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Study unit 1: Legal personality and lifting of the veil

Once a company is incorporated, it is a separate legal entity distinct from its members. It can
enter into contracts in its own name and sue and be sued. Its members are not liable for its
debts and enjoy limited liability.

Separate legal personality:

Salomon v Salomon & Co Ltd:

 The estate of the company is assessed apart from the estates of the individual
members, therefore the debts of the company are the company’s debts and separate
from those of its members;
 The profits of the company belong to the company and not its members and only after
the company has declared a dividend may the members claim that dividend;
 The assets of the company are its exclusive property and the members have no
proportionate proprietary rights therein; and
 No one is qualified by virtue of his or her memberships to act on behalf of the company.
Only those who are appointed as representatives of the company in accordance with
the articles can bind the company.

The branches or divisions of a company are part of the company itself and do not have
their own separate legal existence (ABSA Bank Ltd v Blignaut and Another and Four
Similar Cases 1996 (4) SA 100 (O)).

QUESTIONS:

 When does a company acquire legal personality?

 With reference to case law explain the meaning and effects of separate legal
personality.

Piercing the corporate veil:

 In certain cases the courts have disregarded the separate legal personality of a
company in order to recognize the substance or practical realities of a situation rather
than the form.

 ‘Piercing the corporate veil’ refers to those exceptional circumstances where the
court ignores the separate legal existence of the company and treats the
shareholders as if they were the owners of the assets and had conducted the business
of the company in their personal capacities OR attributes certain rights or obligations of
the shareholders to the company.

 There are no hard and fast rules regarding the lifting of the corporate veil.

Botha v Van Niekerk:

 The seller must have suffered an “unconscionable injustice” before the court could lift
the veil.
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Cape Pacific:

 The court confirmed that it has no general discretion simply to disregard a company’s
separate legal personality.
 The separate legal personality of a company should not be easily ignored.
 However, circumstances do exist for example fraud, dishonesty or other improper
conduct where it would be justifiable to pierce the corporate veil.
 Botha v Van Niekerk was too rigid.
 The court indicated that it would adopt a more flexible approach namely of taking all the
facts of each case into consideration when determining if the veil should be pierced.
 A balance should also be struck between the need to persevere the separate legal
identity of the company against policy considerations in favour of piercing the corporate
veil. The veil could also be pierced in relation to a specific transaction.

Hülse-Reutter:

 Agreed that court has no general discretion simply to disregard a company’s separate
legal personality.
 The corporate veil would only be lifted if there was evidence of misuse or abuse of the
distinction between the company and those who control it and this has enabled those
who control the company to gain an unfair advantage
 Therefore a dual test was used: the element of unfair advantage introduced.
 The court further confirmed that much depended on a close analysis of the facts of each
case, considerations of policy and judicial management.

Die Dros (Pty) Ltd and another v Telefon Beverages CC and others:

 Where fraud, dishonesty and other improper conduct is present, the need to preserve
the seperate legal personality of a company must be balanced against policy
considerations favouring piercing the corporate veil.

Le’Bergo Fashions CC v Lee and another:

 The Court will pierce the corporate veil where a natural person, who is subject to a
restraint of trade uses a close corporation or a company to front to engage in the activity
that is prohibited by the agreement

QUESTION:

Under which circumstances will the separate legal existence of a company be disregarded?
Refer to relevant authority in your answer.

The Companies Act 2008: Piercing the corporate veil

Please note that s 163(4) as discussed in the DVD and study guide has been repealed.
Section 20(9) replaces it.

 The disregard of the separate legal personality of a company is addressed in section

20(9) of the Companies Act 71 of 2008.
 It follows the example of the Close Corporations Act by codifying the general principle of
piercing the corporate veil.
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 This section provides that if a court finds that the incorporation of a company or any act
by or use of a company constitutes an unconscionable abuse of its juristic personality,
the court may declare that the company will be deemed not to be a juristic person in
respect of rights, liabilities and obligations relating to the abuse.
 The wording is a combination of section 65 of the Close Corporations Act and the
judgment in Botha v Van Niekerk.
 It ignores the view expressed in Cape Pacific Ltd v Lubner Controlling Investments (Pty)
Ltd that described the test in Botha v van Niekerk as too rigid.

We do now know what test will be used, but it remains to be seen how the courts will decide
what would constitute an unconscionable abuse and to what extent they will use the existing
case law dealing with the common law rule of piercing the corporate veil.

It therefore seems that there are still no hard and fast rules; no general discretion of the
courts and that the fact of each case will still have to be taken into consideration when
deciding to pierce the corporate veil.

Activity:

John operated a fast food establishment in Durban under a franchise agreement with
McTucky’s Ltd. In terms of the franchise agreement, John is not allowed to operate a similar
business in the Durban area within three years after the end of the franchise agreement.
John does not renew the franchise agreement when its term ends, but continues to operate a
fast food restaurant from the same premises that he previously occupied.

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

Discuss the possibility that the courts may lift the corporate veil in these circumstances.

Study unit 2: Types of companies

The types of companies that are provided for in the Companies Act 71 of 2008 are:

1. Non-profit companies (NPC’s) and

2. Profit companies

Profit companies can be divided into:

 Public companies (Ltd)
 Private companies (Pty) Ltd
 Personal liability companies (Inc) and
 State-owned companies (SOC)

Exercise:
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o Candy Ltd is a ………………… company.

o Rand Water SOC Ltd is a …………………… company.
o Front End (Pty) Ltd is a ……………………… company.
o Dandala and Associates Inc is a ……………. company.
o Estcourt View Home Owners’ Association NPC is a ……………………… company.

Characteristics of Companies:

Public companies: (Ltd)

Shares may be offered to public and is freely transferrable
May be listed on JSE

Private companies: (Pty) Ltd

Shares may not be offered to the public and are not freely transferrable.

Personal liability companies: (Inc) the directors are jointly and severally liable, together with
the company, for all contractual debts and liabilities incurred during their terms of office.

State-owned companies: (SOC)

Is a “state-owned enterprise” in terms of Public Finance Management Act
Owned by a municipality
e.g. Eskom

Non-profit companies: (NPC): purpose = not to make a profit for its shareholders. Aim is the
promotion of social activities, public benefit, cultural activities or group interests. Must have
directors, but they may not acquire any financial gain except for remuneration for work doen.
Need not have members. If company is liquidated, assets must be transferred to a company
with a similar purpose.

QUESTION:

Name and briefly indicate distinguishing characteristics of the profit companies

recognised in terms of the Companies Act 2008.

Study unit 3: Company formation

Important documents relevant for company formation:
o Notice of incorporation
o Memorandum of incorporation
o Registration certificate

Documents that organise the running of a company:

o Memorandum of incorporation and the Rules

The Memorandum of incorporation:

 MOI is only formal constitutive document

 MOI must be lodged before registration of company
 In case of an inconsistency between the MOI and Companies Act, the MOI will be
invalid to the extent of its inconsistency.
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Ring fenced companies (s 15(2)(b) and (c):-

 Special conditions
 Prohibitions of amendments

Please note the mistake in the DVD! RF is an important principle for representation of
companies. An RF company is one of the circumstances where a third party would be
deemed to know the restrictions in the MOI.

Procedure for the Amendment of the MOI:

The amendment may be proposed by:

o Board of directors
o Shareholders with at least 10% of the exercisable voting rights
o As required by memorandum of incorporation
 Amendment must be adopted by special resolution.

The Rules:

 Adopted by board of directors

 Must be ratified by an ordinary resolution of the shareholders’ meeting
 Subordinate to MOI

Unless the Memorandum of incorporation provides otherwise, the board of directors

may make, amend or repeal any necessary or incidental rules relating to the
governance of the company in respect of matters not addressed in the Companies Act
or the Memorandum of incorporation
A rule must be consistent with the Companies Act and the Memorandum of
Incorporation, failing which it will be void to the extent of the inconsistency.

The MOI and rules are binding/ creates a contractual relationship:

o Between company and shareholders
o Between shareholders
o Between company and directors
o Between company and each prescribed officer, member of the audit committee,
member of committee of the board

QUESTIONS:

 Which documents are important for the registration of a company?

 What is the constitutive document in companies called?
 Explain the meaning and effect if ‘RF’ follows a company’s name.

Activity:
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Mandla is a member of a close corporation that intends to enter into a contract with Monri
(Pty) Ltd. He has just found out that the company's rules are contained in the Memorandum
of incorporation as well as in the Rules of the Board of Directors. This worries him. Upon
hearing that you are an LLB student he approaches you and asks you to advise him about
the following: a) The legal status of the Memorandum of incorporation and the rules of the
Board of Directors.

b) What happens if a provision in the rules of the board of directors is inconsistent with the
Memorandum of incorporation?

