Corporate Law

LWCLA2-B22

Eduvos (Pty) Ltd (formerly Pearson Institute of Higher Education) is registered with the Department of Higher Education and Training as a private higher education institution under the
Higher Education Act, 101, of 1997. Registration Certificate number: 2001/HE07/008
Week 1
What will be covered in this week’s lesson(s)?

Forms of Business Undertakings and Types of Companies

• Concept of legal personality

• Consequences of legal personality
• Disregard of separate existence of legal person
• Factors influencing form (type) of business undertaking
• Listing different business structures
• Incorporation of company - reservation of company name
• Memorandum of Incorporation
Week 1
Learning outcomes

Identify and understand legal personality and the

different forms of business undertakings in South Africa
1.1 Explain the concept of legal personality and the consequences for an entity having
acquired legal personality.

1.2 Explain why and when the separateness of the legal person will be disregarded.

1.3 List the different business structures (undertakings).

1.4 Briefly indicate the relative advantages and disadvantages of each business form.

1.5 Apply the theory to a set of facts in an assessment

Week 1
Legal personality

The Law

The law determines the rights and duties of persons (legal subjects)

Legal subjects – natural persons and juristic/artificial/legal persons

Legal persons are created either by specific legislation (eg UCT), general
legislation (eg. Companies Act), or conduct of an association of persons
acting together.
Legal Personality

In essence company deemed

to have capacity to acquire its
S 8 (3) of Companies Act
own rights and obligations
separate from its members

No persons formed for the Unless it is registered as a

purpose of the acquisition of company under this Act of
gain will be recognised as a formed in terms of another
legal person Act
 • A company is a legal person
• It is a separate legal person
• Different from a partnership in this respect
• Legal person:
Consequences - an entity that can acquire rights and duties separate from its
members
of Legal • Airport Cold Storage v Ebrahim

Personality - one of most fundamental consequences of incorporation is

that a company is a juristic entity separate from its
shareholders
• A company is a juristic person separate from its
shareholders
• The assets of the company are the exclusive property of the
company itself and not of its shareholders
• It can acquire assets and is liable to pay its own debt
 Dadoo v Krugersdorp Municipal Council
- court found that property vests in the company

Consequences - property cannot be regarded as vesting in any or all of the

shareholders of the company
of Legal
Personality Salomon v Salomon
- court found that once a company is legally incorporated it
must be treated like any other independent person with its
rights and liabilities appropriated to it
- motives of the promoters of the company are irrelevant
when discussing the rights and liabilities of such a company
 • Legal personality vs limited liability
Legal
Personality - incorporation and limited liability are different concepts

Continued -incorporation also entails limited liability of shareholders

• result: shareholders are generally not liability for debts of

company
 Personal liability companies

Legal - Certain companies can have legal personality but unlimited

liability
Personality - Personal Liability Companies – Inc.

Continued - MOI of such company states that the directors are jointly
and severally liable with the company for contractual debts
and liabilities incurred during their period of office
- Company still has legal personality
- Example: attorneys’ firms
Legal Personality Continued

•Section 19 (1) reinforces common-law position

- “From the date and time that the incorporation of a company is registered, … the company – (a) is a juristic
person
- Company is a juristic person from the date that it is registered
- Subsection also states that the company will continue to exist until its name is removed from the
companies register in accordance with the Companies Act.
- Major advantage of company: It has perpetual existence
- Company’s existence can only be terminated by a legal process, namely deregistration and dissolution
- Different from a partnership in this respect: Partnership is not a juristic person and automatically
ends when a partner dies, or retires, or leaves the partnership.
Disregard of separate existence of legal person

• One cannot abuse limitation of liability

• Courts: law looks at substance of things rather than mere legal form
• Courts won’t allow a legal entity to be used to ‘justify wrong, protect fraud or defend crime’
• Cape Pacific v Lubner: If a company has been legitimately established and is legitimately operated, but is
misused in a particular instance ‘to perpetrate fraud, or for a dishonest or improper purpose’, there is no
reason in principle or logic why its separate personality cannot be disregarded in relation to the
transaction in question
• Airport Cold Storage v Ebrahim: the directors and members of a company ordinarily enjoy extensive
protection against personal liability. However, such protection is not absolute, as the court has the power
in certain exceptional circumstances to pierce or lift or pull aside the corporate veil and to hold the
directors and others personally liable for the debts of the company
Disregard of separate existence of legal person

