Close Corporation Law Reform in Southern Africa

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Close Corporation Law Reform in Southern Africa*
Johan J. Henning**
I. INTRODUCTION ......................................................................................................... 918

II. SOUTH AFRICA .......................................................................................................... 920
A. The Concept........................................................................................................ 920
B. History, Background and Objectives .................................................................. 921
C. Need ................................................................................................................... 92 1
D. Objectives ........................................................................................................... 923
E. Close Corporationsand Private Companies...................................................... 924
F. Salient Featuresof the Close CorporationsAct ................................................. 926
1. Introduction................................................................................................... 926
2. Innovation ........................................................... 927
3. Accessibility .................................................................................................. 927
4. UnrestrictedSize and Scope of Undertaking ................................................ 928
5. Simplification ................................................................................................ 928
6. Legal Personality.......................................................................................... 929
7. FlexibleInternal Relations............................................................................ 930
8. CapitalMaintenance Replaced by Solvency and Liquidity ........................... 930
9. CorporateMembership Excluded ................................................................. 931
10. CriminalizationReplaced by PersonalLiability and Self-Enforcement ........ 932
11. Minimal Administrative Duties ..................................................................... 932
12. Conversion .................................................................................................... 932
13. Members' Contributions............................................................................... 933
14. Agency ........................................................................................................... 933
15. Accounting and Disclosure........................................................................... 934
16. OngoingDevelopment and Simplification .................................................... 935
a. Introduction ............................................................................................. 935
b. The FirstFourAmendment Acts .............................................................. 935
c. Three Year Development Program .......................................................... 936
d. Close CorporationsAmendment Act of 1997 ........................................... 937
i. Agency ................................................................................................. 938
ii. PersonalLiability ................................................................................ 938
* This Article is based on Johan Henning, Close Corporationsand PrivateBusiness Corporations-The

Southern African Solution, 2 DEV. EUR. Co. L. 113-48 (1999). The Journalof CorporationLaw was unable to
verify some of the authority cited in this Article. These sources were not in the English language or could not be
obtained in time for this printing. The Journal would like to note that the author was very kind and cooperative
in providing us with copies of the authority as far as practically possible within the time and cost constraints.
** B. luris LL.B. LL.D. Hon. FSALS. Dean of the Faculty of Law and Distinguised Professor, University
of the Free State, Bloemfontein, South Africa; Director of the Centre for Corporate Law and Practice, Institute
of Advanced Legal Studies, University of London, London.
918 The Journalof CorporationLaw [Summer
iii. Other A m endm ents............................................................................... 939

iv. Simplification and Enhanced Protection............................................. 940
e. R ationalization......................................................................................... 940
f Objections ................................................................................................. 940
g. The Future................................................................................................ 940
G. R esp onse ............................................................................................................ 94 1
1. Dom estic: The Statistics ................................................................................ 941
2. International................................................................................................. 945
III. ZIMBAB WE ................................................................................................................ 945
IV . N AM m A................................................................................................................... 947
V. A UNIFORM SOUTHERN AFRICAN FORM OF BUSINESS ENTERPRISE? ........... . .. . .. .. .. . .
949
VI. C ON CLU SION ............................................................................................................ 949
I. INTRODUCTION
The important contribution of the small business sector to the national product,
employment, and regional development is widely and generally acknowledged in South
Africa. Indeed, this sector of the economy has taken an increasingly important role in the
industrialization strategies of developing countries in the region, especially during the last
1
ten to fifteen years.
In 1984, South Africa became the first country with a British derivative company
law system to take a large step forward in effectively providing for the reasonable
entrepreneurial legal needs and expectations of the typical small businessman.
Recognition of the fact that the small business sector forms the very backbone of a
market orientated economy gave added impetus to the introduction of the Close
2
Corporations Act of 1984 (Act).
The Close Corporations Act has proved to be one of the most remarkable
innovations in South African company law. 3 Its advent has been described as an event of
very significant historical importance in the development of South African
entrepreneurial law.4 The Act introduced a new form of incorporation for closely held
enterprises with several unique and innovative features-combining some of the
attributes of partnership law with the corporate attributes of legal personality and limited
liability. 5 It provides a simple, inexpensive, and flexible form of incorporation for the
1. See J.J. Henning & E. Snyman, A Salutary Dispensationfor Small Business, 21 J. JURID. SCl. 132, 132
(1996).
2. §§ 1-83 of Close Corporations Act 69 of 1984 (S. Afr.); A. A. Venter, Die Ontsaan en Eienskappe van
die Wet op Beslote Korporasies,9 J. JURID. SCI. 109, 110 (1984).
3. See CALLY JORDAN, REvIEw OF THE HONG KONG COMPANIES ORDINANCE-CONSULTANCY REPORT
2-18 (1997).
4. H.S. CILLIERS ET AL., ENTREPRENEURIAL LAW 228 (2d ed. 2000) [unable to verify authority from this
source].
5. See generally S.J. Naud6, The South African Close Corporation 9 J. JURID. SCI. 117, 119 (1984)
[unable to verify authority from this source]; M. P. Larkin, Company Law (including close corporations),ANN.
SURV. OF S. AFR. L. 317 (1985); J.J. Henning et al., Close Corporations,in 4.3 THE LAW OF SOUTH AFRICA
497-500 (1996); H.S. CILLIERS ET AL., CORPORATE LAW 568 (2000) [unable to verify authority from this
2001] Close CorporationLaw Reform in Southern Africa
enterprise consisting of a single entrepreneur or small number of participants that is

designed to meet the participants' needs without burdening them with legal requirements
6
that would not be meaningful in their circumstances.
The South African example has been followed inter alia 7 in southern Africa by
legislative developments in several jurisdictions aimed at introducing new legal forms for
small businesses. Thus, the reactions in the erstwhile Transkei, Bophutatswana, Venda,
and Ciskei states (TBVC) to the South African initiative differed. Bophutatswana, for
instance, introduced Act 36 of 1986 providing for the formation, registration,
incorporation, management, control and liquidation of 'closed corporations,' while the
Ciskei published its Private Companies Act 36 of 1985 consisting of a mere thirty-five
sections. The Rationalisation of Corporate Laws Act of 19968 applied the South Africa
source]; H.S. CILLIERS ET AL., CLOSE CORPORATIONS LAW 12 (3rd ed. 1998) [unable to verify authority from
this source]; H.S. CILLIERS ET AL., CLOSE CORPORATIONS SERVICE 1-4 (1991 et seq.) [unable to verify
authority from this source]; H.S. CILLIERS ET AL., supra note 4, at 288; J.L. VAN DORSTEN, SOUTH AFRICAN
BUSINESS ENTITIES: A PRACTICAL GUIDE 21 (1993); Katz & Barker, Companies, in 3 BUTrERWORTHS FORMS
AND PRECEDENTS 18 (1991); D.S. RIBBENS, IN QUEST FOR THE APPROPRIATE CODE FOR THE IDEAL LEGAL
FORM FOR THE PROPRIETARY BUSINESS ENTERPRISE 228 (1986) [unable to verify authority from this source];
S.J. Naudd, Die Toekoms van die Beslote Korporasieen die Private Maatskappy, 3 TRANSACTIONS CENTRE
FOR BUS. L. 1 (1986) [unable to verify authority from this source]; M.F.R. Bleimschein & J.J. Henning, The
Registrabilityof a Close CorporationNot for Gain, 52 J. CONTEMP. ROMAN-DUTCH L. 251, 251-57 (1989);
M.F.R. Bleimschein & J.J. Henning, Structuring a Close CorporationNot for Gain, 53 J. CONTEMP. ROMAN-
DUTCH L. 567, 567-70 (1990); J.J. Henning & M.F.R. Bleimschein, Die neue Unternehmensform der Close
Corporation in Sadafrika, 8 RECHT DER INTERNATIONALEN WIRTSCHAFT 627, 627-29 (1990); J.J. Henning,
JudicialManagement and CorporateRescues in South Africa, 17 J. JURID. SCI. 90, 90-105 (1992) [unable to
verify authority from this source]; J.J. Henning & M.S. Wandrag, 'n Oorsig van die Herkoms van die Private
Maaatskappy en die Huidige Posisie in Enkele Regstelsels, 1 DE JURE 14 (1993) [unable to verify authority
from this source]; R.C. BEUTHIN & S.M. LUIZ, BASIC COMPANY LAW 325 (2d ed. 1992); H.J. DELPORT & J.J.
PRETORIUS, INTRODUCTION TO THE CLOSE CORPORATIONS ACT 1 (1998); J.J. Henning, The South African
Close Corporation-AStatistical Survey, AMICUS CURIAE 29 (1998).
6. Naud6, The South African Close Corporation,supra note 5, at 117-19; Naudd, Die Toekoms van die
Beslote Korporasie en die PrivateMaatskappy, supra note 5, at 1; S.J. Naud6, A New Form of Enterprisefor
Small Business?, 1 ENTREPRENEUR 8 (1982). The close corporation is a full-fledged legal entity conferring on
its members all the usual advantages associated with legal personality. § 2(4) Close Corporations Act 69 of
1984 (S. Afr.). It is a closely held entity in which all or most members are actively involved. In principle there
is no separation between ownership and control. Id. § 46(c). No board of directors nor general meeting is
required. Every member is entitled to participate in the management of the business and to act as an agent for
the corporation. Id. § 46. Every member owes a fiduciary duty and a duty of care to the corporation. Id. § 42(1).
The consent of all the members is required for the admission of a new member. Id. § 37(b).
In principle membership is limited to natural persons. § 28 Close Corporations Act 69 of 1984 (S.
Afr.). It may have a single member. Id. § 28. The maximum membership is limited to ten, but there is no
restriction on the size of a close corporation's business or undertaking, the number of its employees or creditors,
the size of the total contributions by members, turnover, value of assets or, generally, the type of business and it
need not be an undertaking for gain. Id. § 28. The close corporation can cater for the unsophisticated and the
highly sophisticated businessman alike. It can also provide a viable mechanism for helping to bridge the gap
between the formal and informal sectors of the economy. In this way the establishment of a wide range of
business enterprises is effectively promoted.
7. See Uriel Procaccia, Designinga New CorporateCodefor Israel, 35 AM. J. COMP. L. 581, 589 (1987)
(discussing the developments in Israel). A close corporations act was introduced in Australia in 1989, but not
promulgated. See J.J. Henning, Closely Held CorporationsPerspectives on Developments in FourJurisdictions,
58 J. CONTEMP. ROMAN-DUTCH L. 100, 102-04 (1995).
8. Rationalisation of Corporate Laws Act 45 of 1996 (S. Afr.).
The Journalof CorporationLaw [Summer
Close Corporations Act of 1984 throughout the Republic and repealed the earlier TBVC
legislation. Further discussion of the repealed legislation falls outside the ambit of this
review.
This Article will first discuss the evolution of the close corporation in South Africa.
Then this Article will explore the developments in Namibia and Zimbabwe. This Article
will finish with a discussion on a uniform business form in southern Africa.
II. SOUTH AFRICA
A. The Concept
9
The South African close corporation may startle traditional company lawyers.
"Under the Close Corporations Act a close corporation is a fully fledged corporation' 0
which confers on its members all the usual "advantages of the attributes of legal
personality, in particular perpetual succession and limited liability. The close corporation
has the capacity and powers of a natural person of full capacity." 11 There is no room for
the application of the doctrines of ultra vires or constructive notice. In a previous article, I
described a close corporation as:
[a] closely held entity in which all or most members are usually actively
involved. In principle there is no separation between ownership and control. No
board of directors nor general meeting is required; every member is entitled to
participate in the management of the business and to act as agent for the
corporation, every member owes a fiduciary duty and a duty of care to the
corporation; the consent of all the members is required for the admission of a
12
new member.
Capital maintenance requirements have been abandoned in favor of solvency and
liquidity. 13
"[I]n principle membership is limited to natural persons. It may have a single
member, as is presently the case with approximately seventy five percent of all close
corporations." 14 Although the maximum number of members is limited to ten, there is no
restriction on the size of a close corporation's business or undertaking, the number of its
employees or creditors, the size of the total contributions by members, turnover, value of
assets, or the type of business. Also, the business need not be an undertaking for gain.
This promotes the establishment of a wide range of business enterprises. The close
corporation can cater alike to the unsophisticated and highly sophisticated businessman,
as well as provide a viable mechanism for helping to bridge the gap between the formal
15
and informal sectors of the economy.
9. Jordan, supra note 3, at module 2; see also Press Release, Honourable Mr. Justice Richard J.
Goldstone, Department of Trade and Industry, Press Statement Released by the Department of Trade and
Industry on Behalf of the Chairperson of the Standing Advisory Committee on Company Law (1997) (on file
with author).
10. Henning et al., supranote 5, at 497; see also §§ 1-83 of Close Corporations Act 69 of 1984 (S.Afr.).
11. Henning et al., supranote 5, at 497.
12. Id.
13. Id.
14. Id.
15. S.J. Naud6, Beslote Korporasie: Die Voorgestelde Ondernemingsvorm vir Kleinsake, 187 DE REBUS
B. History, Background and Objectives

