LEARNING UNIT 4: BASICS OF COMPANY LAW

Objective:

 Explain what a company is

 Discuss the nature of a company
 Examine the core concepts in company law such as legal personality and lifting the veil
of incorporation
 Explore how the legal life of a company could be ended

Anticipated outcomes:

After discussion of topics under this learning unit, the students must know the following:

 Understand company as a form of business enterprise

 Appreciate the fundamental attributes of a company and the implications of its
registration.
 Know the legal personality of a company and the corollary concept of cracking the
corporate shield
 Understand the ways by which a company’s legal life can brought to an end such as
liquidation, dissolution and deregistration

1. PREAMBLE

 Why incorporate a business?

It is fairly obvious that a person does not have to form a company in order to trade or to open a
business, and in some cases, it makes good business sense for a person to trade in his or her
own name. However, some naïve or misinformed entrepreneurs may believe that the use of a
close corporation or a company is mandatory if a person wishes to embark on a business
venture. This is clearly not true.

There are a number of matters that require careful consideration prior to deciding which
business entity will be the most appropriate, not least, the number of persons who will be
involved in the business, the extent of their involvement, the capital required to commence

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business, the sources of that capital, the requirements of customers and clients, and the
strategic objectives of those involved.

Tax issues must also be taken into account when considering the most appropriate business
entity, because the South African tax system is not ‘entity neutral’. For example, the effective
tax rates of an individual are different from the rates that apply to a company or close
corporation. Moreover, whilst the Companies Act, 2008 might recognize different types of
companies and allow great flexibility in company structures by virtue of the contents of a
company’s Memorandum of Incorporation, the Income Tax Act 58 of 1962 also recognizes a
variety of different companies for tax purposes, and grants favourable tax treatment to some
(such as to ‘small business corporations’) whilst penalizing others (for example ‘employment
and personal service’ companies).

2. LEGAL PERSONALITY

The doctrine of corporate personality is the most pervading fundamental principle that
underpins company law. This doctrine is established upon an expedient legal fiction. The fiction
is adopted for the convenience of the company in making contracts, in holding property, in
suing and being sued, in management of its affairs, and to preserve the limited liability of its
shareholders.

The implication of this is that a company is a legal person. This means that it is not simply an
association of persons, as in a partnership, but a company is in itself a separate legal person. In
terms of s 14(4), a Registration Certificate is conclusive evidence that the requirements for
incorporation have been complied with and that a company is incorporated in terms of the
2008 Act as from the date and time if any, as stated in the Certificate.

A legal person is regarded as an entity that can acquire rights and duties separate from its
members. One of the most fundamental consequences of incorporation is that a company is a
juristic entity separate from its members. Accordingly, the assets of a company are the
exclusive property of the company itself and not of its members.

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Thus, although a company has no physical existence, it can acquire ownership in assets and it is
liable to pay its own liabilities.

Whilst ‘incorporation’ and ‘limited liability’ are different concepts, generally speaking,
incorporation also entails ‘limited liability’ of members, with the result that members are
generally not liable for the debts of the company.

However, in some cases, a company can have legal personality but have unlimited liability. For
example, if one registers a personal liability company in terms of the Companies Act, 2008, the
Memorandum of Incorporation of such a company would state that the directors are jointly and
severally liable with the company for debts and liabilities incurred during their respective
period of office. Such a company will continue to have legal personality despite the fact that the
directors can be held personally liable for payment of the company’s debts.

Professional persons, such as attorneys, often incorporate their practice in this manner.

3. LIFTING THE CORPORATE VEIL

One of the incidences of independent legal status of the corporate entity is that it cast a veil
between the company and its human constituents. However, there are certain exceptional
circumstances in which the law disregards the corporate entity and pays regards instead to the
economic realities behind the corporate façade. In such circumstances, the veil of incorporation
or the corporate shield is pierced or broken by the court in the interest of justice and the law
goes behind the corporate personality to the individual members, or it ignores the separate
personality of each company in favour of the economic entity constituted by a group of
associated companies.

Whilst incorporation can provide for the limitation of liability of those persons behind the
company, this principle cannot be abused. The courts have made it clear that the law does look
at the ‘substance’ of things rather than at mere legal form and that courts will not allow a legal
entity to be used ‘to justify wrong, protect fraud or defend crime’.

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It was said that if a company has been legitimately established and is legitimately operated, but
is misused in a particular instance ‘to perpetrate a fraud, or for a dishonest or improper
purpose, there is no reason in principle or logic why its separate personality cannot be
disregarded in relation to the transaction.

