Company

Law Notes Prashant Venkatakrishnan

Week 1: Introduction & General Concepts
NOT DIRECTLY EXAMINABLE

14 March 2017
Perspective Lecture

Companies are juristic persons. In terms of a company, you have: the company itself,
directors, shareholders, stakeholders; as well as 3rd persons whom are not connected to the
company in any way.

Issues mainly arise between these parties/entities mentioned above. In addition, one
natural person can be anyone (or many) of these entities. You have to be very careful who
you are dealing with in the scenarios, and in what capacity. These concepts come mainly
from the Companies Act and Law of Contract (covered in Business Law I)

The Companies Act regulates the relationships between each of these entities.

What is a Company? Why have a Company? For two reasons. Firstly, because companies
offer limited liability, which means that the company is sued, rather than the directors and
shareholders. Secondly, there is perpetual succession (i.e. the company is not brought to an
end by the death of somebody).

The purpose of a Company is to hold property and carry out business, and to do so in a
manner that is completely separate and distinct from the members of that company.
• Why incorporate a business? To form a separate entity.
• What to consider when incorporating?
Ø Separate entity
Ø Number of persons involved
Ø Management & Ownership
Ø Process of incorporation
Ø Size
Ø Tax implications

e.g. A partnership does not have separate legal personality; it is an agreement between 2 or
more people at a limit of 20, to effectively share assets and liabilities equally.

In a Company, because of its separate juristic personality, one person can incorporate the
company, and have one shareholder and one director. And they can all be the same person.

• Juristic capacity? The capacity to create binding legal obligations, borne from the
Companies Act and incorporation, which essentially means you can limit the company’s
capacity.

• A Company may exist in terms of the law but how does it operate? What is a director of a
company? They direct the company; they make decisions on behalf of the company. It is
directors who contract on behalf of the company. They are agents of the company.

Because a juristic person has no physical body/presence it necessarily relies on human
agents to do its bidding. Because of this the law of agency is very important when
considering many aspects of the legal position of a juristic person.

Fiduciary Law
– When an agent acts on behalf of another person (principle), the latter is often left
vulnerable to abuse.
– This is also true for juristic persons.
– For this reason, the law considers certain types of agents as fiduciaries and holds their
conduct to a higher standard.
– This forms the basis for the rules relating to, for example, the duties of directors.

A fiduciary, e.g. a director, is in a position of trust.

15 March 2017
Cont. from yesterday:

Company Law regulates the relationships discussed yesterday in very specific ways. The
Companies Act defines the rights and obligations given to those people, and is thus arguably
the most important part of all legislation.

M.C. Esher Picture: A Comparison to Company Law
• Perspective (in the same way that your perspective of the picture changes the way
you look at it, the perspective from different people of a company is highly
important, e.g. the company from shareholders’ perspectives to employees’
perspectives).
• One House/Entity (the picture shows one house or entity, in the same way that we
often view one company albeit from many different viewpoints).
• Fiction (the picture is purely fictitious, as companies being effectively legal fiction).

Development & History
• Corporation = derived from latin ‘corpus’, meaning body
• Roman Law & Middle Ages
• Later developments in England (dealt with below:1-4)
• The US: generally enabling legislation embraced

Arguably, African Customary Law could very much be implemented in the modern
commercial world to help currently with greed in the workplace through Ubuntu.

In the 1700s, England was undergoing its Industrial Revolution. The time saw individuals
becoming increasingly wealthy, well beyond the scope of what was formerly possible. The
Monarch became increasingly worried about these new wealthy individuals, and the
immense power that they may one-day hold, as a new social class.

As such, (1) The British Bubble Act of 1720 was introduced by the Monarch as a measure of
ensuring control over the wealth. It meant that only the Monarch itself or representatives
thereof could create companies.

(2) The Joint Stock Companies Act of 1844 was later introduced, and essentially brought a lot
of the legislation together. It allowed for the incorporation of companies, without the need
to be affiliated to the Monarch itself. However, there were still two requirements stipulated
by the Act:
• One had to pay 5 pounds (a lot at the time).
• One had to follow a registration process.

This allowed for multiple people to operate under one banner. As such, one was able to sue
the company itself as opposed to each of its members individually.

(3) The Limited Liability Act of 1855 took things even further. It meant that the liability of the
shareholder of a company was limited to the investment of that shareholder. Even though
the shareholder was not insulated completely from losses (their investment value could still
decrease), it was at the very least limited.

These Acts, along with the following case, form the basis of almost all Company Law.

(4) Saloman vs Saloman & Co. is the most famous case in terms of Company Law. Mr
Soloman ran a business, and had 3 sons. He split the shareholding of the business equally
between himself, his wife, and his 3 sons. One of the sons, who was very wealthy, and the
father had a large fallout. The son left, and bought all the shares of the business, before
firing his father. However, before doing so, the father had taken assets out of the business
beforehand. The son claimed that the assets should be claimed against the business,
however the courts stated that he could not claim against the business. The court found
that “the company itself has an entirely different legal personality to its members and
shareholders”. This one line has become fundamental in Company Law.

In the US, companies were taxed much more than other business forms and were subject to
a greater degree of governance in the early days. It became what was known as hyper-
regulation. As such, people shifted their wealth into other business forms. However, as the
economy grew, the requirement for a shift towards the company structure grew and the
state was pressured into deregulation. The new regulations that followed enabled business
(while US regulations at the time were known as enabling business, the UK’s were known as
constraining regulations).

Definition of a Company
• A collection of many individuals
• United into one body
• Having perpetual succession under artificial form
• Vested by policy of law
• Capacity of Acting as an individual
o Taking/Granting property
o Contracting obligations
 o Suing and being sued
o Exercising a variety of political rights

Common Law Juristic Persons
The Companies Act is essentially what allows companies to become companies.
A Partnership is simply a contract, offering no separate legal personality.

It is possible for an entity to be considered a juristic person simply due to the way they
acted, despite not being registered, in terms of generally enabling statute or creation in
terms of specific statute. I.e. An entity can become a juristic person due to the way they act.

So… why bother incorporating/registering?
Most importantly, an entity cannot earn profit without incorporating under Common Law.
There are other benefits too, but this is the most prominent.
Therefore, there are two options:

• Specific legislation creates the juristic person.
e.g. Eskom (Electricity Act 42 of 1922), Transnet, Telkom

• Registration in terms of a so-called generally enabling statute
e.g. Close Corporations Act of 1984 (no new registrations allowed)/
Companies Act 71 of 2008

In terms of Closed Corporations, when the number of members exceeds a certain threshold,
the CC is forced to become a company. When the Companies Act was first introduced, it was
free for CCs to transfer to Companies. The CC can still be sued itself.

The Company as a Juristic Person
Section 19 of the Companies Act confirms that a company is indeed a separate legal person:
“from date & time that incorporation of a company is registered … the company –

Ø - is a juristic person, which exists continuously until its name is removed from the
company’s register in accordance with the Act;
Ø has all of the legal powers & capacity of an individual, except to the extent that:

ü a juristic person is incapable of exercising any such power, or having any such
capacity (e.g. marriage), or
ü the company’s Memorandum of Incorporation (MOI) provides otherwise (for
instance, if a company does not have the capacity to fulfil a contract, the
contract is void)”

Companies can create contracts & obligations, but limited to do so as it is a company, not a
human (e.g. company cannot get married).

What are the key features of a juristic personality?
Fundamentals of Company Law as a whole
• Limited Liability
 • Assets are exclusive property of company
• Company must seek redress where a wrong was committed against it
• A company can contract with its members
• Company can acquire rights & duties separate from its members
• Owners/Shareholders have no automatic right to manage
• Profits belong to company; investors only entitled/note investment gains when
company chooses to make distribution

16 March 2017

Contract
rd
Principal 3 Party



Agency



Agent


Cont. from points above

No director/member is directly liable for any losses of the company?
A personal liability company is an exception, in which the members are liable for the
liabilities of the company – quite rare, but can be used as a marketing tool. But, it is
fundamentally risky and is never advised.

The company owns and is responsible for the assets – not the shareholders nor the
directors.

Dadoo vs Krugersdorp Municipality:
Dadoo had a sole proprietorship in Krugersdorp. According to Apartheid laws, he was
operating in a white area as a non-white. Municipality stripped him of his licence as he was a
black person, wanted to seize assets of the company. Lawyers argued that the assets did not
belong to the black man, but to the company. The Group Areas Act did not describe
companies in terms of race. Supreme Court ruled that the assets of the company were
separate to that of Dadoo, even though he was the sole shareholder, sole director and sole
member.

Foss vs Harbottle:
Mr Harbottle was an employee of a company, an investment manager that was irresponsible
and caused the company a great harm. Mr Foss, a shareholder, tried to sue H for his losses.
Courts ruled that in law, he cannot sue the person who caused the company harm, only the
company could sue the person that caused it harm. Unfortunately, Mr Harbottle was the
sole director and therefore chose not to. Where the company has been harmed, it is the
company that must sue. Company enforces its own rights.

Shareholders of a company can also be employees.

Shareholders have no right to manage the company. Even as a sole shareholder, one must
appoint oneself as director to manage the company lawfully. Only directors manage the
affairs of the company.

Value of shareholding may increase, but one has no direct access/automatic right as
shareholder. Not true that just because you have made an investment and company has
made profit, the value of investment accrues to you. Process of distribution must be
followed.

South African Artist Picture
• 3 People
• Person standing by themselves = Principal/Company
• Other People = Agent + Contracting Party (3rd)

Fundamental to companies contracting, are the principles of agency. Companies often
require human actors to act on behalf of company itself. In terms of actually undergoing
business and contracting, company requires humans. Directors contract on behalf of the
company.

• Directors (Agent)
• Company (Principal)
• 3rd Contracting Party (Party to Contract)

Agency is a contract, in terms of which one person (the agent) is authorised and usually
required by another (the principal) to contract or to negotiate a contract on the latter’s
behalf with a third person.

Cannot claim, as a 3rd party, that the rights and duties of the contract are enforceable
against the agent (one way blue arrow, no recourse to agent), should the agent have
authority. Agent is not a party to the contract.

The agent can be empowered or unempowered.

An Agency Contract requires 2 elements (essentiallia of a contract):
• mandate (to do something): you are only an agent if you have a mandate, coupled
together with
• authority (this is our primary concern)

Legal Relationship between Agent & Principal
There is a contract between the principal and the agent – usually a contract of mandate. The
agent can be empowered or unempowered.

Authority (of the essence in the context of agency)
Generally, if the agent acted with authority, the parties to the contract will be the principal
and the 3rd party. The contract is not between the agent and the 3rd party. The agent incurs
no rights or obligations based on the contract with the 3rd party.

However, if the agent does not have authority to do something, then he cannot bind the
principal (and might himself be liable). Often, agents purport that they do have authority to
do something, while the company denies it and states that they are not bound. So, who is
bound by the contract?

There is a contract between principal & 3rd party, but the agency contract lacks authority?
The law over time has developed a number of principles over this authority issue. Authority
can be thought of as fundamental: whether you have authority to carry out the mandate.

In the context of agency, authority is of the essence:

How does agent acquire authority?
• Express authority (written or verbal, but must be exact)
• Implied/Tacit authority (implied: the test is the hypothetical bystander test, and
depends on the surrounding circumstance). This relates to the conduct of the
parties; according to simple common sense, the parties intended the relationship of
principal and agent to exist.
• Ratification (where an agent lacks authority to do something, forms a contract, and
company ratifies authority. Although at the time, agent did not have authority,
company later gives authority – people managing affairs of the company/Board of
Directors ratify. Just because you are a director does not give you authority to do
something. CEOs are responsible only for the day-to-day operations of company.
Ratification can occur verbally, formally or implied).
• Ostensible authority/apparent authority/authority by estoppel (massive overlap with
implied authority as it also dependent on facts of case. This happens when the agent
does not have expressed nor implied authority, however the principal creates
impression in contracting person’s mind that the agent does have authority even
though they don’t). Many companies create impression that CEO has authority to do
something, just because they are the CEO. The CEO is often the face of the company.
Often, the companies create the impression that CEOs do have authority. E.g. Hlaudi
Motsoeneng, former COO of SABC: SABC created impression that he could do
whatever he wanted (data relationships/overseas contracts). However, he did not
necessarily have authority.
• Authorisation by operation of law (this is twofold: the Companies Act & Case Law:
Case Law says it is only the Chairperson of the Board that can contract on any
matter, CFOs have authority to contract on any financial matter, and CEOs on any
employment contracts, or anything seen to be day-to-day operations).

Power of attorney is a written form of authorisation; however, authorisation can be done
verbally.

Overlap between implied authority and ostensible authority (similarities/differences):
• Both dependent on the facts
 • Makes no difference whether there is implied authority and ostensible authority to
you as the 3rd party
• Relevance occurs between principal and agent: if it is determined that there is
authority by way of being implied, principal has no claim for damages against agent.
• If there is ostensible authority, principal can claim for damages against agent.
• Agent hopes for implied authority.

To prove authority by estoppel, there are 5 requirements that 3rd party needs to prove:
• There was a representation made of authority (made either by words or conduct)
• That the representation was made by the principal
• That the representation was made directly to the 3rd party (contracting party)
• That the contracting party was reasonable in relying on that representation
• That the 3rd party must have contracted to his/her/their detriment


17 March 2017

How come it is the case that it is only for ostensible authority that the principal has a claim
against the agent? One of the requirements for ostensible authority is that the principal
gives the impression that the agent does have authority, so why is there a claim?

Where you have implied authority, typically it will not be found where the principal has not
given the agent authority. But there is a grey area, e.g. CEOs.

The relationship becomes nicely balanced. Although the principal may create the impression
in the 3rd party’s mind that the agent has authority within the company itself, there is likely
to be an instruction that that person does not have authority. E.g. Seeking a mortgage from
a bank: one can’t know the structures inside the bank – people within the bank will know
that the agent is not authorized.

Exceeding the Mandate/Acting Without Authority

Consequences of exceeding the mandate/acting without authority:
• Agent could be held liable based on warranty of authority (3rd person can claim
against the agent) (breach of warranty + misrepresentation)
• If principal is liable based on estoppel, the agent may in turn be liable to the
principal.

How does this apply to business entities?

Why is agency relevant in this context?
• Partners are agents of one another
• Directors are agents of the company (generally speaking)
• Members/Shareholders represent the Close Corporation as agents
• Trustees act as agent on behalf of the trust

These actions taken by agents may have legal consequences for the principal in each case.



Trustees
TRUST

Contract



Beneficiaries


Contracts will be signed by trustees, but only on behalf of the Trust.

What/Who is a Fiduciary?

Fiduciary – taken from latin fiducia: “trust”, you stand in a position of trust.

A fiduciary is a person who holds a legal and ethical relationship of trust with one or more
other parties (persons or group of persons). Typically, a fiduciary will be taking prudent care
of money or assets on behalf of someone else.

Why would this happen? Typically, because this person knows more about something than
others. They have a specific knowledge, skillset, and expertise about a subject. This brings
along a ton of problems. Fiduciaries are characterised by being honest, centre of being a
director etc.

A fiduciary is a person (or a business like a bank or a stock brokerage) who has the power
and obligation to act for another (often called the beneficiary) under circumstances which
require:
• Total trust
• Good faith
• Honesty

A fiduciary’s responsibilities are both ethical and legal. When a party knowingly accepts a
fiduciary duty on behalf of another party, they are required to act in the best interest of the
party whose assets they are managing.

A fiduciary is held to a standard of conduct and trust above that of a stranger or of a casual
business person.

Fiduciary duties are when the fiduciary has a responsibility to act in the interests of
someone else, and are hence held to a higher standard of conduct.

He/She/It must avoid self-dealing or conflicts of interests in which the potential benefit to
the fiduciary is in conflict with what is best for the person who trusts him/her/it.

• For example, a stockbroker must consider the best investment for the client and not
buy or sell on the basis of what brings him/her the highest commission.

There will be instances where someone is defined as a fiduciary simply by the role they take,
e.g. trustees & directors. But, there are grey areas, e.g. company secretary.

Phillips vs Fieldstone Africa (Pty) Ltd
Philips said that he was not a fiduciary, and therefore, he did not have to act in the manner
prescribed to a fiduciary and in the interests of the beneficiary. Courts ruled that he was a
fiduciary:

“There is no magic in the term “fiduciary duty”. The existence of such a duty and its nature
and extent are questions of fact to be adduced from a thorough consideration of the
substance of the relationship and any relevant circumstances which affect the operation of
that relationship … while agency is not a necessary element of the existence of a fiduciary
relationship… that agency exists will almost always provide an indication of such a
relationship.”

‘substance of a relationship’ = what is your role/relationship?

Characteristics
Being a fiduciary has 3 major characteristics, the first 2 from the perspective of the fiduciary
himself/herself/itself, and the last from the perspective of the company:
• Scope for the exercise of some discretion or power (make up your own mind as to
what is best)
• That power or discretion can be used unilaterally (without permission) so as to affect
the beneficiary’s legal or practical interests
• A peculiar vulnerability to the exercise of that discretion of power. E.g. it is the
company that is in the position of vulnerability to the conduct of the fiduciary (hence
the need to appoint proper directors).

What duties are usually associated with the fiduciary relationship?

Primary duty?
The duty to act in good faith (general duty #1). There are a number of specific rules that fall
into this general duty.