• Section 20 (9) of Act

• If on application by an interested person or in any proceedings in which a company is involved, a court
finds that the incorporation of the company, and any use of the company, or any act by or on behalf of the
company, constitutes an ‘unconscionable abuse of the juristic personality of the company as a separate
entity the court may do the following:
• declare that the company is to be deemed not to be a juristic person in respect of any right, obligation or
liability of the company or of a shareholder of the company or, in the case of a non-profit company, a
member of the company, or of another person specified in the declaration; and
• Make any further order the court considers appropriate to give effect to such declaration
• Not a remedy of last resort
• Provision does not replace the common law
 • First judgment on meaning of 20 (9) in Ex parte Gore NO.

Disregard of - Case dealt with piercing of corporate veil in group of

companies that were in reality run as if they
separate were one company

existence of - No distinction between affairs and finances of different

companies
legal person - “Unconscionable abuse” was not as extreme as “gross
abuse” but its scope of application is very
wide and it includes words sed in other judgments such as “a
sham”, “a device” and others
- Section 20 (9) is not a remedy of last resort
- The provision does not replace the common law
Disregard of separate existence
of legal person

• Director can be held liable for any loss, damages

or costs sustained by the company as direct or
indirect consequence of the director having
acted in a manner in contravention of the
provisions of theAct.
• S 218 (2)
- any person who contravenes any provision of the
Act is liable to any other person for any loss
ordamage suffered by that person as a result of
that contravention
Disregard of separate
existence of legal person

• 2008 Act allows for a person to be held

personally liable in a variety of circumstances for
losses caused by his or her wrongdoing
• This is also a form of ‘lifting the corporate veil’
• Study these cases on pg 59:
- Airport Cold Storage (Pty) Ltd v Ebrahim
- Robinson v Randfontein Estates Gold Mining
Company Ltd
- Le Bergo Fashions v Lee
- Amlin (SA) (Pty) Ltd v van Kooij
Disregard of separate
existence of legal person

• Power of court to lift / pierce corporate veil to impose personal liability

on shareholders / directors was originally developed in terms of
common law
• • Companies Act, 2008 includes new statutory power for this purpose
- ITO S 20 (9)
- whenever court finds that incorporation of or any act by / on behalf of or
any use of company constitutes an “unconscionable abuse” of juristic
personality of company as separate entity court may declare that company
is deemed not to be juristic person iro any right, obligation or liability
ofcompany or shareholder or member of company or of another person as
specified in declaration
• Court may give any further order it considers appropriate in order to give
effect to such declaration
• Declaration can be made by court on application by interested person /
in any proceedings in which company is involved
Factors influencing form
(type) of business
undertaking
• You do not have to open a close corporation or
partnership when you start a business – it is not a
legal requirement.
To decide, number of issues to consider:
• number of persons who will be involved in the business
• the extent of their involvement
• the capital required to commence business
• the sources of that capital
• the requirements of customers and clients
• tax issues
• the strategic objectives of those involved
• After considering these & other issues can one decide
which vehicle to use for business
Factors influencing
form (type) of
business undertaking
LIMITED LIABLITY IS PROBABLY THE
MOST COMMON MOTIVATING FACTOR
 • Number of choices:
Listing different
business structures - Company: Private, personal liability,
public company, state-owned company)
- Close corporation (CC)
- Business trust
- Partnership
- Or a combination
- Sole proprietorship
Listing different business structures

• Personal liability company - Incorporated or Inc.

• Private company - Proprietary Limited or (Pty) Ltd
• Public Company - Limited or Ltd
• State-owned Enterprise - SOC Ltd
• Non-profit company - NPC
• Ring-fenced - RF
Incorporation of Company – reservation of company
name

• A person may reserve one or more names for use at a later time. These reserved names
may be used for newly incorporated companies or as an amendment to the name of an
existing company.
• The Commission is compelled to reserve each name that the applicant applies for, unless
the name applied for is the registered name of another company, close corporation or
cooperative, external company or has already been reserved by someone else. The
reservation continues for a period of six months from the date of the application for
reservation.
• A person for whom a name has been reserved may transfer the reservation to another
person by filing a signed notice of transfer.
Incorporation

