Entrepreneurial Law Study Unit 5

Principle – Company is a separate legal entity

Forms of enterprises – 1. Sole proprietorship – capital on one person invested2. partnership – 2 or more pool capital and abilities 3. CC – legal personality4. Company – Legal personality 5. business trust

The registration of a company or CC allows the body with separate legal personality with its own rights and liabilities The risk extends only to the loss of amount they contributed as capital CC and company enjoys the benefit of perpetual succession – change in membership does not stop their legal existence)Shareholders of the company do no usually participate directly in management of the enterpriseEach member in CC is entitled to participate in the management and no provision is made for a board of directors.

Benefit of incorporation – Public Company with Share Capital is the most efficient of mobilizing capital from the investing public.Private companies are aimed at smaller enterprises which do not rely on public funds.

The company as a legal personA Company is described as an association of persons with the common objective of acquiring gain. As an association of persons, it exists as a separate entity with a legal personality from registration. Therefore it can acquire rights and duties in its own name assets, employ, sure or be sued. It also acquires rights from the BoR, i.e. nature of company and nature of rights, but the company is not equated to a natural person i.e. right to life.

A company is a business entity and can acquire rights and duties and perform acts required for economic activities. It cannot participate in legal transactions itself; it must act through an organ/agent.

Acquisition of a legal personality There are 3 ways an associations of persons or organized body can acquire a legal personality.

1. separate act – own separate act of Parliament i.e. legislation relating to Eskom2. General Enabling Act – the company’s act, CC act. 3. by conduct – by conducting itself as a legal person in compliance with certain

requirements e.g. company consists of less than 20 people, acquisition for gain must pursue the acquisition for gain Legal personality may appear from the contents of association’s

constitution, dealings, nature and activities of association.An association that conducts business without the objective of making a profit may obtain a legal personality by their conduct e.g. charities.

Liability of members – they only loose the money they invested. They are not liable for debts of the company.

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Company as a separate legal entity SALOMON v SALOMON – S (sole Proprietor) then expanded business to include his family (Company). Business went bad and debtors wanted to claim from him personally. He could not be personally liable.On formation a company, a separate legal entity acquires the capacity to have its own rights and duties. Legal personality exists apart from its members.

Consequences of Separateness:- Company estate is assessed apart from the estates of individual members. The

debts of the company are Company’s debts and not that of its members. The sequestration of a member ≠ the liquidation of the company.

- Profits of the company belong to the company and not the members. - Assets of the company belong to the company and not to its members. Members

do not have proprietary rights. On liquidation members may share in the division of the assets of the company.

- No one is qualified by virtue of membership to act on behalf of the company. Only those who are appointed as representatives, i.t.o the Articles, may bind the Company.

Disregard of the separate existence of the corporate entity

SALOMON and DADOO case

SALOMON - a company has its own legal personality, one which is distinct from its members. It allows a company to perform juristic acts in its own name, as well as to sue and to be sued. Further, members and directors enjoy protection against personal liability. However, the court made it clear that in the event of fraud ordishonesty being proven, the separate corporate personality must be discarded

In Foss v Harbottel, the court confirmed the idea that when a wrong is committed against a company, the company itself would be the plaintiff in the proceedings and not the members. This principle was later reinforced in the Salomon case, where it was held that the company is a separate legal person, this being the first time the court asserted the separate legal existence of the company.

Due consideration to the actual state of affairs pertaining within the company ‘behind’ the corporate entity.Emphasis is placed on inviolability of the entity instead of regarding it as a whole.

Disregard by the Courts – Piercing the veil/lifting of the corporate veil

Because veil piercing is an exception to the rule of separate legal personality and not the rule itself, courts must be careful to permit veil piercing. In exceptional circumstances the veil is said to be “pierced.” When the court ignores the existence of a company, it treats the members as though they are the owners of the corporate assets and that they are conducting the business in their personal capacities. Another form of piercing the corporate veil is where the courts impute the rights and/or obligations of the members on the company. Accordingly veil piercing is where the veil of incorporation is ignored in order to determine the individuals upon whom liability should be imposed. It is important to note than when the courts pierce the corporate veil, they would be doing so

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only to determine the rights, liabilities and obligations of the parties in the instance before it and, for all other purposes, the company’s separate existence and personality remains unaffected. The courts will take the interest of justice into account.

Cape Pacific Ltd v Lubner Controlling Investments (Pty) Ltd and Others, “It is undoubtedly a beneficial principle that our courts should not lightly disregard a companies separate personality, but should strive to give effect to and uphold it”. To do so would undermine the policy and principle that underpin the concept of separate corporate personality.

Daimler case – during WW1 in Britain, the court looked at the nationality of the members and directors in the company to determine whether the Company was an enemy or not.Robinson case – the court refused to look at the subsidiary as a separate entity, where it was sought to use the subsidiary as a device to evade the director’s fiduciary duty to the holding company.

The court would consider piercing the veil in cases of dishonestly, fraud or improper conduct. The court will not allow the true state of affairs to be concealed by provisions in the company’s documents – for tax liability.

The balance between policy consideration and the need to preserve the separate corporate-ness needs to be identified.

Hulse case the court said that one should look at the facts of each case. If there was evidence of misuse/abuse and if members gained an unfair advantage.

Botha case – the court said that the seller must have suffered an “unconscionable injustice” before it will lift the veil.

Disregard by legislature Legislature renders persons other than a company liable for the debts of the company as a SANCTION for non-compliance with a statutory obligation. When a person is personally liable for the debts of the company:

o When a person signs on behalf of the company and the company name is incorrect, unless honoured by the company, he will be personally liable.

o Public company members will be personally liable where the company’s membership is less than 7 for a period of 6 months – S 66

o A company with share capital must not commence business before the registrar issues the Company with the certificate to commence business. Before that members and Directors are jointly and severally liable.

o If the business was carried out recklessly/intent to defraud, any person who was knowingly a party to the business will be personally liable – S 424

o S53 (b) rule – legal personality is disregarded by legislature. The memo of Assoc. of private companies may state that the Directors and past directors may be jointly and severally liable together with the company for debts and liabilities contracted to the company.

The Cape Pacific case – the courts adopted a more flexible approach. “Unconscionable injustice” is a too rigid test. Courts should consider facts of each case and strike a balance.

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Perpetual existenceThe continued existence regardless of a change of membership of the body corporate. Its separateness was caused by law – REGISTRATION, therefore its existence is also terminated by law – DEREGISTRATION.

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Study unit 6 – types of Companies

With Share Capital Without Share Capital (limited by Guarantee)

Public S 21 (incorporated Association not for gain) Private

o S 53 (b) company

Company with share capital It obtains capital by issuing shares Members loose no more than the amount paid by them to buy shares

Public Company o consists of 7 members and 2 directors. If < 7 members it is grounds for liquidation.o Name ends in “LTD”o It can raise capital from the publico Shares can be transferredo Compulsory disclosure of information to the public by registering it with the Registrar.o Shares may be listed on JSEo Quorum is 3 people.o Articles do not restrict the number of memberso Capital from investors given to specialist for the benefit of the investors, however this

is an impersonal relationship.

Private company o 1- 50 members o Names ends with “Pty” Ltdo Not compelled to disclose information to public, do not have to register documents

with Registraro Only a company with SC can be a private company. Co Limited by guarantee is

therefore a public company. o S20

cannot freely transfer shares Limited on the number of members to 50 Cannot sell shares to the public Members may not appoint more than 1 proxy Need only have 1 member and 1 director

o Quorum for a general meeting is 2 people that are present If a private company fails S 20, it has to lodge documents with the Registrar. Private company is likened to a partnership when liquidation is requested on the grounds of ‘just and equitable”

S 53 (b) Companyo Alternate to private company o The act provides for a Private Company that wants to effect liability on Directors o Name ends with “Incorporated” o Provisions in memo that Directors and former directors are jointly and severally liable

for the debts and liabilities of the Company i.e. contractual debts, not statutory or delictual debts.

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o It may be incorporated by special resolution with the written consent of the directors, but removed or amended by special resolution of the court is satisfied that it is just and equitable.

o It is intended for professional associations, but not limited to them.o With share capital

Company without share capitalo A company “limited by guarantee”o It is a public company o At least 7 memberso No share capitalo Liability of members is only limited to the amount in Memo – not <R1 per member

which members undertake to contribute if the Company is wound up.o No special resolution, in Memo or Articles, can make any person other than the

members participate in the divisible profits.o Lodge documents with the Registrar. However all provisional and interim docs do not

need to be lodged with Registrar.

S 21 Companyo Also called Incorporated Association not for gain/Association incorporated under S21o The main object is to promote culture, art, science, religion.o Must observe S21 requirements:

Must be formed for a lawful purpose Main activity is to promote religion, culture, art or public interest. Intends to apply profits to further the object. Prohibits payment of dividends to members. Has in its memo

Income and property for the object and no member can obtain portions of it

On winding up, dissolution or deregistration the remaining assets will be transferred to another institution with similar objects.

o Cannot convert into a company with share capital. But another form may convert to a S21 Company

o It is subject to all duties imposed on the public company. o Limited liability and perpetual existenceo No income tax advantage.

Conversions of companies By special resolution and registration

1. a public company with Share capital→ private company2. private company → public company with share capital 3. any company → company ltd by guarantee4. any company ltd by guarantee → company with share capital5. unlimited company → any company6. any company → CC7. any CC → company

Study unit 7 – Pre-Incorporation ContractsS 35 – companies Act

Common law rule – prior to the incorporation of a company, the company is not a legal person to contract. A person cannot, in terms of the common law act on behalf of the principal who doesn’t

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exist. Therefore promoters of a company cannot act as a representative of the company to be formed.

S35 – Statutory ArrangementA company can ratify or adopt as its own, after incorporation, any written contract entered into by an Agent/Representative before its incorporation as if it had been duly incorporated at the time of the contract. The contract only becomes binding if the following requirements are met:

Contract must be in writing – sale by auction (concluded orally) only qualifies as ‘a contract made in writing once it has been reduced to writing. Therefore includes written and oral contracts subsequently reduced to writing.

Contract entered into by person who professed to act as an agent of the company yet to be incorporated – “Trustee” can mean agent or mean for the benefit of the 3rd party within the context of S35. The capacity on which the person acts is decisive and not description he uses. To determine capacity all circumstances of the case must be taken into account. If all the requirements for S35 are met, it does not matter if the contract takes the form of an agent or benefit for 3rd party. If all the requirements of S35 are not met, the contract is null. It can be adopted in terms of common law and not S35.

MoA, on registration, must contain as its object, the ratification or adoption of the contract – “on its registration” was inserted to prevent subsequent insertion of such an object. The specific contract must be described in the MoA, in order for it to be identified with certainty.

2 copies of the contract – 1 must be certified by the notary and be lodges with the Registrar with lodgment for registering of the memo and Articles. It is merely directory – this documents become public documents and its open to the public.

Company must ratify/adopt the contract after incorporation – the company must actually ratify the contract after its incorporation. If it is a company with share capital, it must be entitled to commence business. If the preceding requirements are met and the company ratifies the contract after incorporation, the contract that comes into existence is between the Company and the other party.

The company must be entitled to commence business – a company with share capital, the contract ratified before the date which the company is issued with the certificate to commence business is, only provisional and cannot become binding until the date. The company has the discretion to ratify the contract. If the company does not ratify the contract within a reasonable/agreed time, it does not come into existence, the contract simply lapses and no one incurs any liability.

PRINCIPLE – the agent/trustee incurs no liability in terms of pre-incorporated contracts, but liability may be agreed upon.

Contract for the benefit of the third party – common law

This is an alternate to S35. it does not have to meet the requirements in S35. The promoter of the company contracts in his own name and may incur personal liability. The third party need not be in existence at the time of the conclusion of the contract. It was held that when the ‘trustee’ acts as a principal and not an agent, in his own name, is in essence a contract for the benefit of a third party which the company may adopt after its incorporation.

S35 is not applicable if the promoter contracts in his personal capacity prior to the incorporation of the company and then, after the incorporation of the company, e.g.

Cedes his rights under the contract of the company Cedes his rights under option which he acquired on the basis that he can exercise these

himself/transfer them to another Nominated the company as Purchaser.

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Transfer assets he acquired to the company.

Retrospective effect Question – does ratification of pre-incorporation contracts operate retrospectively:

1. to date when the contract was concluded, or2. from date when company accedes to it.

Peak Lode Gold Mining – where the promoter acted as an agent for the company to be formed in terms of S35. Such contract comes into operation at the time of ratification and not retrospective to the time when the contract was concluded.

Common law – every ratification has retrospective effect and is equal to a prior mandate. For the benefit of the 3rd party – the company succeeds to the rights retrospectively to the date on which the promoter himself acquired his rights.

The contract should make provisions for the stage at which the rights accrue to the company.

PAGE 57 – handbook

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Study unit 8 – inception and constitutive documents

The company comes into existence when founders apply to the Registrar for the company’s incorporation. When all registration requirements are met the registrar will issue the company with a Certificate of Incorporation.

The company’s constitution consists of the Memorandum of Association, and Articles of Association.

The MoA is a founding document. It states the objects and limits the scope of the company.The AoA states the rights, duties, and powers of members, the general meeting of members and directors and manner in which and by whom the affairs of the company are managed.

The memo and articles must be signed by each member to observe all the provisions in the Act. Each member is deemed to be acquainted with the contents of the 2 documents and is contractually bound thereby.

The result of the incorporation is that the member constitute a body corporate having its own name, assets and liabilities perpetual existence ability to exercise all the functions of the incorporated company limited liability of its members.

S170 – every company should have recorded with the Registrar a postal address and a registered office to which all communication and notices may be addressed. The legal process to be served at the registered address and place of business.

Registration requirements Before applying for the registration the proposed name of the company must be reserved with the Registrar on Form CM5 for the documents to be prepare in the approved name. to obtain registration the following must be lodged with the Registrar:

original and certified copies by notary public of duly executed set of memo and articles Form CM5 – proposed company name and ‘translated and shortened version’ to be

reserved Form CM22 – notice of situation of Company registered office and postal address Power of attorney by each subscribing member authorizing signature on behalf of subscriber

of memo and articles, if subscriber does not sign it himself Proof of payment of prescribed registration fees The documents can only be lodged and uplifted by a subscriber personally or a duly

appointed attorney or his clerk.

Certificate to commence business The company with share capital may not commence business unless and until the registrar has issued a certificate entitling it to do so.

S172 (3) – to obtain the certificate to commence business the following have to be lodged: Form CM46 – application for the issue of the certificate to commence business Form CM47 – statement by each director that the capital of the company is adequate for its

purpose and that of the business Form CM26 – the return stating particulars of directors and officers Form CM31 - consent of Auditor to act as such

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MoA – the memo in nature is a contract between the company and the members and between members

S52 – requirements for the contents of the MoA: 1. name – the right to the use of the Company name is subject to

common law limitations - a company may be restrained from passing itself off as another by suggesting/creating the impression that its undertaking is that of another.

S49 – prescribing distinctive last words/subjoined statements of the company’s name

If the name is undesirable, the registrar may within 1 year of registering the company, order a change of name or the court may so order within 2 years. The business names act S5 – the registrar may on application in writing of aggrieved party prohibits further carrying on of business in the name ‘calculated to deceive to mislead the public, cause annoyance/offence to person, indecency.

S 43 (1) – a company may register its name and officially recognized translated/shortened form in not more than 1 official language.

S43 (2) – registration of a defensive name can be effected for the protection of exclusivity in respect of certain words by satisfying the registrar on applicants interest in the name

S50 – every company must display its name outside its registered office and every office where its business is carried, the name and company’s registration number must be mentioned in all notices and official publications

If anyone signs on behalf of the company, while the company name is not correctly stated thereon, he is personally liable for that documents if the company fails to pay.

2. Purpose describing the main business and main object S 33 – statement of general nature of main business must be made It is followed by formulation of company’s main object

3. ancillary objects the company is deemed to have the capacity together with the main object,

also to pursue unlimited ancillary objects complimenting the main object restrictions may be formulated in this clause

4. plenary and common powers S 34 – the company has plenary powers attributed to it Including schedule 2 – to enable it to realize its main and ancillary objects Restrictions may be formed in this clause

5. special conditions S21 – special conditions may feature in memo Incorporating “Association not for gain” – provisions will feature as ‘special

condition’ Provision that directors are personally liable for debts of the company –

professionals – may be included here Any arrangement between members should be incorporated here.

6. pre-incorporated contracts S 35 – upon registration the company must adopt all pre-incorporated

contracts under this heading in the memo

7. Share Capital/Guarantee Memo must state the share capital with which the company is registered

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If shares have par value the division of capital in shares of fixed amount is stated. If shares have no par value, only number of shares is stated.

A company limited by guarantee has no share capital and no statement in respect of share capital is made but it is stated that the liability if members is limited to the amount which each member undertakes, in the even of company being liquidated, to contribute to assets of the company for payment of debts, liabilities and costs of liquidation.

8. association clause company with share capital, the memo concludes with the statement like:

“we, the several person whose name, addressee and occupations are subscribed, are desirous of being formed into a company in pursuance of this MoA and we respectively agree to take the number of shares in the capital of the company set opposite our respective names”

appropriate wording changes for 1 person co and co without share capital the signing of the memo, particulars of subscribers and number of shares

taken by each follow after the association clause.

9. alteration of memo provisions may be altered by special resolution S55 and S56 Change of co’s name and object may change S 57 – the co may by special resolution substitute its existing memo with a

translation in another official language.

Articles – MoA is the founding document of the co. the articles determines the manner in which the Co is to function.S59 (1) – AoA shall be registered with MoA of company.

Company with share capital S 59(2) – articles may consist of tables in schedule 1 Table A – Public co Table B – Private co If AoA consists of tables, use CM44 for additions, omissions and modifications Or a completely original set of articles may be registered.

Company without share capital Co ltd by guarantee, being a public co without share capital is obliged to

register an original appropriate set of articles and Table A can have no application

Tailoring the contents Act does not prescribe what the articles must contain Articles may be tailored to meet the needs of the co and registrar will register it Articles cannot conflict with general law, constitution, or company’s act.

Form S 60 – articles must be completed and set out in the prescribed framework CM 44 – to be singed by each subscriber of memo and a witness stating each

of their full names and occupations, residential, business and postal addresses.

Interpretation

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Articles not be interpreted to literally It is not an official document – the courts will interpret it practicably from

business point of view Principle – the intention of the party, as expressed in written document, must

prevail

Alteration S62 – articles can be altered supplemented only by means of a special resolution S200 (3) – copy of special resolution in force for the time being must be embodied/annexured to every copy of articles issued.