• Must at all times be open and honest in his dealings (have to explain yourself,
account for your decisions)
• Must avoid a conflict of interest* (N.B.: the key duty for company directors,
particularly CFOs, is to act in the best interests of the company, and not in their own
interests e.g. Bribe/Tender Bonus Payment). E.g. Hargreaves vs Anderson (Estate
Agent). Mr Hargreaves asked Mr Anderson to be his agent to sell his hotel. Mr
Anderson accepted, and asked what the lowest price/bottom line that Mr
 Hargreaves would accept would be. Mr Hargreaves gave his number, and Anderson
sold the hotel. Upon further inspection, in turns out that the agent (Anderson) had
clumped together with a group of friends and bought the property at the lowest
threshold. Seller (Hargreaves) found out and took it to court. The agent had put
himself in a conflict of interest: to get the highest price as the agent vs his own
interest. Therefore, Anderson is in breach of good faith, and placed himself in a
conflict of interest: his interests conflicted with that of the seller. The courts apply
this duty in particular very strictly. This is so strictly applied, that even if you resign as
a director, you will still come under scrutiny from the courts.
• Must hand over any profit made in the course of carrying out the mandate/fulfilling
duties (the fiduciary is not there to make money at expense of person whom you are
acting for). (Secret profit rule + Corporate opportunity rule: if as a director you know
of an opportunity, that opportunity vests with the company, not with the director –
cannot resign and take up the opportunity. This is applied very strictly. If you hear of
information as a director, you cannot use it yourself. If company are informed but
don’t act on it, then it is fine. When in doubt, always err on the side of safety and say
it vests with the company.)
• Must disclose all relevant/pertinent information. Still have to make the disclosure.

While there are these specific rules, the grounds are still the general rule should it not fall
into one of the above 4.

The duty to account (keep a record) (general duty #2).
• Must keep the beneficiary informed of progress
• Must keep his own property separate
• Must maintain proper records of dealings and transactions
• Must account for any transactions concluded during the mandate

Examples to deal with:
• Trustee
• Company Director
• Partner in a Partnership
• Member of a Close Corporation

__________________________________________________ end of non-examinable section


Week 2: Unincorporated Firms
NO PROBLEM QUESTIONS

20 March 2017

The principles of agency and the duties of fiduciaries are very similar, but are two
completely separate areas of the law. Merely due to the fact that you are an agent, does not
automatically make you a fiduciary. Therefore, questions on the law of agency are to be
dealt in that silo of the law. The same applies to law of fiduciaries. Understand that the two
are distinct, even though they tend to overlap.

Company Law is not necessarily the foundations of this course; business structures are:
• Companies
• Trusts
• Sole Proprietorship
• Partnership
• Close Corporations

Have to unpack the juristic personalities of companies and how they are regulated. Our
focus now is on unincorporated firms (which are not companies). These often lack juristic
personalities.

This means they lack
• Limited liability
• Perpetual succession

SA Artwork: Esther Mahlangu
• Colourful vertical stripes (left) (partnership) (one entity holding everything together
[partnership], yet every stripe is on its own and no blending, and one can be
removed with the entity remaining intact unless you remove them all [partners])
• Partnership requires minimum 2: cannot remove all of the colours.
• Existence of the partnership is dependent on the existence of 2 or more partners
• Little circle (middle) (sole proprietorship) (stands alone)
• Sole Proprietorship – absolutely no separation of liability between firm and member,
integrated completely.
• Yellow shape (right) (trust) (very clearly defined boundary: boundaries between the
people of a trust)

The Sole Proprietor
• Also known as sole trader/proprietorship. This is a type of business entity that is
owned and run by one natural person and in which there is no legal distinction
between the owner and the business
• There is only one estate, the sole proprietor owns all assets in his/her personal
capacity
• If the sole proprietor dies the ‘business’ ends as well
• If you create a sole proprietorship and you are married in community of property,
marriage is the one slight exception: sole proprietorship only has claim to half of the
joint estate.
• If you own the assets and liabilities in your own capacity, and a creditor wants to sue
the business, the founder will pay out of his own pocket. If selling stock cannot cover
the claim, the creditor will exercise against the assets.
• If you die, the business ends as well. Absolutely no separate juristic personality. The
Sole Proprietorship, however, can be sold. Technically, it is to be divided through the
law of succession.
• Why would you do it? Consumer Protection Act: sole proprietorships very relevant,
no upsides in terms of taxes or separate liability, even though there may be banking
 advantages. However, CPA protects Consumers, and there are provisions relating to
sole proprietorships. Hallmark: no separate legal personality, no separate ownership
of assets.

The Unincorporated Partnership
• Legal relationship arising from an agreement between at least two persons in terms
of which each contributes towards a business carried on in common with the
objective of obtaining mutual material benefit
• Again, no separate juristic personality/legal liability; however, there are exceptions.
The incorporated partnership (partnership -> company) is a separate juristic
personality.
• Contractual agreement between 2 or more persons.

Important components:
• Agreement/Contract
• At least 2 persons
• Contribution by each partner (can be in the future, and can be a variety of things but
must have a commercial value)
• Mutual Benefit

NOTE:
• Essentiallia – those fundamental elements that define an agreement as a specific
type of contract. Once you have determined that an agreement is of a specific type,
then you can define what the naturalia
• Naturalia – the duties that flow from the type of contract

e.g. Sale: thing to be sold, by someone to another, for a particular price (essentiallia)
risks, warranty etc. = naturallia

Exactly the same is true for partnership: must ascertain that it is partnership first, before
going deeper and seeing what duties flow therefrom. Just due to the existence of a
partnership, there are already certain duties outlined by the law.

Step 1: Partnership or not
Step 2: What are the duties

The essentialia:
• Each partner must make a contribution (can be in the future, & the contribution can
be a wide variety of things, but must have a commercial value e.g. skills and
knowledge). Partners are not entitled to compensation purely for the contribution,
however, the partnership must conclude an employment agreement with you.
• The business must be carried on for the joint benefit (joint profit: can be a single
issue or long term: each partner shares in the profits and the losses) of the partners
• The objective of the partnership must be to make a profit (not the motive to make
money, could simply be the saving of costs: ultimately excluding social welfare
groups and social clubs, but the profit need not be pecuniary)
 • The contract between the parties should be a legitimate contract (needs to be valid,
but more: many agreements may look like a partnership, but may be simply defined
as a business relationship. Here, the law looks at substance, and defines anything
that looks like a partnership as a partnership).

If any of the above are changed, you do not have a partnership agreement. If you do, you
have many naturalia which can be changed.

Trusts: NO PROBLEM QUESTIONS
3 types of trusts in SA
• Inter vivos trust – when you live, e.g. family trust, trust created by trustee document
• Bewind trust – beneficiaries are owners of assets, trustees simply manage the assets
• Trust Mortis Causa – when you die, this is created by your will.

Distinction between them not too important. All of the above are governed by Trust
Property Control Act (N.B!).

What is interesting about all trusts, in terms of tax?
All trusts are taxed at a particular tax rate. In previous years, rate was below tax rate of
individuals. Trevor Manual introduced flat rate tax of 40%. The new budget, threshold tax
rates. New super-tax = 45%.

These trusts are defined by one thing: the distinction between the forms of trust occurs
from where the trusts are born. There are many uses for a trust – each use will be different.
One is tax avoidance, which is legal and you are fully entitled to do. Trusts can also be used
for estate planning purposes. The primary reason for creating a trust is to effectively ensure
that someone looks after the assets. For our purposes: Trusts are not separate juristic
persons. However, because of the way they operate, they do seem to have very similar
features.

You have 3 actors, in terms of the Act:
• The Trust itself, formed by the Trust deed outlining the information.
• The Trustees: hold non-beneficial ownership of the property in a trust. Stand in
fiduciary position to the trust and beneficiaries. Their role is to hold the property –
administer the property for the benefit of the beneficiaries, not themselves. A
trustee can be a beneficiary, but the bulk of trust law comes mostly from common
law and case precedent. There, it has been decided that, to avoid the abuse of trust
mechanism, you have to have an independent (chief) trustee (not a beneficiary, no
connection to one). No formalities for the creation of a trust, but for the trust to
have legal standing, it must be registered, and later be in writing. Typically, you will
always have a trust that is registered and in writing. Have to look at what the trust
says for due diligence.
• The Beneficiaries

22 March 2017

A trust is a legal relationship that has been created by/in a trust deed and it has the
following key characteristics:

• The relationship created by persons known as founder/donor (in all likeliness, there
will be a trust deed created by a donor. You can have a verbal trust deed, however,
the importance of the Trust Properties Control Act, is that to act lawfully as a trustee
you should have a certificate by the master of the High Court, must show security
(funding – not just for alterior motives), and a copy of the trust deed. Hence a trust
deed should be in writing, but this is not required by the Trust Properties Control
Act)
• Founder places assets in control of another person/s known as the trustee/s
• This is either done during founder’s lifetime or after his death
• The purpose of the exercise is to benefit third persons known as the beneficiaries

Compare and Contrast Business Entities
Compare elements of trust to a partnership, for instance. Draw a table with Trust, CCs,
Companies etc., with elements vertically as a reference table.
Use points from slide.

Partnerships NOT DIRECTLY EXAMINABLE
We already know the definition and essential elements as discussed before. We have the
essentiallia of the contracts of partnerships: a contractual agreement between persons. We
refer now to the naturalia that arise therefrom.

In SA law, we take a much different position to a country such as America. Two theories
with regard to how we legally conceptualise the legal personality of a partnership:
• Entity theory: a partnership is an entirely separate legal personality, independent
from its members. Can be a party to litigation (sue and be sued under own name)
but partners still ultimately responsible for debts of the partnership. This is not the
position taken by South African courts, but US, Scotland and Netherlands have
accepted this position. This seems strange, as our law is similar to Scots law and
Dutch law roots, while partnership is a big entity used in the US.
• Aggregate Theory: the partnership is merely a contractual relationship between
persons, effectively just a contract. Therefore, you can include in that agreement
what you want, so long as the essentiallia are met. This is the South African position.
The rights and obligations, assets and liabilities, are actually those of the partners.
There is no right directly to sue (some exceptions), not a party to litigation. Partners
are responsible for the debts. This is typically quite a risky business entity to use;
personally liable for the debts of the partnership. The dissolution of the partnership
happens when they change or they die. Have to constitute a whole new agreement.
Can be done in original agreement under a separate term, happens automatically
because of the agreement. In Law, new partnership to be formed. We follow this in
SA. Developed not by statute or legislature, but judges (common law) – in which
there are roughly 60 fundamental cases.

In South African Law, we do not consider a partnership a separate entity, but there are a
few exceptions for practical purposes.

If a partnership is not a juristic person, who owns the partnership assets?
• The Partnership fund
o When the partnership is formed, there is often the formation of a
partnership fund. The hallmark of a partnership is that the assets and
liabilities are owned by partners in joint and undivided shares. Each partner is
responsible for a contribution of some sort e.g. people in first row agree on
partnership, 10 people contributing 10% each. All of the partners have the
same skills, same qualifications, own no property as of yet, but all have cars,
houses and bank accounts (personal asset base). The effect of the
partnership is that all of these assets are pooled into the joint partnership
fund. Severable? Cannot remove things from that fund individually.
Therefore, you don’t want to be the partner contributing the most; you have
the most to lose. Contribution does not just have to be financial, but must be
beneficial etc. However, business is always at a risk of making a loss. Danger
of that is that if the partnership itself suffers a loss, that loss is taken from the
fund, and becomes a massive risk when talking about the Law of Insolvency.
2 Steps to figure out insolvency: balance sheet insolvency (Liabilities >
Assets), or commercially insolvent (cannot pay debts as and when they fall
due – liquidity).
o The term liquidated is reserved for juristic persons; hence natural persons
and partnerships are sequestrated. If the partnership is sequestrated, the
estates of all of the partners are also put into sequestration. Sequestrator
gets put in a position of trust and sells off assets. With reference to the
partnership fund, the sequestrator will take from the partnership assets
(desks, chairs, bank accounts) necessary for day to day operations and sells
them. Typically, this will not be enough. Sequestrator then goes to each
personal estate. However, sequestrator does not have to take something
from everyone. If there is a single significant asset that will satisfy most of the
claims, he can sell it. According to Constitution, sell least important assets
and work to most important for the sake dignity (e.g. if choice is between
family home of A and luxury car of B, have to pick car). Note that being the
beneficiary of a trust does not fall into the partnership, as you do not have a
claim on these assets.
o In terms of claims for/against partnership, these claims can be done by
partnership itself: for practical reasons, you do not have to list all partners as
defendants. However, if found liable, it is the partners who are liable, jointly
or severably. Up to partners to claim between each other, can claim
proportion from 1.
i.e. I, as a claimant against partnership, sue the partnership, not having to
name each partner. If the partnership is found liable, I can sue any one of the
partners and claim portions from each. It is then up to that partner/those
 partners to sue the others; the burden is on the sued partner to lay claim on
other partners, not the claimant.

Exceptions to the aggregate theory:
• Insolvency
• Litigation
• VAT (do not confuse with income tax. Partnerships can register as a VAT vendor.
That is not the same as saying that a partnership is taxed separately, because it is
not. Profits of partnership are taxed as part of the income of individuals: due to
pooling of assets into partnership fund.

Typically, there are 3 types of partnerships (extraordinary partnerships, atypical):
• Universal partnership (it is effectively a partnership of all property: when two or
more partners choose to pool their assets, both present and future).
• Silent Partnership (1 or more of the parties is not disclosed to the public – hidden.
That partner is not liable directly to 3rd parties, but he or she will remain liable for
his/her pro rata share of the losses to the partnership. You can’t sue silent partners,
this is where venture capitalists come into partnerships: do not like market to know
that they are a partner – may affect share prices). Big partnerships will most often
have a silent partner, in their private capacities. Limit liability using partnership en
commendite (commenditarian partner only liable up to a fixed amount, typically the
amount that they have contributed to the partnership).

Rights and Duties of the Partners
Relationship between all partners is one of fiduciary nature, but by law is one of the utmost
good faith, based on trust and confidence. Practically speaking, when partnership contracts
are defined, they are so clear and tightly worded that they become very intricate. What is
on the board is the naturallia of the agreement. Where partnership is silent, it is these rights
and duties which will arise simply because of the existence of a partnership agreement).

Rights:
• Right to share in the profits of the partnership (invest 60%, expect profits of 60% or
more) but if you do not agree to a split then it is pro rata (30 to 30). If you cannot
ascertain percentage contribution, i.e. skills, split equally.
• Right to participate in the management of the business
• Right to inspect the partnership books
• Right to the distribution of assets upon dissolution
Many of the rights will be outlined by the contract itself. Partnership not a separate juristic
person.

23 March 2017
3RD PARTY
Partner

Partner
Partner

PARTNERSHIP FUND

Partner Partner

Only once a claim has attempted to be claimed from the partnership, can you then enforce
the claim against any partner to satisfy the claim as the 3rd party claimant. That partner
reclaims proportionally from the other partners.

The same is true of insolvency proceedings. Liquidator first looks at fund to satisfy creditors
– once all sold, focus on personal assets of partners.

Many of the rights of partners are self-explanatory. Partners are agents of all the other
partners and stands in fiduciary position to other partners, and certain duties arise as a
result. In terms of the duties, most are born out of the fiduciary position (care and skill).

Duties:
• Duty to make contribution
• Duty to share in losses
• Duty of care and skill (big distinction between law of companies and law of
partnerships: For partnerships, it is interesting to note that degree of care and skill
required of partners is not particularly high – nor is it with company law, because in
company law it used to be purely subjective. For partnerships, the law states that a
partner must take care of the partnership assets with the same degree of care and
skill that he or she displays when managing his/her own assets. Simply put: you must
manage assets of partnerships as if they were your own. Why does this make sense?
Because they are. No separate legal or juristic personality.
• Duty to accept and fulfil the obligations of the partnership agreement
• Duty to acquire benefits for the partnership
• Duty to guard against a conflict of interest
• Duty of disclosure

Belgian Artist: Trapeze Artist
• Signifies the trust between partners; the hallmark of partnerships
• There’s risk in what they are doing; this risk is fundamentally linked to the trust.
Placing certain amount of risk in the trust you have in them.
• Despite the fact that you have been operating as a team, at the end of the day, they
are going to walk away as individuals.

Contracting On Behalf of the Partnership
• What is actually happening? Can you technically contract on behalf of the
partnership?
• Introduction of a contracting 3rdparty
• Partnerships themselves are not the bearers of rights and obligations, the partners
are. Register property in name of the partners. All of the partners are joined as co-
 creditors in their own right (remain individuals). When a 3rd party is introduced, they
contract with one partner and that contract will then bind the rest of the partners.
As 3rd party, must look into whether partner has the authority/mandate to bind the
others in the contract, risk the contract becoming void.

What is required:
• Valid agreement/contract
• Authority (taking fundamentals of Bus Law 1 and adding authority)
• The contract must be concluded in the name of the partnership

What is interesting: when you are contracting with partner X, he is acting in two roles
simultaneously:
• Representative of partnership himself
• Binding himself

In some cases, you do bump up against conflicts of interest. The disputes that you often
deal with is that 3rd party contracts without knowledge of other parties, or lacks authority.

We need both a valid partnership agreement, as well as a valid agreement between the 3rd
party and partner.

Authority
We dealt extensively with authority when discussing agency. A particular issue to be aware
of in the context of the partnership is a principle referred to as mutual mandate: unless your
partnership agreement states otherwise; each partner binds the other partners as a whole
so long as that contract is in the scope of the business. However, it is sometimes very
difficult to determine what is the “scope” of the business.

e.g. Law Firm: Employ people? Yes. Buy office furniture? Yes. Buy race horse? No. Although
there is a certain amount of flexibility about the scope, but there are certainly limitations.
Outside the scope of a law firm. Unless there is express provision in your agreement as to
what the scope is/what the authorities of the partners; each partners entitled to necessary
for authority to perform incidental to the form part of the scope of the business.