Advise Mandla accordingly.

Pre-incorporation contracts:

 Contract concluded obo of company that is not yet registered

 Intention of person concluding the contract is to hold company liable once company
comes into existence
 Common law agency impossible – non-existent principle

Companies Act 2008 – Section 21: Pre-incorporation Contracts

o Person must purport to act as an agent of a company yet to be incorporated

o Agreement must be in writing
o Agreement must be ratified or rejected within three months after incorporation
 If nothing is done, deemed to be adopted
 If partly rejected, person who contracted will be liable for rejected part
 If totally rejected, person who contracted will be liable
 If ratified, person not liable

Activity:

Jack enters into a lease agreement with Mpfari on behalf of a yet to be incorporated
company.

 What is required in terms of section 21 of the Companies Act for the contract to be
binding against the company when it is incorporated?
 Who will be liable if the company is not incorporated?
 Who will be liable if the company only ratifies the agreement partially?

Registration of company names:

• Restrictions have been placed on the name permitted for a company

• A company must use its registered name at all times, and not a modified version of
such name
• In the case of a profit company the name may consist of a registration number only,
followed by the words ‘South Africa’.

o Chosen name may not offend a persons of a particular race, ethnicity, gender or
religion
o The name must not lead to confusion, which could lead to damage
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o Must not be calculated to cause damage

Questions asked in order to ascertain whether or not a name is offensive/ objectionable:

o Do objector and company have similar businesses?
o How sophisticated are their clients?
Activity:

Suppose John, who previously was a franchisee of McTucky’s Ltd, wants to incorporate a
company with the name MacTuckies Ltd. The new company will run substantially the same
business as McTucky’s Ltd. Consider whether McTucky’s Ltd has grounds to object to the
registration of the name.

Study unit 4: Capacity and representation

Legal Capacity and Power of Companies:

 Section 19(1) of the Companies Act of 2008 states that a company has all the legal
capacity and the powers of an individual except to the extent that a juristic person is
incapable of exercising any such power, for instance the capacity to enter into a
marriage. The company’s Memorandum may impose additional restrictions on the
company’s capacity.
o Section 20 of the Companies Act 71 of 2008 determines that no transaction is invalid
solely because it exceeds the company’s capacity.
o Shareholders may ratify transaction that breaches a limitation, restriction or
qualification by special resolution (s 20(2))
o Shareholders, directors or prescribed officers may restrain a company from doing
anything inconsistent with limitations, restrictions or qualifications, but
 May not prejudice the rights of third parties who contracted in good faith; and
 Without actual knowledge of the limitation, restriction or qualification.
o Shareholders have a claim against anyone who fraudulently or due to gross
negligence allowed the company to act inconsistent with a limitation, restriction or
qualification of capacity, unless ratified by the general meeting.

Activity:

The Memorandum of incorporation of ToyZ Ltd state that the main business of the company
is to sell toys. Suppose that the board of directors of ToyZ Ltd decides to buy a luxury yacht
on behalf of the company.
 Is this a valid transaction?
 Would your answer differ if the Memorandum of incorporation of ToyZ Ltd stated that
the company only has the capacity to sell toys?
o How will it affect your answer if the seller of the yacht was aware of the limitation in
capacity of the company?
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Representation:

Authority may be actual or ostensible

Sources of actual authority:

o Memorandum of incorporation
o Rules
o Express mandate

Ostensible authority:
In terms of ostensible authority a company may be liable to a bona fide third party if it is
represented by someone who does not have actual authority, but the company allows such a
person to represent the company as if that person did have authority.

Doctrine of constructive notice –

A person dealing with company is deemed to know the content of the company’s registered
documents.

Section 19(4) of the Companies Act 2008 abolishes doctrine of constructive notice, except:
 Person is deemed to have knowledge of special conditions in RF company
 For purposes of personal liability companies

The Turquand rule –

 A company’s MOI determines who has authority to act on behalf of the company.
 The Turquand rule applies where there is an internal requirement.

e.g. Company A’s MOI determines that the board of directors have authority to
conclude all contracts on behalf of the company. If the amount of the transaction
exceeds R50 000, consent must be acquired from the shareholders in general meeting.

The underlined section is an internal requirement. Even though the MOI is registered and
available to the public, a third party contracting with the company would have to do further
investigation to ascertain whether or not consent was acquired from the shareholders.

The Turquand rule makes this unnecessary as in terms of this rule, third parties who act in
good faith may assume that such internal requirement has been complied with.

• Practical effect of Turquand Rule: A company cannot escape liability under an

otherwise valid contract on the ground that some internal formality or procedure was not
complied with
• The Turquand Rule does not protect:
– Directors, prescribed officers or shareholders
– A third party who has relied on a forged document

Common law rule –

 In terms of this rule, also known as the ‘indoor management’ rule, a person who is
dealing with a company in good faith may make the assumption that the company has
complied with all its internal formalities or that it has duly performed acts of management.
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 The rule emanates from the decision in Royal British Bank v Turquand.
 The Turquand rule was aimed at countering the effects of constructive notice: “If persons
dealing with companies were expected to investigate whether the internal requirements
had been satisfied, it would lead to an impossible situation, and no one could safely
contract with companies.”

Statutory Turquand rule (Section 20(7) of the Companies Act 2008) –

• Section 20(7) of the Companies Act of 2008 encapsulates the Turquand Rule but goes
further than the common law in excluding a third party who reasonably ought to have
known of non-compliance with the formality.

A person dealing with the company in good faith is entitled to assume that the company has
complied with all procedural requirements in terms of the Act, the MOI and the Rules, unless:
 the person knew of failure to comply with formal or procedural requirements; or
 reasonably ought to have known of such a failure

The Doctrine of Estoppel -

Company will be bound to a contract entered into by a person without actual authority if:
 There was a misrepresentation by the company that the person had authority;
 The misrepresentation was intentional or negligent;
 The third party was induced by the misrepresentation to deal with the purported agent;
 The third party suffered prejudice due to the misrepresentation.

In Freeman and Lockyer v Buckhurst Part Properties (Mangal) Ltd the court decided that
estoppel could not only arise from the articles, but also because the company with the full
knowledge and approval allowed and ordinary director to act as the managing director and in
this manner culpably represented that he was entitled to act.

Activity:

The rules of Concord Ceramics (Pty) Ltd (RF) provide that the board of directors have
authority to deal on behalf of the company. The rules further provide that for any transaction
of which the value exceeds R1 million the approval of the general meeting by way of a
special resolution is required.

 Are third parties deemed to be aware that the consent of the general meeting is required
for transactions in excess of R 1 million?
 To what extent is the doctrine of constructive notice still applicable to this company?
 Suppose that one of the directors enters into a contract in excess of R1 million without
the approval of the general meeting. Will the company be bound to the contract?
 Suppose that Mike, a site manager on one of the company’s plants, regularly contracts
on behalf of the company without having a mandate to do so. The board of directors take
note of this behaviour, but never take any steps to caution Mike against contracting on
behalf of the company. Mike enters into a contract with Timothy for the purchase of raw
materials. The company now argues that Mike did not have authority to enter into the
contract and that it is not bound to the contract. Advise Timothy on whether the company
can be held bound to the contract.
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Study unit 5: Corporate finance, shares, debentures and

distributions
Authorised share capital: The authorised share capital of a company is indicated in the
company’s MOI. It may be increased or decreased in accordance with the needs of the
company by special resolution or by the board of directors of the company in certain
circumstances, except to the extent that the company’s MOI provides otherwise.

The position regarding par value shares:

Par value shares issued prior to the coming into effect of the 2008 Act will continue to be
valid until the Minister has made regulations under the 2008 Act providing for their conversion
into no par value shares. The regulations must provide for the preservation of the existing
rights of the holders of par value shares. Where this is not possible, the regulations must
provide for compensation to be paid to the holders of par value shares.

Distinctions between shareholders and debenture holders:

 The shareholder of a company has the right to a share in the profits of a company
(provided that a dividend is declared by the company) and a right to a share in the net
assets of the company if it is wound up. However, a shareholder is also under a duty to
abide by the company’s MOI.
 As a debenture is a debt instrument, the holder of a debenture has effectively loaned a
sum of money to the company on certain terms. Accordingly, the debenture holder is
entitled to repayment of the sum of money loaned to the company and is therefore a
creditor of the company.
 A debenture is a document issued by a company acknowledging that it is indebted
to the debenture holder in the amount stated therein (Coetzee v Rand Sporting Club
1918 WLD 74)

 A debenture may be secured or unsecured.