Although the importance of the small business sector has been long recognized in
South Africa, 16 this specific legal development originated when a proposal for the
introduction of a new legal form for small business (referred to as the "small business
corporation") was submitted to and accepted by the Standing Advisory Committee on
Company Law (SAC). 17 The memorandum entitled The Needfor a New Legal Form for
Small Business was circulated for comment in 1981 and published in 1982.18 It identified
a definite need for a new legal form of business enterprise that would provide
entrepreneurs with the advantages of incorporation without subjecting them to the
complex company law regime.
The author of the memorandum 19 was instructed by the SAC to prepare a draft of a
close corporations bill which, after review by a drafting subcommittee, was circulated for
comment on May 17, 1983.20 Cognizance was taken of the largely favorable and many
excellent comments received by the drafting subcommittee. On September 16, 1983 a
proposed bill was recommended by the SAC to the Minister of Industries, Trade and
Tourism for enactment. 21 Eventually, the proposed bill, entitled the Close Corporations
Act 69 of 1984, was assented to on June 19, 1984. It was published in the Government
Gazette on July 4, 198422 and became operative on January 1, 1985.23
C. The Needfor a New Business Form

This section discusses the more important reasons advanced for a new legal form
providing corporate personality for the single entrepreneur or small number of
participants.
On account of considerations such as unlimited liability, lack of continuity, absence
of legal personality and want of legal certainty, neither the sole proprietorship, the
various types of partnership, nor indigenous business forms like the stokvel 24 or
mashonisa25 can meet most of the reasonable needs and expectations of the typical small
businessman. Incorporation under the Companies Act 61 of 1973 offers the evident
332 (1983) [unable to verify authority from this source]; Naudd, A New Form of Enterprisefor Small Business?,
supra note 6, at 7.
16. A. Venter, The Origin and Characteristicsof the Close CorporationsAct, 9 J. JURID. SC. 109, 110
(1984) [unable to verify authority from this source].
17. Naud6, The South African Close Corporation,supra note 5, at 117.
18. S.J. Naud6, The Needfor a New Legal Formfor Small Business, 4 MOD. Bus. L. 5 (1982).
19. Professor S.J. Naud6, presently a Professor Honorarius, Faculty of Law, University of the Free State,
Bloemfontein, South Africa.
20. An explanatory document accompanied the bill, and more detailed versions were published during the
same year. See Naud6, Beslote Korporasie,supra note 15, at 332; Naud6, A New Form of Enterprisefor Small
Business?,supra note 6, at 7; Larkin, supranote 5, at 317.
21. Naud6, The South African Close Corporation,supra note 5, at 117.
22. GN 1354 in GG9285 of 4 July 1984.
23. Proc R194 in GG9503 of 16 November 1984.
24. A form of rotating credit association, where each member contributes money on a regular basis. The
contributed money may then be withdrawn by members on a rotating basis or on the basis of financial need. See
D.H.C. van der Merwe, Die Stokvet- "n OndermeningsregtelikeStudie, 26 TRANSACTIONS CENTRE BUS. L. 1, 6
(1996).
25. A traditional informal form of micro business.
advantages of limitation of risk, perpetual succession and a regulated structure. However,

as a result of the increasing complexity of the Companies Act, which historically was
largely developed to deal with problems posed or needs experienced by large public
companies, the incorporated company as a form of business enterprise outgrew the
particular needs of small businessmen. The small private company is also subject to most
of the complex provisions of the Companies Act. This is due partly to the fear of possible
misuse of the private company subsidiaries by public holding companies in a group
context. The alternative of building further exemptions for small companies into the
Companies Act was considered unacceptable. It would only have increased the overall
complexity of the Companies Act and would have aggravated the problem. 26 The
Companies Act had in effect become inappropriate for the needs of the bona fide small
entrepreneur:
Incorporation as a company.., has two significant implications.
The first is the ever increasing complexity of the massive Companies Act,
1973. Despite its 443 sections and four schedules this Act, like the English
Companies Act of which it is a now rather emancipated offspring, it is by no
means a codification of company law. It is simply impossible for the
unsophisticated businessman with limited access to professional assistance to
master the plethora of legal complexities that surround him. In practice he
survives only because his infractions of statutory and uncodified company law
are not visited by the criminal and civil sanctions which in theory ought to
follow. The fact that he nevertheless retains the benefits of the system is a
cause of concern from a policy point of view. [S]econdly, the one or few
businessmen have to comply with a system which in many ways is obviously
inappropriate for his or their needs and circumstances. The requirement to have
a board of directors, the numerous provisions applying to various aspects of
meetings and voting thereat and the extensive accounting and disclosure
provisions are merely the most obvious instances. It is known that sham
compliance with formalities, like the drafting of notices of meetings that never
took place, is common practice. This is a waste of money and skilled
manpower. Moreover, the fact that this sham compliance has not given rise to
serious prejudice does not prove that the "system works". It rather shows that
the formalities concerned are meaningless. Sham compliance also fosters
disrespect for the law.
[A]n attempt to build the required flexibility into the Companies Act could
only exacerbate the problem by an inevitable overall increase in complexity. At
the root of the new development is the conviction that a single Act can no
longer present a satisfactory legal form for the giant as well as the small man.
The Companies Act develops mainly in response to the needs of and problems
posed by large companies. It has to provide for the large industrial or financial
conglomerate with its listed shares, professional management reflecting a clear
separation between ownership and control or direct and indirect control of say a
institutional investor, scattered and powerless small shareholders and group
26. Cf H.S. CILLIERS ET AL., CLOSE CORPORATIONS: A COMPREHENSIVE GUIDE 12 (2d ed. 1993) [unable
to verify authority from this source].
problems. Hence it inevitably outgrows the needs and problems of the small
man with his restricted means and limited access to professional advice. 27
At a later occasion, these considerations were phrased as follows by Professor Naud&
It is clear that a highly complex situation exists. The fact is that a point has
been reached where a single Act can no longer in this country cater for the
needs of the big listed company, which may be the ultimate holding company
of a vast group having several listed companies, and the small business. Trying
to cater for the needs of both in one Act has become quite impossible. In
practice when the idea of the new legal form was bandied about, the reactions
was: "Why bother with the Companies Act? It works so well." The experienced
attorney would say to you: "I have registered private companies all my life
ands they work beautifully." The only reason why it seemed to work
beautifully was that it did not work at all. The Companies Act was never
28
effectively applied to the small businessman.
D. Objectives
The stated purpose of the Close Corporations Act is to provide a simple, less
expensive, and more flexible legal form for the enterprise consisting of a single
entrepreneur or a small number of participants. It is designed to accommodate the
participants' needs, and confers the advantages of a separate legal personality without the
burden of legal requirements that are not meaningful under their circumstances.
Membership in this enterprise is limited. There are no restrictions on the size of a
close corporation's business or undertaking, the number of its employees or creditors, the
size of the total contributions by members or turnover, the value of assets, the type of
business, or whether the business is operated for gain. In this way the establishment of a
wide range of business enterprises is effectively promoted. The close corporation can
cater to both the unsophisticated and highly sophisticated businessman. It can also
provide a viable mechanism for helping to bridge the gap between the formal and
informal sectors of the economy.29
The introduction of the close corporation should not be regarded as an isolated
event. It forms part of a larger process of economic, social, political, and legal reform in
South Africa, together with other components such as democratization, deregulation, the
advancement of effective competition, and the advancement of small business. 30 Such
statements should not be taken as providing some measure of justification, albeit
minimal, for the conclusion that the South African experience with the close corporation
can be conveniently discredited as a development exclusively attributable to the
27. See Naudd, The South African Close Corporation, supra note 5, at 117-19; see also Naudd, Die
Toekoms van die Beslote Korporasieen die PrivateMaatskappy, supra note 5, at 1.
28. Naudd, A New Form ofEnterprisefor Small Business?, supranote 6, at 8.
29. J.J. Henning, Close Corporations and Private Companies in South and Southern Africa, in 1
PERSPECTIVES ON COMPANY LAW 163, 166 (Fiona Macmillan Patfield ed., 1995) [unable to verify authority
from this source].
30. Naud6, Die Toekoms van die Beslote Korporasieen die PrivateMaatskappy, supra note 5, at 3.
vicissitude of political expediency. Professor Larkin aptly provides the correct

perspective in this regard:
The point has been made about a proposal similar in kind to the Close
Corporations Act that it was "a generally practical, well-developed one of the
'here and now' variety. It would do as much for small businesses one could
reasonably expect from a reforming approach which does not jeopardize
existing assumptions as to how the law of business associations should be
structured and what interest groups it should serve." Hence one finds it very
difficult to agree with the view that with the Close Corporations Act 'the legal
system looked beyond the class interests of the business elite, doing justice to
all classes, applying the moral imperative.' Upon analysis, one's 'excitement
and great expectations' are merely those of a 'black letter' lawyer faced with a
31
first rate piece of 'black letter' law.
The acceptance of this concept is born out by the large number of close corporations that
32
have been formed since the Act became operative.
Therefore, South Africa not only took a large step forward to effectively provide for
the reasonable legal needs and expectations of the typical small businessman but, through
the introduction of the innovative concepts of the Act, made provision for a convenient
blueprint for the reform of important areas of South African company law. Instances
which come to mind are the ultra vires doctrine, the doctrine of constructive notice, and
the common law rules and statutory provisions relating to the maintenance of share
33
capital.
E. Close Corporationsand Private Companies