Applying that test depends purely on the contents and the facts. Fair amount of case law,
but there’s not that much actually defined ratio: left very flexible of the basis of each
partnership being different. What is a problem, for the 3rd party, is that it is the person
alleging that X did have authority to prove it. That is problematic when X actually does not
have authority, in the case where his/her authority is limited by the agreement. 3rd party
would obviously first ask for partnership agreement; what else would you advise the 3rd
party to do:

• Try and prove that the partnership gave the 3rd party the impression that X did have
authority.
• Effectively, you need to determine whether there is: A) implied authority or B)
ostensible authority. In all likelihood, authority is not implied or tacit due to the
agreement, but could still be ostensible – and then hold the other partners liable.

Even if the agreement limits authority in a certain way, the 3rd party is able to assume that
the partner does have authority when contract falls in regular scope of business. Trumps
limitations set out by agreement. Ultimately, should X not act in accordance with the
agreement, they are breaching the contract of agreement – leads to damages in the form of
full consequential financial losses. That is why authority has to be defined very clearly and
precisely.

Agreement Concluded in the Name of the Partnership

• Both the representative (X) and the 3rd party must intend for the contract to be with
the partnership. If you fail to do so, you may not have a valid contract with the
partnership. Requisite intention that the contract is with the partnership, not the
individual. ___________________________________ end of non-examinable section

24 March 2017

Trusts NO PROBLEM QUESTIONS
Trusts fit in here for 2 reasons:
• Often, trusts used for estate planning purposes (tax specialists) and also in particular
for tax reasons
• About to become very relevant for new budget

What makes a trust so special (interesting) is fundamental concept:
Trustees own property in their capacity as a trustee but do not derive any benefit from that
ownership. It is someone else that gets the benefit from the assets (beneficiaries).

Trust created by founder through will (mortis causer/testamentary trust). Secondly, you
have an inter vivos trust (between people while they are alive). Lastly, you have a bewind
trust (the exception to the model below, the typical trust model). Called a trust because
trustees own the property in trust.



FOUNDER (executes trust deed and
hands over assets to trustees)



Trust Deed
Ownership
TRUST

Trustees (own and administer assets for the benefit of
trustees, but still not part of personal estate)



BENEFICIARIES
(does not make up part of their
estate)



Beneficiaries do not own assets, but derive the benefit thereof.

If trust goes insolvent (which it shouldn’t), creditors of the trust cannot claim against the
personal estates of beneficiaries or trustees.

Trustee of 3 trusts has 4 estates: his own and one of each of the trust that they are on
(independent trustee). If trust 1 gets into a bad business deal and goes insolvent, creditors
of that trust cannot claim his car.

Trustee does NOT own the trust, but the trust property in his/her capacity as trustee.
Entirely different from personal estate. Do not derive benefit thereof. For instance, if one of
the trusts makes a lot of profit and pays massive dividend to trust, trustee has discretion as
to whether to pay that amount directly to beneficiary or to reinvest.

Trustee typically does benefit in some way.

Vincent Kubitser (Polish): The King Painting
Founder is top of the guy’s pip. King is related to trustee. Big bird looks down adoringly,
which effectively shows the beneficiary. There are a lot of compartments, things are
compartmentalized. Things are kept very separate from each other. Quite a bit of care going
on.

What is a Trust?
Benefits of using trust as part of business structure are numerous. E.g. you die, large estate
of property, but don’t want family fighting over it or don’t know who to give it to. Another
reason is tax: personal high income tax is 45%, and tax on trusts is 41% - immediately being
taxed less. However, if there are donations tax, why would you? Isolates you from liability –
no longer holding property in own personal estate. Someone claims a lot from you, you
have nothing – so good for risk takers. Here, you are dealing with separate estates.

Types of trusts (repeated):
• Inter vivos
• Mortis causa
• Bewind trust

You can have an inter vivos trust you are both a trustee and beneficiary, so why wouldn’t
you? However,

Liability depends on type of trust; typically, it isolates founder and beneficiary from
liabilities. Beneficiaries derive benefit, do not own.

Bewind trust is the exception to this rule. In short, a bewind trust, is one in which the
beneficiaries are also the owners (hold in personal capacity), and the trustee is only in a
sense managing the property (still administered).

Law seeks to regularize the relationship between the 3 parties: founder, trust, beneficiaries.
Problems arise when 3rd party comes in.

Messy divorce: wife left with next to nothing, and married OCOP – wife tried to claim house,
maintenance etc. However, husband held assets in a trust (as founder, trustee and
beneficiaries) – he also had independent trustees and lists kids as trustees, limits him from
having to pay her. She sued him and she lost.

Parties to a Trust:
• The founder
• The trustee
• The beneficiary

Duties of Trustee
• Must act with care, diligence and skill
• Must open separate trust account (everything you have held in trust)
• Must act with good faith
• Must exercise an independent discretion at all times* (not influenced by
beneficiaries or founders: if you have founder looking over your shoulder telling you
what to do at all times, trust viewed as a sham. Act with independent discretion at
all times. BUT cannot do whatever you want with the property)
• May not expose assets to undue risk* (traditionally, when CPI was very low, you
couldn’t purchase on stock exchange and instead had to buy low risk investments
such as immovable property – BUT because of increase in CPI and still aiming for
benefit, law has developed and you can make risky investments … but still don’t put
all wealth in stock exchange)
• Must invest trust property productively
• Must act within the powers granted in the trust deed

Look very similar to duties of company directors. However, here there is no agency between
beneficiary and trustee. Why? Property owned by trustees, agency agreement not required.
Benefit only accrues to beneficiaries, and duties above arise from that picture.

Duties above can be changed: trust deed can say trustees are authorized to make short
term high risk investment as % of portfolio in pursuit of profits. Again, trust deed is
absolutely vital.

If trust deed limits your authority to do something, very similar problems from yesterday as
with breach of contract for exceeding authority: beneficiaries will claim against the trustee,
not from contract, but from trust law. As trustee owns property in position as trustee, held
to higher position than company director. Ownership of property for benefit of someone
else, thus held to high standard. Standard of care skill and diligence is generally higher than
that of a company director.

The Business Trust
A business trust is no more than an ordinary trust in which the trustees have been given
power to carry on business and to trade.

A business trust can be created in above 3 manners, and is no more different to picture
above. Ultimately, trustees are in a position to trade, to operate trust as a business.

Beneficiaries are usually able to sell, cede, or else deal with their benefit the same way a
shareholder could deal with his shares. You can structure in a way that resembles a close
corporation or company, if described as such by the trust deed (when to claim etc., very
flexible)

Judge Cameron: Parker vs Land Bank: on bewind trusts
Yes, you can have beneficiaries being owners of property. However, needs to be level of
independence of trustees to ensure trust is not a sham. If same person all 3 = sham. If
independent trustees = not a sham!!! These things can be abused, and are abused a lot:

People are trying to hide assets. SARS will find them, but 3rd party wants access to the assets
of the trust.

Week 3: Promoters & Pre-Incorporation Contracts
NOT DIRECTLY EXAMINABLE

27 March 2017

There will be an application lecture on Friday

Perspective Lecture:

Promoters & Pre-Incorporation Contracts
Pre-incorporation contracts are contracts established prior to registration/formation of
company.

Promoter: person (typically 1) who plays an integral role in the integrational role of the
company. Starting point is Section 1 (definitions), however there is no generalized definition
of a promoter in the Act.

Twycross v Grant (1877) 2 CPD 469 (CA) 541:
“one who undertakes to form a company with reference to a given project and to get it
going, and who takes the necessary steps to accomplish that purpose”

Companies Act 2008
Section 95 – for purposes of the particular chapter.
See discussion on raising share capital later
• Neither an agent nor a trustee
– BUT does have rights and duties…

However, there is a definition much later on in the Act. Chapter 4 of Companies Act, dealing
with IPOs on the JSE. There are 3 stock exchanges (JSE is a company, registered on its own
stock exchanges – main board, and AltX; ZarX (& 4AltX)). An IPO is integrally linked with the
JSE, deciding to list on stock exchange, there are a densely set of laws in terms of
compliance. There are provisions in the Act dealing with IPOs, so important that there is a
chapter about it with its own definitions:

Promoter (in terms of IPOs – hence taken out of context): a person who was a party to the
preparation of the prospectus, or of the portion of it that contains an untrue statement
(consensus needs to be truthful) and does not contain. People who prepare the prospectus
are classified as a promoter. However, in the definition of a pre-incorporation contract
(s21)*, the term promoter is not used directly here.

Promoter gets the pre-incorporation contracts in place, but there is also a theoretical
problem: promoter creates potentially binding contracts before a principal has come into
being. Therefore, promoter is not an agent as a principle does not exist. An agency
agreement does not exist. Under common law of ratification, you can only ratify contracts
from 6 months, not prior from you actually existing. Hence pre-incorporation contracts can’t
be retrospectively ratified. Practically, you need these contracts, yet theoretically it can’t
happen.

Hence; statute can change the common law. S21 permits you to do exactly what the
common law says you can’t, and creates statutory agency.

Stipulatio Alteri is another way of getting around the problems; there are others.

In terms of agency, you cannot have an agent-principle relation until the principal exists.
This is why, practically, s21 is a necessity for the creation of the company. Why not set up
company first? Not that simple. Venture Capitalists do not like investing into company once
it has been formed, dealing with companies are somewhat tenuous. Pre-incorporation
contracts are therefore very useful.

Best definition of promoter: Twycross v Grant (California), in which the court gave the
following description: a promoter is someone who undertakes to form a company with
reference to a given project and get it going, and takes necessary steps to get it going. This
promoter, while not an agent, still has rights and duties in South African law.

Rights and Duties

Fiduciary Duties (position of trust & honesty):
• exercise good faith
• no personal interest
 • full disclosure (need to disclose everything once company has come into existence to
board)

Expenses & Remuneration (typically come either from themselves or written into contracts
or after the formation of the company). You do get specialist promoters, for networks and
promotion of companies and where they add value.

Statutory Provisions:
• s95 (definition of promoter)
• s104 (liability for untrue statements: things promoters can and can’t say)
• s105 (liability of experts: cannot be an expert unless you are one, and you need to
give expert opinion)
• s106 (responsibility for untrue statements)

Pre-Incorporation Contracts (PICs)

Number of cases based on the fact that individuals didn’t fall within scope of promoter
definition: therefore, no definition for promoter, and used definition of person.

• Contract between 3rd party and company before incorporation (people will not
invest in company if you do not have bank account, bank premises, etc)
• Significance of PICs
• Common Law agency requirements (no principle in existence)
• Other options at common law (other than s21: stipulatio alteri, or s21 pre-
incorporation contract)(other alternatives: be clever about contracts drafted and
terms thereof, use a cession agreement (cede rights: a transfer of personal rights;
contracts have value: e.g. if I give you the right to use my credit card for a day, go on
a spree, depends on month end etc. but if you are clever, you’ll lend to someone
else at higher interest rate)(delegation/assign: you transfer rights and duties) – pay
lawyers to structure affairs to do so. Section 21 is a very standard way of dealing
with problem, other manners may be more profitable.
• “Statutory Agency” – s95 of Companies Act 2008
• Ratification & Enforceability of PICs
• Liability of Promoters for a s21 Contract

28 March 2017

Today’s lecture is a deeper level of engagement on promoters. S21 of Companies Act
overcomes common law where agency doesn’t exist; company cannot ratify contracts from
before formation.

Who may be a ‘Promoter’ or ‘Incorporator’?
Any person who undertakes the task of promoting the company, but does not include
professionals engaged in the promotion activities (e.g. incorporation & preparing
prospectus).

In other words, there must be an intention to promote the company, and perform some
act/s inferable to this intention.

Stipulatio Alteri – contract for the benefit of a 3rd person. Promoter (or someone else) has a
contract with 3rd person (investor). In this case, the promoter is the principle while the
benefits accrue to the company. The promotor is principally liable to the contract; efficient
and practical. The contract can be claused how you want: limit liability, clause to receiving
benefit – not constrained by S21 of the Act (prescriptive). Lays down the law in a very
specific way: roles, duties, ratification, who can ratify etc. and takes away a lot of the
flexibility. A promoter or an incorporator is any person who undertakes the task of
promoting the company.

Can a company be a promoter of another company? YES. S21: “a person”, which can
technically under its definition, includes a juristic person. However, promoters for the
purposes of the common law and IPOs becomes a little tricky when dealing with agents of
the promoter: signatories, accountants. Distinction between incorporating promoters and
promoters who prepares prospectuses. Through the process of incorporation, this is a lot
more limited (stricter). Why? Definition of prom in s94 is broad, yet limiting, whereas for the
process of incorporation the risks are lower.

An accountant preparing prospectus falls in liability provisions of chapter 4. Be clear as to
which one you’re dealing with.

Not promoting company for profits, but promoting it for listing requirements:

A promoter involved in pre-incorporation has specific role of effectively getting stuff ready,
and ensuring that when incorporated, the entity is ready to go/operate. Whereas, preparing
prospectus, company has already been formed and are most likely big and profitable,
probably for many years: prepare picture of company for possible investors; giving public all
info of company. To be categorized as a promoter, someone has to have an intention to
promote the company and do things linked with that intention. Common Law: test A,
intention to promote, test B, contracting linked/borne from that intention.

Role of Promoter (effectively look to incorporate):
• Attending to formalities of incorporation
• Instructing professionals to incorporate, register for tax, set up websites etc.
• Preparing business proposal
• Raising initial finance
• Finding shareholders and directors for the new company
• Negotiating business contracts on behalf of the company

Effectively, you are preparing the company for operations from the moment it is
incorporated. Prior to incorporation, there is no such thing as a company, does not exist.

Duties of Promoter (not in Companies Act), find in Common Law of promoters (not trust),
stands in and of itself:
 • You as promoter stand in a fiduciary position in the company (from promotion to
eventual incorporation). What is intriguing is: how can you be a in a fiduciary
position for someone who doesn’t exist? Promoter will be doing things for that
person’s (new company) best interest.
• The duties that arise from this, due to peculiarity of the whole thing, are different to
that of a director or trustee. Closest comparison is to a trustee. Why? Operating a lot
like a trustee (own property, forms part of estate, but benefits accrue to someone
else)
• Fiduciary relationship imposes the following:
o Duty to act in good faith (with potential company’s best interests in hand
when contracting)
o Cannot make a secret profit (provided you disclose it, you can make a profit)
o Duty of full and frank disclosure of all interests in any transactions involving
the company

E.g. Secret Profit
Promoter buys property after promoting begins, with intention of reselling to company at
increased premium. However, promoter is unlikely to directly purchase land but put it into
trust etc.
You do get very sneaky people paying promoters.

Under S21, duties are similar to that of agents in agent-principle relationships. This section
effectively solves the common law problems of agency.

Liability of Promoter
This is potentially vast. Typically though, it doesn’t happen due to the following:

Under s21, promoter jointly or severably liable if:

…company is not subsequently incorporated.

…company is incorporated but rejects any part of the pre-incorporation contract (fails to
ratify)
• Once company becomes incorporated, you’ve got incorporation date A, and
company according S21(7) has 3 months within which to ratify (agree to be bound)
pre-incorporation contracts. If there are parts of the contract company doesn’t like,
they will be severed. If not ratified within 3 months, you are deemed to have ratified
the contract in its entirety (@ date B). This means practically, late nights at 2 months
and 30 nights. You never want to be held to a contract not in your interest. Can be
sneakily surprised in this instance of 2 years. In this case, you would sue the
promoter in terms of disclosure.

…liability of promoter is discharged upon ratification of contract by company.

Entitlement of Promoter
• Benefits of a rejected or unratified contract (investor makes investment and put in
trust account, and company not incorporated, accrues to you but accept the duties
 thereof too). Otherwise the company would be unjustly enriched if it were allowed
to reject the contract but still keep the benefits.
• A company cannot pay a promoter for his job during the process; needs to be paid in
other ways. Paid in lump sum on incorporation, remunerated in equity of the
company (because most promoters become directors). Issues come up when
promoter will not become director, but only become director when company is
incorporated. Otherwise just classified as a promoter, but directors would have to
ratify own contracts. Therefore, the company is not liable for remuneration for
promotion services or expenses incurred.
• Promoter can be remunerated in shares, if company so decides.

In all practicality, you would hire shelf company. Create “shell” company, merely exists with
name etc., and promoters buy a shelf company with its directors, while investors invest into
shell company then change the names with company’s permission – negate all the difficult
issues of agency above.

29 March 2017

Pre-Incorporation Contracts

CIPC: gatekeepers of company. Download Companies Act, highlight specific definitions from
S21. What we are doing today is not s21, today we look at other options such as stipulatio
alteri.

Most answers here depend on clauses of the contract. Important to understand that
Stipulatio Alteri is very flexible. Much like agency agreement, there are specific terms that
hold out through whichever agreement, but can be claused/framed in whatever way you
want; its primary factor is its flexibility. Many options when using it instead of section 21. 3rd
Party and Promoter can agree on certain terms. It is because of that flexibility that it is so
popular as an alternative to s21.

Nature and role (repeated because of wording of s21)
– Pre-incorporation contract: contract entered into by person acting on behalf
of company that doesn’t exist.
– S1: “an agreement entered into before the incorporation of a company by a
person who purports to act in the name of, or on behalf of, the company,
with the intention or understanding that the company will be incorporated,
and will thereafter be bound by the agreement” (what you are doing is acting
as an agent) – relying on statutory agency, is an agent of the unincorporated
company. Overcomes common law, which states that agency can only exist
when principal exists. This means that you cannot be an agent under
common law. But even if you could, there are bigger problems in terms of
ratification. Under Common Law, companies only able to ratify contracts that
are entered into after the time of their incorporation. There are alternatives
that you can use in terms of contracting, but as the principal you can only
ratify contracts after incorporation; therefore promoter cannot contract as
an agent.