Court – provisions in articles prohibiting its alteration is invalid. Alteration effected bona fide and for the benefit of Co, cannot be impeached. Therefore if shareholder acted against best interest of the co, it is lawful to amend article, in good faith, in such a way that shareholder be compelled to sell his shares and a fair price to some-one nominated by Co.

Effective date of alteration Alteration comes into effect not on adoption of resolution but S203 – on

registration by Registrar S201 – exception

Conflict between memo and articles Both the memo and articles must be read together in the event of obscurity Any provision in the memo which is in conflict with the articles has precedence

over the articles.

S65(2) states that the memo and articles bind the company and the members as if it was signed by each member the memo and articles creates a contractual relationship between the company and the members. The memo and articles are constitutional documents of the company, if it states that issues between the company and members be resolved via arbitration, parties must follow that route first. The contract arising from the constitution binds members only in their capacity as members. The memo and the articles regarding rights and duties of members, bind members contractually as against each other to comply with provisions. Memo and articles do not constitute a contract between the company and director in capacity as Director. If a special contract had been entered into between the company and director, reference must be made to the contract.

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Study unit 9 – office bearers and division of corporate functions

Employees:1. SECRETARY

– S 268 (a) states that directors of a public company must appoint a secretary who is a permanent resident of South Africa.

– S 268(g) states the duties of the secretary Guide directors as to their duties Alert directors of law or legislation affecting the company and report at meetings

on failure to comply. Record minutes of meetings of shareholders, directors and committee of

directors. Certify company annual financial statements, returns to be lodged Ensure a copy of the annual financial statements is sent to all entitled by law.

Company without share capital and private companies are not obliged to appoint a secretary, but may.

The first secretary of the company will be appointed by subscribers of memo and articles

Other secretaries are appointed by the director. Form CM 27 – Secretary to lodge consent to act with company Form CM 29 – company to record such appoint with registrar. The name of the secretary to be stated on all trade catalogue, circulars business

letters of public company. The secretary is the principal admin officer of the company He owes a fiduciary duty to the company He is an employee of the company The nature of work is determined by contract of employment. PANORAMA CASE – it held that a secretary has the authority to make

representation and enter into contract on behalf of the company within the scope of business and admin matters.

a secretary may serve as a director of his employer company, provided that the articles provide for such a person

Person who performs duties of a secretary or partner or employee may be an auditor of a public company.

RE: Private companies – a secretary may act as an auditor, only if shareholders consent to it, no shares are held by the public company and he is registered under public accountants and auditors act and relevant facts are set in the auditor’s report.

The act talks about ‘officers’ which include secretaries. Pattern is to hold either the company or every director and officer of company or

company and every director and officer criminally liable for non-compliance with the act.

2. MANAGERi. Means ‘any person who is a principal executive officer’ of the company for the

time being, by whatever name he may be designated and whether or not he is a director.

ii. ‘officer’ includes any manager and MD and Secretaryiii. CEO is responsible, together with the director and secretary of the company, for

large number if corporate activities and incurs criminal liabilities if requirements are not met.

iv. Managers are obliged to keep minutes

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MANAGING DIRECTOR Usually applies to director to whom all or material part of general powers of control over the

affairs of the company have been entrusted either by board of directors or articles. ‘officer’ includes MD MD is responsible for a large number of corporate activities and incurs criminal liabilities Same rights and duties as a director, included in articles and contract between MD and

company. Articles authorizes the director to appoint member/s as MD Director authorized to confer any of their powers on the MD and may do so ‘either

collaterally or to the exclusion, or substitution for’ their own powers. When the MD deals with an outsider on behalf of the company, normal principles to

determine the scope of authority would apply. The scope of the MD’s implied a, usual and ostensible authority is greater than the director MD can be dismissed in terms of his contract of appointment of S 220.

CHAIRMAN OF THE BOARD OF DIRECTORS Not defined in the act but provisions in the articles state, “ the board of Directors may elect a

chairman and determine the period for which he is to hold office If no special mandate or authority by the co in the articles are provided for, the position of

the chairman differs form ordinary directors He has no additional powers Outsider should therefore ascertain the scope of his authority Chairman might often act MD Unless regulated by articles, a person can be chairman and MD, but it is not good corporate

governance practice. It concentrates too much power in 1 person.

CORPORATE CONDUCT Corporate functions must be performed by humans Corporate functions include general meetings; other entities are Board or Directors,

Committees of Director, MD, Secretary and employees. They are ‘organs’ which means more than the functionary of the company When the ‘organ’ act, the company acts. In the internal structure , the bd of directors, general meeting of members, MD maybe

organs, and not the rest. RULE – the company acts through an agent in external dealings. These agents can only act within their authority

DIVISION OF POWER Interaction internally – general meeting of members and other organs Isle of wight railway co case – it was contended that the meeting of members was the

company itself, and company refers to members as a body. This implied that the final say in ALL matters vested in the meeting of members

When certain matters are assigned to the Board of Directors by the articles, the board alone would have the power to deal with those matters

PRINCIPLE - Powers within the exclusive jurisdiction of the directors and general meetings of members respectively, have to be determined by reference to the articles – LSA UK LTD

SCOTT CASE – the principle that functions conferred on an organ in terms of articles should be exercised by that organ alone – adopted in SA

The directors are normally charged with the duty of managing the company, except only for those matters specifically conferred on other organs by the articles or Act.

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The BD of directors, general meetings and MD may therefore all be managing organs of the company, each with its own separate function

General meetings has a final say over BD of directors whereby they refer to S220 to remove BD members or decline to reelect them

S208 every company has to have a director, new bd will have the same independent powers as old bd unless the articles say otherwise.

RULE – certain matters are assigned to the bd of directors by the articles, only the board has the power to deal with those matters.

Exceptions – general meeting may intervene o When the bd of directors refuses or is unable to institute action on behalf of the

company.o When bd of dir cannot or will not exercise the powers conferred on it, as when a

deadlock has developed among the director/quorum cant be obtainedo When certain powers have been reserved for the bd of directors, but the particular

Act is voidable because the bd has exceeded/abused its powers e.g. allotting shares not bona fide on behalf of company.

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Study unit 10 – Company organs

General meetingsThere are two kinds of meetings

- meetings for general body of shareholders- Meetings for members who hold shares of a specific class.

Class meetings are held to decide matters which concern only the holders of those classes of shares e.g. annual general meetings.

AGM- it is a general meeting subject to the provision of the articles and act. - Act also provides that the company must hold an AGM

o 1st one being within 18months of the incorporation of the companyo Thereafter 2 be held not later than 9months before the financial year end, but within

15months of previous AGM - S179 – the failure to meet within the timeframes – R50 per day but not more than R1000- You can apply for an extension to the Registrar- Notice of AGM must be provided 21 days before or longer according to the articles- Notice to describe meeting as AGM- S179 (2) AGM can deal and dispose of matters, but do so according to the articles or

matters that can be discussed at other general meetings- Additional company matters may be discussed, but resolutions can be passed on items of

which members had proper notice- Directors to ensure that the annual financial statements that are presented at AGM consists

of Balance sheets, income statements, annual financial statements, statement of source and application of funds, Director’s report and auditor’s report.

- The chairman must provide a chairman report which deals with the affairs and prospect of company. It may be published in the press, but the report is not a statutory requirement

- The company needs not hold AGM if all members agree in writing. The resolution may be signed like it was at the AGM

- If the AGM did not take place within the timeframes or certain matters were not discussed, members or legal reps can make an application to the Registrar who may call an AGM, and give further direction

- Directors cannot avoid holding an AGM

General Meetings- Articles indicated how and how many directors a general meeting requires.- Meetings convened by BD of directors- A general meeting are convened by way if resolution at proper meeting of the bd.- Power of directors to call a GM is fiduciary power.- If the articles had a provision that a resolution signed by all director is as valid as a bd

resolution passed at a meeting of director, the meeting can be convened by way of written resolution.

- S 180 (2) – if not stated in the articles, 2 or more member not less than 10 % of the company’s issued capital / 75% of the members may call a GM.

- S181 states the rights of members to requisition the company to convene a meeting or if company fails to respond, they can call the meeting themselves.

- The meeting can be requisitioned by o 100 members, oro Members holding 5% of capital carrying voting rights at GM. Co ltd by guarantee the

requirement are 100% members or members representing 5% of total voting rights at GM.

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- The requisition must be signed by required number of members, state the object of meetings and be deposited at registered office of the company.

- S183 – the court is authorized to order a meeting - If it’s impractical to hold a meeting or the court thinks otherwise, it may order direction of

calling, holding and conducting the meeting.- The court can make an order on its own or on application of registrar of any

director/member/legal rep.- The court’s policy is not to interfere in domestic affairs of the company as the company must

regulate its own affairs by appropriate resolutions.- S179(4) – the registrar has the power to call and AGM when the company fails to do so- S182 – the registrar has the power to call a GM or direct calling of the GM when the

directors cease to be directors or has been incapacitated.- The registrar may issue ancillary directions as he may.

Notice of meetings –The notice must be given at least 21 days for an AGM and 14 days notice for other GM’s, at least 21 days for a GM’s meeting where a special resolution has to be passed. The day on which the notice is given and the day the meeting has to be held are excluded. The notice must be given in writing.

Short notice – any provision in the articles registering the notice period to be shorter should be void, the period can however be longer. A shorter notice can be permitted if so agrees before or at a meeting by a majority in the number of members with the right to vote and who holds a 95% of total voting rights. If members holding a 5% object to a shorter notice the meeting cannot be held and full notice must be given againS186 (2) (b) is another way of a meeting with a short notice or no notice is when all members agree thereto in writing

Special notice – special notice is given when the removal of directors or auditors is proposed. Regarding directors – the resolution requires only a simple majority vote, but special notice means that the notice of the motion must be given 28 days before the meeting,

Persons entitled to notice – the requirement for valid meetings is that all members entitled to notice are given notice according to the articles. However if all members approve, non-compliance with this provision may be condoned.

Contents of notice – notice of meeting must contain the information required according to the articles. Principle – notices must provide sufficient information on the business to be transacted and the purpose of the meetingIn terms of special resolution, the act provides notice must be given not only of the intention to propose special resolution, but also of the terms of resolution, its effect and reasons for it.

Proceedings at meetings – the matters relating to the proceedings at the GMs are usually dealt with in the articles

The chairman – the chairman of the bd of directors shall be the chairman at the GM., while S191 provides if the articles don’t provide such, the members may elect anyone of them as chairman. He must be impartial but is entitles to exercise his vote. May exercise a casting vote if authorized by the articles. Unless this superior authority is desired, a casting vote should be avoided in the articles.

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Quorum – S 190 lays down the quorum for meetings. The articles may allow for a longer period. In the case of public companies, 3 members that are present are entitled to vote. They may be represented. Regarding private companies, with more than 2 members, 2 members present, are entitled to vote. With 1 member, the quorum is 1. No valid resolution can be passes without a quorum. If it is within ½ hr of appointment time and a quorum if not formed:

- The meeting, if convened on requisition of members, must be dissolved.- On any other case, it is adjourned to a day not earlier than 7 days and not later than 21

days after the date of meeting. If no quorum within ½ hour the members present or proxy may constitute a quorum – inoperative provision cos it is in conflict with S190.

Adjournment – it refers to the continuation of the original meeting at a later stage. The chairman must consent to the adjournment, S192 states the chairman is obliged to adjourn in certain circumstances. If the adjournment is demanded, the chairman must put it to a vote. If the demand is successful, the chairman will adjourn to not less than 7days and more than 21 days. When a meeting is adjourned, the company will publish it in the newspaper of the province where the company is registered in:

- It will state the time and place to which meeting is adjourned- Matter before the meeting at time it was adjourned- Ground for adjournment

Private companies may send this notice to its members by registered post within 3 days after adjournment instead of publishing it. The chairman is not entitled to adjourn the meeting on his own accord since this right vest in the meeting itself. If he does attempt to, the meeting may appoint another chairman.

Proxies – any member of the company may appoint a proxy who is not a member to attend, speak and vote on his behalf. Proxy may vote on a poll, and if the articles provides, by show of hands. The proxy appointed by using the form in the articles.

Attendance of meetings by legal persons S 188 provides that the company or body corporate may through representation attend all meetings of the company of which it is a member. By resolution of the directors, the body corporate will authorize the representatives to act and exercise powers. Presentation is entitled to exercise the same powers on behalf of a legal person as legal if natural person.

Voting rights Principle – every member of the company shall have a vote.A company with share capital – every member has a vote in respect of each share held by himCompany limited by guarantee – every member has one vote unless the articles provide otherwise

S195 – Principle of equal voting S195 (1) – if the share capital of a public company is divided into shares of par value, the votes of the member must be the same proportion to the total votes in the company as the nominal value of all the shares issued by the company

Exceptions:1. voting rights of a member of a private company must be determined by the articles, subject

to S193 i.e. each share must carry a right to vote, but not necessarily in the same proportion2. the chairman of a meeting may be given a second or casting vote by the articles

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3. the articles may specific that, above a stated number, a member’s vote will no longer increase in direct proportion to the number of shares held by him but in some lower portion and if such scaling down is provided for

4. the articles may provide that preference shares shall not confer the right to vote, except in 2 instances where the vote cannot be denied.

a. While the preference dividend or any redemption payment thereon remains in arrears and unpaid, the preference shares will confer voting rights from the date specifies in the articles

b. Preference shares shall confer full voting rights when any resolution to wind up the company or reduce the interests of its holders.

5. companies existing in terms of the previous act and which have issued non voting shares or shares carrying different voting rights are exempted by S196(1), but S196(2) subjects all new shares issued by such companies to the provisions of the present act as to voting rights.

Manner of voting It is regulated by the articles and S197 The show of hands – each member has one vote – unless the articles states otherwise On a poll – S195 – each vote must be proportioned to the share capital represented by his

shares The demand for a poll must be done by members having the right to vote or by members

representing at least 10% of voting rights or issued share capital.

Resolution at meetings By simple majority – the company resolution is the forma decision of the company in GM to act

in a certain way. The company resolution is passed by simple majority vote by members present and entitled to

vote and who constitutes a quorum. Principle – the minority must subject themselves to the wishes of the majority, provided that

the majority acts in accordance with the company’ constitution. It is an ordinary resolution and effective from date of adoption but operative from a different date if it so provides.

Requirements for a special resolution It is effective from the date of its registration by the registrar. The act requires special resolutions for most major decisions S199 – requirements:

o Notice must: Be 21 day notice of the meeting in writing State the intention to propose the resolution as a special resolution, the terms and

effect of the resolution and the reasons for the resolutiono The resolution must be passed at a GM at which members holding in the aggregate at

least ¼ of the total votes of all members entitled to vote are present in person or proxy. If less, meeting is adjourned.

o On a vote by show of hands the resolution must be passed by at least ¾ of the number of members entitled to vote in a show of hands at the meeting and who are present in person or proxy. If a poll is demanded it must be passed by at least ¾ of the total votes to which members present in person or proxy are entitled.

Special resolution must be lodges with the registrar within 30days after it was passed, otherwise penalties.

If not lodges within 6months, it will be void and will lapse. The registrar may refuse to register the special resolution if it is in conflict with the act, memo or

articles.

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Once the special resolution is registered a copy must be attached to every articles issued.

Conduct by unanimous assent General rule and cases – corporate decision are to be taken at properly constituted meetings of

the company and not by separately obtaining the individual assent of members. Members of unanimous assent, by signing a constitution could validly appoint a director without

a meeting Unsigned copies of the articles but acted on for a long period of time, is said to be binding All members are to be unanimous and fully cognizance of what they are assenting to No illegal result.

Minutes Every company shall have minutes recorded in an official language in a minute book kept for

that purpose. Minutes must be done within 1month of the date of the meeting Minute book must be kept in company’s registered office or where it is made up.

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Study unit 11 – organs of the company

Directors Every company must have a director, at least 2 for a public company and 1 for a private

company From incorporation until the bd of directors is appointed, the subscribers of the memo are

deemed for all purposes to be directors. The mere fact of holding office as a director creates no contractual relationship between the

company and the director, nor does the articles bring about such a relationship. When a director accepts appointment to that office he becomes a functionary within the

company. The dismissal of a director as an employee does not in itself cause the termination of his office.

Appointment of directorsAppointment and acceptance At common law a person’s appointment as director is complete on his appointment to the office

by those having the authority to do so and his acceptance to such appointment.

Irregular appointment and its effect An irregular appointment as a director can be set aside S 214 provides that an act of a director is valid despite any defect in connection with his

appointment qualification that may afterwards be discovered The result is that it may be assumes that a person who appears to be properly appointed

director may validly act in that capacity. This provision only comes into operation if

o Some form of appointment has been madeo There has not been a fraudulent assumption or powero It concerns an act which was performed before the discovery of the irregularity.

Resignation A director terminates his office simply by tendering his resignation. Company does not have to

accept or concur.

Qualification for the office of the Director Share qualification A company is in no way obliged to require share qualification for its director Each company must determine whether its directors must have a specified minimum interest in

the company as shareholders and such requirement must be stated in the articles. If such a requirement is stated a director must comply within 2 months of appointment. If he does not, then he must vacate office and cannot be reappointed until he obtains his

qualifications

S218 – Statutory disqualification NB – once a person is disqualified from being a appointed or acting as a director, he cannot

have any part in the management of any company – the court cannot even allow this person to do so.

The following are disqualified from being appointed or acting:o A body corporate o A minor or any other person under legal disability, but married woman is no longer

disqualified.o Any person who is disqualified as director by an order of the courto Unless authorized by the court

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An unrehabilitated insolvent Any person removed from office of trust on account of misconduct Any person who has been convicted and sentenced wither to imprisonment without the

option of a fine to a fine exceeding R100 for theft, fraud, forgery or uttering a forged document, perjury.

Disqualification by an order of court The main purpose of S219 is to give the court effective power to restrain persons who have

shown themselves to be dishonest in the formation and running of companies, from continuing to do so.

This is done so by giving the court the power to direct that for a specified period such a person may not, without leave from the court, be a director or take part in the management of any company.

Removal of a directorBy ordinary resolution S220 enables a company to remove a director from office by ordinary resolution of the GM

before the expiration of his period of office This power is given to the company despite anything in memo, articles or contract

Special notice and representations Before a director can be removed by simple majority, the proposer must serve notice of 21days

on the company. A copy must be sent to the director concerned, who is entitled to make personal representation

at the meeting

Compensation or damages S220 – power to remove a director shall not be construed as depriving him of any claim which

he may have to compensation of damages in respect of his untimely removal. A person occupying director post in terms of the articles has no claim for damages against the

company. But a director, who has a separate contract with the company, has a claim for damages under breach of contract.