34
The close corporation presents an attractive additional choice to the entrepreneur.
Its introduction did not result in the phasing-out of any of the existing types of
companies, partnerships or other forms of business enterprise. However, in the future
there will be far less sympathy in the development of company law for the particular
needs and expectations of the small businessman, now that he has his form of business
35
enterprise to use.
In the original memorandum, The Need for a New Legal Form for Small Business,
the idea was expressed that the introduction of the close corporation should result in the
private company being phased out of the Companies Act. 36 This view had some
37
support.
31. ANNUAL SURVEY OF SOUTH AFRICAN LAW 1984, 321 (P.Q.R. Boberq ed., 1985) (citations omitted);
see also Dirk C. du Toit, Applying the Moral Imperative: The Close Corporation,9 J. JURID. Scl. 1, 108 (1984).
32. See infra Part H.t.
33. For a discussion on the reform of the ultra vires rule and the doctrine of constructive notice, see J.S.A.
Fourie, Abolition of the Ultra Vires and Related Doctrines, 15 OBITER 46 (1994); Henning, supra note 7, at
101; Naudi, Beslote Korporasie,supranote 15, at 62; CILLIERS ET AL., CORPORATE LAW, supra note 5, at 568.
34. CILLIERS ET AL., CORPORATE LAW, supra note 5, at 23-24; Henning & Wandrag, supra note 5, at 14-
16.
35. Naud6, Die Toekoms van die Beslote Korporasie en die PrivateMaatskappy, supranote 5, at 9-10.
36. Naud6, The South African Close Corporation, supra note 5, at 119; Naud6, Die Toekoms van die
Beslote Korporasieen die PrivateMaatskappy, supranote 5, at 1.
37. See J.P.G. Lessing, A Critical Evaluationof the Distinction Between Private and Public Companies, 5
In a major policy statement on the future development of company law issued by the
SAC in 1985,38 the second issue placed in the most urgent category was the abolition of
the distinction between public and private companies. 39 In a further statement on future
development issued by the SAC in 1989,40 the abolition of the distinction between 41
private and public companies again appeared very high on a fairly long list of priorities.
Consequently, the SAC published proposals involving the removal of most of the
distinctions between private and public companies concerning the filing and disclosure of
annual financial statements; maximum and minimum membership; minimum number of
directors; divergent quorum requirements for general meetings; special conditions in the
memorandum providing for the personal liability of directors for the debts and liabilities
of the section 53(b) company; number of proxies who can be appointed by members at
general meetings; and the performance by an auditor of the duties of a secretary or
42
accountant of his company.
Under the SAC proposals to reduce distinctions between private and public
companies, some limited privileges would have been retained for private companies. For
example, a private company would have been allowed to load voting rights. 43 It would
not have been required to restrict the right to transfer its shares, although it would have
retained an option to do so.44 In contrast, a public company would have been prohibited
from limiting the transferability of its shares. 4 5 A public company would have had to
state expressly in its memorandum that it is a public company. 4 6 The proposals would
thus have retained certain limited privileges and exemptions for private companies. On
the other hand, the traditional most important privilege of a private company to withhold
its financial statements would have been abolished, while the obligation of public
companies in this respect would have been relaxed to a certain extent. Under the SAC
proposals, the two forms of company would have been treated with a greater degree of
equality and a substantial simplification of the Companies Act would have been effected.
Nevertheless, as a result of submissions received and its own research into proposed
amendments to company legislation, the SAC decided not to recommend the abolition of
the distinction between public and private companies. The wider issue of the place of
private companies in company legislation would have been considered by the SAC and a
recommendation as to private companies would have been made "at a later stage and
47
after appropriate consultation."
MOD. BUS. L.20 (1983).

38. Press Release, Standing Advisory Committee on Company Law, Future Development of Company
Law (Feb. 8, 1985) (on file with The Journal of Corporation Law).
39. Id at 3. The most important issue was the introduction of a take-over panel. Id.
40. Press Release, Standing Advisory Committee on Company Law, Future Development of Company
Law (June 1989) (on file with The Journal of Corporation Law).
41. See CILLIERS ET AL., CORPORATE LAW, supra note 5, at 23-24.
42. Press Release, Standing Advisory Committee on Company Law, Review of the Distinctions between
Public and Private Companies (Sept. 25, 1991) (on file with The Journal of Corporation Law).
43. Id.
44. Id.
45. Id.
46. Id.
47. Press Release, Statement by the Department of Trade and Industry on Behalf of the Chairperson of the
Standing Advisory Committee on Company Law (SAC) (May 25, 1992) (on file with The Journal of
According to a recent press release by the SAC, 4 8 the corporate law in South Africa
is to be developed within a framework of five principal statutes. The framework is to be
inclusive of a new Companies Act, a new Securities Act, and a new consolidated
Bankruptcy Act.4 9 In view of the statement that the Close Corporations Act is to be
retained in its present form, it may well be expected that the issue of the removal of the
distinctions between private and public companies is to receive further serious
consideration in the drafting of the newly proposed, leaner, and simplified Companies
Act.
It is clear that the issue has conveniently been made part of a more lengthy and time
consuming process of comprehensive corporate law reform. In view of the undoubted
success of the close corporation, as well as all the academic research and official
attention lavished on the removal of the distinctions between public and private
companies, it is, with respect, paradoxical that in the interim the latter is simply allowed
to soldier on in South Africa in a form almost indistinguishable from that in which it was
originally introduced in the United Kingdom in 1907.
F. Salient Featuresof the Close CorporationsAct"O
1. Introduction
The term "close corporation" is derived from the expression "closely held
corporation." This refers inter alia to the limited number of members of the corporation
and the closeness of their relationship. 5 1 The term was used by company lawyers at least
as far back as the nineteenth century, and "internationally it is a widely accepted
''52
concept.
The name "close corporation" was decided upon mainly because it is a concept
accepted throughout the world. In principle, a closely held corporation has no separation
between ownership and control: every member is entitled to participate in the
management of the business and to act as an agent for the corporation; every member
owes a fiduciary duty and a duty of care to the corporation; the consent of each and every
member is required for the admission of a new member and membership is limited to
53
natural persons.
Corporation Law).
48. Press Release, supra note 9.
49. Id.
50. See generally Naud&, South African Close Corporation,supra note 5, at 124-29; CILLIERS ET AL.,
CLOSE CORPORATIONS, supra note 5, at 13-14; J.P.G. Lessing, Company Law Reform in New Zealand, 2 SA
MERCANTILE L. J. 49, 57-58; Trichard Organ & H.S. Cilliers, Purchase by a Company of Its Own Shares, 10
TRANSACTIONS OF THE CENTRE FOR BUS. L. 1, 14-18 (1989); Morsner v. Len, 1992 (3) SA 626, 631 (A).
51. J.J. Henning, Closely Held Corporations:Perspectives on Developments in Four Jurisdictions,58 J.
CONTEMP. ROMAN-DUTCH L. 100 (1995); see also Henning, Close Corporationsand Private Companies in
South and Southern Africa, supra note 29, at 163; Henning et al., Close Corporations,supra note 5, at 497;
Venter, supra note 2, at 113.
52. Henning, Closely Held Corporations,supra note 51, at 100.
53. See supra notes 11-12 and accompanying text.
2. Innovation
It is clear that in adopting the approach that separate provisions be made for the
incorporation of the typically bigger and the typically smaller business, cognizance was
taken of similar approaches, particularly those in Western Europe. Nevertheless, the
South African close corporation is not closely modeled after the Dutch besloten
vennootschap, the German Gesellschaft mit beschrdnkter Haftung or the French socidtg b
54
responsabilitg limitge. Guidance was sought in modem corporation acts, various
partnership acts and codes as well as Professor Gower's The Incorporated Private
PartnershipBill.55
Although a few provisions of the South African Companies Act of 1973 were
simplified, the Act is not by any stretch of the imagination to be typified as merely an
unsophisticated companies act. In essence, the Act is original and innovative in design
and content. The Act contains important departures from traditional company law
concepts. The maintenance of a capital concept is abandoned, replaced by a more realistic
and flexible approach based on solvency and liquidity. 56 This approach is used as a basis
for regulating payments to members, 57 the purchase by the close corporation of its
members' interests 58 and financial assistance by the close corporation in the acquisition
of its members' interests. 59 There is also a complete break with traditional company law
in regard to inter alia capacity and powers en hence ultra vires, shares and share capital,
the distinction between a board of directors and a general meeting of members,
constructive notice, agency, accounting and disclosure and sanctions for non-compliance
with the Act.
3. Accessibility
Two requirements relating to membership determine the availability of the close

corporation to particular parties: 1) the minimum membership is one and the maximum is
61
ten, 60 and 2) only natural persons qualify for membership. The reasoning behind these
requirements stems from the fact that it is a closely held corporation where there is no
separation between ownership and control. The most practical way to avoid any real
separation between ownership and control is to restrict the number of members to a
particular maximum, and to require them, in principle, to be natural persons. Excluding
any form of corporate membership in a close corporation avoids situations whereby a
large public company, through a simple conversion of subsidiaries into close
corporations, could do business in a form not intended for them.
54. See, e.g., Canada Business Corporations Act of 1975.

55. Gower, The IncorporatedPrivate PartnershipBill, in COMMISSION OF INQUIRY, FINAL REPORT INTO
THE WORKING AND ADMINISTRATION OF THE PRESENT COMPANY LAW OF GHANA (1961).
56. See supranote 13 and accompanying text.
57. § 51 of Companies Act 61 of 1973 (S. Mr.).
58. Id. § 39.
59. Id. § 40.
60. § 28 of Close Corporations Act 69 of 1984 (S. Afr.).
61. Id. § 29(1) (stating only natural persons can be members and that "no juristic person or trustee of a
trust inter vivos in that capacity shall directly or indirectly.., hold a member's interst in a corporation").
4. UnrestrictedSize and Scope of Undertaking

The only limitation in the Act on the size of the corporation is directed at the number
of its members. There is no restriction on the size or scope of a close corporation's
business or undertaking, the number of its employees or creditors, the size of the total
contributions by members, turnover, or value of assets or type of business. 62 The
business of a close corporation may be large and complex, but it need not be an
undertaking for gain. 63 Hence, the successful close corporation cannot outgrow its legal
form, and conversion to a company, although possible, is not required. In addition, the
close corporation may also be suitable for the sophisticated entrepreneur. 64 In this way,
the establishment of a wide range of business enterprises is effectively promoted, thus
contributing towards satisfying an acute need in a country with a growing number of
unemployed.
5. Simplification
In accordance with the awareness of socio-economic and political aspects of small
businesses, the legal requirements under which the close corporation operates are basic
and much simpler than under the Companies Act. Simplification was a primary aim in the
design and drafting of the Act. In volume and length its eighty-three sections contain less
than the first schedule to the Companies Act. Succinct administrative regulations have
been issued under section 10, and section 66 provides for the application of some
provisions of the liquidations chapter of the Companies Act. These facts, however, do not
affect the validity of the conclusion that, when compared to the Companies Act with its
four-hundred forty-three sections, five schedules and comprehensive administrative
regulations, a very considerable simplification has been attained.
Incorporation of a close corporation merely involves the registration of a single
document, the founding statement, which must contain seven different particulars. 65
Reservation of a name for the close corporation, previously available as an option, is now
required. 66 The abbreviation of "CC," or its equivalent, in any one of the ten other
official languages must now be subjoined to the name of the corporation. The terms for
"close corporation [and] suitable abbreviations therefor [have] been identified
as
follows:"67
62. See supra note 15 and accompanying text.