 Debenture holders may have a right to attend and vote at general meetings and to
appoint directors, and have special privileges regarding the allotment of securities,
unless the Memorandum of incorporation provides otherwise

The procedure for the issue of shares prescribed by the 2008 Act:
 The power to issue shares is exercisable by the company’s board of directors, not the
shareholders of the company in general meeting.
 The directors may only issue new shares within the classes and to the extent that the
company’s MOI has authorised the shares.
 The board of directors may at any time resolve to issue new shares.
 If the issue of shares exceeds the authorised share capital of the company, the issue of
the shares may be retrospectively authorised by amendment of the company’s MOI by
special resolution or, in appropriate cases, by the board itself.
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 The issue of shares must be approved by the shareholders of the company by special
resolution where the shares are issued to:
- directors, including future directors, or to certain prescribed officers of the company;
- a person related or interrelated to the company, or to a director or prescribed officer of the
company; or
- a nominee of any of the above persons.
 No special resolution is required where the issue is:
- under an underwriting agreement;
- in the exercise of pre-emptive rights;
- in proportion to existing shareholdings and on the same terms and conditions as have been
offered to all shareholders;
- in pursuance of an employee share scheme;
- in pursuance of an offer of shares to the public.
 Where further shares are issued in a transaction or series of integrated transactions, and
the voting power of the new shares equals or exceeds 30 per cent of the voting power of
all the shares of that class held before the new issue of shares, the issue must be
approved by a special resolution.
 A company may not issue shares to itself.

“Right of pre-emption” in private companies.

 A right of pre-emption is a right conferred on shareholders in private companies to
subscribe for new shares to be issued by the company in proportion to their voting power.
 Rights of pre-emption prevent the dilution of shareholding interests held by existing
shareholders of the company and are therefore aimed at protecting such shareholders.

The solvency and liquidity test:

 The solvency and liquidity test set out in section 4 of the 2008 Act replaces the capital
maintenance concept, which underpinned the 1973 Act.
 The solvency and liquidity test will play a crucial role in company distributions, share
repurchases, financial assistance by a company for the purchase of its own shares, and
financial assistance given by a company to its directors. The test will also play a role in
mergers and acquisitions.
In terms of section 4, a company will satisfy the solvency and liquidity test if, considering
all the reasonably foreseeable financial circumstances of the company at that time, both
of the following conditions apply:
○ The assets of the company, fairly valued, equal or exceed the liabilities of the company
as fairly valued
○ It appears that the company will be able to pay its debts as they become due in the
ordinary course of business for a period of 12 months after the date on which the test is
considered, or, in the case of a distribution, 12 months following that distribution.
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● Accordingly, the test aims to assess whether a company is in the financial position to pay
out funds to shareholders, prospective purchasers of company shares and company
directors.
● The test seeks to ascertain whether a company is solvent (it has more assets than
debts), and whether it is reasonably foreseeable that it will have the ability to pay its
debts as they become due over the next 12 months. Thus, the liquidity test is really an
enquiry into the cash flow position of the company. Solvency does not necessarily imply
liquidity, and vice versa.

Classes of shares:

Shares Main features

Constitute the equity share capital of the company

Ordinary shares The amount of the dividend paid fluctuates in accordance with the
profits of the company

Holders enjoy preference over other classes of shares with respect

to the payment of their dividends and sometimes to the return of capital
Preference shares
on a winding up. The preferential dividend is usually fixed as a
percentage of the nominal value of the shares

Cumulative Holders enjoy a right of priority in respect of both arrear dividends

preference shares and current dividends

Holders have a right to share on a pro rata basis together with ordinary
Participating
shareholders in the distribution of surplus profits after the
preference shares
payment of their preferential dividend.

Preferential rights to
Holders enjoy a right to repayment of their capital in a winding-up in
refund of capital on
priority to ordinary shareholders
winding-up

Convertible Holders have the right to convert, usually after a given date,
preference shares all or part of their preference shares into shares of another class
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Issued to remunerate promoters of companies for their services in

Deferred shares the formation and incorporation of companies
(founder’s shares) Qualify for a dividend after a prescribed minimum dividend has
been paid to ordinary shareholders

Distributions (Payment of dividend, repurchase of shares by company/ debt/ waiver of

debt)

 A distribution refers to payments to shareholders either as a return on share capital or as

a return of share capital.
 A distribution is a direct or indirect transfer of money or other property of the company,
other than its own shares, to shareholders of that company.
 Dividends are the amounts declared by the board of directors to be awarded to
shareholders as a return on their investment in the company.

Requirements for a valid distribution

(section 46 of the Companies Act 2008)

o Authorisation by board
o Statement that solvency and liquidity was considered and found to be adhered to
o Distribution must be made within 120 days after the resolution of the board, otherwise a
new resolution must be taken and the solvency and liquidity of the company must again
be considered.

Non-adherence may lead to personal liability of directors.

Activity:

Prosperity Ltd wants to decrease its share capital by a repurchase of shares.

 Advise the board of directors of Prosperity Ltd of the requirements before they may
proceed with this transaction.

 Suppose that it emerges after the transaction is approved by the board of directors that
one of the company’s main debtors is insolvent and will not be able to pay its debts to the
company. This means in turn that Prosperity Ltd will not be able to pay its debts after the
repurchase of the shares. Advise Prosperity Ltd on possible steps it may take to remedy
the situation.

Financial assistance:

 One must determine whether a transaction is financial assistance. If it is not, section 44 is

not applicable - Take careful note of the Lipschitz decision (Impoverishment test
(Gradwell), exposure to risk, purpose of acquiring shares in the company)

Section 44 of the Companies Act 2008:

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Requirements for financial assistance:

 Assistance may be given to two categories of persons:

o In terms of an employee share scheme; OR
o If the shareholders by way of a special resolution have agreed that specific persons or
persons falling in a specific class of persons may be assisted to acquire shares in the
company
 Persons must then fall in the class of persons
 Board must authorise provision of financial assistance.
 Resolution of the board to provide financial assistance must be within two years of the
shareholders’ resolution

Before financial assistance is given, the board must be satisfied that:

o The solvency and liquidity criteria have been met

o That the assistance is provided in terms that are fair and reasonable to the company.
o It is possible to include restrictions on financial assistance in the Memorandum of
incorporation, or to include extra qualifications of persons that may be assisted.
 The board must ensure that such restrictions or limitations have been complied with
before extending financial assistance.

Activity:

Vusi, a shareholder and director of Securities (Pty) Ltd agrees to sell his shares in the
company to Jonathan for R20 000. To enable Jonathan to acquire the shares, Securities
(Pty) Ltd agrees to lend Jonathan the sum of R20 000.

Explain whether this transaction amounts to financial assistance and if so, what requirements
have to be satisfied in order for it to be a valid transaction.

Study Unit 6: Shareholders and company meetings

Corporate decision making:

 The majority makes the decisions in companies.

 General rule: corporate decisions are to be taken at properly constituted meetings of the
company and not by separately obtaining the individual assent of members.

 The courts however, recognise that a company can perform certain acts validly without
any meeting being held, provided that all members were fully aware of what was being
done and unanimously assented thereto (Gohlke and Schneider v Westies Minerals
(Pty) Ltd and In re Duomatic)

 Section 60 of the Companies Act 2008: unanimous assent unnecessary. A decision may
be taken by the required majority of shareholders in writing. This does not apply in
matters which must be decided upon at an AGM.

 Where every shareholder is also a director of a company, they may decide on any matter
to be referred by the board at any time, without notice or compliance with any internal
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formalities except when the Memorandum provides otherwise. Every director must be
present at the board meeting when the matter is referred to them in their capacity as
shareholders. A quorum must be present at the meeting and the resolution passed must
be accepted for it to be either an ordinary or a special resolution.

Matters to be decided upon at AGM:

 Appointment of directors
 Appointment of auditor
 Appointment of audit committee
 Director’s report
 Audit committee report
 Any other matter raised by shareholders

Activity:

Bongi and Zandile each hold 50% of the shares in Monateness (Pty) Ltd. They are also the
only two directors of the company. Monateness (Pty) Ltd’s Memorandum of incorporation
provides that the company in general meeting may declare final dividends and that no
dividend may exceed the amount recommended by the directors. At a meeting of the board
of directors, Bongi and Zandile agree that the company must declare a dividend of 25 cents
per share. The dividend is paid out to them without a general meeting being held to formally
declare the dividend. Was the declaration of the dividend valid? Refer to relevant case law in
your answer.