Removal in terms of the articles S220(7) provides that removal in terms of the statutory power shall not be construed ‘as

derogating from any power to remove a director which may exist apart from S220 Therefore, companies may provide extensively for the removal of the director in the articles.

Registers concerning directors and officers Every company is obliged to keep a register of its director and officer. Kept at registered office, and open for public inspection Failure to comply constitutes an offence Register will include:

1. His full names and any former names, id number, his date of birth and if an officer is a corporate body, the address of the registered office.

2. his nationality, occupation, residential, business and postal address and date of appointment

3. name and registration number of every other company of which he is a director4. Any changes in these particulars and the date and nature of the change.

Meetings of the board of directorsFormal meetings

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Rule – unless the articles provide to the contrary, the board of directors as such can only act at a meeting properly convened with notice to all members and at which a quorum is formed

Procedure at meeting of directors is regulated by the articles.

Written resolution Common way to deviate form this rule, is to provide in the articles that a written resolution

singed by all directors is as valid as a resolution passed at a meeting of directors, or that the bd of dir may delegate any of its powers to a committee consisting of one or more of its members

Unanimous assent The position is that a decision arrived at unanimously by all directors, in full knowledge of what

is involved, cannot be impugned by any of them.

Notice Reasonable notice must be given of meetings of the bd of dir. If this is not done the meeting is invalid and resolutions passed there can be set aside. Notice will not be necessary if the board of director meets regularly at an agreed fixed time and

place since the bd of dir would then have made its own rules in this respect.

Quorum The requirements for a quorum at meetings of the board of directors are laid down in the

articles. A private company – 1 director if a one man company. A quorum must be a disinterested quorum. Therefore a director who has an interest in a matter

may not vote on it and may not be countered towards the quorum, unless the articles specifically provide to the contrary.

Minutes Directors must ensure that minutes must be entered into a minute book kept at registered office. Failure is an offence

Director’s rights and duties Management Bd of directors undertake to management the company Rights and duties of directors are determined by their contracts with the company, the articles,

and memo and common law.

Fiduciary duty towards the companyStatutory and common law duties A director stand in a fiduciary relationship to his company with the result that he has the duty to

act in good faith towards the company, to exercise his powers as director for the benefit of the company and to avoid a conflict between his own interests and those of the company.

A director cannot be relieved of his duty:o In the articleso In a contracto In any other way

The SCA suggested that no distinction should be drawn between the fiduciary duty of executive and non—executive directors.

It is in the existence of this duty that the company and its members in their best protection against exploiting their office.

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If as a result a director’s breach of his fiduciary duty the company suffers a loss or the director derives a benefit, the company may set the transaction aside and recover the loss or benefit from the director.

Basis of liability for breach of fiduciary duty The basis on which a director is held liable by his company for a breach of his fiduciary duty is

the general principle that a person standing in a fiduciary relationship to another commits a breach of trust if he acts for his own benefit or to the prejudice of that other.

Typical breached of directors’ fiduciary duties 1. conflict of interest – a director may obtain no other advantage from his office than that to which

he is entitled by way of director’s remunerationRobinson v Randfontein Estates – Robinson the chairman of the board, purchased a farm in his own name after his company, which was anxious to acquire the farm, could not finality with the sellers. He purchased the farm through an agent for R60 000 and thereafter sold it to the company for R 275 000. the AD held that R was not justified in making a profit from his office or in placing himself in a position where his personal interests conflicted with the duties arising out of his fiduciary position. He was consequently ordered t repay to the company the profit of R215000 which he had made. The decisive factor is whether the advantage arose from the Director’s occupation of his office, whether or not the company itself has been deprived of any advantage is immaterial.On the same principle a director may not, for personal gain, make use of information acquired in his capacity as director. Industrial Development Consultants v Cooley – the MD, Cooley, unsuccessfully tried to obtain a building for his company – the client was simply not prepared to enter into a contract with that company. The client approached C to form his own company to take up the contract, which C then did. Despite the fact that the client was not prepared to contract with C’s former company, C was nevertheless held liable to account to that company for his profits since the profits were made as a result of information which C obtained in his capacity as its MD.Atlas fertilizers v Pikkewyn Ghano, a MD was held to have breached his fiduciary duties where he sabotaged his company’s chances to obtain a contract and later, after severing connections with his company, subverted and took over that contract for his new company. In Sibex Construction v Injectaseal CC a provisional interdict was granted against I, because their directors who used confidential information to prepare tenders in competition with their former company, acted in breach of their fiduciary duties towards Sibex

As a general rule – a director, is not prohibited from serving as a director of other companies, apparently not even if the other company is a competitor of the first company, but he then occupies an almost untenable position in that he may not use or disclose confidential information of the one company for the benefit of the other.

2. Exceeding limitation of powers – a director has a fiduciary duty to observe limitations of the powers of the company as well as the limits of his own authority to act on behalf of the company. Should a director enter into a transaction on behalf of the company which falls beyond the capacity of the company, neither the company nor the other party can claim that the transaction is void. However, within the company, directors may incur liability to the company. Thus if a director made payments as a result of transactions beyond the capacity of the company (ultra vires) he may be called upon to compensate the company.

i. Estoppel – a director can bind his company even when not authorized to perform a particular act, provided it is a situation covered by estoppel or the Turquand rule.

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ii. Unauthorized Acts – a company can also recover any loss suffered as a result of unauthorized acts by a director on behalf of the company.

3. Failure to maintain and exercise an unfettered discretion Contractual limitation of discretion - a director must consider the affairs of the company in an objective manner. He must therefore not contract as director to act in a certain manner. For this reason an undertaking to vote in a certain way cannot be enforced against a director.In Coronation syndicate v Lilienfeld, the directors contracted with a non-member to call a general meeting and to launch a proposal for increasing the capital. The judge stated that the directors have a fiduciary duty to the company, and it is their duty to do what they consider will best serve the interest of the shareholders. If they have bound themselves to contract to do a certain thing and thus bona fide have come to the conclusion that it is not in the interests of the shareholders that they should carry out their undertaking, I do not think that the court would be justified in interfering with their discretion and compelling them to do what they honestly believe would be detrimental to the interests of the shareholders. Rule – the ability to act in the best interest of the company should not be fettered Exception to the rule – if the interests of the company required that a particular contract be entered into and one of the implications is that the directors must undertake to vote in a certain way, such a contract would nevertheless be valid – Fisheries development corporation v Jorgenson.Interest of others – the practice of appointing a director as nominee representing certain shareholders or other interests within the company is legally recognized but such nominee is nonetheless obliged to exercise his discretion without being fettered.

4. Failure to exercise his powers for the purpose for which they were conferredSpecific meaning – a director has a duty to exercise his powers for their true purpose Defeating of pre-existing majority – as the bd of directors must use its powers for their true purpose and not for e.g. frustrating the wishes of the majority, it follows that they will not be allowed to use their powers to allot shares in the company with the object of defeating the pre-existing majority.

Duty to act with care and skillDefinition of ‘care and skill’ – a director must exercise his powers and carry out his office bona fide and for the benefit of the company. To do so he must exercise the required degree of care and skill. Fisheries development – * the extent of a director’s care and skill depends to a considerable degree on the nature of the company’s business and any particular obligations assumed by or assigned to him. * a director is not required to have special business acumen or expertise, or ability or intelligence or experience in the business of the company. He is expected to exercise the care which a reasonably be expected of a person with his knowledge and experience. * in respect of all duties that may properly be left to some other official, a director, is in the absence of specific grounds for suspicion, justified in trusting that official to perform such duties honestly. He is entitled to rely the judgment, information and advice of management.

Basis of liability for breach of dutyA director who does not observe his duties of care and skill towards his company is liable to it in delict for damages, if in addition there had been a contract between the company and the director he could be guilty of breach of contract as well.

Conduct towards members No fiduciary duty towards individual members - There is no fiduciary duty that exists between a director and individual members of the company. It is a matter of impossibility for a director to

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maintain a fiduciary relationship towards both the company and the individual members. The interest of the company and members may diverge with the result that a director would be an untenable position if he were to observe fiduciary duties towards both.

The rights to deal shares – a director having inside information of company affairs at his disposal may buy and sell shares in his company for his personal gain without being required to disclose that information to the other party. There should be no unfair dealing on the part of the directors, that the directors did not approach the member but the member approached them, and that the transaction was concluded at the member’s price. The court should not interpret so widely as to absolve directors from all responsibility towards a buyer or seller of the shares of their company.

Prohibition on insider trading - S2 – it is an offence to trade with inside information. “Offence” means any person possessing inside information and using that information to trade in securities or financial instruments shall be guilty of an offence. “inside information’ means a specific or precise information which has not been made public and which is obtained and learned as an insider, and if it were made public would be likely to have a material effect on the price or value of any security or financial instrument. The fine is a fine of not exceeding R2 million or imprisonment for a period not exceeding 10 years or both. There is also a statutory civil action available to those who acted to their detriment because of inside information.

Contract between a director and a company Statutory provisions and common law rules – S234-241 Principle – due to his fiduciary position, a director may not place himself in a position where his interests conflict with those of the company. Should the director nonetheless contract with his company, the contract may, subject to contrary provisions in the articles, be voidable at the option of the company.

Avoidance of voidability – the voidability of the contract can be overcome either by the articles permitting contracts between a director and the company or by obtaining the approval on the contract at a general meeting after the full disclosure.

Statutory provisions for disclosure – S 234 -241 are designed to ensure that a director with a material interest in the more important contracts of his company discloses full particulars of his interest. The contracts concerned are those which: Are of importance in relation to the company’s business Are entered into:

o In pursuance of a resolution of the bd of directors, oro By one or more directors or officers authorized by the bd of directors to enter into a

particular contract or type of contract.

General written notice – a director may experience the problem that he is a member of a company or firm which contract with his company more or less regularly. Repeated identical disclosures can be avoided by a general written notice to the effect that he is a member of the company or firm and is to be regarded from then on as having interests in such contracts.

Failure to disclose – failure by a director to disclose his interest in these types of contract constitutes an offence and the contract may be voidable, while the profits may be recoverable from the director.

Time of disclosure – the declaration of interest must be made at or before the meeting of directors at which the question of entering into or confirming the contract is first considered. Must be given in

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writing and read at the meeting, unless each director present states in writing that he has read the declaration. A written resolution which circulates among the directors and concerns the types of contract is valid if the declaration of interest was made in the prescribed manner. When a director of officer who has been authorized specifically to enter into contracts on behalf of the company has a personal interest in the contract to be concluded by him, prior approval by way of a director’s resolution is required.

Manner of disclosure – audible utterance or tacit assent to and acceptance of assertation as to a director’s interest in a contract is considered proper disclosure.

Recording of a disclosure – all declaration of interests must be recorded in the minutes of the relevant meeting of the bd of directors and, unless copies of the minutes are circulated to the directors, the minute recording the declaration must be read out at the next meeting. A register of the declarations must be kept, and open for public inspection.

S 247 –Indemnity of DirectorsLimitation on indemnity – no provision in the articles or stipulation in a contract can validly indemnify a director, officer or auditor of a company against any liability towards the company which would normally result from their negligence, default, breach of duty or breach of trust. A general meeting may, notwithstanding S247, still ratify or condone certain breached of fiduciary duties by directors.

Indemnity against costs of litigation – the only indemnity which can still be provided for in the articles is indemnity against liability incurred by a director, officer or auditor in defending himself in any court proceeding which was decided in his favour.

S248 – relief by the court – the court may relieve from liability a director who has acted honestly and reasonably and in its opinion ought fairly to be excused when proceedings are pending against him for negligence, default breach of contract or trust. Special circumstances will have to prevail before the court will grants this relief.

S323 – personal liability – when it appears in winding-up, judicial management or otherwise that any business of the company was carried on:

Recklessly, or With intent to defraud creditors of the company or any other person, or For any fraudulent purpose

The court may declare that any person, who was knowingly a party to the carrying on of the business in that manner, is personally responsible, without liability, for all or any of the debts or other liabilities of the company.

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Study unit 12 – Representation of the Company

A company, as a legal person, cannot perform juristic acts. It must act through an agent when concluding a contract. If a principal gives an agent the authority to act on its behalf, the agent possesses actual authority and will bind the principal in acts which fall within the scope of the mandate given to him. Authority can be given expressly (in writing or orally) or by implication. Whether authority has been conferred is a question of fact.

Common law principle – company’s agent must have the necessary authority to bind the company as principal to the company. A person acting on behalf of another without authority as a rule does not bind the other.

Authorized actsActual authority – authorized acts by an agent signifies that the agent has the actual authority and will bind the principal (company)

Express authority – may be conferred either in writing or orally. The articles will confer expressed authority on Directors to manage the company. These powers by the bd of directors maybe delegated to MD.

Tacit authority – appointment of a person to a post in the company justifies inference that he possesses tacit authority to carry out acts associated with the office. The question of fact – depend on circumstances of each case and the conduct of the parties.

Unauthorized acts Adaptation and change – people often either have no authority to perform particular acts or their authority is defective. Common law principle – an agent with defective authority cannot bind his principal – it changed however.

The doctrine of disclosure - the disclosure of certain information provides protection for interested parties. The doctrine of disclosure ensures the publication of certain information relating to a company. It regulates corporate conduct and it is transparent. The articles and memo are public documents. When the company invites the public to subscribe to shares, it must issue a prospectus. The requirements of this doctrine are continuous in nature and are applied to the company in every phase of its existence. Financial statements, prospectus, memo and articles are public documents. Several classes whose interests are safeguarded or benefited by the publication of information relating to the company may be distinguished, namely potential shareholders or investors, shareholders, creditors, persons dealing with the company and the company itself.

Doctrine of constructive notice – Presumption – everyone dealing with the company is presumed to be fully acquainted with the contents of the public documents of the company. Knowledge of the contents is thus ‘constructed’ upon. The doctrine of disclosure forms the basis of the doctrine of constructive notice in the sense that the doctrine of disclosure ensures the publication of documents that provide certain information relating to a company (after publication called public documents).Doctrine of constructive notice is the statutory created doctrine of disclosure. Doctrine of constructive notice exclusively protects the company and has a dual function. Since everybody contracting with the company is able to ascertain what limitations have been placed on the authority of the agent to conclude intra vires acts in the articles, no outsider would be able to assert against the company that an agent has ostensible authority to conclude an act conflicting with an express limitation in the articles. The law assumes that sufficient publicity has been given to the limitation on

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the agent’s authority to bind the company by its publication in the articles. He would therefore not be able to rely on estoppel. The doctrine of constructive notice can preclude a third party from invoking the Turquand rule.

The traditional ultra vires Doctrine – it is common law rules which is group and called Ultra vires doctrine. Due to S36 the consequences of the ultra vires doctrine has been changed drastically.

Previously – the doctrine was developed similarly to a company created by a private act. It exists only for the objects for which it has been incorporated and only has the capacity to perform such acts as are indicated by its objects. The doctrine is further complemented by the doctrine of constructive notice in terms of which anyone dealing with a company is deemed to be fully acquainted with the company’s public documents. An act ultra vires the company was void and accordingly any contractual obligation beyond the scope of the company’s objects which was sought to be imposed on such a company was legally unenforceable. Any of the parties to an ultra vires transaction was entitled to raise its invalidity. Two classes of person were protected by the ultra vires doctrine, namely shareholders and creditors. They had the assurance that the funds of the company could not legally be applied for an ultra vires purpose. Not even the unanimous assent of all its members could validate an ultra vires act. If the company acted outside its capacity if was as if the company did not exist in law. Therefore the directors could not have had the authority to perform that act obo of the co because the company was deemed not to have existed to perform that particular act.

Currently - the act provides that the company possesses capacity and powers. The capacity is determined by the main objects clause a set out in the memo and included in its capacity are unlimited objects ancillary to the main object. The company also has plenary powers, including common powers to enable it to realize its main and ancillary objects, except for those specifically excluded.

In Ashbury Railway Carriage and Iron Co v Riche (1875) LR 7 (HL) 653, the memorandum of association of the company gave it the power to make and sell railway carriages. The court held that a contract entered into by the directors of the company to buy aconcession for constructing a railway in Belgium was void. The contract could not be ratified even if all the shareholders approved the contract. This is because building railway carriages is very different from building the railway itself.

In Attorney-General v Mersey Railway Co (1907) 1 Ch 81 (HL), the court explained that whether a particular contract falls within the capacity and powers of the company is a question of fact. If the main purpose of the company was to carry on the business of a hotel, it is clear that the acts necessary to achieve that purpose, for example, the purchasing of furniture and the hiring of staff are intra vires.

Capacity and authority – the company has limited capacity with juridical determines the limits of its exercise and the ambit of the authority of its agents. The authority of agents is usually set out in the articles. Legislature expressly limits the powers of a company to those powers which enable it to realize its main and ancillary objects. Any limitation on the authority in the articles must be subject to the capacity of the company. Therefore the articles only apply to intra vires acts notwithstanding S36 nobody can legally obtain authority to conclude an ultra vires act.

S36 – acts ultra vires the company not void – no act of a company shall be void by reason only of the fact that a co was without capacity or power so to act or because the directors has no authority to perform that act obo the co by reason only of the said fact and except as between the company

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and its members or directors, ort as between its members and directors, neither the company nor any other person may in legal proceedings assert or rely upon such lack of capacity or authority. The capacity of a company is the sphere of actions that a company may legally perform, because it falls inside the scope of the main objects of the company.EXAMPLE – suppose the main object of cycle’s Pty ltd is to manufacture bicycles. The directors enter into a contract obo the co for the purchase of a yacht. In terms of common law the co would not have been bound to the contract for 2 reasons, 1 because in law the co was deemed not to exist for the purposes of the ultra vires act, and 2 because the directors therefore did not have the authority to bind the co. However S36 provides that a contract despite that the fact that it is beyond the capacity of the co and therefore falls outside the authority of the directors, is no longer void, the co is thus bound by the contract of the operation of S36. S36 specifically suggests that there be another reason why the directors may not have the authority to enter into this contract. EXAMPLE – suppose cycle’s Pty ltd provides that 2 named directors must sign all contracts obo cycle’s Pty ltd. If only A signs then the co will not be bound because a 3rd party is deemed to know that A and B must sign all contracts. – Doctrine of constructive disclosure. It should not be confused with the Turquand rule – here there is a not internal requirement, but an express limitation. Also the Turquand rule only applies to intra vires acts as directors can in principle only be ‘authorized’ to act intra vires.

