BIANCA & JAMIE

Chapter 4: The legal concept of a company / Legal personality:

Introduction:

Foundation of company law:

- Company has a separate legal personality
o Limited liability bestowed on shareholders
o Perpetual succession of a company
o Property, profits, debts and liabilities of the company belong to it and
not the shareholders
o May sue and be sued in its own name

Summary of the life of a company:

- Register
o Incorporators
o Memorandum of Incorporation (MOI)
- Raise money
o Shareholders (equity)
o Creditors (debt)
- Run the business
o Directors (manage)
o Shareholders (capital)
o Enlightened shareholder value approach
o Persons (employees/agents/partners)
o Governed by
ß Companies Act (overarching legislation)
ß MOI
ß Certain rules made by directors
- Run into trouble
o Business rescue practitioner
o Optional
- Deregister
o Winding-up
o Liquidate

Ways of acquiring legal personality:

- Enabling Act
o Companies Act
o Gateway for a number of entities to obtain legal personality
- Specific Act
o University of Pretoria Act
o Only allows one specific entity to obtain legal personality
- Common law
o Conduct enables an entity to obtain legal personality
o Requirements:
ß Separate property of association and members
ß Association must have its own standing and capacity
ß Association must have its own rights and obligations
ß Usually an express or tacit agreement between people to this
effect

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o S 8(3) of the Companies Act:

ß Limited instances in which the rules of common law would
create a company that has its own separate legal personality
(e.g. an association for gain)

Framework for companies:

- 1926 – 1973 – 2008 ‘Companies Acts’
- Main reason for its development:
o National development such as the need for employment and
entrepreneurial opportunities
o International development in the need for a rescue culture for viable
businesses, to preserve employments and economic benefits
- Characteristics:
o The 2008 Act aims to encourage business activity by providing a
flexible regulatory environment, while ensuring sufficient regulation to
make a company and its office bearers accountable to relevant
stakeholders
o Initially it was very expensive and intricate steps were necessary to
create a company, and once it was created there were rigid and
structured rules it had to comply with – had an impact on the
productivity of the company
o An important feature of the 2008 Act is its emphasis on flexibility, and
this is reflected in allowing a company to regulate itself through its MOI,
the contents of which can be varied to a significant degree from
company to company (only one ‘Constitution’ is required for the
company)
- Common law
o 2008 Act does not cover all aspects in relation to companies
o It has not completely wiped out common law
- Impact on other entities: CCs and partnerships

Purposes of the Companies Act 71 of 2008 (the Act): (section 7)

- Promote compliance with the BoR as provided for in the Constitution, in the
application of company law
- Promote the development of the SA economy by
o Encouraging entrepreneurship and enterprise efficiency
o Creating flexibility and simplicity in the formation and maintenance of
companies
o Encourage transparency and high standards of corporate governance
as appropriate, given the significant role of enterprises within the social
and economic life of the nation
- Promote innovation and investment in the SA markets
- Reaffirm the concept of the company as a means of achieving economic and
social benefits
- Promote the development of companies within all sectors of the company,
and encourage active participation in economic organisation, management
and productivity
- Balance the rights and obligations of shareholders and directors within
companies
- Encourage the efficient and responsible management of companies

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- Provide for the efficient rescue and recovery of financially distressed

companies, in a manner that balances the rights and interests of all relevant
stakeholders; and
- Provide a predictable and effective environment for the efficient regulation of
companies

The concept of separate legal personality:

Company (s 1 definition):
- A juristic person incorporated in terms of this Act, a domesticated company, or
a juristic person that, immediately before the effective date
o Was registered in terms of the
ß 1973 Companies Act, other than as an external company as
defined in that Act; or
ß Close Corporations Act, if it has subsequently been converted in
terms of Schedule 2
o Was in existence and recognised as an ‘existing company’ in terms of
the 1973 Companies Act; or
o Was deregistered in terms of the 1973 Companies Act and has
subsequently been reregistered in terms of this Act

A legal person is merely a legal concept:

- A legal or juristic person cannot perform acts that are inherently human in
nature, such as marriage, occupying land, appearing in court in person or
being appointed as guardian of a minor

Separate legal personality of a company:

Section 19(1):
- From the date and time that the incorporation of a company is
registered, as stated in its registration certificate, the company
o Is a juristic person, which exists continuously until its name is
removed from the companies register in accordance with this Act
o Has all of the legal powers and capacity of an individual, except to
the extent that
ß A juristic person is incapable of exercising any such power, or
having any such capacity
ß The company’s MOI provides otherwise
o Is constituted in accordance with
ß The unalterable provisions of this Act
ß The alterable provisions of this Act, subject to any negation,
restriction, limitation, qualification, extension or other alteration
that is contemplated in an alterable provision, and has been
noted in the company’s MOI
ß Any further provisions of the company’s MOI

Section 19(2):
- A person is not, solely by reason of being an incorporator, shareholder
or director of a company, liable for any liabilities or obligations of the

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company, except to the extent that this Act or the company’s MOI
provides otherwise

Section 19(3):
- If a company is a personal liability company, the directors and past
directors are jointly and severally liable, together with the company, for
any debts and liabilities of the company as are or were contracted during
their respective periods of office

Unalterable provisions:
- A provision of this Act that does not expressly contemplate that its effect on
any particular company may be negated, restricted, limited, qualified,
extended or otherwise altered in substance or effect by a company’s MOI or
rules (s 1 definition)
- Example of an unalterable provision:
o S 71(1): Removal of directors
ß Despite anything to the contrary in a company’s MOI or
rules, or any agreement between a company and a director, or
between any shareholders and a director, a director may be
removed by an ordinary resolution adopted at a shareholders
meeting by the persons entitled to exercise voting rights in an
election of that director, subject to subsection (2)

Alterable provisions:
- A provision of this Act in which it is expressly contemplated that its effect on a
particular company may be negated, restricted, limited, qualified, extended or
otherwise altered in substance or effect by that company’s MOI (s 1 definition)
- Examples of alterable provisions:
o S 69(6):
ß In addition to the provisions of this section, the MOI of a
company may impose
∑ Additional grounds of ineligibility or disqualification of
directors; or
∑ Minimum qualifications to be met by directors of that
company
o S 64(9):
ß Unless the company’s MOI or rules provide otherwise, after
a quorum has been established for a meeting, or for a matter to
be considered at a meeting, the meeting may continue, or the
matter may be considered, so long as at least one shareholder
with voting rights entitled to be exercised at the meeting or on
that mater, is present at the meeting

A registration certificate issued by the Companies and Intellectual Property

Commission (CIPC) is conclusive evidence that all the requirements for incorporation
have been complied with (s 14(4))

Act applies to:

- Juristic persons formed under the 2008 Companies Act and the 1973
Companies Act

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- The s 1 definition of a ‘juristic person’ includes a foreign company and a trust,

irrespective of whether it was established within or outside SA
- In SA common law a trust is not a juristic person, but for purposes of the Act a
trust is regarded as being a juristic person
- The Act also applies to CCs that have been converted into companies under
the act

Salomon v Salomon & Co Ltd (1897):

Facts:
- Mr Aron Salomon was a sole trader for many years and had carried on a
prosperous business as a leather merchant and wholesale boot manufacturer
- He wished to expand his business and wanted to enjoy the benefits of limited
liability and perpetual succession
- Accordingly, he sold his business to a company with a nominal capital of
40 000 shares of ₤1 each
- Salomon, his wife, daughter and four sons were shareholders in the company,
with each of them subscribing for one ₤1 share in the company
- Salomon and two of his sons were directors of the company
- In payment of the purchase price of ₤39 000 the company issued 20 000 fully
paid shares of ₤1 each to Salomon, ₤9 000 was paid in cash and for the
balance of ₤10 000 the company issued debentures secured over its assets to
Salomon
- [A debenture is a written acknowledgement of indebtedness and may be a
secured or unsecured debenture]
- The terms of the sale were approved by all the shareholders of the company
- Salomon thus held 20 001 out of the 20 007 shares issued by the company
- He was a secured creditor, a controlling shareholder, a director and an
employee of the company

The company’s business failed and a year later it went into liquidation
- It was found that if the amount realised from the assets of the company were
to be applied in payment of the debentures held by Salomon there would be
no funds left for payment to the ordinary creditors
- The liquidator objected on behalf of the trade creditors and contended that the
company was a sham and a scheme designed to enable Salomon to conduct
his business in the name of the company and thereby to limit his liability for
the debts of the company
- It was also contended that since Salomon owned all but six of the shares
issued by the company, he and the company were one and the same person
and that consequently the company’s debts were his debts

The House of Lords’s decision:

- The House of Lords unanimously found in favour of Salomon
- The House of Lords found that the company had been validly formed and
registered
- It was therefore a legal person
- Once the company was legally incorporated, it was a completely
different person with its own rights and liabilities

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- The motives of those who took part in the formation of the company
were irrelevant in discussing what those rights and liabilities were
- There was no requirement in the Companies Act (of 1862) that required the
subscribers to the memorandum to be independent or unconnected, or that
required them to take a substantial interest in the company
- The court remarked that it was a common practice to have nominee
shareholders in a company who did not intend to take part in the
company
- Concluded that the secured debentures issued by the company to
Salomon as part of the purchase price for his business were valid as
against the company’s creditors, and that the business belonged to the
company and not to Salomon, who was not liable for the debts of the
company
- Salomon was thus a secured creditor
- Of fundamental importance to the outcome of the case was that there was no
fraud on the part of Salomon, nor any fraud on the creditors of the
company

Contribution of Salomon v Salomon & Co Ltd:

- Legitimated the one-man company
- First case to establish the principle that a company is a separate legal person
quite distinct from its shareholders and directors
- First case to establish that shareholders are in principle not liable for the debts
and liabilities of the company
- These principles comprise the very gist of the concept of separate legal
personality

Legal consequences of separate legal personality:

1.Limited liability:

Enjoyed by the shareholders, not the company

- The liability of shareholders for the company’s debts is limited to the amount
they have paid to the company for its shares
- The shareholders are as a general principle not liable for the debts of the
company
- They are under no obligation to the company or its creditors beyond their
obligations based in the value of their shares
- The company itself remains fully liable for its debts

The claims of the creditors of the company:

- Confined to the assets of the company
- The creditors of the company cannot obtain satisfaction of their debts from the
personal assets of the shareholders of the company

Section 19(2) of the Act:

- A person is not, solely by reason of being an incorporator, shareholder or
director of a company, liable for any liabilities or obligations of the company,
except to the extent that the Act or the Company’s MOI provides otherwise

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Limited liability encourages the growth and expansion of companies:

- Because they enjoy the privilege of limited liability, business people are able
to limit the risk of investing funds into a business venture
- Crucial importance to the economy
o Successful companies generate wealth and employment

2. Perpetual succession:

Existence of a company is not affected by any changes in its shareholding:

- Notwithstanding any changes in the company’s shareholding, through a
transfer of shares, by death or any other cause, it retains its legal identity and
continues to survive

3. Property and assets of the company belong to the company:

The company’s property and assets belong to the company, and not to its
shareholders
- Even a shareholder holding all the shares in a private company does not have
a proprietary interest in the company’s assets
- Only once the company is liquidated do the shareholders have a right to share
in a division of the company’s assets

Dadoo Ltd v Krugersdorp Municipal Council (1920):

- Under certain legislation enacted in the then Transvaal province, Indians were
prohibited from owning immovable property in the Transvaal
- In 1915 Dadoo Ltd was formed with two Indian shareholders: Dadoo, who
owned all the shares in the company save for one share, and Dinar, who
owned the other share
- The company purchased property in Krugersdorp and subsequently let the
property out to Dadoo in his personal capacity, where he carried on a general
dealer’s business
- The Krugersdorp Municipal Council contended that the company had
contravened the statute prohibiting Indian people from owning immovable
property in the Transvaal
- The then Appellate Division rejected this argument on the ground that
the statute did not apply to companies, even if all the shares of the
company were held by South Africans of Indian origin
- Ownership by Dadoo Ltd was not ownership by its Indian shareholders
- Property vested in the company cannot be regarded as vested in its
shareholders
- Nationality of members cannot be attached to the company
- The statute in question had not been contravened by the company

4. Profits of the company belong to the company:

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Not even a sole shareholder of a company may help himself to the profits of the
company
- Should he do so, he would be guilty of the criminal offence of theft (S v De
Jager)
- The shareholders have a right to profits only when the company declares a
dividend

5. Debts and liabilities of the company belong to the company:

The shareholders of a company cannot be compelled to pay the debts of the

company
- If the company is liquidated, it will not generally result in the shareholders’
estates being sequestrated, and vice versa
- Section 19(2) confirms this principle [mentioned above]

6. A shareholder has no right to manage the company’s business or to enter

into transactions on its behalf:

Contracts entered into by a company are those of the company and not the
shareholders
- Membership of a company does not qualify a shareholder to manage the
company’s business or to bind the company to a contract
- Only those persons who are authorised as representatives to bind the
company may do so

7. Company can sue or be sued in its own name:

If a company sustains a loss for which it has a legal right of action:

- A shareholder of the company does not have a direct right of action for the
loss
- The company itself must institute the action

8. Company may contract with its shareholders:

May enter into contracts with its shareholders because it is a person separate from
them
- May employ one of its shareholders as an employee under a contract of
service, even if such a person owns all the shares in the company and is the
sole director of the company, and thus has total control over the company

Types of companies:

Section 8(1)-(2):
- Two types of companies may be formed and incorporated under this Act,
namely

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o Profit companies
o Non-profit companies
- A profit company is:
a. A state-owned company
b. A private company if
i. It is not a state-owned company; and
ii. Its MOI prohibits it from offering any of its securities to the
public, and restricts the transferability of its securities
c. A personal liability company if
i. It meets the criteria for a private company; and
ii. Its MOI states that it is a personal liability company; or
d. A public company

Definitions of the above in section 1: (NB!)

- Profit company
o A company incorporated for the purpose of financial gain for its
shareholders
- Public company
o A profit company that is not a state-owned company, a private
company or a personal liability company
- Private company
o A profit company that
ß Is not a public, personal, liability, or state-owned company; and
ß That satisfies the criteria set out in s 8(2)(b)
- Personal liability company
o A profit company that satisfies the criteria in s 8(2)(c)
- State-owned company
o An enterprise that is registered in terms of this Act as a company and
either
ß Is listed as a public entity in Schedule 2 or 3 of the Public
Finance Management Act, 1999; or
ß Is owned by a municipality, as contemplated in the Local
Government: Municipal Systems Act, 2000 and is otherwise
similar to an enterprise referred to listed in Schedule 2 or 3 of
the Finance Management Act
- Non-profit company
o A company
ß Incorporated for a public benefit or object as required by item
1(1) Schedule 1; and
ß The income and property of which are not distributable to its
incorporators, members, directors, officers or persons related to
any of them except to the extent permitted by item 1(3) of
Schedule 1

Section 8(3):
- Limits the creation of an entity with separate legal personality by way of
conduct (under the rules of common law)
- No association of persons formed after 31 December 1939 for the purpose of
carrying on any business that has for its object the acquisition of gain by the

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association or its individual members is or may be a company or other form of

body corporate unless it
o Is registered as a company under this Act
o Is formed pursuant to another law; or
o Was formed pursuant to Letters Patent or Royal Charter before 31 May
1962

Exceptions to the principle of separate legal personality:

Piercing of the corporate veil:

- The protection afforded to the shareholders and directors is removed and the
substance of the company is examined, rather than the form in which it has
been cast
- The focus shifts from the company to the natural person behind it or in control
if its activities as if there were no division between such person and the
company
- In this way personal liability is attributed to someone who misuses or abuses
the principle of corporate personality
- Purpose:
o To hold the actual wrongdoer liable
o Where the corporate personality is abused

Le’Bergo Fashions CC v Lee (1998):

Facts:
- Lee had signed a restraint of trade agreement in her personal capacity not to
compete with the applicant, but had then used her company of which she was
the sole shareholder and director to compete with the applicant
Legal question:
- Can the restraint of trade obligation be imposed on Lee’s company who had
not been a party to the restraint of trade agreement entered into between Lee
and Le’Bergo Fashions CC?
Judgment:
- Lee had effectively carried on the business of the company
- In their daily activities, Lee and the company had acted as one persona,
and by her conduct and business activities she had not treated the
company as a separate entity but merely as an instrumentality or
conduit for promoting her business affairs
- This was sufficient to sustain the argument that Lee had been guilty of
improper conduct in using the company as a façade behind which she
had engaged in business in breach of the restraint of trade agreement
- Even though the company had not been a party to the restraint of trade
agreement, the court held that its competition with the applicant had
amounted to intentionally assisting Lee to breach her undertaking in the
restraint clause, which was wrongful in law and could thus be
interdicted
- Accordingly, both Lee and the company were interdicted from competing with
the applicant
- Thus, one instance when a court would permit the separate corporate
personality of a company to be disregarded is when a natural person who is

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subject to a restraint of trade uses a company as a front to engage in the

activity that is prohibited by a restraint of trade agreement

Jones v Lipman (1962):

Facts:
- Lipman had concluded a contract to sell land to Jones
- Thereafter Lipman asked to be released from the contract, but Jones refused,
intimating that, if necessary, he would sue for specific performance
- Pending completion of the sale, Lipman formed a company of which he and a
clerk of his solicitor were the sole shareholders and directors, and conveyed
the land to the company in order to defeat Jones’s right to specific
performance
Judgment:
- Ordered specific performance against both Lipman and the company
- Described the company as a sham or a creature or a mask of Lipman
which he used as a device in order to evade his contractual obligation

Courts do not have a general discretion to pierce the corporate veil:

- Courts must undertake a balancing act:
o Sanctity of separate legal personality v misuse of corporate personality
of the company
- Misuse corporate personality – commit fraud/dishonesty/improper
aim/purpose
- Manong case:
o Discrimination against company on the basis of the race of its
members
o Courts can look at who the members and shareholders are to
determine whether there is discrimination
o Lifting corporate veil
- Daimler case:
o Nationality of a company is used to label a company as an enemy
company
o Lifting corporate veil

Distinction between ‘piercing the veil’ and ‘lifting the veil’:

- Piercing the veil:
o Court treats the liabilities of the company as those of its shareholders
or directors, and disregards the corporate personality of the company
- Lifting the veil:
o Courts take into account who the company’s shareholders or directors
are
o This does not necessarily entail ignoring the separate identity of the
company or treating the liabilities of the company as those of its
shareholders or directors

The approach adopted to piercing the veil in our common law:

When will courts pierce the corporate veil:

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- This is an exceptional procedure and drastic remedy

- In most instances the courts uphold the separate existence of a company
despite arguments that they should not do so
- There must be compelling reasons for a court to ignore the separate legal
existence of a company
- Courts have not generally followed consistent principles in determining when
they will pierce the veil

Cape Pacific Ltd v Lubner Controlling Investments (Pty) Ltd (1995):

- Laid down a number of general principles relating to the common-law
instances of piercing the veil:
o Courts have no general discretion simply to disregard a
company’s legal personality whenever it considers it just to do so,
because they should strive to give effect to and uphold it
o It is an exceptional remedy
o Each case must be decided on its own facts
o Where there is fraud or dishonesty or other improper conduct, a
court may disregard the company’s separate legal personality
o A balancing approach must be adopted:
ß The need to preserve fundamental company law principle v
policy considerations to pierce the veil
o Even if a company has been legitimately established and operated but
is later misused, the corporate veil may nevertheless be pierced

Hülse-Reutter v Gӧdde (2001):

- Piercing the veil should be used as a remedy of last resort
- It should not be resorted to if another remedy on the same facts could
successfully be employed in order to administer justice between the parties –
the veil must only be lifted exceptional circumstances
- Each case must be considered on its own facts
- As a matter of principle there must at least be some misuse or abuse of
the distinction between the corporate entity and those who control it
which results in an unfair advantage being afforded to those who
control the corporate entity

Piercing the corporate veil under the Act:

Section 20(9):
- If a court finds that the incorporation of the company, any use of the company
or any act by or on behalf of the company constitutes an unconscionable
abuse of the juristic personality of the company as a separate entity, the court
may:
a. Declare that the company is to be deemed not to be a juristic
person in respect of any right, obligation or liability of the
company or of a shareholder of the company or, in the case of a
non-profit company, a member of the company, or of another person
specified in the declaration; and

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b. Make any further order the court considers appropriate to give effect to
a declaration contemplated in par (a)

Advantage of this section:

- Gives more certainty and visibility to the doctrine of piercing the corporate veil

Danger of this section:

- May result in the rigidity of the doctrine, particularly if the courts interpret the
provision in a highly technical way

Ex parte Gore case:

- The readiness of courts to pierce or lift the corporate veil vary depending on
the facts of every case
- There is no common, unifying principle, which underlies the occasional
decision of the courts to pierce the corporate veil (no principled approach can
be derived from the authorities)
- Leading SA authority on the subject, Cape Pacific Ltd, expressly refrained
from being drawn into making a semantic distinction between ‘piercing’ and
‘lifting’ the corporate veil
“The law is far from settled with regard to the circumstances in which it
would be permissible to pierce the corporate veil. Each case involves
a process of enquiring into the facts, which, once determined, may be
of decisive importance.”
- Courts will ignore or look behind the separate legal personality of a company
where justice requires it, and not only when there is no alternative remedy
- The involvement of fraud or other improper conduct has generally been
present in the cases in which the veil has been lifted or pierced, or when the
corporate structure is a mere façade concealing the true facts
- Court’s view:
o The determination to disregard the distinctness provided in terms of a
company’s separate legal personality appears in each case to reflect a
policy-based decision resultant upon weighing by the court
o Weighs up the importance of giving effect to the legal concept or
juristic personality, acknowledging the material, practical and
legal considerations that underpin the legal fiction, on the one
hand, as against the adverse moral and economic effects of
countenancing an unconscionable abuse of the concept of the
founders, shareholders, or controllers of the company, on the
other
o The courts have shown an acute appreciation that juristic
personality is a statutory creation and that their separate
existence remains a figment of law, liable to be curtailed or
withdrawn when the objects of their creation are abused or
thwarted
- Section 20(9) of the Companies Act has introduced a statutory basis for
piercing or lifting the corporate veil of companies
- Wording is similar to the common-law provision
o Common-law provision provides that the veil may be pierced or
lifted in the event of ‘gross negligence’

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o The section provides that the veil may be pierced or lifted in the
event of ‘unconscionable abuse’
- ‘Unconscionable abuse’ postulates conduct in relation to the formation and
use of companies diverse enough to cover all the descriptive terms like
‘sham’, ‘device’, ‘stratagem’ and the like
- The provision brings about that a remedy can be provided whenever the
illegitimate use of the concept of juristic personality adversely affects a third
party in a way that reasonably should not be countenanced
- S 20(9) is supplemental to the common-law provision, not a substitute
thereof
- Relief in terms of s 20(9) may be granted on application by an interested
person in any proceedings in which a company is involved

S 20(9) does not override the common-law instances of piercing the corporate veil:
- It is suggested that where the requirements of s 20(9) are not met and cannot
be relied on, the common-law remedy of piercing the veil will probably still
apply
- The principles developed at common law will also serve as useful guidelines
in interpreting s 20(9) and in deciding whether there has been unconscionable
abuse of the juristic personality of a company

Common law v s 20(9):

- At common law piercing of the veil is to be used as a last resort, but in light of
s 20(9) it is questionable whether piercing the veil in terms of the Act is to be
used as a last resort. It may well be that reliance may be placed on s 20(9)
despite other remedies also being available
- Courts may now also have a wider discretion to pierce the corporate veil
under s 20(9) compared to their discretion under common law

Nonetheless, piercing the veil is an exceptional remedy and should be used

sparingly

Test for piercing the corporate veil envisaged in s 20(9):

- Concentrates on the abuse of the juristic personality of the company as a
separate entity, and whether that abuse constitutes ‘unconscionable abuse’
- Unconscionable abuse of the juristic personality of a company may occur
o On the incorporation of the company
o As a result of the use of the company as a legal entity
o As a result of any act by, or on behalf of, the company

Examples of piercing:
- Gilford Motors v Horne:
o GM appointed H as GM on condition that he signs restraint of trade
o H forms company and breach restraint
o Court pierced the corporate veil
o H cannot hide behind the company to escape personal liability
o Company was formed for a fraudulent purpose
- Robinson v Randforntein:
o Director used his personal capacity to make secret profit by creating a
scheme

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o Created a company to escape personal liability

o Court pierced the corporate veil to expose true state of affairs

S 20(9) of the Companies Act v s 65 of the CC Act:

- Worded similarly
- However, s 65 of the CC Act deems a CC not to be a juristic person in
instances of ‘gross abuse’ of the juristic personality of the CC as a separate
entity
- S 20(9) of the Act deems a company not to be a juristic person where there is
an ‘unconscionable abuse’ of the juristic personality of the company as a
separate entity (‘unconscionable abuse’ not defined in the Act – troublesome
aspect)

Haygro Catering BK v Van der Merwe:

- [Where courts regarded abuse of the juristic personality of a CC as a
separate entity to be a ‘gross abuse’ under s 65 of the CC Act]
- Members of a CC, together with the CC, were jointly and severally liable for
the debts of the CC where the name of the CC had not been displayed
anywhere on the CC’s business premises, documents or correspondence, in
contravention with s 23 of the CC Act
- Court found that the failure to display the name of the CC constituted a gross
abuse of the juristic personality of the CC as a separate entity

Airport Cold Storage (Pty) Ltd v Ebrahim:

- [Where courts regarded abuse of the juristic personality of a CC as a
separate entity to be a ‘gross abuse’ under s 65 of the CC Act]
- Factors the court considered relevant in coming to the conclusion that there
had been a gross abuse of the juristic personality of the CC:
o CC had formed part of a conglomerate of associated family businesses
that had been conducted with scant regard for the separate legal
personalities of the entities concerned
o CC had not kept proper books of account
o CC had operated without having appointed an accounting officer
o CC had voluntarily assumed a debt owing by the family business when
it was incorporated and had acquired significant debts from the start of
commencing business, which had amounted to reckless trading
- Court found that the defendants ignored the separate juristic identity of the CC
- They could not ‘now choose to take refuge behind the corporate veil’ of the
CC in order to evade liability of its debts

The principles developed with regard to piercing the corporate veil in the context of s
65 of the CC Act and at common law generally may serve as useful guidelines in
determining the meaning of the phrase ‘unconscionable conduct’

Quasi-partnerships:

Quasi-partnerships:
- Where parties form a company but have an underlying partnership intention

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- Applies predominantly to small private companies

- Courts may nevertheless recognise this intention and take cognisance of the
individuals behind the corporate veil

Facts that may indicate that the parties had formed a quasi-partnership:
- Their association was formed on the basis of a personal relationship involving
mutual confidence
- An agreement or understanding that all or some of the shareholders will
participate in the conduct of the business
- An agreement that the profits of the company will be distributed in the form of
salaries instead of by way of dividends

Agency / alter ego doctrine:

Normal relationship between company and its directors or shareholders:

- Company is the principal
- Shareholders and directors are the agents of the company

In certain circumstances it may be that the normal relationship between a company

and its directors or shareholders is in fact inverted, whether expressly or impliedly,
so that the company is the agent and the directors or shareholders are the principals

For instance:
- Where the directors or controlling shareholders do not treat the company as a
separate entity, but treat it as if it were merely a means of furthering their own
private business affairs
- In this instance the company may be regarded as the agent or the alter ego
(i.e. other self) or instrumentality of its directors or controlling shareholders

There is abuse of the company’s separate legal existence:

- The directors or shareholders strive to obtain the advantages of separate
legal personality of the company without treating the company as a separate
legal person
- The company does not carry on its own business or affairs, but acts merely to
further the business or affairs of its directors or controlling shareholders

The separate legal personality of the company is still recognised:

- The corporate veil is not pierced
- Liability is imposed personally on the directors or shareholders in their
capacity as principal of the company
- This is an example of lifting the veil
- The practical effect of piercing the corporate veil is achieved by establishing
an agency relationship, without having to pierce the veil

Company groups:

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The fact that the group of companies effectively forms one economic unit does not
mean that the separate identity of each company is ignored and the group is treated
as one entity
- Each company in a group of companies is in law regarded as a separate legal
entity with its own separate legal personality and rights, privileges, duties and
liabilities separate from those of the other subsidiary companies

In certain instances, a court will pierce the corporate veil in a group of companies
and treat the group as a single entity as opposed to a collection of different separate
corporate entities
- However, courts are not entitled to disregard the separate legal personality of
a company in a group of companies simply because it considers that justice
so requires
- The mere fact that a group of companies constitutes a single economic unit
does not in itself justify the treatment of the group as a single entity
- Note that the position may be different where the subsidiary is a façade or
sham

Approach rather followed by courts:

- Rather than piercing the corporate veil in company groups, it is more common
for courts to invoke principles of agency and to treat the subsidiary as the
agent of its holding company
- If it can be shown that a subsidiary company acted as the agent of its holding
company, then on ordinary agency principles, liability will attach to the holding
company and not to the subsidiary
- Example:
o Where the profits of the subsidiary company are treated as those of the
holding company, or where the holding company is in effectual and
constant control of the subsidiary company, this may indicate that there
is an agency relationship between the holding company and the
subsidiary
- But there is no presumption that a subsidiary company is the agent of the
holding company and whether or not a subsidiary was acting as the agent of
the holding company will depend on an analysis of all the facts

Imposing personal liability on the directors of a company:

More accurately described as instances of ‘lifting the corporate veil’

Acting without authority: (s 77(4))

- Where a director acts in the name of the company, signs anything on behalf of
the company, purports to bind the company or authorises the taking of any
action by or on behalf of the company, despite knowing that he lacks the
authority to do so:
o Will be personally liable for any loss, damage or costs sustained by the
company as a direct or indirect consequence of his actions

Reckless trading: (s 77(3))

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- A director who has directly or indirectly acquiesced in the carrying on of the

company’s business despite knowing that the business was being carried on
recklessly, with gross negligence, with intent to defraud any person or for any
fraudulent purpose
o Liable for any loss, damage or costs sustained by the company

False or misleading statements: (s 77(3))

- A director who signed, consented to or authorised the publication of
o Any financial statements that were false or misleading in a material
respect; or
o A prospectus or written statement required when secondary offers are
made to the public that contains untrue statements, or a statement to
the effect that a person had consented to be a director when no such
consent had been given
- despite knowing that the statements were false, misleading or untrue shall be
liable for any loss, damage or cost sustained by the company as a direct or
indirect result thereof

Contravening the Companies Act: (s 218(2))

- Any person who contravenes any provision of the Act is liable to any other
person for any loss or damage suffered by that person as a result of that
contravention

Interpretation of the Act:

Section 5(1):
- This act must be interpreted and applied in a manner that gives effect to the
purposes set out in s 7

Section 5(2):
- To the extent appropriate, a court interpreting or applying this Act may
consider foreign company law

Section 5(3):
- When in this Act a particular number of ‘business days’ is provided for
between the happening of one event and another, the number of days must
be calculated by
o Excluding the day on which the first such event occurs
o Including the day on or by which the second event is to occur; and
o Excluding any public holiday, Saturday or Sunday that falls on or
between the days contemplated

Section 5(4):
- If there is an inconsistency between any provision of this Act and a provision
of any other legislation
o The provisions of both Acts apply concurrently to the extent possible;
apply one of the inconsistent provisions without contravening the
second

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o To the extent that it is impossible, the following Acts prevail in the case
of an inconsistency involving any one of them, except to the extent
provided otherwise in s 49(4)
ß Auditing Profession Act
ß Labour Relations Act
ß Promotion of Access to Information Act
ß Promotion of Administrative Justice Act
ß Public Finance Management Act
ß Securities Services Act
ß Banks Act
o The provisions of this Act prevail in any other case, except to the extent
provided for in subsection (5) or section 118(4)

Section 5(5):
- If there is a conflict between a provision of Chapter 8 and a provision of the
Public Service Act, the provisions of that Act prevail

Example:
South African Airways case:
- Court held that you have to follow and look at the objectives of the Companies
Act when you want to interpret certain sections thereof (s 5(1))
- One of the objectives in s 7:
o Provide for business rescue
o Look out for the preservation of jobs
- These were two aspects the court had to take into account when interpreting
certain sections pertaining to the business rescue procedure
- The court had to look at the procedure of the Labour Relations Act and the
procedure set out in the Companies Act in relation to retrenchment
- The court also had to look at the interplay between the Public Finance
Management Act and the Companies Act
Judgment:
- The language adopted by the legislature remains the starting point of
any interpretative inquiry
- Where the words employed admit of more than one plausible
interpretation, the purpose of the legislation must be employed as a
tiebreaker
- In the context of the Companies Act such an interpretative process must
be applied in a manner that gives effect to the purposes set out in s 7
- In the case of s 136 and the balance of the business rescue provisions, a key
purpose is to provide for the efficient rescue and recovery of financially
distressed companies, in a manner that balances the rights and interests of all
relevant stakeholders
- The statutory mechanism for the achievement of this purpose is contained in
Chapter 6 of the Companies Act which governs business rescue and
compromise with creditors
- The primary aim of a corporate rescue procedure is not merely to rescue a
company business or potentially successful parts of the business
- The procedure aims to rescue the whole company or corporate entity
- This will naturally include preservation of jobs.

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- Indeed, one of the main drivers for the introduction of the business rescue
regime in place of the system of judicial management was the rescue of an
ailing business and thus the retention of jobs
It is against this purpose that s 136(1) ought to be construed

Chapter 5: Types of Companies:

Introduction:

Share:
- Incorporeal movable property that is a measure of a shareholder’s financial
and non-financial interest in a company
- A share entitles the shareholder to certain interests in the company, its assets
and dividends (for distribution)

Securities:
- Has a much wider meaning than ‘shares’ (umbrella term)
- Includes any shares, debentures or other instruments, irrespective of their
form or title, issued or authorised to be issued by a profit company

Shareholder:
- A person who holds at least one share issued by a company and whose name
is entered as a shareholder in the securities register of the company

Member:
- A member of a non-profit company

Board of directors:
- The organ of a company that is responsible for managing the business and
affairs of a company

Director:
- A member of the board of a company

Memorandum of Incorporation (MOI):

- The sole founding or governing document of the company, setting out the
rights, duties and responsibilities of shareholders, directors and other within
and in relation to the company, together with various other matters
-

Profit and non-profit companies:

Broad categories of companies:

- Profit companies (of which there are 4 types)
- Non-profit companies

Non-profit company:

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- Formed for a public benefit object, or an object relating to a cultural or social

activity or communal or group interest
- Its income and property cannot be distributed to its members or directors
- Are subject to a modified application of the Act and to a distinct set of
essential rules that govern matters unique to non-profit companies

Profit company:
- Formed for the purpose of financial gain for its shareholders
- Companies with shares, in contrast with non-profit companies which are
companies without a share capital
- Subdivided into 4 categories
o Private company
o Public company
o Personal liability company
o State-owned company

General characteristics of profit companies:

General characteristics common to all types of profit companies:

- The purpose of the incorporation is financial gain for its shareholders
- May have any number of shareholders
- Formed by one or more persons as incorporators (or by an organ of
state)

Companies that bear a greater responsibility to a wider public are subjected to a

more demanding disclosure, accountability and transparency regime.
The extended accountability and transparency requirements include, among
other things:
- Auditing of financial statements
- Obligatory appointment of company secretaries
- Appointment of auditors
- Appointment of audit committees
- Appointment of social and ethics committees which monitor the extent to
which the company takes shareholder interests into account

Exceptions are created for certain companies as an added measure to create

flexibility in the Act. These provisions enhance flexibility in the regulation of small,
owner-managed companies and single-shareholder or single-director companies,
which need not be regulated to the same extent as other companies

Exceptions:
- In owner-managed companies (all the shareholders are also directors), there
are diminished formalities and a diminished need to seek shareholder
approval for certain board actions. This is because ownership and control are
not split in such companies
- Companies in which all the shares are owned by ‘related persons’ have a
diminished need to protect minority shareholders

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- In a single-shareholder profit company (other than a state-owned company),

the single shareholder may exercise any voting rights on any matter at any
time, without notice or compliance with any other internal formalities
- Same applies to the sole director in a single-director profit company other
than a state-owned entity, who may exercise any power or perform any
function of the board without notice or compliance with any other internal
formalities

The private company:

Definition:
- A private company is one which is not a state-owned company, and by its
MOI both
o Prohibits the offer of any of its securities to the public; and
o Restricts the transferability of its securities

Core characteristics/requirements:
- Its securities may not be offered to the public
- The transferability of its securities must be restricted

Essential distinctions between a private company and a public company:

- Private company is prohibited by its MOI from making any offer to the public
of any of its securities, while a public company is permitted to do so
- MOI of a private company must restrict the transferability of its securities,
whereas that of a public company may but need not do so

Restriction of transferability of securities of private companies:

- The transfer of a company’s securities applies to the situation where a person
acquires shares in the company from an existing shareholder who wishes to
dispose of them, and the shares are then transferred into the name of the
acquirer (usually by way of purchase)
- This must be distinguished where the shares are acquired directly from the
company and the company in this case issues the shares to the subscriber
(subscription of shares)

Rights of pre-emption:
- One of the ways in which the transferability of securities is restricted
- Such rights prohibit an existing shareholder from selling his shares to a non-
shareholder, unless the other shareholders of the company have first had an
opportunity to purchase the shares

Distinction between pre-emptive rights restricting transferability of securities

and s 39 pre-emptive rights:
- Section 39:
o Confers on each shareholder of a private company a pre-emptive right
to be offered a proportionate percentage of any new shares that the
company proposes to issue, before those shares may be offered to a
non-shareholder

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o Such proportionate percentage is equal to the shareholder’s general

voting power immediately before the offer is made
o Protect the existing shareholders of a private company by enabling
them to preserve their voting power and prevent dilution of their voting
power
o The more shareholders, the more people who are entitled to vote, the
lesser existing shareholders’ voting rights will be
- S 39 is concerned with the issue of shares by the company
- Pre-emptive rights restricting the transferability of shares is related to the
transfer of shares by an existing shareholder
- Pre-emptive rights in terms of s 39 is concerned with the acquisition of new
shares directly from the company and the company in this case issues the
shares to the acquirer
- The pre-emptive right restricting the transferability of shares applies to the
situation where one acquires shares in the company from an existing
shareholder who wishes to dispose of them, and the shares are then
transferred into the name of the acquirer
- S 39 can be ‘overruled’ in the company’s MOI (private company then does not
have to comply with it)

In essence:
Different ways in which a person can acquire shares of a company:
- Acquire shares in the company from an existing shareholder who wishes to
dispose of them
o Shares are transferred into the name of the acquirer
o Pre-emptive rights restricting transferability of shares is applicable
- Acquire new shares directly from the company
o Subscription of shares
o Company issues the shares to the subscriber
o S 39 is applicable

Other characteristics:
- Name must end with the expression ‘Proprietary Limited’ or its abbreviation
‘(Pty) Ltd’
- Regarding the extended accountability and transparency requirements, it is
not obligatory for a private company to appoint a company secretary or an
audit committee
- This is required only when the company elects to do so in terms of its MOI
- Private companies are not required to appoint social and ethics committees
either, unless their public interest scores exceed the threshold prescribed by
the Regulations
- It is not obligatory for a private company to appoint an auditor, save where its
MOI provides otherwise, or it is a significant private company that is required
by the Act or regulations to have its financial statements audited every year
- Financial statements need to be independently reviewed, but need not be
audited
o An audit is necessary only if the private company has voluntarily opted
to have its financial statements audited, or if it is required to do so by
the terms of the Act

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o The Regulations require an audit by those private companies that have

a significant social or economic impact and consequently have greater
responsibility to a wider public, as indicated by factors such as their
annual turnover, size of their workforce or nature and extent of their
activities
- Exemption is generally granted from both the independent review as well as
the audit of the annual financial statements of an owner-managed private
company

Personal liability company:

Definition:
- A profit company is a personal liability company if it satisfies the criteria for a
private company and its MOI states that it is a personal liability company

Regarded as a sub-group of private companies:

- Its MOI must thus both prohibit it from offering any of its securities to the
public, and restrict the transferability of its securities

The distinguishing characteristic is that its MOI must specifically state that it is a
personal liability company

Exception to the separation between the company and its directors:

- Its directors, including its past directors, are jointly and severally liable,
together with the company, for any debts and liabilities of the company that
are or were contracted during their respective period of office

Other characteristics:
- Must have the word ‘Incorporated’ or its abbreviation ‘Inc’ suffixed as the last
word of its name
- Expected t be used primarily by associations of professional persons, such as
attorneys, stockbrokers, auditors, etc who wish to have the convenience and
advantages of separate legal personality, especially perpetual succession,
while still complying with their professional rules, which require personal
liability
- Subject to accountability and transparency requirements similar to those of a
private company
o Need not appoint an audit committee or company secretary, unless
MOI provides otherwise
o Appointment of an auditor is only necessary if its MOI so requires, or if
the company is required to have its financial statements audited every
year in terms of the Act or Regulations

Section 19(3):
- The directors and past directors of a personal liability company are jointly and
severally liable, together with the company, for any debts and liabilities of the
company that are or were ‘contracted’ during their respective periods of office
- The Act further states that a person must be regarded as having received
notice and knowledge of the effect of s 19(3) on a personal liability company –
exception to the abolition of the doctrine of constructive notice under the Act

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Effect of s 19(3) on a personal liability company:

- It renders the directors and past directors co-debtors with the company
- Directors and company are liable jointly and severally for the contractual
debts and liabilities of the company
- Limitations on liabilities of directors:
o Limited to the debts and liabilities of the company that were contracted
during his period of office as a director
o It is further limited to the contractual debts and liabilities of the
company

Fundstrust (Pty) Ltd (In Liquidation) v Van Deventer:

- Laid down that the extent of the directors’ liability is limited to the company’s
contractual debts and liabilities that were contracted during their periods of
office, and that the directors’ joint and several liability does not include any
liability for delictual claims or unjustified enrichment claims against the
company, because these liabilities are not ‘contracted’
- Found that the intention of the legislature was to relate directors’ liability to
nothing other than the company’s ordinary financial or commercial
commitments

Sonnenberg McLoughlin Inc v Spiro:

- Proclaimed that the intention of the legislature was not simply to impose on
the directors a liability equivalent to the common-law liability of partners
- It was rather to impose on the directors an entirely new statutory liability, and
to give creditors an entirely new remedy that would enable them to hold the
directors liable jointly and severally for the company’s debts and liabilities
before its liquidation
- Twofold effect:
o Creditors can hold the directors jointly and severally liable
o If a director pays any such debt of the company, he would have a right
of recourse against his fellow directors for their proportionate shares of
the debt

It should be noted that the company itself does not have a right of recourse
against its directors where the company has paid any of its debts

For a personal liability company to be transformed into another type of

company:
- Must give 10 days’ notice before filing transformation documents with CIPC
- Must give 10 days’ notice to the professional or industry regulatory authority
regulating that particular industry
- Must give notice to people who have dealt with the company and relied on
joint and several liability of the directors

Summary of what should and can be included and dealt with into the MOI of a
private company and a personal liability company:

Private company:

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- Unalterable: (must be included)

o Prohibit offering of securities to public
o Restrict transfer of securities
- Alterable provisions:
o S 39
o Minimum number of directors
o Minimum number of incorporators
o Voluntary extension of accountability and transparency requirements
(audit committee (BUT see requirements below) or social and ethics
committee)

Personal liability company:

- Unalterable:
o State that it is a personal liability company
o Prohibit offering of securities to public
o Restrict transfer of securities
o S 19(3)
- Alterable:
o Minimum number of directors
o Minimum number of incorporators
o Voluntary extension accountability and transparency requirements
(audit committee (BUT see requirements below) or social and ethics
committee)

Requirements for an audit committee (regulated by the Act)

- At least 3 members
- Who are all directors
- With certain qualifications
So, if the company’s MOI provides that it should have an audit committee, it has to
have at least 3 directors, since the requirements for the audit committee is
unalterable

When a private company is compelled by the Act or Regulations to have, for

instance, an audit committee since it has to comply with higher accountability and
transparency requirements, having an audit committee it will not be an alterable
provision in their MOI, but a requirement (unalterable)

Public company:
Unlike a private company, securities of a public company may be freely offered to
the public
- Facilitates the raising of capital from the general public

Shareholders may freely transfer their securities unless, of course, the company
elects to impose restrictions on the transferability of securities in terms of its MOI

Other characteristics:
- Name must end with the word ‘Limited’ or its abbreviation ‘Ltd’
- Have a greater responsibility to the wider public

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o They raise their share capital from members of the public

o It is a matter of policy that there ought to be more safeguards imposed
on this type of company and, in particular, a more demanding
disclosure and transparency regime
- Accordingly, the enhanced accountability and transparency
requirements (of Chapter 3 of the Act) apply to public companies
o Mandatory for a public company to appoint a company secretary,
and audit committee and an independent auditor, and to have its
annual financial statements audited
- The annual financial statements must generally be drawn up in accordance
with IFRS
- The annual financial statements must include particulars showing the
remuneration and benefits received by each director or prescribed officer
- The annual return that every company files with the CIPC must include a copy
of its annual financial statements
- A social and ethics committee must be appointed by listed public
companies and by public companies with public interest scores that
exceed the threshold prescribed by the regulations
- The board of directors must consist of a minimum of three directors
o More precisely, more than three directors are really required, bearing in
mind that the mandatory audit committee of a public company must
consist of at least three independent non-executive directors and that
the social and ethics committee must have at least three directors or
prescribed officers, at least one of whom is a non-executive director
o The minimum number of three directors is therefore in addition to
the number of directors that the company must have to satisfy
any requirement to appoint an audit committee or a social and
ethics committee

Listing of securities:
- The offer by a public company of shares to the public must be distinguished
from the listing of a public company’s shares on a securities exchange, such
as the JSE Limited
- The shares (securities) of a public company may or may not be listed
- The advantage of a listing
o Listed securities are traded in an organised and accessible public
securities market
o The effect of a trading market is that members of the public are more
willing to trade in securities of the company
o This facilitates access to finance for the listed public company
o Listing also makes it easier for shareholders to later sell their securities
should they wish to do so
- Listed companies are, however, subject to additional exchange rules such as
the JSE Rules and JSE Listing Requirements
o Prescribe stricter and more demanding requirements, and often more
extensive duties of disclosure of certain information than are required
by the Act
o This provides additional safeguards for members of the public and for
those who trade in securities on the exchange

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Differences between public and private companies:

Public company: Private company:

Name must end with ‘Ltd’ or ‘Limited’ Name must end with ‘(Pty) Ltd’ or
(Proprietary Limited’

May offer their securities to the public, Its MOI must both:
enabling them to raise capital from the - Restrict the transferability of its
public. May, but need not, restrict the securities; and
transferability of their securities - Prohibit it from offering its
securities to the public

Pre-emptive rights do not apply as the Existing shareholders, as a default rule,

default position: only if company opts in enjoy pre-emptive rights in respect of
to s 39 in terms of its MOI new shares to be issued by the
company ito s 39, unless MOI provides
otherwise

Minimum number of directors on the Default position is a minimum of one

board of directors is three directors, but director on the board
taking into account the membership of
the audit committee and the social and
ethics committee, more than three
directors would generally be required

The Act imposes more onerous legal Less stringent and onerous
duties of disclosure, accountability and accountability and transparency
transparency. The more stringent requirements
disclosure and transparency regime (Ch
3) requires a public company to appoint:
- A company secretary
- An auditor; and
- An audit committee

Generally required to have their annual Its annual financial statements must be
financial statements audited, and must independently reviewed but not audited,
also include copies of their annual unless the company voluntarily audits
financial statements in their annual its financial statements or an audit is
returns required by regulations in terms of the
Act (which depends, inter alia, on the
company’s public interest score)

Exception is generally granted from

both an audit and an independent
review for certain private companies
(namely owner-managed private
companies where every holder of
securities is also a director

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Must convene an annual general No longer applies to private companies

meeting of its shareholders

State-owned company:

Definition:
- An enterprise that is registered as a company in terms of the Act and either:
o Is listed as a public entity in Schedules 2 or 3 of the Public Finance
Management Act; or
o Is owned by a municipality and is otherwise similar to such an
enterprise

Other characteristics:
- Name ends with the expression ‘SOC Ltd’
- State-owned companies are now recognised as a distinct category of
company and thus receive separate legislative treatment with regard to
certain matters so as to avoid conflict or overlap with other legislation that
applies specifically to state-owned companies but not to other companies in
general, such as the Public Finance Management Act
- All provisions of the Act that apply to public companies generally also apply to
state-owned companies (subject to some exceptions)
- The Minister has the power to grant exemptions to state-owned companies,
exempting them from having to comply with certain provisions of the Act
- Subject to the extended accountability and transparency requirements
in terms of Chapter 3 of the Act
o Must appoint a company secretary
o An audit committee; and
o An auditor
- Must also appoint a social and ethics committee

Company secretary:
- Chief administrative officer of the company who must provide guidance to the
board of directors on their duties and similar matters, keep minutes of
meetings, etc

Auditor:
- Person who performs an audit in terms of prescribed or applicable auditing
standards

Audit committee:
- A sub-committee of a company’s board or directors, appointed by that
company’s incorporators, board of directors or shareholders, which plays an
important role in
o Identifying financial risks
o Managing these risks
o Ensuring the integrity of internal financial controls
o Ensuring the integrity of integrated reporting

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Summary of profit companies:

Private: Personal liability: Public: State-owned:

(Pty) Ltd Inc. Ltd SOC Ltd

Securities may not Securities may not No prohibition on Registered in

be offered to be offered to securities terms of
public public Companies Act

Securities not Securities not May place Listed in

freely transferable freely transferable restrictions, but Schedules 2 or 3
need not to of the PFMA, or
municipality

1 director, unless 1 director, unless 3 or more directors Public company

MOI or CA MOI or CA (more re rules
requires requires accountability and
transparency
rules)

Can be owner- Directors jointly Audit committee Accountability and

managed and severally transparency
liable with rules; PFMA
company

Public interest Debts and Social and ethics There are

score liabilities committee exceptions and
‘contracted’ exemptions

Review annual Contracted during Company

financial period of office secretary
statements but not
audit unless
required

May have auditing Audit committee

requirements in
respect of
legislation, e.g.
attorneys trust
account

Non-profit companies:

Definition:
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- A company that is incorporated for a public benefit object, or an object relating

to one or more cultural or social activities, or communal or group interests;
and
- It is of the essence that the income and property of a non-profit company must
not be distributable to its members or directors or to its incorporators, officers,
or any ‘related’ persons (subject to certain exceptions permitted by the Act)

[Both these requirements must be satisfied]

Object of non-profit companies:

- Must set out at least one object in its MOI
- Each object must either be
o A public benefit object; or
o An object relating to one or more cultural or social activities, or
communal or group interests

Public benefit object:

- An object for the benefit of the general public
- For instance, the general promotion of education or charity

An object that advances a communal or group interest:

- Is not necessarily for the wider benefit of the general public, but is in the
interests of a community or a group
- For instance, local sports organisation
- Excludes purely commercial activities (relates to cultural or social activities)

Cuninghame v First Ready Development 249 (association incorporated under s

21):
- Held that the phrase ‘communal or group interests’ relates to cultural or
social activities, and excludes objects of a purely commercial nature
- The main object of a company had changed from managing a rental pool on a
non-profit basis to the management of the hotel business as a whole
- The court ruled that, since purely commercial enterprises were excluded
from the ambit of non-profit companies, the result was that the
company’s commercial hotel business was not a permissible object for
a non-profit company (or its equivalent under the 1973 Act, the s 21
company)

Scope of business:
- A non-profit company does have the scope to carry on a business, trade or
undertaking
- But this must be consistent with or ‘ancillary’ to its stated objects
- It cannot be an activity that is unrelated to the stated objects of the company
- Any profits derived from such activity may not of course be distributed to its
members or directors (or officers or related persons), but instead be applied to
advance the stated objects of the non-profit company
- A non-profit company may validly make profits, as long as it complies
with the basic prohibition on distributions to its members and
controllers, provided that all its assets and income, however derived,
are applied to advance its stated objects

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- Profit-making activity may not be the main or primary purpose or object

- It may at best be only a secondary activity that is consistent with or
ancillary to the company’s non-commercial objects and that is used as a
means of promoting and advancing the company’s non-commercial
objects

Financial benefit or gain:

- A non-profit company may not pay or distribute any portion of its
income or transfer any of its assets, whether directly or indirectly, to a
member, director, incorporator or any person appointing a director of
the company
- Exceptions:
o Reasonable remuneration for goods delivered or for services rendered
to or at the direction of the company
o Reasonable payment or reimbursement for expenses incurred in
advancing the company’s objects
o Payment of an amount due and payable by the company in terms of a
bona fide agreement between the company and another
o Payment in respect of any rights of that person, to the extent that those
rights are administered by the company in order to advance one of its
objectives
o Payment in respect of any legal obligation that is binding on the
company
- Upon the winding-up, the prohibition on distributions to members or
directors applies equally
- Upon the winding-up or dissolution, no past or present member, director or
person appointing a director of the company is entitled to receive any part of
the net value of the company

Other characteristics:
- Company name ends with the expression ‘NPC’
- The NPC is the successor to the s 21 company under the 1973 Act, which
was also known as an incorporated association not for gain
- Specific provisions that have no direct relevance to NPCs and do NOT apply
to them:
o Capitalisation of profit companies
o Securities registration and transfer
o Remuneration and election of directors
o Company secretaries and audit committees, except to the extent that
an obligation arises to appoint a company secretary, auditor or audit
committee in terms of a requirement in the company’s MOI or
regulations
o Public offerings of company securities
o Takeovers, offers and fundamental transactions
o Rights of shareholders to approve a business rescue plan (except to
the extent that the NPC is itself a shareholder of a profit company
engaged in business rescue proceedings
o Dissenting shareholders’ appraisal rights (except to the extent that the
NPC is itself a shareholder of a profit company)

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o Ss 58 and 65, dealing with shareholders and governance of

companies, which do not apply to a NPC unless it has voting members
- Not generally subject to the extended disclosure, transparency and audit
requirements of the Act
o Need not appoint an auditor, a company secretary or an audit
committee, except of its MOI calls for it to do so
- An auditor must be appointed in the event that a NPC is obliged to have its
financial statements audited very year in terms of the Act or regulations
- Annual financial statements require only an independent review
o An audit is unnecessary, unless voluntarily opting for an audit or
if regulations in terms of the Act call for it
- Regulations require an NPC to have its annual financial statements
audited if:
o For instance, in the ordinary course of its activities it holds assets in a
fiduciary capacity for persons who are not related to the company and
the aggregate value of those assets at any time exceeds R5 million; or
o If its public interest score for the particular financial year exceeds the
threshold prescribed by the regulations

Assets and income:

- All the assets and income, however derived, are applied to advance the
NPC’s stated object
- Subject to this prerequisite, it is permissible for a NPC to:
o Acquire and hold securities (or shares) issued by a profit company; or
o Carry on any business, trade or undertaking, whether it does so directly
or indirectly and whether it does so alone or with any other person,
provided that this is consistent with or ancillary to its stated objects

Winding-up or dissolution:
- No past or present member, director or person appointing a director of the
company is entitled to any part of the net value of the company after its
obligations and liabilities have been met
- The entire net value must instead be distributed to one or more NPCs (or
registered external NPCs, voluntary associations or non-profit trusts)
that have objects similar to its main object, as determined by the
company’s MOI, or by its members (if any) or directors; or court can
make this decision

Tax:
- To obtain any tax exemption or tax advantage, it must satisfy the
requirements of the Income Tax Act
- It would not automatically qualify as a public benefit organisation

Incorporators of NPCs:
- Three or more persons acting in common (profit company may be
incorporated by even one person)
- An organ of state or juristic person may also incorporate a NPC
- The incorporators of a NPC are its first directors and its first members (if any)

Members of NPCs and voting rights:

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- May be incorporated with or without members

- Not required to have members unless its MOI so provides
- A NPC with members may have voting members and non-voting members
- No more than two classes of members may be provided for in the MOI, i.e.
voting and non-voting
- Where there are voting members:
o Each voting member has at least one vote
o Generally, the votes carry equal value or weight on any matter, but the
company’s MOI may provide otherwise
o Voting rights may be loaded disproportionately
- A NPC with members must maintain a membership register
- MOI must also set out the qualifications for membership, as well as the
grounds for suspension or loss of membership
- It may allow membership to be held by juristic persons, including profit
companies
- MOI may not restrict or regulate membership in any manner that amounts to
unfair discrimination in terms of s 9 of the Constitution
- Nor may it presume the membership of any person, regard a person to be a
member or provide for the automatic or ex officio membership of any person,
on any basis other than life-time membership awarded to a person for service
to the company or to its stated public benefit objects, and with that person’s
consent
- MOI may provide for a membership cost
o May be initial and/or periodic and may apply to any class of
membership
- MOI must also deal with the process for applying for membership, as well as
any rights and obligations of membership in any class

Directors:
- Must have at least three directors
- In a NPC without members:
o The directors are appointed by the board or by other persons on the
basis set out in the MOI
- In a NPC with members:
o The directors are chosen by the members on the basis set out in the
MOI
o If the voting members are to elect any directors, then the MOI must
provide for the election at least a third of those elected directors each
year
- NPC is prohibited from giving loans to its directors, securing the debts
or obligations of directors, or otherwise giving direct or indirect
financial assistance to directors
o This prohibition extends also to the directors of related or interrelated
companies and/or to persons related to any such directors
o Exceptions:
ß Transactions in the ordinary course of the company’s business
and for fair value
ß Transactions that constitute an accountable advance to meet
legal expenses in relation to a matter concerning the company

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ß Transactions that constitute an accountable advance to meet

anticipated expenses to be incurred by the person on behalf of
the company
ß Transactions that are to defray the person’s expenses for
removal at the company’s request; or
ß Transactions in terms of an employee benefit scheme generally
available to all employees or a specific class of employees

Fundamental transactions:
- A NPC may convert to a profit company
- A NPC may not amalgamate or merge with a profit company; nor may it
dispose of any part of its assets, undertaking or business to a profit company,
other than for fair value, except to the extent that such disposals of assets
occur in the ordinary course of the activities of the NPC
- Where a NPC with voting members proposes to dispose of all or the greater
part of its assets or undertaking to another non-profit company, or proposes to
amalgamate or merge with another NPC, such proposal must be submitted to
the voting members for approval in a manner comparable to that required of
profit companies

External companies:
Foreign company v external company:
- Foreign company:
o An entity incorporated or registered in some other jurisdiction outside
RSA
o Irrespective of whether it is a profit or non-profit entity
o Irrespective of whether it carries on business or non-profit activities
within SA
- External company:
o A foreign company which carries on business or non-profit
activities in SA and that is registered as such under the Act
o A subcategory of a foreign company
- It is only external companies that are specifically required to register under the
Act and to observe certain provisions of the Act that apply to external
companies

A foreign company is regarded as conducting business or non-profit activities

in SA in two circumstances:
- If the foreign company is a party to one or more employment contracts within
SA, it must be registered as an external company in SA
o This provides some protection to persons who are employed by such
companies and who carry out their employment duties within SA
- When a foreign company is engaging in a course of conduct, or has engaged
in a course or pattern of activities within SA over a period of at least 6 months,
such as would lead a person to reasonably conclude that the company
intended to continually engage in business or non-profit activities within SA

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o For these purposes, a foreign company is not required to register as an

external company solely on the ground that it is currently engaged in or
has engaged in any one or more of the following activities in SA:
ß The holding of a shareholders’ meeting or a board meeting, or
otherwise conducting any of its internal affairs in SA
ß The establishment or maintenance of any bank accounts or
other financial accounts
ß The establishment or maintenance of offices or agencies for the
transfer, exchange or registration of the foreign company’s own
securities
ß The creation or acquisition of any debts in SA, or mortgages or
security interests in any property within SA
ß The securing or collection of any debt, or the enforcement of any
mortgage or security interest
ß The acquisition of any interest in any property

Registration of external companies:

- The protection of third parties who deal with external companies, particularly
employees, is catered for by the definition of an external company and the
requirement for registration
- The consequence of registration is that these companies must disclose
specified information to the CIPC both upon registration and continuously as
part of their annual returns
- An external company must continuously maintain at least one office in SA and
must register its office in SA with the CIPC
- It must also provide the names of its directors at the time, the address of its
principal office outside SA and the name and address of the person in SA who
has undertaken to accept service of documents on its behalf
- Such information will to a certain extent protect employees of external
companies and third parties who deal with external companies
- The statutory requirements on the use of the name and registration number of
an external company will also ensure the provision and disclosure of vital
information to third parties who deal with such a company

Types of external companies:

- An external company that registers with the CIPC in terms of the Act must
register either as an:
o External profit company; or
o External non-profit company
- This depends on whether, within the jurisdiction in which it was incorporated,
the external company meets legislative or definitional requirements that are
comparable with those of a non-profit company that is incorporated under the
Act
- If it does, it must register as an external non-profit company
- If not, it must register as an external profit company
- Once an external company has registered its office and has been assigned a
registration number, it is by definition a registered external company

Failure of a foreign company to register when required to do so:

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- May be subject to a compliance notice issued by the CIPC requiring the

company to register within 20 business days, or to otherwise cease carrying
on business or activities in SA
- The compliance notice may be issued when an external company fails to
register within three months after commencing its activities in SA

Application of the Act to external companies:

- Foreign companies:
o The Act does not apply to foreign companies in general
o It applies only to those that qualify as external companies, and even
then, only to a limited extent
o Important exception:
ß Chapter 4 of the Act which deals with public offerings of
company securities does apply when the securities of foreign
companies are offered to the public in SA, irrespective of
whether the foreign company carries on business in SA and
irrespective of whether it qualifies as an external company
- External companies:
o Only certain specific sections of the Act extend to external companies
o The legislative policy evidently is to diminish or reduce the extent of the
regulation of external companies in SA law
o It may be expected to promote investment in the SA markets, in line
with the purposes of the Act, while concurrently providing some degree
of protection for employees and third parties who deal with external
companies
o Sections of the Act that apply to external companies:
ß Provision with regard to the registration of external companies
ß Various sections protecting the names of registered external
companies
ß Certain provisions relating to fundamental transactions (and, in
particular, the requirement of a special resolution by external
holding companies)
ß Protection for whistle-blowers who disclose information about
external companies
- If upon the dissolution or winding-up of a SA NPC having similar main objects
to those of a registered external NPC, the external company qualifies to
receive the net value and assets of the SA company

Domesticated companies:
Definition:
- A foreign company whose registration has been transferred to RSA

A foreign company may have its registration transferred to SA from the foreign
jurisdiction in which it is registered. Once its registration has been transferred, the
company exists as a company in terms of the Act as if it had originally been so
incorporated and registered

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A foreign company may transfer its registration to SA if ALL of the following

requirements are satisfied:
- The law of the jurisdiction (or country) in which it is initially registered permits
a transfer of registration, and the company has complied with the
requirements of that law in relation to the transfer
- The transfer has been approved by the company’s shareholders in the
specified manner (if there is no provision in the foreign law for the provision of
the shareholders, follow the SA law position – special resolution of
shareholders required (75%)
- The whole or greater part of the company’s assets and undertakings are
within SA (other than the assets and undertaking of any foreign subsidiary)
- The majority of the company’s shareholders are resident in SA
- The majority of the company’s directors are or will be SA citizens
- Immediately following the transfer of registration, the company will satisfy the
solvency and liquidity test; and
- Immediately following the transfer of registration, the company will no longer
be registered in another jurisdiction