The directors and members of a company ordinarily enjoy extensive protection against personal
liability. However, ‘such protection is not absolute, as the court has the power, in certain
exceptional circumstances, to ‘pierce’ or ‘lift’ or’ pull aside’ ‘the corporate veil’ and to hold the
directors and others personally liable for the debts of the company’.

‘Piercing the corporate veil’ refers to those exceptional circumstances where the court would
(a) either ignore the separate legal existence of the company and treat its members as if they
were the owners of the assets and had conducted the business of the company in their
personal capacities, or (b) where the court attributes certain rights or obligations of the
members to the company.

When the court pierces the corporate veil it ignores the legal existence of the company only for
the purposes for adjudicating the rights or liabilities of the parties to the particular disputes
before the court.

In other words, for all other purposes, the separate legal existence of the company continues to
be recognized in law.

Where a plaintiff seeks relief against a company but has a remedy alternative to that of piercing
the veil, a court will be reluctant to so act. In other words, a plaintiff cannot resort to piercing
the veil unless he or she can show that there is no other remedy available to him or her and
accordingly he or she will suffer injustice if the veil is not so pierced.

The exceptional circumstances in which the law disregards the corporate entity include the
following-

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  Fraud or improper conduct

Where a company is formed primarily to evade liabilities or to defeat law, the

courts have always been prepared to investigate sharp practice by

individuals hiding behind the corporate façade.

 Illegality

The courts have been most disposed to piercing the veil of incorporation in

order to establish that a company is not owned or controlled by nationals of

an enemy country so that to do business with it would be illegal because it

would be trading with the enemy.

 Concept of agency
The concept of agency has sometimes been used by the courts by which a
subsidiary is regarded as the agent of its holding company even though
there is no agency agreement as such between them in regard to the
transaction concerned. The effect is that transactions entered into by a
subsidiary are regarded as those of the holding company for which the
holding company is liable.

 Public policy
The courts do pay higher premium to sacrosanctity of public policy in that
the court may also disregard the separate legal personality of a company
and investigate the persons in control of it because an over-riding public
interest would be served by doing so.

 Taxation

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The courts may also lift the veil of incorporation where a company is found to

be formed to evade tax which amounts to defrauding governments.

 Trust
The court may pierce the veil of incorporation so as to reconcile the

company’s property with the terms of trust where shares in a company are

held upon trusts and the management of the company is in the hands of

trustees.

 Personal liability of directors and officers

Where a company receives money by way of loan for specific purpose or

receives money or other property by way of advance payment for the

execution of a contract or project, and with intent to defraud, fails to apply

the money or other property for the purpose for which it was received, every

director or other officer of the company who is in default shall be personally

liable to the party from whom the money or property was received for a

refund of the money or property so received and not applied for the purpose

for which it was received.

 Reckless or Fraudulent Trading

If, in the course of the winding up of a company, it appears that any business

of the company has been carried on in a reckless manner or with intent to

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defraud creditors of the company or any other person or for any fraudulent

purpose, the court may, on the application of the liquidator or any creditor

declare that any persons who were knowingly parties to the carrying on of

the business in that manner shall be personally responsible without any

limitation of liability, for all or any of the debts or other liabilities of the

company as the court may direct.

 Holding and subsidiary company

If at the end of a year, a company has subsidiaries, the directors shall

prepare group financial statements dealing with the state of affairs and the

profit and loss of the company and the subsidiaries. These must be laid

before the company in general meeting when the company’s balance sheet

and profit and loss account are so laid. In this regard, the veil of

incorporation may be pierced to discover the realities of a situation, for

example, where a group of companies is virtually a partnership or where one

of the companies is a trustee of the other in respect of some property in

issue. The effect of such an account is to detract from the independent legal

personality of each of the companies and to show that they are related and

are subject to examination behind the incorporation.

 Investigation into related companies

Another circumstance in which the veil of incorporation is pierced by court is

when there is need for investigation of the affairs of a company, the

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investigator may, if he thinks it necessary for the purpose of his

investigation, investigate also the affairs of any other related companies, and

report on the affairs of the other companies so far as he thinks the results of

his investigation thereof are relevant to his main investigation.

Liability where proper accounts are not kept


If where a company is wound up it is shown that proper books of account were not kept by the

company from the time of incorporation to the commencement of the winding–up, every officer of

the company who is in default, unless he shows that he acted honestly, shall be liable.