Section 62: Notice requirements:

 In writing
 Must indicate date, time and place
 Must indicate purpose
 Indicate that shareholder is entitled to appoint a proxy
 Must include a copy of any proposed resolution
 Must be given at least 10 days prior to the meeting (15 days for public companies and
non-profit companies with members)

Where the company has failed to give notice of the meeting or there has been a defect
in the giving of notice, the meeting may proceed if the persons who are entitled to vote
in respect of each item on the agenda are present at the meeting, and acknowledge
actual receipt of the notice, and agree to waive notice of the meeting or in the case of a
material defect, ratify the defective notice.

Quorum:

Presence at meeting of holders of at least 25% of the shares entitled to be voted in respect of
at least one matter

If quorum is not achieved within 1 hour, meeting must be postponed for a week.
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Resolutions:

 Ordinary resolution: 50% of exercised voting rights

 Special resolution: 75% of exercised voting rights
 MOI may indicate higher percentage for ordinary resolution/ lower percentage for special
resolution
 Difference between ordinary and special resolution must remain at least 10%

Proxies:

 Shareholder may appoint proxy to act on his/ her behalf.

 Appointment must be in writing, dated and signed by shareholder.
 A proxy can remain valid for a maximum of one year from date of signature.

Postponement/ Adjournment of meetings:

o A meeting may be postponed or adjourned for one week* if, within one hour* after the
appointed time for a meeting to begin, a quorum is not present
o Where a quorum is not present at the postponed or adjourned meeting, those present in
person or by proxy will be deemed to constitute a quorum
o A meeting may be adjourned from time to time without further notice on a motion
supported by a majority of the voting rights held by all those present at the meeting.

Activity:

The board of directors of Zithulele (Pty) Ltd convened a meeting to be held on 26 February
2011. Mr Ngcobo a shareholder of Zithulele (Pty) Ltd was given a notice dated 19 February
2011, to attend the meeting at the board room of Zithulele (Pty) Ltd at 10:00. The agenda for
the meeting is to discuss Zithulele’s business.

Advise Mr Ngcobo whether he was given proper notice.

Study Unit 7: Directors and directors committees

 Section 66(1) of the Companies Act 71 of 2008 provides that ‘[t]he business and affairs of
a company must be managed by or under the direction of its board, which has the
authority to exercise all of the powers and perform any of the functions of the company,
except to the extent that this Act or the company’s Memorandum of incorporation
provides otherwise.’

Companies are obliged to have directors:

 Public and non-profit companies – at least 3

 Private and personal liability companies – at least 1
 MOI may provide for a higher number.

Where a company does not have the prescribed number of directors any act done by
the board or the company will nevertheless remain valid
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Types of Directors:

Types of directors recognised by King Code:

 Executive directors
 Non-executive directors
 Independent directors

(NB! Note what the court held in Howard v Herrigel regarding the distinction between
executive and non-executive directors.)

Types of directors recognised by Companies Act, 2008:

 Ex officio director
 MOI-appointed director
 Alternate director
 Elected director
 Temporary director

Shareholders must elect at least 50% of the directors of a profit company. The rest of the
directors can hold office either because they have also been elected by the shareholders, or
for one of the following four reasons:

 A director can hold the office of director because he holds another office. E.g. the MOI
can provide that any person who is appointed as legal adviser of the company will also
be a director of the company. In such case a person appointed as legal adviser will
automatically be a director – an ex officio director.

 A director can hold the office of director because he was appointed by name in the MOI
or because he was appointed by someone who was given the authority in the MOI to
appoint a director - MOI-appointed director.

 A director can hold the office of director because he is an alternate director. Depending
on the MOI, these directors may either be appointed by the board or elected by the
shareholders, but at least 50% of the alternate directors must be elected by the
shareholders.

 A director can hold the office of director because he is a temporary director. Depending
on the MOI, the board may appoint these directors.

Activity:

Sam is appointed as a director in ABC Ltd a subsidiary of FAB Ltd. Sam has a separate
employment contract with the company and is engaged in the day-to day operations of the
company.
Linda was elected as a director by the shareholders. However, she does not participate in the
management of ABC Ltd or any of its subsidiaries. She also does not have a separate
contract of employment with ABC Ltd.
 P a g e | 18

In the company’s annual report it is states that ABC Ltd’s Head of Department will by virtue of
holding this office be a director. Jack is appointed as the Chief Executive Officer, but was
never appointed as a director by the shareholders at any meeting.

Calvin was appointed by the directors of ABC Ltd to stand in for Sandra, an executive
director of the company while she is on maternity leave.

Distinguish between the different types of directors as recognised in the Companies Act.
Indicate which type of director Sam, Linda, Jack and Calvin each would be classified as.

Disqualification to Act as Directors:

Ineligible:  (may never be) A person who is ineligible to be a director is absolutely

prohibited from becoming a director
• There are no exceptions to the prohibition.

 Juristic person
 Unemancipated minor/ under legal disability
 Ineligible in terms of provisions of MOI

Disqualified: A disqualification from being a director is not absolute

• A court has discretion to permit a disqualified person to accept appointment as a
director.

 Declared delinquent
 Unrehabilitated insolvent
 Prohibited from being director i.t.o. public regulation
 Removed from office of trust for misconduct/ dishonesty
 Convicted of fraud, dishonesty, theft or a related offence
 Disqualified in terms of provisions of MOI
 Remember s 69(12): Under certain conditions a disqualified person may act as a director
of a private company without the court’s consent.

Ex Parte Barron:
 Court can be more lenient in a case where a private company is affected than where a
public company is affected. This is due to the fact that
 a director of a public company deals with funds in which a vast number of people are
involved.
 Such a director should obviously be under more scrutiny than a director of a private
company

QUESTION:

Explain the difference between persons who are ineligible to be directors of a

company and those who are disqualified from being directors of a company.

Section 162: Delinquency and probation:

A director may be declared delinquent or under probation in terms of s 162 of the Companies
Act 2008
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The CICP must keep a public registry of persons who are subject to an order of the court in
terms of this section

Delinquency:

Any one of the following may apply for a delinquency order:

 Company
 Shareholder
 Director
 Company secretary or prescribed officer
 Registered trade union/ other employee representative

Grounds:

 Served as a director while disqualified

 Acted as director while under probation in a manner that contravened order of probation
 Grossly abused position of director
 Took personal advantage of information/ an opportunity
 Intentionally/ by gross negligence inflicted harm to company/ subsidiary.
 Acted in a manner that amounts to gross negligence, wilful misconduct or breach of trust.

The CICP or TRP may apply to a court if all of the above grounds are present and in
addition they have proof that the director:

 acted in the name of the company, signed anything on behalf of the company, or
purported to bind the company or authorise the taking of any action by or on behalf of the
company, despite knowing that the director lacked the authority to do so
 acquiesced in the carrying on of the company’s business despite knowing that it was
being conducted in a reckless manner
 been a party to an act or omission by the company despite knowing that the act or
omission was calculated to defraud a creditor, employee or shareholder of the company,
or had another fraudulent purpose
 Has repeatedly been personally subject to compliance notices for similar contraventions
 At least twice been convicted of an offence/ fined in terms of any legislation
 Within a period of 5 years was a director/ managing member of a company/ companies
or a close corporation/s that contravened legislation in the time that the person was a
director/ managing member.

Any organ of state may apply to declare a director delinquent if at least 3 grounds listed
above is present.

Probation:

Applicants:
 P a g e | 20

 Company
 Shareholder
 Director
 Company secretary or prescribed officer
 Registered trade union/ other employee representative

Grounds for order:

A person may be placed under probation on the same grounds for delinquency, and in
addition also the following grounds:

 while serving as a director, the person was present at a meeting and failed to vote
against a resolution despite the inability of the company to satisfy the solvency and
liquidity test
 while serving as a director, the person acted in a manner materially inconsistent with the
duties of a director
 while serving as a director, the person acted in a way that had a result that was
oppressive or unfairly prejudicial to a shareholder or another director, or that unfairly
disregarded the interests of a shareholder or another director
 while serving as a director, the person acted in a way that had a result that the business
of the company, or a related person, was being or had been carried on or conducted in a
manner that was oppressive or unfairly prejudicial to a shareholder or another director, or
that unfairly disregarded the interests of a shareholder or another director
 while serving as a director, the person exercised his powers in a manner that was
oppressive or unfairly prejudicial to a shareholder or another director, or that unfairly
disregarded the interests of a shareholder or another director
within any period of 10 years after the effective date the person has been a director of
more than one company, or a managing member of more than one close corporation,
irrespective whether concurrently, sequentially or at unrelated times; and during this time
two or more of those companies or close corporations each failed to fully pay all of its
creditors or meet all of its obligations, except in terms of a business rescue plan or
business rescue plan

The CICP or TRP may apply to a court if the first two grounds are present:
 while serving as a director, the person was present at a meeting and failed to vote
against a resolution despite the inability of the company to satisfy the solvency and
liquidity test
 while serving as a director, the person acted in a manner materially inconsistent with the
duties of a director

Probation/Delinquency order:

 The court may order in a declaration of probation/ delinquency that the person:
 Undergo remedial education
 Carry out a designated program of community service
 Pay compensation
 In case of probation: be supervised by a mentor/ limited to serving as a director of a
private company or company of which he or she is the only shareholder.