Common Law Obstacles

• Agency: Principal à Agent à Third party
• Requirement that the principal be in existence
• Prior to incorporation,
company is not a legal person – cannot be party to a contract – so promoter cannot
conclude the PIC in the company’s name
– Promoter cannot be an agent because the
principal is not yet in existence [co not registered]
– Lack of authority
– If a person proceeds on this basis, he/she
may become personally liable

Promoter Contracting in Own Name

• Promoter can contract in own name, then pass on the deal to the company once it’s
incorporated in various ways (this all falls outside of section 21: the fundamental
difference between 21 and this is that here, you are contracting in your own name
and not in behalf of the company):
– Cession (and delegation): you can cede your rights as a promoter. You are
party to a contract, so you can transfer your rights via a cession and duties by
a delegation to a company (only need permission from contracting party to
delegate).
– You can also use an option contract (when there is valid offer). Option
contract is where you have a valid offer being made, the effect of which is to
hold open the offer for a certain period of time with certain terms. There is
no main agreement. This allows you to accept the offer. Option contract
makes offer irrevocable for a certain period of time. E.g. someone grants an
offer in the name of the promoter, it is the promoter who can make the
acceptance on the offer as defined by the option contract. That in and of
itself is a right, and as it is a right, you can cede it to the company. It is the
company who brings into force the agreement. Also gets you around s21.
Also very flexible; both offer and option contract. This can be coupled with
surety contracts, showing that principal will accept should company not; this
makes investors happy. Nothing by law forcing you too, but would be dumb
not to.
– transfer (transferable option)
– outright sale to company: you decide to buy a company off the shelf, change
the directors at CIPC etc. you can as well contract as a promoter and sell
everything to the company; is not used very much as the promoter puts
himself under great risk.
– right to nominate another (see veil piercing section):

Stipulatio Alteri
Merely a contract for the benefit for the third person. You are the principal of the contract.

 • Roman law origin
• Contract for the benefit of a third person
• Promoter acts as principal and not as agent
• Example:
Contract of sale between A (the seller) and
Mr. Y (the purchaser & promoter) for the benefit of X
(a private company yet to be incorporated).

You have the promoter contracting together with the 3rd party, but is the benefit of that
contract which will accrue to the company upon incorporation. Much like s21, company has
election whether to accept this benefit. If they accept the benefit, the relationship between
promoter and 3rd party is negated, and company becomes party to contract and adopts
rights and duties under contract. However, because there are no formalities that are
required, you can structure it that if the company chooses not to accept benefit, prom stays
liable. Even if they accept, prom jointly and severably liable. Very flexible, to the benefit of
almost all parties, especially with 3rd party investors. If you accept benefit, you accept
liabilities. New agreement comes into presence where company is the principal. If company
accepts benefit it must accept all duties as well.

Company can only accept benefit after incorporation, upon which it actually has juristic
personality. Despite that company is principal to contract, fiduciary duties of promoter are
ongoing. Promoter still bound by fiduciary duties.




Promoter contracts
with third party – this
is a ‘contract to
contract’ PROMOTOR





rd
3 Party undertakes
3rd PARTY
to contract with the

company once it is


incorporated



If the company agrees
to the contract, the COMPANY
final contract is
between the company
rd
and the 3 party



• Unless specifically stated in the contract, the promoter is not personally liable if
company rejects PIC. Unless specifically stated, promoter is not automatically liable
should company choose not to accept contract. However, this is unlikely to happen
as investors want to secure their investments.
• Promoter entitled to automatically step in where company rejects PIC (is already
principal to the contract)
• No formalities needed for a stipulatio alteri
• Stipulatio alteri alternative to s21 PICs

30 March 2017

What is the number one feature of a stipulatio alteri? Its flexibility, and the promoter is
contracting in his own name. He is principal to contract in his capacity as a promoter.

Section 21: General
This stuff in large part we know, but we are going to go a bit deeper today.
• Remember common law obstacles. No possibility of agency because principal is non-
existent.
 • S21 provides legislative solution – creates statutory agency (overcomes the
problems of common law agency. Promoter is thus an agent of a non-existent
principal, and in S21 – you do not enter contracts in your own name)
• Essence: put promoters, acting as agents, in a position to contract on behalf of
company even though non-existent.

PICs Requirements – S21

• PIC must be in writing (only written agreements fall into section 21, but do not have
to be formally signed or stamped by High Court etc… that can potentially create a
problem. Unfairness is not sufficient to strike down contract, unless they are so
unfair that they are unlawful.
• Entered into before company is incorporated (also 21.1 “an entity that is
contemplated to be incorporated” – you have to have an idea of the company, e.g.
name, operation, premises etc. problematic from an administration perspective
(name)).
• Between third party and promoter (acting as agent on behalf of or in the name of
company)
• Intention is that company will be bound once it comes into existence (you cannot
just go around setting up agreeing to S21 agreements, without intention. If you do
so, you are liable for fraud. Cannot conclude a contract that you know company will
not accept/ratify.
• Company only bound by a contract upon ratification. So what happens before the
contract is ratified, is company bound after incorporation but before ratification?
NO. Murky uncertainty that happens. Not binding on promoter, or company. Under
an option contract, you do not have a valid agreement, you only have a valid offer
that is irrevocable for a certain period of time. Here, there is a contract! BUT
company is not bound by the contract until company says so. So is it binding on 3rd
party? Should not be possible for 3rd party to unilaterally pull out of contract without
having clause to that effect. They only have that right if the contract allows them to
do so. Nowhere in the act does it say that 3rd parties can’t unilaterally withdraw.
Otherwise, they may be liable for specific performance.


Ratification of S21 PIC

• Ratify within 3 months of incorporation (otherwise deemed to have ratify the
contract in its entirety; bound)
• May reject part or whole agreement (again, fail to ratify by 3 months, then ratified in
full)(can companies ratify by conduct? Yes, use of computers by conduct = ratified!
Can happen in company law; lease of business premises)(under subsection 4, 3
months after incorporation, board can ratify or reject any contracts)
• What if company fails to ratify or reject within the 3 months?
– Company will be ‘deemed to have ratified’
• Once ratified (or deemed to be), company bound by the PIC.

Liability of Promoter – S21
Liability of agent/promoter
• Company is not later incorporated – jointly and severally liable (with other
promoters – if company partially accepts or rejects contract, you are either partially
or severally liable for the portion that has not been ratification. When contract is
ratified, you as a promoter are free under the contract and have no liability.
However, your fiduciary duties do not stop after this time, these are ongoing by
nature. If you do not bring contract to attention to company, and company ratified
by time, company can sue promoter. There is no limit on this fiduciary duty, still
liable 100 years down the line. Promoter can still bring contracts to attention of
company after incorporation but cannot contract on behalf of company at this point.
• Company once in existence rejects agreement/part thereof – jointly and severally
liable
• Liability discharged by ratification
• Would promoter still be liable to third party if PIC not ratified but company enters
into the same contract with third party: A sneaky company cannot ratify: 21.3: if
after its incorporation, a company enters into an agreement in same
terms/substance as an agreement contemplated under section 1, liability is
discharged. If company does not agree to contract, promoter is liable. However, if
company agrees to same/similar contract, promoter is not liable. Secondly, if you
were the promoter, potentially you could use the Act as a basis for an interdict to
stop the company from doing so, as your rights have been prejudiced due to not
receiving payment.

31 March 2017
Application

Question 1:
You should be comfortable with a compare and contrast question in your exam, for which
you would write a short essay. Short sentences, 2 paragraphs. Ensure that there is structure
to your answer. Add third paragraph to actually compare. Testing whether you know the
legal principles, but aim to express yourself clearly.

What are the big fundamental differences here?

The primary difference here is that in s21 is that there is statutory agency relationship
between the yet to be incorporated company and the promoters, with the company being
the principle and promoter acting as an agent.

The stipulatio alteri is where the promoter is personally liable for the contracts; promoter
agrees to contract in his/her own name. Binding contract between promoter and 3rd party.
But the core concept here is that the contract is designed in such a way that the benefit of
the contract will accrue typically to the yet to be incorporated company, when it is
incorporated. Effectively what is happening here is that you have contract between
promoter and 3rd party with a benefit which will accrue to the company when it is
incorporated should it decide to do so. Effectively, you are creating an offer for the company.
If you accept the benefits under Stipulatio Alteri, you also accept the associated liabilities.
Should this be accepted, the promoter falls away and a new contract is concluded. This is
ultimately how the Stipulatio Alteri works.

What else would you include in your answer?
Under s21, PIC there is a statutory limitation of 3 months from the date of incorporation. If
not ratified within this period, the company is deemed to have ratified the agreement
entirely. The result of ratification and non-ratification can vary, and this is determined by this
agreement. This means that if under s21 PIC, either A) company not incorporated or B)
company incorporated but does not ratify, the promoter is liable. It is not by default the
same for Stipulatio Alteri, in which it will be determined by the contract (there may be a
clause saying the contract simply falls away).

Section 21 agreements have to be in writing, while stipulatio alteri is under common law.
Stipulatio alteri allows flexibility, while s21 rigid in terms of ratification periods and liability
provisions (flexible otherwise)

Question 2:
Question asks simply on liability of the contract; so when thinking about answering DO NOT
talk about fiduciary duties. Do not skim read. Easy way to avoid that is to have a structure to
your answer, not only in terms of answer but thinking. Take marker step by step as to what
the law is.

• Issue – how you define the issue will determine what law to use.
• Law*/Legal Principles (5/7 marks)
• Argument
• Conclusion

Where things go wrong is where you fudge Law and Argument together. Give partially
correct statement of what the law is, “and so” then apply – WRONG. Need to see clear and
precise statement as to what the legal principles are.

The question is asking whether Jimmy is personally liable. Issue only rephrases the question:

Issue:
Is Jimmy personally liable in the contract? (1/2 mark)

Legal Principle (should be applicable to any case, do not mention specific facts here):
Jimmy is a promoter. A promoter is someone who enters into contracts on behalf of the
company (DEFINE FROM CASE OF TWYCROSS).

(Now deal with Section 21)
A promoter under section 21 of the Act allows a person to enter into a written agreement
on behalf of a still-to-be incorporated company. Section 21 states that the company is
entitled to completely, partially or conditionally ratify the contract or not, within a 3 month
period post the date of incorporation. If it does not ratify, company deemed to have ratified
the contract in its entirety. If contract is ratified, then the promoter will not be liable and is
discharged from his liability under the Act. In this instance, question also raises what will
happen if company does not come into being, so mention it but only after previous issue is
dealt with in conclusion. Use subheadings.

Apply:
Due to the fact that the 3 month ratification period would have ended on 25 August 2015,
the company is deemed to have ratified the contract in its entirety.

Conclusion
Due to the fact that the company has ratified the contract in its entirety, Jimmy as promoter
is discharged of all his liabilities under the Act.

__________________________________________________end of non-examinable section


Week 4: Types of Companies & Corporate Formation

3 April 2017

Types of Companies
Perspective Lecture

The content this week is hugely examinable, in particular in terms of MCQs. Despite being so
examinable, it is also a bit black and white/boring: “this is what you do because the Act says
so”. There will be an application on Thursday AND Friday, with partnerships also on Friday
(also very examinable).

The 1973 Companies Act was shambolic, and led to the Department of Trade and Industries
having to rethink Company Law in SA. The 1973 Act was extremely rigid, and very difficult to
engage with. It was hugely influenced by the US, the UK, the OPEC Oil Crisis 70s, and
partially Apartheid. Because of that, the old Companies Act was very rigid and prescriptive.
Companies then were seen as a privilege, not easily accessible as they are now.

During that time, Company Law and growth of economy was stifled for many reasons:
Apartheid was one of them, but it was also not easy to incorporate a Company. Legislature
created the idea of Closed Corporations in 1983/4, and became very popular because they
were easy to engage with, and easy to incorporate. Very popular amongst the little guys.

At the advent of the new Companies Act, the Closed Corporations Act was repealed and
needed a new alternative. The Department of Trade and Industry released a policy paper
saying Companies incorporating will be a lot easier to do and has been effective.
Incorporating a company is now a right of all people, not a privilege to, in particular, the
wealthy. By the end of this week, you should know enough to incorporate your own
company.

Two Umbrella Types of Companies (profit vs non-profit)

Profit
Within Profit companies, “incorporated with the purpose of financial gain for its
shareholders”. If the purpose is not financial gain, not categorized as a for profit company.
Suffixes form part of the name of the company.

• Public Ltd.
Limited
• Private (Pty) Ltd.
Not a public person, and satisfies s8(2)(b): limitation of amount of
shareholders you can have, and that in a private comp, your shares are not
openly transferrable.
Proprietary Limited
• Personal Liability Inc.
Profit company s8(2)(c): directors are liable jointly and severably with the
company; no separate legal liability. Can still have shareholders, but they are
not jointly and severably liable with the company. Also a type of private
company.
Incorporated
• State Owned SOC.
Typically come from statute: profit companies
State Owned Company

The above companies; are they taxed differently? PWC, Deloitte etc. are Incorporated’s AND
Proprietary Limited’s.
The biggest private companies in the world: of the top 10, 4 are the accounting firms, but
number one is grain sellers from 1896. Market Cap, if public, would make them the 9th
biggest company in USA.

Other examples of private company: Dell (5th in US), Motor Oil, Pet Shops.

These categories are not defined by size or market value.

Some parts of the Act which apply only to public companies, e.g. issuing of shares in an IPO.
However, there is one specific regulation that is interesting:

Regulation 26(2): Private companies are required by law to have a public interest score.
Private companies are not required to have an audit committee, unless they fall over a
specific threshold. Every company must calculate PIS: no. of employees, liability, turnover.
750 points = audit.

• Non-profit NPC
• A non-profit company is not a profit company (catch-all definition. Need to know
what a profit company is for this to apply)

Apart from the above distinctions, companies can also be the following:

• “Ring-fenced company” RF
– Restrictive/ entrenched MOI provisions
 – Limiting capacity of the company
– They would first fall under one of the 5 above, then into this e.g. (Pty) Ltd ‘RF’

• “External company”
– foreign company carrying on business in SA
– Can be profit or non-profit
– Compelled to register with Commission within 20 business days
– Companies which carry on business in SA and compelled to register,
otherwise cannot operate as a company. Does not necessarily mean you will
pay tax here.

• “Share block company”
– Share Block Control Act 59 of 1980
– a company the activities of which comprise or include the operation of a
share block scheme
– “share block scheme” means any scheme in terms of which a share, in any
manner whatsoever, confers a right to or an interest in the use of immovable
property;
– Provisions of the Companies Act apply to a share block company in so far as
such provisions are not in conflict with those of the Share Blocks Control Act
– You operate a share block scheme: time shares in companies; hotels, golf
estate, sun international.
– Not inherently a SA thing, but used a lot by Sun International.
– When there is a conflict here, look at Share Block Control Act, not Companies
Act


Corporate Formation
Still forms you have to fill in.

• Documentation
– Notice of Incorporation
– Memorandum of Incorporation*: the document that determines so much of
the company’s operation. An MOI can limit things like distributions, amount
of shareholders, voting rights etc.
• Unalterable Provisions: only these cannot be changed in terms of the
MOI (ring fencing); protects employees and creditors – as lender,
need to know what limitations there are. If they lack capacity,
contract is void.
• Alterable Provisions
• Default Provisions

• Company names
– Registration and reservation documents
– Criteria & mandatory suffixes

Underlying Philosophy of Companies Act

Philosophy Informing Companies Act

• Incorporation as right not privilege - opens up companies to people that would not
have previously been able to afford this. Those below flow directly from that.
• Flexibility – MOI creates flexibility
• Simplicity – easier to just fill in forms, commission, and file
• Efficiency – CIPC is most efficient
• Transparency – who is incorporating companies

Dept. of T&I needed to change the law, due to outdated ’73 Companies Act. There was a
shift to allowing companies to be incorporated, from the days of restricted company
incorporation.


Incorporation as Right not a Privilege

• The formation of a company is the exercise by a person of a constitutional right to
freedom of association and freedom of contract.

The constitution informed the thinking that incorporation of a company is a right, due to
dignity, as there were not many black owned companies in South Africa. Not recognized
under law, black people couldn’t own shares, be a director etc.

Need to see incorporation of a company as a right, a right of dignity.

Also allows for freedom of contract or freedom of association.

5 April 2017

Simplicity

• A single-member or one-person profit can incorporate a profit company (private or
public)
• A non-profit company requires a minimum of three persons
• Only requirement for formation is to file ‘a Notice of Incorporation’
• Plus MOI and payment of the prescribed fee

You can have a one shareholder one director company. Old one had to have 3 directors, one
of which had to be auditors, forming barriers to entry which were unnecessary. This is the
same for private and public companies.

Now, non-profit companies need 3, because they don’t have shares or shareholding. The
defining feature of profit company is financial gain.

File Notice of Incorporation with CIPC. No base level of skills/qualifications required.

Then file Memorandum of Incorporation, together with registration fee (±R300) – not a tax,
but a fee for CIPC.

The old act was difficult to engage with (amended way too much), but also with regards to
the ease of incorporation. Not easy to create companies under the old act. Led to the
problem of becoming a barrier to entry for many people.

Under the new act, simplicity was key. All you need for a profit company is the above
(simplicity). In particular, one person could be director, shareholder, and employee. Why
not? Law allows you to do it, limited liability. It costs R175 a year to do. Initial cost is R425.

If you are a non-profit company, you require a minimum board of 3 persons. The only
requirement is to file NOI at CIPC and pay the fee. Difference between NOI and MOI –
difference lies in name.

NOI: purpose is to inform Companies Commission of intention to incorporate. These come
in prescribed forms. Takes into account regulations. Fill in form and submit. Typical info
included: name of company, first director, location of registered office, date of financial year
end, if relevant – name of first auditor (not every company has to employ an auditor). Very
little substantive content – litigious content (issues which may cause a dispute), mostly
administrative.