4. A COMPANY AS A JURISTIC PERSON: SUMMARY OF KEY ISSUES

The fact that a company is a separate legal person, separate and distinct from its shareholders,
has a number of practical implications including the following:

 Incorporation entails ‘limited liability’ of members, with the result that they are
generally not liable for the debts of the corporation (unless of course it is a personal
liability company).
 The assets of a company are the exclusive property of that company itself and the assets
of a company do not belong to its shareholders.
 Where a wrong is alleged to have been committed against a company, it is the company
itself that must seek redress in respect therefore and not the shareholders of the
company.

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  Unless the Memorandum of Incorporation provides otherwise, managerial and
executive powers are exercisable exclusively by the directors of a company and not by
its shareholders.
 A share in a company consists of a bundle or conglomerate of personal rights entitling
the shareholder to a certain interest in the company: the right to dividends when
declared, the return of capital on the winding up of the company (or once there has
been an authorized reduction of capital), and the right to attend and vote at meetings of
shareholders.

5. TYPES OF COMPANIES

The 2008 Act provides for two types of companies, namely: profit companies, and non-profit
companies.

A company is a profit company if it is incorporated for the purpose of financial gains for its
shareholders. A profit company may be incorporated by one or more persons. The Act does not
restrict the maximum number of members in a profit company.

In the group of ‘profit’ companies, there are four separate entities. These are:

 A public company
 A state-owned enterprise
 A personal liability company
 A private company

 ‘Profit’ companies: the public company

A public company is any ‘profit’ company that is not a state-owned enterprise, a private
company or a personal liability company. In a public company, shares may be offered to the
public and are freely transferable. A public company could be listed or unlisted. The recognition

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of public company status is essentially sourced in the Memorandum of Incorporation, which is
the sole governing document of a company. Its provisions will determine whether a company
enjoys public company status.

 ‘Profit’ companies: the state-owned enterprise

A state-owned enterprise is a company that falls within the meaning of a state-owned

enterprise under the Public Finance Management Act or is owned by a municipality. A state-
owned enterprise is therefore a national government business enterprise which is a juristic
person under the ownership and control of the national executive that has been assigned
financial and operational authority to carry on a business activity. The principal business of a
government business enterprise or state-owned enterprise is that it provides goods or services
in accordance with ordinary business principles and is fully or substantially financed from
sources other than the National Revenue Fund or by way of tax, levy or any other statutory
money.

 ‘Profit’ companies: the personal liability company

A personal liability company is a private company used mainly by professional associations such
as attorneys, entrepreneurs and stockbrokers who wish to exploit some of the advantages of
corporate personality such as perpetual succession. A personal liability company’s
Memorandum of Incorporation will state that it is a personal liability company, which usually
means that the directors are liable jointly and severally together with the company for all debts
and liability incurred during their terms of office.

 ‘Profit’ companies: the private company

A private company is a company whose Memorandum of Incorporation prohibits the offering of

its share to the public and restricts the transferability of its shares. The articles of association of
the company require a member wishing to sell his shares to inform the directors of his intention
to sell his shares, whereupon the directors would inform the other members of their right to
purchase the shares offered for sale to any person, including an outsider or non-member.

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  Non-profit companies

A ‘non-profit’ company is a company that was previously recognized in terms of s21 of the
Companies Act of 1973. The 2008 Act provides for the regulation of non-profit companies in
Schedule 2. Briefly stated, such companies must have at least as one of their objectives a public
benefit object or an object relating to one or more cultural or social activities or communal or
group interests. All assets and income of a non-profit company must be used to further the
company’s stated objective.

A non-profit company may acquire and hold securities issued by a profit company, or directly or
indirectly, alone or with any other person, carry on any business, trade or undertaking
consistent with or ancillary to its stated objects. An incorporator, member or director, or
person appointing a director, of a non-profit company may not directly or indirectly receive any
financial benefit or gain from the company, other than reasonable remuneration for work done,
or compensation for expenses incurred, to advance the stated objects of the company.

When a non-profit company is being wound up or dissolved, no member or director of that

company is entitled to any part of the net value of the company after its obligations and
liabilities have been paid. The entire net value of the company must be distributed to one or
more non-profit companies, external non-profit companies carrying on activities within the
Republic, voluntary associations, or non-profit trusts having objects similar to the company’s
main object.

A non-profit company is not required to have members but the provisions of the Memorandum
of Incorporation can provide that the company has members. Two categories of members are
provided for, namely voting and non-voting members. Voting members of a non-profit
company will each have at least one vote. The incorporators of a non-profit company are its
first directors and its first members, if its Memorandum of Incorporation provides for it to have
members.

 Transitional provisions and close corporations

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Schedule 5 to the Act contains very important transitional provisions designed to ensure that
the transition between the companies Act of 1973 and the Companies Act, 2008 is as seamless
as possible.