A foreign company, despite satisfying the above requirements, is prohibited from

transferring its registration to SA if:
- It is permitted to issue bearer shares, in terms of any law or its Articles or
MOI, or if it has any bearer shares that remain issued
- It is in liquidation
- A receiver or manager has been appointed by a court or otherwise in relation
to its property
- It is engaged in business rescue or in comparable proceedings; or is subject
to an approved plan or court order, comparable to an approved business
rescue plan under the Act; or has entered into a compromise or arrangement
with a creditor that is in force; or
- An application, which has not been fully disposed of, has been made to a
court in any jurisdiction either to put the foreign company into liquidation, wind
it up or have it declared insolvent; or for the approval of a compromise or
arrangement between it and a creditor; or for the appointment of a receiver or
administrator in relation to any of its property

Application for the transfer of registration:

- Must be made in the prescribed form
- Must be accompanied by the prescribed application fee and requisite
documents, including a copy of the company’s most recent annual financial
statements and a copy of its MOI to be registered in SA
- Where the foreign company complies with the requirements for domestication
and registration, the Commissioner issues a registration certificate to the
effect that registration has taken place and that the company is deemed to
have been incorporated under the Act

Registration does not establish a new juristic person

- Both the domesticated company’s identity and its continuity as a juristic
person are unaffected, and are not prejudiced
- Its property, rights, liabilities and obligations are not affected or prejudiced,
nor are the rights of any other person in relation to it

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- Any legal proceedings by or against the company remain effective

The deregistration of a SA company upon the transfer of its registration to a foreign

jurisdiction:
- Requirements:
o The adoption of a special resolution by the shareholders approving of
the application and transfer of registration
o Compliance by the company with the prescribed requirements

Chapter 6: The formation of companies:

Why is it important:
- Creates a juristic person with a separate legal personality from the effective
date set out on registration certificate
- MOI drafted during formation and registration
- A formal process is involved – role of CIPC
- Creation to operation
o What is the purpose of the company and the needs it has to serve
o MOI is important for formation because it sets the company’s
foundation
o Incorporators become the first directors
- Registered office – tangible being and access to information

Incorporation of the company:

Profit company:
- May be incorporated by one or more persons acting as incorporators
- May be incorporated by an organ of state

Non-profit company:
- Requires a minimum of three persons acting in concert
- May be incorporated by a juristic person or an organ of state

Incorporators:
- Founders of the company
- Responsible for the formation and incorporation of the property, which
includes the duty to sign the company’s MOI, whether in person or by proxy
- Each incorporator is automatically a first director of the company, who serves
as a director until such time as sufficient directors have been appointed or
elected
- Incorporators are under no statutory duty to subscribe for any shares in the
company

Steps of incorporation:
1. Draft the MOI
o MOI is the sole founding or governing document of the company,
setting out the rights, duties and responsibilities of shareholders,

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directors and others within and in relation to the company, together

with various other matters
o Keep the following in mind when drafting MOI:
ß Type of company (certain information has to be stated in MOI)
ß Needs of entrepreneurs
ß Alterable and unalterable provisions
ß Ring-fencing
2. Complete the Notice of Incorporation
o Purpose of NOI is to inform the CIPC of the company for the purpose
of having it registered
o Information to be stated in the NOI:
ß Name of the company
ß Its initial directors (incorporators)
ß Points out ring-fenced provisions as contained in MOI
ß Its registered office
ß Date of its financial year-end
ß Notice of the appointment of the first auditor (where appointed)
3. Payment of prescribed fee
- File above with the CIPC

Process of incorporation:
- Sign MOI
o Incorporators
- File NOI and MOI
o Pay prescribed fee
o RF
- Registration:
o CIPC must
ß Assign a unique registration number to the company
ß Enter certain information concerning the company, including the
company name, in the companies register that is established by
the CIPC
ß Endorse the NOI and the copy of the MOI
ß Issue and deliver a registration certificate to the company

Name and registration number has to appear on all invoices, documents, etc of the
company
- Non-compliance is an offence

Issue of registration certificate by CIPC:

- Evidence of the incorporation and registration of the company (conclusive
evidence that all the requirements for incorporation have ben complied with)
- The company is incorporated and comes into existence as a separate legal
person or juristic person, with effect from the date and time stated on the
registration certificate
- Registration certificate is dated on the later date between
o Date and time certificate is issued; or
o Date requested by the incorporators

Commencement of company’s business:

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- There is no requirement for a certificate to commence business

- There is not a minimum share capital requirement
- A company may generally commence business once it is registered

Role of CIPC:
- Check documentation submitted and it can then accept or reject the
application for registration of the company
- Under the 2008 Companies Act, people have a right to incorporate and
register a company, but there are instances where the CIPC can reject such
an application
- Instances where the CIPC must reject the application for registration:
o Not enough directors (1 – private; 3 – non-profit)
o Directors are disqualified
- Instances where the CIPC may reject or accept the application for
registration:
o Documentation incomplete or improperly completed
ß Substance over form approach is followed
ß The necessary information is present, and application can still
be accepted
ß E.g. the effect of name on success of registration (e.g. name
already exists, etc.)
ß Registration number is used by CIPC as the name of the
company with the abbreviation

Registration of external companies:

- Must register with the CIPC within 20 business days of commencing with the
conduct of business or non-profit activities within the RSA
- Must provide:
o A certified copy of its MOI and certificate of incorporation in its
jurisdiction of incorporation
o Name and address of any person within SA who has undertaken to
accept service of documents on its behalf
o Names and details of its directors at the time
o Address of its principal office outside SA

Company names:

Regulated by Regulations in the Companies Act

Basic requirements:
- Can be in words of any language
- Can use letters or numbers
- Can use the registration number if it’s a profit company; what then usually
happens is that it is followed with the abbreviation and (South Africa)
- Can contain punctuations
- Can contain symbols
- Can contain the Arabic alphabet, Roman numerals, etc.

Prohibited company names

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- First group:
o Unsuitable
o Inappropriate
o Incomplete
- Second group:
o Misleading
o Deceptive
o Hateful
- Third group:
o Offensive
o Unconstitutional

There are some specific requirements for names of companies

- Cassim argues that it is to protect intellectual property rights, goodwill, etc.
- Misleading / deceptive name:
o If the name is the same or confusing similar to existing names or trade
marks, or falsely imply or reasonably mislead people to think that the
company might be associated with another company or person
o E.g. A company wants to start a swimming school and is called the Ryk
Neethling Swimming School Ltd. The use of his name can falsely
implies that the company is associated with a particular person, where
in fact it is not. Name will not meet the requirements set out in the
regulations in the CA

Further requirements and regulations for the name of the company:

- The concluding words or concluding expression of the type of company
(i.e. abbreviation) must be and the end of the name of the company
- If there is a problem with a company’s name, the CA makes provision for the
registration number to be used as its name
o Only applicable to profit company
o (South Africa) needs to appear after the registration number and the
abbreviation of the company
- Interim name:
o In event that proposed name is the same as that of another company
or the name is confusingly similar or implies a non-existent association
with someone else
o Interim name consists merely of the company’s registration number
followed by the appropriate expression indicating the type of company
it is
o Once the company has been registered, the CIPC invites the company
to file an amended NOI using another, satisfactory name
o When the company does so, the CIPC enters the amended company
name in the companies register and issues an amended registration
certificate reflecting the amended company name
- When the name falls within the first or second group of prohibited
names (referred to above):
o CIPC may order the applicant to serve a copy of the application on any
particular parson or class of persons on the grounds that they may
have an interest in the applicant’s use of the name

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o A person to whom the notice is delivered or another person with an

interest in the name may then apply to the CIPC for a determination
and an order on whether the name satisfies the requirements of the Act
- When the name falls within the third group of prohibited names:
o CIPC may refer the application to the SA Human Rights Commission
o The SA Human Rights Commission could then apply to the Companies
Tribunal
o Disputes concerning company names are dealt with by the Companies
Tribunal

Changing the company name:

- Effected by a special resolution (75% of the shareholders / holders of voting
rights)
- Process:
o The company must file with the CIPC:
ß Notice of Amendment
ß A copy of the amendment
ß Payment of the prescribed fee
o CIPC then issues an amended registration certificate and alters the
company’s name on the companies register
o Amendment takes effect on the date set out in the amended
registration certificate
- Will have no effect on any legal proceedings by or against the company
- Legal proceedings may be commenced or continued by or against the
company under its new name

Reserved names:
- Company names may be reserved for use at a later stage
- May serve a useful purpose when, for instance, the incorporators have an
interest in ensuring that a particular name is reserved for the company before
proceeding with the formalities for incorporating and registering the company
- The name may be reserved for later use either for a newly incorporated
company or for an amendment to the name of an existing company
- Reservation period:
o 6 months
o On good cause, may be extended by CIPC for a period of 60 business
days at a time
- The Act permits the transfer of reserved names
o A person may transfer a name reservation to another by filing a signed
notice of transfer with the CIPC, together with payment of the
prescribed fee
o No reason or cause of transfer is ordinarily required
- No person may attempt to abuse the name reservation system for the
purpose of selling access to names or trading in or marketing names:
o CIPC may issue a notice to the person suspected of attempting to
abuse the name reservation system, requiring that person to show
cause why the name should be transferred to or reserved for it; or
o CIPC may simply refuse to grant the transfer or extension of the name
reservation, or may even cancel the name reservation

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o Where, as a result of a pattern of conduct, the CIPC has reasonable

grounds to believe that a person has abused the name reservation
system, it may apply for a court order prohibiting that person from
reserving any names for a just and reasonable period

Defensive names:
- The purpose of registering a defensive name is essentially to protect the
name from use by another company
- A person may register any name as a defensive name if he has a direct and
material interest in respect of the name
- Registration period of a defensive name:
o 2 years
o Is renewable for a further two-year period
- May be transferred to another person

Use of company name and registration number:

- All companies (and all external companies) are required to provide their full
registered names and registration numbers to any person on demand
- Companies are prohibited from misstating their names or registration numbers
in a manner that would be likely to mislead or deceive
- Must have its name and registration number stated in legible characters in all
notices and other official publications of the company
- Failure to comply constitutes an offence
- The CPA prohibits a juristic person from carrying on business under any
name except its registered name or a ‘business name’ that has been
registered to it under the CPA (or another public regulation)
- ‘Business name’
o Refers to a name, other than its registered name, under which a juristic
person carries on business
- A company may consequently trade only under its registered company name
or under any business name that has been registered for the use of that
company under the CPA or another public regulation

MOI:
Deals with matters such as:
- The powers of the company
- Amendment of the MOI
- Ability to create rules of the company
- Securities of the company and debt instruments
- Shareholders, shareholders’ meetings and procedures
- Composition of the board of directors
- Authority and powers of the directors
- Board meetings and committees of the board
- Compensation and indemnification of directors
- Disposal of company’s assets upon dissolution of the company (if NPC)

These will vary depending on each company, the type of company it is and the
envisaged needs and structure of the company

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Form of MOI:
- Either in a form unique to the company or in the prescribed form
- The regulations set out five prescribed forms for different types of companies
- The prescribed form constitutes the simplest possible form of company, as the
incorporators simply adopt the mandatory provisions of the Act and accept the
default provisions with or without alterations

Amending the MOI:

Section 16:
- General principle is that the MOI may be amended at any time, by means
of a special resolution

Amendment may be proposed either by:

- Board of directors
- Shareholders holding at least 10% of the exercisable voting rights

This is subject to the company’s MOI, which may stipulate different requirements for
proposals for an amendment
- The special resolution to amend the MOI must be supported by at least 75%
of the exercised voting rights, but this threshold requirement may be validly
increased or decreased in a company’s MOI
- Provided that there is a minimum margin of at least 10% between the highest
established requirement for approval of an ordinary resolution on any matter
and the lowest established requirement for approval of a special resolution
matter

It must be borne in mind that some provisions of the MOI may be restrictive
conditions that are subject to additional requirements for amendment over and above
the requirements of s 16, while other provisions of the MOI may be entirely
prohibited from amendment

When a profit company amends it MOI in a manner that it no longer meets the
criteria for the relevant type of profit company, the concluding expression in the
name of the company must simultaneously be amended to reflect the new type of
profit company it is

Process of amendment of a company’s MOI in the form of a new MOI replacing

the existing one, or an alternation made to existing one:
- Company files a Notice of Amendment with the CIPC together with payment
of the prescribed fee
- This must be accompanied by a copy of the new, substituted MOI or by a
copy of the amendment
- Amendment takes effect from the date on and time at which the Notice of
Amendment is filed, or the later date (if any) set out in the notice of
Amendment
- In the case of an amendment of the name of a company, the amendment
takes effect on the date set out in the amended registration certificate

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Methods of alteration of a company’s MOI:

- Special resolution (as described above)
- MOI amended in compliance with a court order
o Special resolution of shareholders is not needed
o Amendment is effected simply by a resolution of the board of directors
- Board of directors amend MOI in the manner contemplated in s 36(3) and (4)
o Relating to authorisation and classification of shares
o No special resolution of shareholders is required

Correction of patent errors in the MOI or rules:

- When there is a patent error in spelling, punctuation, reference, grammar or a
similar defect on the face of the document, the board of directors of a
company may alter the company’s MOI or rules in any manner necessary to
correct the error
- This is done simply by publishing a Notice of Alteration and filing it with the
CIPC

Translation of the MOI:

- Must be made by a sworn statement by the person who made the translation,
stating that it is a true, accurate and complete translation of the MOI
- MOI prevails in case of conflict

Consolidation of the MOI:

- After a company has filed its MOI and has subsequently filed one or more
alterations or amendments to it, the company may at any time file a
consolidated revision of its MOI, as so altered or amended
- CIPC may also require the company to file a consolidated revision of its MOI
- A consolidated revision must be accompanied by a sworn statement by a
director of the company or a statement by an attorney or notary public to the
effect that it is a true, accurate and complete representation of the MOI, as
altered and amended up to the date of the statement

Authenticity of versions of the MOI:

- In event of conflict between MOI and filed translation, MOI prevails
- MOI as altered or amended will prevail if there is a conflict between the
company’s MOI and a filed consolidated revision, unless the consolidated
revision has subsequently been ratified by a special resolution at a general
shareholders’ meeting
- Latest version of a MOI that has been endorsed by the CIPC prevails in the
event of any conflict between that version and any other purported version of
the company’s MOI

Contents of MOI:

Section 15:
1. Each provision of a company’s MOI
a. Must be consistent with this Act; and
b. Is void to the extent that it contravenes, or is inconsistent with, this Act,
subject to section 6(15)

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2. The MOI of any company may

a. Include any provision
i. Dealing with a matter that this Act does not address;
ii Altering the effect of any alterable provision of this Act; or
iii Imposing on the company a higher standard, greater restriction,
longer period of time or any similarly more onerous requirement,
than would otherwise apply to the company in terms of an
unalterable provision of this Act

Section 6(15):
- If there is a specific content required by a particular public regulation (i.e. a
legislative rule or a listing requirement of an exchange (JSE rules)) and that
has the effect of an unalterable provision of the Act being limited, that
particular provision should not be seen as being contrary to s 15(1)
- If a particular provision that must be in a particular company’s MOI because of
a public regulation or the listing requirements of an exchange, that provision is
not going to be inconsistent with s 15(1)

Alterable provision:
- Default rules of the Act that a company may choose either to accept or to alter
in its MOI
- These provisions would apply toa company unless it specifically opts out of
these in its MOI
- Allow for flexibility and enable a company to tailor the contents of its
constitution (MOI) to fit its needs
- Section 65(8):
o Except for an ordinary resolution for the removal of a director under s
71, a company’s MOI may require
ß A higher percentage of voting rights to approve an ordinary
resolution; or
ß One or more higher percentages of voting rights to approve
ordinary resolutions concerning one or more particular matters,
respectfully
provided that there must at all times be a margin of at least 10% points
between the highest established requirement for approval of an
ordinary resolution on any matter, and the lowest established
requirement for approval of a special resolution on any matter

Basic ordinary = 50% + 1

Basic special = 75%

[Not applicable to the removal of a director – ordinary resolution remains at 50% + 1]

Unalterable provision:
- Mandatory provisions which may not be altered whether in substance or in
effect in any company’s MOI
- When a provision in a company’s MOI is inconsistent with or contravenes the
Act, it is void to the extent of its inconsistency or contravention with the Act
- Section 71(1):

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o Despite anything to the contrary in a company’s MOI or rules, or an

agreement between a company and a director, or between any
shareholders and a director, a director may be removed by an ordinary
resolution adopted at a shareholders meeting by the persons entitled to
exercise voting rights in an election of that director, subject to
subsection (2)
o The higher the particular percentage points become, the more difficult it
is for the shareholders to remove the director, which is not always in
the best interests of the company

Anti-avoidance provisions:
- Empowers the court to declare any provision of a company’s MOI or rules (or
an agreement, transaction, arrangement or resolution) to be primarily or
substantially intended to defeat or reduce the effect of a prohibition or
requirement established by an unalterable provision, and to declare it void to
that extent
o If Act says provision is void = void ab initio
o If Act just says provision is prohibited = a declaration made by the court
will be needed to declare that provision/rule void or voidable
- A person can apply to the Companies Tribunal to exempt an agreement,
transaction, arrangement, resolution or provision of a company’s MOI or rules
from a prohibition that is set in terms of an unalterable provision
o Companies Tribunal can make an order that exempts that particular
provision from being a reduction in effect of this prohibition requirement
o Tribunal must be satisfied that the purpose of the particular agreement
is a reasonable purpose, and it is not to defeat the purpose or effect of
that prohibition requirement

Ring-fenced companies:

The MOI may generally be amended by a special resolution in terms of s 16

However, it is permissible for a company to ring-fence a provision in the MOI by:

- Inserting restrictive conditions into its MOI coupled with additional
requirements for their amendment (in addition to the requirements set out in s
16) [restriction + s 16 special resolution requirement]
- Prohibiting the amendment of any of the MOI’s particulars

Requirements:
- Its NOI must include a prominent statement drawing attention to each such
provision and its location to the MOI
- The name of the company must immediately be followed by the expression
‘(RF)’, which means ‘ring-fenced’

The purpose of these two features is to draw the attention of third parties to the
presence of the restrictive conditions or prohibitions on amendment
- Provides the basis for the limited application of the doctrine of constructive
notice

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Doctrine of constructive notice:

- Third parties are regarded as having received notice and knowledge of any
restrictive condition or prohibition on amendment, provided that both
requirements are met
- Section 19(4):
o A person must not be regarded as having received notice or
knowledge of the content of any document relating to a company
just because the document was filed or is accessible for inspection at
the office of the company
- Section 19(5):
o Exceptions: (person is deemed to have knowledge and doctrine of
constructive notice applies)
ß Restrictive condition applicable to the company, and any
requirement for its amendment (in addition to the requirements
of s 16)
ß Prohibition on the amendment of any particular provision of the
MOI
ß The doctrine applies to the effect of the personal liability of
directors and former directors of a personal liability company (s
19(3) effect)

Implications of a third party’s constructive notice of restrictive conditions and

prohibitions on the amendment of a company’s constitution:
- If, for instance, the restrictive conditions limit the authority of the directors,
then any third party who deals with the company would be deemed to have
notice and knowledge of the directors’ lack of authority (depending on
the nature of the limitation)
- As such, this could destroy the third party’s prospects of relying on the
ostensible authority of the directors

Example:
- The MOI of a company contains an entrenched provision (may not be
amended) stating that no contract of loan in excess of R1 million shall be valid
unless approved in writing by two directors
- A third party purports to enter into such a contract with the company that is
signed by only one director
- The third party cannot hold the company bound to the contract
- This is because the director clearly did not have actual authority to enter into
the contract, nor did the director have ostensible authority
- Ostensible authority is destroyed by the third party’s constructive
knowledge of the director’s lack of authority to contract on his own in
terms of the entrenched provision in the company’s constitution

Doctrine only applies in respect of:

- Restricted (ring-fenced) provisions in MOI (not entire MOI)
- To the extent that the requirements were satisfied with regard to those
restricted provisions

Rules of the company:

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The rules may deal only with matters that are not addressed in the Act or in the
company’s MOI

Board of directors:
- Has the power to make rules, unless this is prohibited by MOI
- May make any necessary or incidental rules by publishing a copy of the
rules in the manner specified in the company’s MOI or in the rules themselves
- A copy of the rules must be filed with the CIPC within 10 business days
of publication
- The rules take effect 10 business days after filing, or on a later date if so
stated in the rules
- Rules may be amended or repealed in a similar manner

Ratification of the rules:

- Although a rule is binding from its effective date, it is initially binding on an
interim basis only
- The interim effect of the rule continues until it is put to a vote at the next
general shareholders’ meeting
- If the rule is ratified by an ordinary resolution at the shareholders’ meeting:
o The rule then becomes binding on a permanent basis
- If the rule is not ratified:
o The rule is no longer binding on the company and it simply lapses
o The lapse of the rule does not affect the validity of anything done in
terms of that rule during the period it had an interim effect
o The board of directors may not make a substantially similar rule
within the ensuing 12 months unless the new rule has been
approved in advance by an ordinary resolution
o This deters the board from taking inappropriate advantages of the
interim enforceability of unratified rules
- Within 5 business days after the ratification vote by the shareholders,
the company must file with the CIPC a notice of ratification or non-
ratification (as the case may be)