63. There may also be other restrictions. See, e.g., § 20(l)(b) of Unit Trusts Control Act 54 of 1981 (S.
Afr.) (a close corporation may not act as the trustee of a unit trust scheme).
64. Naudd, The South African Close Corporation,supra note 5, at 119; Naud6, Die Toekoms van die
Beslote Korporasieen die PrivateMaatskappy, supra note 5, at 2. The most sophisticated internal arrangements
can be effected by an appropriate association agreement.
65. § 12(a)-(g) of Close Corporations Act 69 of 1984 (S. Afr.) (requiring the inclusion of 1) the full name
of the corporation, 2) the principal business to be carried on by the corporation, 3) the postal address of the
corporation, 4) the full name of each member, 5) the size of each members' interest, 6) particulars of each
members' contribution, and 7) the name and address of the accounting officer of the corporation).
66. Id. § 12(a).
67. GN P4 in GG1 8208 of 22 August 1997.
Language Term for close corporation Abbreviation

Afrikaans Beslote Korporasie BK
Sepedi Kgwebo e Kgotlangantswego KK
Setswana Dikorporasi tse di Tswaletsweng KT
siSwati LiBhizinisi leliValekile BV
Sesotho Kgwebo e Lekanyeditsweng KL
Tshivenda Dzikoporasi dzo valiwaliwaho KV
Xitsonga Ntirhisano wa Nhlangano NH
isiNdebele Ikampani yaba-Thileko KT
isiXhosa Inkampani yabamBalwa KB
isiZulu Ikamphani yabamBalwa KB
Considering that a close corporation does not have shares or a share capital, the legal
position has been simplified considerably. A member merely owns an interest in the
corporation which is expressed as a percentage.
A lucid statement of a members' fiduciary duties and duty of care and skill is
contained in the Act. 68 The common law principles relating to the fiduciary duties and
duty of care and skill in managing the affairs of the corporation are to a large extent
codified in the Act. Consequently, even the unsophisticated member knows exactly what
69
is expected of him and his fellow members.
In its original form, the Close Corporations Bill, like the Companies Act, entrusted
the Supreme Court with sole jurisdiction over close corporations in certain matters, for
instance in respect of liquidation or giving relief in a case of unfairly prejudicial conduct.
However, in view of the purpose of the Act and the cost and time factors involved in
Supreme Court proceedings, concurrent jurisdiction was later conferred on magistrate's
70
courts.
6. Legal Personality
As the name implies, the close corporation is a legal persona distinct from its
members. 7 1 It has the capacity and powers of a natural person of full capacity. 72 It is a
proper corporation designed for a particular purpose. It may have a single member, as is
presently the case with approximately seventy-five percent of all close corporations. 7 3 In
this event, there is little or no resemblance to an incorporated partnership and, by and
large, the applicable law is even more elementary. Where a close corporation does have
more than one member, some principles having a clear partnership heritage do become
74
applicable.
68. § 42 of Close Corporations Act 69 of 1984 (S. Afr.).

69. Id. §§ 42-43.
70. Id. § 7; see also J.J. Henning, Geselekteerde Problematiek in die Suid-Afrikaanse Beslote
Korporasiereg,24 TRANSACTIONS CENTRE BUS. L. 1, 6-24 (1995).
71. § 2(2)-(3) of Close Corporations Act 69 of 1984 (S. Afr.).
72. Id. § 2(4).
73. Henning, Close Corporationsand Private Companies in South and Southern Africa, supra note 29, at
163.
74. See J.J. Henning Die Aunspreeldikheid van'n Beslote Korporasie vir die Handelinge van n Liden
Enkele Andes Aspekte van Eksterne Verhoudings, 9 J. JURID. SCI. 166 (1984).
7. Flexible InternalRelations
The regulation of internal relations is basic and flexible. As the naturalia of
partnership, many of the rules regulating internal relations are variable, in the sense that
they apply unless an association agreement or other agreement between the members
provides otherwise. 75 In this way, members can vary the rules to suit their personal
circumstances. Examples of such variable rules are that all members may actively
participate in the business, all members have equal rights in regard to the management of
the close corporation's affairs, and voting rights are determined by the percentage of the
members' interests. 76 When members want a particular division of powers between them,
this can be created by an appropriate clause in an association agreement. 77
An association agreement is not compulsory. 78 If there is one, it must be in writing
and must be kept at the close corporation's registered office. 79 It is not filed with the
Registrar and not available for public inspection. It can be entered into and amended at
any time. 80 Members, but not outsiders, have access to it.8 1
The vast majority of close corporations are single member corporations. In this case,
the option of an association agreement is not available 82 and the legal position provided
for in the Act is very simple indeed. As far as multiple member close corporations are
concerned, detailed precedents for "tailored" association agreements, if needed, are
available in a publication of the Association of Law Societies of South Africa, authored
83
by Hyman.
8. CapitalMaintenanceReplaced by Solvency and Liquidity

Until 1999, the traditional concept of maintenance of share capital was fundamental
to limited liability in South African company law.84 The share capital constituted the
fund to which the company's creditors must look for the satisfaction of their claims. 85
A completely different approach is followed in the Act. The substitution of solvency
and liquidity for the traditional capital maintenance rules of company law was probably
the most significant innovation in the Act. Section 51 essentially provides that a payment
75. § 43 of Close Corporations Act 69 of 1984 (S. Aft.).

76. Id. § 46.
77. Id.
78. Id. § 44.
79. Id.
80. § 45 of Close Corporation Act 69 of 1984 (S. Afr.).
81. Id. §§ 44-45.
82. Id. § 44 (stating that only corporations having two or more members may enter into an association
agreement).
83. A. HYMAN, CLOSE CORPORATION ASSOCIATION AGREEMENTS (1985).
84. Since the
creditor has no debtor but that impalpable thing the corporation, which has no property except
the assets of the business. The creditor, therefore ... gives credit to that capital, gives credit to
the company on the faith of the implied representation that the capital shall be applied only for
the purpose of the business, and he has therefore a right to say that the corporation shall keep its
capital and not return it to the shareholders ....
S. J. Naud6, The South African Close Corporation, 9 J. JuRiD. Sci. 117, 126 (1984) (quoting M. R. Jessel, In re
Exchange Bank Co. (Flitcroft's Case), 21 Ch. 519 (Eng. C.A. 1882)).
85. Ch. 5 of Companies Act 61 of 1973 (S. Aft.).
by a close corporation to a member by reason only of his membership 8 6 may be made

only
if, after such payment is made, the corporation's assets, fairly valued, exceed
all its liabilities; if the corporation is able to pay its debts as they become due in
the ordinary course of its business; and if such payment will in the particular
circumstances not in fact render the corporation unable to pay its debts as they
87
become due in the ordinary course of its business.
Subject to these three requirements, as well as the "previously obtained written consent of
every member" for a specific transaction, sections 39 and 40 permit a corporation to
acquire and pay for the interest of one of its members, or to render financial assistance in
88
connection with any acquisition of a member's interest in the corporation.
9. CorporateMembership Excluded
In principle, a corporate membership of a close corporation is excluded. 89 This

prevents companies from doing business through the instrumentality of close corporation
subsidiaries. One or several persons can have more than one close corporation, but the
latter may not be a member of any other close corporation.
A close corporation may hold shares in, and even control, a company. 90 It is clear
that dangers arise where a close corporation controls companies free from the restraints
that company law imposes on holding companies. Evasion of the "abuse of control"
provisions of the Companies Act 91 could be effected by simply putting a close
corporation on top of the one or more companies in a pyramid. For that reason, section 55
of the Close Corporations Act was designed to deal with a situation where the
relationship between a company and a corporation is such that the corporation, if it were
a company, would be a holding company of that company. 92 In effect, section 55 applies
the provisions of section 37 of the Companies Act (loans and security by a subsidiary for
the benefit of a holding company or fellow subsidiary) and section 226 (loans and
security by a company for the benefit of a director or manager of itself, of a holding
company or of a fellow subsidiary) as if the controlling close corporation were a holding
company, in order to prevent abuse of its control in the manner contemplated in those
93
sections.
However, the mere fact that section 55 of the Act provides for the application of
some provisions of the Companies Act to prevent the abuse of control by holding
corporations, does not mean that the legal position of such controlling corporations and
86. The equivalent of a dividend in company law.

87. § 51 of Close Corporations Act 69 of 1984 (S. Aft.).
88. Id. §§ 39-40.
89. Id. §§ 29(1), 63(d).
90. See J.J. Henning, Caveats Rakende Beslote Korporasiesin Groepsverband, 17 J. CONTEM. ROMAN-
DUTCH L. 286,296-97 (1992).
91. §§ 37-39, 226 of the Companies Act 61 of 1973 (S. Afr.).
92. Id. § 55.
93. See Henning, supra note 90, at 296-97.
their subsidiary companies can, for all intents and purposes, be equated to that of holding
companies and their subsidiaries. Important differences still remain. 94
10. CriminalizationReplaced by PersonalLiability and Self-Enforcement

A significant defect of the Companies Act is that it bristles with provisions creating
purely technical offenses, which are sometimes difficult to prosecute, and in many cases
rarely enforced. 9 5 Criminal law is a blunt and largely ineffective instrument for ensuring
that technical or administrative duties are complied with. For this reason, the Act creates
96
only eleven offenses.
As a sanction for non-compliance with the new system, reliance is placed first on
self-enforcement. Members failing to observe the relatively few basic rules of the system,
with its obvious benefits, forfeit their protection by incurring a personal and concurrent
liability with the close corporation for the debts of the corporation. Section 63 of the Act
provides for such liability in regard to restrictions or duties imposed in eight different
sections in the Act. In addition, the Registrar is empowered in a few instances to impose a
penalty, which is given the force of a civil judgement. 97
11. Minimal AdministrativeDuties

When imposing a single administrative duty, particular care was taken to ensure the
duty was considered meaningful and necessary in view of the characteristics of the form
of business enterprise. In consequence, only eight prescribed forms presently exist. Apart
from updating the particulars of the registered founding statement as the need arises, no
document must be filed with the Registrar of Close Corporations on a regular basis. 9 8
12. Conversion
To promote the formation of close corporations, provisions were made for the
conversion of companies into close corporations and vice versa. 9 9 Certain tax benefits
were initially granted where existing companies converted to close corporations. If a
close corporation wishes to convert into a company, or vice versa, there is no need for a
"deregistration" or "reincorporation" strictu sensu. A simple procedure provides for the
conversion in such a way that the existence of the juristic person continues in existence
but in another form. All assets, liabilities, rights, and obligations remain vested in the
juristic person. A registrar, or any other officer maintaining a register under any law,
must make in the register all alterations necessary because of the conversion. No transfer
duty or stamp duty is payable by making these alterations. Hence, costs are kept as low as
possible.100
94. Id.
95. J.C. Burger, Misdrywe Ingevolge die Maatskappywet, 1973, 5 TRANSACTIONS OF THE CENTRE FOR
Bus. L. 1, 1-187 (1987).
96. Id.
97. § 15(3) of Close Corporations Act 46 of 1984 (S. Afr.).
98. Henning et al., supra note 5, at 497-500.
99. See § 29A-D of Companies Act 61 of 1973 (S. Afr.); § 27 of Close Corporations Act 46 of 1984 (S.
Afr.).
100. Id.
13. Members' Contributions