You should note that the doctrine of constructive notice has not been abolished by section 36, but has become irrelevant as far as the capacity of the company is concerned. Further, it should be understood that the application of section 36 does not depend on whether the other contracting party acted in good faith or not. Thus, even though the other contracting party may have known that the contract fell outside the capacity of the company or that thedirectors had no authority simply because the contract fell outside the capacity of the company, that person will still be able to hold the company liable to the contract. It has been said that section 36 gives the other contracting party too much protection at the expense of the company. Note that the ultra vires doctrine has not been expressly abolished. If section 36 applies, an ultra vires contract will be valid. If section 36 does not apply, an ultra vires contract is still void. Section 36 does not cause an ultra vires act to become intra vires. Thus, the application of section 36 alters the consequences of concluding an ultra vires contract. Remember that the memorandum and the articles of association constitute a contract between the company and its members. The objects clause, which determines the capacity of the company, is found in the memorandum. If the members hear about a proposed ultra vires contract before it is concluded, they may interdict the company from acting in breach of its contractual relationship with them. However, if the ultra vires contract has already been concluded, the contract will be binding on the company. An action can be brought against directors who have exceeded their powers by concluding a contract, on behalf of the company, that falls outside the capacity of the company on the basis that the directors have breached their fiduciary duties. Since these duties are owed to the company, the action will have to be brought by the company. It is possible that the members could make use of a derivative action to bring an action on behalf of the company for the damages suffered by the company as a result of the directors' breach of their fiduciary duties.

Turquand ruleInternal requirements – the articles provide for the potential authority of the agents. The bd of directors or the MD’s mandate may be dependant on certain internal requirements e.g. acquiring the prior approval of the GM or that certain powers may be delegated to an individual director. A person that reads the articles would not b e able to ascertain from the articles whether the GM gave its approval, or whether the necessary delegation has in fact taken place. If the prerequisites were met, no problem would arise since the agent would then bind the co in terms of his mandate. If the requirements were lacking, or in the case of internal irregularities, the mandate would be defective.

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In Wolpert v Uitzigt Properties (Pty) Ltd 1961 (2) SA 257 (W) the articles of the company provided that the board of directors could authorize a person to sign promissory notes on its behalf. Clearly the board could authorise anyone to sign promissory notes on its behalf.In Wolpert, one of the company's ordinary directors signed promissory notes on behalf of the company without authorisation and the question arose whether the outsider was entitled to assume that the director was authorised to do so. The court found that an outsider with express or constructive notice of the articles could assume that someone was authorised to sign the notes, but not that a specific person was so authorised. The Turquand rule only comes into operation if an internal formality is required.

Also, for the Turquand rule to come into operation the person who acted must have possessed actual authority, which was subject only to an internal formality. In Tuckers Land and Development Corporation (Pty) Ltd v Perpellief 1978 (2) SA 11 (T) the court found that third parties may not automatically assume that a branch manager or an ordinary director has authority to act on behalf of the company. The company may then still escape liability on the ground that the person had no authority.

Limitation on the duty to inquire – in order to keep the 3 rd party’s duty to make inquiries within reasonable bounds and to restrict it to matters which were granted publicly, courts formulated the Turquand rule. In terms of this rule –each outsider contracting with the co in good faith is entitles to assume that the internal requirements and procedures have been complied with. The co will then be bound to the contract even though all matters of internal management and procedure have not been complied with.

Exceptions to the rule – it will not apply a. where the outsider knew of the irregularity and was therefore in bad faith, orb. Circumstances were suspicious. – depends on the facts of each case.

If articles provides for a special resolution to be passed and it isn’t, 3rd party cannot rely on the Turquand rule, and a special resolution is a public doc and the 3rd party should be aware that the resolution was not passed.

Estoppel not the basis – the principles of estoppel does not form part of the Turquand rule. The Turquand rule is an independent legal rule which constitutes a common law exception to the rule that an agent with defective authority cannot bind his principal. Since its not based on estoppel, the 3rd party is protected even if he was ignorant of the enabling provisions in the articles.

Estoppel and ostensible authorityEstoppel only applies when the agent did not have actual (express or implied) authority to bind the company. Take particular note of the fact that the misrepresentation (i.e. that the agent had the necessary authority when, in fact, he or she did not) must have been made by the company as principal. This is very important. It is not sufficient for the agent to have made the misrepresentation. This rule is logical: if Peter were to tell you that he is the authorised agent of a particular company and it transpires that the company has never even heard of him, the company will not be bound to any contract concluded by him on their behalf even on the basis of estoppel. In other words, the misrepresentation that the agent had the necessary authority must be made by the company and not the agent. If, however, the company was aware of Peter's actions and never did anything to stop him, estoppel may apply.

Freeman case – K and H formed a co to purchase a piece of land to subdivide it into lots and dispose of it little by little. The bd of dir (K, H and a nominee) although empowered by the articles to appoint a MD, did not. With the full knowledge of the bd K acted as MD and entered into

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transactions obo the co. K gave certain instructions to the plaintiff (land surveyors and architects). Upon being sued for their fees by the firm, the co resisted the claim on the grounds that K was not authorized to bind the co and that the firm could not rely on the principle of estoppel because they had not read the articles. The ct decided that estoppel could not only arise from the articles, but also, as in this case, because the bd of dir allowed K to act as MD and in this manner culpably represented that he was entitled to act.

Ostensible authority – ct held that the co was estopped from denying K’s lack of actual authority. Ct held that he had ostensible authority as the bd of dir had a mandate to appoint a MD, which they in] fact never did. However, by allowing K to act as a MD they therefore represented that the necessary authority existed and was the company therefore bound to the transaction concluded by K.

Ratification – it should finally be notes that an intra vires contract concluded by someone who does not have expressed, ostensible or tacit authority, will still bind the co if it is ratified by the bd of dir or the GM. If cases were the Turquand rule applied, the co will also be able to rectify the defective authority by ratification.

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Study unit 13 – shares and shareholders and members

A company having share capital initially obtains its funds by issuing shares to the members. The members of a company stand to lose no more than the amount contributed by them by way of the shared they have acquired in the company, hence the word “ltd” in the name of the company. Subject to the provisions of the memo and articles, there is no statutory limitation on the maximum number and value of the shares that a co may issue. The various types and classes of shares are primarily regulated by the co itself. Shares, debentures and certain derivative instruments like options are collectively called ‘securities’.

Types of shares S52 – requires that the memo states the types of shares into which the share capital is divided, i.e.1. whether the shares are of a fixed amount, namely par value shares, or2. Whether they are fixed in number, namely n o par value shares. All shares, irrespective of the class, must either be shares of par value to shares of no par value. Shares may be converted into the other. PV share has an indicator known as its nominal value. A NPV share carries no such indicator.

Authorized and issued share capital The memo must state the amount of the authorized share capital. For PV shares the authorized shares must be divided into shares of fixed amount and the number if shares in the case of NPV shares. Share capital is the amount of money/capital raised by the issue of shares. Authorised share capital is the amount of capital a company is legally allowed to raise through issuing shares. The authorised capital is made up of the amount of capital, divided in par value shares, as well as the number of no par value shares. This means that authorised share capital is not necessarily an amount of money. In the case of par value shares, the memorandum may provide: ``the capital of the company is R1 000 divided into shares of R1 each.'' However, if a company has only no par value shares, the authorised capital will be a number of shares without any indication of an amount of money: ``The share capital of the company is 1 000 shares of no par value.'' Where both par value and no par value shares are used, the authorised capital will be a combination of a sum of money and a number of (no par value) shares.

Authorised share capital must be distinguished from issued share capital. Issued share capital is the total of the share capital account (equal to the par value of all issued par value shares) and the stated capital account (reflecting the consideration received for no par value shares). Any premium received on par value shares is reflected in a share premium account which, apart form certain exceptions to be discussed in study unit 17, is treated as share capital. It is possible to have more authorised capital than issued capital.

Although the Companies Act does not define the term ``share'', it is clear that a share is a form of property (it can be bought, sold, used as security, etc) denotes a financial stake in the company (entitling its holder to dividends and to participate

in a distribution on liquidation) entitles its holder to membership rights (egg voting rights)

Shares in a company need not all be of equal value. Nor is it necessary that equal rights and privileges should be attached to all shares: some may have preferential rights, either to capital, dividend, or both. Shareholders may even, subject to the provisions of the Act, have peculiar privileges in the matter of voting or in other respects. The division of shares into various classes is thus based on the nature of the rights they confer in terms of dividends and participation in distribution on liquidation. Although we usually think of preference shares in terms of a preferential right to a fixed dividend, a share could also be called a preference share because it enjoys a

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preferential right to repayment of capital in a winding-up. Mineral Products Ltd has such a class of preference shares. A company may differentiate between its shares in various ways. For instance, a company can identify each class of shares by means of a letter of the alphabet (e.g. A class shares enjoy different rights from B class shares). Ordinary shareholders share in company's risks andprofits. When the company becomes profitable, the ordinary shareholders receive more dividends than preference shareholders, because the preferential dividend is fixed. However, if the company does not perform well, the preference shareholders will still receive their fixed dividend, whereas the ordinary shareholders may end up receiving nothing. This is why ordinary shareholders bear a greater risk and why they also have voting shares while preference shareholders do not. Generally speaking, voteless shares are not allowed. S194 allows the limitation of the voting rights of preference shareholders, but at the same time states the circumstances in which voting rights of preference shareholders cannot be denied. An example would be a resolution for the winding-up of the company. Winding-up of the company will affect the rights of all classes of shareholders, including preference shareholders. In Utopia Vakansie-Oorde Bpk v Du Plessis, the following questions arose regarding the application of S 194:

Is the preferential dividend in arrears and unpaid when no dividend has been declared, or only when a dividend has been declared but not paid?

When can a proposed resolution be said to affect the interests of the preference shareholders?

The court held that, in the context of voting rights, ``in arrears and unpaid'' means either that the dividend has not been declared or that it remains unpaid even though it may have been declared. A resolution could only affect the rights attached to shares if it caused a variation of those rights by changing, prejudicing, or affecting their extent or content. The court held that the concept of ``interests'' was much wider than that of rights.

Sometimes the articles of association are not clear on the rights of preference shareholders. The courts have developed certain criteria for ascertaining the rights of preference shareholders. If a preferential dividend is not declared in a particular year, it is assumed that the dividend is cumulative or carries over to the following year. This is the position unless the articles provide that the reference shares are not cumulative. In the case of Mineral Products Ltd, the articles provide for one class of cumulative preference shares and we can therefore assume that the articles state (at least by implication) that the other classes are not cumulative.

However, our courts have said that the terms on which preference shares are issued are generally regarded as complete. For this reason, preference shares will only be regarded as participating (i.e. able to share in a dividend in addition to their fixed percentage dividend) if it is expressly provided. The same is true regarding rights to capital distribution. Where the articles confer only a preferential dividend it is assumed that the shares do not enjoy priority over ordinary shares when it comes to the repayment of their capital contribution upon winding-up. Also, where the articles state that preference shareholders are entitled to be repaid their capital contribution in priority to other classes of shares, they will not be entitled to share in any surplus distribution to shareholders.The redemption of redeemable preference shares under section 98 must not be confused with the buying back of shares in terms of section 85, which is discussed in study unit 17. In the case of redemption the Companies Act protects creditors by regulating the source of money from which the shares may be redeemed. Redemption out of the proceeds of a fresh issue of shares cannot prejudice creditors, because new share capital replaces the old share capital returned in redemption of the old shares. If distributable profits are used, the company has to create a capital redemption reserve fund to replace the cancelled share capital. This fund is treated similarly to share capital. The term ‘share’ denotes that the holder contributed to the share capital of the co – and does not refer to a right of ownership in any part of the net assets of the co. shares have been described as simply rights of action entitling their owner to a certain interest in the co, its assets and dividends.

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In the capacity as a party to this legal relationship there accrue to the shareholder:1. rights, mainly the tight to dividends when they have been declared and the right to

participate in a distribution on liquidation, and 2. duties, mainly to honour the provisions of the articles.

S91- provides that the shares which any member has in a co shall be movable property. Moveable property may be corporeal or incorporeal. A share in the co is not a corporeal object but represents a complex of rights and duties. A share is therefore a moveable incorporeal property. Moveable incorporeal property is transferred in ownership through cession. A co may in its memo or articles divide its share capital into various classed of shares and set out the rights attached to the various classes of shares.

Main classes of shares Principle – all shares of the same nominal value enjoy the same rights 1. Preference shares – it can only be found where another class of shares exists in relation to

which they carry some preferential rights. The distinguishing feature is that they usually enjoy a preferential right to dividends. The memo or the articles may make the provisions and conditions for the issue of the following specific types of preferential shares:

a. Participating preference shares carry the right to both fixed percentage preference dividends as well as to a share in the residual distributable profits.

b. Convertible preference shares carry the right usually after a stated date, to be converted into ordinary shares.

S98 – makes provision for the redeemable preference shares, which may be regarded as a hybrid form of shares and debentures incorporating features of both. It is merely a share that can be redeemed by the company under certain circumstances. It may be redeemable either by option of the co or by a certain date. Cumulativeness in respect of dividends is a characteristic of preference shares. This implies that the preference shares are entitles to a dividend in respect of each financial year. The articles may provide that preference shares shall not confer the right to vote except: when the preference dividend or any redemption payment remains in arrears and unpaid or, when any resolution is proposed which directly affects the rights attached to these shares or the interests of their bodies.

2. Ordinary shares – only come into consideration for a dividend after provision for the dividend on preference shares has already been made. There is no limit to the amount of the dividend which the ordinary shareholder can receive other than the provisions of S90 and the rights conferred on other classes of shares. On liquidation the ordinary shareholder is regarded as a residual heir after creditors and preference shareholders have been repaid.

3. Deferred shares – it only comes into consideration for a dividend after a prescribed minimum dividend has been paid to ordinary shareholders. They are usually issued by way of remunerating promoters for services rendered in the information of the co or to person who have sold assets to the co.

Meaning of class rights and their variation – the division of shares into various classes is based mainly on their rights in regard to dividends, capital distribution and voting power. These rights may be set out entirely or part in either the memo, articles or members’ or directors’ resolution governing an issue of shares made by virtue of an authorisation in the articles. Where shares are divided into different classes and the rights of a particular class are specified in the memo, such rights may only be varied if the variation is not in conflict with the memo in regard to such variation. Where the class rights are set out in the articles they may be similarly varied. The articles usually specify that any variation of class must be approved beforehand by the particular class of shareholders. Where the rights attached to a particular class of shares have been varied by virtue of power contained in the memo or articles after the required written consent of the prescribed proportion of shareholders of

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the class, or the sanction of a resolution at a class meeting, has been duly obtained, a dissenting shareholder still has recourse to the court. The holder of a share of the particular class who did not consent to or vote in favour of a resolution for such variation may apply to the court for relief. If the court finds that the variation of class rights is unfairly prejudicial, unjust or inequitable it may make such order as it thinks fit.

Debentures The power to borrow money is one of the common powers of a co. such powers may be expressly excluded or qualified in the co’s memo. A co with share capital may not exercise any borrowing powers until the Registrar has issued a certificate entitling the co to commence business. The issue of debentures is mostly used by a co for obtaining long-terms loan funds, which means that the amount to be borrowed is divided into smaller units. This has the effect that smaller amounts are obtained from more lenders, for the lenders it has the benefit that debenture is more easily transferable than the total loan amount. The term debenture denotes a document or certificate issued by a co and designating itself a debenture which acknowledges the indebtedness of a states sum of money, and specifies rate interest, the payment dates and conditions of repayment.

A co may create and issue debentures only if so authorised by its memos ort articles. No debenture or debenture certificate may be issued unless the conditions of the debenture are stated thereon. Debentures may be described as secure or unsecured. A debenture is only a particular kind of creditor. He participates in the profits of the co. a denture holder receives interest at a predetermined rate which is payable at fixed times, irrespective of whether the co earns sufficient profits. A debenture does not confer voting rights. A co may issue debentures which are convertible into full paid shares at the option of the holder. Debenture holders are secured creditors, a prospectus must be issued. The reason this that debentures can readily be used to obtain funds from the public. Every co must keep at its registered office registers of pledges, bonds and debentures holders.

The word debenture refers to the document which is issued by the company as proof of the right to reclaim a loan- it is an acknowledgment of debt. A debenture is a security, that is, it is an investment in a company that can be transferred like a share. Debentures are often not paid back during the existence of the company. A debenture holder who wants to get his or her investment back will sell the debenture to someone else (who will then become the debenture holder and collect the interest). A company can have different classes of debentures, issued for different periods and at different rates of interest. The main distinction is between secured and unsecured debentures. In the case of default by the company, the holders of secured debentures have a right to be paid out of the proceeds of the specific property used as security. Although debenture holders are creditors of a company and are therefore not entitled to attend meetings and to vote, shares and debentures are treated as similar for certain purposes. For example, the same rules apply when shares and debentures are offered to the public.

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Membership of a coCo with share capital the member is normally the person whose legal relationship with the co arises by virtue of his shareholding in the co. therefore ‘shareholder’ and ‘member’ can refer to the same person. A person can become a member of a co with share capital:1. By subscribing to the memo, or2. By agreeing to become a member if the co and subsequently having entered in the register of

members. A person’s membership is terminated by:1. transfer of all his shares to another and deletion of his name from the register by the members, 2. the sale and transfer of shares by the co according to articles and the deletion of his name from

the register of members, or3. the dissolution of the co after liquidation.

Any person is normally capable of becoming a member of a co. only a person having contractual capacity an undertake to become a member himself. Where a person has limited capacity (child over 7) such a person must be assisted when undertaking to become a member, where a person has no contractual capacity such as child under 7 or mentally disturbed person, he cannot undertake to become a member.

The minimum number of members for a public co is seven, while pvt co can be formed with only one member. Where a private co is formed with 2 or more members, the minimum is 2. S66 – if a member is aware that the co is functioning without minimum number of members for a period of 6months such member is severally liable to the creditors for all debts contracted by the co.