MOI v rules:
- Rules are generally amended more easily
o Amendment of MOI usually requires a special resolution
o Company rules are made, amended or repealed by the board of
directors subject to confirmation by an ordinary resolution of
shareholders
- MOI takes precedence over its rules
o Company rules must be consistent with both the Act as well as
the MOI
o Any inconsistent rules are void to the extent of their
inconsistency
o Rules are also subject to the anti-avoidance provisions of the Act

The legal status of the MOI and rules:

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Section 15(6):
- A company’s MOI and any rules of the company are binding
o Between the company and each shareholder
o Between or among the shareholders of the company; and
o Between the company and
ß Each director or prescribed officer of the company; or
ß Any other person serving the company as a member of a
committee of the board, in the exercise of their respective
functions within the company

The MOI is not binding between the company and outsiders, and therefore
unenforceable by outsiders or third parties
[doctrine of constructive notice only applies to ring-fenced provisions and to the
extent that both requirements are met]

Eley v Positive Government Security Life Assurance Co

- Case from which the following examples and principles are derived in respect
of the binding effect of an MOI on shareholders, directors and outsiders”

Example: Outsider’s position

- Company appoints a shareholder’s spouse as its attorney
- A provision in the MOI states that an attorney has to be appointed for a period
of at least 5 years
- However, the actual contract with the attorney provides that he can be fired on
one month’s notice
- This happens and the agreement comes to an end before expiration of 5
years
- The attorney cannot enforce the agreement against the company, even
though his spouse knew about the provision in the MOI
- The attorney has no right to enforce the provisions of the MOI against the
company because it does not constitute a binding contract between him and
the company
- The fact that the attorney knows about the provision in the MOI has no effect
since it is not binding between him and the attorney

Cassim’s argument: The right can be indirectly enforced

- If the shareholders find out that the company acted in contravention with the
MOI, they can enforce the provisions of the MOI against the company
- The MOI binds the company and the shareholders to its provisions

Example: Director’s position

- Is appointed as an attorney of the company
- Cannot rely on the provisions of the MOI, even though he knows about them
- MOI does not bind him and the company in his capacity as attorney
- The director can enforce the provisions of the MOI against the company, but
only in respect of the capacity and the functions of the director

Shareholder agreements:

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The shareholders of a company may enter into any shareholder agreement with one
another concerning any matters relating to the company

Advantages:
- Private document
o Unlike the MOI, it is not filed with the CIPC and is not available for
inspection by the general public
- Derives it binding force from the normal principles of the law of contract, as
opposed to s 15 of the CA

Disadvantages:
- Binds only those shareholders who are parties to it
o Does not bind any new shareholders of the company unless they
consent to be bound
- Unless the agreement provides otherwise, the consent of each party to the
shareholder agreement will be required to amend it
o Unlike amendments to the MOI, which may be effected by a special
resolution of the shareholders

Requirements:
- Consistent with the Act and MOI
- May no longer be used to supplant or supersede provisions of a company’s
constitution

Any inconsistent agreement is void to the extent of its inconsistency

The anti-avoidance provisions of the Act is widely drafted and empowers a court to
declare any agreement (or transaction, arrangement, resolution or provision of a
company’s MOI or rules) to be primarily or substantially intended to defeat or reduce
the effect of a prohibition or requirement established by an unalterable provision of
the Act, and to declare the agreement void to that extent

Hierarchy:

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CA
•Anything that contravenes or is inconsistent with it
will be void as indicated in the CA, or it can be
declared void if the Act contains a prohibition

MOI
•Has to be consistent with the CA
•Any provision inconsistent with CA will be void to
extent of inconsistency

Rules and shareholders agreements

•Must be consistent with CA and MOI

Questions:
The MOI of BPS (Pty) Ltd contains the following:
1. A special resoltuion has the meaning prescribed to it in the Act
2. An ordinary reslution requires the support of shareholders holding at least
70% of the voting rights exercised on the matter
3. In order to increase the protection afforded, a special resolution is needed to
remove a director
4. The company must, at all times, have ten directors. This provision may only
be amended if all the directors support the amendment, supported by a
special resolution of the shareholders

Tip: “A company’s MOI may specify a higher number in substitution for the minimum
number of directors required by subsection (2)”

Discuss the validity of these clauses:

1. Valid
2. Not valid
o S 65(8) of the CA provides that a higher percentage of voting rights to
approve an order resolution may be made in terms of a company’s
MOI, provided that there must at all times be a margin of at least 10%
points between the highest established requirement for approval of an
ordinary resolution on any matter and the lowerst established
requirement for approval of a special resoltuion on any matter

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o If the MOI provides for an ordinary resolution to consist of 70% voting

rights, while a special resolution remains unchanged by consisting of
75% voting rights, the minimum margin of 10% is not met
o A provision in the MOI which is contrary to the act is void
o This clause is void and the situation will be governed by the default
postion, i.e. ordinary resolution consists of 50% + 1
3. Not valid
o Section 71(1) of the CA provides that despite anything to the contrary
in a company’s MOI or rules, or an agreement between a company and
a director, or between any shareholders and a director, a director may
be removed by an ordinary resolution adopted at a shareholders
meeting by the persons entitled to exercise voting rights in an election
of that director, subject to subsection (2)
o This is an unalterable provision
o The clause would afford more protection to the director, and not protect
the company
o The clause is inconsistent with the CA and the default position will
apply, i.e. ordinary resolution required to remove director
4. Valid
o Restrictive provision and additional requirement to amend this
provision in the MOI
o This is an RF company
o The name of the company should read BPS (RF) (Pty) Ltd, and the
NOI must point this out and state that this restrictive provision and
additional requirement is found in clause 4 for the doctrine of
constructive notice to apply to the restrictive provision

Pre-incorporation contracts:
Significance of pre-incorporation contracts:

Need for pre-incorporation contracts:

- Before incurring the costs of forming (i.e. incorporating and registering) a
company, the promotrs of the company naturally desire the assurance that the
cmpany would indeed be able to acquire those assets or busiess
oppertunities upon its incorporation
- Investors are also more assured when investing in a venture in which the
promoter has already made the necessary egal arrangements to acquire the
assets or benefits for which the ocmpany is formed
- There is thus the need for binding legal arrangements prior to the formation of
the company

Common-law obstacles:

At common law, a company cannot be a party to a contract before its incorporation,

since the company comes into existence as a legal person only upon its
incorporation

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Common law on agency does not apply:

- Impossible for a perosn (the promoter) to act as an agent for a non-existing
prinicpal
- If an agent purports to enter into a contract on a company’s behalf before the
company is incorporated, the company will be unable to ratify the contract,
since ratification operates retrospectively to the time that the agent had
entered into the contract, and thus to a time at which the company was not yet
in existence

At common law, the contract will be a nullity as between the third party and the
company; in addition, the agent may be held personly liable on the ocntract

Main methods of contracting on behalf of a company to be formed:

Methods:
- Section 21 of the CA:
o Provides a legislative solution to overcome the hurdle of ‘non-
ratification’ at common law
o Purpose is to put persons, acting as agents, in a position to contract on
behalf of the company, even though the company does not yet exist
o It does so by permitting the cmpan, once formed, to ratify a pre-
incorporation contract entered into by an agent
o It thus permits a form of statutory agency
o Promoter acts in the capacity of an agent on behalf of the company to
be formed
- Stipulatio alteri:
o Contract for the benefit of a third party
o The promoter contracts in his own name, as pricnipal (and not as
agent), for the benefit of the company to be formed
o If company is not incorporated or does not accept the offer, the
promoter will only be liable in terms of the original stipulation if the
parties agree to it
- Cession and delegation
o Of rights and the obligations
o Under a contract concluded between the promoter and the third party
o To the company once it is formed
o Where the other party is a debtor of the ‘company’, his consent is not
required
o Where the other party is a creditor, his consent is required to transfer
the obligations or duties in terms of the contract to the company
o Company will also have to agree to the delegation, and if it doesn’t, the
promoer remains liable in terms of the contract
- Offer made to the promoter ‘or his nominee’, or the cession of an option by
the promoter to the company once it comes into existence

Stipulatio alteri:

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A common law device by which two parties contract with each other for the benefit of
a third party

Used as an alternative for pre-incorporation contracts:

- A promoter stipulates in favour of an unformed company that he is engaged in
bringing into existence
- Promoter enters into a contract with the other party for the benefit of the
company yet to be formed

Promoter acts as principal and not as an agent

- Promoter contracts in his own name and not in the name of the company
- Main characteristic that distinguishes stipulatio alter from s 21
- In stipulatio alteri the promoter enters into the pre-incorporation contract as a
principal, whereas in a s 21 pre-incorporation contract the promoter
apparently acts as an agent on bhealf of the ocmpany to be formed

Once the company is incorporated, it has an election (or choice) to accpet or

adopt the benefit of the contract
- Consequently, the company is not bound to the contract unless and until it
elects to adopt the benefit of the contract
- Upon acceptance of by the company, it becomes a party to the contract with
the promisor
- If the company accepts the benefit, it must also accept all the consequent
obligations and other terms of the contract

Until the company makes its election, the parties to the contract are the
promoter and the promiser (other party to the contract)
- The promisor cannot unilaterally withdraw from or cancel the contract
- Should the promisor attempt to do so, the promoter may obtain an interdict
against him
- Failing an interdict, and if the promisor repudiates the contract, the pormoter
may claim damages for breach of contract
- However, specific performance (in respect of an obligation ulitmately to be
due to the company) will not as a ageneral principle be granted in favour of
the promoter, unless the terms of the contract so provide

Disadvantages of stipulatio alteri:

- Prior to acceptance by the ocmpany, the promoter and the promisor may
mutually cancel the contract
- This is because the promoter acts as a principal
- The mutual cancellation of the contract clearly has the effect of depriving the
ocmpany of the benefit of the contract

Personal liability of the promoter:

- Unless the contract so provides, the promoter does not become personally
liable on the contract, and the contract simply lapses
- Accordingly, the promisor is well advised to ensure that the particular
stipulatio alteri agreement indeed proivdes for the personal liability of the
promoter

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If the company fails to adopt the benefit of the ocntract, the promoter is not
automatically entilted to step into the shoes of the company and insist on accepting
the benefit of the contract fo rhimself or to personally exact performance of the
contract, save where the contract so provides

There are no formalities for the stipulatio alteri other than those imposed by the
general law of contract for the relevant transaction

Question whether the parties entered into a stipulatio alteri or a s 21 pre-

incorporation contract:
- Deciding factor is the intention of the parties to the particular contract, which
depends on the facts of the case, and is determined from the terms of the
contract and the surrounding circumstances
- “The fact that a contract between A and B contains a term benefitting C does
not mean that the contract contains a stipulatio alteri. There must be an
intention between A and B that C should be enabled by notifying the promoter
to become a party to a contract between himself and B (third party).” – Delport

Section 21 pre-incorporation contracts:

Pre-incorporation contract:
- A written agreement entered into before the incorporation of a company by a
peron who purports to act in the name of, or on behalf of, the proposed
company, with the intention or understanding that the proposed company will
be incorporated, and will thereafter be bound by the agreement

Requirements:
- Must be a written agreement entered into before company comes into
existence
- Concluded in the name or on behalf of the company by the promoter in his
capacity as an agent of the company
- Once the ocmpany is incorporated and comes into existence, ti may ratify the
pre-incorporation contract entered into by the promoter

Section 21:
(1) A person may enter into a written agreement in the name of, or purport
to act in the name of, or on behalf of, an entity that is contemplated to
be incorporated in terms of this Act, but does not yet exist at the time.

(2) A person who does anything contemplated in subsection (1) is jointly

and severally liable with any other such person for liabilities created as
provided for in the pre-incorporation contract while so acting, if the
contemplated entity is not subsequently incorporated; or after being
incorporated, the company rejects any part of such an agreement or
action.

(3) If, after its incorporation, a company enters into an agreement on the
same terms as, or in substitution for, an agreement contemplated in

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subsection (1), the liability of a person under subsection (2) in respect

of the substituted agreement is discharged.

(4) Within three months after the date on which a company was
incorporated the board of that company may completely, partially or
conditionally ratify or reject any pre-incorporation contract or other
action purported to have been made or done in its name or on its
behalf, as contemplated in subsection (1)
- Company must ratify the agreement within 3 months from date of
incorporation
- If company ratifies, the contract will be enforceable retrospectively
from the date it was entered into by the agent
- If the company rejects the contract (or is not subsequently
incorporated), the person who contracted as agent on behalf of the
copany will be jointly and severally liable for the contract [refer to
subsection (3)]
- If the company does not reject or ratify the contract after its
incorporation within 3 months, the company will be deemed to have
ratified the contract [refer to subsection (5)]

(5) If, within three months after the date on which a company was
incorporated, the board has neither ratified nor rejected a particular
pre-incorporation contract, or other action purported to have been
made or done in the name of the company, or on its behalf, as
contemplated in subsection (1), the company will be regarded to have
ratified that agreement or action.
- Contract will be enforceable against the company, and the agent’s
liability will be discharged
- Contract is enforceable retrospectively from the date the contract
was entered into by the agent

(6) To the extent that a pre-incorporation contract or action has been

ratified or regarded to have been ratified in terms of subsection (5) the
agreement is as enforceable against the company as if the company
had been a party to the agreement when it was made; and the liability
of a person under subsection (2) in respect of the ratified agreement or
action is discharged

(7) If a company rejects an agreement or action contemplated in

subsection (1), a person who bears any liability in terms of subsection
(2) for that rejected agreement or action may assert a claim against the
company for any benefit it has received, or is entitled to receive, in
terms of the agreement or action

Issue of retrospectivity:
- Debate about whether it is the date that the company become incorporated, or
the date that the contract was entered into by the agent
- S 21(6)(a):
o “The agreement is enforceable against the company as if the ocmpany
had been a aprty to the agreement when it was made”

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- Thus, Delport is of the opinion that the date referred to in respect of

retrospectivity is the date the contract was entered into by the company’s
agent

Liability of promoter:
- Section 21(2):
o Promoter is jointly and severally liable with any other person for
liabilities created by the pre-incorporation contract if the company is not
incorporated or does not or only partially ratifies the contract
- Promoter is relieved from liability to the extent that the company ratifies the
pre-incorporation contract (s 21(6)(b))
- Promoter cannot contract out of liability in terms of s 21

Chapter 7: Representation

Doctrine of constructive notice:

Common-law doctrine of constructive notice:
- Persons dealing with a company were deemed (or presumed) to be aware of
the contents of the constitution and other public documents of the company
that were lodged with the Registrar of Companies and were open to public
inspection, whether they had read those or not

Section 19(4):
- Doctrine of constructive notice was finally abolished
- A person may not be regarded as having received notice or knowledge of the
contents of any document relating to a company merely because the
document has been filed or is accessible for inspection at an office of the
company

Section 19(5):
- Reintroduces a muted version of the doctrine that applies only in two specific
circumstances:
o A person must be regarded as having notice and knowledge of any
‘ring-fencing’ provisions in the COI, provided that attention has been
drawn to it in the NOI and to its location in the company’s MOI; and
o Expression ‘RF’ has been suffixed to the name of the company
- Persons dealing with a personal liability company are deemed to be aware of
the effect of the directors’ and former directors’ joint and several liability for
debts and liabilities of the company ‘contracted’ during their periods of office

Turquand rule:
The presumption of compliance with formal and procedural requirements

The common law:

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Turquand rule was historically formulated as an exception to the doctrine of

constructive notice – developments in the rule came to serve functions other than
merely mitigating the effect of the doctrine of constructive notice; otherwise it would
have been abolished together with the doctrine of constructive notice

Turquand rule as the ‘indoor management rule’:

- Those dealing with a company are not affected by the company’s indoor
management rules or by the company’s internal irregularities
- Protects bona fide third parties who are not aware of any internal irregularities
that affect the validity of their contracts with the company
- Entitles bona fide third parties to assume that all the company’s internal
formalities required for a valid contract have been complied with
- Basis of the rule is that bona fide third parties should not be prejudiced by a
company’s failure to comply with its own internal procedures and formal
requirements
- Justified on the basis of business convenience – business dealings with a
company would be very difficult if third parties were required to enquire into
the internal affairs of a company

Typical internal formalities:

- Quorum requirements for shareholders’ meetings or board meetings
- Period of notice for such meetings
- Voting procedure at meetings
- Constitutional limitations on the authority of persons representing the
company

Practical effect of the Turquand rule:

- Prevents a company from escaping liability under an otherwise valid contract
solely on the grounds that some internal formality or procedure was not
complied with
- Proof by the company that it has failed to fulfil its own internal formalities is
not a sufficient basis for escaping liability under the contract

Royal British Bank v Turquand:

Facts:
- Articles of association (or the constitution) of the company authorised its
board of directors to borrow money, provided that the board obtained the prior
approval by ordinary resolution of the shareholders of the company
- The board borrowed money from the Royal British Bank without obtaining the
approval of the shareholders of the company
- The Royal British Bank had no knowledge of this fact
Judgment:
- Even though the board had failed to comply with the company’s articles f
association, the company was nevertheless bound by the loan taken from the
Royal British Bank
- The approval of the shareholders as stipulated in the company’s articles of
association was an internal formality
- The bank, which was in good faith, was entitled to assume that this
internal formality had been duly complied with

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There must be an absence of circumstances that put the third party on inquiry
- Does not protect a third party who knows or suspects that an internal formality
has not been applied with but deliberately shuts his eyes or turns a blind eye
- The rule cannot be invoked by a third party who is put on inquiry and fails to
make inquiry
- If a third party is put on inquiry, he must make inquiry
- The third party may be put on inquiry by the very nature of the transaction
- The more unusual the transaction, the greater is the need to make inquiry
- Significantly, the rule does not protect a third party who relies on a forged
document

Directors and other insiders may not rely on the rule:

- It is intended for the protection of outsiders who have no means of knowing
whether the internal formalities and procedures required under the company’s
constitution have been complied with
- The directors of a company are taken to know that a company’s internal
formalities have not been complied with
- It is the duty of the directors to manage the affairs of the company and ensure
that its transactions are regular

Hely-Hutchinson v Brayhead Ltd:

- Court distinguished between a director acting in his capacity as a director and
a director who is acting, not as a director, but as an outsider contracting with
the company
- Court suggested that in the latter instance the director may rely on the
Turquand rule
- This attempt to narrow down the rule that insiders may not rely on the
Turquand rule draws a distinction between inside and outside transactions

The Turquand rule and the Act:

Section 20(7):
- A person dealing with a company in good faith, other than a director,
prescribed officer or shareholder of the company, is entitled to presume that
the company, in making any decision in the exercise of tis powers, has
complied with all the formal and procedural requirements in terms of the Act,
its MOI and any rules of the company unless, in the circumstances, the
person knew or ‘reasonably ought to have known’ of any failure by the
company to comply with any such requirement

This section is the statutory formulation of the common-law Turquand rule but with
some modifications
- This section applies to internal procedures and formalities even if they are
prescribed by the Act
o The fact that the internal formality is contained in a statute should make
no difference to the application of the section
- This section is very wide and also applies to all of the company’s formal and
procedural requirements in terms of the company’s MOI or rules

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The CA provides that s 20(7) must be construed concurrently with, and not in
substitution for, the common-law Turquand rule
- There is now in our law both a common-law and a statutory indoor
management rule

The difficulty is that s 20(7) is not properly aligned with the common-law formulation
of the Turquand rule
- The overlap between the two could prove to be a source of difficulties in
practice
- The statutory rule is likely to operate both more widely in some respects than
the common-law rule and, in other respects, more narrowly
o The common-law rule will not protect a third party who knew or
suspected that an internal formality or procedure had not been
complied with
o The statutory rule goes much further than this, in excluding a third party
who reasonably ought to have known of non-compliance with a
formality
o One possible advantage of the approach adopted in the Act is that if
the requirements of the statutory rule in s20(7) are not satisfied, a bona
fide third party may still be entitled to rely on the common-law
Turquand rule
- The common-law Turquand rule is not applied to companies only, unlike the
statutory rule
o Courts have extended the rule to technikons and trade unions

Important consequence of the abolition of the doctrine of constructive notice:

- The common-law Turquand rule and the statutory rule will now, unlike in the
past, apply even where a special resolution is required as an internal formality
to some matter
- This is because there is no longer any constructive notice of special
resolutions filed by the company with the CIPC

The Turquand rule and the delegation of authority:

An important issue is whether the statutory rule in s 20(7) applies to the power of
delegation
- The common-law Turquand rule does not apply to the authority of the
board of directors to delegate its powers to any ordinary director or
agent
- In other words, the Turquand rule may entitle a third party to assume that
someone has been appointed as an authorised agent, but he cannot, by
relying on the Turquand rule, assume that a specific person or person has or
have been appointed
- To apply the Turquand rule in this situation would be to place companies at
the mercy of any agent who purports to contract on their behalf
- This common-law principle may well continue to apply to s 20(7) of the Act
- This remains to be seen

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Presentation and the authority of the directors:

Section 19(1) of the CA:
- From the date and time that the incorporation of a company is registered, the
company
a. Is a juristic person, which exists continuously until its name is removed
from the companies register in accordance with this Act
b. Has all the legal powers and capacity of an individual, except to the
extent that –
i. A juristic person is incapable of exercising any such power, or
having such capacity; or
ii. The company’s MOI provides otherwise