• Incorporation entails limited liability for its shareholders

- Shareholders are not liable for the debts of the company
- The assets of the company are the exclusive assets of the company
- The assets do not belong to the shareholders
- Where a wrong is alleged to have been committed against the company the company must seek redress
• Not the shareholders
• Shares in a company entitle holders to certain interests in the company
• Legal personality is acquired by companies upon incorporation
• Companies afforded rights and attributes
• Certain circumstance where the “corporate veil” will be lifted
Incorporation

• Steps to incorporate a company:

One or more persons may incorporate a profit company, whereas three or more persons
may incorporate a non-profit company. The following are the necessary steps that should be
taken in order to incorporate a company:
- Each person should complete and sign the MOI.
- The notice of incorporation must be filed with the Commission together with the
prescribed fee and must be accompanied by a copy of the MOI, unless the company uses
the MOI provided for in the 2008 Act. (The MOI can be in a form that is unique to the
company or the company can use the MOI provided for in the 2008 Act).
Incorporation

• Registration of a company:
The registration of a company is dealt with in section 14. Upon accetptance of the notice of
incorporation, the Commission assigns a unique registration number to the company. The
Commission must enter the prescribed information relating to the company into the
companies register. This register is one that is opened by the Commission and does not refer
to a register that is kept at the relevant company.
Incorporation

• Registration of a company (continued):

If all formalities are in order, a registration certificate will be issued and delivered to the
company. Such a registration certificate is conclusive evidence that all the requirements for
the incorporation of the company have been complied with and that the company is
incorporated from the date stated in the certificate. The date of incorporation on the
certificate is the date on which the company comes into existence as a separate legal entity.
Memorandum of Incorporation

• In terms of section 13, the Notice of Incorporation must be filed together with the
prescribed fee and must be accompanied by a copy of the Memorandum of Incorporation
(MOI).
• The MOI is an important document that enables significant flexibility as to the
relationship between a company and its stakeholders. It can accommodate very simle
company structures or very detailed and complex provisions - for example, to protect
minority shareholders and withhold certain powers from the board of directors.
Memorandum of Incorporation

• The MOI is defined in section 1 as the document, as amended from time to time, tha sets
out rights, duties and responsibilities of shareholders, directors and others within and in
relation to a company, and other matters as contemplated in section 15. The MOI can
therefore determine the rights, powers and duties of all stakeholders, as well as the
nature of the company - that is, whether it is a public or private company or another type
of company.
Flexibility With Memorandum of
Incorporation

The Companies Act, 208 allows a large degree of flexibility with regard to The MOI is the founding document of a company, and determines the
the content of the MOI. However, each provision of a company’s MOI must nature of the company, as well as the rights, privileges and duties of
be consistent with the provisions of the Act. Any provision that is stakeholders.
inconsistent with the provisions of the Act will be regarded as void to the
extent that it contravenes, or is inconsistent with, the Act. The
incorporators of a company are free to include any provision in the MOI
that is not covered by the Act.
Flexibility With Memorandum of Incorporation

• In terms of the 2008 Act, there are certain:

- unalterable provisions (which an MOI cannot abolish);
- alterable provisions (which an MOI can change taking into account the specific needs and
requirements of those wishing to make use of the company structure); and also
- default provisions (which will automatically apply if an MOI does not deal with that
specific matter - that is, the default provisions will apply unless they are altered by a
company’s MOI).
Flexibility With Memorandum of Incorporation

• The MOI may contain provisions:

- altering the effect of any alterable provision in the Companies Act, 2008;
- containing special conditions applicable to the company;
- containing requirements for the amendment of any special conditions applicable to the
company in addition to any of the requirements set out in the Act; and/or
- prohibiting the amendment of any particular provision contained in the MOI.
Flexibility With Memorandum of Incorporation

• A company’s MOI can deal with any number of different issues including the following:
- the objects and powers of the company; the authorised shares and types of shares; any
restrictions or limitations on the powers of the company; what happens to the assets if the
company is dissolved; the composition of the board of directors; the election and removal of
directors; alternate directors; the frequency of board meetings; the committees of the
board; the personal liability of directors; the indemnification of directors; powers of
directors and powers of shareholders; restrictions on powers of directors or shareholders;
types of shareholders’ resolution; rights of shareholders, including voting rights; the disposal
by shareholders of their shares; the ability to create rules of the company; shareholders’
meetings and the procedures involved; specific audit requirements; and the amendment of
the MOI.
Rules made by the Board of Directors