QUESTION:
 P a g e | 21

On what grounds can a person be declared a delinquent for the purposes of the Companies
Act 2008?

Activity:

Cynthia is a director of Healthline (Pty) Ltd. Healthline has developed a new treatment for
AIDS. Cynthia sold the formula to a scientist at AIDSCO (Pty) Ltd for R1 M. Healthline is very
upset about this. Explain whether or not the company may take action against Cynthia in
terms of s 162. In your answer refer to:

 The applicants
 The grounds
 The possible order
 The effect of the order

Duties of Directors:

Fiduciary Duties:

 The duties of directors contained in the Companies Act 71 of 2008 are subject to and
does not substitute their common law duties.

 Directors stand in a fiduciary relationship to the company of which they are directors,
even if they are non-executive directors. In Cyberscene Ltd and others v i- Kiosk internet
and information (Pty) Ltd, it was confirmed that a director stands in a fiduciary
relationship towards a company of which he is a director, even if he or she is a non-
executive director.

 A director has a fiduciary duty towards the company to act bona fide and for the best
interest of the company.

 He or she should therefore always avoid a conflict between his own interests and those
of the company.

 This duty entails in principle that he or she may not for personal gain make use of any
information which he acquired in his capacity as a director.

 If the company suffers a loss as a result of the director’s breach of his fiduciary duty or if
the director has benefited, the amount of that loss/ benefit can be recovered by the
company and the transaction can be set aside.

Robinson v Randfontein Estates Gold Mining Co – Directors must avoid conflicts of interest.

Facts: the company wanted to buy a farm, but couldn’t come to an agreement with its owner.
Robinson, the chairman of the board bought the farm in his own name for R120 000 and sold
it to the company for a profit of R550 000
AD held: Robinson was not justified in making a profit from his office or placing himself in a
position where his personal interests conflicted with his duties. He was ordered to repay the
company the profit of R430 000 which he had made.
 P a g e | 22

The fiduciary relationship arises from the purpose for which a director is entrusted with his
office.

Howard v Herrigel -
It is unhelpful or even misleading to classify company directors as “executive” or “non-
executive” for purposes of determining their duties to the company or when any specific or
affirmative action is required of them.
Once a person accepts an appointment as director, he or she is obliged to display the utmost
good faith towards the company irrespective of whether such a person is an ‘executive’ or
‘non-executive’ director.

Regal Hastings v Gulliver- Directors must avoid a conflict of interest. Previous director who
has since resigned can be held liable for profits made in the course of his performance of
duties in company.
It makes no difference if the profit is made in good faith with full disclosure and whether or not
the company suffered any loss as a result of the director’s actions.
Magnus Diamond Mining Syndicate v Macdonald & Hawthorne - Directors may not use
information acquired in capacity as director for own personal benefit.

Industrial Development Consultants v Cooley - Directors may not use information acquired in
their capacities as directors for their own personal benefit. Even where a person did not wish
to contract with a specific company and then a contract is concluded with a director, such
director could be held liable for profits as he/ she used information that he/ she gained in his/
her capacity as director for his/ her own benefit.
Facts: the managing director, Cooley, tried to get a building contract for his company. The
other party did not wish to do business with the company, but indicated they would do
business with Cooley himself. Cooley resigned as MD and accepted work from the other
party.

Held: Even though the other party was not prepared to contract with the company Cooley
was held liable to pay the company all the profit he made in terms of the contract, because
they were made as a result of information Cooley got in his capacity as a director.

The court confirmed that a managing director might be in breach of the fiduciary duty owed to
the company despite termination of his or her office and may be held liable to account to it for
any profits he made as a result of information which he obtained in his capacity as its director

A director may not use the information that he acquired in his capacity as director for his own
personal benefit (Magnus Diamond Mining Syndicate v Macdonald & Hawthorne (1909 ORC
65) and Sibex Construction (SA) (Pty) Ltd v Injectaseal Ltd (1988 2) SA 54 (T); Atlas Organic
Fertilizers v Pikkewyn Ghwano (Pty) Ltd (1981 (2) SA 173 (T) 197))

Fiduciary Duties in Companies Act 71 of 2008: (ss 75 and 76)

● To disclose to the board any personal financial interest in matters of the company (s
75).
● Not to use the position of director or information obtained as director to gain an
advantage for himself or another person, or to knowingly cause harm to the company or
a subsidiary (s 76(2)(a).
● To disclose to the board of directors any material information that comes to a director’s
attention (s 76(2)(b))
 P a g e | 23

● To act in good faith and for a proper purpose (s 76 (3)(a)).

● To act in the best interests of the company (s 76 (3)(b)).
● To act with a reasonable degree of care, skill and diligence (s 76 (3)(c)).

Activity:
Samson is a director of Tectronics (Pty) Ltd, a company that manufactures tyres. Samson
obtains information that a limited amount of rubber, which is used in the manufacture of tyres,
is being sold very cheaply by a foreign company. Samson resigns as director of Tectronics
(Pty) Ltd and incorporates Speedytyres (Pty) Ltd. His company also manufactures tyres.
Samson then enters into a contract with the foreign company on behalf of Speedytyres (Pty)
Ltd, for the purchase of the entire rubber stock.

Advise Samson whether or not he acted in breach of his fiduciary duties to Tectronics (Pty)
Ltd. Refer to relevant case law in your answer.

Duty to act with reasonable care and skill:

 Section 76(3)(c) (i) & (ii) requires a director to exercise a degree of care, skill and
diligence that may reasonably be expected of a person carrying out the same functions
in relation to the company as those carried out by that director and having the general
knowledge, skill and diligence of that director.
 The test to determine whether or not a director acted with the required degree of care
and skill is objective with subjective elements.

 The extent of a director’s duty of care and skill depends to a considerable degree on the
nature of the company’s business and on any particular obligations assumed by or
assigned to him.

 There is a difference between the full time director or executive director who participates
in the day to day management of the company’s affairs and the non-executive director
who has not undertaken any special obligation.

 A director is not required to have special business acumen or expertise, or singular

ability or intelligence or even experience in the business of the company.

 He or she is expected to exercise the care which can 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 or she is entitled to accept and rely on the judgement,
information and advice of the management, unless there are proper reasons for
questioning such. A director is therefore entitled to rely on the following persons:

- One or more employees of the company whom the director reasonably believes to be
reliable and competent in the functions performed
- The information, opinions, reports or statements provided by legal counsel,
accountants, or other professional persons retained by the company
 P a g e | 24

- The board or committee as to matters involving skills and expertise that the director
reasonably believes are matters within the particular persons professional or
competence or as to which the particular person merits confidence or a committee of
the board of which the director is not a member, unless the director has a reason to
believe that the actions of the committee do not merit confidence.
o Remedies against a breach of the duty of care and skill may be based on contract if a
contract was concluded between the company and the director. Alternatively, a delictual
claim for damages exists. In order to claim for delict, obviously all the requirements
must be proven.
 Section 77 (2) (a) and (b) provides that a company may recover loss, damages or costs
sustained by it from the directors in terms of the common law principles relating to
breach of fiduciary duties or a breach of the duty to act with care and skill.
 Section 77(3)(b) further provides that a director may be held liable for any loss,
damages or costs sustained by the company as a result consequence of the director
having acquiesced in the carrying on of the company’s business despite knowing that it
was being conducted in a manner prohibited by section 22 (1).
Case Law:

In Fisheries Development Corporation v Jorgensen, it was held that:

 The extent of the director’s duty of care and skill depends to a considerable degree on
the nature of the company’s business and on any particular obligations assumed by or
assigned to him.
 The law does not require of a director to have special business acumen and that
directors may assume that officials will perform their duties honestly.
 The fact that someone is a non-executive director does not exclude assumption of
liability as section 76(1) of the Companies Act does not distinguish between a director
and a non executive director.

The Business Judgment Rule (Section 76(4))

In any proceedings against a director, other than for wilful misconduct or wilful breach
of trust, a court may relieve the director from liability if it appears to the court that the
director has acted honestly and reasonably or it would be fair to excuse the director.

The Companies Act 71 of 2008 introduces the business judgment rule. This provision states
that a director will be regarded as having acted in the best interests of the company and with
the required degree of care, skill and diligence if the director
• took reasonable steps to become informed about the matter;
• had no material personal financial interest in the subject matter of the decision or knew
of anybody else having a financial interest in the matter, or disclosed his interests; and
• made, or supported a decision in the belief that it was in the best interests of the
company.