However, MOI: delineates relationship between those of a company. Birthing document of
a company: what are the shareholder rights, different levels of shareholders, preference
shares, level of shares, do you use debentures, when the Annual General Meetings are, but
also more importantly, what is the quorum of the meeting: minimum threshold required at
meeting for vote to be valid, which members of the board should be there. The MOI
delineates litigious, substantive issues between people within company. Why relevant to 3rd
parties? If it is a ring fenced company: you can change the capacity of a company, limit its
capacity. Default is that you can do anything, changed through MOI. Effectively, a small
company may be limited to taking small loans. If you need a bigger loan, need permission
from the shareholders. This is where ring-fencing will occur.

Insiders: directors, shareholders, employees etc.
Outsiders: creditors

Flexibility

• The Companies Act provides for flexibility in the regulation of the internal affairs of a
company through MOI and company rules.
• Governing principle: MOI must be consistent with the Act and is void to the extent
that it contravenes the Act.
• E.g.: s 15(2)(b) - MOI may contain any special conditions specific to the company.

In particular, there is flexibility to the internal affairs of the company. Important to know
what alterable and unalterable affairs of the company are.

Internal affairs: how can shareholder sue director? Rights of shareholders? Capacity of
directors? When are shareholders entitled to payment? All of this is dealt with in MOI. Must
be consistent with the Act, else that provision is void.

MOI creates alterable and unalterable provisions. Unalterable usually present to protect
shareholders and creditors.

Efficiency

• Shift from capital maintenance rule (seeking to avoid bank runs, should everyone
wish to withdraw their funds from the bank: company itself have to have its own
liquidity to pay off its shares. Not good for company; can only invest with surplus
that stifles growth – efficient to take loans. Capital maintenance allowed only
minimal gearing) to solvency and liquidity (a lot more flexible: not limited to shares,
take into account liquid and illiquid assets. Company must be able to pay debts when
they come due)
• No par value shares (if you have R5m, you can buy 1m R5 shares – the higher the
amount the more preference – now no par value shares, effectively not a good way
of financing companies. We now only use no par value shares, inherently flexible).
Does flexibility lead to efficiency? Yes. You can effectively regulate your own affairs
the way you like to. Look at secondary offerings within the financial markets.
Flexibility and efficiency go hand in hand.
• Introduction of business rescue (prior to insolvency proceedings, you could go to
court, say you are going insolvent, and judges would handle your company –
incredibly inefficient. They would appoint trustee, most judges have better things to
do. Different from judicial – to rescue or save company from insolvency. More
efficient.

You cannot restrict shareholder rights; only make shareholder rights more effective; can
only give more than what the act says, not take away.

e.g. Ordinary/Special Resolution: require 75% of members present for special resol.

Process of Incorporation

Hurdles you have to overcome:
Notice must mention ring-fencing provisions, i.e. changing the default provisions in the MOI:

Any company, private/state owned, has to have an MOI – but those companies look and
feel different, hence there will be different MOIs etc.

• Who may incorporate?
• 1 or more persons may incorporate a profit company, or
• 3 or more persons may incorporate a non-profit co.
• Each must complete and sign a MOI in prescribed form or in a form unique to the
company
• Notice of Incorporation must be filed (must be accompanied by MOI and
prescribed fee)
• Notice must mention special requirements

Once this is done:

• The next step: CIPC
– Commission may reject the notice
• Incomplete or improperly completed
– Commission must reject the notice
• Initial directors are fewer than required
• Reasonably believes one of initial directors disqualified in terms of
s69, and remaining directors are too few (if you have breached
fiduciary duties/not good at what you do – tricky from a compliance
perspective. If MOI says company will have 8 directors, each of which
has LLB, then 8 people with LLB need to be found. If not, you have not
complied with your own memo, and you will not be issued a
registration certificate. Other tricky elements: can be disqualified on
MOI, appointing disqualified director (breach F.D., foreign etc.)

4 Potential problems with incomplete notice/issues to consider.

• As soon as practicable
– Unique registration number assigned
– Prescribed info. entered into companies register (open to public, anyone can
see how many there are, what their names are etc.) (naming is at times a
problem)
– NOI endorsed and MOI filed with it
– Issue and deliver registration certificate containing date of issue
• A registration certificate is conclusive evidence of incorporation and date thereof
• Registration of name…

Name can be:

You may:
• Comprise words in any language – as long as you can say it (must be able to
pronounce)
• Letters, numbers, punctuation marks
 • Symbols: +, &, #, %, =
• Any other symbol permitted by regulations
• Round brackets
• Profit company: may be registration no.

e.g. M&R – SPV (Merger w – G5)
#deadmau5 Pty.
Completely legitimate company name

But cannot use it as you are piggy backing on someone else’s goodwill and reputation. How
do you quantify that? Tricky e.g. DHL.**

Suffixes come after the company name.

May not: confuse
– Name may not be the same or confusingly similar to:
– Name of another company, CC etc.
– Business Names Act**
– Trade Marks Act**
– Merchandise Marks Act

But cannot use it as you are piggy backing on someone else’s goodwill and reputation, e.g.
FUMA. How do you quantify that? Tricky e.g. DHL.**

May not: mislead
• Name may not suggest that the company
• Is part of/associated with entity or person
• Is organ of state or a court
• Is owned/managed by person with particular education and designation
• Owned/ operated/ sponsored/
supported by foreign state,
head of state, government,
international organisation, etc.

Cannot use a name to lead people to believe you provide a service which you don’t, e.g.
Plumber selling lightbulbs.

Where do trademarks come in? Substance over form. Just because you register your
company, it is not trademarked. BUT trademarks do protect your name. Trademark does not
reserve name for you, you have to go to company and say cease and desist, or change your
name.

Nandos is not its own company, but is a franchise of Steers Co.
Debonairs also franchise of Famous Brands.

May not: incite violence etc
• Name may not contain word or symbol
 – Propaganda for war
– Incitement of imminent violence
– Advocacy of hatred based on
race/ ethnicity/ gender/ religion/
incitement to cause harm

Can’t have a name like “Fuck Zuma”.

Must end with:
• Incorporated / Inc
• Proprietary Limited / (Pty) Ltd
• Limited / Ltd
• SOC Ltd
• NPC
• Profit company & name is registration number = (South Africa)
• MOI includes special requirements = (RF)

Must end with designated suffix. Get provided with registration number.

Non-Compliance?

• If name does not contain abbreviation at the end – Commission may alter the
name
• If name is the same as the name of another company, CC etc or is reserved – use
registration no. as interim name, invite company to file amended NOI
• If name confuses / misleads
– Notify person/s possibly affected (Nomadic Kitchen was notified, and the
dispute is…)
– Refer to tribunal (makes a decision)
–
• If name incites violence, etc.
– Refer to Human Rights Commission (and typically company will not be
registered, not given interim name)
– who may choose to refer to the Tribunal
• Possible to reserve name by filing application together with prescribed fee
(somewhat limited these days, still pay, and can be done by filing application to do
so and pay)
• Commission must reserve name unless
– Name applied for already in use
– Name of registered external company
– Name already reserved in terms of section 12
• Name inconsistent with Act?

Reservation of Names
• Name reservation continues for 6 months
• Can be extended for 60 business days at a time
• Reservation may be transferred
 • Abuse of name reservation system prohibited (not an abuse to make profit, but
abuse not to let people register the name they want)
• Defensive name may be registered for period of 2 years


6 April 2017

Categories of Companies
This particular set of slides is quite comprehensive. Hallmark of profit companies is financial
gain for shareholders, not directors. There is nothing stopping a director from being a
shareholder, or being remunerated in equity for the most part (there are exceptions).

Profit Companies

• Purpose is financial gain for shareholders
• One or more incorporators
• Any number of shareholders (only need one of each, unlike non-profit companies)
• Act attempts flexible regime that keenly regulates companies that may impact the
broad public while offering exemptions and measures to also accommodate small,
owner-managed entities.

There is no limitation in theory as to how many shareholders you can have, only to type of
profit company you are. Goal is looking for those shares to have value.

Two types of Company:

Profit & Non-Profit Company

Profit:
• Public
• Private
• Personal Liability (Inc) is a form of private company
• State Owned Companies

Public Companies – Ltd.

• Any ‘profit’ company
• that is not a state-owned enterprise
• not a personal liability company
• nor a private company.
• Shares may be offered to the public
• Freely transferable
• Compliance with
• Companies Act - Big issue with public companies is that they are hyper-
regulated – very problematic. Why? Power and influence they have over the
public.
• JSE listing requirements
 • Public companies by law, have to appoint secretary, audit committee, have to
have to have reports independently audited. Financial reports have to be
drawn up in terms of IFRS. Interesting that public companies have to have a
social and ethics committee – focus board that looks at social and ethical
issues. E.g. if PnP wants to insource cleaners, what has to be taken into
consideration? Looked into by social and ethics committee. Who to report as
a director etc.
• Board of directors must consist of at least 3 people, but tends to be a lot
more than that. An audit committee consists of 3 non-exec directors. Already
at 6 people. If listed at JSE, minimum of 18-20 directors. Having said that,
there are a lot of independent directors that do nothing. Shortage of
diversity, 3 black women on 92 boards. Very much due to education. Most
directors are white, Afrikaans males – white monopoly money. That dynamic
is not limited to SA, in USA too with women on directors of companies on
NYSE. That problem is mostly due to downtrodden women? Need to take
account of it in SA? Produce more graduates, extend the pool, facilitate that
happening.
• Public companies are obliged to have an annual shareholder meeting, but can
have any number of shareholders. Listing requirements very dense. 418
pages of regulation – mandatory to comply with the King Code: IV is now
enforceable, 16 Principles + 1, 1 applies to institutional investors (hedge
funds, pension funds, banks).
• Nature of public company: shares are going to be transferred to and within
the public. Alexander Forbes doesn’t care whether X or Y owns their share.
Provided you are a member of the public, you can buy the shares. Typically,
this is how you raise funds. Big issue with public companies is that they are
hyper-regulated – very problematic. Why? Power and influence they have
over the public.

Private Companies – (pty) Ltd

• MOI:
• prohibits offering of securities to the public
• restricts transferability of shares
• How?

Personal Liability – Inc

• Private company used by professional associations
• MOI will state that it is a limited liability company
• Liability of directors
• 4 Issues
o extent of directors’ liability limited to contractual debt and liability
contracted during the time in office.
o Liability does not include unjustified enrichment or delict
o Liability does not extend to tax and other statutory charges
 o Strange: this liability is not the same/cannot be the same as the liabilities to
the partners of a partnership. The intention of the legislature was to relate
directors’ of liability capacity as directors to nothing other than company’s
ordinary financial/commercial commitments. Personal liability of directors of
Personal Liability Company can be nothing more/limited to nothing other
than company’s ordinary financial/commercial commitments; no tax, U.R.,
delict, etc.
• Many practical ramifications of this: “joint and severably liable” – creditors are
entitled to hold directors joint & severably liable for claims, even if contract is with
the company. If director pays a debt of the company, he/she has a right of recourse
from the company and fellow directors.
• The company itself does not have a right of recourse against directors where
company has paid debts, cannot claim back from the directors, only the other way
around. Company wants to claim? Have to use act, outlining director’s duties.
• restriction on the transferability of shares, and these restrictions are found in the
MOI. Don’t need to have RF, because the Act implies this already/already says so.
All you need is the suffix (Pty) Ltd. A profit company = private if not state owned, and
MOI A) prohibits offering securities to public, no IPOs, and B) restriction on transfer
of shares. No prescribed manner or form as to how to restrict transferability of
shares. Need to have restriction in some shape or form – can only transfer shares to
insiders in some way. What happens if nobody else wants to buy your shares?
Inefficient, do not want to be stuck with a minority shareholding in a private
company. Why? Very little power as to how directors conduct their affairs. Your vote
means close to nothing. When taking a vote, people can simply vote against you if it
is in their interest to do so. Transferability can happen in no of ways: attached to
shareholding is a right of pre-emption: if you decide to sell, you will make an offer to
X first. Another restriction is that any transfer of shares requires shareholder
approval or must be authorized by directors. Directors can control who the
shareholders are. Can now have as many shareholders as you like, no longer max 50.
Under the Common Law automatic right of pre-emption, X puts up 30 shares, you
had to buy all 30 “all or nothing rule”, but can be changed within your MOI. Don’t
have to be RF, because RF only changes the Act. Section 39 of the Act: with regards
to subscription of shares: If a private company wants to issue shares, shareholders
have a right of first refusal. Very different to the transfer of your shares, only deals
with issuing of new shares.
• hallmark is MOI states that it is a personal liability company – one in which directors
are jointly are severably liable with the company. What are they liable for? Liability
of directors limited to liability from contractual debts.

State Owned Company

• Company that either falls within meaning under Public Finance Management Act or
owned by Municipality
• National government business enterprise
• Juristic person under ownership and control of national executive
• Goods or services provided
 • Financed fully or substantially from sources other than National Revenue Fund/ tax/
levies
• fall within definition of Act, but get that from Public Finance Management Act.

Come from number of different places:
• Owned by municipality
• Can be massive: Transnet, SABC, PRASA, etc. and all of these companies defined by
specific acts.
• Typically, they will provide goods/services, and are often funded by sources other
than government revenue. Not limited to being controlled by national executive. Can
also be owned by municipalities, provincial execs.
• Hallmark of SOC: directly/indirectly controlled by the state. Hallmark is not
ownership but control.

Non-Profit Company

• Company previously recognised in terms of section 21 of the Companies Act of 1973
• At least one of objectives public benefit or cultural or social activities
• All assets and income used to further the stated objective
• May acquire and hold securities
• Carry on business/trade/undertaking consistent with or ancillary to stated objectives

• Not just organisations, but companies.
• Have to have 3 directors
• As described by MOI, benefit must be public, social, cultural benefit/activities.
• Essence of NPC is that income and property must not be distributable, do not
distribute profits to shareholders/directors etc. You can however, make a profit.
However, if profit is made, you pump it back into business operations in whatever
way you deem fit e.g. pay a bonus to directors, employ other people, open new
office, buy computers, but do not declare profit or dividends. No financial benefit
other than reasonable compensation. If a NPC is wound up and ceases to have a
purpose, assets are not distributed to directors. They are largely given away, often to
other non-profits NGOs etc. Interesting question is how to determine what
constitutes activities as being for social etc. benefit. New Act: public benefit, social or
cultural activities. Case: court said that communal or group interests relates to
cultural or social activities and excludes activities those of a purely commercial
nature. If you are purely reporting profits, cannot register as NPO. Important for tax
purposes. Hallmark is that you need a minimum group of persons benefitting from
the activities.
• Important part: saying you are non-profit does not mean you cannot make profits.
What it means is that you cannot pay distributions or dividends from that profit;
must be stored and used for the purposes of the company’s operations.



No financial benefit apart from reasonable remuneration of compensation for expenses
incurred furthering the objectives of the company

When non-profit company is wound up – no member or director entitled to assets etc.
Does not have to have members – incorporated by directors
Must have at least three directors


7 April 2017

APPLICATION QUESTIONS – PARTNERSHIPS
QUESTION 1 A
Gigi and Byte decide to start doing business together. Gigi is a skilled computer
programmer and Byte has a business science degree and is an experienced recruiter.
The two enter into a partnership agreement in terms of which:
a) Gigi will offer his skills as programmer & Byte offers his business
experience
b) Gigi also contributes all the computer equipment that they will require (to
the value of R 70 000)
c) Byte contributes a lump sum of R 100 000.00 to cover rent and expenses during
the first year of the business’ lifetime. This sum must be paid back to him with
interest.

Firstly, is this a valid partnership in terms of the info given? Yes, they have both made a
contribution. This contribution does not need to be financial. They have to have an intention
to make a profit: this does not have to be purely financial in nature, can be lessening costs.

Is Byte making a contribution? Will contributing business acumen be enough? Not
automatically entitled to recompense. No real problem. If he is going to be getting this money
back, probably to the detriment of the partnership – is he still making a contribution? Raises
a tricky area: what constitutes a valid contribution.

At first the business seems to be doing well, but soon a big client suffers a loss when
an app that Gigi developed malfunctions. The two have to defend an action in court
and although Gigi is vindicated the legal costs and the impact on their reputation takes
its toll. It is soon clear that the partners are no longer able to pay their debts as they
become due. One of the creditors applies to have the partnership sequestrated.
Comment on the following:
1. How is the creditor able to apply to have the partnership sequestrated, in other
words who would be the defendant(s)?

This is one of the exceptions to the aggregate theory. First, creditor must attach the assets of the
partnership fund before attaching assets of their personal capacity. There is no separate legal
personality, partnerships are not separate juristic persons. The partners would be the defendants.
Practically you would sue the partners. The business assets would be seized, then the private assets.
For a partnership to be insolvent, it means that both partners are insolvent. The term sequestration
is used for the very same reason, not liquidating a juristic person.

In terms of damage caused by the partnership, then sue partnership.

Why would you ever have a partnership instead of priv? Many partnerships may become personal
liable companies; doctors etc. have to by law. Why choose? It is easier and more flexible, not
constrained by company law. You get taxed differently as a company, constrained by Companies Act.

2. What will be the consequences? i.e what will the creditors be able to lay claim
to assuming the sequestration order is granted?

Attach the assets of the partnership fund first. Following which, personal assets of each partner can
be attached.

QUESTION 1 B
Gigi and Byte manage to stave off the sequestration application because two further
partners see potential in the business and decide to join forces with Gigi and Byte.
Meg and Terra each contribute an amount of R 50 000.00. Terra only enters into the
agreement subject to the condition that he is to remain anonymous and will only ever
be liable up to R 50 000.00 should the partnership ever face legal liability again. The
partners decide to improve their office space. Gigi comes across a stunning antique
oriental carpet. He explains to the seller that he represents the partnership and
summarily agrees to buy the rug for R 250 000.00. When the others hear about this
they are understandably infuriated. Terra meanwhile has forgotten all about his desire
to remain anonymous and has been actively managing the partnership along with the
others. When the shop owner demands payment they deny liability on the contract.
Answer the following questions:
1. What will the effect of the new partners joining be on the partnership
between Gigi and Byte?