Unless a company’s MOI provides otherwise, the board of directors of The board must publish a copy of the rules in the manner required in
a company may make, amend or repeal any necessary or incidental terms of the MOI (or in the manner set out in the rules themselves).
rules relating to the governance of the company in respect of matters A copy of the rules must also be filed with the Commission if this is in
that are not addressed in the Act or in the MOI. accordance with MOI or the rules themselves.
Rules made by the Board of Directors

Any rule made by the board of directors takes effect 20 business days after the rule is
published, or on the date, if any, specified in the rule, whichever date is the later. The rule is
binding on an interim basis from the time it takes effect until it is put to a vote at the next
general shareholders’ meeting of the company. The rule will become permanent once it is
ratified by an ordinary resolution at the shareholders’ meeting. Where the rule is not
accepted by the majority of the shareholders, the board of directors may not make a
substantially similar rule within the ensuing 12 months, unless it has been approved in
advance by ordinary resolution at a shareholders’ meeting.
Legal Status of the MOI and the rules developed by the
Board of Directors

A company’s MOI and any rules of the company are binding as follows:
• between a company and each shareholder;
• between or among the shareholders of the company;
• between the company and each director; and
• between the company and each prescribed officer of the company, or other person
serving the company as a member of the audit committee or as a member of a committee
of the board in the exercise of their respective functions within the company.
Ring-fenced companies

Section 11(3)(b) of the Companies Act, 2008 provides that a company’s name must be
immediately followed by the expression ‘RF’ (meaning ring-fenced), if a company’s MOI
contains:
• any restrictive conditions applicable to the company and any procedural requirements (in
addition to the normal amendment requirements as set out in section 16) that impedes
the amendment of any particular provision of the MOI; or
• if a company’s MOI contains any provision restricting or prohibiting the amendment of
any particular provision of the MOI.
Amending the Memorandum of Incorporation

A company’s MOI may be amended in any of the following three ways:

1. In compliance with a court order;
2. In the manner contemplated in section 36(3) and (4); or
3. at any other time if a special resolution to amend it is proposed (a) by the board of the
company, or (b) by shareholders who are entitled to exercise at least 10 per cent of the
voting rights that may be exercised on such a resolution; and if (no matter who proposes
such special resolution) that resolution is adopted at a shareholders’ meeting.
Amending of MOI in compliance with a court order

Section 16(4) provides that an amendment to a company’s MOU that is required by any
court order must be effected by a resolution of the company’s board. Such an amendment
does not require a special resolution of shareholders.
Amendment of MOI when directors act in terms of
section 36(3) and (4)

Section 36(3) provides that (except to the extent that a company’s MOI provides otherwise),
the board of directors itself may:
(a) increase of decrease the number of authorised shares of any class of shares;
(b) reclassify any classified shares that have been authorised but not issued;
(c) classify any unclassified shares that have been authorised...but are not issued; or
(d) determine the preferences, rights, limitations or other terms of shares in a class
contemplated in subsection 1(d).
Amendment by way of special resolution of
shareholders

An amendment by way of special resolution may take the form of:

• a new MOI in substitution for the existing MOI; or
• one or more alterations to the existing MOI by
- changing the name of the company;
- deleting, altering or replacing any of its provisions;
- inserting any new provisions into the MOI; or
- making any combination of alterations as described above.
Effective date of amendments to the MOI

In the case of an amendment to a company’s MOI that changes the name of the company,
the amendment takes effect on the date set out in the amended registration certificate
issed by the Commission. In any other case, the amendment takes effect on the later of:
• the date on, and time at, which the notice of amendmdent is filed; or
• the date, if any, set out in the notice of amendment.
In terms of section 167(7), a company must file a notice of amendment together with the
prescribed fee with the Commission, and the Commission may require the company to file a
full copy of its amended MOI within a reasonable time.
Discussion of Case law

Airport Cold Storage v Ebrahim 2008 (6) SA 585 (SCA) - corporate veil as
mentioned above.

Shipping Corporation of India Ltd v Evdomon Corporation 1994 (1) SA 550 (A)
Discussion of Case law

Airport Cold Storage v Ebrahim 2008 (6) SA 585 (SCA) - corporate veil as
mentioned above.