A director will also escape liability where he or she had a rational basis for believing and
actually believed that the decision was in the best interest of the company.
 P a g e | 25

NB! The Business Judgment Rule will only apply if the decision was taken in the presence of
the director.

Activity:

Tinyiko is a non-executive director of Verytaste (Pty) Ltd. She attended a meeting where she
became aware of the fact that the company defaulted on certain payments due to Distribo
(Pty) Ltd who is responsible for the distribution of the company’s products. Distribo (Pty) Ltd
had threatened to cancel the contract. However, Verytaste (Pty) Ltd’s chief financial officer
assured the board that this was only due to a temporary cash flow problem. Tinyiko relied on
this assurance. Tinyiko does not attend the next two board meetings. At a subsequent board
meeting Tinyiko learns that Distribo (Pty) Ltd cancelled the contract as a result of continual
non-payments by Verytaste (Pty) Ltd. As a result of the interruption in distribution, Verytaste
suffered a loss in excess of R5 million to the company. As a result, Verytaste (Pty) Ltd is
placed in liquidation.
 On what basis can the liquidator possibly hold the directors liable for the loss that the
company had suffered?
 How will the court determine whether or not the directors are liable for the loss? Refer to
relevant case law in your answer.
 Explain the defence that could possibly be raised by Tinyiko in terms of the Companies
Act 71 of 2008 to avoid liability.

Study Unit 8: Auditors and Company secretaries

 The annual financial statements of public companies must be audited.
 Other companies must audit statements if required by regulation/ voluntarily.

Company Secretaries:

 Public companies and state-owned companies must appoint a company secretary,

appoint an auditor and establish an audit committee.

Duties:

 Provide directors with guidance about their duties, responsibilities and powers.
 Make directors aware of any law affecting the company.
 Report to the Board any failure on the part of the company or a director to comply with
the Act.
 Keep minutes of shareholders’ meetings, board meetings and committee meetings
 Certify the annual financial statements
 Ensure that a copy of the company’s financial statements is sent to every person entitled
to receive it.
 Carry out functions in respect of annual transparency and accountability report.

Auditors:

Auditor must be:

- permanently resident of the RSA.
-registered auditors
 P a g e | 26

-Independent

Appointment:

 Public companies and SOC must appoint an auditor upon incorporation and each year at
the AGM.

 If no auditor is appointed upon registration the directors must appoint an auditor within 40
business days after the date of incorporation.

 The same individual may not serve as an auditor for more than 5 consecutive years.
(Rotation requirement).
 If a person has served as an auditor for two or more years and then ceases to be the
auditor, he or she may not be appointed again until the expiry of least 2 further financial
years.

Rights of auditors:

 Access to accounting records, books and documents;

 Access to information regarding subsidiaries if the company is a holding company.
 To attend any general meeting of the company;
 To receive all notices and communications relating to a general meeting that members
are entitled to receive;
 To be heard at any general meeting on any part of the business pertaining to his/ her
duties or functions.

Resignation of auditor and casual vacancy:

 Resignation effective when notice is filed.

 Declares that no irregularities.
 Board must appoint a new auditor within 40 business days.
 The board must nominate a new auditor within 15 days to the audit committee.
 If the audit committee does not reject the proposal in writing within 5 business days, the
board may appoint the nominated auditor.

Audit committee:

 Public company and state-owned company obliged to have an audit committee.

 Elected each year at AGM.
 Committee must have at least 3 non-executive directors.

Duties:

 To nominate an auditor for appointment;

 To determine the fees to be paid to the auditor and the terms of engagement
 To ensure that the appointment of the auditor complies with the Act and any other
relevant legislation;
 Determine the nature and extent of any non-audit functions performed by the auditor
 Pre-approve a proposed contract for non-audit services to the company;
 To insert a report on the financial statements –
- Describing how the audit committee carried out its functions
 P a g e | 27

- Stating that the audit committee is satisfied that the auditor was independent from the
company;
- Commenting on the accounting practices and internal financial control of the company
and

 To receive and deal with complaints relating to the accounting practices and internal
audit of the company or related matters; and
 To make submissions to the board on any matter concerning accounting policies,
financial control, records and reporting and
 Perform any functions determined by the board.

Liability of auditors:

 Auditors may incur civil liability to company (client) and third party.
 In respect of the company, an auditor may be held liable in terms of breach of contract or
delict
 In respect of third parties, auditors may be held liable in terms of delict or incur statutory
liability in terms of s 58 (2) of the Auditing Professions Act.

Study Unit 9: Remedies, Regulating Agencies and ADR.

 The Companies Act of 2008 provides for specific remedies for holders of securities.

 The MOI and rules form a contractual relationship. Therefore the contractual rights of
parties will apply if there is a contravention of the MOI to the extent that the Companies
Act does not expressly provide otherwise.

 Alternatives to formal dispute resolutions (ADR) include “voluntary” mediation,

conciliation or arbitration.

Statutory remedies:

Against directors: Section 162 – declaring directors delinquent or placing directors under
probation

Against the company:

(a) Section 20(2):

The applicant:

● One or more shareholders

● Directors
● Prescribed officers

Grounds:

 If company does something in contravention with the Companies Act of 2008; or

 A person causes the company to do something inconsistent with the Act.

Effect:
 P a g e | 28

 Any person who causes the contravention is liable to any other person (including
shareholders) for the loss or damage suffered as a result of the contravention.
 Each shareholder has a claim for damages if a person causes the contravention against
such a person

(b) Security Holders’ declaratory order: (s 161)

- A securities holder may apply to a court for a declaratory order determining his or her
rights or;

- Any order to protect his or her rights/ rectify harm done by the company or directors.

These remedies are not available to members of non-profit companies.

(c) Oppressive or prejudicial conduct or abuse of the separate juristic personality of

the company: (Section 20(9))

Applicant:

-Shareholder or
-Director

Grounds:

 Any act/ omission of the company or a related person that is oppressive or unfairly
prejudicial or unfairly disregards the interests of the applicant;

 The company’s business is being carried on in a manner that is oppressive or unfairly

prejudicial, or

 The powers of the directors of the company or related person are being or have been
exercised in a manner which is oppressive or unfairly prejudicial to or unfairly disregards
the interests of the applicant.

The order:

 The Court may restrain the conduct complained of;

 Appoint a liquidator if the company appears to be insolvent;
 Place the company under supervision and commencing business rescue proceedings;
 Regulating the company affairs by amending the MOI or amending a shareholders’
agreement;
 Directing an issue or exchange of shares;
 Appointing directors in place of or in addition to all directors in office, or declaring any
person delinquent or under probation;
 Directing the company or any other person to repay the consideration that the securities
holder paid for shares with or without conditions;
 Varying or setting aside a transaction/ contract.
 Requiring the company to produce financial statements to the court or an interested
person;
 To pay compensation to an aggrieved person;
 Directing rectification of the registers or records of the company or
 P a g e | 29

 For the trial of any as determined by the court.

 If court finds that there has been an unconscionable abuse of the juristic personality of
the company as a separate entity, the court may order that the company is to be
deemed not to be a juristic person in respect of the rights, obligations or liabilities of the
company, or of another person specified in the declaration. The court may give any
order it deems fit.

(d) Derivative actions:

Section 165:

 Section 165 abolishes any right at common law of a person other than a company to
bring or prosecute any legal proceedings on behalf of that company.

Demand (notice) to company:

A person can deliver a notice to a company demanding it to institute legal proceedings or

take other steps to protect the company’s legal interests.

Who can deliver demand?

 a shareholder/ person entitled to be registered as a shareholder;
 a director
 a prescribed officer;
 a registered trade union that represents employees, or another representative of the
employees;
 or any person who is granted leave by the court to do so.

 The company may apply to court within 15 days to have the demand set aside if it is
frivolous, vexatious or without merit.

 If demand is not set aside, the company must appoint an independent person or
committee to investigate the demand.

 This person or committee must report to the board.

 Within 60 days (or as long a court permits) action must be instituted or a refusal notice
must be served on the person who made the demand.

Personal derivative action:

 The person who made the demand may apply to the court for leave to continue with
proceedings in the name of or obo the company if:
 The company failed to take steps as required;
 The company appointed a person or committee who is not independent;
 The company accepted an inadequate report
 The company acted in a way inconsistent with the reasonable report of an independent,
impartial investigator or
 The company has served a refusal notice.

