COMPANY LAW AND CLOSE

CORPORATIONS

MS J GELDENHUYS
&
MS A MTHEMBU
 LEGAL PERSONALITY
• Acquired upon incorporation

Consequences: (Salomon v Salomon):

- Company is a separate legal entity.
- Company can contract in its own name.
- Company can sue and be sued in its own name.
- Members enjoy limited liability.
- Profits belong to the company and not its members.
- Company assets are company’s property. Members have no
proportionate proprietary rights.
- No one is qualified by virtue of memberships to act obo
company.
 PIERCING THE CORPORATE VEIL
• Corporate personality disregarded.
• Substance/ practical realities are recognised rather
than the form.
• Exceptional circumstances required.
• Fraud, dishonesty/ improper conduct.
Section 163(4) of the Companies Act 2008:
If any act or use of a company constitutes an unconscionable
abuse of the juristic personality a court may declare that
company is not deemed to be a juristic person in respect of
the rights, liabilities and obligations relating to abuse.
 Case Law: Piercing the Corporate Veil
• Botha v Van Niekerk – an “unconscionable injustice”
required.
• Cape Pacific – rule in Botha is too rigid. Facts of each case
and public policy considered.

• Hülse-Reutter – Dual test: misuse/ abuse and company

must gain unfair advantage.
• Le’Bergo Fashions CC – the need to preserve the separate
legal personality must be weighed up against the public
policy.
• Die Dros (Pty) Ltd and another – court may pierce corporate
veil where a person abuses a company to avoid a restraint
of trade agreement.
 ACTIVITY
John operated a fast food establishment in Durban under a
franchise agreement with McTucky’s Ltd. In terms of the
agreement, John is not allowed to operate a similar business in
the Durban area within 3 years after the end of the franchise
agreement. John does not renew the franchise agreement when
its term ends, but continues to operate a fast food restaurant
from the same premises that he previously occupied.

McTucky’s Ltd wants to institute an action against John for

breach of the restraint of trade in the original franchise
agreement. John’s defence is that the new business is owned
by a newly incorporated company Macfries (Pty) Ltd which was
not a party to the original agreement. John is the sole
shareholder and director of Macfries (Pty) Ltd.

Can the court lift the corporate veil?

 TYPES OF COMPANIES
1. PROFIT 2. NO PROFIT
• Public : Ltd (NPC)
• Private :(Pty) Ltd
• Limited liability: Inc
• State-owned: (SOC)

Different Characteristics
 COMPANY FORMATION
• Notice of Incorporation
• Memorandum of Incorporation
• Registration certificate

CONSTITUTIVE DOCUMENT: Memorandum of Incorporation

• INTERNAL REGULATION:
Memorandum of Incorporation and Rules.

MOI and rules are binding between: (Contractual rights)

- Company & shareholders;
- Shareholders inter se;
- Company & directors; and
- Company & prescribed officer, member of audit committee
or board committee.
 Amendment of the MOI

• Proposed by board of directors; or

• Shareholders holding at least 10% of voting
rights.

Procedure:
- As required by Memorandum of Incorporation.
- Adopted by special resolution.
 PRE-INCORPORATION CONTRACTS

Section 21 of Companies Act of 2008:

Requirements:
• In writing.
• Promoter must purport to act as an agent of a company to
be incorporated.
• Contract must be ratified or rejected within 3 months after
incorporation.

Consequences:
- Promoter jointly and severally liable.
- If company fails to adopt or reject the contract, it is deemed
to have been adopted it. Promoter escapes liability.
 ACTIVITY
Jack enters into a lease agreement with
Mpfari on behalf of a yet to be incorporated
company.
• What are the requirements in terms of s 21 of the
Companies Act of 2008 for the contract to be binding
against the company when it is incorporated?
• Who will be liable if the company is not incorporated?
• Who will be liable if the company only ratifies the
agreement partially?
• If Jack is held liable, what recourse does he have?
 COMPANY NAMES

• May not be offensive.