Nominee shareholder – a person nominated or appointed by another to hold shares in his name on that other’s behalf. The nominee is therefore simply an agent with limited authority, holding share in name only obo his nominator or principal from whom he take instructions. A person becomes a member of a company when he or she is registered as a shareholder. A registered shareholder is a shareholder who is registered as the owner of shares in the register of members. In listed companies especially the registered shareholders are often not the real beneficial owners, but instead nominee companies holding shares on behalf of the real beneficial owners. As a result, many companies previously did not know the identity of their shareholders. To prevent underhand dealing such as insider trading, the Companies Act makes it compulsory for nominee shareholders to disclose the fact that they are holding the shares on behalf of someone else. Nominee shareholders can also be obliged, on request, to disclose the name of the person on whose behalf they are holding shares. In addition, companies are obliged to publish the names and holdings of beneficial owners of 5% or more of the company's shares in their annual financial statements. The distinction between nominal and beneficial shareholders is important in that the company regards the registered shareholder as its member and not the beneficial shareholder. For instance, only the registered member will receive notices of and be able to vote at meetings. The nominee has to exercise the membership rights of the share according to the instructions of the beneficial owner and pay over any dividends to him or her.

Every co must keep a register of members which may also be in electronic format in one official language. Usually kept at the registered office or where compiled

Value of register - such information is accepted as correct until the contrary is proved. 3rd parties are entitled to rely on the register if they do business with the co.

Uncertificated shares – shares certificates can be handed in at a depository institution called the participant, for custody. The name of the owner who handed the shares certificates in for custody is

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then entered into a securities account, together with the shares he is entitled to. Any transfer of shares is affected merely by changing the name iof the particular person in the records of the participant.

Share certificates and share warrantsShare certificates – every member of a co is entitled to a certificate for his shares. Such a certificate must be ready for delivery within 2months after allotment or within 6weeks after an instrument or transfer has been duly lodged.

Share warrants – a co, if authorized by its articles, can issue share warrant in respect of fully paid up shares. The share warrant certifies that the bearer thereof is the person entitled to the share mentioned. The share warrant is transferable by mere delivery and is a negotiable instrument and a person who acquires possession thereof in good faith and in his own right becomes the legal holder thereof. Rule – companies may at present not issue share warrants due to exchange control restrictions.

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Study unit 14 – shareholders’ remedies

Rule in Foss v Harbottle Principle of majority rule that is to say the affairs of a co are decided by the majority of votes in that cop. The minority is obliged to subject itself to the wishes of the majority. As long as the majority acts lawfully, the court will refuse to interfere in the management of the co’s affairs at the instance of a minority, even if the rights of the minority were infringed.

Aggrieved person must institute action Principle – if the conduct by the majority is not a lawful exercise of powers, the aggrieved person must act. Therefore, if a co has not been wronged, it must itself act to have the wrong redressed, a member or a group of members cannot normally do so for the co. this principle exists with the co having a separate existence with its own rights which consequently has to enforce itself and in its own name.

Rule in Foss v Harbottle The rule is based on the separate legal personality and majority rule. Together they amount the this: when a wrong is done to the co, it is the co that must institute action, if the co fails to do so, a member may, in certain circumstances, institute action obo the co, but even in these circumstances a member cannot act if the wrong concerned is one which a simple majority could condone or ratify. The rule in Foss doesn’t protect minorities but is rather a majority rule. The minority is however, not subject to the unlawful exercise of majority rule.

Rights of membership – principle – a member of a co in his capacity as member acquires certain rights from the constitution and co’s act which he can enforce against the majority acting as the co. these rights are known as individual membership rights and the majority cannot divest him of these rights.

Range of legal remedies: 1. the majority rules, members thus have no recourse to the courts iro internal irregularities and

wrongs to the co which can be ratified by a simple majority,2. wrongs to the co which cannot be ratified by means of an ordinary resolution may be redressed, 3. The co itself must act against such wrongdoers, although in certain circumstances, a member may

enforce the co’s rights by way of derivative action. This action is so called because the member derives his right of action from that of the co.;

4. a member can institute an individual action – personal action – to enforce individual membership rights – those rights which he enjoys under the corporate constitution or on other grounds and which refer to his membership as such. These rights belong to him personally and are not subject to majority rule. This action can also be instituted in the form of a representative action obo himself and those who are in the same position as himself to enforce the rights of such group.

Personal action – when the conduct of the majority exceeds the permissible limits, a member has the choice of instituting a personal action against the co. under certain circumstances.

Grounds for personal action:1. Breaches of the rights if a member which he derives from the memo or articles in his

capacity as member – RT to exercise a vote.2. Illegal conduct and conduct in breach of common law which relates to his membership rights

and which cannot be ratified by an ordinary resolution. 3. where ‘fraud on the minority’ is committed.

Fraud denotes an abuse of power. The injured persons need not be a minority, it may be the co or class of shareholders

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Derivative actionCommon law derivative action – it refers to 1. wrongs done to the Co. and b. the fact that the co cannot or will not act against those who wronged. In these circumstances a derivative action against the co may be instituted. Such an action will have to be instituted against the wrongdoers by somebody acting obo himself and all the shareholders other than the wrongdoers. The co, being unable to act as plaintiff, must be joined as nominal defendant so that it is party to the proceedings and any order of the court may be applicable to it. It is accepted that a derivative action may be instituted if:

1. unratifiable wrong has been done to the co, 2. The co cannot or will not institute the action because the wrongdoers control the co.

Classes of unratifiable wrongs – it is the same as personal action1. Acts in breach of the rights of the co as set out in the articles and memo. E.g. ultra vires2. unlawful conduct and conduct in breach of common law which is not ratifiable by ordinary

resolution and which amounts to a wrong to the co. e.g. theft of co funds3. ‘fraud on the minority’

The common law derivative action is negatively affected by the serious defect that a member has to conduct the case at personal risk. Should he be successful, the benefits accrue to the co, whilst he cannot recover his cost and expenses should he fail he would be liable for all costs. The problem is that the statutory derivative action applies even in respect of ratifiable wrongs, thereby preventing the necessity to distinguish between wrongs that can be ratified and those that cannot be ratified.

Statutory derivative action - S 266 facilitates the institution of proceedings obo the co. without getting personally involved in litigation against wrongdoers, the member can initiate proceedings for the appointment of a provisional curator al litem by requesting the co, in writing to institute proceedings against the wrongdoer within one month and at the same time, informing the co that if the co fails to institute proceedings, then the court will be asked to appoint a provisional curator. If the co fails to institute proceedings the member may make an application to the court for an order appointing a curator to institute action obo the co. the court has to be convinced that 1. the co has not instituted proceedings, 2. there are prima facie grounds for such proceedings and 3. an investigation is justified. The court has discretion to appoint a curator. The provisional curator investigate and reports to the court and the court decides whether to appoint a curator to institute proceedings.

AvailabilityS266 – a statutory derivative action may be instituted:

1. if a co has suffered damages or loess or has been deprived of any benefit as a result of a wrong, breach of trust or faith that has been committed

2. if the co has not instituted proceedings to redress the wrong3. if the worn or breach has been committed by a director of officer of that co or by past

director while he was a director of officer of the co, and4. Irrespective of whether the wrong was ratified.

Comments on S266 – - only wrongs where the co has suffered damages or has been deprived of a benefit as a

result are covered by this section- Only certain types of wrongs are covered- The action is only available if the co has not instituted proceedings. - The action is only available if damages or loss have been caused by a director or officer

of that co. or past directors of officers, whilst in office.

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S266 did not abolish the common law derivative action. It solved the following problems:- the applicants risk to pay costs is reduced since he is not personally involved in the

proceedings against the wrongdoer. - Since the provisional curator has the investigative powers of an inspector, information is

more readily available.- The process can be initiated irrespective of whether the conduct was ratified- The co is protected against annoyance as security for costs may be claimed from the

applicant and the court has to decide, whether proceedings against the wrongdoer are desirable.

Relief from oppressionMinorities are not necessarily defenseless against majority rule in terms of common law, the availability of the personal action is likewise flawed by uncertainty due to confusion regarding the Foss case. S252 was enacted for this reason.S252 – a member may under certain circumstances seek relief from the court if he has been prejudiced by the co. the common law personal action is not abolished by S252. a member can approach the court for relief under the following circumstances:

- if he complains that a particular act or omission of a co, or- the affairs of the co, are being conducted in a manner which is- unfairly prejudicial, unjust or inequitable- to him or to some part of the members of the co.

the court may then:- if it is satisfied of the above, - and if it considers that it is fair and equitable, - make such order as it thinks fit,- with a view to bringing to an end the matters complained of.

Only person who are formally registered as members of the co may apply for relief. Such members must act bona fide and should not abuse the provisions of this section in order to enforce payment as creditor. The company’s conduct must have prejudicial effect on the applicants in their capacity as members and not in their capacity as directors, officers, employees or creditors.

S252 is an additional remedy which does not encroach on majority rule to the same extent as the personal action, as it provides relief for oppressed shareholders without necessarily overruling the majority’s decision. The conduct about which the member is complaining must be an act or omission of the co of which he is a member. S252, a member may rely on an isolated act and there is no need to prove continuous conduct. The conduct must be unfairly prejudicial, unjust or inequitable to the member. S252 brings the availability of the remedy in direct relation to certain types of special resolution. Not all acts affecting a shareholder prejudicially will entitle him to obtain relief under S252. as a minority shareholder he is bound by majority rule and cannot obtain relief merely because he is constantly outvoted. S252 is aimed at providing an alternative remedy to winding-up the co on the basis that is just and equitable. A court will therefore be unwilling to order the winding-up of a co if the other shareholders wish to continue with the business and the grievances of the minority shareholder can be addresses equitably, justly and effectively under S252. to ascertain whether it is just to grant relief, all surrounding circumstances must be considered. The court still has the discretion whether or not to grant relief. The applicant must indicate the type of relief sought and the court must be satisfied that

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such relief will remedy the complaint in such a manner that the co can then continue to function properly.

Appointment of inspectorsAn inspector can be appointed to investigate the affairs of a co, while in others he is obliged to do so. It is within the Minister’s discretion to make the appointment in the following circumstances:

- when 100 members or members holding 5% of the issued shares make such an application

- when there are circumstances suggesting: o that the co was formed for a fraudulent or unlawful purpose, or the business of

the co is being conducted with the intent to defraudo that the founders or managers of the co have acted fraudulently or unlawfully

towards the co or its members, oro that the members have not been given the information in respect of the co which

they might reasonably expect.

The minister is obliged to make the appointment if:- the co adopts a special resolution that its affairs should be investigated, or- the court orders that the affairs of the co should be investigated.

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Study unit 15 - Divisible profit and dividends

Rule – dividends may not be paid out of capital, the consequence is that dividends must only be paid out of profits. A clear distinction needs to be drawn between divisible profit and profit available for dividend:- divisible profit (legal concept) refers to the profit which the law allows the co to distribute to

shareholders by way of dividends- profit available for dividend (Accounting concept) has been held to mean that part of the profit

which the directors regard as distributable after making provision for past losses, for reserves, and for other purposes

Profit available for dividend The income statement of a co involves the determination, for the financial year, of:

- operating income- net income- unappropriated income.

To show the interaction between the income statement and the balance sheet, the accounting equation may be stated as follow:Issued share capital +non-distributable reserves +retained earnings long term + loan funds =fixed assets +net current assets.

In this equation:Retained assets = unappropriated income plus distributable reservesLong term loan fund = debentures plus other long term loans, andNet current assets – current assets plus current liabilities

The articles usually authorize the directors to transfer such portion of profits as they think fit, to reserves such as the federal reserve, and to use them for other purposes. The ‘profit available for dividend’ is determined in accordance with the standards and conventions of the professional accountant and auditor, and thus largely forms the basis on which dividends are determined.

Divisible Profit Dividends could not be paid out of contributed share capital and in determining the extend of the divisible profit, 2 rules were used. These rules were the ‘all surplus’ rule and the ‘earned surplus’ rule. In terms of the ‘all surplus rule’ any increase in shareholder’s equity can be declared as a dividend while the ‘earned surplus rule’ provided that only the profit out of operations could be declared as a dividend. These rules could also be used in combination by the underlying principle was still that contributed share capital must remain intact.

Certain common law rules that apply these principles are:1. the co’s annual financial statements as a whole were to be taken into account in determining

whether profit was divisible;2. dividends could be distributed out of revenue profit without first providing for losses or

depreciations of fixed assets3. losses incurred in previous years could be disregarded in the computation of divisible profit,

and4. A realized profit on the sale of fixed assets was available for distribution by way of dividend.

Companies Act

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The co’s act now provides for the acquisition of its own shares by the co. this means that the common law principle of capital maintenance and the application of the dividend rules based on this principle were also amended. S90 (2) a co can now make a payment to shareholders, but subject to the provisions of S90 and authorization in the articles. It should be noted that S90 does not prescribe any majority for the co to make the payment. In terms of the principle of majority control, an ordinary resolution is therefore required. S90 also does not necessarily make the common law rules redundant.

General rules on dividend distribution A co has the power to distribute its divisible profit by way of dividend unless, as in the case of S21 co, its memo prohibits the payment of any dividend to its members. The co must also look to the provisions of its own articles. The articles may also prohibit the distribution of realized profits on fixed assets either expressly or by implication. The co in annual generally meeting is usually given the power to declare final dividends. Unless the articles provide otherwise a co is under no obligation to declare a dividend and it need not distribute all or even any available divisible profit to shareholders. The directors generally have the power, before recommending any dividend to a general meeting, to transfer from net profit such sums as they deem desirable to reserves. A shareholder is only entitled to a final dividend provided that profit is available for dividend and also that such dividend has in fact been declared in the manner provided by the articles. Upon the declaration of a dividend the shareholders can claim payment thereof from the co. The articles usually also authorize the directors from time to time to pay such interim dividends as appear to them to be justified by the profits of co.

Unless the articles provide otherwise, a dividend must be paid in cash. If the co does not have sufficient cash resources for this purpose it may borrow the necessary amount. Where, however, the articles so authorize, divisible profit may be ‘distributed’ by means of the issue of fully paid capitalization shares. In a capitalization issue no cash payment to shareholders takes place, instead the issued capital is increased, in other words profit which was available for distribution us used to pay the issue price of unissued shares and the fully paid shares are then issued to the shareholders.

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Study unit 16 – the offer and transfer of shares

The main attractions for investors in a co are the limitation of the risk to which they are exposed as regards the investment, continued existence of the co irrespective of changes in its individual shareholders, the transferability of shares enabling shareholders to realize their investments freely and a regulated structure logically dividing the functions of the co between directors who are charged with management and the shareholders in general who exercise ultimate control through voting rights.

Doctrine of disclosure which is based on the assumption that if publicity is given to sufficient information relating to the co whose shares are offered, investors will be able to look after their own interests by making an informed decision on the merits of an offer. However, it is also accepted that not everybody needs to be protected by this disclosure. Categories of people that do no need this protection are, people who can, due to various factors, fend for themselves and those who already have or can readily obtain the information, either because of a relationship with the co concerned, or because of the nature of the shares being offered. The category of people that ‘need to know’ is termed ‘public’ in co law.

The initial process whereby the co makes investment opportunities available to investors and then receives the proceeds is termed primary market’. An investor can trade his investments. This transaction, where the investor and not the co gets the proceeds, is the ‘secondary market’.

Offers in the primary marketThe co’s act provides a set or rules to determine whether disclosure in respect of a particular offer is required, and to what extent that disclosure should be. S143 – it is an offence to offer any shares to the public other than in accordance with the provisions of the Act. The 3 requirements are:

1. there must be an offer2. for the subscriptions or purchase3. of shares4. made to the public

If these requirements are met, the addressees are entitled to information as stipulated in the Act.

Offer is aimed at the conclusion of a particular type of contract and that an invitation to do business in not an offer. The first requirements can therefore not be avoided by making an invitation instead of an offer. The offer is aimed at concluding a contract for subscription or sale of shares.

When a co is to raise funds for itself, it will offer its own unissued shares for subscription or invite investors to make offers for it for those shares. The procedure if subscribing for shares requires an application by the applicant to take up a certain number of shares by means of a completed application form accompanied by payment for the shares. This is followed by an acceptance of that offer by the co by means of the allotment to the subscriber of all or some of the shares applied for. Because the shares are not yet in issue, the contract is one of subscription not one of purchase.

The direct offer by the co to investors carries with it the risk that all the shares will not be taken up and the co may therefore wish to shift this risk to someone else. To achieve this, the co allots or agrees to allot unissued shares to an intermediary (go-between). The co will receive share capital for the allotment and the remuneration of the intermediary will be the difference between the allotment price and the price at which the shares are sold to the public. This procedure, which is actually a type of underwriting, is also the only exception to the rule that a share must be fully paid-up on allotment or issue.

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Such an offer for sale must be accompanied by a full prospectus if the shares have been allotted with a view to them being offered to the public.

The offer must be for shares and given the definition of a ‘share’ of the act. It refers not only to shares in the share capital of a company but also to”

1. stock2. debentures3. the shares and debentures of a co not governed by the co’s act, and4. Rights or interest in a co or in or to any share or debenture.

Interests in a co may be lawfully offered for subscription or for sale only in accordance with the prospectus provisions of the act.An offer is taken not to be an offer to the public and does not require a prospectus if it is an offer:

1. for subscription or sale to a bank, mutual bank or long term insurer acting as a principal, or2. for subscription of shares in units of at least R100 000 to a person acting as principal, or3. for subscription under the following circumstances:

it is a once-off offer it is accepted by a maximum of 50 persons acting as principals the total offer, including any share premium, is a maximum of R100000; The offer and the issue of shares is finalized within 6months of the date on which the

offer was first made. The offer must be in writing The particulars of the offer must be lodged with the Registrar; The offer must not be made by way of an advertisement and no selling expenses

must be incurred in respect of the offer. This is called for ‘small issue’ or ‘seed capital’ exemption,

4. for subscription to the members or debenture holders of the co without the right to renounce any right to take up the shares in favour of others

5. Being a rights offer. A rights offer is a renounciable offer for subscription to the members or debenture holders of a co for the shares of that or any other co, where the JSE has granted a listing for those shares. As the shares concerned are or are to be lusted and the disclosure of adequate information will be required by the JSE, no additional disclosure will be required in terms of the Act. In making a rights offer the co has to issue to the offerees a letter if allocation accompanied by the documents required and approved by the JSE where these rights are to listed. No more is required by way of disclosure in respect of a rights offer that the letter of allocation and its accompanying documentation. The only additional safeguard are that:

S146A provides for the registration of copies of the letter of allocation and other documentation must be lodged with the Registrar together with a copy of any contract referred to in the documentation, and

Prospectus-type statutory liability attaches to those responsible for issuing the documentation to attempt to ensure the accuracy of the information disclosed therein.

6. For subscription or sale to a director or officer of the co or a close relative of such person, without the right to renounce the offer to anybody outside this category. No information is needed.