Section 19(1)(b) is the reason companies have separate legal personality

Separate legal personality is the reason companies need agents to act on their
behalf in all their dealings
- A company as a juristic person cannot contract on its own
- It needs natural persons to do everything for it

Section 66(1):
- The business and the 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 companies MOI provides otherwise

Our point of departure is ALWAYS with the board of directors as the Act vests the
authority to manage the business and the affairs of the company with the directors

S 66(1) imposes, subject to the company’s MOI and the Act, a mandatory duty on
the board of directors to manage the business of the company, and the authority to
exercise all the powers of the company subject to the company’s MOI

Who has the authority between the directors:

- The ENTIRE board of directors exercise this authority to manage the
company TOGETHER
- If there are ten directors, all ten directors must agree on what to do, no single
director can act on their own will and volition and bind the company
accordingly
- If a singular director from the board of directors concludes a contract on
behalf of the company
o Company will not be bound
o Only an agent with the necessary authority can bind their principal to a
contract so entered into
o If the agent does have the authority but he exceeds this authority (also
known as mandate) then the principal is only bound to the agreement
to the extent that the gent actually had authority to conclude that
aspect of the contract

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o An agent who concludes an agreement without authority from

their principal will be bound to the third party contractor in terms
of that contract on the basis of either
ß A breach of warranty of authority (the agent assured the
third party that they had this authority when in fact they did
not) or
ß Misrepresentation which will be a delictual claim
o Either way, the third party contractor will have a claim against the
agent
- Therefore, the entire board of directors must exercise their authority
vested in them as a group
- No one director can act with the group’s authority without their
permission

Many companies have specific directors in charge of specific portfolios

- That director has been given the authority from the board of directors to
do whatever is necessary to run that portfolio effectively
- The extent of the authority will all depend on how much authority the board of
directors have decided to allow the other directors to have in relation to their
portfolio
- It depends on how much authority the board of directors have allowed that
director to have with regard to whether he can hire new employees, decide on
how much to pay them and negotiate contracts and even delegate some of
their authority to someone else
- The board of directors will have to decide as a delegated group on how much
of their authority to delegate

It is for this reason that many companies have Managing Directors and/or a
Company Secretary
- These positions are known for the specific duties that they do for a company
- The board of directors may therefore decide to keep their authority and
exercise it as a group and only delegate their authority in terms of the day to
day management to their Managing Director

S 66(1) provides that the board of directors may delegate authority entirely or
partly to others, if MOI allows for this. Reasons why the board of directors may
choose to do this:
- Say for instance it is a small welding company that we are dealing with and
the owner is also the sole shareholder. In this scenario it may be practical
under certain circumstances to allow his or her brother or sister to run the
company (paying employees, signing contracts, doing the accounting) whilst
he or she simply does the welding that brings in the money for the company.
The owner in this regard may be good at welding but may not be especially
prudent in effectively running the company. The owner may, therefore, as the
director of the company, choose to delegate his or her authority
- Say for instance in a larger company there are plenty of directors. Not all
these directors can be everywhere at once so they delegate parts of their
authority to senior managers to help them run their portfolio

Different types of authority:

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- Actual authority
o Express (actual) authority
o Implied (actual) authority
- Ostensible authority
- Usual authority

- Ex post facto ratification

o Recognised as a fourth type of authority
o Allows for someone with actual authority to give their consent and
effectively ‘authorise’ the agreement as if the agent had the necessary
authority at the time of agreement
o In effect, the company or principal forgives the agent and adopts the
unauthorised contract
o If ratified, the contract becomes fully binding, with retrospective effect,
on the company

1.Actual authority:

Express authority:
- Authority given in so many words, either orally or in writing
- An agent wither will or will not have this type of authority; there is no in-
between
- Express (actual) authority is given expressly to the Board of Directors in terms
of s 66(1) of the CA
o This authority is given to the board as a whole and must be exercised
as whole
o If one of the directors decides to enter into a contract without the other
directors, the company will not be bound by the contract
- Where express authority is subject to compliance with some internal formality,
the common-law Turquand rule and s 20(7) entitle a bona fide party to
assume that this formality ahs been duly complied with, unless he knew or
ought reasonably to have known that it has not
- Example:
o A employs B in the normal course of business. A says to B, ‘Here is
R10, please buy me R10’s worth of sweets’. In this situation B has the
express authority to buy R10’s worth of sweets for A. B may not buy
R11’s worth or less than R10’s worth. B has the exact express
authority to spend R10 and buy sweets, he may not exercise discretion
- There is, therefore, the express authority to do exactly something

Implied authority:
- Authority given not in so many words, but which arises as a reasonable
inference from the conduct of the principal
- It may also be authority that is necessary or reasonably incidental to the
performance of the agent’s express authority
- Implied authority often flows from an agent’s express authority
- Example:
o It may be the usual practice in Company ABC (Pty) Ltd for the
Managing Director to sign all the pay slips for all of the employees

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every month. Now the Managing Director may not have the express
(actual) authority to request these pay slips from the Human Resources
(HR) department in terms of the company’s MOI, but how can the
Managing Director sign these pay slips if he or she cannot actually see
or request the pay slips? Therefore, the Managing Director will have
the implied (actual) authority to request that the pay slips of all
employees be sent to him or her so that he or she may sign them as
per the requirements of their job.
o In other words even though the Managing Director does not have the
express (actual) authority to request the pay slips of all employees, he
or she has the authority to request the pay slips in terms of their
implied (actual) authority of their position as this request is reasonably
incidental to the completion of their job – the signing of the employees
pay slips every month.
- It is, therefore, the authority to do something which is necessary for the
completion of something else which you have the authority to do
- This authority is usually seen with Managing Directors and Company
Secretaries; these positions carry enormous authority regardless of whether
or not the company has allocated this authority to them
- If a Managing Director or Company Secretary enter into a relevant contract for
their title and usual scope of employment, the company will be bound to the
agreement so entered into
- If the company specifically states in their MOI that these officials do not have
authority (e.g. by ring-fencing their MOI as to alert outsiders) and a third party
contractor still enters into agreements with these officials, the third party
contractor cannot state that they did not know that these officials did not have
the requisite authority to contract with them

2.Ostensible authority:

Also known as apparent authority or agency by estoppel

It is no authority at all; it is an oxymoron or contradiction in terms

- Arises where a person has by his words or conduct created the
impression that someone is his duly authorised agent thereby inducing
an innocent third party to deal with the agent in that capacity
- A principal represents his agent as someone who has the authority to bind
him to an agreement but in reality, the agent has no such authority
- If a third party contractor reasonably relies on this misrepresentation, then the
principal will be precluded (estopped) from denying the agent’s lack of
authority because he is at fault for representing the agent in this way
- The representation must be made by the principal and not only by the agent,
otherwise anyone would be bound by the acts of a self-appointed agent or
director

Requirements: (NSB Bank v Cape Procedure Co (Pty) Ltd)

- A representation, whether by words or conduct
- Made by the principal (someone with actual authority)
o Only someone with actual authority can represent the agent as having
authority to enter into the agreement with the third party

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o Board of Directors acting together can make this representation,

because together they have actual authority
o A lone director of such a Board cannot make this representation,
because the Board of Directors only have actual authority if they act
together
o If the Board of Directors have delegated authority to one of their own
members or to another appointed agent, this person can make this
representation because this agent has actual authority
- Made in such a manner that it could reasonably have been expected to
mislead the third party
- The third party relied on such representation
- Such reliance was reasonable
- Resulted in prejudice to the third party
o Can be anything from a monetary loss to the loss of an opportunity that
has a monetary value

If these six requirements are proved by the third party, it has been proved that the
agent had ostensible authority and the third party may then hold the principal liable
for the contracts so entered into between him and the agent

3. Usual authority:

May either form part of:

- Implied authority
o Will be referred to as implied usual authority
- Ostensible authority
o Will be referred to as restricted usual authority
o Principal appoints an agent to an office or a position that carries with it
authority to contract on behalf of the principal, but the principal has
restricted this usual authority
o If a bank appoints a person as a branch manager, it thereby makes the
representation that its branch manager has the powers usually
associated with the branch manager of a bank
o It is a form of holding-out

Usual authority arises from the office that a particular person holds (is employed in)
- The office/position that the person occupies may carry with it the usual
authority to do certain tasks related to that position
- In other words, the authority of an agent flows from the office held by the
particular company officer

There are two positions of importance that carry usual authority, namely a Managing
Director and a Company Secretary

Managing Directors:
- Hopkins v T L Dallas Group Ltd:
o Court stated that where the board of directors appoints one of their
members to an executive position, they implicitly authorise him to do all
such things as fall within the usual scope of that office

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o A managing director or chief executive director has very wide implied

usual authority to contract on behalf of the company
- SA Securities Ltd v Nicholas:
o Court stated that the mere fact of appointing a person as managing
director gives him certain implied powers
o Anyone dealing bona fide with the managing director is entitled to
assume that the managing director has all the powers which his
position ostensible would give him

(The chairperson of the board of directors or an ordinary individual director does not
have wide usual authority to contract on the company’s behalf)

Company Secretaries:
- Panorama Developments (Guildford) Ltd v Fidelis furnishing Fabrics
Ltd:
o Held that a company secretary is an officer of the company with
extensive duties and responsibilities
o He is no longer a mere clerk, but the chief administrative officer of the
company
o He is entitled to sign contracts connected with the administrative side
of a company’s affairs, such as employing staff and hiring chauffeur-
driven cars required for the purposes of the company’s business
o All these things may be regarded as part of the usual authority of a
company secretary

If the company has restricted the usual authority of an agent but they have put
them in an office which carries with it the usual authority to do things, then the
company is obliged to inform the public of this otherwise third party
contractors could contract with the agent on the basis of their title (say for
example the agent is a managing director) only to find out that the agent does
not have the authority to bind their principle to their contract.

In these instances, the agent’s restricted usual authority overlaps with ostensible
authority and the third party contractor may rely on a claim of ostensible authority.
This is because the principle did not effectively communicate the restriction of that
agent’s authority and they occupy a position which carries with it usual authority to
do certain things. The third party contractor will still have to prove ostensible
authority.

Chapter 8: Groups of companies:

The holding/subsidiary relationship:

Existence of holding/subsidiary relationship:

- Based on control of the subsidiary company by the holding company either at
board meeting or general meeting level
- The relationship exists if the holding company itself controls the
subsidiary, or does so through other subsidiaries or in combination with
other subsidiaries

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- Possibilities to make Company S a subsidiary of Company H:

o Company H itself controls Company S
o Company H together with one or more of its subsidiaries, controls
Company S
o One or more of Company H’s subsidiaries control company S (it will
then be recognised that, if a subsidiary of Company H controls
Company S, then Company S will have two holding companies)

The above possibilities also exist if the control is exercised through the nominees of
Company H and/or its subsidiaries (that is, by persons who hold shares not for their
own benefit but on behalf of Company H, i.e. agents)

Control at board meeting level:

- Having the right to appoint or elect, or control the appointment or election of,
directors of that company who control a majority of the votes at a meeting of
the board

Control at general meeting level:

- Having the ability directly or indirectly to exercise, or control the exercise of, a
majority of the general voting rights at general meetings of that company,
whether pursuant to a shareholder agreement or otherwise

Majority = 50% + 1

When a company is a ‘wholly-owned subsidiary’ of another juristic person:

- If all of the general voting rights of the company are held or controlled, alone
or in any combination, by that juristic person, one or more other subsidiaries
of that juristic person, or one or more nominees of that juristic person or any
of its subsidiaries

Whereas it is possible for a juristic person other than a company to be a

holding company, the same is not true of a subsidiary company, which must
be a company
(e.g. CC and trusts can be holding companies, but not subsidiary companies)

Related and interrelated concepts:

Apart from the holding/subsidiary relationship, the Act also recognises what are
termed ‘related’ and ‘interrelated’ relationships between persons, and makes certain
provisions applicable if such relationships exist

Rationale for recognition of such relationship:

- If a company transacts with another person and they are related or
interrelated, they might not act at arm’s length (i.e. without bias), and might
accordingly act to the detriment of the company and its creditors and/or
members

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- E.g. if a company makes a loan to a director of the company, certain

requirements of the Act must be met; the same applies if the loan is to a
person ‘related’ to the director

Section 2(3):
- It is possible that the parties to the transaction who are related or interrelated
may be acting quite independently and at arm’s length
- This section makes it possible for a person to be exempted from the
application of a provision of the Act that would apply to that person because of
the relationship

The related relationship:

Section 1:
- ‘Related’ when used in respect of two persons, means persons who are
connected to one another in any manner contemplated in s 2(1)

Section 2(1) distinguishes the ‘related’ relationships between:

- Two individuals
- An individual and a juristic person
- Two juristic persons

Two individuals:
- An individual is related to another individual if they are:
o Married or live together in a relationship similar to a marriage; or
o Separated by no more than two degrees of natural or adopted
consanguinity or affinity
- To determine the degree of consanguinity between two relatives, one must
count up from the one relative to the nearest common ancestor and then
continue counting down to the other relative
- Relatives of a person separated by no more than two degrees of
consanguinity are thus the person’s parents and children (first degree) and
brothers, sisters, grandchildren and grandparents (second degree)
- Such persons are included whether the relationship arises naturally, through
adoption or through marriage (affinity)

An individual and a juristic person:

- If the individual directly or indirectly controls the juristic person
- [See ‘control of a company’ below]

Two juristic persons:

- A juristic person is related to another juristic person if:
o Either of them directly or indirectly controls the other, or the business of
the other
o Either is a subsidiary to the other; or
o A person directly or indirectly controls each of them, or the business of
each of them

Control of a company (s 2(2) definition):

- A person controls a company if:

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o That person is a subsidiary of that company

o That person, together with any related or interrelated person
ß Is directly or indirectly able to exercise or control the exercise of
a majority of the voting rights associated with securities of that
company, whether pursuant to a shareholder agreement or
otherwise; or
ß Has the right to appoint or elect, or control the appointment or
election of, directors of that company who control a majority of
the votes at a meeting of the board
o That person has the ability to materially influence the policy of the
company in a manner comparable to a person who, in the ordinary
commercial practice, would be able to exercise an element of control
referred to in the two bullets above

Example: Control over a company 2 by Company 1:

- Company 1 controls Company 2
- Company 1 directly or indirectly exercises control over the business of
Company 2
- Company 2 is a subsidiary of company 1

The interrelated relationship:

Section 1 defines ‘interrelated’ as follows:

- ‘inter-related’ when used in respect of three or more persons, means persons
who are related to one another in a linked series of relationships, such that
two of the persons are related in a manner contemplated in s 2(1), and one of
them is related to the third in any such manner and so forth in an unbroken
series

Example:
- Company A controls Company B
o A + B = related
- Company B is the holding company of Company C
o B + C = related
o A + C = interrelated

Additional example from New Entrepreneurial Law pg 165:

- S has 1 000 shares and 1 000 debentures in issue.
- The debentures each have on vote.
- H is the registered shareholder of 800 of the shares in S.
- S will not be the subsidiary of H, as the latter only holds 40% of the voting
rights.
o Shares = normally 1 vote
o Debentures = states 1 vote
o 2 000 votes in total
o H has 800 shares = 800 votes
o 800/2000 x 100 = 40%
- If the debentures are non-voting, S will be of the subsidiary of H
o Shares = normally 1 vote
o Debentures = states no votes

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o 1 000 votes in total

o H has 800 shares
o 800/1000 = 80%

Chapter 12: Governance and the Board of Directors:

Directors play a crucial role in managing the affairs of a company. Higher standards
are continually being expected of directors, as evidenced by the Act, the King Report
on Governance for SA 2009 (the King III Report) and the King Code of Governance
for SA (the King Code)

Definition of a ‘director’ (s 1):

- A member of the board of a company, as contemplated in s 66, or an
alternate director of a company and includes any person occupying the
position of a director or alternate director, by whatever name designated

(From the definition it is clear that a person who is not formally appointed as a
director of a company may nevertheless be deemed to be a director if he occupies
the position of a director, whether with or without lawful authority)

The title or description of a position is not relevant in determining whether a person is

a director
- It is possible for someone to be a director even though he is described as a
manager
- It is the substance of that person’s activities that will determine whether
he is a director

Directors recognised in our law:

Recognised in s 66:
- Director as defined in s 1:
o A member of the board of a company, or an alternate director,
including any person occupying the position of a director or alternate
director, by whatever name designated
- Director appointed in terms of the MOI:
o A director may be appointed by any person who is named in, or
determined in terms of the MOI
- Ex officio director:
o A person who is a director as a consequence of holding some other
office, title, designation or similar status
o He has all the powers and functions of any other director of the
company, except to the extent that these are restricted by the MOI
o He is subject to all the liabilities of any other director of the company
o A person may not serve as an ex officio director should he be or
become ineligible or disqualified to be a director under the Act
- Alternate director:

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o Elected or appointed to serve as a member of the board of a company

in substitution for another director who has been elected or appointed
to the board of directors
o Serve a useful purpose; they allow a director who is ill or has other
commitments to ensure that his influence is still maintained at board
level through an alternate director when he is unable to be present
o May only be appointed if the MOI makes provision for a director to
nominate an alternate director to act in his stead
o May act as a director only in the absence of his appointer
o Only enjoys the powers that his appointer enjoyed
o However, he is subject to all the duties a director owes to his company
and must exercise and discharge all the powers and functions of a
director
o Ceases to hold office whenever the director who appointed him ceases
to be a director, or gives notice to the company secretary that the
alternate director is no longer representing him
- Director elected by shareholders:
o Each director of a profit company (except the first directors, a director
appointed in terms of the MOI and an ex officio director) must be
elected by the shareholders, to serve as a director of the company for
an indefinite term or for a term set out in the MOI
o In the case of a profit company (other than a state-owned company)
the MOI must provide for the election by shareholders of at least 50%
of the directors, and 50% of any alternative directors
o MOI may provide that a higher percentage of directors must be elected
by the shareholders
o Alternatively, a company may (for example) require 50% or less of its
directors to be appointed by parties other than shareholders, such as
the board of directors, other stakeholders or outsiders

In addition, the following types of directors are recognised in our law:

- De jure director:
o A person validly and formally appointed to the position of a company
director who has freely consented to that appointment
- Temporary director:
o Unless the MOI of a profit company provides otherwise, the board of
directors may appoint a person to serve as a director temporarily until
such time as the vacancy has been filled by a director who has been
elected by the shareholders
o Such temporary director must satisfy the requirements for election as a
director, and has all the powers, functions and duties and is subject to
all of the liabilities of any other director of the company
- Nominee director:
o Generally appointed by a shareholder who controls sufficient voting
power in the company to represent his interests
o Nominee directors may, for example, represent a major shareholder, a
class of shareholders, a significant creditor or an employee group
o They are useful in certain situations, for instance where a major
shareholder agrees to subscribe for shares in a company on the
condition that he has representation on the board of directors, or where

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a major shareholder lacks the time or expertise to serve as a director

personally and thus wishes to appoint a nominee to act on his behalf
o The presence of a nominee director may lead to a potential conflict of
interests should the interests of the company coincide with those of the
nominator
o In carrying out his duties and functions as a director, a nominee
director is in law obliged to serve the interests of the company and not
the interests of any nominator, employer or principal
o He may not fetter his vote as a director, and as a director may not be
subject to the control of any employer or principal other than the
company
- Puppet director:
o Person who has been placed on the board of directors with the
intention that he should blindly follow the instructions of his controller
o S v Shaban:
ß Our law does not know the complete puppet who pretends to
take part in the management of a company whilst having no idea
what it is to which he puts his signature
ß It is utterly foreign to the basic concepts of our law and the
Courts will punish it as fraud
o Will not escape liability for breach of a fiduciary duty by laying the
blame on the person who put him in office and pulled the strings
o Likewise, the ‘puppet master’ will not escape liability on the ground that
he was not formally appointed to the office of director
- De facto director:
o Person who claims to act and purports to act as a director, without
having been so appointed either validly or at all
o The words ‘occupying the position of a director’ in the s 1 definition of a
‘director’ make it clear that a de facto director constitutes a director for
purposes of the Act
o May not escape his duties because he was not formally or validly
appointed as a director
o Subject to fiduciary and other duties of a director
o Undertakes functions in relation to the company that could properly
have been discharged only by a director, and participates in directing
the affairs of the company on an equal footing with the other directors
and not a subordinate role
o Must be shown to have exercised a real influence in the corporate
decision-making process of the company
o All the relevant factors must be taken into account in determining
whether a person is a de facto director
- Shadow director:
o A person in accordance with whose directors or instructions the
directors of the company are accustomed to act
o ‘Lurks in the shadows’ and shelters behind others who he claims are
the only directors of the company to the exclusion of himself
o The concept of a shadow director emerged to prevent the use of
intermediaries acting as directors as a façade for the real exercise of
power within the company