The court concluded that the defendants operated the business of the corporation as if
it were their own, and without due regard for, or compliance with, the statutory and
bookkeeping requirements associated with the conduct of the corporation’s business.
The court held that when it suited them, the defendants chose to ignore the separate
juristic identity of the corporation. ‘In these circumstances, the defendants cannot now
choose to take refuge behind the corporate veil’ of the corporation in order to evade
liability for its debts.

The defendants were therefore held to be jointly and severally liable to the plaintiff for
the amounts owed to the plaintiffs at the time of liquidation.
Discussion of Case law

Shipping Corporation of India Ltd v Evdomon Corporation 1994 (1) SA 550 (A)

Corbett CJ held that ‘the separate personality of the company and the members is of
supreme significance and that deviation from this rule should only occur in exceptional
cases, especially where fraud and improper conduct are present.’

“The corporate veil may be pierced where there is proof of fraud or dishonesty or other
improper conduct in the establishment or the use of the company or the conduct of its
affairs and in this regard it may be convenient to consider whether the transactions
complained of were part of a “device”, “stratagem”, “cloak” or a “sham””.
Questions for Discussion

1. What are the advantage of incorporating a business?

2. What is legal personality? What is its implication for shareholders?
3. What does lifting the corporate veil entail? What is its purpose and under
what circumstances can it occur?
4. Do branches, divisions and units of a company have their own separate
legal personality?
5. List and briefly discuss the three advantages of incorporating a business.
Modern company usually has various divisions which may
even compete with each other

- Questions about their separate legal personality might be

raised
- Branches and divisions of a company are part of the
company
- They do not have their own separate legal existence
- ABSA v Blignaut – a company can decide to have separate
operating divisions but this does not result in different
businesses that exist separately
 Activity

Discuss the principle of lifting the corporate veil and indicate the
circumstances under which this principle becomes relevant
 Activity

In 2005, Pat and Tracy Morgan established NetMedia (Pty) Ltd which offered internet-based news, until it
went into liquidation when the company could no longer pay its creditors. During the winding-up of the
company, the liquidator discovered that Mr. and Mrs. Morgan, the only shareholders and directors of
NetMedia (Pty) Ltd had made a loan of R10 million to the company as a start-up cash injection. This loan
was secured by a mortgage bond over immovable property by NetMedia.

The liquidator argued that there was no real distinction in law between the Morgans and NetMedia, and
the proceeds of the sale of the company’s assets, therefore had to be utilised to settle all debts owed by
the company to its other ordinary creditors. Mr. and Mrs. Morgan believed that NetMedia’s separate legal
identity entitled them to have their secured claim against the company settled first and vowed to take
their fight to the highest court in the land.

• Advise both parties about their respective positions

 Activity

Lisa resigned from ABC (Pty) Limited where she was employed for several years. At the time of her
employment with ABC (Pty) Limited she signed a restraint of trade agreement which stated that she may
not compete with the business of ABC (Pty) Limited for a period of 1 year after resigning. She has
subsequent to her resignation registered her own company, Lisa’s Brand (Pty) Limited, and is using the
company, of which she is the sole shareholder and director, as a front to circumvent the provisions of the
restraint of trade agreement. The directors of ABC (Pty) Limited approach you for advice. They are aware
that Lisa’s Brand (Pty) Limited is a separate legal person to Lisa, they however feel that Lisa’s Brand
(Pty) Limited should still be bound by the restraint of trade agreement.
 Activity

Provide advice to ABC (Pty) Limited in respect of the legal position and whether they can still rely on the
restraint of trade agreement to prevent Lisa’s Brand (Pty) Limited from competing with them. In your
answer refer to the case that is most relevant to the facts in this question. [Note: This question does
not require you to have an understanding of the validity of restraint of trade agreements but
rather an understanding of legal personality].
Quiz True/False
1. Amy wishes to conduct a business but does not what to be responsible for the business’ debts.
The best form of business for Amy is the Sole Proprietorship.
2. The shareholders of a company are the beneficial owners of the company.
3. The shareholders of a company own the company’s assets.
4. The separate legal personality of a company may never be disregarded.
5. The legal personality of a company ends at death.
6. When a public company has fewer directors than prescribed, it ceases to exist as a separate
legal personality.
7. A trust is a separate legal person because trustees are not personally liable for the debts of
the trust.
8. A non-profit company does not need to have a specific object.
9. A domesticated company is a foreign company that has transferred its registration to South
Africa