(e) Dissenting securities holders’ appraisal rights:

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Section 164 of the Companies Act of 2008:

 Section 164 provides a remedy for dissenting shareholders who are aggrieved by the
variation of class rights. This remedy only becomes available when the resolution which
detriments the shareholders is taken and cannot be used before the adverse decision
has been taken

Dissenting shareholder can make use of the appraisal remedy provided for in the
Companies Act 2008:

○ Where the company has adopted a special resolution to amend its MOI by altering the
preferences, rights or other terms of any class of its shares in a manner that is
materially adverse to the rights or interests of the holders of that class of shares.
○ Where a company is considering adopting a resolution concerning the disposal of the
greater part of the assets of the company.
○ In circumstances where the company is considering merging or amalgamating with
another corporate entity.
○ Where a company is considering entering into a scheme of arrangement.

Procedure:

If a company (except under a business rescue plan) has given the shareholders notice of a
meeting to consider adoption of a resolution to:
 Amend its MOI by altering preferences, rights, limitations or other terms of any class of
shares adverse to the rights or interests of the holders of the class of shares; or
 Enter into a transaction for the disposal of substantially all assets of the undertaking, or
a merger or amalgamation or a proposed scheme of arrangement

 Dissenting shareholders may send a written objection to the resolution of the company
prior to the meeting.

 Within 10 business days after adoption of the resolution, the company must send a
notice that the resolution has been adopted to each security holder who filed an
objection and has not withdrawn the objection, or voted in favour of the resolution.

 The shareholder may then demand payment of a fair value for the shares held by him or
her.

 The demand must be sent within 20 business days after receiving notice from the
company that the resolution has been adopted or within 20 business days after learning
that the resolution has been adopted if no notice is received.

 The company must then make a written offer to pay an amount considered by the
company’s directors to be a fair value, accompanies by a statement showing how the
value was determined within 5 business days.

 The offer made by the company to dissenting shareholders must all be on the same
terms.
 The offer must be accepted within 30 business days after it was made.
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 The company must pay the agreed amount within 10 business days after the
shareholder accepted the offer and tendered the share certificates or transferred the
shares to the company or the company’s transfer agent.

 If the company fails to make an offer of the offer is considered to be inadequate the
shareholder may apply to court to determine a fair value and for an order requiring the
company to pay the shareholder that fair value.

 If compliance with a court order would result in a company being unable to pay its debts
as they fall due and payable for the next 12 months, the company may apply to court for
an order varying its obligations.

QUESTIONS:

1. Give an example of a remedy provided by the Companies Act 2008:

a. Against directors who have abused their position.
b. To enable shareholders to protect their rights.
c. To prevent the abuse of the separate juristic personality of the company.

Alternative Dispute resolution:

 Alternative dispute resolution is dealt with in Part C of Chapter 7 of the Companies Act
71 of 2008.

 If a dispute was resolved through ADR, the parties can submit the order to a court to
be confirmed as a court order.

Alternative remedies:

The 2008 Act seeks, where appropriate, to replace criminal offences with civil penalties.
Examples of ways in which the 2008 Act imposes civil penalties on persons have
contravened its provisions are:
 The Commission can issue compliance notices to companies and individuals.
 The Commission can levy an administrative fine in certain circumstances.
 Application can be made for a court order to ensure compliance in certain instances.
 Application can be made to declare a director delinquent or under probation.
 Defaulting directors and certain other persons may be personally liable in certain
circumstances.
 A number of provisions give rights to shareholders and other stakeholders.

The role of the Commission and the Tribunal under the Companies Act 2008:
The Commission has a broad range of objectives and functions. One of its most important
functions is receiving complaints regarding alleged contraventions of the 2008 Act, a
particular company’s MOI or the rules of a company. Once it has received a complaint
regarding an alleged contravention of the 2008 Act, the Commission must decide whether or
not to issue a compliance notice in respect of that complaint. It will decide whether or not to
issue such a notice after conducting an investigation into the complaint. However, the
Commission has other objects and functions, including promoting the use of alternative
dispute resolution (“ADR”) procedures by companies in resolving internal disputes, promoting
the reliability of financial statements, establishing a register of companies, advising the
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Minister Finance on company law matters, issuing guidance to the public regarding the 2008
Act, and carrying out research relevant to the 2008 Act.
The Tribunal is tasked with resolving disputes that may arise in connection with the 2008 Act.
In terms of section 156(b), a person seeking to address an alleged contravention of the 2008
Act or to enforce rights under the 2008 Act, or under a company’s MOI or rules, has the
option of applying to the Tribunal for adjudication. The Tribunal also has a role in resolving
disputes referred to it in terms of the ADR provisions of the 2008 Act. The Tribunal also has
other functions assigned to it by the 2008 Act, such as resolving disputes concerning
company names (sections 160 and 17(2)).

Complaints to the Companies and Intellectual Property Commission or the Take-over

Regulation Panel:

Any person may lodge a complaint is a person has acted in a manner inconsistent with the
Act or has acted in a way that infringes the rights of the complainant.

If the CIPC or TRP receives a complaint it can:

 Refuse to investigate because the complaint is frivolous or vexatious (except for
ministerial complaints)
 Refer the complaint to the Companies Tribunal or other ADR agent or
 Direct an investigator to investigate the complaint.

Powers of the Companies and Intellectual Properties Commission and the Take-over
Regulation Panel:

Upon receipt of the report from the investigator the CIPC or TPR can:

 Excuse any person as a respondent;

 Refer the complaint to the Companies Tribunal, or CIPC or TPR (as the case may be)
 Issue a notice of non-referral, with a statement advising the complainant of any rights
he or she may have to seek a remedy in court;
 The CICP can purpose that the person meets with the Companies Tribunal or CICP to
resolve the matter by consent order
 Commence proceedings in court in the name of the complainant, if the complainant:
 Has a right in terms of the Companies Act to apply to the court and
 Has consented to the CIPC of TRP doing so; or
 Report the matter to the National Prosecuting Authority if the person committed an
offence under other legislation or
 The CICP may issue a compliance notice or
 The TRP may refer the matter to te Executive Director who may issue a compliance
notice.

A compliance notice may require the person to:

 Cease, correct or reverse any action in contravention of the Companies Act of 2008;
 Take any action required by the Companies Act of 2008;
 Restore assets or their value to a company or any other person;
 Provide a community service (for CICP notices) or
 Take any other reasonable necessary steps to rectify the effect of the contravention.
 The person who received the compliance notice may object thereto within 15 business
days of receipt.
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NB! Study Unit 10: Partnerships

can be ignored for purposes of the examination

Study Unit 11 – Close Corporations

Please note that this Study Unit will count towards more than 20 percent of your
examination mark.

Distinguishing features of close corporations:

 Close corporations acquire legal personality upon incorporation.

 Legal personality is acquired upon registration of the founding statement.
 Close corporations enjoy perpetual succession, which means that the entity exists
separately from its members and changes in membership will not influence its future
existence.
 Sometimes the court may be called upon to “pierce the corporate veil” or disregard the
separate legal personality of the close corporation.
 As close corporations were intended mainly for small businesses, the number of
members is limited to 10.
 Only natural persons are permitted to be members of a close corporation.
 A company or another close corporation may not be a member of a close corporation.
 A minor, insolvent or person under legal disability may become or remain a member of
a close corporation with the necessary assistance from a guardian, trustee or the
court.
 A trustee in his or her capacity as trustee of a testamentary or inter vivos trust may
become a member of a close corporation. However, the restriction in membership to
the maximum of 10 members still applies.
 Should the membership of a close corporation change, an amended founding
statement must be lodged for registration.
 The Close Corporations Act 69 of 1984 regulates close corporations. Upon
incorporation of the Companies Act 71 of 2008 certain section of the Close
Corporations Act 69 of 1984 will be amended. However close corporation will continue
to mainly be regulated by the Close Corporations Act 69 of 1984.

QUESTION:

What are the advantages connected to close corporations as a business form?

The Future of Close Corporations:

 It is no longer be possible to register new close corporations.

 Existing companies are prohibited from converting into close corporations.
 Already existent close corporations will be permitted to continue and the Close
Corporations Act 69 of 1984 is not repealed.
 Provision is however made for close corporations to convert into companies.

Membership:
Characteristics of member’s interest:

 member’s interest is expressed as a percentage (out of a total of 100%) in the founding

statement.
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 member’s interest may not be jointly held

 the aggregate member’s interests must at all times add up to 100%
 a member’s interest in a close corporation is similar to a share in a company
 member’s interest is an incorporeal, moveable thing
 member’s interest is a personal right to share in the profits of the close corporation after
its creditors has been paid.

Member’s interest can be acquired by:

 becoming a member upon registration of the founding statement

 acquiring member’s interest from existing members
 making a contribution to the close corporation.