What happened to the original partnership? The original partnership ceases to exist and there
is a new partnership formed, new agreement would have to be constituted. What kind of
agreement is it? There is a silent partner.

2. What kind of partnership is this and why?

3. Assuming that the partnership agreement makes no provision for it, how
will profits and losses be divided/shared?
4. Do you believe that the other partners will be liable in this instance?
5. If we were to assume that the shop owner could hold the other partners
liable:
5(a) Will Terra be liable and to what extent?
5(b) Could he insist on payment of the full amount by Gigi?

Types of Companies Application:

Thabo (18 years old) and Joe (17 years old) are first year students at UCT. They would like to
start a so-called sharing economy company that would rely on independent contractors to
provide plumbing services in Cape Town. In essence they will develop an application (app)
(akin to uber or airbnb) where prospective clients would use plumbers on their app and they
would get commission for connecting plumbers with clients. They approach you for advice
on the following:

 - Whether the two of them can incorporate a public company.

One of them is a minor – is there a problem there? Can minors incorporate companies? This
comes down to contractual capacity. If you have limited contractual capacity as a person,
how can you incorporate a company? Perhaps this is a problem?

Partnership is ruled out.

Very clearly here, you want to be dealing with a profit company. What type?

Would you advise them to use an incorporated company? Personal Liability Inc? No: this
could lead to a limping contract due to him being a minor. Directors of personal liability
companies are jointly and severably liable together with the company.

Can they incorporate a public company? To list on the JSE, you have to be a public company
… but you can be a public company that is not listed? Look at the definition of public
company in the act: defined in the negative, the catch-all. Nothing there about listing. One
of the hallmarks of a public company is that its shares are freely transferrable, which for
many companies will mean listing, but nothing stopping you for putting an offer for shares
in a tweet or magazine.

Why would you use a public or a private company? What are the pros and cons?

Over-the-Counter derivative trading.

A private companies has all the pros of limited liability and perpetual succession etc., and it
is easier to do for the most part. Probably cheaper to do. There is also a restriction on who
the shares can be sold; allows minors shares to be protected, condensed to two people,
make good profits, management of the company etc. BUT one big reason:

Directors manage companies. They make decisions on behalf of the companies. This is
allows them to maintain control of the company, by controlling who the shareholders are.
No one able to vote them out. They control shareholding, they control the direction of the
company. Control – that is why you would form a private company.


- Whether they can co-opt their auditor friend who has just lost his job after a
conviction of fraud.

Can you have the ex-con be a director? No, declared delinquent. Can they audit? Depends if
they have a permit to do so.

- The practical steps needed to incorporate their start-up.
- Documents and fees required for incorporation

2 step process to incorporate.
Step 1: submit a notice of incorporation to the CIPC, entails: name, directors, premises,
financial year end, other related financial issues. Anyone can be a director, no minimum
threshold of education, but you need to have full contractual capacity to do so. Thabo
would be sole director, but have two shareholders. Have Joe as an executive committee
member.

Step 2A: memorandum of incorporation (know the difference between Notice and
Memorandum! N: administration, M: defines relationship between those within the
company e.g. shareholder meetings etc, substantive litigious issues)
Step 2B: pay (R175 – R435)
.
- They still have not thought of a name and would like to know whether this
will be prohibitive.

No, no need necessarily in memorandum for a name. Given intermediate name often
registration number. If there are options for names, they can reserve a name, apply for a
defensive name.

- They do not have funds to rent office space in town and would like to know
whether a residential place qualifies as a ‘registered office’ under the
Companies Act.

Key concern is that creditors need to know where and to whom they can come and claim
from. You can run a business from a house. There are tax implications. They just require a
license/licenses to work from home. Depends on operations.

Likely to get MCQ’s from this section

Week 5: Corporate Form & Legal Status of Juristic Persons

10 April 2016

Test Content for Test 1 will be everything covered up until Thursday of this week. As soon as
content and form is finalized, we will be told. Partnerships are highly examinable:
partnership agreements, authority, agency etc.

This week we engage with the internal workings of a company: shareholders, directors, and
other stakeholders.

Winslow Homer: Painting, focus on maritime topics.
• The guy at the back steering is the director (1 director, focus on profit companies)
• Dude chilling at the back/pushing the sale out is a majority shareholder, because he
chooses direction of the ship, and is relaxed because he can outvote the others
• The little boy sitting in the middle is a minority shareholder, little bit more tense than
the others, investment not as secured as the others etc.
• Boat is a company, big and small
• Sea represents market forces etc. which director has to navigate.

FTSE has company listed on it called SnapInc: Snapchat – very low assets. Recently issued a
new batch of shares with no voting rights. Why would you buy it?

Company Law ensures safety on the ship, keep ship moving forward, and balance the
interests of all parties involved. Yes, you deal with black and white aspect (what the Act
says) but where it gets interesting is within the behavioural dynamic between the parties.

Corporate Stakeholders
This term will be used a lot.

• Separation of ownership and control
– Control vests in the board (business and affairs of company must be
managed by or under direction of the board, has authority to exercise any
actions of the company – not shareholders)
– The shareholders are the owners (own shares, effectively owning
proportion of company: 30 shares of Alexander Forbes, own some of that
company – but control and direction of company does not lie with
shareholders but with directors – s66 of the Act)
• What this means, especially for small companies, very big chance of blurring the
lines between ownership and control. Do not think that ownership and control align,
there may be overlap in terms of who is doing it, there are clear divisions between
these two groups of stakeholders.

• The Board of Directors:
– The business and affairs of a company must be managed by or under the
direction of its board (widely encompassing statement: UK – directors are
the directing mind and will of the company; King III – directors are the
custodians of corporate governance; New Comp Act – directors’ duties are
stricter/objective, and the risk of liability is much higher (e.g. MTN bonus for
director but company made a loss?))
– The board has the authority to exercise all of the powers and perform any
of the functions of the company except to the extent that the Act or the
MOI provides otherwise (this is where shareholders exercise control over the
directors, but not the company – why? Shareholders have a right to alter
MOIs, which means that you can alter what the board of directors can do;
shareholders can hire and fire directors (recall and appoint) (very loosely);
can ratify conduct of directors; and some provisions which allow
shareholders to litigate on behalf of the company. Shareholders have a huge
amount of power; ultimately the shareholders who have the oversight of the
direction of the company, but directors have day to day control

– The act defines the term ‘director’ broadly (comes as reaction to ’73 Act
where term was narrowly defined: large no. of other people who aren’t
necessarily directors who fall into bounds of definition) (also fundamental
difference by exec v non-exec directors of old Act not fundamental now)
 – CEO is head of operations, does not make you an automatic member of the
board. This is where the MOI is all-important. Same is true for COO’s, CFO’s,
CIO’s etc. Typically, CEO is head of EXCO (executive committee), and CEO
reports to board, but not necessarily a board-member. Although not director,
can be held liable below due to directors’ duties. Just because director not in
title, doesn’t mean law isolates you from director’s duties and liabilities.
– There are also other terms that are significant
• Ex officio director
• Prescribed officer
• What about executive and non-executive director?
– The Act also deals with the election/appointment of directors and their
removal
– It stipulates how the board functions and sets out statutory directors’
duties and liabilities

• The Shareholders:
– A share is, briefly, a unit of ownership (divide ownership of company into
shares, classes of shares, all determined by MOI – what proportion of
shareholding is, classes of shares etc.)
– The shareholders as a body act through shareholders’ meetings (this is
where shareholders exercise their power. If you are a publicly listed
company, need to have an Annual General Meeting)
– There are certain powers that only the shareholders are allowed to exercise
and they fulfil an oversight function where appropriate (ratification: if
director does something outside the bounds of his authority; rights of
interdict: interdict director or company from doing something; appointment
of board members: can choose who their board members are, have the
power to appoint directors – greatest oversight power. THAT DOES NOT
MEAN: just because you have an oversight function that you can dictate how
company is directed to the board. If you do start dictating (in particular small
companies), then you will be seen as a closet/silent/hidden director and not
as a shareholder. Decide who directors are but cannot tell them what to do.
– Importance of shareholding categories: preference shares may have a
stronger vote in comparison to ordinary, you can have no vote shareholding
(should not hold only this)
– Super-Majority – ACT/MOI requires special resolution to decide *** we will
discuss the majority rule dynamic; as a majority shareholder, you are smiling.
Minority, not happy. Minority in private, even worse.

• Other stakeholders:
• Here is where the King Code comes into play: directors of companies in SA should
have stakeholder-inclusive model of running a company. Term stakeholder is still
very broad. Much broader than shareholder; includes directors, employees, other
companies, and members of the public. E.g. Pick’n’Pay, we are stakeholders. If they
decide to pull out of SA, people left without groceries.
– Which other stakeholders can you identify?
 – To what extent to you believe the rights of these stakeholders should be on
the corporate agenda? If you are an employee, your interests should be
placed on corporate agenda. E.g. PnP with online shopping, SAB selling
alcohol. You may often have a disconnect between interests of shareholders
and interests of stakeholders. When PnP say they will increase dividends by
reducing salaries, shareholders accept it. King Code very clearly says
shareholder inclusiveness matters, but Companies Act say that companies
have the end goal making profit. Tries to merge through enlightened
shareholder: shareholders take into account (in perfect world) the 3 P’s:
Triple Bottom Line: Profit, People, Planet. Even enlightened shareholder
needs to earn profits. Shareholders are under no duty to act in anyone else’s
interest by law. Is this in line with Ubuntu? No, ought to be decolonised. Still
no legal duty on shareholders to vote along other people’s interests or tears
and this leads to a problem: shareholders ultimately own the power, so if
they can vote out someone who fails to make them a profit and vote in
someone else who can? That is a problem.

11 April 2017

e.g. Bus Driver strike starting tomorrow. Fundamental stakeholders of the company: unions
are a very important stakeholder to take into account. Stakeholders who have also lent
busses to the company. Competing interests of those different parties. What about those
interests of those workers who wish to continue driving? Very rarely a correct, right answer
– unlike the BP Scandal (board did not take into account the environmental factors – did not
pay maintenance for one year, now paying for damage and reputation). You can NEVER only
look at bottom line in terms of profit. Nowadays, a bottom line entails the 3 Ps. You will
always be looking at those.

• The stakeholder debate:
– The general rule is that the directors must always act in the best interests of
‘the company’(of the shareholders – for this point the terms are
interchangeable)
– What does that mean? Shareholder wealth. But what shareholders? What
have the courts said in terms of interpreting this phrase? Howard v Heregal,
binding precedent in SA, judges concluded that: phrase conceptualised
shareholders; all shareholders, past present and future. This makes sense, in
the view of sustainability – not just of the environment, but of the company.
For a company to be sustainable, you need to work in best interests of
shareholders – past, present and future. Why past? Companies can accrue
debts, reputation linked (institutional investors). Shareholders and the
company are two very distinct groups – one is entity, and it is owned by the
other. How do you work in best interests of future shareholders? E.g. make
strategic decision to merge with other companies to maximize future share
price. Company is largely defined by shareholders, not stakeholders,
historically.

 • There are different views about the extent to which various shareholders’ interests
should be taken into account

• How the company is governed is determined largely by the Act and the MOI
• The Memorandum of Incorporation is also referred to as the ‘company
constitution’: effectively the starting point of the company. Look at constitution first,
then MOI.
• The new Act has, as one of its aims, flexibility: shareholders can change the MOI,
alter the alterable provisions.
– The legislation aims to facilitate rather than regulate
• The way the MOI works is one example of how they do this – we will look in some
detail at this


Directors
Skip this picture. Supposedly, directors looking after company (house).

• Role and function: The role of a director is to give life to the juristic company. What
this means is that you are an agent of the company.
• The agents of the company: you are not an agent of the shareholders!! Ultimately,
what this means is that any particular problem is dealing with agency, but more
importantly authority (what is director authorised to do). Directors are not dictated
to by anyone else, and must act independently by law regardless of who appoints
them, for the best interests of the company.
• Directors as opposed to managers: Determining who and who is not a director was
tough due to old Act: CFOs, CEOs etc.? The new Act fudges it a bit, not perfect.
Brings a much broader range of person within the range of director’s duties, by using
specific categories of person. E.g. A Prescribed Officer: people who have a significant
impact on the way a company functions, in particular on a day-to-day basis.
Prescribed officers are not automatically directors, e.g. CEOs. Automatically defined
as prescribed officers not director. Prescribed Officer: A – exercise of general
executive control over management over the company, or regularly, the guys that
have the big job and control the management and operations of the company:
auditors, senior managers, directors, secretary, CEOs etc. not automatically
directors. Just because you do not have the title director in your title does not isolate
you from director’s duties. ‘Directors and Prescribed Officers’ Duties.

• The Board of Directors
– How many board members: directors typically operate on a board, even if
only one.
• Private company min 1
• Public company min 3 (do not confuse directors and incorporator
numbers) Incorporators are often by default the first director of the
company.
– Definitions in the Act
• Director: still broadly defined – includes anyone including
director/alternate director by any name (just because not termed a
 director, does not make you NOT a director). Created number of
problems in the old act.
• Non-executive/executive director? No distinction in the companies
act between these two. Distinction comes from King Code, dealing
with best principles of corporate governance. Act itself (Law) draws
no distinction. Executive director – involved in day to day
operations/running of company. Non-executive – not at business
premises every day, fly in, advise, and attend board meetings. May
not even have a vote. May simply be there to give advice.

– How do they obtain the position: how do you become a director?
• By becoming incorporator: by default, will be first director unless
specifically pointing out someone else.
• Elected
– Elected by the shareholders
• Ex officio
– Holds the position by virtue of another position
• Appointed
– Appointed by person designated in the MOI
• It does not matter how you have become a director when considering
whether you are bound by director’s duties. Even if elected by
shareholders, you are not an agent of them. Must apply an
independent mind, cannot be a puppet of the people who appointed
you – in breach of duties bestowed upon you.
• 50% of directors in profit companies have to be elected by
shareholders. This is typically done at an AGM. Directors are often
appointed for a finite period of time, especially if elected by
shareholders: 1/2/5/10 years.

e.g. Whitey Basson: Shoprite Chairperson of Board, extremely rare long-term appointment.
Appointed because they are fantastic what they do. Very successful, voted in by
shareholders, given 8 years. He has now been there for 15 years. Gets results, shareholders
like him. Not one for stakeholder inclusiveness, but makes a lot of profits for shareholders.
Other elected members of the boards made him chairperson. Directors of various types
sitting on board, and boardmembers voting (typically one member = one vote, split vote
goes to chairperson). No base threshold in law for directors providing they have full
contractual capacity in the Act. However, MOI may provide info on who can be appointed as
director: e.g. qualifications, experience etc.

Ex Officio directors become directors because of the positions that they hold. Very often,
CEOs are ex officio directors because they are the CEO MOI says that CEO sits as a board
member/operates as a director. Operates the same for COOs and CFOs. Again, director not
in title, but still directors. Can be family members: oldest man in the family automatically
becomes ex officio director. Typically limited to MOI, but not limited to people within the
company.

Appointed directors – these are tricky. Can have directors elected by outsiders (creditors) or
by national executive (government in public company).

Irrespective of how you are elected, directors duties are to be fully upheld by you. The only
one may be non-exec, non-voting directors: if the directors take a decision that you disagree
with fundamentally, and you have voted against, then you are exempt from liability.

– How are they removed?
• Shareholders
– In general meeting
– Grounds for removal?
– Procedural requirements: need to give director notice (2
weeks before general meeting, tell director that you are up for
recall. Director can speak and say why he should be kept.
Directors can quietly speak to institutional investors etc.
because the vote is 50%, big voting power matters. Even 30%
matters, go to the bank, make them put out a notice of their
support, small shareholders follow suit. Like a chess game.
– Do not need reason, and do not have fiduciary duty to
company, and can act in own interests. Cannot be reviewed by
the course and no recourse by the director. Can be removed
because they don’t like you.

• Board
– Under what circumstances?
– Grounds for removal? Lot more limited than above, 3 specific
grounds: you become incapacitated (hit by car, died);
dereliction of your duty (board thinks you have breached your
duties); you become disqualified. The last one is interesting,
e.g. SABC director lied about having a matric qualification.
Could have been removed by board for not meeting
requirements, but was not.
– Procedural requirements: such that, you need to give notice
etc. but also that board cannot remove you themselves, but
take you to Companies Tribunal. Head of the tribunal removes
you as director, board only facilitates this process. Tribunal can
also facilitate your removal.
• Tribunal
– Under what circumstances?
– Grounds for removal? Very similar to that of the grounds of
the board: unrehabilitated insolvent, declared delinquent as a
director – breached director’s duties in other office, registered
as DD (15 years); so if you are a director but still within this
period, tribunal can remove you.
– Procedural requirements


12 April 2017

Yesterday’s lecture was all about directors, and prescribed officers (e.g. CFOs and CEOs)
which is anyone that has a significant or tangible influence on the day to day operations of
the company. Not just linked to chief officers, but can be managers or senior managers. You
have to look at the context under which the company is operating.

If it is a smaller company with a small management group, you do not have to be CEO, but
you can be a line-manager, so long as you have the requirement above.

Today we deal with shareholders, shareholdings, shares.

