousand (1000) A-shares, all of which were issued (as ordinary
shares) at the time that the company first listed on the JSE. Five hundred (500) B-
Shares were subsequently authorised as participating preference shares, half of which
were issued, the remainder retained by the company. Each of the twelve directors hold
ten (10) of the one hundred and twenty (120) total C-Shares, which are deferred shares.
Although one thousand (1000) D-shares have been authorised, none of these have
been issued.
It is the end of the financial year and the board of Lame Ltd would like to enter into the
following transactions:
distribution by virtue of dividend.
A. Payment of a dividend from the profits made by Lame Ltd to its shareholders in
terms of their respective preferences to be paid in 6 months’ time; 120 days resolution......
B. Extending loans to certain black South African investors which the company has
financial assistance for subscription of shares.
identified as potential new holders of the remaining (250) B-Shares for the
purposes of subscribing for these shares in 6 months’ time;
C. Securing a loan from Max (Pty) Ltd, which is a private equity company, for the
purposes of refurbishing one of Lame Ltd’s factories;business rescue??????
financial assistance to director
D. Providing a loan to Ms Manthe (one of the directors of Lame Ltd) to buy a luxury
yacht for her personal use during her annual leave month;
E. Offering 500 of the (as yet unissued) D-shares to a group of twelve (12) private
investors who had approached the company and expressed an interest in
subscribing for these shares (to be sold at R1000 each).
F. Providing security for a loan obtained by Mr Shaw for the purposes of purchasing
the remaining 500 D-shares; financial assistance for subscription. BUT no outflow yet
G. Repurchasing 200 of the A-shares from existing shareholders; distribution = buy back
H. Issuing 500 more A-Shares to interested investors via a stock broker.
issuing in excess of what has been initially (@ current standing point)
authorized
You are a director on the board of Lame Ltd and a majority shareholder of and Max (Pty)
Ltd and are present at the meeting where these proposals are tabled. All twelve
directors (including you) are present. Answer the following questions, taking into
account the mark allocation for each.
(a) What procedure would the board have to follow to conclude Transaction A?
(b) What procedure would the board have to follow to conclude Transaction B?
(c) What would be the implications for the board if the required procedures for
Transactions A and B were not complied with?
(d) What would the impact on each of the transactions (A and B) in the event of non-
compliance?
(e) Assuming that you thought that Transaction C was in the best interests of the
company and the matter was put to a vote, what procedure should be followed?
(f) Following from the above, how many votes would be required to authorise
Transaction C?

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Company Law CML2001F University of Cape Town

(g) Would it be possible to authorise Transaction D? Explain?

(h) Would a prospectus need to be issued to accompany the offer described in

Transaction E? Explain fully.

(i) Would Transaction F amount to financial assistance even though the company
is not impoverished by the transaction?

(j) Would there be any special requirements (over and above those required for
Transaction A) to approve Transaction G?

(k) If a vote was taken on approving Transaction H, how would you vote, and why?

(2) ‘SMARTMART LTD’

Busi and Camilla are two of five directors on the board of SmartMart Ltd. The business
of SmartMart Ltd is specified in its objects clause as follows: ‘The company has the
power to enter into any contract concluded in the furtherance of the object of buying or
selling electronic devices to the public for a profit, and any contract necessary therefor
or ancillary thereto’. The company has recently decided to go online, and will require a
website. Since Busi used to work as a software programmer, the board asks him to find
someone competent to design the website. Busi sees this as an opportunity to start his
own business, and registers e-Retail Solutions (Pty) Ltd with himself as sole director and
shareholder. He recommends e-Retail Solutions (Pty) Ltd, and appoints his friend
Danwood (a lawyer) to negotiate a contract with SmartMart Ltd. A week later, the board
meets and passes two resolutions: the first is to enter into an ongoing contract with e-
Retail Solutions (Pty) Ltd for the design and maintenance of a website for its new e-
commerce project, and the second is to purchase a commercial building adjacent to one
of SmartMart’s outlets that went on auction for the purposes of letting the property at a
profit.
1. Has Busi possibly breached any duties as director of SmartMart Ltd? Advise him of
what he would have needed to do comply with the relevant provisions of the
Companies Act.
2. If Busi, Camilla and Edna (one of the other directors) were the only ones present at
the meeting, could the resolution be validly passed?
3. Eeshaam, one of the shareholders of SmartMart Ltd, also has his eye on the
commercial property going on auction and is worried that he will be outbid by the
company. Is there anything that he can do to ensure that this does not happen
without breaching any fiduciary duties? Explain.
4. Assume that Eeshaam only found out that SmartMart Ltd was also interested in
purchasing the property at the auction, and was indeed outbid by the company.
Would he be able to have the contract of sale set aside, or reversed in some way,
and what would the consequences be for the seller?