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o Not held out to be a director by the company, but exercises power from
the shadows
o While concealment is not a prerequisite for a person to be a shadow
director, in practice most are likely to want to remain anonymous
o Some reasons are that they wish to avoid being subject to certain of
the duties or liabilities imposed on directors, or because they have
been disqualified from being validly appointed as directors
o Should only a minority of the company’s directors be accustomed to act
in accordance with a person’s instructions or directions, this would not
be sufficient to make that person a shadow director
o The s 1 definition is wide enough to include a shadow director
- Executive director:
o Involved in the day-to-day management of the company and is in the
full-time salaried employ of the company
o Generally under a contract of service with the company
- Non-executive director:
o Part-time director and is not an employee of the company
o Not involved in the day-to-day management of the company, but plays
an important role in providing objective judgment, independence of
management, on issues facing the company
o Usually appointed to the board of directors for the purpose of bringing
an external, independent perspective to the management of a company
o An independent, non-executive director is one who does not have a
relationship with the company outside his directorship
o He is free of any relationships which could materially interfere with the
independent exercise of his judgment

Audit committee:
- A sub-committee of a company’s board of directors, appointed by that
company’s incorporators, board of directors or shareholders, which plays an
important role in
o Identifying financial risks
o Managing these risks
o Ensuring the integrity of internal financial controls
o Ensuring the integrity of integrated financial reporting

Board committee:
- Except to the extent that the MOI provides otherwise, the board of directors
may appoint any number of committees and may delegate any of its authority
to these committees
- The board remains liable for the proper performance of the duty delegated

Prescribed officer:
- Person who
o Exercises general executive control over and management of the
whole, or a significant portion, of the business and activities of the
company; or
o Regularly participates to a material degree in the exercise of the whole,
or a significant portion, of the business and activities of the company
- Provisions that apply to directors also apply to prescribed officers

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- E.g. CEO

Organs of the company:

Organs:
- Normally, a company only has 2 organs
o Board of directors (responsible for management)
o Shareholders (debate and vote on matters that affect the company)
- Some larger companies or companies with a high PIS need to appoint 2
additional organs
o Audit committee
o Social and ethics committee

The one organ cannot make the decisions that the other has to make

If an organ acts, it is as if the company acts

Legal position of directors:

Position of a director is analogous to that of an agent:
- Directors, like agents, act for the benefit of some other person, that is, the
company, and not for their own benefit, unless they act outside their powers,
or expressly or impliedly assume liability
- But under the 2008 Act, the analogy between a director and an agent is not as
strong as it may have been under the 1973 Act
- Previously, a director did not enjoy original powers to act and, like an agent,
his power to act arose from, and was limited by, the powers conferred on him
- Now, s 66(1) of the 2008 Act, subject to the company’s MOI, confers original
powers and duties on directors
- Thus, the position of a director has changed considerably under the Act

Position of a director is analogous to that of a trustee:

- Directors, like trustees, stand in a fiduciary relationship to the company in the
performance of their duties, and act for the benefit of some other person, and
not for their own benefit
- As in the case of a trustee, the property that is under the control of a director
must be applied for the specified purposes of the company, and for its benefit
- But the description of a director as a trustee is not appropriate in SA law
because in SA law trust property is vested in the trustee, whereas the
property which directors are bound to administer is not vested in them but in
the company itself
- Also, the courts do not apply the same strict standards of care and ski9ll to
directors as are applied to trustees

Position of a director is analogous to that of a managing partner:

- They are empowered to manage a business

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- But, unlike managing partners, directors do not necessarily have a financial

interest in the business, and even where they do hold shares in the company
they are not, as directors, liable for the company’s debts

The legal relationship of a director is sui generis:

- It stands in a class of its own
- It cannot be determined by reference to a single legal relationship, but must
be determined by reference to the facts of each case

Appointment of directors:
Initial appointment of directors:

The first directors of a company are the incorporators of the company, and such
persons serve as directors of the company until the minimum number of required
directors (in terms of the Act or MOI) has been appointed or elected

Subsequent appointments:

Appointments by a person named in the MOI:

- A director may be appointed and removed by a person named in, or
determined in terms of, the MOI
- Where the authority to appoint a director is vested in a third party, that third
party is not under any obligation to appoint as a director the most suitable
person for the position

Appointments by the shareholders:

- Each director of a profit company, other than the first directors, a director
appointed in terms of the MOI and an ex officio director, must be elected by
the shareholders, to serve as a director of the company for an indefinite term
or for a term set out in the MOI
- Unless the MOI of a profit company provides otherwise, the election is to be
conducted as a series of votes, and each director is to be appointed by a
separate resolution
- The series of votes continues until all vacancies on the board at that time
have been filled
- Having separate voting for each candidate prevents a block of candidates
being voted on together, which will compel a shareholder who wishes to vote
for only one candidate of the block to vote for all the candidates even though
there may be one (or more) candidates whom he does not want to elect as a
director
- But note that the MOI may make provision for two or more candidates to be
elected as directors by way of a single resolution
- A shareholder may only exercise his right to vote once, and the vacancy will
be filled if a majority of the voting rights exercised are in support of the
candidate
- The general rule is that shareholders may vote for a director in their own
interests, even if their interests conflict with those of the company and they
are under no obligation to choose the person most suitable to be a director

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Appointments by the board of directors or other stakeholders or outsiders:

- In the case of a profit company, other than a state-owned company, the MOI
must provide for the election by shareholders of at least 50% of the directors
and 50% of any alternate directors
- Thus at least half of the board of directors must be elected by the
shareholders
- This implies that a company could require 50% or less of its directors to be
appointed by parties other than shareholders, such as the board of directors,
or other stakeholders or outsiders
- Where the power to appoint directors is vested in the board of directors, it is a
fiduciary power and must be exercised in good faith in the interests of the
company and not for any improper or collateral purpose

Other appointments:
- Provision is made in the Act for the appointment of ex officio directors,
alternate directors, temporary directors and nominee directors

Consent to be a director:

Person must deliver written consent to the company to serve as its director
(This obviously does not apply to de facto and shadow directors)

An election or appointment of a person will be a nullity if at the time of the election or

appointment that person was ineligible or disqualified from being a director

Within 10 business days after a person becomes a director (or ceased to be a

director) the company is required to file a notice with the CIPC to this effect

Terms of appointment:
A director is not as such an employee or servant of the company, but may be
employed by the company as an employee in terms of a separate contract of service
- A person’s position as a director is independent of his position as an
employee

A person simultaneously employed as an executive director and as a board member

holds two distinct positions – that of a director and that of an employee

The terms upon which directors hold office may be contained either in:
- The MOI; or
- A service contract that exists outside of, and is unconnected to, the MOI

The dismissal of a director as an employee does not of itself result in the termination
of his office as a director
- Thus, depending on the terms of his employment contract, should a director
be dismissed as an employee, he may still remain a director of the company
until he is removed as a director or resigns as a director

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- Likewise, the removal of a director from the board of directors does not result
in the automatic termination of his employment contract

Should the company breach the provisions of the MOI relating to a director, the
director will have a contractual claim against the company based on the MOI

Term of office of a director:

- Each director, other than the first directors, directors appointed in terms of the
MOI and an ex officio director, must be elected by the shareholders to serve
for an indefinite term or for a term as set out in the MOI
- It is questionable whether it is advisable for a person to remain in the position
of a director for an indefinite term, because this may affect his independence
as a director and may not accord with good corporate governance practices
- Of course, even if a director is appointed for an indefinite term, he may
nevertheless be removed as a director by ordinary resolution at any time in
terms of the Act

Ineligibility and disqualification of persons to be directors:

Application:
- Provisions of the Act setting out the grounds of ineligibility and disqualification
of directors and alternative directors, but also to prescribed officers and
persons who are members of the company’s board committees or audit
committee, irrespective of whether or not such persons are also members of
the company’s board of directors

Qualifications:

The Act does not prescribe any minimum qualifications for a director, such as
qualifications relating to the education and training of directors
- Being a shareholder is not a formal condition of being a director (the Act does
not impose a share qualification requirement on directors)
- Reason for not imposing minimum qualifications:
o These are regarded as being an internal company policy issue
- The MOI may, however, on an optional basis, impose minimum qualifications
to be met by directors of a particular company

Instead, the Act imposes criteria that disqualify a person from being a director

Distinguishing ineligibility from disqualification:

Disqualification is not absolute and a court has a discretion to permit a disqualified

person to accept an appointment as director

No such flexibility is permitted with respect to an ineligible person, who is absolutely

prohibited from being a director

Grounds of ineligibility:

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The following persons are ineligible to be company directors:

- Juristic persons
- Unemancipated minors or persons under a similar legal disability
- Any persons who do not satisfy any minimum qualification set out in the MOI
- Any persons disqualified in terms of any additional grounds of ineligibility (or
disqualification) set out in the MOI

A director must be a natural person

A person is a minor until he attains the age of 18 (no maximum age prescribed in the
Act)

Grounds for disqualification:

Each of the following persons is disqualified from being a director of a company:

- A person prohibited by a court of law from becoming a director
- A person declared to be delinquent by a court of law
- An unrehabilitated insolvent
- A person prohibited in terms of any public regulation to be a director of a
company
- A person removed from an office of trust on the grounds of misconduct
involving dishonesty
- A person convicted, in SA or elsewhere, and imprisoned without the option of
a fine or fined more than the prescribed amount, for theft, fraud, forgery,
perjury or other offences as specified in s 69(8)(b)(iv) of the Act

The offences specified in s 69(8)(b)(iv):

- An offence involving fraud, misrepresentation or dishonesty
- An offence in connection with the promotion, formation or management of a
company
- An offence under the Companies Act, Insolvency Act, CC Act, Competition
Act, Financial Intelligence Centre Act, Securities Services Act or Chapter 2 of
the Prevention and Combating of Corrupt Activities Act

The MOI may impose additional grounds for the disqualification of directors

These provisions are not designed to punish the individual, but to protect the public
and to prevent the corporate structure from being used to the financial detriment of
investors, shareholders, creditors and persons dealing with the company

Consequences of ineligibility and disqualification:

An ineligible or disqualified person may not be appointed or elected as a director of

the company, or consent to be appointed or elected as a director, or act as a director
of a company

Person will cease to be entitled to continue to act as director with immediate effect

A company may not knowingly permit an ineligible or disqualified person to serve or

act as a director

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Exemption from disqualification:

A court has an unfettered discretion to exempt a person from the application of the
following grounds:
- An unrehabilitated insolvent
- A person prohibited in terms of any public regulation to be a director of a
company
- A person removed from an office of trust on the grounds of misconduct
involving dishonesty
- A person convicted, in SA or elsewhere, and imprisoned without the option of
a fine or fined more than the prescribed amount, for theft, fraud, forgery,
perjury or other offences as specified in s 69(8)(b)(iv) of the Act

A court of appeal will only interfere with the decision if it is satisfied that the
discretion was not exercised properly

Factors to be taken into account by a court in exercising its discretion cannot be

stated exhaustively, because each case depends on its own facts

Fundamental question:
- Whether in all the circumstances the applicant has satisfied the court that the
defect of character no longer exists, and that the person concerned has
rehabilitated himself and measures up to the high standards required of
directors

Duration of disqualification:

Disqualification under the following grounds ends at the later of five years after the
date of removal from office or the completion of any sentence imposed for the
relevant offence, as the case may be, or at the end of any extension of the
disqualification, as determined by a court of law
- A person removed from an office of trust on the grounds of misconduct
involving dishonesty
- A person convicted, in SA or elsewhere, and imprisoned without the option of
a fine or fined more than the prescribed amount, for theft, fraud, forgery,
perjury or other offences as specified in s 69(8)(b)(iv) of the Act

The CIPC may apply to court, at any time before the expiry of a person’s
disqualification, for an extension of the disqualification under the grounds listed
above, which the court, in its discretion, may grant for no more than 5 years at a
time, should it find that an extension is necessary to protect the public, having regard
to the conduct of that person up to the time of the application

Public register:

CIPC must establish and maintain a public register of persons who are disqualified
from serving as directors, or who are subject to an order of probation as a director, in
terms of a court order pursuant to the Act or any other law

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CIPC may, for purposes of maintaining the public register of persons disqualified
from serving as directors, obtain relevant information from the official records of the
clerk of the magistrates’ court, the Master of the HC, the SAPS, any regulatory
authority or any institution that regulates any profession in SA

Delinquent directors and directors on probation:

Under the Act an application may be made to court to declare a director delinquent
or to have him placed under an order of probation

Locus standi:

A wide range of persons may apply to court for orders declaring a director delinquent
or placing him under probation
- Company
- Shareholder
- Director
- Company secretary or prescribed officer of the company
- Registered trade union that represents employees of a company or another
employee representative
- CIPC
- Takeover Regulation Panel
- Any organ of state responsible for the administration of any legislation

The application may be brought not only against a present director of a company, but
also against a former director, i.e. a person who had been a director within the 24
months immediately preceding the application

Grounds of delinquency:

It is a ground of delinquency if the person:

- Consented to serve as director, or acted in the capacity of a director or
prescribed officer, while ineligible or disqualified to be a director
- While under an order of probation, acted as a director in a manner that
contravened that order
- While a director, grossly abused the position of a director
- While a director, took personal advantage of information or an opportunity, or
intentionally or by gross negligence inflicted harm upon the company or a
subsidiary of the company
- While a director, acted in a manner that amounted to gross negligence, wilful
misconduct or breach of trust in relation to the performance of his functions
within, and duties to, the company or in a manner contemplated in s 77(3)(a),
(b) or (c) of the Act
- Has repeatedly been subject to a compliance notice or similar enforcement
mechanism
- Has at least twice been personally convicted of an offence or subjected to an
administrative fine or penalty, in terms of any legislation
- Was, within a period of 5 years, a director of one or more companies or a
managing member of one or more CC’s, or controlled or participated in the

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control of a juristic person, irrespective of whether concurrently, sequentially

or at unrelated times, that was convicted of an offence or subjected to an
administrative fine or similar penalty in terms of any legislation

Grounds of probation:

Court may make an order placing a person under probation if the person:
- While serving as a director, the person:
o Was present at a meeting (whether in person, by electronic
communication or represented by proxy) and failed to vote against a
resolution despite the inability of the company to satisfy the solvency
and liquidity test, contrary to the Act
o Otherwise acted in a manner materially inconsistent with the duties of a
director
o Acted in or supported a decision of the company to act in a manner
that was oppressive or unfairly prejudicial
- Within any period of 10 years after 1 May 2011(the effective date)
o Person was a director of more than one company or a managing
member of more than one CC (be it concurrently, sequentially or at
unrelated times); and
o During that time two or more of these companies or CC’s had each
failed to pay all their creditors or meet all their obligations (except
under a business rescue plan resulting from a resolution of the board of
directors or a compromise with creditors)

Terms of the order and conditions:

Effect of an order of delinquency:

- Person is disqualified from being a director of a company

An order of delinquency may under certain circumstances be unconditional and

subsists for the lifetime of the delinquent director, or it may be conditional and
subsist for 7 year or longer, as determined by the court

A person who has been placed under probation may not serve as a director except
to the extent permitted by the order of probation
- The probation order may be subject to any conditions the court considers
appropriate and generally subsists for a period not exceeding 5 years

Some of the conditions that the court may impose on the order of delinquency or
probation are:
- The director is required to undertake a designated programme of remedial
education relevant to the nature of his conduct as director, or to carry out a
designated programme of community service
- The director may be ordered to pay compensation to any person adversely
affected by his conduct as a director, to the extent that such a victim does not
otherwise have a legal basis for claiming compensation
- The person concerned may be ordered to be supervised by a mentor in any
future participation as a director while the order remains in force

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- Person may be limited to serving as a director of a private company, or of a

company of which that person is the sole shareholder

Application to suspend or set aside the order of delinquency or probation:

A delinquent person may, 3 years after the order of delinquency was made, apply to
court to suspend the order of delinquency and to substitute for it an order of
probation (with or without conditions)
- If the order of delinquency is so suspended, it may be set aside by the court
after 2 years of suspension

A person who is subject to an order of probation may apply t court to set aside the
order of probation, at any time more than 2 years after it was made

On considering these applications:

- A court may not grant the order applied for unless the applicant has satisfied
any conditions attached to the original order
- A court may grant the order if, having regard to the circumstances leading to
the original order, and the conduct of the applicant in the ensuing period, the
court is satisfied that the applicant has demonstrated satisfactory progress
towards rehabilitation, and there is a reasonable prospect that the applicant
will be able to serve successfully as a director of a company in the future

Case study:
[S 162 deals with delinquent directors]

Outa v Myeni:
- In Gihwala v Graney Property the SCA stated that s 162 has a protective
purpose:
o “Its aim is to ensure that those who invest in companies, big or small,
are protected against directors who engage in serious misconduct of
the type described in these sections. That is conduct that breaches the
bond of trust that shareholders have in the people they appoint to the
board of directors. Directors who show themselves unworthy of that
trust are declared delinquent and excluded from the office of director.
It protects those who deal with companies by seeking to ensure that
the management of those companies is in fit hands. And it is required
in the public interest that those who enjoy the benefits of incorporation
and limited liability should not abuse their position”

Appointment and removal of directors (recap):

Appointment:
- Incorporators are the first directors of the company until the directors needed
in terms of the Act or MOI is appointed
- If the company needs to appoint an audit committee, or a social and ethics
committee, then the minimum number of directors needed for that company is

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over and above the number necessary for the audit committee and social and
ethics committee
- Directors can be appointed by a person named in the MOI
- MOI must have a provision that allows the shareholders of a profit company to
elect at least 50% of the directors

Removal:
- Shareholders can remove the directors on any ground notwithstanding a
provision to the contrary in the MOI or any agreement
- They also have the ability to place a director under probation or have him
declared delinquent
- Board of directors also have the ability to remove a director, but only under
certain circumstances (specific grounds)
o Director becomes ineligible or disqualified
o Director becomes incapacitated to the extent that he is unable to
perform his functions and it is unlikely that he will regain this capacity
within a reasonable time
o Director has allegedly been negligent or neglected or has been derelict
in the performance of his functions

Removal of directors: (s 71)

Section 71:
1) Despite anything to the contrary in a company’s MOI or rules, or any
agreement between a company and a director, or between any shareholder
and a director, a director may be removed by an ordinary resolution adopted a
shareholders meeting by the persons entitled to exercise voting rights in an
election of that director, subject to subsection (2)
2) Before the shareholders of a company may consider a resolution
contemplated in subsection (1)
a. The director concerned must be given notice of the meeting and the
resolution, at least equivalent to that which a shareholder is entitled to
receive, irrespective of whether or not the director is a shareholder of the
company; and
b. The director must be afforded a reasonable opportunity to make a
presentation, in person or through a representative, tot eh meeting, before
the resolution is put to a vote

If shareholders wish to remove a director, they can do so on any ground and they
only need to adopt this decision by way of an ordinary resolution (50% + 1)
[This ordinary resolution is an unalterable provision and cannot be made higher –
remains at 50% + 1]

Procedural matters in s 71:

- Director must receive written notice of such a shareholder’s meeting and the
decision they will make
- The director must be given a chance to ma a presentation at that meeting
before they take the particular decision

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Section 71: continued

3) If a company has more than two directors, and a shareholder or director has
alleged that a director of the company
a. Has become
i. Ineligible or disqualified in terms of s 69, other than on the
grounds contemplated in s 69(8)(a); or
ii. Incapacitated to the extent that the director is unable to perform
the functions of a director, and is unlikely to regain that capacity
within a reasonable time; or
b. Has neglected, or been derelict in the performance of, the functions of
director
the board, other than the director concerned, must determine the matter by
resolution, and may remove a director whom it has determined to be ineligible
or disqualified, incapacitated, or negligent or derelict as the case may be
4) Before the board of a company may consider a resolution contemplated in
subsection (3), the director concerned must be given
a. Notice of the meeting, including a copy of the proposed resolution and a
statement setting out the reasons for the resolution, with sufficient
specificity to reasonably permit the director to prepare and present a
response; and
b. A reasonable opportunity to make a presentation, in person or through a
representative, to the meaning before the resolution is put to a vote

Section 71: continued

8) If a company has fewer than three directors
a. subsection (3) does not apply to the company
b. in any circumstances contemplated in subsection (3), any director or
shareholder of the company may apply to the Companies Tribunal, to make
a determination contemplated in that subsection; and
c. subsections (4), (5) and (6), each read with the changes required by the
context, apply to the determination of the matter by the Companies
Tribunal
9) Nothing in this section deprives a person removed from office as a director in
terms of this section of any right that person may have at common law or
otherwise to apply to a court for damages or other compensation for
a. loss of office as a director
b. loss of any other office as a consequence of being removed as a director
10) This section is in addition to the right of a person, in terms of s 162, to apply
to a court for an order declaring a director delinquent, or placing a director on
probation

Company has to have at least 3 directors on the board of directors to remove if a

director
- If less than three, matter can be referred to Companies Tribunal to make a
decision

In both instances, whether the shareholders remove the director or the board
removes the director, the director has to receive notice of the meeting and a copy of
the proposed resolution

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- When director is removed by the board, the notice has to give reasons with
sufficient detail so that the director can present a response
- Reason for this requirement is because the board can only remove a director
based on certain grounds
- Director does not have to be given sufficient detail when the shareholders
want to remove him, because they can do so on any ground; merely have to
inform him of the meeting and that they wish to make that particular decision
- Director may apply to court to review that board of directors’ decision
- In both instances, the director has to be given the opportunity to make a
presentation at the meeting before they are put to vote

Remuneration of directors:
Directors do not have an automatic right to remuneration just because they were
appointed as a director

If a director also enters into a contract of employment, the remuneration rights will
flow from the contract of employment and the director would be an employee as well
as a director