The new Companies Act ensures that the incorporation of a company is made accessible and
easy. The 2008 Act has also been designed to facilitate the formation and maintenance of small
companies. The 2008 Act recognizes that existing close corporations should be free to retain
their current status until such time as their members may determine that it is in their interests
to convert to a company under the Act. The Act therefore provides for the indefinite continued
existence of the Close Corporation Act.

Existing Close Corporation will be allowed to continue, but the formation of a new Close
Corporation after the date of commencement of the Companies Act, 2008 is not possible.

 External companies

An external company is a foreign company that is carrying on business or non-profit activities

within the Republic of South Africa. A foreign company can be either a profit or a non-profit
entity that carries on business or non-profit activities in South Africa.

An external company is compelled to register with the Companies and Intellectual Property
Commission (CIPC) within 20 business days after it first begins to conduct activities within the
Republic as an external non-profit activities within South Africa if it is engaged in maintaining,
defending or settling any legal affairs of the company; establishing or maintaining any bank or
other financial accounts; the foreign company’s own securities; creating or acquiring any debts,
mortgages, or security interests in any property; securing or collecting any debt; enforcing any
mortgages or security interest; or acquiring any interest in any property. An external company
must continuously maintain at least one office in the Republic.

 Branches and divisions of a company

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Note that the branches or divisions of a company are part of the company itself and a division
or branch does not have its own separate legal existence.

9. INCORPORATION OF A COMPANY

In terms of corporate law reform in South Africa, five key objectives were agreed to and these
objectives were taken into account in the drafting of the Companies Bill. The objectives of
‘flexibility’ and ‘simplicity’ are most evident from a reading of the sections of the Companies
Act, 2008 that deal with the incorporation of a company.

As far as flexibility is concerned, whilst it was necessary that company law provides for ‘an
appropriate diversity of corporate structures’ as far as ‘simplicity’ is concerned, it was also
considered necessary to provide for the formation of a company structure that reflects the
characteristics of close corporations as one of the available options.

It can therefore be said that the Companies Act, 2008 can provide for the simplest of structures,
yet it can also provide an appropriate business structure for the most sophisticated and
complex of businesses.

 The notice of incorporation and the Memorandum of Incorporation

The incorporation of a company involves the filing of a ‘notice’ of incorporation. ‘Notice of

Incorporation’ is defined as the notice to be filed in terms of s 13(1), by which the incorporators
of a company inform the Commission of the incorporation of that company, for the purpose of
having it registered.

In terms of s13, the ‘Notice of Incorporation’ must be filed together with the prescribed fee,
and must be accompanied by a copy of the Memorandum of Incorporation. The Memorandum
of Incorporation is an important document that enables complete flexibility as to the
relationship between a company and its stakeholders, and which can also allow for very simple
company structures or for very detailed and complex provisions that can, for example, protect
minority shareholders and withhold certain powers from the board of directors.

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In terms of the Companies Act 61 of 1973 all companies were required to submit a
memorandum and articles of association as the constitutive documents of a company formed
under the Act. In terms of the Companies Act, 2008 the incorporators of a company now submit
a Memorandum of Incorporation only as a founding document of the company.

The Memorandum of Incorporation is defined as the document, as amended from time to time,
that sets out rights, duties and responsibilities of shareholders, directors and others within and
in relation to a company, and other matters as contemplated.

 The incorporation of a company: steps to be taken

The following are the necessary steps that should be taken in order to incorporate a company:

o One or more persons may incorporate a profit company whereas three or more persons
may incorporate a non-profit company.
o Each person should complete and sign a Memorandum of Incorporation.
o The Notice of Incorporation must be filed with the Commission together with the
prescribed fee and must be accompanied by a copy of the Memorandum of
Incorporation, which is provided for in the 2008 Act.
o A Memorandum of Incorporation can be in a form that is unique to the company or the
company can use the Memorandum of Incorporation provided for in the 2008 Act.

 The incorporation of a company: the role of the Commission

The Commission may reject a Notice of Incorporation if it is incomplete or improperly

completed. Any deviation from the design or content of the prescribed form does not invalidate
the action taken by the person completing the form unless the deviation negatively and
materially affects the substance of the Notice of Incorporation or where the deviation would

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reasonable mislead a person reading the notice. In each instance it would depend on the
particular completed form to determine whether the Notice of Incorporation will be regarded
as invalid. The Commission is compelled to reject a Notice of Incorporation if the initial
directors of the company are less than the prescribed minimum number of members. The
Commission is also compelled to reject a Notice of Incorporation where one or more of the
suggested directors are disqualified from becoming directors and the remaining directors are
fewer than the required minimum.