Upon registration of a close corporation, prospective members must make an initial
contribution of money, property, or services that are rendered in connection with and for
10 1
the purpose of forming and incorporating the entity. Particulars of the contributions
102
are stated in the registered founding statement. Members may, by agreement, increase
or reduce contribution amounts, provided that the solvency and liquidity of the
10 3
corporation is maintained.
A person may become a member of an existing corporation, without making a
contribution to the corporation, by acquiring one member's interest, multiple members'
interests, or by obtaining the interest(s) from the estate(s) of deceased or insolvent
member(s). 10 4 In addition, a person may also acquire an interest by contributing to the
corporation, in which case the percentage of the interest is determined by agreement
5
between the new member and the existing members. 10 The percentages of the existing
10 6
members are either reduced proportionally or by agreement.
14. Agency
A close corporation has the capacity and powers of a natural person of full capacity,
10 7
but no more than those a juristic person is allowed to have and exercise. For this
reason the ultra vires doctrine has no application in respect to close corporations. The
statement of the principal business of the corporation in the founding statement does not
affect the corporation's capacity and powers. 10 8 There is no constructive notice of any
particulars stated in a founding statement. 10 9 For most practical purposes, the legal
capacity of a close corporation is unlimited and does not form any hindrance to its
participation in business. Those having dealings with a close corporation do not run any
risk of finding the validity of transactions being affected by the internal limitations of the
corporation's legal capacity. 110 This depends on the 11 1
authority of the person who has
acted for the corporation in the particular transaction.
In principle, members have equal rights in regard to the power to represent the
corporation, 1 12 like "mutual mandate" in partnership law. As in the law of partnership,
this is a default rule and it may be varied by appropriate provisions in an association
agreement. 113
101. § 24(1) of Close Corporations Act 46 of 1984 (S. Afr.).

102. Id.
103. Id. § 24(2) (containing an amended founding statement (Form CK 2)).
104. Id. § 33.
105. Id.
106. § 38(b) of Close Corporations Act 46 of 1984 (S. Afr.).
107. Id. § 2(4).
108. Id. § 12.
109. Id. § 17.
110. Id. §§ 42-52.
111. §§ 42-52 of Close Corporations Act 46 of 1984 (S. Afr.).
112. Id. § 46(b).
113. Id.§44.
The power of a member to bind the corporation is set out in section 54 of the Act. 1 14
Section 54 has been replaced in toto by section 13 of the Close Corporations Amendment
Act of 1997 with the result that a very significant simplification of the legal position is
attained and far greater protection is afforded to bona fide third parties. 115 The effect is
that, as far as bona fide third parties dealing with the corporation are concerned, each and
every member is an agent of the corporation. 116 The act of a member binds the
corporation to third parties dealing with the corporation whether or not the member
performed the act for the carrying on of the business of the corporation.1 17
If a member's power to represent the corporation is restricted or excluded, he will
still bind the corporation in respect of an outsider, unless the outsider "has, or ought
reasonably to have, knowledge of the fact that the member has no such power" to act for
the corporation in the particular matter. 118 Since there is no constructive notice of the
provisions of an association agreement, knowledge of such internal restrictions on
members' powers is not imputed to outsiders. They are entitled to assume that each
member has the necessary authority to act on behalf of the corporation in a transaction,
whether or not the particular transaction was entered into by the member for the carrying
119
on of the business of the corporation.
As in the law of partnership, a bona fide third party who does not know of internal
restrictions of power is not affected by it. 120 However, in contradistinction to the position
in partnership law, a corporation may be bound even to contracts by members not falling
within its scope of business, whether or not they were authorized or ratified by the
1
12
corporation.
The enhancement of the protection of bona fide third parties does not imply that the
close corporation is without a remedy if a member acts without power, or exceeds it, and
binds the corporation in the particular circumstances to a contract. The member is in
breach of his fiduciary duty to the corporation and is liable to the corporation for any
122
resulting loss.
15. Accounting and Disclosure

A close corporation is obliged to keep accounting records to enable it to report to its
members. 123 Financial statements must be prepared for each fiscal year. The annual
financial statements must, in conformity with generally accepted accounting principles,
fairly present the corporation's state of affairs and the results of its operations at the end
124
of the fiscal year concerned.
114. Id.§54.
115. Id. § 13.
116. §§ 53-55 of Close Corporation Act 69 of 1984 (S. Afr.).
117. Id.
118. Id. § 54(2) (amended by § 10 of Close Corporation Amendment Act 38 of 1986 and § 13 of Close
Corporation Amendment Act 26 of 1997).
119. Id.
120. Id. §§ 53-55.
121. §§ 53-55 of Close Corporation Act 69 of 1984 (S. Afr.).
122. Id. § 42(2)(a)(ii).
123. Id. § 56.
124. Id. § 58(2)(b).
An important deviation from company law is that a close corporation is not required
to have a chartered accountant as an auditor. 125 It must appoint an accounting officer,
who must report on the annual financial statements. 12 6 A formal audit as in the case of
companies is, however, not required. Although chartered accountants qualify for an
appointment as accounting officers, quite a number of other sufficiently qualified
professions have also been permitted.
It should be emphasized that it is quite possible to have audited annual financial
statements, for instance, where the members need it for their own purposes or because a
potential creditor requires it. Hence, audits are carried out where they serve a meaningful
purpose. In practice, a great majority of accounting officers appointed by close
corporations (more than 90%) are in fact duly qualified and registered firms of chartered
accountants. 127
16. Ongoing Development and Simplification
a. Introduction
The SAC 12 8 is responsible for making recommendations from time to time for the
amendment of the Close Corporations Act and to assist the Minister on matters he refers
to it. 129 A Standing Sub-Committee on Close Corporations (SSCC) is appointed by the
SAC pursuant to the Act for advice on all matters referred to it by the SAC. 130 In this
way, the provision is made for the observation of the operation and development of the
13 1
Close Corporations Act and for shaping suggestions for reform.
b. The FirstFourAmendment Acts

Although a wide variety of amendments concerning close corporations were
introduced by other legislation, for the sake of brevity, this section is focused on the
Close Corporation Amendment Acts. Compared to the Companies Act of 1973, the Close
Corporations Act has proved to be relative free of teething troubles. Up to 1992, four
Close Corporations Amendments Acts were introduced dealing with a variety of matters
132
as they arose.
125. Id. § 59.

126. § 59 of Close Corporation Act 69 of 1984 (S. Afr.).
127. Henning et al., supra note 5, at 497-500.
128. Appointed in terms of section 18 of the Companies Act 61 of 1973 (S. Afr.).
129. § 11 of Close Corporations Act 69 of 1984 (S. Afr.). CILLIERS ET AL., CORPORATE LAW, supra note 5,
at 20.
130. CILLIERS ET AL., CORPORATE LAW, supranote 5, at 20.
131. DEPT. OF TRADE AND INDUSTRY, COMPANY LAW REVIEW: THE LAW APPLICABLE TO PRIVATE
COMPANIES 24 (1994).
132. The Close Corporations Amendment Act 38 of 1986 dealt with the following important and more
mundane matters: the submission of the founding statement in triplicate; the evidential value of a copy of the
founding statement signed by the Registrar; lodgement of an amended founding statement by order of court;
limitation of liability of former members for debt of corporation on deregistration; conversion of companies into
close corporations; consent of members for certain transactions; amendment of voting provisions by association
agreements; financial year; duties of accounting officers; and security by persons nominated as liquidators of
close corporations.
The Close Corporations Amendment Act 64 of 1988 addressed the jurisdiction of the Supreme Court
c. Three Year Development Program
In 1992, the SAC approved and published a three-year work schedule for the SSCC
on the following aspects: 133 replacing the section 72 composition; 134 eliminating
anomalies in corporate groups context; 13 5 regulation of debentures and prohibition of
offers to the public; 136 jurisdiction in liquidation and winding-up; 137 membership of
in matters relating to close corporations; placed it beyond doubt that there is no interruption in the existence of
the juristic person where a company is converted into a close corporation; disqualified trustees of an inter vivos
trust or his nominees to become a member of a close corporation; introduced the principle that resolution and
approvals of financial statements may be by a majority vote and not necessarily unanimously.
The Close Corporations Amendment Act 17 of 1990 dealt with the following matters: membership of
a close corporation by the trustee of an inter vivos trust acquired before April 13, 1987; refining the prohibition
on loans and security in group context; changes of financial year; duties of accounting officers in respect of
reporting on the financial policies applied by the close corporation; duties of accounting officer where liabilities
exceeded assets and the position reversed itself before the matter could be reported on.
The Close Corporations Amendment Act 81 of 1992 addressed the following matters: furnishing of
personal residential addresses by members in founding statement; signing of founding statement on behalf of
prospective members; simplified procedure for registration of certain changes to original founding statement;
objections to names of close corporations; improper use of name or title which contains the abbreviation "CC"
or "BK"; use of registration number as part of name of corporation in advertisements; measures to facilitate the
conversion of companies to corporations; redefining requirements relating to the register of fixed assets;
requirements for appointment to, and resignation or removal from, the office of accounting officer.
133. Johan J. Henning, Recommendations for Amendment, in Press Release of the SSCC of the SAC of 28
October 1992.
134. In February 1992, it was recommended that section 66 of the Act should expressly provide that section
311 of the Companies Act does not apply to close corporations; that the composition provisions contained in
section 72 of the Act should be amended to rectify present shortcomings and that opportunity should be given
for further research on a simplified procedure based on section 311 of the Companies Act which may serve to
provide an optional compromise procedure for close corporations not in liquidation. A draft provision amending
section 66 by expressly excluding sections 311 to 313 of the Companies Act from application to close
corporations in liquidation was approved in 1992. A draft provision replacing section 72 in toto was approved in
1993. The existing procedure in section 72 proved to be cumbersome and unworkable, effectively prohibiting
an insolvent corporation from effecting a composition with its creditors. The amendment sets out a new form of
composition or arrangement which could be concluded without an order of the court, but would nevertheless
constitute a formal binding agreement between the corporation and its creditors. It involves the liquidator of the
corporation extensively. He must decide if the offer is formally in order, and further decide on the acceptability
of the offer. The reason for the screening of offers by a liquidator is not to burden the Master with the
consideration of large numbers of prima facie fatally defective offers. It might be in the interest of the effective
and commercial administration of the corporation's estate that a successful composition or arrangement be
concluded, and a liquidator could advise and assist the offeror in this regard. The Master would be unable to
give such advise or assistance had the offers been referred directly to him. In any case, provision is made for an
appeal by the offeror to the Master.
135. Various discrepancies exist between the provisions of the Act and the Companies Act concerning the
regulation of close corporations in a group context, especially those dealing with abuse of control. Compare Pt.
V of Close Corporations Act 69 of 1984 (S. Afr.), with Ch. VII of Companies Act 61 of 1973 (S. Afr.).
Numerous anomalies appear from a comparison between the legal position of holding companies and their
subsidiaries, and holding corporations and their subsidiary companies. Johan Henning & E.M. De Waal,
Recommendations for Amendment of the Close Corporations Act 69 of 1984, in Press Release, Centre for
Business Law, Review of the Law of Close Corporations 5 (Oct. 28, 1992) (on file with The Journal of
Corporation Law).
136. The SSCC and SAC have decided that all offers to the public of interests in close corporations,
including debentures, should be expressly prohibited. Henning, supranote 133, at 5.
137. Notwithstanding previous amendments to the Act, the exposition of the jurisdiction of the magistrate's
20011 Close CorporationLaw Reform in Southern Africa
disqualified persons; 138 enforcement of maximum membership; 139 liability for the delay
of subsequent members' contributions; 140 use of the name and abbreviations and
explanations with the name of a corporation; 14 1 participation of disqualified persons in
the management of the corporation; 142 reprieve period for filling a vacancy in the office
144
of accounting officer; 14 3 duties of accounting officer and sanctions for their breach;
abuse of separate legal personality of the corporation; 14 5
representation of a close
corporation and the protection of bona fide third parties dealing with the corporation;
147
and, 146 close corporations not for gain.
d. Close CorporationsAmendment Act of 1997