7. I.t.o an employee share scheme i.t.o S144A. It is a scheme whereby bona fide employees can buy shares in the co or get options on shares. The co must appoint a compliance officer who must administer the scheme and ensure that certain information is provided to the employees and to the Registrar of Companies.

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The general purpose of the provisions regulating an offer for shares or debentures to the public is to provide the potential investor with essential minimum information to enable him to assess the merits of the offer. This information relates to the co itself and to the shares or debentures being offered and is set out in a document known as a prospectus. A prospectus must be registered with the Registrar so as to ensure that the provisions for the manner and scope of the presentation of information have been complied with, and to ensure that the prospectus as a public document will be available to the public.

A prospectus is defined as any prospectus, notice, circular, advertisement or other invitation irrespective if it is done in non-electronic manner, offering any shares of a co to the public. The prospectus must be:

- an offer or invitation for the subscription or sale of shares An offer to the public An offer relating to shares as defined, i.e. not only shares but also the range of other

forms of securities incl in the concept.S145-146 refers to the prospectus as the document that must accompany the offer, even if it is an oral offer, and the above definition, must therefore be interpreted against this background. These sections also prohibit the making of an offer to the public for the subscription or sale of shares unaccompanied by a prospectus registered with the Registrar.

S147 prohibits a person from issuing, distributing or delivering any form of application in respect of shares in a co, unless a) the form is attached to a prospectus and b) bears on the date of it the date of its registration with the Registrar.

S166 (1) prohibits the allotment of shares offered to the public for subscription and the acceptance of any offer to purchase any shares offered for sale to the public unless application has been make on a form attached to or accompanied by a prospectus, or it is shown that when applying, the applicant was in possession of a prospectus or was aware of its contents.

S157 (1) – Presumption - that every newspaper or other advertisement also in electronic format, which offers or calls attention to an offer or intended offer of shares of a co to the public, is deemed to be a prospectus. An advertisement is not deemed to be a prospectus if it contains no more information that the following:

- the number and description of the shares being offered- the name and date of registration of the co- the general nature of the main business carried on by the co- the names and addresses of the directors- the places at and times during which copies of the prospectus may be obtained- Where the shares are being offered as a rights issue to members or debenture holders

of a co. - the issue price of shares- the ratio on which the share will be offered- The last day to register to qualify to receive the offer.

As no offer may, in principle, be made to the public unless in the form of or accompanied by a duly registered prospectus, the requirements for such registration have to be considered. Facts must not only be correctly stated but nothing must be omitted which might have a bearing on the benefits held out in the prospectus as the inducement to subscribe for the shares. For this reason S148 came into being. S148 – Requirement – every prospectus must contain a fair presentation of the state of affairs of the co whose shares are being offered to the public.

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S149 – requires every prospectus issued to state on the fact of it that a copy thereof has been registered with the Registrar. A prospectus of an offer for subscription of shares must be signed and dated by every person named therein as a director of the co or by his agent acting on his written authority. S156 (1) prohibits the issuing of a prospectus more than three months after the date of its registration.

Liability for untruths in Prospectus Common law and criminal law S163 provides that the provisions of the Act do not limit or diminish any liability which a person may incur under any other law or common law. Common law criminal liability is based on the principles of fraud and punishable as such

Statutory civil liability The statutory civil liability for au untrue statement in a prospectus was created for an aggrieved subscriber or purchaser of shares so as to cover damages resulting from such statement from a director or other person responsible for the content of the prospectus. The statutory remedy, enables subscribers or purchasers to recover the damages by merely proving that he acquired the shares on the faith of a prospectus and sustained loss or damages by reason of an untrue statements contained therein without having to establish fault.S160 –regulates the statutory remedy and the persons involved in the prospectus that may be held liable. It also provides for certain limited defenses which may be relied on by such personsS161 – deals with the statutory liability of experts for untrue statements.

Untrue statements: extended meaning S142 extends the definition of an ‘untrue statement’ in relation to a prospectus or any portion thereof so as to include:

- statements which is misleading in the form and context in which it is include therein, and - An omission from a prospectus of any matter, whether required to be included therein by

the Act or not, where such omission is calculated to mislead.

Offers in the Secondary Market Offer for sale When the party offering shares for sale to the public does so in conjunction with the co whose shares are on offer, it is feasible to require a prospectus as the prescribed information would be obtainable from the co. however, when the party offering the shares for sale to the public acts independently of the co he is in no position to meet the requirements for the issue of a prospectus. When the shareholding of the offeror is so large that he cannot effectively dispose of it by private negotiation, he will be obliged to resort to a public offer. He may then avail himself of a written statement in terms of S141 instead of the more comprehensive prospectus. S141 requires that a statement setting out prescribed minimum information concerning the offeror, the shares and the co concerned must accompany the offer.

Meaning of public in S141When someone wishes to dispose of his shares in a co by selling them to the public, the sale must be affected in accordance with S141. S141 – no person may either verbally or in writing, directly or indirectly, offer shares for sale to the public, or invite offers from the public to purchase any shares, unless the offer or invite is accompanied by a written, signed and dated statement containing the prescribed information.

When a statement is not required

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The written statement need not be issued where the circumstances are such that disclosure, i.t.o S141 will not effectively assist the offeree. This is the case where the shares are listed, or the offer is only made to existing shareholders or to persons whose ordinary business is to deal in shares. Exception is also made for the offers made by an executor or by public auction or tender. If the offer is accompanied by a registered prospectus, the statement is obviously not required.

Provision regarding matters to be stated in a prospectus (section 148 of Companies Act):

Schedule 3 has been revised to be more specific in so far as the form and content of a prospectus is concerned. However, you do not have to know what the content of a prospectus is. Section 148(1) now provides that a prospectus must adhere to the specifications of Schedule 3 and contain all the information that an investor may reasonably require to assess a company in which a right or interest is to be acquired, the company’s assets and liabilities, financial position, profits and losses, cash flow and the shares and rights attached to them. The newly inserted section 148A provides that the Registrar may, on application, allow information required under section 148 to be omitted from the prospectus, if the Registrar is satisfied that publication of the information would be unnecessarily burdensome for the applicant, seriously detrimental to the company or against public interest, and users would not be unduly prejudiced by the omission.

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Study unit 17 – Share CapitalBasic approach was that the contributed capital of a limited co constitutes the fund to which creditors of the co must look for the satisfaction of their claims.

The principles that were applied to draft the new provisions can be divided into 2 categories, protection of the shareholders and alternatives for the protection of creditors.

Acquisition of own shares A co may if authorized in the articles, approve the acquisition of its issued shares by special resolution. The approval can be a general approval, that will be valid until the next annual general meeting unless it is revoked by a special resolution before then, or a specific approval for a particular acquisition.

Effect on capital Shares that are acquired by the co itself will be cancelled and will become authorised but unissued shares. Principle – the share capital of the co will be reduced by the shares so acquired. In the case of par value shares, the issued capital will be reduced by the shares so acquired. In the case of non-par value shares, a ‘value’ per share must be computed and the stated share capital will be reduced by multiplying the value with the number of shares acquired.

Protection of Creditors A co may not acquire all its shares and the acquisition of shares is excluded by the very important requirement that a co may only acquire its shares if there is reasonable belief that the co is or would after the acquisition exceed its consolidated liabilities. If the above requirements are not met, a creditor may apply to court for an order to compel a shareholder or former shareholder to return the consideration to the co and to order the co to reissue shares to that shareholders or any other order that the court thinks fit.

The directors of the co are jointly and severally liable for any consideration given for the acquisition of the shares in contravention of S84(5) and not recovered by the co but directors so liable may obtain a court order to compel a shareholder to return the consideration that she received in contravention of S 85 (4). An action against directors must be instituted within 3years after date of completion of the action and the directors who are liable would include the directors of a holding co.

Protection of shareholdersThe initial protection of shareholders lies in the requirement that the acquisition of shares must be authorized by a special resolution. If a co proposes to acquire shares, it must distribute an offering circular to all the shareholders holding shares of the class that it proposes to acquire, and also lodge a copy of the circular with the Registrar.

If the co receives reaction on the offering circular for the acquisition of a number of shares that is greater than the numbers of shares the co intends to acquire, the company must as near as possible acquire the shares pro rata, except when the shares are listed on a stock exchange.

Other capital rules Payment of dividendsCommon Law Rule – capital maintenance was that dividends may not be paid out of share capital – this common law rule was replaced by a statutory provision. S 90 – allows a co to make payments to its shareholders, if the provisions of S90 are complied with and the payment is authorized in the articles. S90 requires that there must be a reasonable belief that the co is, or would after the payment, be able to pay its debts as they fall due in the ordinary course of business and that the consolidated assets of the co would after the payment exceed its

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consolidated liabilities. The shareholders would be liable to the co for any payment made in contravention of S90.

S90 requires no majority and therefore the minimum requirements would be an ordinary resolution. Any payment, even if it meets the requirements of S90, must still be authorized in the articles of the co.

Payment of interest on shares out of capitalThe Act provides that where shares are issued too finance construction works or the acquisition of plant which cannot produce profits for a lengthy period, the co may, subject to the stipulated statutory requirements, during such period pay interest on share capital and then capitalize the interest – S79

Issue of shares at a discount Common law rule on the maintenance of share capital – shares may not be issued at a discount.

Act – permits the issue of shares at a discount under the following conditions:- the shares which are issued at a discount must be of a class already unissued by the co- at the date of issue at least one year must have lapsed since the date on which the co

became entitled to commence business or since the date of the first issue of the class of shares

- the issue must be authorized by a special resolution specifying the maximum rate of discount

- The issue must be sanctioned by the court, the court may make an order on such terms and conditions as it deems fit.

- The shares in question must be issued within 1month after the date on which the court’s sanction has been obtained or within such extended time as the court may allow.

In the case of NPV shares, the issue of shares lower than particular ‘value’ must be authorized by special resolution.

S38 – prohibition of financial assistance for purchase or subscription of own sharesCommon law prohibition of the purchase by a co for the purchase of its own shares or in its holding co. A co is prohibited from giving whether directly or indirectly and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any share of the co. where the co concerned is a subsidiary, the prohibition also extends to financial assistance iro the purchase or subscription of shares in its holding co.

Expressly exempted from the prohibition against financial assistance, are:- the lending of money in ordinary course of business of a co whose main business is the

lending of money- the provision of money by a co - The making of loans by a co to its bona fide employees to enable them to purchase or

subscribe to shares in the co on their own behalf. - The provision of financial assistance by the co for acquisition of shares in the co or its

subsidiaries i.t.o S85.

Lipschitz case – in analyzing the prohibition against the provision of financial assistance it was pointed out that it compromised 2 elements which are vitally different in concept:

- the giving of financial assistance, and- The purpose for which it is given.

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Financial assistance – the test formulated by the courts to assist in the determination as to whether financial assistance had been rendered or not was the ‘impoverishment’ test. This test involves the question whether the co had become poorer in consequence of what it did for the purpose of or in connection with the purchase or subscription of its shares. If the co’s financial position had been adversely affected by the transaction, if had been impoverished and therefore given financial assistance. If the impoverishment test is positive, then it would be financial assistance, if it negative, it may not necessarily be that there is no financial assistance.

Consequences of a contravention of the prohibition – civil consequence attached to a transaction illegally is that such transaction and any ancillary contract is void in its entirety. And, the directors of the co providing financial assistance could be held liable for damages to that co for breach of their fiduciary duties towards it by entering into an illegal contract on its behalf.

Share premium account and Capital redemption reserve fundThe Act makes provision for 2 kinds of statutory non-distributable reserves, the capital redemption reserve fund, and the share premium account. Both are regarded as the equivalent of paid-up share capital.

Share premium account – where a co issues par value shares at a premium, whether for cash or otherwise, a sum equal to the amount or value of the premium must be transferred to s ;share premium account’. The share premium account may be applied by the co for the following purposes:

- In paying up unissued shares of the co to be issued to members of the co as fully paid capitalization shares.

- In writing off the preliminary expenses of the co- In writing off share or debenture issue expenses, or the commission paid or the discount

allowed on an issue of shares or debentures. - In providing for any premium payable on the redemption of redeemable preference

shares or of debentures- For the payment of a premium over par value in the case of an acquisition of shares.

Capital redemption reserve fund – redeemable preference shares may be redeemed wither out of the proceeds of a fresh issue of shares or out of divisible profits. In the latter case a capital redemption reserve fund must be created. It may be applied to paying up unissued shares to be issued to members of the co as fully paid capitalization shares or for the payments of the premium over par value in the case of the acquisition of shares i.t.o S85.

Financial assistance for the purchase of a company's shares (section 38 of theCompanies Act):

A general exception has been introduced in addition to the exceptions currently contained in section 38 of the Companies Act which prohibits a company from giving financial assistance for the purchase or subscription of its own shares or that of its holding company.This exception is contained in section 38(2A) of the Act. It allows a company to give financial assistance if the board of directors is satisfied that, subsequent to the assistance, the company’s consolidated assets fairly valued will be more than its consolidated liabilities (solvency) and for the duration of the transaction, the company will be able to pay its debts as they become due in the ordinary course of business (liquidity). Further, the terms upon which the financial assistance is to be given must be approved by a special resolution of the company’s members.

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Study Unit 18 - Auditors

Appointment of auditorsThe aim of the legislation relating to the role of auditors in companies is to ensure their professional competence and independence. In order to be eligible for appointment as a co auditor, a person must have certain professional qualifications. The disqualifications are primarily to ensure that only persons with the required level of skill and objectivity with regard to the financial matters of a co may act as auditors of that co. the following are disqualified from being appointed:

- a director, officer or employee of the co- a director, officer or employee of any co performing secretarial work for the co- a partner or employer or employee of a director or an officer of the co- a person who, personally, or whose partner or employee, habitually or regularly,

performs the duties of secretary or bookkeeper of the co, an exception applies in the case of a private co, provided that:

o the person in question is a registered accountant and auditoro all the shareholders agree in writing to his appointment, ando The relevant circumstances are set out in the auditor’s reports.

- A person who at any time during the financial year was a director or officer of the co- A person not qualified to act as such under the Public Accountants’ and Auditors’ Act.

A disqualified person who acts as auditor of a co is guilty of an offenceA firm of auditors may be appointed auditor of a co.The first auditor holds office until the conclusion of the first annual general meeting. At every annual general meeting a co must appoint an auditor to hold the office from the conclusion of that meeting until the conclusion of the next annual general meeting. A retiring auditor is deemed to be re-appointed at an annual general meeting without any resolution being passed, unless

- he is not qualified for reappointment, or- a resolution of which special notice has been given to the co, has been passed at that

meeting by not less than ¾ of such members entitled to vote as are present in person or by proxy, or

- He has given the co and the Registrar notice in writing of his unwillingness to be reappointed at the annual general meeting concerned.

A Co may, at any general meeting by an ordinary resolution of which special notice has been given to the co, remove an auditor appointed in any of the following 3 ways before three expiration of his term of office and appoint another person as auditor in his place

- a first auditor appointed by the directors or the registrar i.t.o S269- An auditor appointed by the directors or the Registrar i.t.o S271 on failure by the annual

general meeting to do so. - An auditor appointed by the directors i.t.o S273 to fill a casual vacancy.

A auditor may resign at any time during his period of office by delivering written notification to the Registrar and the co to the effect that he has no reason to believe that, in the conducting of affairs of the co, a material irregularity involving financial loss to the co or to any of its members or creditors, has taken place, other that an irregularity which has been reports to the Public Accountants’ and Auditors’ Board.

General duties of auditor The auditor must have adequate professional training and proficiency, be of independent status and maintain an independent mental attitude and exercise due professional care during the audit examination and in the preparation of his report.

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Due professional care requires standards:- the work must be adequately planned and the audit staff adequately supervised- there must be a proper study and evaluation of existing internal controls to determine the

extent of reliance thereon and the extent to which the auditing tests must be applied- The auditor’s opinion in regard to the financial statements must be based on sufficient

acceptable evidence obtained through inspection, observation, inquiry and confirmation. Work must show compliance with generally accepted auditing standards.

Financial reporting can only be effective if it takes place in conformity with accepted principles and if people can count on its reliability. It is the function of the co’s auditor to evaluate the co’s financial reporting and to express an opinion on whether it was indeed done in accordance with accepted principles of financial reporting.

Civil liability of the AuditorA clear distinction must be made between and Auditor’s civil liability to the co which has appointed him as auditor and his liability to third parties, that is persons falling outside the auditor-co relationship who act to their detriment on the strength of financial information prepared or certified by the Auditor. Instances where the potential liability of an auditor to the co may arise are where the co alleges that it suffered a loss as a result of the Auditor’s failure to detect the fraud of one of the director’s or to properly verify the existence of the co’s assets. The Auditor’s potential liability to a third party may arise in cases where the third party alleges that he suffered a loss as a result of the fact that he relied on the co’s financial statements to make a loan to the co or buy shares in the company.

Civil liability towards the co: reasonable care and skillIn the performance of his duties to the co i.t.o his contract, the auditor must act with reasonable care and skill, that is to say he must ‘bring to bear on the work he has to perform that skill, care and caution which a reasonably competent, careful and cautious auditor would.

Civil liability towards the co: client co’s civil remedies against its auditorThe co will usually be able to choose between suing its auditor for breach of contract, as the same conduct on part of the auditor is usually actionable on either of these 2 grounds. In practice the co may rely on either of the grounds for framing its action in the alternative. In an action for damages against the auditor for breach of contract, the co will have to provide the contractual relationship, the breach of contract complained of and the loss it suffered as a result of that breach.

Thoroughbred Breeder’s Association v Price Waterhouse – the audit contract was not reduced to writing but it was tacitly agreed that the audit would be conducted in accordance with the generally accepted auditing standards and with due professional care required of an auditor in public practice. The audit failed to discover the theft of a promissory note by one of the co’s financial managers and that several substantial sums of cash had not been deposited for long periods. The co knew that the financial manager had a criminal record, but never disclosed this to the auditor. Damages were claimed from the auditor on the grounds that if he had performed his duties, the theft by him would have been uncovered and further thefts perpetrated by the financial manager would have been prevented. The court found that the auditor was negligent and therefore had committed breach of contract. There was also factual causation between the breach of contract and the loss suffered by the plaintiff. The loss suffered by the plaintiff was also not too remote as it flowed naturally and generally from the breach. Furthermore, the court found that the fact that the plaintiff appointed a person with a criminal record such as the financial manager in a senior position may amount to carelessness, but that this carelessness was not the sole cause of the plaintiff’s loss. The plaintiff’s loss was caused by the auditor’s negligence. Because the plaintiff’s claim was based on a breach of

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contract, there was no room for an apportionment of loss between those parties. The auditor was thus held liable for the loss suffered by the plaintiff.