• May not lead to confusion.
• Must not be calculated to cause damage.
Is a name offensive or objectionable?
(Peregrine Holdings)
- Is the business similar?
- How sophisticated are the clients?
- Generic words?
 ACTIVITY

John was previously a franchisee of

McTucky’s Ltd. He wants to incorporate a
company with the name MacTuckies Ltd.
The new company will run substantially
the same business as McTucky’s Ltd.
Can McTucky’s Ltd object to the registration of
the name?
 CAPACITY OF COMPANIES
• Section 19(1) of the Companies Act of 2008:
-Company enjoys the legal capacity and powers of an individual
-Except : it is a juristic person…
• Section 20 of the Companies Act of 2008:
- No transaction is invalid solely because it exceeds the
company’s capacity.
- Shareholders may ratify transaction by special resolution.
- Shareholders, directors/ prescribed officers may prevent
company from acting contrary to restrictions.
- Bona fide third party protected if he/ she was unaware.
- Shareholders can claim against person who fraudulently/ due
to gross negligence allowed act, unless ratified.
 ACTIVITY

ToyZ Ltd’s MOI states that the main business

of the company is selling toys. The board of
directors decides to buy a luxury yacht obo the
company.
• Is this transaction valid?
• What if the MOI stated that the company only has the
capacity to sell toys?
• Would it affect your answer if the seller of the yacht
was aware of this limitation in the company’s
capacity?
 REPRESENTATION IN COMPANIES
Authority:
1. Actual or
2. Ostensible
• Sources of Actual Authority:
- MOI
- Rules
- Express mandate
• Ostensible Authority:
Company liable if a misrepresentation was created by
the company that a person in fact had authority.
 Doctrine of Constructive Notice
• Person dealing with a company is deemed to
know the content of the company’s registered
documents.

Section 19(4) of the Companies Act of 2008:

Doctrine abolished, except:

- Person dealing with RF company deemed to
have knowledge of the special conditions.
- In personal liability companies
 TURQUAND RULE
• COMMON LAW
• SECTION 20(7) OF THE COMPANIES ACT OF 2008

Third party dealing with company in good faith may

assume that the internal requirements have been met to
render contract enforceable.

• Internal requirement:
Company A’s MOI determines that the board of directors
has authority to conclude contracts obo the company. If
the amount of the transaction exceeds R50 000 consent
must be acquired from the shareholders in a general
meeting.
 Exceptions to Turquand Rule

Companies Act of 2008:

- If the 3rd party knew that the internal
requirements were not complied with; or
- reasonably ought to have known

e.g. contract concluded with a member

 ESTOPPEL
Company will be bound to a contract entered
into by a person without actual authority if:

- Company created a misrepresentation;

- The misrepresentation was made intentionally/
negligently;
- The 3rd party was induced by the
misrepresentation to contract; and
- The 3rd party suffered prejudice.
 ACTIVITY
The rules of Concord Ceramics (Pty) Ltd (RF)
provide that the board of directors have authority
to deal obo the company. The rules further
provide that for any transaction of which the
value exceeds R1 million the approval of the
general meeting by way of a special resolution is
required.
- Are third parties deemed to be aware that consent must be given
for transactions exceeding R1m?
- A director enters into a contract exceeding R1m without the
approval of the general meeting. Will the company be bound?
 ACTIVITY

Mike, a manager, regularly contracts obo the

company without a mandate. The board of
directors knows this, but allows Mike to
contract obo of the company. Mike enters into
a contract with Tim. The company argues that
it is not bound by this contract because Mike
lacks authority.
Can the company be held liable?
 CORPORATE FINANCE
• DISTRIBUTIONS:
- Return on share capital/ return of share capital
- Direct or indirect transfer of money/ property, other than
shares to shareholders of the company.
- Dividends are amounts declared by the board of
directors as a return on their investment.
• Section 46 of the Companies Act of 2008:
- Board must authorise
- Solvency and liquidity
- Distribution must be made within 120 days
- Non-adherence: Personal liability of directors
 Financial assistance

1. Was financial assistance provided?

• Gradwell: If company is impoverished by transaction
financial assistance was provided.
• Lipschitz: Impoverishment test inconclusive.
Two elements: 1. Financial assistance provided and
2. Purpose must be to acquire shares in company.

2. Was the provision of financial assistance valid?

Requirements in section 44 must be adhered to.
 SECTION 44 REQUIREMENTS

Assistance to:
- employee share scheme or
- special resolution by shareholders
- person must be in group/ class agreed upon
Authorisation by: Board of directors
Requirements:
- Solvency
- Liquidity
- Prescriptions in MOI
- Financial assistance must be provided within 120 days
 ACTIVITY
At a shareholders’ meeting of Build-a-Book Publishing (Pty)
Ltd that took place six months ago, a special resolution was
passed that financial assistance may be given to black
women as part of the company’s BEE endeavours.

ABC Bank Ltd is only willing to extend a loan to Naledi if

someone stands surety for her obligations. Naledi wants to
use the money she loans to buy shares in Build-a-Book
Publishing (Pty) Ltd.
- Will it be financial assistance if the company stands surety for
the loan?
- Who must take the decision obo the company whether or not
to stand surety and what must be taken into consideration?
 END

Part 2 to follow.