A comprehensive draft Close Corporations Amendment Bill dealing with almost all
the issues addressed in the work program of the SSCC was approved by the SAC and
court and the Supreme Court has been criticized as defective. Press Release, Centre for Business Law, Review
of the Law of Close Corporations 5 (Oct. 28, 1992) (on file with Journal of Corporation Law). Section 29 of the
Lower Courts Act 32 of 1944 was amended in 1993 in an effort to address this issue. § 29 of Lower Courts Act
32 of 1944 (S. Afr.). It has been contended, however, that the matter is still not free from all doubt. Centre for
Business Law, supra, at 5.
138. Effective regulation of schemes by disqualified persons to acquire membership of close corporations is
required, and suitable amendments to sections 29 and 63(d) are envisioned. Press Release, Centre for Business
Law, supra note 137, at 6.
139. The wording of section 63(c) of the Act leaves room for an interpretation that the membership of a
close corporation may exceed ten. Id. The SAC has approved the recommendation of the SSCC to repeal this
section. Henning, supra note 133, at 6.
140. The failure of a member to timely deliver an additional contribution to the corporation could expose
such member to personal liability for all debts the corporation incurred since registration. Press Release, Centre
for Business Law, supra note 137, at 6. A more reasonable sanction was required in this regard. The SAC
approved the recommendation of the SSCC that section 63(b) of the Act should be amended to render a member
personally liable only ninety days after the registration of the amended founding statement in which the
particulars of the contribution are stated. Henning, supranote 133, at 6-7.
141. Discrepancies with regard to the correct use of the name of the corporation and abbreviations thereof
justify a re-assessment of the relevant provisions. Amendments to various sections of the Act were approved to
remedy the situation. Henning, supra note 133, at 7-8. The introduction of a modem and comprehensive new
Business Names Act to regulate the names of both close corporations and companies is envisioned.
142. Disqualified persons were excluded from the management of the corporation only if they were also
members of that corporation. Centre for Business Law, supra note 137, at 8.
143. A shorter period of reprieve to fill a vacancy in the office of accounting officer was considered. Id.
144. It has been suggested that the accounting officer ought to play a more important role in the regulation
of a close corporation. Id. The SSCC is considering extending the role of the accounting officer and the more
effective regulation of his duties. Id.
145. The SSCC has been assessing the need to replace the wording of the phrase "a gross abuse of the
juristic personality" in section 65 of the Act with "unconscionable abuse," as well as redefining the powers of
the Court in this regard. Id.
146. To some extent, the exclusion of the ultra vires doctrine and the doctrine of constructive notice
simplify the legal position concerning the representation of a close corporation. Section 54 of the Act, however,
does give rise to various problems of interpretation. This is mostly due to its (statutory) origins in the British
law of partnership. Centre for Business Law, supra note 137, at 14.
147. Research shows that it is possible to structure a close corporation not for gain. Although clarification
regarding the legal position of such close corporations is required, in the absence of a pressing problems and
needs in practice, the SAC decided that the status quo should be maintained. Press Release, Centre for Business
Law, supra note 137, at 15.
recommended for enactment in late 1994.148 This draft, with minor amendments to the
text-effected during the committee stage concerning the name of a corporation, the use
of the term "close corporation," and its abbreviation in the ten other official languages-
was eventually enacted as the Close Corporations Amendment Act 26 of 1997.149
i. Agency
Section 54 of the Close Corporations Act was significantly amended in 1997 to
better the position of the bona fide third party in a transaction with the close corporation.
The original provisions of this section were in effect derived from the U.K. Partnership
Act of 1890.150 This made any interpretation of section 54 an unneccessarily complicated
exercise for which a sound knowledge of the U.K. law of partnership was recommended,
if not required. The experience with the close corporation in South Africa has shown that
approximately seventy-five percent of all close corporations comprised of one person,
15 1
and this compelled the SSCC and the SAC to reconsider these provisions.
The amended section 54 provides, in essence, that a contract is binding on the close
corporation if the third party contracted in good faith. 152 Only in the event where the
third party was, or reasonably should have been, aware of the lack of authority of the
member to enter into a particular transaction, or should reasonably have been aware of
the same, will the corporation not be bound. It should be clear that this amendment
enhances the protection of innocent third parties in their dealings with close corporations
to a very significant extent, and to this extent also curbs the abuse of the limited liability
offered by the close corporation.
ii. PersonalLiability
The Close Corporations Act has been a model for non-criminalization; it is a
conscious legislative effort not to apply criminal sanctions in the first place. In this
process, the personal liability of the members of the close corporation has been an
effective tool.
One of the anomalies in the Close Corporations Act was the mechanism for the
enforcement of the maximum membership contained in section 63(c). 153 Analogous to
section 66 of the Companies Act, members were held personally liable for every debt of
the corporation where the membership exceeded ten. Section 66, however, enforces a
minimum membership and results in piercing the corporate veil. In effect, this could be
interpreted as meaning that there is no maximum membership for the close corporation as
a business entity, and that there are in fact two types of close corporations, those with
limited liability and limited membership, and those with personal liability for the
members but unlimited membership. This could place the close corporation in a
legislative environment for which it was not designed. It would, for instance, be possible
148. Press Release, Centre for Business Law, supra note 137, at 5.
149. See Henning et al., Close Corporations,supranote 5, at 501.
150. Partnership Act, 1890, 53 & 54 Vict., c.39, § I (Eng.).
151. Centre for Business Law, supra note 137, at 5.
152. § 54 of Close Corporations Act 69 of 1984 (S. Afr.) (amended 1997).
153. § 63(c) of Close Corporations Act 69 of 1904 (S. Afr.) (replaced by § 15(c) of Close Corporations
Amendment Act 26 of 1997). The maximum number of members allowed in a close corporation is ten. Id.
to employ the close corporation for raising capital from the public. To prevent such a
scenario, section 63(c) was repealed.
iii. Other Amendments

For some time the jurisdiction of the magistrate's courts and the High Court has
been uncertain in disputes involving close corporations. Section 29(A) of the Magistrates'
Court Act of 1944154 now expressly delineates the jurisdiction of these courts while
amendments to the Close Corporations Act clarify the availability of this cheaper
procedure for most other actions stemming from its provisions.
Some new provisions have been made with reference to the name of the close
corporation, specifically a definition of the term "name" and compulsory name
reservation. 155 The requirement is aimed at the prevention of duplication and the
elimination of undesirable names, which may lead to confusion or apply to the detriment
of creditors and consumers. As South Africa recognizes eleven official languages, the
registration of translations of a name could be against the public interest if a business is
allowed to trade under eleven names, even if it has the same meaning in all eleven forms.
The Close Corporations Act has also been amended to make it clear that in certain
circumstances the participation, directly or indirectly, in the management of the close
corporation by non-members is prohibited, but in fact the participation by any other
156
person who is thus disqualified is also prohibited.
In practice, members holding either a minority or a majority of the member's
interest in the close corporation may sometimes hold the others at ransom by not
attending members' meetings, thereby rendering the corporation impotent in passing
resolutions. Amendments to the principal Act provide for these situations where
15 7
members' meetings are to be held but a quorum is not present.
The accounting officer of the close corporation has also been under review. For
practical purposes, the length of time allowed for the appointment of a new accounting
officer has been extended from fourteen to twenty-eight days. 158 A vacating accounting
officer is obliged to inform the Registrar of Close Corporations of any contravention of
the Close Corporations Act of which he is aware upon resignation or removal. 15 9 In
addition, the ineffective section 72 procedure available to close corporations in
liquidation has been substituted to provide for relatively inexpensive, fast, and practical
procedure to effect a composition between the creditors and the corporation in
question. 160
154. § 29(A) of Magistrates' Court Act 32 of 1944 (S. Aft.).

155. § I of Close Corporations Act 69 of 1984 (S. Aft.).
156. Id. § 47.
157. Id. § 48(2)(A)-(B).
158. Id. § 59(3).
159. Id. § 59.
160. H.S. CILLIERS ET AL., CLOSE CORPORATION SERVICE, supra note 5, at 89.
The Journalof Corporation Law [Summer
iv. Simplification and EnhancedProtection