Remuneration of directors can be disallowed by the MOI

Remuneration paid to directors for their services as directors may only be affected in
terms of a special resolution approved by the shareholders within the previous 2
years
- Shareholders decide on the remuneration of the directors, and not the
directors themselves

Remuneration is not dependent on the company earning sufficient profits, unless

specifically provided for
- Remuneration would then constitute a debt which is owed by the company to
the directors

King Report (King III):

- Recommends that the company should remunerate its directors fairly and
responsibly
- Remuneration policies and practices should be linked to the directors’
contributions to the performance of the company

King Code (King IV):

- Recommends that remuneration should be linked to positive outcomes in
respect of the triple context

Prescribed officers (Reg 38):

Regulation 38:
1) Despite not being a director of a particular company, a person is a ‘prescribed
officer’ of the company for all purposes of the Act if that person

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a. Exercises general executive control over and management of the

whole, or a significant portion, of the business and activities of the
company; or
b. Regularly participates to a material degree in the exercise of general
executive control over and management of the whole, or a significant
portion, of the business and activities of the company
2) This regulation applies to a person contemplated in subregulation (1)
irrespective of any particular title given by the company to
a. An office held by the person in the company; or
b. A function performed by the person for the company

E.g. Chief Executive Officer (CEO), Financial Director, Chief Operating Officer
(COO)

Social and ethics committee (Reg 43):

Regulation 43:
5. Social and ethics committee has the following functions:
a. To monitor the company’s activities, having regard to any relevant
legislation, other legal requirements or prevailing codes of best
practice, with regard to matters relating to
i. Social and economic development, including the company’s
standing in terms of the goals and purposes of
aa. The 10 principles set out in the UN Global Compact
Principles
bb. contribution to development of the communities in which
its activities are predominantly conducted or within which
its products or services are predominantly marketed
cc. record of sponsorship, donations and charitable giving
ii. Good corporate citizenship, including the company’s
aa. promotion of equality, prevention of unfair discrimination,
and reduction of corruption
bb. contribution to development of the communities in which
its activities are predominantly conducted or within which
its products or services are predominantly marketed
cc. record of sponsorship, donations and charitable giving
iii. The environment, health and public safety, including the impact
of the company’s activities and of its products or services
iv. Consumer relationships, including the company’s advertising,
public relations and compliance with consumer protection laws;
and
v. Labour and employment, including
aa. the company’s standing in terms of the International
Labour Organization Protocol on decent work and
working conditions
bb. the company’s employment relationships, and its
contribution towards the educational development of its
employees

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[Regulations have to be read with s 72 of the Act]

Regulations require the following in subsection (4):

- A company’s social and ethics committee must comprise not less than 3
directors or prescribed officers of the company, at least one of whom must be
a director who is not involved in the day-to-day management of the company’s
business, and who must also not have been so involved in the three previous
financial years
[At least 3 directors of which one is a non-executive director]

Regulations require the following in subsection (3):

- A state-owned and a listed public company must have a social and ethics
committee, as well as a company that scores over 500 in the Public Interest
Score (PIS)

Exceptions:
- When the company is a subsidiary and the parent company’s social and
ethics committee will fulfil the functions on behalf of the subsidiary, that
particular subsidiary need not appoint a social and ethics committee
- Where the Company’s Tribunal has exempted a company from having a
social and ethics committee; there are a number of grounds for such
exemption
o Inter alia, the company has another form of structure which can fulfil
the functions of a social and ethics committee in a substantial manner

Chapter 14:
Duties/standard of conduct of directors: (common law and s 76)
“The common-law duties of directors are the fiduciary duties of good faith, honesty
and loyalty. In addition, directors have the duty to exercise reasonably care and skill.
The duty to exercise reasonable care and skill is not a fiduciary duty. The fiduciary
duties of directors and the duty of care and skill are of fundamental importance to
any developed corporate law system. Under the Companies Act 71 of 2008 … the
fiduciary duties of directors are mandatory, prescriptive and unalterable, and apply to
all companies. Directors cannot contract out of these duties. The object of these
duties is to raise the standard of corporate and directorial behaviour. A further
reason for imposing these duties on directors is deterrence. The fiduciary duties are
protective of the company, its shareholders and the public interest.”

“In South Africa, the fiduciary duties of directors have been created and developed
by the courts, based mainly on English law. The fiduciary duties of directors are now
of even greater importance, because for the first time in our corporate law system
the Act confers on the board of directors a new statutory power and duty to manage
the business and affairs of the company subject to the company’s Memorandum of
Incorporation. Since this power is now derived from the Act instead of the
constitution of the company, it is subject to shareholder control to a much lesser
extent than before.”

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Although the 2008 Act is a partial codification of the directors’ duties, they do not
include all possible duties and there are still a number of residual common law duties
that can apply
- Act does not exclude common law duties
- Common law duties that were not expressly amended will continue to apply
as under the common law
- E.g. independent and unfettered discretion

The duties of the director are owed to the company

- Definition of director is ‘open-ended’ and ‘non-exhaustive’

Categories of duties of a director:

- Fiduciary duties
o Loyalty
o Good faith
o Avoidance of conflict of interest and duty
- Duty of care, skill and diligence
o Objective test – reasonable director in same circumstances
o Subjective test – director’s knowledge, skill and experience

Statutory defence:
- Business judgment test
o Linked to duty of care, skill and diligence
o Save harbour in Act – we want to make sure that directors do take
chances and are not unreasonable prejudiced if they believed that the
decision was in the best interest of the company
o Conduct did not breach duty of care, skill and diligence
- Requirements:
o Director must have taken reasonable and diligent steps to obtain
information about a particular matter
o He had no material or personal financial interest in the issue
o He had a rational foundation to believe that the decision was in the
best interest of the company

Fiduciary duties:
- Act bona fide
o Interests of company
o Not exceed powers
o Use powers for proper purpose
o Independent discretion
- Avoid conflict of interest
o No secret profit rule
o Corporate opportunities rule
o Rules including contracts with directors
- Breach of duties:
o Basis is sui generis
o Director liable for loss to the company and/or benefit to the director
- Independent judgment elaboration:
o Independent and unfettered
o Deciding what is in the best interests of the company

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o Part of duties of director in terms of common law (even though not

referenced in s 76)
- No profit rule elaboration: (component of conflict of interests)
o May not retain profit in capacity as director while performing duty as
director, even if not at expense of company
o Not only money, any gain or advantage
- Corporate opportunity rule elaboration: (component of conflict of interests)
o May not take a contract, information or opportunity that had to go to the
company for himself
o E.g. company is an accounting firm, director sings with prospective
client to do their taxes in his personal capacity
o Cannot avoid obligation by resigning and then taking up the opportunity
– still breach

Duty of care, skill and diligence:

- Duty of care and skill:
o Act or fail to act while under duty to act
o Infringe right when duty not to infringe
o Intentional or negligent
o Patrimonial
o Act causes loss
- Breach:
o Based in delict
o Elements of delict:
ß Act/omission
ß Wrongful
ß Fault
ß Damage/loss
ß Causation
- Standard:
o Reasonable man with director’s skill and experience

Duties of directors under the Act:

- Positive duties:
o Good faith
o Proper purpose
o Best interests of the company
o Duty to disclose information
o Degree of care and skill
- Negative duties directors should refrain from
o Use position or information
o Knowingly cause harm
o Reckless trading

Section 76:
3) Subject to subsection (4) and (5), a director of a company, when acting in that
capacity, must exercise the powers and perform the functions of director
a. In good faith and for a proper purpose
b. In the best interests of the company

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c. With the degree of care, skill and diligence that may reasonably be
expected of a person
i. Carrying out the same functions in relation to the company as
those carried out by that director
ii. Having the general knowledge, skill and experience of that
director

Case study example of s 76(3)(c):

- Outa v Myeni:
o An objective and subjective standard must be applied in
assessing gross negligence
o This is made clear by s 76(3)(c) of the Companies Act
o Objectively
ß Ms Myeni’s conduct must be weighed against the standards
expected of a reasonable director in her position
o Subjectively
ß Ms Myeni’s conduct must also be weighed against the skills,
qualifications and experience she possessed
o More could be expected of an experienced director, particularly a
director who was on the SAA board for more than nine years and was,
by her own account, a ‘corporate governance expert’

Proper purpose (s 76(3)(a)) elaboration:

- Test:
o Identify the particular power that is being challenged
o Identify the proper purpose for which the power was given
o Identify the substantive purpose for which the power was exercised
o Decide whether this purpose was proper
- Example:
o Identify the particular power that is being challenged
ß Director allow company to issue a number of shares
o Identify purpose for which power was given
ß Usually so that company can raise capital
o Identify the substantive purpose for which power was exercised
ß Directors realised that shareholders might want to remove them
from office
ß The more additional shareholders they get, the more difficult it
might be to obtain the 50% + 1 removal resolution
ß Shares were issued to dilute the voting power of the existing
shareholder body
o Decide whether purpose was proper
ß Not a proper purpose for which this particular power was
exercised
- Multiple purposes – look at dominant/substantial purpose
- If power was exercised for an improper purpose = decision is voidable by
court
- If incidentally there is an additional purpose for this power, if the power is
properly exercised and still in the best interest of the company, it will not
render the decision void

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Good faith and proper purpose (s 76(3)(a)) elaboration:

- Re Smith & Fawcett Ltd:
o Court laid down the longstanding legal principle that the directors are
bound to exercise the powers conferred upon them bona fide in what
they consider – not what a court may consider – is in the interests of
the company
o A director’s duty is thus to act in what he in good faith honestly
considers to be in the best interests of the company
- The director’s duty to exercise power for a ‘proper purpose’ is now both a
statutory and a common law obligation
- It is an abuse of power for directors to exercise their powers for a purpose
other than the purpose for which the power was conferred on them
- Unlike the duty of good faith, which is subjective, the test for ‘proper purpose’
is objective
- If the dominant purpose is found to be improper, the court must regard the
exercise of that power as being voidable (i.e. the court may set it aside)
- Conversely, if the exercise of that power is found to be proper and in the
interests of the company, the fact that an incidental effect of it is to defeat a
takeover bid or to enable the directors to maintain themselves in office will not
make the exercise of the power improper

Best interests of the company elaboration (who):

- Pluralist approach
o Favour interests of other stakeholders
o The approach that companies have a social responsibility to society
and that its directors have a duty to balance the interests of
shareholders and stakeholders, and to give independent value to the
interests of stakeholders (other than shareholders) whose interests are
not necessarily subordinate to those of shareholders
- Enlightened shareholder value approach
o Most authors view this as the approach which best promotes the
values of the Act
o Interests of other stakeholders only taken into account
o It promotes interests of shareholders
o School of thought that holds that shareholders’ interests retain primacy
and that directors may prioritise the interests of other stakeholders only
if this is likely to promote the success of the company for the benefit of
the shareholders in general

Negative duties:
- Section 76(2)
- A director of a company must
o Not use the position of director, or any information obtained while
acting in the capacity of a director
ß To gain an advantage for the director, or for another person
other than the company or a wholly owned subsidiary of the
company; or
ß To knowingly cause ham rot the company or a subsidiary of the
company; and

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o Communicate to the board at the earliest practicable opportunity any

information that comes to the director’s attention, unless the Director
ß Reasonably believes that the information is immaterial to the
company or generally available to the public, or is known to the
other directors; or
ß Is bound not to disclose that information by a legal or ethical
obligation of confidentiality

Duty to disclose:
- Information
o Earliest possible opportunity information becomes known to director
o Unless
ß Immaterial of value
ß Public domain
ß Known to directors or company
ß Legal/ethical obligation
- Future contracts: (s 75(5))
o When a company contemplates to enter into a particular agreement or
contract, and a director realises that he or a related person has a
personal financial interest in the matter
o Similar to no conflict rule in common law
o Must disclose interest and nature of such interest, material information
and observations, and leave after such disclosure and not take part in
the contract or agreement
- Existing contracts: (s 75(6))
o A director or a related person acquires a personal financial interest in a
matter in which a company is already involved
o Director must promptly disclose such information to the board which
pertain to the nature and extent of this interest, as well as the material
circumstances that lead to the acquisition of this interest

Section 75(5):
- If a director of a company, other than a company contemplated in subsection
(2)(b) or (3), has a personal financial interest in respect of a matter to be
considered at a meeting of the board, or knows that a related person has a
personal financial interest in the matter, the director
o Must disclose the interest and its general nature before the matter is
considered at the meeting
o Must disclose to the meeting any material information relating to the
matter, and known to the director
o May disclose any observations or pertinent insights relating to the
matter if requested to do so by the other directors
o If present at the meeting, must leave the meeting immediately after
making any disclosure contemplated in paragraph (b) or (c)
o Must not take part in the consideration of the matter, except to the
extent contemplated in paragraphs (b) and (c)

Section 75(6):
- If a director of a company acquires a personal financial interest in an
agreement or other matter in which the company has a material interest, or

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knows that a related person has acquired a personal financial interest in the
matter, after the agreement or other matter has been approved by the
company, the director must promptly disclose to the board, or to the
shareholders in the case of a company contemplated in subsection (3), the
nature and extent of that interest, and the material circumstances relating to
the director or related person's acquisition of that interest

Instances where the company has one director who is also the shareholder of the
company who holds all the beneficial interests relating to the securities of that
company:
- These rules of disclosure will not apply because the director and shareholder
are the same person

Instances where the company has one director but the beneficial interests relating to
the securities of the company is not held by that director but by other shareholders
- The director won’t be able to approach the board of directors to disclose these
interests that he has
- He will have to disclose the information to the shareholders (‘in the case of a
company contemplated in subsection (3)’
- [Subsection (3) basically tells a director what to do if there is not a board of
directors]

Section 75(7):
- A decision by the board, or a transaction or agreement approved by the
board, or by a company as contemplated in subsection (3), is valid despite
any personal financial interest of a director or person related to the director,
only if
o It was approved following disclosure of that interest in the manner
contemplated in this section; or
o Despite having been approved without disclosure of that interest, it
ß Has subsequently been ratified by an ordinary resolution of the
shareholders following disclosure of that interest; or
ß Has been declared to be valid by a court in terms of subsection
(8)

Duty of care, skill and diligence approach elaboration (common law):

- The broad general principle is that directors are liable for negligence or
carelessness in the performance of their duties. The issue is the extent to
which the directors … are liable for loss caused to the company by their
incompetence or carelessness, and the standard of care that is expected of
them
- At common law:
o The standard was very lenient and low
o The idea was that because the shareholders chose who they wanted to
be directors, they needed to accept if that person ended up being
incompetent or careless
o Ignorance and experience protected the director, because his own
knowledge was taken into account
- Breach was based on delict

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- Standard has been raised in the 2008 Act:

o The twofold dual standard test – objective and subjective
o Standard is the reasonable director executing the same functions as
that particular director, taking into account the individual’s knowledge,
skill and care
o Not all possible care, only reasonable care
o No liability for a mere mistake or error of judgment

Example:

[See details of examples in practice questions emailed during week 7]

Another new business opportunity, pertaining to the purchase of computer hardware,
presented itself to the company. The prospective seller does not have connections
with the company or any directors of the company. The director has the general
authorisation to accept business opportunities and accepted this specific opportunity
after consulting with hardware experts. The director has basic training, but no
specialist knowledge of hardware. Nevertheless, he believed that the opportunity
was in the best interest of the company, because the product was well priced and
came highly recommended. Unfortunately, it turns out that the hardware is unable to
withstand heat and melts shortly after the computer is switched off.

1) The director may have breached his duty of care, skill and diligence, two
possible scenarios are presented here: One, there is no breach of duty due to
standard of care applicable here as the 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 (objective test)
and having the general knowledge, skill and experience of that director
(subjective test) is taken into account. It can be argued that the strength of the
subjective test due to limited knowledge and experience of director is
sufficient to show that Jamie still acted with the required degree of standard
and care taking into account his knowledge, skill and experience
(this is an open-ended question where you need to show 1. Which duty the
question deals with 2. What the legal rules are and 3. Give your opinion based
on your interpretation of the facts in light of the law. You can also argue that a
reasonable director in Jamie’s position would not have acted in this manner
and that he did not act with the required degree of care, skill and diligence =
this is NB because the subjective test is actually there to raise the objective
standard).

OR

2) Even if there is a breach of the duty, the business judgment rule can preclude
liability if the director made an informed decision, which he did as he spoke to
experts to become informed about the matter. The director has no material
personal financial interest in the matter, which it seems like as the seller has
no connections with the company or any of the directors of the company and
there must be a reasonable basis for believing that the director was acting in
the best interests of the company, which there is as the product was well
priced and came highly recommended and the facts state that the director

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(had a reasonable basis) and believed the opportunity to be in the best

interests of the company.

Business judgment rule: (further elaboration/recap)

- S 76(4)(a)
o Prevents a court from interfering, with the benefit of hindsight, in honest
and reasonable business decisions of the directors of the company
- Director is deemed or presumed to have complied with duty of care, skill and
diligence
- Rule protects directors from liability for mere errors of judgment or poor
business decisions, provided they have taken an informed decision, without
any self-dealing on their part or on the part of a related person, and provided
that the directors have reasonable grounds for believing that they were acting
in the best interest of the company
- Requirements
o Took steps to become informed on the matter
o Had no personal or financial interest in the transaction
o Had a reasonable basis to believe that the decision was in the best
interest of the company

Liability of directors:
Pre 2008 Act:
- Lack of efficient mechanisms to enforce directors’ duties
- Cannot codify all of the duties and forms of liabilities due to changing
environment
- Thus, particle codification – common law still relevant in so far as a statute
does not cover a particular issue

Context:
- S 76 – standards of conduct
- S 75 – personal financial interests
- S 77 – liability
- S 78 – indemnification and insurance
- S 218 – civil actions

Cannot relieve a director of a duty (unalterable provisions in the Act)

Liability: other provisions of the Act to take note of:

- S 15
o MOI binds the directors in a relationship to the company and the
shareholders but according to s 77 this liability is delictual, although at
common law, the relationship is thought to be contractual
- S 20(6)
o Shareholders has a claim for damages against any person who
fraudulently or due to gross negligence caused the company to do
anything inconsistent with the Act or a limitation int eh MOI (unless
shareholders ratified)
- S 218(2)

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o Any person who contravenes any provision of this Act is liable to any
other person for any loss or damage suffered by that person as a result
of that contravention

Section 77: liability of directors and prescribed officers:

1) In this section, ‘director’ includes an alternative director, and
a. A prescribed officer; or
b. A person who is a member of a committee of a board of a company, or
of the audit committee of a company, irrespective of whether or not the
person is also a member of the company’s board
2) A director of a company may be held liable
a. In accordance with the principles of the common law relating to breach
of a fiduciary duty, for any loss, damage or costs sustained by the
company as a consequence of any breach of the director of a duty
contemplated in s 75, 76(2) or 76(3)(a) or (b); or
b. In accordance with the principles of the common law relating to delict
for any loss, damages or costs sustained by the company as a
consequence of any breach by the director of
i. A duty contemplated in s 76(3)(c)
ii. Any provision of this Act not otherwise mentioned in this section;
or
iii. Any provision of the company’s MOI
3) A director of a company is liable for any loss, damage or costs
sustained by the company as a direct or indirect consequence of the
director having
a. 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
b. Acquiesced in the carrying on of the company's business despite
knowing that it was being conducted in a manner prohibited by s 22(1)
c. 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;
d. Signed, consented to, or authorised, the publication of
i. any financial statements that were false or misleading in a
material respect; or
ii. a prospectus, or a written statement contemplated in s 101, that
contained
aa. an 'untrue statement' as defined and described in section
95; or
bb. a statement to the effect that a person had consented to
be a director of the company, when no such consent had
been given, despite knowing that the statement was
false, misleading or untrue, as the case may be, but the
provisions of s 104 (3), read with the changes required by
the context, apply to limit the liability of a director in terms
of this paragraph; or
e. Been present at a meeting, or participated int eh making of a decision
in terms of s 74, and failed to vote against

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i. the issuing of any unauthorised shares, despite knowing that

those shares had not been authorised in accordance with
section 36
iii. the provision of financial assistance to any person
contemplated in section 44 for the acquisition of securities of the
company, despite knowing that the provision of financial
assistance was inconsistent with section 44 or the company's
Memorandum of Incorporation;
iv. the provision of financial assistance to a director for a purpose
contemplated in section 45, despite knowing that the provision
of financial assistance was inconsistent with that section or the
company's Memorandum of Incorporation;
v. a resolution approving a distribution, despite knowing that the
distribution was contrary to s 46, subject to subsection (4)
vi. the acquisition by the company of any of its shares, or the
shares of its holding company, despite knowing that the
acquisition was contrary to s 46 or 48

Indemnity, insurance, liability (condonation):

- Sometimes the company or directors can take out liability insurance that will
basically indemnify them against claims for negligent conduct
- The Act generally allows this, but subject to certain exceptions
- S 78 (indemnity by company):
o Where the director acted with knowledge or wilfulness, the company or
director will not be allowed to take out indemnity insurance
o Indemnification also prohibited with regard to any fine imposed on the
director of the company who has been convicted of an offence, unless
the conviction was based on strict liability
- Relief by court:
o Two grounds for relief under this provision:
ß Director must have acted honestly and reasonably
ß Circumstances must be such that he ought fairly to be excused
from liability (under s 77) for his negligence, breach of duty or
other default, excluding wilful misconduct or wilful breach of trust

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