The co can also couch its action for damages against the auditor in delict.

Civil liability towards third parties: common law As auditor of the co, he does not stand in a contractual or fiduciary relationship to 3rd parties such as creditors or prospective creditors, its clients, individual members of the co or prospective purchasers of the co’s shares. Therefore, if any such 3 rd party should seek to hold the auditor liable for the wrongful conduct, they should do so under delictual liability.

Principle – culpable wrongful conduct by a person which causes damage to another constitutes a delict and gives rise to liability to compensate that other for his damage. To establish delictual liability, all elements of delict must be proved. Elements include:

- conduct – omission or act- Wrongfulness – conduct must have infringed some subjective right of another. - fault – intent or negligence- damages – loss suffered by the injured party- Causation – causal link between the damage and the conduct of the perpetrator.

Bentley case the common law liability of auditors towards 3rd parties was put under scrutiny. On the strength of the financial statements of a group of companies, the appellant continued to provide certain financial facilities to the D group. It was later discovered that the financial statements on which this decision was based, did not reflect the true financial position of D group. Action for damages was instituted against the auditor. The action was dismissed by the court a quo since the facts of the case indicated that the appellant continued to provide the financial facilities even after it was discovered that the financial statements did or reflect the true financial position of D group. On appeal. It is clear that, in order to succeed under common law action against an auditor, the 3 rd

party will have to prove all the elements of delict. It was held that the respondent’s act was in fact materially false and misleading. The court accepted the court a quo’s finding regarding fault, the respondent acted negligently. Also, it was held there was a legal duty owed by the respondent to the appellate and that the respondent was in breach of that legal duty and thus acted unlawfully. Appeal was dismissed on causation.

Civil liability towards 3 rd parties: statutory dispensation S20 (9) of Public Accountants’ and Auditors’ Act provides that in respect of any opinion express or certificate given or report or statement made, or statement, account or document certified in the ordinary course of his duties, an auditor incurs no liability towards any 3 rd party, unless it is proved that such opinion, certificate, reports, statement, account or document was given, made or certified maliciously or pursuant to a negligent performance of his duties.

The appointment of auditors and audit committees

These amendments to the Companies Act are aimed at establishing and maintaining the independence of auditors in support of the Auditing Profession Act 26 of 2005 (which Act repealed the Public Accountants’ and Auditors’ Act 80 of 1991). The Auditing Professions Act introduced more stringent regulation for the auditing profession with the establishment of an Independent Regulatory Board for Auditors (“IRBA”) and for a Standard-Setting Board for Auditor Ethics and Auditing and covers issues relating to the conduct and accountability of auditors. The amendments to the Companies Act complements the Auditing Profession Act by introducing a number of measures aimed at ensuring that in future the auditor of a widely held company will not have too close an association with its client and that a degree of independence is maintained in respect of

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widely held companies. Before the latest amendments, it was required that a company’s financial statements had to fairly represent the affairs and results of the company. One of the important amendments is the introduction of legal backing for accounting standards in terms of which statements have to comply with specific published standards. In this regard, a distinction is made between widely held and limited interest companies and separate sets of standards apply to each typeIn terms of a new Section 1(6)(a) a company is widely held if(i) its articles provide for an unrestricted transfer of shares(ii) it is permitted by its articles to offer its shares to the public at large(iii) it decides by special resolution to be a widely held company, or(iv) it is a subsidiary of a company described in subparagraph (i), (ii) or (iii)Section 1(6)(d) provides that a company is a limited interest company if it is not widely held. Further measures aimed at auditor independence include the establishment of audit committees, the rotation of auditors; and the prohibition on certain non-audit services by the auditor.

Audit committeesA new section 269A has been inserted into the Companies Act 1973 in terms of which the board of directors of a widely held company are required to appoint an audit committee for every financial year.The audit committee must have at least two members and consist only of non-executive directors of the company who must act independently. A non-executive director is one who is not involved in the day-to-day management of the business and has not in the previous three financial years been a full-time salaried employee of the company or its group and is also not a member of the immediate family of an aforementioned person. The audit committee must, for the year it is appointed, perform the following functions: * nominate for appointment a registered auditor who is independent of the company* determine the auditor’s fees and terms of engagement* ensure that auditor’s appointment complies with the Act and other legislation relating to the appointment of auditors* determine the nature and extent of any non-audit services which may be provided by the auditor to the company* pre-approve any proposed contract with the auditor regarding the provision of non-audit services by the auditor* insert in the financial statements a report describing how it carried out its functions and that it is satisfied that the auditor was independent of the company and* deal with any complaints relating to the accounting practices and internal audit of the company or to the content of its financial statementsIn addition, further requirements have been introduced regarding the way in which the auditor of a widely held company must be appointed. The purpose of these requirements is to ensure auditor independence. The appointment of a firm as auditor of a widely held company will only be valid if the appointment specifies, in addition to the name of the firm, the name of the individual registered auditor, who must be a member of the firm, who undertakes the audit.

Audit rotationThe Companies Act now provides for the rotation of auditors and provides that the same individual may not serve as the auditor or designated auditor of a widely held company for more than five consecutive financial years. With the purpose of further ensuring the independence of the company auditor, the Act provides, in addition, that an individual auditor who has served as the auditor or designated auditor of a widely held company for two or more consecutive financial years and then ceases to be the auditor or designated auditor, may not be re-appointed as auditor of that company until after the expiry of at least two further financial years. This requirement of rotation applies to individual auditors only and not to firms and further not to limited-interest companies.

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Prohibition on certain non-audit services by the auditorAn auditor appointed to a widely held company may not perform for that company, for the duration of his appointment, services prohibited under the code of professional conduct mentioned in section 21(2)(a) of the Auditing Profession Act. Section 21(2)(a) provides that the committee for auditor ethics must assist the IRBA ”to determine what constitutes improper conduct by registered auditors by developing rules and guidelines for professional ethics, including a code of professional conduct”. The IRBA is required to define and prohibit in this code the provision by an auditor of certain non-audit services which may result in being subjected to the auditor’s own auditing. As pointed out above, the audit committee of the company may further limit the services that an auditor of the company may render.

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Close Corporation

Study unit 19 – internal matters, etc.

The intention was to provide a simple, less expensive and more flexible form for the small enterprise consisting of a single or a small number of particulars who would be afforded the advantages or separate legal personality. The close corporations act forms the basis for close corporations. The following are some of the distinctive features of the CC:

- cc implies a juristic person distinct from its members, it therefore enjoys perpetual succession and its members have limited liability i.r.o the corporation’s debts.

- It is granted the capacity and powers of a natural person in so far as these are appropriate to a legal person

- The formation, administration and operation of a CC are subject to a minimum number of formalities and its members are subject to a minimum of duties.

- A single person can form a CC and it need not be an undertaking for gain- No shares are issued and there is no share capital- Strict rules relating to the maintenance of capital do no apply to CC. CC is allowed to use its

capital as it please, provided it maintains the necessary solvency and liquidity. The CC may provide financial assistance for the purchase of a member’s interest and may even itself buy a member’s interest.

- Members are allowed the greatest possible flexibility in arranging their internal relationships and the management of the CC

- All members have, in principle, an equal say in the management of the business and no provision is made of the appointment of directors.

- The Act is decriminalized and members run the risk of personal liability should it appear that they have contravened the Act, or put the CC in jeopardy.

- The common law principles relating to fiduciary duties and duties of cares and skill in managing the affairs of the CC are codified.

- The accounting and disclosure provisions are less expensive and the CC may enjoy certain fiscal benefits.

Comparisons with partnershipsA partnership consists of at least 2 but not more that 20 members and must have as its object the pursuit of gain. Companies and other corporate bodies may become partners. Since a partnership does not exist as a separate legal person, the partners are personally liable for its debts and they own the partnership estate. A change in membership results in the dissolution of the partnership and each partner is the agents of his co-partners in law. A close personal and fiduciary relationship exists amongst partners. Although members of a CC owe a fiduciary duties to the CC itself, the relationship between the principles govern the relationship between the members of the CC to a significant extent. Although a partnership must submit a joint tax return, the partners are taxed individually. Often this is to the advantage of the business and the participants. The CC is taxed as a separate entity.

Comparisons with business trusts Business trusts are subject to even fewer formalities and administrative restraints that CC. Although they are not endowed with separates legal personality; they enjoy most of the advantages by limiting the liability of the trustees to trust property. The number of beneficiaries is not limited to 10 or to natural persons.

Relative advantages and disadvantages of CC as compared to companies

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Advantages of CC- Simplicity of management. There is no separate board of directors and management is the

responsibility of members. - Simplicity of decision-making structure. There is no prescribed annual general meeting and

although provision is made for members’ meetings, most decisions can be taken informally on the basis of consultation between members.

- A CC may, with few formalities, acquire the interest of a member or may give financial assistance to a member to acquire an interest in the CC

- The transfer and acquisition of members’ interests is not liable to stamp duty- On the conversion of a co into a CC, no transfer or stamp duties are payable i.r.o. the

transfer of property registered in the name of the co. - Only the annual return needs to be submitted to the registrar of CC on a regular basis- A CC can hold shares in a co, even to the extent of controlling it. A co cannot hold a

member’s interest in a CC

Disadvantages - Every member is an agent of the CC, can act on its behalf, can participate in its

management and bind its credit, therefore creating risk for other members as insolvency of the CC can give rise to the personal liability of members.

- The simplicity and informality of the corporate structure may facilitate fraud and unauthorized or improper actions within the CC.

A CC acquires legal personality and corporate status by its registration in terms of the CC Act. The juristic person which comes into existence continues to exist, despite the changes in membership, until it is deregistered or dissolved.

Registration requirements Registration itself is effected at the Registrar of CC in PTA. Registration itself has to be preceded by reserving the proposed name for the CC. Reservation is obtained by application to the registrar on Form CK7 with proof of payment of the prescribed fee (R50). The name will be approved if it is, in the opinion of the Registrar, not undesirable.

Application for registration is made by lodging with the Registrar:- CK 1- duly completed founding statements with proof of payments of the prescribed fee

(R100)- If the CK 1 form has been signed be someone else obo the member, a power of attorney by

such member authorizing the person concerned to sign the CK1 form on the member’s behalf.

- The written consent of the accounting officer to his appointment- Copy of CK 7 indicating the approved name reservation

The constitutive documents of a CC consist of a founding statement and an optional association agreement. The founding statement serves the same purpose as the memo of association and records of information of the corporation. Any change or additions to any of the matters set out in the founding statement is to be recorded with the Registrar by mean of the lodging of an amended founding statement (on form CK2).

The members of the CC may in addition enter into a written association agreement regulating internal matters of the CC not inconsistent with the provisions of the Act. It is the same as the articles on a co. the association agreement must be signed by or on behalf of each member and must be kept at the registered office where only members may inspect it.

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Upon registration of the founding statement the Registrar must assign a registration number to the CC and issue a Certificate of Incorporation to the CC. A certificate of Incorporation shall be conclusive evidence that all the requirements in respect of registration have been complied with and that the corporation is duly incorporated. The certificate shall be validated on CIPRO website.

The founding statement in original form is filed by the Registrar and a certificate is issued to the CC which serves as its Certificate of Incorporation setting out all the relevant information contained in the founding statement.

The founding statement on CK1 serves as the charter of the CC and sets out its corporate structure. It must be signed by or on behalf of very person who is to be a member of the CC upon its registration.

The following particulars are requires for the founding statement:- the full name of the corporation and, if required, a literal translation of that name in one other

official language and a shortened form of that name- the principal business to be carried on by the corporation- the date of the end of its financial year- the postal address and the address to which all communications to the corporation may be

addressed- The name and postal address of the corporation’s accounting officer and the name of the

profession to which he belongs qualifying him as such, accompanied by his written consent to so act.

- The full names, identity numbers and the residential and postal address of each member- The size, expressed as a percentage, of each member’s interest in the corporation- Particulars of the contribution of each member to the contribution, usually an amount of

money or property or services to be rendered, together with a description of such property or services and a statement of its fair value.

The CC must keep a copy of its founding statement and proof of its registration at its registered office.

Form CK 7 is used to reserve a name for the CC which may not closely resemble the name of another CC or Company or contravene one of the many guidelines formulated by the registrars of companies and CC concerning acceptability of names. The registrar must first approve the reservation of the name before the name may be used.

Within one year of a corporation’s registration, the Registrar may order it to change its name if it appears to the registrar that the name is undesirable. He may take the decision on his own initiative or on written application of an interested party, or on payment of the prescribed fee, for an order directing a change of name on the ground of undesirability or because the name is calculated to cause damage to the applicant. Similar application may be made to the High court and the period being extended to 2 years. A change of name has no effect on the rights and duties of or continuance of legal proceedings by or against a corporation.

Additional requirements - The abbreviation CC, in capital letters, or its equivalent in any other official language, must

be added to the name of the corporation. If a CC does not comply it will be guilty of an offence

- the full registered name of the corporation and its registration number in eligible characters shall be:

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o displayed on the outside of the registered office and every office or toerh place which its business is carried on, and

o Mentioned in all notices and other official publication of the corporation (cheques, promissory notes, endorsements, etc.)

- the issue of such notice without stating the name and registration numbers shall render the member or other person so acting on behalf of the corporation:

o guilty of an offence, and o Liable to the holder of promissory note, etc. for the amount thereof, unless the

amount is pad by the corporation.

Lodging of amendmentS15 provides that is any change has taken place in respect of any of the particulars stated in the founding statement; an amended founding statement must be lodged with the Registrar for registration on form CK2.

If a corporation fails to lodge an amended founding statement, the Registrar may on own initiative or on application by any member or creditor of the corporation, call upon the corporation to make good default within 28 days. Failing response, the Registrar may direct the members to make good the default with 21 days. Failing reaction on such direction the Registrar may be further written notice impose them a penalty not exceeding R5 per day from the date upon which the original reminder was sent.

MembershipNumber of membersS 28 - A CC may be formed with 1 or more members but at no time may there be more than ten members. Members are not even entitled to be joint holders of the same member’s interest in the corporation.

S29 - Only natural persons may be members of a CC. the trustees of a contractual trust may not directly or indirectly hold e member’s interest in a CC, although a person holding a membership for the benefit of such trust may before 13 April 1987 continue to do so, subject to certain limitation. No juristic person may directly or indirectly hold a member’s interest in a CC. consequently, a co or a CC may not become a member of a CC. S 63 - if they do, they risk personal liability for the debts of the corporation. However, a CC may be a shareholder in a Co and may even control it. A CC may also enter into partnerships with companies or other CCs.

A natural person will qualify for membership under the following circumstances:- if he is entitled to a member’s interest- In his official capacity as a trustee of testamentary trust (trust created by a will) provided that

no juristic person is a beneficiary of such trust.- In his official capacity as a trustee, administrator, executor or curator of an insolvent,

deceased or mentally disordered member’s estate, or his duly appointed or authorized legal representative.

As no other qualification is set for membership of a CC, it appears that even minors, insolvents or other legally disabled person may become members of a CC if they are qualified to hold a member’s interest. In contracting to become members they would have to be represented or assisted by their legal guardians, legal representative or trustees. S 47 - However, subject to a few qualifications, such persons are disqualified from taking part in the management of the corporation. S32 – they must be represented in the corporation by their guardian or legal reps.

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Despite this limitation their names must be stated in the founding statement as members.

Juristic persons only qualify for membership under the following restricted circumstances: - In his official capacity as a trustee of testamentary trust (trust created by a will) provided that

no juristic person is a beneficiary of such trust.- In his official capacity as a trustee, administrator, executor or curator of an estate of an

insolvent, deceased or mentally disordered person otherwise incapable of managing his own affairs.

Commencement of membershipS 29 - Membership commences on the date of the registration of the founding statement reflecting particulars of the membership S12 -The full names of the member, the size of the member’s interest and particulars of the contribution must appear in the founding statement.On the admission of a new member, or if the need arises to register someone in his official capacity as representative, an amended founding statement must be registered within 28 days. S15 -It is the duty of the existing members to ensure that the amended founding statement is registered and this must be signed by or obo each member and by or obo any person who will become a member of the corporation on registration of the amended founding statement.

Membership commences on registration of the founding statementS15 (1) and (2) implies that on the admission of a new member, membership may well commence at an earlier date, possibly the date that the amended founding statement was signed. In view of this fact S29 indicates that a new member’s membership commences at the earliest on the date of registration of the amended founding statement.

Register of memberNo formal register need be kept. The founding statement must contain the names of members. It must be kept up to date and the names of the present members can easily be ascertained since a copy of the founding statement must be kept open for inspection at the registered office of the corporation. The names of members must be stated in every business letter bearing the registered name of the corporation.

Termination of membership A member may cease to be a member of a CC under the following circumstances:

- voluntary disposal of his member’s interest - Forced disposal of his member’s interest due to insolvency – S37- Disposal of a deceased member’s inters i.t.o his will – S34- Forced disposal of his member’s interest after attachment and sale of the interest in

execution – S34 A- On the deregistration or liquidation and consequent dissolution of the CC – S 26 and 66- By order of the court – S36. on application by any member the court may on one of the

following grounds, order that a member shall cease to be a member of the CC:o Permanent inability to perform his part in carrying on the businesso Conduct which is likely to have a prejudicial effect on the carrying on of the businesso Conduct making it reasonably impossible for the other members to associate with

him in carrying on the businesso It being just and equitable in the view of the court that he should cease to be a

member.

Member’s Interest

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Each member acquires a member’s interest in the corporation. Such an interest expressed as a percentage of the total.S30 - Two or more person may not be joint holders of the same member’s interest.Each member must be issued with a certificate, signed by or obo every member, stating the current percentage of such member’s interest in the corporation. The aggregate of all members’ interest in a corporation expressed as a percentage must be 100% at all times. On the admission of a new member or the retirement of an existing member the percentage of the respective members’ interest must therefore be adjusted to retain an aggregate of 100%.

Since a CC is a juristic person it holds the assets of the corporation and the members are not co-owners thereof. A member’s interest can thus be described as a personal right as against the CC, entitling the holder to a pro rata share in the aggregate of members’ interest and to participate in a distribution of profits and on liquidation, in a distribution of the remaining assets after all creditors have been paid. S30 – provides that a member’s interest shall be movable property. Moveable property may be corporeal or incorporeal. A member’s interest is not a corporeal object but represents a complex of rights and duties. The certificate of member’s interest is a tangible document evidencing the legal relationship existing between the corporation and the member.