The result of the amendments is that the Close Corporations Act has been simplified
in significant respects while the protection of creditors in general and of third parties
dealing with the corporation in particular has been greatly enhanced.
e. Rationalization
As pointed out above, the example of the Close Corporations Act was followed by
legislative developments in the erstwhile TBVC jurisdictions introducing various guises
of new legal forms for small business. 16 1 Due to political and constitutional
developments, a rationalization of the corporate legislation in South Africa was of
necessary. This has been effected by the Rationalisation of Corporate Laws Act 45 of
1996,162 which provides for the application of the Close Corporations Act 69 of 1984
throughout the Republic and the repeal of the erstwhile TBVC legislation.
f Objections
Some statements have been made indicating that close corporations have been used
for tax avoidance schemes, for instance by employees incorporating to avoid PAYE
deductions, 16 3 and to circumvent foreign exchange regulations as well as labor
legislation. Cognizance was duly taken of these averments, but after research and
consultation by the SSCC, no amendment of the Close Corporations Act was deemed
necessary by the SAC. 16 4 In any event, such usage was not peculiar to or limited to close
corporations. Certain perceived loopholes in fiscal and labor legislation with regard to
close corporations as well as companies have since been addressed by amending
legislation. 165 In contrast, effective legislative action has been singularly lacking against
the business trust, which has been and is thriving as a much more versatile estate and tax
planning tool.
g. The Future
In 1997, the chairperson of the SAC released a press statement dealing with the
development of corporate law in South Africa within the framework of five principal
statutes. 166 It is significant of the close corporation's meritorious performance that only
161. Bophuthatswana, for instance, introduced Act 30 of 1986 providing for the formation, registration,
incorporation, management, control and liquidation of "closed" corporations, while the Ciskei published its Act
36 of 1985, a "Private Companies" Act consisting of a mere thirty-five sections. Bophuthatswana Act 30 of
1986; Ciskei Act of 1985; Henning, supra note 7, at 100; H.S. CILLIERS ET AL., CLOSE CORPORATION SERVICE,
supra note 5, 1.11.
162. Rationalization of Corporate Laws Act 45 of 1996 (S. Afr.).
163. PAYE (Pay-As-You-Eam) is a tax withholding system in which taxes are automatically deducted from
an employees paycheck. The employer is required to deduct each employee's tax and pay the amount to the
South African Revenue Service. For more information on the South African tax system, see SOUTH AFRICAN
REVENUE SERVICE, TAXATION IN SOUTH AFRICA (1998), available at http://www.sars.gov.za/it/
brochures/brochure tax in sa.htn#4.%20PAYASYOUEARN%20SYSTEM.
164. Henning, supra note 133, at 5.
165. Id.
166. Press Release, supra note 9.
2001) Close CorporationLaw Reform in Southern Africa
four of the envisaged Acts will necessitate new legislation, since the Close Corporations
Act is to be retained in its present form as one of the five principal statutes.
G. Response
1. Domestic: The Statistics
The close corporation has met wide and enthusiastic approval despite 167 a generally
unfavorable economic climate, as seen from the following comparative tables.
TABLE I: CUMULATIVE REGISTRATION

Cumulative Annual Registration [Incorporation and Conversion] of
Close Corporations and Companies
Year Close Corporations Companies
1985 15,911 5848
1986 39,298 11,084
1987 68,660 17,757
1988 104,752 25,150
1989 146,543 32,357
1990 185,462 39,425
1991 220,015 46,040
1992 255,020 52,788
1993 288,020 61,559
1994 331,813 73,620
1995 387,973 89,160
1996 452,797 108,851
1997 524,157 132,800
1998 598,815 159,725
1999 641,866 186,722
2000 693,205 220,218
167. The relevant information was kindly supplied by the Registrar of Companies and Close Corporations,
SACRO, Pretoria.
TABLE II: REGISTRATION

Registration [Incorporation and Conversion] of Close Corporations and Companies
Year Close Corvorations Companies Ratio CC:Co
1985 15,911 5848 2.72:1
1986 23,387 5235 4.46:1
1987 29,362 6673 4.40:1
1988 36,092 7393 4.88:1
1989 41,791 7207 5.80:1
1990 38,919 7068 5.51:1
1991 34,553 6616 5.22:1
1992 35,005 6748 5.18:1
1993 33,000 8771 3.76:1
1994 43,793 12,061 3.63:1
1995 56,160 15,540 3.61:1
1996 65,006 19,691 3.30:1
1997 71,178 23,949 2.99:1
1998 74,640 26,925 2.78:1
1999 43,051 26,997 2.77:1
2000 51,339 33,496 2.84:1
TOTAL 693,205 220,218 3.14:1
TABLE HI: INCORPORATION

Incorporation of Close Corporations and Companies
Year Close Corporations Companies
1985 9840 5836
1986 16,737 5188
1987 24,151 6395
1988 31,204 7061
1989 37,058 7207
1990 36,179 7068
1991 33,069 6815
1992 33,671 6748
1993 31,881 7957
1994 42,747 10,909
1995 54,815 14,000
1996 63,128 18,281
1997 69,120 22,120
1998 72,280 25,800
1999 43,051 26,997
2000 44,309 31,910
TABLE IV: CONVERSION

Conversion of Companies to Close Corporations and
Close Corporations to Companies
Year Co's to CC's CC's to Co's
1985 6071 12
1986 6650 47
1987 5211 278
1988 4888 332
1989 4733 430
1990 2740 643
1991 1484 806
1992 1324 721
1993 1119 814
1994 1046 1154
1995 1245 1540
1996 1878 1410
1997 2058 1351
1998 2358 1125
1999
2000 7090 1586
A few observers deemed it fit to emphasize that close corporations enjoyed certain
tax benefits until 1989, after which registrations began to fall. It is quite correct that
registrations of close corporations showed a steady decline from 1990 to 1993.168 But it
should be clear that this trend was reversed after the constitutional and political changes
in 1994. In fact, the registrations of close corporations in 1994 showed a very significant
16 9
increase compared to the 1993 figure. This increase was sustained in the following
years to the effect that the registrations in 1998 were more than double the figure of
1993.170 The registrations of close corporations in fact increased from 33,000 in 1993 to
74,640 in 1998.171 It should also be noted that the registrations of companies showed a
similar downward trend from 1988 to 1992.172 These statistics and the economic, social,
and political circumstances in South Africa during the particular period mean that the
impression that the downward trend was maintained only in terms of close corporations
and solely due to a change in its tax dispensation, should not be left unchallenged.
It has been suggested in the popular press that close corporations are far more
susceptible than companies to liquidation by the court as well as deregistration by the
Registrar, and that this may point to the possible abuse of the close corporation. Taking
into account the relatively high failure rate of small businesses in general, especially in
times of economic recession, the following statistics do not seem to provide conclusive
support for such an averment.
168. See supra tbl. II.

169. Id.
170. Id.
171. Id.
172. Id.
The Journalof CorporationLaw [Summner
TABLE V: LIQUIDATION
Year Companies Close Corporations
1985 3057 9
1986 2623 118
1987 1625 281
1988 1280 271
1989 1051 399
1990 1057 631
1991 1150 738
1992 1037 1142
1993 1002 1226
1994 844 778
1995 764 963
1996 882 1210
1997 1265 891
1998 1738 2274
1999 1202 1569
2000 2901 2228
Total 23,478 14.728
TABLE VI: DEREGISTRATION

Year Companies Close Corporations
1985 3938 38
1986 4744 401
1987 5748 1110
1988 5361 1711
1989 4290 2004
1990 4976 3936
1991 5445 5335
1992 6342 6777
1993 6135 8058
1994 4376 7563
1995 3515 6806
1996 2089 7323
1997 2655 6071
1998 2062 6866
1999 748 3873
2000 391 4875
Total 62.815 72.747
Total 62.815 72.747
20011 Close CorporationLaw Reform in Southern Africa
2. International
173
Developments in South Africa did not pass unnoticed in other countries. The Act
was judged by Professor Uriel Procaccia of the Hebrew University of Jerusalem as "a
174
recent impressive close corporation statute." Professor Len Sealy of Gonville and
Caius College, Cambridge described the Act as "a model worth very serious
consideration" and considered it to be a much bigger success than the "unanimous written
resolution" and "elective regime" amendments introduced for private companies by the
Companies Act of 1989.175 He succinctly contrasted the South African and Australian
experience of the close corporation:
The (South African) legislation shows that it is possible to do without shares,
capital, directors, meetings, articles of association, annual returns and
audit .... Australia endeavoured to go down the same road in the mid 1980s
and did, in fact, enact a Close Corporations Act in 1989. It was modelled
initially on the South African precedent, but they (the Australians) kept wanting
to build more and more of the traditional company into it, so it became a fairly
lengthy piece of legislation. If that were not enough, it then incorporated by
reference, huge chunks of the main Corporations Act. So it was not a successful
176
venture.
A report on alternative structures for small businesses in the United Kingdom pointed out
that the South African close corporation has been highly successful inter alia because of
"its own intrinsic merit,"' 177 while Professor Dine expressed
' 178
a "particular fondness for
some aspects of the South African close corporation."
In her comprehensive 1996 survey of company law in more than twelve
jurisdictions, as part of the review of the Hong Kong Companies Ordinance, Professor
Cally Jordan stressed that the South African Close Corporations Act "has proved to be
one of the most remarkable innovations in South African company law" and one, at that,
179
which appears to have been singularly successful.
III. ZIMBABWE
1 80
The present Companies Act of Zimbabwe dates from 1951 and came into
operation on April 1, 1952. It was based on the British Companies Act of 1948 and the
previous South African Companies Act 46 of 1926. It followed the recommendation of
173. See W.A. Ramsden, Comment, CorporateLaw: Recent Developments 1,INT'L Bus. LAw. 76, 81 (Feb.
1987); see also Henning & Bleimschein, Die neue Unternehmensform der Close Corporation in Sudafrika,
supra note 5, at 627.
174. Procaccia, supranote 7, at 589.
175. Len Sealy, Legislating for the Small Business, Address Before the Institute of Directors (Dec. 7,
1993).
176. Id.
177. CHARTERED ASSOCIATION OF CERTIFIED ACCOUNTANTS, ALTERNATIVE COMPANY STRUCTURES FOR
THE SMALL BUSINESS 44 (1995).
178. Janet Dine, The Comprehensive Review of Company Law, COMPANY LAW 83 (1998).
179. JORDAN, supranote 3, at 47-49.
180. Companies Act of Zimbabwe, ch. 190 (1952) (previously ch. 223).
the Millin Commission1 81 in South Africa by not introducing the concept of the "exempt
182
private company."
After the introduction and apparent success of the close corporation in South Africa,
a privately commissioned and prepared report on a new legal form for small businesses in
Zimbabwe was widely circulated for comment. This report, which became known as the
Christie/Fairburn Report, recommended the reorganization and removal of private
companies from the Companies Act. 183 Thus a two tier system was envisaged: public
companies under the Companies Act and private companies under a new separate law.
Subsequently, the Law Development Commission appointed a subcommittee in
January 1989 to report on proposed changes to the company law. Two interim reports
were issued: The Interim Report on Proposed New Private Business Corporations Bill of
1990184 and Proposed Amendments to the Companies Act (Chapter 190) of 1990.185
These were followed by the Final Report: Private Business Corporations Bill of 1991,186
and Final Report: Amendments to the Companies Act (Chapter 190) of 1991.187
The Companies Amendment Bill of 1993188 was promulgated as the Companies
Amendment Act of 1993.189 The principal objects of the amending legislation are inter
alia to enable a company to be formed with one member (two directors are however still
required), to modify the ultra vires rule and to make fuller and better provision for the
judicial management of companies. Save for these amendments, the position of private
companies remained unaffected.
The Interim Report on Proposed New Private Business Corporations Bill rejected
the two tier approach of the Christie/Fairburn Report and recommended a three tier
system. Public and private companies would continue to be governed by the Companies
Act and entirely new legislation should provide for the introduction of an new form of
business enterprise called the private business corporation (PBC). This recommendation
was formally adopted in the Final Report: Private Business Corporations Bill. On June
30, 1991, the full Law Development Commission recommended that its Private Business
Corporations Bill be passed into law. Consequently, the Private Business Corporations
Bill 190 was presented to parliament by the Minister of Justice, Legal and Parliamentary
Affairs in 1993. The Private Business Corporations Act of 1993 was promulgated on
February 18, 1994191 in the Gazette. The Private Business Corporations Act became
operative on May 5, 1997 by virtue of Statutory Instrument 107 of 1997 published in the
181. COMMISSION OF ENQUIRY, FINAL REPORT OF THE COMPANY LAW AMENDMENT (1947-1948),
available at UG 69 of 1948.
182. The exempt private company was introduced in the United Kingdom by the Companies Act of 1947,
and consolidated in the Companies Act of 1948, following the proposal of the Cohen Committee. Companies
Act, 1967, § 2 (Eng.) (abolishing the concept in Britain on recommendation of the Jenkins Committee).
183. LAW DEV. COMM'N REP. No. 5 (Jan. 1990).
184. Id.
185. LAW DEv. COMM'N REP. No. 8 (Sept 1990).
186. LAW DEV. COMM'N REP. No. 10 (July 1991).
187. LAW DEv. COMM'N REP. No. 11 (July 1991).
188. Companies Amendment Bill, 1993, HB 23 (GA) (Zimb.).
189. GN 658 of 22 October 1993 (Zimb.).
190. Private Business Corporations Bill, 1993, HB 12 (GA) (Zimb.). The Private Business Corporations
Act contains sixty-three sections and one schedule.
191. GN 101 of 18 February 1994 (Zimb.).
Supplement of the Zimbabwean Government Gazette on May 2, 1997.192 One hundred