 Registration of a company

The registration of a company is dealt with in s14. Upon acceptance of the Notice of
Incorporation the Commission will assign a unique registration number to the Company. The
Commission must enter the prescribed information relating to the company into the Companies
Register. This register is one that is opened by the Commission and does not refer to any
register that is kept at the relevant company.

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

10. MEMORANDUM OF INCORPORATION: FLEXIBILITY

The Companies Act, 2008 allows a large degree of flexibility with regard to the content of the
Memorandum of Incorporation. The Act requires that each provision of a company’s
Memorandum of Incorporation must be consistent with the provisions of the Act. Any provision
that is inconsistent with the provisions of the Companies Act, 2008 will be regarded as void to
the extent that it contravenes, or is inconsistent with the Act. The incorporators of a company

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are free to include any provision in the Memorandum of Incorporation that is not covered by
the Companies Act, 2008.

 The Memorandum of Incorporation can deal with any of the following matters:
 The provisions in the Memorandum of Incorporation may alter the effect of any
alterable provision in the Companies Act, 2008.
 Incorporators are not compelled to make use of any prescribed forms of the
Memorandum of Incorporation.
 The Memorandum of Incorporation may contain any special conditions applicable to the
company.
 The Memorandum of Incorporation may contain any requirement for the amendment of
any special conditions applicable to the company in addition to any of the requirements
set out in the Act.
 The Memorandum of Incorporation may prohibit the amendment of any particular
provision contained in the Memorandum of Incorporation.

A company’s Memorandum of Incorporation will deal with any number of different issues
including the following:

 The objects and powers of the company

 Any restrictions or limitations on the powers of the company
 What happens to the assets if the company is dissolved
 The composition of the board of directors
 Alternative directors
 The frequency of board meetings
 The committees of the board
 The personal liability of the directors
 The indemnification of the directors
 Powers of directors, powers of shareholders
 Rights of shareholders
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  The disposal by shareholders of their shares
 The ability to create rules of the company
 Shareholders’ meetings and the procedure involved
 The amendment of the Memorandum of Incorporation

 Rules made by board of directors

 Unless a company’s Memorandum of Incorporation provides otherwise, the board of
directors of a company may make, amend or repeal any necessary or incidental rules
relating to the governance of the company in respect of matters that are not
addressed in the 2008 Act or in the Memorandum of Incorporation.

 The board must publish a copy of the rules in the manner required in terms of the
Memorandum of Incorporation (or in the manner set out in the rules themselves). A
copy of the rules must also be filed with the Commission if this is in accordance with
the Memorandum of Incorporation and the rules themselves. Any rules developed
by the board must be consistent with the 2008 Act and with the company’s
Memorandum of Incorporation. Any rule that is inconsistent with this Act or with a
company’s Memorandum of Incorporation is void to the extent of the inconsistency.

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

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  Legal status of the memorandum of incorporation and the rules developed by the
board of directors

A company’s Memorandum of Incorporation and any rules of the company are binding as
follows:

 Between a company and each shareholder

 Between or among the shareholders of the company
 Between the company and each director
 Between the company and each prescribed officer of the company, or other person
serving the company as a member of the audit committee or as a committee of the
board in the exercise of their respective functions within the company.

 Amending the memorandum of incorporation

 Any amendment to a company’s Memorandum of Incorporation may be proposed
either (a) by the board of directors or (b) by shareholders that have at least 10% of
the exercisable voting rights or (c) in any manner required in terms of a company’s
Memorandum of Incorporation. Any proposed amendment must be in accordance
with a company’s Memorandum of Incorporation and must be approved by special
resolution of shareholders for it to be effective. Amendments to a company’s
Memorandum of Incorporation can also be made by order of court.

 An amendment may take the form of a new Memorandum of Incorporation, which

will then substitute the existing Memorandum of Incorporation, or alterations could
be made to the existing provisions of the Memorandum of Incorporation. Instead of
convening a meeting to vote on any proposed amendment, a proposal can be
circulated amongst the shareholders who are entitled to vote. In such a case, the
shareholders may exercise their votes in writing within 20 business days after the
resolution was circulated to them. Once such a proposal has been accepted by the

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 required number of members, such a decision will have the same effect as if it had
been approved by voting at a meeting.
 Allowing the company to ‘round robin’ such a decision instead of convening a
meeting allows shareholders who normally fail to attend meetings an opportunity to
vote on a particular matter. The provision should be commended as it works
towards improving communication with shareholders as required by the King Report
on Corporate Governance. The procedure as described above and the requirements
for the amendment may in themselves be altered in a Memorandum of
Incorporation.