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(3) ‘POTRERO GROUP’

Ralph is the CEO of Potrero Holdings (Pty) Ltd, and a director of one of its subsidiaries,
Potrero Investments (Pty) Ltd, the primary business of which is trading in publicly listed
shares. The other subsidiary of Potrero Holdings is Potrero Distribution (Pty) Ltd, which
is a distributor of high-end retail goods, the business of which is described in its objects
clause as follows: ‘Potrero Distribution (Pty) Ltd has the capacity to enter into any
transaction for the purchase and sale of luxury goods’.
At a board meeting of Potrero Distribution, Ralph instructs the three directors to
purchase R12 million of shares in Fintech Ltd (a listed company unrelated to the Potrero
group), with a view to re-sell them in six months’ time at a profit. Ralph anticipates a
profit of between 20-30%, because he has reliable information from his wife, Cecile (the
CFO of Fintech) that there will be a significant increase in the demand for FinTech
shares when news of a merger between FinTech and one of its competitors becomes
public. Ralph tells the board that it is necessary to capitalize on this opportunity in order
for Potrero Distribution to record a profit at year end so as to not taint the financial
statements of the Potrero Group, particularly since Potrero Distribution had suffered a
loss over the last two quarters as a result of fluctuating exchange rates and a decrease
in demand for luxury goods.
The board of Potrero Distribution approves the acquisition of shares in FinTech, and
also purchases R5 million of securities in Coyote (Pty) Ltd in terms of a rights offer that
Ralph renounced in favour of Potrero Distribution. Six months later, Potrero Distribution
sells the FinTech shares for a profit of R6.4million, and the Coyote shares to make a
further profit of R450 000.
A shareholder of Potrero Investments hears of what transpired and sues Ralph for
breach of his duty of care, skill and diligence, alleging that (as director of Potrero
Investments), he should have also instructed his own board to make these investments.
(a) Could Ralph be exposed to any civil or criminal liability, and would it be possible for
him to be indemnified against any such liability, and/or the costs of defending the
action brought by the shareholder of Potrero Distribution?
(b) Would Coyote have had to issue a prospectus with respect of the rights offer referred
to if Ralph was one of only five shareholders of the company?

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(4) PRAGMATECH (PTY) LTD

PragmaTech (Pty) Ltd is a successful software development company run by a board
of three directors, Gareth, Tristan and Troy. The company has three classes of shares:
founders’ shares (class A), preference shares (class B) and ordinary shares (class C).
The 1000 class A shares are held by the original founders of the company, Jenna and
Minenhle (500 each), and the 1000 class B shares are held by three early investors,
(Maahier, Luyanda and Khanyisa, with 600, 200 and 200 respectively). Of the 10,000
class C shares that have been authorised, 5,000 are in issue to various investors
(including the directors and original founders).
buy back = distribution. more that 5% buy back. thus notice applies
The board of PragmaTech decides to do away with founder’s shares completely, and to
buy back = distribution. more than 5% thus notice applies
reduce the number of preference shares in issue. In December 2018, the board
approved the repurchase of all shares in class A, and Maahier’s 600 class B shares.
The majority of the assets belonging to PragmaTech (Pty) Ltd are intellectual property,
providing protection for its software, including a number of process patents registered
overseas. During the period between December 2018 and February 2019, the lapse of
one of the company’s patents in the USA, and the development by a competitor of a
solvency and liquidity???
new software platform (used in automated production lines) has a significant impact on
the company’s net asset value.
In May, the transaction is carried out, but the company becomes insolvent as a result.
At the time of applying the solvency and liquidity test in relation to the proposed
repurchase, the directors relied on valuations of intellectual property belonging to the
financial statements must not be false or misleading or prepared with intent to mislead the users. preparer of financial statements may be held accountable.
company that was greatly overstated because the reasonably foreseeable financial
circumstances of the company were not taken into account. Because of the complexity
of the valuation, the board had relied entirely on Gareth’s friend, Bibi, whom Gareth had
presumed to be competent by virtue of the fact that she had recently completed a PhD
on the valuation of intellectual property and is also a registered chartered accountant.
>rely on information provided by professionals retained by the company,
> employees who are employed and responsible for such activities
> rely on committee's info if such director is not a part of that committee

1. Aside from applying the solvency and liquidity test, what other requirements would
have needed to be satisfied before the company could repurchase the class A and
class B shares.
2. What would the impact of non-compliance in this case be?
3. Luyanda (one of the class B shareholders) is unhappy about the idea of restructuring
the company’s share capital because he does not think that this will be in the best
interests of the company.
Advise him of an appropriate remedy that he could have made use of, and the steps
that he would have needed to follow in order to do so.

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After the company becomes insolvent, one of the Class C shareholders, Thejna, decides
that she is going to sue Gareth in his personal capacity for breach of the duty of care,
skill and diligence owed to the company. She alleges that he was negligent in the
fulfilment of his duties as director because he relied on Bibi’s report instead of learning
how to do the calculation himself.
4. What defense could Gareth raise to show that he was not negligent by relying on the
valuation by Bibi, and would he be able to successfully raise the defense in this case?
5. Would PragmaTech (Pty) Ltd have been able to indemnify Gareth against having to
compensate Thejna for loss that she may have incurred as a result of breaching his
duty of care, skill and diligence? Explain briefly.
6. VergeCom (Pty) Ltd (the competitor which developed the software platform referred
to above) hears of the unhappy shareholders and decides to offer them its own
shares, promising them a generous dividend in the next few months. The company
offers the total of thirty (30) shareholders of PragmaTech (Pty) Ltd (including
Luyanda and Thejna) each 1000 shares in VergeCom (Pty) Ltd at R50 each. Explain
whether this offer by VergeCom (Pty) Ltd would be considered an offer of shares to
the public under the Companies Act 2008.