Shareholders

Sakari Douglas Camp (Nigerian) Atlas Flower.
• Person is a shareholder.
• Shareholders have a bundle/basket of rights. You have this thing called a share
which you own, an intangible/incorporeal asset. Corporeal property are assets that
you can touch and feel, opposite is incorporeal. You can have a certificated share,
but very few places rely on that in the modern day world of company law. Part rights
attributable to you due to the share, part value such as the goodwill and dividends. A
share is not a closed brick or bucket – the bucket is the share, but within it are a
number of different rights and duties which flow from the ownership of it (flowers):
typically holding directors to account and shaping directors of the company. There
are some duties attached to shareholding too.
• Very importantly – there is no fiduciary duty attached to the shareholding, do not
have to operate or exercise rights on behalf of anyone else. No trust/honesty
involved. Exercise rights how you see fit. Do not have to exercise shareholding in
best interest of company, shareholders etc. but purely based on “own, selfish
interests” (courts). Problem – if you are a majority shareholder, you can guide the
company in such a way that you make yourself a profit while making losses for other
stakeholders (society, minority shareholders, creditors, directors, other employees
etc). This is one of the greatest problems we face with company law today. Why?
Most of shareholding in SA is not held by regular or even wealthy individuals; people
who hold the power are the institutional investors (banks, financial intermediaries)
and they shape direction of the company. Typically, they do vote in accordance with
their best interests. You are dealing with a monopoly-based shareholding. CIRSA is
linked to King Code, code for responsible investment in SA. One specific principle
(17) linked (16 + 1). This code is undervalued in SA. This creates the power
differential between minority and majority shareholders.

• The Shareholders
– What is a share
– ‘‘share’’ means one of the units into which the proprietary
interest in a profit company is divided (integrally linked with
profit companies: the more interesting definition is ‘sec’ – any
shares/debentures/instruments irrespective of title to be
 issued by profit companies. Securities is what we should
generally be talking about. Cannot use the two terms
interchangeably as securities is a wider definition. Share is a
unit of equity, debenture is a debt instrument. In broad terms,
a share is a proprietary interest. Just because the company
owns something does not mean that the shareholder owns it.
If company owns property, shareholder does not own
property, no direct right to leverage right. You hold equity in
the company that owns property. You can only leverage your
shares (e.g. pledge shares as security for mortgage).
Ownership of assets resides with the company.
– ‘‘shareholder’’ means the holder of a share issued by a
company and who is entered as such in the certificated or
uncertificated securities register, as the case may be
(effectively someone who holds a share – these days it is done
through the STRATE who affects the transfer of shares.

• Nature of a share
– A share issued by a company is movable property,
transferable in any manner provided for or recognised by the
Act or other legislation (Section 35(1)). (immovable property
is property that is literally attached to the land:
house/windmill).

• In other words:
• A share is the interest of a person in a company
• Composed of financial and non-financial rights and duties (in large part,
those rights are defined by MOI and company rules – the two used to go
hand in hand).
• A share is a kind of incorporeal movable property – measure of the
shareholder’s interest in the company

• The MOI may:
• The MOI determines high level rules, company rules are other rules (e.g. form
required for invitation to meeting etc. Some companies only have MOI, others have
MOI and rules.
• confer special, conditional or limited voting rights
• entitle the shareholders to distributions calculated in any manner (typically
that directors see fit), including dividends that may be cumulative, non-
cumulative
• provide for shares of a class to have preference over any other class of
shares e.g.
• Preference share: you are a shareholder, but get paid before ordinary
shareholders. Can also have preferential debentures (MOI determines which
is paid first between pref share and pref debt). Always want to buy
preference shares if you can afford it, will be more expensive relatively to
ordinary shares.
 • Participating preference share: one in which voting rights are greater, or you
get to vote first (i.e. vote must be passed first by participating preference
shareholders). Can have 5 votes vs 1 in normal case.
• Ordinary Shares
• Deferred Share (attach your rights to those of the preference).
• Where this becomes interesting is how to structure the shareholding
dynamic. Where you are doing a due diligence (of buying another company)
what you want to look at is what the shareholding is and what to buy to
obtain control.

• What rights generally attach to a share?
• There is a rebuttable presumption in our law that each share = one vote. What that
means is that you have to prove that this is the case, usually through MOI (different
types of share, voting rates)
• The primary rights that are usually attached to shares are below (deferred shares,
take away point 3 as it is not declared to your typical class of shareholding – either
reinvested or given to preference shares). You can have non-voting shares (take
away 1). The one element you can’t take away is number 2 – integrally linked to your
right of ownership, can’t own something where you don’t have information about it.
Some companies have tried to strip away point 2, but has failed miserably and
ruined reputations of the company: only reason you would do it is to raise capital
while not financially strong, which is already against the King Code. The MOI should
be looked at to see if the below are not present.
1. The right to vote
2. The right to information
3. The right to share in the profits of a company that have been declared as
dividend
4. The right to share in the net surplus capital of a company on its winding-up

• What duties generally attach to a share?
1. Shareholders must comply with MOI & Rules and Shareholders
Agreement, if any** (under the old act, agreements would be made
to say that “if you agree to this, you will not vote on a particular
thing” – if you breach this you are breaching a contract, between you
and other shareholders and can end up limiting your own rights as a
shareholder. This can create a power dynamic: if 40% majority
shareholder pays shareholders to vote alongside, and they don’t, they
are in breach of contract if they don’t. Interesting power plays
between shareholders and directors. This becomes relevant in
shareholder activism in the US: you hold shares, not to make money
from company, but to make money from other shareholders, e.g. you
get to AGM and block vote @ 20%, and only change unless you pay.
Don’t bind yourself on company equity, but contracts between other
shareholders. Again, no fiduciary duties. Not bribery, just a powerplay
(e.g. UCT housing crisis).
2. Pay for shares,
 3. Participate in meetings and vote, (abstaining from a vote is still
voting, but if you don’t pitch up it is a problem)
4. Notify company of any changes that need to be made in register e.g.
change of address change of name change of property etc.

Shareholders’ Meetings
Power of a shareholder vests in the meetings and in votes

• Certain substantive decisions regarding the management of the company are
reserved for the shareholders
– A shareholders' meeting (meeting of that company’s security holders etc.) is
the focus of decision making by the shareholders
– Act sets out procedural rules relating to the convening of shareholders’
meetings etc. (some shareholders are not entitled to vote and not entitled to
be there).

• Definition:
– A meeting of those holders of that company’s issued securities who are
entitled to exercise voting rights in relation to that matter’
• Held to provide shareholders with an opportunity to debate and vote on matters
affecting the company

• Act gives shareholders at a shareholders’ meeting some substantive constitutional
and managerial powers.
– Power to amend MOI (governs internal workings of a company, and
shareholders can change it)
– Power to vote on and approve a rule made by Board of Directors (holding
directors to account, see below)
– Power to remove directors

• AGM
– Shareholders’ meeting held once a year where particular business is
required to be conducted
– Public company required to have AGM (at least once a year), reports
included – auditing type stuff. When a company releases its results, it is done
at the AGM.
– At AGM you will have discussion on appointment on directors and
creditors, and matters can be brought up by shareholders

13 April 2017

With shareholders’ meetings, there are 3 dates which you need to have clear in your mind
in terms of procedure:
• Date of meeting, work back to
• Date of record, work back to
• Date of notice (all s59 of Companies Act)

 • Who may attend? Any shareholder can attend the AGM.
– Record date
• Important for company to be able to establish who is entitled to
receive notice of a shareholders’ meeting and to vote on resolutions,
who is entitled to receive a distribution/dividend etc.
• Record date must not be set too far in advance of meeting
• Record date may not be more than 10 business days before meeting
This is because if you release too far in advance, shares are traded
before the time to become activist shareholders. This means that MOI
by default will be 10 business days, but can be shortened (5 business
days) and the record date is used to determined who has right of
participation and right of vote.
• Also be a threshold for who can and cannot vote (e.g. those who
held shares on dd/mm/yyyy can vote)

• Who may convene a meeting?
– Board of directors or any other person specified in MOI (e.g. company
secretary)
– Shareholders that hold at least 10% of the voting rights (MOI may require
less, not more) if you as shareholder are not happy, you can call a meeting.

• Notice of shareholders’ meeting
– Must be given at 15 days prior to meeting for public company, 10 days
before meeting for anything else (private company)
– Two periods that can be altered by MOI: for a date of record, it can be
shorter than 10 business days, and for the notice, must be at least – meaning
this period can be made longer.
– MOI may provide for a longer or shorter minimum period of notice for a)
record or b) notice. Notice of meeting can be different from date of record!!
– Notice must be in writing and include amongst other things
• Date, time and place
• General purpose of meeting
• Copy of any proposed resolutions to be tabled

• Compliance with formalities
– Are there circumstances where we do not have to comply with formalities?
• Unanimous assent at common law where all shareholders agree
• Companies with one shareholder
• Every shareholder is also a director

• Proxies
– What is a proxy?
• A shareholder is not obliged to attend a shareholders’ meeting
personally, can send a proxy to attend. The proxy will attend, vote
and speak on shareholders’ behalf
• Shareholders, while under duty to attend meeting, do not have to be
present. Can participate in meeting through someone else.
 Determining when they can/can’t speak etc. on behalf depends on a)
Company’s MOI and b) agreement between shareholder and proxy.
No threshold for who can be proxy (generally) but you would have to
have full contractual capacity in reality, but do not have to be
shareholders of the company as well. Very often they are, as they are
already going. Can be grouped under one banner who becomes a very
influential person.
• 1/2/3 Tier proxies: 3 Tier can do everything, 1 Tier can only do one
etc.
• Companies can limit proxies and attendance of proxies in MOI (e.g.
everyone has to attend in person)
– Persons who may be appointed as proxies
– Procedure have to give notice to company that proxy has authority to
act/vote on your behalf

• Quorum (base threshold of persons to be there for meeting to be considered valid)
– The minimum number of qualified persons whose presence at a meeting is
necessary before any business may be validly transacted at the meeting.
– Act specifies two different quorum requirements:
• …in order for meeting to commence
• …in order for matter at meeting to be considered
• Clarificatory notice will be put up on Vula by James

At the meeting itself:
• Voting on a show of hands (should matter be taken via vote) but can email in vote if
not there etc. and are counted differently. Also different if shares hold more votes
than others, putting two hands up here does not make sense. There are other
complex ways of doing but these are not prescribed by law. Voting is done by proxy
in large part. Often proxy given to largest shareholder, who is usually the
institutional investor.
• Voting by poll
• Resolutions: At the meetings you have two different types of resolution, and these
resolutions are used for specific purposes. The one that get used for day to day
decisions is Ordinary, while the ones that change the way the business
operates/alter MOI are special
– Ordinary (50% +1)
– Special (75%)
– These figures can be changed, but the base threshold between these two
needs to be 10% (i.e. minimum 10% difference between these two)

Picture: Matisse “The Cutout”
• The MOI is a blueprint for the internal governance of a company. It describes the
relationships between various stakeholders of the company, such as between
shareholders and directors. Shareholders agreement and company rules also play a
part in this.
• The woman in the picture is not only beautiful but flexible; as we know the new
Companies Act works along the lines of creating flexibility for the company. This
 allows companies to regulate themselves internally their own affairs how they see
fit. This is done through the MOI. The MOI and the rules contained therein are
flexible.

Internal Governance

• THE MEMORANDUM OF INCORPORATION
– Allows complete flexibility between company and stakeholders - simple or
detailed MOI can be simple or incredibly detailed. The CIPC provides people
with basic MOIs, MOIs in pretty standard form complying with Companies Act
and relevant limitations. However, big companies and some small may have
very intricate rules and used old company rules. Some MOIs are thus
incredibly detailed as you want, or as simple, providing it complies with the
Act. If a section is non-compliant, that section will be declared as void. MOIs
have to comply with the Act.
– Before new act: Memorandum and Articles of Association, now only MOI
MOI defined in s1 (next page)
• Contents will depend on type of company and its envisages needs and structure
• There are “standard form” MOIs for each type of company that can be tailored to
specific needs, OR can draft own MOI from scratch (subject to compliance with the
Act) – flexible approach of CA 2008.

Definition in Section 1
– The document, as amended from time to time, that sets out rights, duties
and responsibilities of shareholders, directors and others within and in
relation to a company, and other matters as contemplated in s15
S15 delineates what provisions are (un)alterable, and it allows you to have certain
restrictions. If you have restriction on company, RF company. If you restrict any internal
working of company, limiting capacity in some way, RF. E.g. if the company contracts to
R100m or more, require shareholder vote: company cannot enter into any contract of this
amount unless approved. This is a restriction, hence RF.

– All provisions in the MOI must be consistent with the Act
– Provisions that are inconsistent regarded as void to the extent that it
contravenes/is inconsistent
• Alterable & unalterable provisions allows for flexibility, and need to
look at wording of each specific section to see what is and is not.
• Ring Fenced companies
• 3 Types of provisions found in an MOI:
– General Provisions
– Provisions on matters not covered by Act (Act does not cover
anything, therefore you can add to it in your MOI. However,
where this is something in the Act…)
– Alterable (can be changed, default rules that the Act makes
that company can opt out of), and Unalterable (core
foundation of company, typically there to protect creditors,
shareholders (minority especially) and other persons dealing
 with the company). If you start changing things, you need to
be aware of whether this complies with the Act e.g. if days are
not in compliance with Act, lapses back to default position.
– The MOI can be thought of as company constitution. Company
contracts can be between members of company and can be
used to manage internal workings, e.g. shareholder
agreements.
– You cannot have a contract between a shareholder and a
director, whereby the director becomes controlled by the
shareholder. MOI is not a contract, not between shareholders.
Rely on MOI to be a claim in law: say in court, but it is not a
contract and cannot be breached – this is not a valid claim.
However, it is enforced in a very similar way. What the MOI
provides you with are rights, the same way a contract does,
but it is not a contract! No offer and acceptance. Same as the
SA Constitution.
– Incorporators free to include any provision not covered by the Act

You as an individual (shareholder) can enforce your rights as presented in the MOI in court.
The MOI itself has no contractual force between the company itself and 3rd parties,
including stakeholders in their personal capacity.

Sometimes though, as an outsider, you can rely on the restrictions of the MOI to get out of a
contract (rare). You can compel company to act within their powers, and insist on the
company’s compliance with the MOI. MOIs can be amended, and can be called by
shareholders with at least 10% voting rights or defined by MOI.

Call to alter MOI can be called by Board of Directors, without requiring vote of shareholders,
but these amendments are limited: the increase/decrease in number of authorised shares
of a specific class, classify/reclassify authorised shares that are unissued, and determine
preferences or rights of shares where blank shares have been provided for.

• “THE COMPANY CONTRACT”
– Parties to the contract:
• Company – Shareholder
• Company – Director
• Company – Prescribed Officer
• Between/among shareholders

– MOI has contractual (not really correct, discussed above) force between the
members in so far as they relate to their rights and obligations as members
– Individual member can always enforce his personal rights as a member
arising under the MOI by means of proceedings for an interdict or a
declaration of rights or for specific performance
– However member remains bound by the decision of the majority of the
members in general meeting!!

 – MOI as such has no contractual force between the company and an
outsider - including a member in his personal capacity
– Right must be conferred on him by reason, or by virtue, of his membership
of the company - must also relate to his membership of the company
– General right both to compel the company and its organs to act within their
powers, and to insist on compliance with the conditions specified for the
exercise of those powers.

• Amending the MOI
– Who may propose an amendment?
– Amendment approved by special resolution of shareholders Amendment
itself needs to passed by a special resolution
– Court can order amendment of MOI typically when there is non-compliance
in the MOI with the Act.

• Miscellaneous
– Alterations to correct errors Alteration is different from amendment, cannot
change substantive content here.
– Translations of the MOI Fundamental right of SA Constitution
– Consolidation of the MOI Happens where number of different shareholder
agreements and different MOIs, and consolidate them into a single MOI. Can
only happen if people do not have their rights limited
– Authenticity of versions of the MOI You have to find the original MOI. MOI
can be translated, and then there are differences between them. The one
you look for is typically in English, is the one that is filed with and stamped by
the Companies Commission. This is the one that is binding.

• RULES OF THE BOARD OF DIRECTORS
– Unless MOI provides otherwise, the Board of Directors can
make/amend/repeal necessary or incidental rules relating to governance of
the company These have to be filed with the Companies Commission
– Rules must be consistent with MOI and the Act
– Any rule that is inconsistent – void to the extent of inconsistency
– What is the process? Must be filed and published by Companies Commission,
and take 20 days to become binding. Rules are binding once passed by
shareholders (approved in ordinary resolution).

• SHAREHOLDERS’ AGREEMENTS
– The shareholders of a company may enter into any agreement with one
another concerning any matter relating to the company, but any such
agreement must be consistent with this Act and the company’s MOI, and
any provision of such an agreement that is inconsistent with this Act or the
company’s MOI is void to the extent of the inconsistency (Section15(7)).
– Can be between any number and any class of shareholders

• Nature of shareholders agreement
– Agreement between all or some of the shareholders
 – Only binds persons who are parties to it
– If conflict exists between agreement and MOI, the MOI will prevail

• Utility of shareholders agreement
Hugely flexible, but up to a point. Can’t have non-compliance with Act or MOI itself.
– To deal with things that can’t fully be covered in MOI & Rules
– Confidentiality
– Entrenchment of certain rights.
– Extend scope of remedies
– Compliments the company constitution

Week 6: Ownership & Control

18 April 2017

Ownership & Control: Perspective

“The Fighting Goats” by Ezrom Legae, South African Artist
The points below in italics are that of the class, those written normally are James’ points.

• You have this potential problem of a power dynamic between the shareholders on
mass and the directors. Why? Directors direct a company while shareholders own
shares in the company
• You can potentially have a conflict of interest in a personal capacity as director vs
shareholder
• Dynamic between company as a whole and outsiders
• There is also power dynamic between the shareholders themselves, as interests are
aligned to different groups of shareholders. Preference shareholders may have a
different interest to that of minority shareholders, majority vs minority
shareholders, etc.
• There are specific sections of the Act that regulate this power play.
• The power dynamic within shareholders is governed by a simple majority rule;
democracy – people with more votes hold greater power. They control how the
company functions. You can control who the directors are, as well as ratify decisions
according to your interests and no one else’s.