 The provisions of a Memorandum of Incorporation may also be amended in

compliance with a court order, the company’s board must give effect to that
amendment by way of board resolution and such an amendment will not require a
shareholders’ special resolution.

 Where the amendment of its Memorandum of Incorporation of a profit company

results in the company no longer meeting the criteria for its particular category of
Profit Company, the company must also amend its name at the same time by
altering the ending expression to reflect the category of Profit Company into which it
now falls.

 An amendment to a company’s Memorandum of Incorporation takes effect on the

date upon which the Commission accepts the filing of the notice of amendment or
the date, if any, set out in the notice of amendment.

 Alteration to a Memorandum of Incorporation or rules to correct errors

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The board of a company, or an individual authorized by the board, may alter the company’s
rules or its Memorandum of Incorporation in order to correct a spelling error, punctuation,
reference, grammar or similar defects on the face of the document. This can be done simply by
publishing a notice of the alteration, in any manner required or permitted by the Memorandum
of Incorporation or the rules of the company, and filing a notice of the alteration.

 Translation of a Memorandum of Incorporation

A company that has filed its Memorandum of Incorporation may file one or more translations of
it, in any official language or languages of the Republic. A translation of a company’s
Memorandum of Incorporation must be accompanied by a sworn statement by the person who
made the translation, stating that it is a true, accurate and complete translation of the
Memorandum of Incorporation. Should the provisions of the Memorandum of Incorporation of
a company conflict with a translated provision, the provisions of the Memorandum of
Incorporation will prevail.

 Consolidation of a Memorandum of Incorporation

At any time after a company has filed its Memorandum of Incorporation and subsequently filed
one or more alterations or amendments to it, the company may file a consolidated revision of
its Memorandum of Incorporation as so altered or amended. The Commission may also require
a company to file a consolidated revision of its Memorandum of Incorporation.

A consolidated revision of a company’s Memorandum of Incorporation must be accompanied

by a sworn statement by a director of the company, or by a statement by an attorney or notary
public, stating that the consolidated revision is true, accurate and complete representation of
the company’s Memorandum of Incorporation, as altered and amended up to the date
statement.

 Authenticity of versions of the Memorandum of Incorporation

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  The Memorandum of Incorporation, as altered or amended, prevails in any case of a
conflict between it and a translation filed in terms of s 18(1) (a). The Memorandum of
Incorporation, as altered or amended, prevails in any case of a conflict between it and a
consolidated revision filed in terms of s 18(1)(b), unless the consolidated revision has
subsequently been ratified by a special resolution at a general shareholders’ meeting of
the company.
 The latest version of a company’s Memorandum of incorporation endorsed by the
Commission prevails in the case of any conflict between it and any purported version of
the company’s Memorandum of Incorporation in terms of s 18(2).

 Shareholders’ agreement
 The shareholders of a company may enter into any agreement with one another
concerning any matter in relation to the company, but any such agreement must be
consistent with the 2008 Act and with a company’s Memorandum of Incorporation, and
any provision of such an agreement that is inconsistent with the Act or with the
company’s Memorandum of Incorporation is void to the extent of the inconsistency.

11. PRE-INCORPORATION CONTRACTS

 Because a company, prior to incorporation, is not yet in existence and cannot perform a
juristic act, and because no one can at that stage act as its agent because one cannot act
as the agent of a non-existent principal, s 21 prevents a company from losing the
opportunity to benefit from a business opportunity that presents itself prior to
incorporation of the company by allowing pre-incorporation contracts to be entered
into, provided certain requirements are complied with.
 A pre-incorporation contract is a contract that is entered into by a person who is acting
on behalf of a company that does not exist. The person entering into the agreement has
the intention that once the company comes into existence the company will be bound
by the provisions of the pre-incorporation contract.
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  The 2008 Act provides that the person who enters into a pre-incorporation contract on
behalf of a company yet to be formed will be jointly or severally liable if the company is
not later incur[orated or where the company is incorporated but the company, once it is
in existence, rejects any part of the agreement. Such a person will, however, not be
liable in terms of the agreement if the company after incorporation enters into an
agreement on the same terms as, or in substitution for the agreement entered into prior
to its incorporation.
 Once the company is incorporated the board of directors may within three months after
the date on which a company was incorporated, completely, partially or conditionally
ratify or reject any pre-incorporation contract. Where after three months of
incorporation the board has not ratified of rejected the pre-incorporation contract the
company will be deemed to have ratified that agreement or action.
 Once the agreement has been either partially or completely ratified by the company the
company will be liable in terms of the agreement as if it has been a party to the
agreement when it was concluded. Should the company reject the agreement the
person who will incur liability in terms of the agreement will be allowed to recover from
the company any benefit it has received in terms of the agreement.
 Two further important matters need to be noted: at first, the Companies Bill will not
require the contract to be a written contract, and it would seem that the common law
methods of entering into a pre-incorporation contract would continue to apply as they
would be unaffected by the Companies Act, 2008. As a result of this provision, the
Companies Bill was amended to require a written contract.