S33 - A member’s interest can be acquired directly from the corporation or form an existing members or his estate.

A founding member of a corporation must make an initial contribution to the corporation in pursuance whereof he receives a member’s interest. The contribution may consist of corporeal or incorporeal property or of services rendered in connection with and for the purpose of the formation and incorporation of the corporation particulars of the contribution must be stated in the founding statement and if it is a non-monetary contribution, a description and statement of the fair value thereof must be included. By agreement all the members, the contribution of any member may be increased or reduced, provided details are furnished in an amended founding statement.

The initial contribution, if it consists of money or property, must be paid, delivered or transferred to the corporation within 90 days after the date of registration or within 90 days after the registration of the amended founding statement in the case of an increase in the contribution.

Acquisition of interest from existing membersA person may acquire a member’s interest from an existing member. It must be in accordance with the association agreement; in its absence the consent of every other member of the corporation is required.

Cessation of membershipS36 and 49 – the court may under certain circumstances, order the cessation of a member’s membership and make such order as it deems necessary in regard to the disposition of the member’s interest.

Insolvency or death of memberIn case of the insolvency of a member or upon his death, his trustee or executor is compelled to sell his member’s interest. Despite any contrary provisions in the association agreement, the member’s

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interest must, in case of insolvency, be sold to the CC, or the remaining members or an outsider who qualifies for membership. The duties of the executor of a deceased estate to dispose of the member’s interest of the deceased member must be exercised subject to the provisions of the association agreement. In its absence the executor may only transfer the member’s interest to the CC, the remaining members or an outsider.

Transfer of member’s interestAny transfer of a member’s interest should be reflected in an amended founding statement. The Act does not stipulate the method of transfer. Matters should be dealt with the in association agreement. In such absence, common sense would dictate:

- the instrument of transfer must be a form approved by the members, preferably similar to a share transfer form

- the instrument of transfer must be executed by both transferor and transferee- the instrument of transfer accompanied by the certificate stating the percentage of interest

held by the transferor must be lodges at the registered office of the corporation.

The association agreement may well contain provisions restricting the transfer of interest. The transfer of an interest necessitates the registration of an amended founding statement i.t.o S15. The amended founding statement has to be signed by or on behalf of every member and by or obo any person who will become a member on such registration.CK 2 provides for the signature of both continuing and resigning members.

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Internal Relations Fiduciary Duties and duties of car and SkillFiduciary position of members Members of a CC stand in close relationship towards each other and may then in this respect be similar to partners. However, they owe their fiduciary duties to the corporation as a separate legal personality and not to each other. CC Act gives an overview of the fiduciary duties of members of CC. the Act sets out definition of these fiduciary duties of members ‘without prejudice to the generality of the expression fiduciary relationship’. S42 (2) – each member must act honestly and in good faith and must exercise the powers he has to manage or represent the corporation in its interests and for its benefit. A member may also not exceed these powers. A member must avoid a conflict between his interests and those of the corporation and may not derive unwarranted personal economic benefit from the corporation or someone else, nor complete with it in its business activities. Where a member fails in his duty to disclose any material interest directly or indirectly, in any contract of the corporation to every other member, the contract is voidable at the option of the corporation. Where the corporation elects not to be bound by the contract the court may, on application by an interested party, order that the contract be nevertheless binding on the parties.

A member who breached his fiduciary duty is liable to the corporation for any loss suffered by the corporation as a result thereof or any economic benefit derived from him as a result of breach. Except for unratifiable wrongs, breaches may be ratified by the written approval of all the members provided they are fully aware of all the material facts.

Duties of care and skillCo law – director owe a common law duty towards the co to act with due care and skill. S43 of CC Act established the duty of members of CC to act with due care and skill. A member is accordingly liable to the corporation for loss caused by his failure to carry on the business with the degree of care and skill that may be reasonably expected from a person of his knowledge and experience.

This requirement introduces an element of personal judgment which means that members would only be liable for a breach of this duty in exceptional cases. Breaches of this duty may be ratified by the written approval of all the members where they are aware of all the material facts.

Association Agreement and other AgreementsAn association agreement may be described as a written agreement between member of a CC regulating the internal relation between them and between them and the CC. although is it advisable to enter into an association agreement, it is not a prerequisite for the formation or running of a CC. in the absence os an association agreement, the provisions of the Act would apply.

General principles applicable in the absence of an association agreement S 46 the following principles apply unless altered or carried by association agreement:

- every member shall be entitled to participate in the carrying on of the business of the CC- members shall have equal rights irt the management of the business and in the

representation of the CC- differences between members in connection with the business of the CC shall be decided by

majority vote.- A member shall have the number of votes corresponding with his percentage interest - Every member shall be indemnified iro expenditure incurred in connection with the

conducting of the business and the preservation of the business or assets of the CC- Payments by the CC to its members by reason only of their membership shall be reason

only of their membership shall be in proportion to their respective interests in the CC

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Entering into an association agreementWhen a CC has 2 or more members they can enter into a written association agreement. This must be signed by or obo each member. The agreement may regulated any matter regarding the internal relationship between the members or the members and the CC. S44 - A copy of the agreement must be kept at the registered office where it may be inspected by any member.S45 – no person dealing with the CC will be deemed to have knowledge of any provision of the association agreement. A third party having actual knowledge of the content of the association agreement will not be able to escape the consequences of that knowledge by relying on S45. if the association agreement prescribes that A and B must sign all contract obo the CC and C is aware of this provision C will, as a general rule, not be able to hold the CC to the agreement if only A signs it.

Other agreements between membersWhether or not an association agreement exists, the members can also be bound by the provisions of the ‘other agreements’. Such other agreements between the parties may deal with any matter that may be regulated by an association agreement and will be equally valid in so far as it is not inconsistent with the association agreement or the Act. S44 (3) –other agreements do not effect any person other than the corporation or a member thereof and cease to have effect when any party ceases to be a member of the CC.

The association agreements and other such agreement constitutes a contract between the CC and the members and between the members. There are some important aspects distinguishing the formal association agreement and the other type of agreements. The latter need not be in writing, signed by the parties or kept available at the registered office for inspection. It binds the parties only as long as they remain member of the CC. new members or members ceasing to be such are thus not bound. New member automatically become bound by a formal association agreement without having to sigh it and remain bound even after they cease to be members of the CC. other agreements are subordinate to the formal association agreement in the case of conflicting provisions.S46 – apply unless this has been superseded by an association agreement. Amendments to and cancellation of an association agreement must be in writing and signed by or obo every member, incl new members.

The reason why other agreements are allowed in CC is to allow for even more flexibility in managing their own internal affairs and the Act also ensure that members cannot escape the consequences of established practices according to which the internal affairs of a particular CC.

Matters that may be regulated by association agreement- participation of members in the management of the CC- settling of disputes between members- voting at meetings and proxy votes- repayment of contributions- procedures at meetings- sale and transfer of a member’s interest by a member- financing of the CC

Unalterable provisions- The manner in which an insolvent member’s interest may be disposed

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- Persons who are disqualified from taking part in the management of the CC- The power of a member to call a meeting of members- A blanket approval of a member’s breach of duties i.t.o S42 and S43

Certain matters require the written consent of each member:- the acquisition of member’s interest- financial assistance iro the acquisition of a member’s interest- the granting of loans and furnishing of security- the ratification of pre-incorporation contract- the ratification of a breach of fiduciary duties - The appointment of accounting officer.

Management Members may elect whether to conduct the management of the CC. CC Act contains:

- every member is entitled to participate in the carrying on of the business, to exercise equal rights and to represent the CC.

o certain persons are disqualified: people under legal disability – exception of minors under 18years who

obtained written consent from guardians persons who have been disqualified by the court

o the following persons may take part in management if authorized by the court: an unrehabilitated insolvent persons removed from an office of trust on account of misconduct Persons convicted of certain crimes involving dishonesty.

- Unless the association agreement provides otherwise, matter concerning the CC are decided by majority vote at meetings, each member having the number of votes corresponding with the percentage of his interest on the CC

- A member of a CC may by notice to every other member and every other person entitled to attend a meeting of members, call a meeting of members for any purpose disclosed in the notice.

- A meeting at which a quorum in not present within ½ hour after the time appointed for the meting, shall be adjourned to a day not earlier than 7 days and not later than 21 days.

- A corporation must minute the proceedings of the meeting in a minute book within 14 days after the date on which the meeting was held. Minute book must be kept at registered office

- A resolution in writing singed by all members and entered into the minute book is as valid and effective as if it were passed at a meeting duly convened

Remedies for members and the CCS49 – statutory person actionAny member of a CC who alleges that any particular act or omission of the CC or of one or more other members is unfairly prejudicial, unjust or inequitable to him or that the affairs of the CC are being conducted in a manner unfairly prejudicial may apply to court to rectify the matter. If the court considers it just and equitable, the court may make such an order as it thinks fit.

GATENBY v GATENBY – S 49 ? – What type of order the court could make for purposes of ‘regulating the future conduct of the affairs of the CC’ i.t.o S 49. Could the court order a sale of a CC’s only asset – a hotel?Court said that the object of S49 is to come to the relief of the victim of oppressive conduct. The section gives the court the power to make orders ‘with a view to settling the dispute” between the members of a CC if it is just and equitable to do so. To this end the court is given a wide discretion.

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It may ‘make such order as it thinks fit’ within the framework of either ‘regulating the future conduct of the affairs of the CC’ or ‘the purchase of the interest of any member of the CC by other members thereof, or by the CC.” these are far-reaching powers. One member can be compelled to purchase the interest of another at a fair price whether he wants to or not.

De FRANCA v EXHAUST PRO CC. the case deals with a fierce confrontation between a father and a son for the acquisition of the other’s interest in the CC. in this case the court held that it is clear from section 49 (2) that the court has a discretion to order the purchase of the interest of any member if the CC by other members, or by the CC, if the court finds it just and equitable to make such an order. The court does need particulars as to the value of a member’s interest in order to establish ‘a fair price’ for such an interest. Without such particulars of claim the court cannot in its own account determine such a ‘fair price’. The court felt that it was precluded by S39 to make an order compelling the CC to buy a member’s interest if insufficient information was before the court for determining the ‘fair value’ of a member’s interest. Although S39 actually deals with the payment by the CC for a member’s interest in the normal course of business there is not clear indication that the consideration mentioned in S39 could be ignored if a court orders that the CC should purchase a member’s interest i.t.o S49 (2). The court refused to make an order for the C to buy a member’s interest without full particulars of the fair value of the member’s interest being available to the court.

S50: Statutory Derivative Action Where a member or a former member of a CC is liable to the CC:

- to make an initial contribution or any additional contribution as agrees on by the members, or

- on account of:o the breach of a duty arising from his fiduciary relationship with the CC, oro negligence in the handling of the affairs of the CC

any member of the CC may institute proceedings iro any such liability obo the CC against such member or former member after notifying all the other members of the CC of his intention to do so. Should it appear that the proceedings have been instituted without prima facie grounds; the member may be ordered by the court to pay the cost of the CC and of the defendant in question. The member institutes proceedings obo the C. therefore judgment is in favour of the CC and the CC is liable for the costs and not the member acting on its behalf.

As any member is entitled to institute action obo the CC and as the consent of all the members is required before the conduct giving rise to the action can be ratified, there is no danger of the majority abusing their position This section refers to situation where the CC rights are at issue.

Prohibition of loansWithout prior express consent in writing of all its members, a CC may not directly or indirectly, make a loan:

- to any member- to any other CC in which members together hold more than 50% interest- to any Co or other juristic person controlled by one or more of the members of the CC,

and may not provide any security to any person in connection with any obligation of any such member, or other CC, Co to other juristic person.

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Study unit 21 – External Relations

Pre-incorporation Contracts S53 of the CC is in effect a simplified version of S35 of Co’s Act. It also constitutes an exception to the common law principle that there can be no representation of a person not yet in existence. S53 allows a CC to ratify a pre-incorporation contract concluded by an agent if certain requirements are met.

S53 0 a CC can ratify or adopt as its own, after ins incorporation, a written contract entered into by someone purporting to act as the corp’s agent or trustees before its incorporation, as if the corp had been duly incorporated at the time the contract was entered into. It will only be binding on the corp if the following requirements are complied with:

- the contract must be made in writing – it is wide enough to embrace oral contracts subsequently reduced to writing.

- It must have been entered into by a person who professed to act as an agent or trustee or a corp not yet incorporated – trustee can be equated with an agent.

- The corp must duly ratify or adopt the contract after its incorporation – this must be done by the consent in writing of all the members of the corporation within the time specified in the contract. If no time is specified, the consent must be given within a reasonable time after incorporation.

The corporation is under no obligation to ratify or adopt the contract. If the corporation does not ratify the contract timeously, the contract lapses. In principle the agent incurs no personal liability. However the contract may provide that the agent will be liable in his personal capacity for the due performance of the contract.

Alternative arrangementsS53 is permissive (lenient) and not peremptory (Absolute). Other arrangements may therefore also be used, such as a contract in favour of a third party. since the third party need not be used be in existence at the time the agreement is concluded, the contract in favour of the 3rd party can be used in the case of a corp not yet incorporated.

S53 is also not applicable if a person contract in his personal capacity before the incorporation of the CC and then after its incorporation, e.g.

- cedes his rights under the contract to the corporation, or nominates the corporation as the purchaser

- transfers assets he acquired to the corporation- Cedes his rights under an option to the corporation which can then exercise the option.

Capacity and Representation of a CCCommon law doctrine Common law requirements for a juristic person to be bound by a contract on its behald are that:

- the juristic person much have the necessary capacity and powers to perform the particular act, and

- the juristic person’s representative must have the necessary authority to bind the juristic person iro the particular contract.

CC Act provides that the ultra vires doctrine and doctrine of constructive notice has no application i.r.o. CC.

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Legal capacity of a CC is unlimited. Those having business with the CC do not run the risk of finding the validity of transactions being affected by internal limitation on the corporation’s legal capacity.

Representation of a CC Members as agents S54 – the powers of members to bind the corporation has been amended. Therefore the power of members to bind the corporation to bona fide 3rd parties has been extended.

S54 - each and every member of the corporation is an agent of the corporation in relation to a person who is not a member of the corporation and who is dealing with the corporation. The act of a member binds the corporation to a 3rd party, irrespective of whether the act was performed for the carrying on of business of the corporation or not. If the member so acting in fact had no power to act for the CC in that matter, he will still bind the CC in respect of a 3 rd party dealing with the CC, unless the outsider has, or ought to have reasonably to have, knowledge of the fat that the member has no such power. A CC may be bound to contracts falling outside its business scope, even if it was not actually or ostensibly authorized or ratified by the CC. outsiders are entitled to assume that each member had the necessary authority to act on behalf of the CC in a transaction.

Scope of S54 – deals only with the power of a member to bind the CC in relation to a person who is not a member of the CC and who is dealing with the CC. S54 does not apply, where

- a non-member acts as agents of the corporation, or- the person dealing with the CC is not an outsides but a member, or- the outsider is unaware of the existence of the CC at the time of the conclusion of the

contract, or- the outsider is aware of the existence of the CC but deals with the member in his personal

capacity and not as an agent of the CC.

Non-members as agents CC may authorize a person who is not a member to act as its agent. In such an event S54 is not applicable.

CC will be bound by an agreement entered into on its behalf by a non-member if the non-member had express or implied authority from the CC to enter into the agreement on the CC’s behalf, or the CC consequently ratified the agreement.

A contract between a member and a CC falls outside the scope of S54. The principles of representation should apply. The contract will be voidable at the option of the CC, by reason of breach of members’ fiduciary duties, if the member failed to disclose his interest in the contract at the earliest opportunity.

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Study unit 21- Personal liability of the CC Personal liability as a sanction

CC creates very few sanctions. One sanction is the imposition of personal liability on members and certain other persons for the debts of the CC.

S 63 – joint and several liability for the debts of the CC - contains a number of provisions giving rise to civil liability. Renders persons who contravene specified provisions of the Act jointly and severally liable together with the CC, for specified debts of the CC. liability arises automatically from contravention of statutory provisions. The statutory liability of an offender does not relieve the CC of its primary liability for that debt. The offender simply becomes jointly and severally liable together with the CC for payment of the debt. The creditor may sue either the CC or the offender for payment of the whole of the debt or may proceed against both debtors jointly.

Joint and severally liability arises in the following instances:- use of the identifying abbreviation – if the name of the CC is used in any way without the

abbreviation CC in English, or equivalent , subjoined, any member of the CC who is responsible for, or knowingly permitted the omission is so liable for any debt incurred by the CC.

- Delivery of contribution – if a member fails to contribute his initial or additional contribution to the CC, he is liable for every debt of the CC incurred from the date of registration of the founding statement in which the particulars of the contribution concerned are stated.

- Membership – if a juristic person or a trustee if a trust purports to hold a member’s interest in circumstances other than those in S29, the juristic person or trustee of a trust and their nominee is so liable for the debts of the CC incurred at the time of membership.

- Payment iro acquisition of member’s interest – where the CC makes a payment or delivers or transfers property in respect of it acquisition of a member’s interest, it must comply with S39. This section requires the prior written consent of every member for the specified payment and the maintenance of insolvency and liquidity of the CC. if the payment is in contravention of S39, every member who is aware of the payment, incl prior to payment.

- Financial assistance – A CC may provide financial assistance to enable another to acquire a member’s interest in that CC if the requirements of S40 are met.

- Management of disqualified persons – that person if they take part and are disqualified to do so, may be liable for every debt incurred as a result of his participation in the management.

- S47 now disqualifies such a person from participating in the management of the CC irrespective of his membership.

S64 – liability for recklessness and fraudulent trading – if it appears that any business of a CC was carried on recklessly, with gross negligence or fraudulently, the court may declare that any person who was knowingly a party to the carrying on of the business in such a manner will be personally liable for such debts or other liabilities of the CC as the court may direct. S 64 allows for gross negligence. The test for recklessness is objective because the defendant’s conduct is measured against the standard of conduct of a notional reasonable person. The test also has a subjective element because the notional reasonable person is placed in the same group as the defendant and with his knowledge.

S65 – abuse of corporate juristic personality – the court may be called upon to find that the incorporation of the CC or any act by or obo the CC constitutes a gross abuse of its juristic personality as a separate legal entity. If such abuse is found, the court may declare that the CC is deemed not to be a juristic person as regards the rights, obligation or liabilities of the CC or any of its members.

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