1 93
and two private business corporations have since been incorporated.
The Law Development Commission stressed the possibility that not only the very
small businessman, but also large enterprises, may form a private business corporation.
The Commission did not regard this as a matter 194 for concern except from a revenue
viewpoint in the case of a conversion of a company.
The salient features of the private business corporation are very briefly: (a) a
minimum membership of one and a maximum of twenty; (b) formation by way of an
incorporation statement filed with the Registrar of Companies, and; (c) complexity and
formality reduced to a minimum as there is no need to specify the objects of the private
business corporation in a formal memorandum. 195 There is no need to appoint directors
to hold formal meetings, no shares or share capital other than members' interests, and no
196
need to publish or submit annual accounts to the Registrar. Further, there is no need to
appoint a chartered accountant as auditor-a suitably qualified person may be appointed
as accounting officer. The form of accounts has been simplified. Each member is an
agent of the private business corporation, and in the event of reckless dealing, members
can be declared personally liable by the court. 197 There are no complicated provisions
dealing with judicial management and winding-up. 19 8 Decriminalization is the central
policy, with only six criminal offenses. Lastly, non-compliance with the law gives rise to
personal liability of members for debts. 199
IV. NAMmA
Namibian company law is largely based on the South African Companies Act of
1973,200 without the South African amendments introduced after 1978.201 However, the
Law Reform and Development Commission of Namibia has recently invited proposals on
the reform of company law and related matters.
The Namibian Close Corporations Act of 1988, in effect the South African Act as
amended, was promulgated on December 31, 1988. It was put into operation on March 1,
1994202 as a result of the transfer of Walvis Bay from South Africa to Namibia on
February 28, 1994. The administrative regulations made under section 10 of the Act were
published on March 30, 1994.203
A proclamation 2 04 under the South African Transfer of Walvis Bay to Namibia Act
of 1993 makes a provision for the conversion of close corporations, which were
192. This information was kindly supplied by the Zimbabwean Law Development Commission.
193. Id.
194. LAW DEV. COMM'N REP. No. 6.
195. Id.
196. Id.
197. Id.
198. Id.
199. LAW DEv. COMM'N REP. No. 6.
200. Companies Act 61 of 1973 (S. Aft.).
201. Registration of Companies, Proc. No. 234 (1978) (amended by Proc No. 23 (1979)).
202. Proc No. 9 in GG829 of March 1994 (Namib.).
203. GN 43 of 30 March 1994 (Namib.).
204. Proc R57 in GG15616 of 31 March 1994 (Namib.).
registered in South Africa and which have their registered office or place of business in
Walvis Bay. The provision calls for the deregistration in South Africa and conversion to a
Namibian close corporation. If such an existing close corporation, wishing to be
converted into a close corporation incorporated in Namibia under the Namibian Close
Corporations Act, has a place of business in South Africa, the South African Registrar of
Companies and Close Corporations may upon compliance with certain conditions,
register that close corporation as an external company in South Africa. 20 5 Because such
an external company is a body corporate under the Namibian Close Corporations Act
which is required to subjoin the abbreviation CC to the name under which it is
registered, 20 6 it will also have to subjoin the statement "Incorporated in Namibia-
207
external company under section 322" in terms of the South African Companies Act.
The Namibia Close Corporations Amendment Act of 1994208 incorporated some of
the South African amendments up to 1992 but also went its own way to some extent. For
example, section 7 has been amended to expressly provide that no magistrate's court shall
entertain any matter with respect to the winding-up of a close corporation. In addition, the
Namibian legislature acted more proactively than the South African legislature as far as
the amendment of at least one section is concerned. The amendment to section 47(1) of
the Close Corporations Act excludes disqualified persons from the management of the
corporation even if they are not members of that corporation, which was recommended
by the South African SSCC in 1993 and effected in 1997,209 was introduced in Namibia
in 1994 by section 20 of the Close Corporations Amendment Act.
Approximately one hundred close corporations registered in South Africa were
initially converted into close corporations incorporated in Namibia. It is indicative of the
inherent merits of the concept and its successful application beyond the borders of its
country of origin that almost eleven thousand close corporations were registered in
Namibia by December 2000.
TABLE VII: Namibian Registrations

Year Close Corporations
1994 800
1995 1144
1996 1239
1997 1552
1998 1724
1999 1773
2000 2375
Total 10607
205. Proc R57 of 1994, § 4.

206. Namibian Close Corporations Act, § 22(1) (1988) (amended by section 13 of the Close Corporations
Amendment Act of 1994).
207. § 49(2) of Companies Act 61 of 1973 (S. Afr.) (amended by Proc R57 of 1994, § 6).
208. The Act was published on July 22, 1994.
209. See J.J. Henning & E.M. De Waal, FutureDevelopment of the Law of Close Corporations,1 CORP. L.
DEv. SERIES 153, 155 (1994).
V. A UNIFORM SOUTHERN AFRICAN FORM OF BUSINESS ENTERPRISE?
In the same manner as the European Community recognized the necessity of

company law harmonization through, inter alia, the establishment of a Societas
Europaea, the need for a southern African form of business enterprise to achieve the
ideal of greater economic cooperation must be recognized. There is, however, little need
for the formulation of an entirely new form of business enterprise.
When the SAC became convinced of the need for a new form of business enterprise,
the close corporation was introduced in South African Law as a form of business offering
greater freedom of choice in an incorporated business entity: deregulation; the promotion
of more effective competition between small businesses; and certain tax advantages. The
close corporation form of business enterprise proved less cumbersome than the highly
complex and inappropriate company law regime and is infinitely more accessible. At
present, in addition to South Africa, Namibia and Zimbabwe now offer entrepreneurs the
2 10
option of incorporating as a close corporation.
When one takes into consideration the fact that the close corporation developed as a
uniquely South African export, the application of its objectives mentioned above to a
Southern African context seems fitting: These objectives are by now familiar to every
student of company law, but they echo the needs of the Southern African Development
Community (SADC) for a Societas Africaea to complement the African Renaissance. The
same objectives guiding the South African legislature can now guide SADC: simplicity,
accessibility and limited liability. The distinctive features of the close corporation
mentioned above can serve the whole of SADC well.
Finally, one of the most important aspects of the close corporation is the extent to
which the criminal sanction has been avoided. The close corporation offers an example of
effective and premeditated non-criminalization necessary in the region. Supple
application of personal liability serves as a commendable precedent for other SADC
countries in the regulation of small business enterprises. There is no need to reinvent the
wheel.
VI. CONCLUSION
In the three southern African jurisdictions referred to above, special provision is

made for the small business either by way of close corporation or private business
corporation. These jurisdictions accept the notion that differentiation between the small
incorporated business and the large company is necessary so that each may participate in
the commercial activity of the country in the most efficient manner in furtherance of the
best interests, individual and collective, of all concerned.
It is clear that the South African and Namibian experience with the close corporation
concept has been a very positive one. The favorable and enthusiastic reaction of
entrepreneurs exceeded the expectations of even the initiators of the Act. It has given a
considerable and very necessary impetus to the small business sector in particular, while
many large undertakings conducting business in the form of a close corporation are
210. See infra Part III-IV.

950 The Journalof CorporationLaw [Summer
encountered in practice. Time will tell whether the Zimbawean experience of the private
business corporation will prove to be as positive.

Close Corporation Law Reform in Southern Africa

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Bluebook 21st ed.

ALWD 7th ed.

APA 7th ed.

Chicago 17th ed.

McGill Guide 9th ed.

AGLC 4th ed.

MLA 9th ed.

OSCOLA 4th ed.

I. INTRODUCTION ......................................................................................................... 918

* This Article is based on Johan Henning, Close Corporationsand PrivateBusiness Corporations-The

iii. Other A m endm ents............................................................................... 939

enterprise consisting of a single entrepreneur or small number of participants that is

II. SOUTH AFRICA

B. History, Background and Objectives

C. The Needfor a New Business Form

advantages of limitation of risk, perpetual succession and a regulated structure. However,

vicissitude of political expediency. Professor Larkin aptly provides the correct

E. Close Corporationsand Private Companies

MOD. BUS. L.20 (1983).

F. Salient Featuresof the Close CorporationsAct"O

Two requirements relating to membership determine the availability of the close

54. See, e.g., Canada Business Corporations Act of 1975.

4. UnrestrictedSize and Scope of Undertaking

62. See supra note 15 and accompanying text.

Language Term for close corporation Abbreviation

68. § 42 of Close Corporations Act 69 of 1984 (S. Afr.).

8. CapitalMaintenanceReplaced by Solvency and Liquidity

75. § 43 of Close Corporations Act 69 of 1984 (S. Aft.).

by a close corporation to a member by reason only of his membership 8 6 may be made

In principle, a corporate membership of a close corporation is excluded. 89 This

86. The equivalent of a dividend in company law.

10. CriminalizationReplaced by PersonalLiability and Self-Enforcement

11. Minimal AdministrativeDuties

13. Members' Contributions

101. § 24(1) of Close Corporations Act 46 of 1984 (S. Afr.).

15. Accounting and Disclosure

16. Ongoing Development and Simplification

b. The FirstFourAmendment Acts

125. Id. § 59.

c. Three Year Development Program

d. Close CorporationsAmendment Act of 1997

iii. Other Amendments

154. § 29(A) of Magistrates' Court Act 32 of 1944 (S. Aft.).

iv. Simplification and EnhancedProtection

TABLE I: CUMULATIVE REGISTRATION

TABLE II: REGISTRATION

TABLE HI: INCORPORATION

TABLE IV: CONVERSION

168. See supra tbl. II.

TABLE VI: DEREGISTRATION

Supplement of the Zimbabwean Government Gazette on May 2, 1997.192 One hundred

TABLE VII: Namibian Registrations

205. Proc R57 of 1994, § 4.

V. A UNIFORM SOUTHERN AFRICAN FORM OF BUSINESS ENTERPRISE?

In the same manner as the European Community recognized the necessity of

In the three southern African jurisdictions referred to above, special provision is

210. See infra Part III-IV.

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