12. REGISTRATION OF COMPANY NAMES

 The Companies Act, 2008 provides that a name of a company may not generally offend
persons of a particular race, ethnicity, gender or religion. When choosing a name for the
company, care must be taken to ensure compliance with the provisions of the
Companies Act, 2008, and also not to offend the common law rule of ‘passing off’.

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 ‘Passing off’ occurs when one business adopts a distinguishing feature of a competitor,
for example the competitor’s trade name.
 In addition to provisions relating to avoiding unlawful competition in terms of the
common law when choosing a name, the companies Act, 2008 contains specific
provisions that have to be complied with when choosing a name for a company. These
are discussed below.

 Criteria for names of companies in terms of the Companies act, 2008

 Section 11(2) specifically provides that the name of a company may not be the same or
confusingly similar to the name of another company, close corporation or co-operative.
A name will be confusingly similar if the name has the ability to make a potential client
think that the company is the same as or affiliated to another company with either the
same or a similar name. The name may also not be the same as a name that has been
registered as a business name in terms of the Business Names Act 27 of 1960 or a
trademark that has been filed for registration in terms of the Trade Marks Act 194 of
1993.

 The name of a company also may not falsely suggest that the company is part of or
associated with any other person or entity, is an organ of state, is owned by a person
having a particular educational designation or who is a regulated entity, is owned by a
person having a particular educational designation or who is a regulated entity, is
owned or operated by a foreign state, government or an international organization.

 In the case of a ‘profit’ company’, the name of the company could simply be the
registration number of the company. If such a name is adopted, the number must be
followed by the expression ‘south Africa’. The name of a non-profit company may not be
only a registration number.

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  A company name may comprise words in any language even if the words are not
commonly used. The name can be used together with any letters, numbers or
punctuation marks. The following symbols can be used as part of a company name: +, &,
#, @, %, = or any other prescribed symbol. Round brackets (…) may be used in pairs to
isolate any part of the name. A combination of letters, numbers, symbols, punctuation
marks and brackets may also be used in a name. If the name of a company, as entered
on the Notice of Incorporation, fails to satisfy the requirements set out in the Table
above, the Commission may alter the name to ensure compliance with the above.

 Change of name

Where the name of the company is the same as the name of another company, close
corporation or co-operative, or has been reserved in terms of s 12 for someone other
than the incorporators of the company, the Commission must simply use the company’s
registration number as the interim name of the company in the Companies Register and
on the Registration Certificate. Such registration number must be followed by ‘Inc.’,
‘(Pty) Ltd’, ‘Ltd’, ‘SOC’, or ‘NPC’ in the manner indicated in the Table below.

 Different types of company

Types of company Name must end as follows

Personal liability company ‘Incorporated’ or ‘Inc.’

Private company ‘Proprietary Limited’ or ‘(Pty) Ltd’

Public company ‘Limited’ or ‘Ltd”

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 State-owned Enterprise ‘SOC Ltd’

Non-profit company ‘NPC’

 The Commission must then invite the company to file an amended Notice of
Incorporation using a satisfactory name. Upon the filing of an amended Notice of
Incorporation by a company, the Commission must enter the company’s
amended name in the Companies Register, and issue an amended Registration
Certificate showing the amended name of the company.
 Where the Commission is of the opinion that the name suggests that the
applicant company is associated with another company or business entity or
organ of state, the Commission can by written notice require the applicant to
serve a copy of the application and name reservation on any particular person,
or class of persons, named in the notice, on the grounds that the person or
persons may have an interest in the use of the reserved name by the applicant.
Any person with an interest in the company name may apply to the Companies
Tribunal for a determination whether the name satisfies the requirements of the
2008 Act.

 Use of name and registration number

In terms of s 32 a company must provide its full registered name or registration number
to any person on demand and must not misstate its name or registration number in a
manner likely to mislead or deceive any person. If the Commission has issued a
Registration Certificate with an interim name, as contemplated in s 14(2)(b), the
company must use its interim name, until its name has been amended.