Disposal of a member’s interest

The disposal of a member’s interest is largely controlled by the members.

Requirements for disposal of a member’s interest

 must be made in accordance with the association agreement; or

 with the consent of all members.

Death of a member
 A member may bequeath his or her member’s interest to his or her heir or legatee in a
will.
 Transfer of the member’s interest to the heir/ legatee may however only occur with the
consent of the other members.

Should the members not permit such transfer, the executor of the estate may:

 sell the member’s interest to the close corporation

 sell the member’s interest to other members
 sell the member’s interest to a third party subject to the other members’ pre-emptive
right to purchase the member’s interest.

The monetary value will thereafter be paid over to the heir or legatee.

Insolvency of member

 Section 34(1) of the Close Corporations Act 69 of 1984 prescribes a mandatory

procedure for disposal of an insolvent member’s interest.
 The purpose is to balance the rights of the other members against the rights of creditors
of the insolvent member’s estate.

If a member becomes insolvent, the trustee may realise the member’s interest and do one of
the following:

 sell the member’s interest to the close corporation

 sell the member’s interest to the other members
 sell the member’s interest to a third party subject to the other members’ pre-emptive
right to purchase the member’s interest.
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The monetary value will then be paid over to the creditors.

Attachment and sale in execution

Section 34A of the Close Corporations Act 69 of 1984 applies in instances where a member’s
interest has been attached after judgment is taken against the member. The member’s
interest may then be sold to the close corporation, other members or an outsider subject to
the right of pre-emption in favour of the close corporation and other members.

Internal relations in Close Corporations:

Association Agreements:

Regulates internal relations.

 An association agreements is not a prerequisite for the formation and running of a close
corporation.

 The members of the corporation may change provisions to suit their specific needs in an
association agreement on condition that such changes are not inconsistent with the Act.

 Association agreements must be signed by all members.

 Certain matters are unalterable:

- disposal of insolvent member’s interest

- Who is disqualified from participating in management and
- The right to call a meeting

 Alterable provisions include:

- the rights of the members to carry on business and manage the close corporation
- what the requirements are for making a decision and voting
- the procedure and proportions for payments to members.
- The manner in which members will settle disputes.
- The procedure to be followed at meetings.

 An association agreement is not lodged with the Registrar and is not a public document.
However, should such an agreement be concluded, it must be held at the registered
offices of the business.

 No stipulation in contravention of the Close Corporations Act 69 of 1984 which is

included in the association agreement will be valid.

Loans and payments to members: Section 51

● Loans can only be made to members if written consent is given by all the other
members and the solvency and liquidity requirements are complied with.

● In terms of section 51(2), a member is liable to the CC for any payment received
contrary to any of the solvency and liquidity requirements.
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● In circumstances where the CC is wound up because it cannot pay its debts, the onus is
on the members who received payment from the CC to prove that the solvency and
liquidity requirements were met, provided that the payment took place not more than
two years prior to the commencement of the winding-up.

● If the members cannot show that the CC satisfied the solvency and liquidity
requirements after the payment was made, the members will be liable to the CC for the
payments made by the CC to them. The members will therefore be required to repay
the amounts paid to them by the CC.

● Note that section 51 applies only to instances where payments are made to members in
their capacity as members and not if the payment is made to a member in his or her
capacity as a creditor.

Activity:

Jane and Jill each hold a 50% member’s interest in Flight of Fancy CC (“FOF”), a catering
business. In June 2010, FOF makes an equal cash distribution to both Jane and Jill utilising
profits from the previous financial year. In July 2011, FOF is wound up on the basis that it
cannot pay its debts. Will Jane and Jill be liable to FOF for the payment each received from
FOF?

Duties of members:

 fiduciary duty (duty of good faith) in terms of s 42 of the Close Corporations Act 69 of
1984 and
 duty of care and skill.

Fiduciary Duty

Section 42 of the Close Corporations Act 69 of 1984 provides that a member should:
 act honestly and in good faith
 avoid a conflict of interest between his or her own interests and those of the close
corporation
 exercise powers in the interest of the corporation
 disclose any interest in a transaction to the other members of a close corporation as
soon as possible
 not derive any economical benefit to which he or she is not entitled by virtue of his or
her membership of the close corporation

Contracts concluded between member and close corporation:

Should a member have a material interest in a contract of the close corporation, it must be
disclosed to the other members and all material facts regarding the interest must be divulged
as soon as possible.
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Should a member fail to disclose his or her interest, the contract would be voidable at the
option of the close corporation. Application can, however, be made to the court to declare the
contract binding upon the parties despite failure to disclose.

If fiduciary duties are breached a member may be held personally liable for any loss suffered
by the corporation or debts incurred as a result of such a transaction (s 42(3)). The member
would then have to repay any profit made by him or her.

Duty of Care and Skill

A member will be liable only if the close corporation suffers a loss as a result of the breach of
this duty (s 43(1)).

The member’s conduct is measured against the conduct which could reasonably have been
expected from a person with the same level of skill and knowledge as the member (to
establish negligence).

If there has been a breach, of the duty of care and skill another member may institute action
against the close corporation or its members in his or her personal capacity.

Personal liability for debts:

A member may incur personal liability for the debts of the close corporation if a contract were
concluded that conflicted with his or her fiduciary duty to the close corporation.

Personal liability can however be avoided by disclosing all material facts regarding the
member’s interest in a transaction to the other members of the close corporation and
acquiring prior written approval from all the other members.
Question:

Discuss the nature of the fiduciary duties of members of a close corporation and the
consequences of breach.

Remedies:

Section 36 of the Close Corporations Act:

A member/ members may apply for the termination of another member’s membership by
order of court. In order to do so the member(s) will have to prove:
(1) that the member is unable to perform his/ her part in carrying out the business.
(2) That the member’s conduct is likely to have a prejudicial effect on the carrying on of the
business of the CC.
(3) That the member’s conduct has made it reasonably impossible for the other member(s)
to associate with him/ her in the carrying on of the business of the CC
(4) That In the circumstances it is just and equitable that such a person should cease to be
a member of the CC.
Relevant information relating to how the members’ interests in the CC should be
adjusted once the person’s membership of the CC ceases should be presented.

Activity:
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John, Mike and Dave are members of a CC, with each of them holding an equal member’s
interest in the CC. Mike and Dave are aggrieved at the manner in which John has been
performing his management duties in respect of the CC. They are of the view that John has
breached his fiduciary duties to the CC on several occasions over the past year. What is
Mike and Dave’s remedy in terms of the CC Act, and how should they go about invoking this
remedy?

Section 49 of the Close Corporations Act: Personal action

 A member may institute an action where there was a single act or omission in the
conduct or affairs of the business by the corporation or other member or members
which was unfairly prejudicial to such member.

 The court will only intervene if it is just and equitable to do so.

The court may then direct that:

-the aggrieved act or omission be stopped;
-the corporation must amend the founding statement or association agreement;
-make an order to wind-up the corporation.

Section 50 of the Close Corporations Act: Derivative action

 A member may institute action against another member who does not comply with his
or her duties.
 This action is instituted on behalf of the close corporation, it is therefore a derivate
action and not a personal action.
 The close corporation is liable for the legal costs.

External Relations:

Representation in Close Corporations: Section 54 of the Close Corporations Act

 Members of close corporations act as agents for the close corporation.

 The doctrine of constructive notice does not apply to close corporations. Therefore, third
parties or outsiders are not deemed to have knowledge regarding the content of close
corporations’ registered documents.
 Close corporations are in general bound to any contract concluded with an outsider by a
member, regardless of whether or not the transaction falls within the scope of the
enterprise’s main business.
 A close corporation could however escape liability if the third party or an outsider knew
or reasonably ought to have been aware of the fact that the member who concluded the
contract on behalf of the close corporation lacked the necessary authority to do so.
 J&K Timbers (Pty) Ltd v GL&S Furniture Enterprises CC: a member is an agent, even
though no authority, express or implied, has been conferred upon him by the close
corporation and the corporation is bound by the related act, unless the third party knew
or reasonably ought to have known of the absence of such power.

Activity:

Johannes, Phineas and Beauty are the members of Mnandi CC. Beauty discovers that
Phineas concluded a contract of purchase and sale on behalf of Mnandi CC for the
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purchase of a yacht without the consent of the other members. She believes that
Mnandi CC should not be held bound to the terms of the contract because the
corporation’s main business is catering. She also points out that the association
agreement stipulates that only Johannes has authority to conclude contracts on behalf
of Mnandi CC. Advise Beauty whether or not Mnandi CC will be bound to the contract
concluded by Phineas. Refer to relevant case law in your answer.

NB! Study Unit 12: Trusts can be ignored for purposes of the examination.