 Reservation of a name for later use

A person may reserve one or more names for use at a later time. These reserved names
may be used for newly incorporated companies or as an amendment to the name of an
existing company.

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 The Commission is compelled to reserve each name that the applicant applies for unless
the name applied for is the registered name of another company, close corporation or
co-operative, external company or has already been reserved by someone else. The
reservation continues for a period of six months from the date of the application for
reservation. A person for whom a name has been reserved may transfer the reservation
to another person by filing a signed notice of transfer.

13. THE ULTRA VIRES DOCTRINE

 Under the 1973 Companies Act the legal capacity of a company was determined by the
objects clause which the memorandum of association of every company had to contain.
The objects clause defined the existence in law only for the purpose of the objects for
which it was incorporated and it had legal capacity to perform only such acts as are
indicated by its objects. It followed that any contract that fell outside the scope of the
company’s objects clause was null and void.

 An ultra vires act therefore denotes some act or transaction entered into by the
company which, although not lawful or contrary to public policy, is beyond the
legitimate powers of the company as defined by its objects clause. The objection to an
ultra vires contract is not merely that the company ought not to make it, but that it
could not make it.

 The purpose of the ultra vires doctrine was to protect both shareholders and creditors
so that they may know the objects or business activities for which their money was to
be employed by the company. The legal consequences of ultra vires contract were that
as between the company and the other party to the contract, the contract was null and
void; but, internally as between the company, its directors and members, the directors
would be liable to the company for breach of their fiduciary duty not to exceed their

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 authority. In addition every member of the company was entitled to restrain the
company or its directors from entering into or performing an ultra vires contract.

 In South Africa, s 36 of the 1973 Companies Act abolished the ultra vires doctrine
externally by repealing the common law rule that an ultra vires contract was null and
void. It provided instead that no ultra vires contract would be void and that in any legal
proceedings neither the company nor the other party to the contract could assert or
rely on such lack of capacity. It nevertheless preserved the rule that as between the
company, its directors and members, the directors would be liable to the company for
breach of their fiduciary duty not to exceed their authority.

 The Companies Act, 2008

 Section 19(1)(b) of the Companies Act, 2008 states that a company has the legal
capacity and the powers of an individual except to the extent that a juristic person is
incapable of exercising any such power, such as, for instance, the capacity to enter into
a contract of marriage.

 The company’s Memorandum of Incorporation may, however, impose restrictions on

the legal capacity of the company. The Companies Act, 2008 thus correctly, with
respect, states that any such restrictions would not render invalid any contract that
conflicts with such restrictions, i.e. the contract remains valid and binding on the
company and the other party of the contract. The restrictions on the company’s capacity
may only be raised internally in legal proceedings between the company, its
shareholders and directors. The right to restrain the directors is extended to a trade
union representing the employees of the company.

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  This right to restrain the directors from entering into the contract will not affect the
other party to the contract, provided that such party has acted in good faith and
without knowledge of the restriction imposed by the constitution of the company. It is
now explicitly provided that each shareholder of a company has a claim for damages
against any person who fraudulently or due to gross negligence causes the company to
do anything inconsistent with the Companies Act, 2008 or a limitation, restriction or
qualification on the powers of the company as stated in its memorandum of
Incorporation, unless this has been ratified by special resolution. Ratification is not
permissible if the act in question contravenes the Companies Act, 2008.

14. THE DOCTRINE OF CONSTRUCTIVE NOTICE AND TURQUAND RULE

 Third parties contracting or dealing with a company will no longer be deemed to have
had notice of the contents of the public documents of a company merely because they
have been filed with the Commission or are accessible for inspection at the office of the
company. An important exception applies to special conditions stated in the company’s
memorandum of incorporation and also to the effects of the personal liability of
directors and former directors of a personal liability company.

 The Turquand Rule, also known as the ‘indoor management rule’, is a special rule of
company law intended to mitigate the severe effects of the doctrine of constructive
notice by entitling a bona fide third party to assume that the company has complied
with its internal formalities and procedures as specified in its constitution unless the
third party or suspects that they were not complied with but had deliberately and
wilfully shut his eyes to the irregularity by not making any further inquiry.

15. GENERAL MEETING

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Basically, the general meeting has the ultimate control over the affairs of the company. The
general meeting of companies provides the forum where the shareholders can ventilate their
views on matters relating to the company. This is where opportunity is given to the
shareholders and members to question the directors on all aspects of the management.

The general meeting has a residual executive power to exercise the powers vested in the board
if the board cannot or will not exercise them, for instance, where there is a dead-lock on the
board; where there are no directors; or where an effective quorum could not be obtained.

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