The content this week is extremely tough, and hard to simplify. Learn the core fundamentals
as best you can.

• Shareholders own & board must manage
– Shareholders have an equity stake of the company, but not an equity portion
of the assets
– In large part, the management of the company is done by directors. The
Board manages the affairs of the company.
– A few words about smaller companies: You get a blurring of the lines in this
instance between the concepts of ownership and control. In many cases, the
same person is shareholder and director. There is case precedent that
 discusses/addresses smaller companies as quasi partnerships. Although they
are technically a company, they operate as partnership. Just because you’ve
got a small company does not mean you can disregard the separate legal
personality of that company. You can have a one shareholder, one director
company. You do get what is known as a piercing/shifting of the corporate
veil. What the courts do there is they disregard the legal capacity of the
company, and say that the debts and liabilities of the company are that of the
shareholder(s). One case where that has happened is Hullett & Others vs
Hullett – at the time, it was what you would call as a small domestic company
(private). 3 people, 2 brothers and a father, created this company – a special
purpose vehicle. 3 people created the company, all were co-directors, co-
creditors, and all had a representative capacity with equal shareholding. The
judges in that case said the following: A legal person is not merely a legal
entity, but that there are individuals with rights and obligations behind it: in
some instances, you need to look past the formal structure of the company
to determine what is right. This blurs the distinction between shareholders
and directors. These need to be kept separate. Even small private companies
need to respect this distinction. There are some instances in the Act which
allows you to negate that, but only some and these are very well defined, e.g.
if all shareholders are all directors, you do not need to give notice periods
etc. but this doesn’t mean that shareholders should not vote on certain
matters. This blurring does not mean that it (the distinction) is not there!
– Also referred to as ‘domestic companies’
– A separation between ownership and control is less pronounced or entirely
absent
– We deal with these companies on a slightly different basis

Majority Rule

• When a person becomes a shareholder, he or she agrees to be bound by the
decisions of the majority
– As a shareholder, when you take a vote, you are bound by that vote
according to majority rule. There are no exceptions to this. However,
minority shareholders may have some rights that are borne by the decision.
Typically, though, the majority rule binds the minority shareholder. This
means you cannot easily get out as a shareholder, especially due to the
possible restriction on the transferability of shares (in private companies).
– If you are a minority shareholder, not only does your vote lack proper effect,
you cannot easily get out of the company as a shareholder. Selling your
shares will likely cause a loss, as investors do not want an investment in
which they have almost no control.
– The point is this: and it comes from case law. Samool vs President Brand Gold
Mining Company – necessity that among shareholders there will be a concept
of majority rule.
– Remember that this remains subject to what is determined in the MOI
– Also remember that this is one of the reasons why the Act contains several
provisions aimed at protecting minority shareholders

Minority Protection
• As a result of certain unethical events, there are forms of minority protection.
• There are several remedies in the Act aimed at protecting stakeholders in general
and minority shareholders in particular
• Remedies we will discuss this week:
– Declaration of rights – comes from the common law generally. This is an
application to court whereby you ask the judge to tell you what your rights
are, i.e. to declare what your rights are. You will seek this where your MOI is
unclear/uncertain or where the specific contexts/facts that there is a certain
ambiguity. For instance: “I’m a minority shareholder, and I think that the
decision made is unfair to me. What can I do?”. You need a lawyer for it, you
pay, and present to a judge. This process can be done yourself, but it is
usually between You (as the shareholder) vs The Company/Ex Parte. Very
useful rule, declaration of rights is not in Act but from Common Law. Your
lawyer can do this and advise you, but the advice from the lawyer is not
binding.
– The appraisal remedy – this is linked with fundamental transactions, those
that fundamentally change the company, e.g. merger between 2 companies,
the sale of the greater part of your assets. How this operates (very technical),
for all of those types of transactions, is that the shareholders will vote
whether to approve the transaction or not. If you are a dissenting
shareholder, i.e. do not agree to this fundamental decision of shareholders,
and you vote against that decision, you can force the company to buy back
your shares to the value of the shares prior to or at the time of the vote.
Refinances the structure of shares. Providing you adhere to the procedure, it
is effectively a put option. This occurs even if voting by proxy.
– The derivative action – Foss v Harbottle, also known as the Foss/Proper
Plaintiff rule: if a wrong is done to the company, it is the company that has
right of recourse and must so, not the shareholders. This comes from the
basis of personal rights – you as a shareholder do not have a right to sue
those who harm the company itself. However, in many instances, the
directors are the ones who harm the company … and who would take the
executive decision to sue themselves? Obviously, this doesn’t make sense.
The Derivative Action states that shareholders/interested persons sue or
enforces the rights of the company in the company’s own name. Still sued by
the company, but executed by others.
– Declaring a director delinquent – any person can bring an application to
court to declare director delinquent for the various reasons listed earlier in
the sections. An order of delinquencies strips you of right to be a director,
and you cannot be director of any company for a certain number of years.
– Oppressive and prejudicial conduct – if you are a minority shareholder and
you have suffered from “unfair” conduct … what you have to prove is that
the conduct of the majority/directors was oppressive or unfairly prejudicial to
your interests. The issue is that it must be unfair, not unlawful. This happens
very rarely, in fact there is only one case of this happening: BEE fronting of
two black female janitors not being taken into account. The important part of
 that case was that the courts have what is known as equitable discretion in
making an order linked with that. Just because you think that as a minority
shareholder something was unfair does not mean that you have a claim
there; conduct needs to be oppressive and prejudicial. However, just because
the majority may make more of a profit per share than the minority, this is
just unfair but not oppressive. There is a high threshold to prove. What
actually happens?

Corporate Capacity (This will be covered on Thursday)
Companies can have their capacities limited which therefore restricts directors. If this is the
case, then one you are operating with a ring-fenced company.

• Company is a juristic person. When it contracts agents have to act on its behalf.
• There are two core requirements:
– The juristic person (the company) must have capacity
– The agent (usually directors) must have authority to represent the juristic
person

19 April 2017

Subsidiaries, Related Persons and Control

• A company is a separate juristic person and is regulated as such however
• It would be inaccurate to deny that there may be forces or persons behind the
company that influence or control it
• The law would leave room for abuse if it did not acknowledge and regulate these
relationships as well

You can be a related person if you are two companies, or you are married, etc. – this
concept applies to both natural and juristic persons. Control is linked with shareholding. It
would be very easy to have control over a company and hide that by you not holding the
shares but your wife holding the shares. There are thus two defining sections to deal with
this. You can have a contract with a company under a parent company, but it is only
enforceable against that specific company (e.g. as a supplier to Woolworths Retail, you
cannot go after/claim against Woolworths food when your contract is with the retail
company).

However, you do get some companies that have organized their organisation in similar ways
to Woolworths – the holding company limits its own liability by separating itself from the
structure. The holding company overlooks the operations company, financial company,
retail company etc. and each of these subsidiaries can have further subsidiaries. These
subsidiaries are completely separate juristic persons. Very clearly, this is open to abuse. This
is why we need regulations for related persons.

Natural persons - consanguinity of affinity (see later)

A juristic person is related to another if: either of them directly or indirectly controls the
other (or the business of the other), either of them is a subsidiary of the other, or if a single
person directly or indirectly controls both of them. This stops “operations company” and its
subsidiaries from being separated completely from holding company and operations.

So what is control?
For a juristic person, control is where you directly or indirectly are able to exercise the
majority of voting rights. The shareholders have no fiduciary duties, to the company on
which they are shareholders, or any other related company. However, directors have a
fiduciary duty relevant to the company of which they are directors. The directors of a
holding company only have fiduciary duties to that of the holding company.

Even if the companies serve no similar purpose, if they are controlled by the same person,
they are considered related.


Majority Rule

Artwork: “The Scream”
• As a minority shareholder, you are faced with a significant amount of trouble. Your
position is open to abuse from majority shareholders.

• Majority decisions made in a lawful manner will prevail
• How does the majority act?
– By means of resolutions at general meetings
– Either special or ordinary resolution depending on the nature of the
decision
– Requiring a special resolution is actually one of the first protective
mechanisms

For all decisions undertaken by the company, especially those decided by special
resolutions, you need a high proportion of shareholders to vote in specific way (75%
threshold). As such, you would think that any decision made by it would be for best interest
of company as a whole. However, historically majority shareholders have abused this for
their own self-interest. In these cases, minority shareholders require protection.

Remedies: Introduction

• The 2008 Companies Act largely decriminalized company law: in our law today,
there are very few provisions leading to a criminal prosecution; e.g. trading under
insolvent circumstances, or where you present a financial statement which is false or
misleading. In the latter, it is always accountants fudging the numbers, making things
look better than they are. A breach of the fiduciary duties is not a crime. The general
criminal laws still apply to you, but under companies act this is what we are worried
about.
• Instead aims to provide effective private-law remedies to discourage abuse of
power & gross mismanagement
 – Shift to holding errant parties responsible in terms of statute, not just
common law
• Some criminal sanctions still exist

• Remedies can broadly be divided into three categories:
1. Remedies where there has been an abuse of position by director etc.
2. Remedies given to shareholders to protect their own rights
3. Remedies where there has been an abuse of the company’s separate juristic
personality

Remedies: Declaration of Rights

• Holder of securities may apply to court for declaratory order regarding rights in
terms of – (does not have to be a share, can also be a debenture), where court tells
you what your rights and duties are. These can be rights and duties in terms of:
– The Act
– The MOI
– Any rules of the company
– Any rules according to shares/debt instruments
– Any applicable debt instrument

This feeds into a lot of the other remedies. This is the court telling you what your rights are.
The courts, unlike lawyers, do this in a binding manner. Act upon declaratory order.

Remedies: Appraisal Rights
This one is very interesting. Section 35(3) of the Act: a company may not issue shares to
itself.

There are two concepts around shares: A- they are authorized, B- the same authorized
shares are issued. It is only at this point when they have legal standing, and are known as a
share, and can then be sold/transferred. It is a two-step process.

In the appraisal remedy, you can force the company to pay you back the value of the shares
providing you adhere with the procedural requirements. If you do not like the decision that
is taken, you can take your share back to company and they have to buy it back from you at
fair market value. During this process, the shares become authorized but not issued. The
shares do not cease to exist, but just become unissued.

• When may shareholder use this remedy?
– Resolution to amend MOI that alters rights or terms attached to shares in
manner that is materially adverse to the rights or interests of that
shareholder
– Where company undertakes a fundamental transaction
• Disposing of greater part of assets (>50%)
• Merger or amalgamation
• Scheme or arrangement (very loosely: internals of a company are
restructured)

However, what you can’t do is hedge. You have to give a written notice beforehand. You
cannot just go back after the meeting and say you don’t want to hold the share anymore.
This can be abused by shareholders, hence it is an extremely tenuous procedure for
shareholders, and becomes extremely technical e.g. what exactly must it say. You are not
forced to accept offer should shareholding spike. Directors determine the value of the
shares, and aim to value them low. In US, most litigation about share price deals with the
valuation of the share. If the shares are not publicly traded, then how do you determine
value of the share? This is where directors abuse their position and value shares low,
leading to big fights. There is no reported case law of this in South Africa.

• Procedural requirements:
– Entitle to value of shares at time immediately before resolution was
adopted
– Must give written notice of objection before resolution put to vote
– Must attend meeting and vote against resolution
– Must notify company that he/she will rely on appraisal rights after meeting

Remedies: Oppressive and Prejudicial Conduct
Only case on this in SA was case discussed yesterday about the two janitors.

• Action/omission of company or business being conducted or powers of director or
prescribed officer being exercised in way that
• Has result that is oppressive or unfairly prejudicial to or that unfairly disregards the
interests of the applicant

Court has wide discretion here; they can strike down the prejudicial part of an agreement.

Remedies: Derivative Action
Very important.

• Proper plaintiff rule Foss vs Harbottle. The court in that case said: in dismissing the
claim that shareholders suffered a loss because their share price dropped, the court
said this: where a company is wronged by its directors, it is only the company that
has the standing to sue. It is not the shareholders of the company. Problem –
directors suing themselves. This is where derivative action comes in. There is no
Derivative Action in Common Law anymore, the Act is the only place you can enforce
the rights.
• Who has standing? Locus Standi? Shareholder, director, or representative of
employees. Cannot use this if you are an employee, have to talk to union.
• Statutory derivative action, steps to proceed: PROCEDURE
– Serve a demand
– Independent person or committee appointed
– Company initiates proceedings or refuses to comply
– Following refusal – may now approach court
– When will court grant leave?

Requirements for this to happen:
• Court must be satisfied that company failed to comply with demand that is set:
“company has been harmed, please act”
• The applicant applying for access to Derivative Action acts in good faith
• The resulting proceeding will involve the trial of a matter of material consequence to
the company
• Court must be satisfied that it is in the best interests of the company that the
Derivative Action be permitted
All 4 of these requirements must be satisfied. It is still the company that will be suing, only
3rd party enforcing company’s rights.

Remedies Against Directors

• Delinquency
– Who has standing to bring the application?
– How long does it last?
– When must the court make an order declaring a director delinquent?
• Consenting to act as director when ineligible/disqualified
• Acting in manner that amounts to gross negligence, willful
misconduct or breach of trust

• Probation
– Who has standing?
– How long does it last?
– When may the court make an order?
• Acting in manner materially inconsistent with the duties of a
director
• Present at meeting and failing to vote against resolution despite
knowing it fails to satisfy solvency and liquidity test

20 April 2017
Today will arguably the trickiest lecture of the semester.

Before understanding the concepts below, you need to ensure you have a solid
understanding of the following concepts:

Capacity – in law, it means you have the ability to be bound by and to enforce rights and
duties, “you can do stuff”. If you lack capacity, you cannot do X. In contract law, if you lack
contractual capacity, the contract is void and is if it has never come into existence.

Authority – by now, we should know this.

The above two are interlinked. Why? Companies have to act through human agents, and as
we know already, companies are restricted in terms of doing certain things in terms of their
MOI. An MOI can restrict the bounds of a company’s capacity. If it does that, it is
fundamentally changing, and the company must be a ring fenced company.

We talk about capacity in two spheres: the capacity of the company and the capacity of the
directors. There is also this concept of authority kicking around, and it is linked to capacity
as follows: directors’ authority to bind the company must be necessarily limited by or
constrained to what the company has the capacity to do/bounds of the company. Directors
have only as much authority to bind a company to what the company can do. What the
company can do limits what the directors have in terms of their authority.

You can also have your authority as a director limited, not by capacity of company, but by
something else, e.g. MOI or employment contracts. This is where the MOI explicitly limits
the capacity of directors to a further extent: for example, a company has the capacity to
enter into a contract worth R10m, or even any value, but the directors may only have the
capacity to bind company in contracts of R1m, above which they have shareholder approval.
This forms a ring-fenced company.

Company’s object clause: anything outside of company’s bounds is considered Ultra Vires.

Introduction

• Concepts to understand first:
– Ultra vires Company’s object clause: anything outside of company’s bounds is
considered Ultra Vires. That is a very antiquated way of talking about
companies. Companies do not limit themselves to a minute business
operations, but vast activities within the marketplace. Lawyers thus used to
drive very wide object clauses, to the extent that it was not at all useful to
have one. But having a narrow objects clause is to the detriment of creditors.
If it fell outside of objects as a company, the shareholders could say that the
contract was ultra vires and contract would be declared void. So how do you
know what the object of the company is from the creditor’s perspective?
There was no creditor protection. Therefore, the New Companies Act scraps
the concept of Ultra Vires.
– Constructive notice This was linked to Ultra Vires. In the old Companies Act,
all the rules of companies were filed at the Companies Commission and made
public. The thinking behind this was that you should go and check what they
are before contracting with company, but who would do this? This process is
far too inefficient. This again was to the detriment of creditors. Shareholders
could argue that the contract did not abide by the internal rules. Hence, the
new Act scraps this in large part. The exception is ring-fenced companies.
Under today’s act, if company is Ring-Fenced, you as the contracting party
with the company are taken to know what that limitation is. Onus is on 3rd
party to check the implications of the Ring-Fencing clause(s). If you don’t
check, you will be bound by it and the company can say that directors did not
get shareholder approval. Ring Fencing is thus the only exception to
Constructive Notice in company law, but does not apply if dealing with
limitations on company capacity alone.

– The turquand rule This comes from English rule: people acting with the
company in good faith can assume that all internal formalities within the
 company have been complied with. This is a means of creditor protection.
This phrase has been the subject to many court decisions and discussions.
Requiring a shareholder approval is not a formality, a formality is something
like sending a notice at the right time. Vote is not a procedural formality, just
substance. Hence, a bit of creditor protection was offered but not much.

How does it work now?
• For company to act with legal consequences there are two basic requirements
– Capacity
– Authority

Capacity NO PROBLEM QUESTIONS

• In terms of the Act a company has the same capacity that a natural person has
except where it is incapable of performing the act in question or the MOI restricts
capacity
• This is where the ultra vires doctrine operated or might be relevant (acting beyond
bounds of your authority). It is still relevant, for this reason: you get what is called
internal and external consequences. External: legal effects between company as a
whole and 3rd parties (e.g. validity of contract between creditor and company).
Internal: consequences within the company (dynamic between stakeholders within
the company) – this is all governed by the MOI.
• An MOI acts like a contract but is not a contract – if director breaches his
authority/breaches the MOI and acts Ultra Vires, only the internal consequences
have legal relevance. What that means is that shareholders can enforce their rights
in terms of the MOI for a director who has breached authority, and sue that director.
Internal consequences remain legally valid. However, it does not have the same
impact on external consequences for breaching the MOI, e.g. for director acting ultra
vires.

e.g. if a director only has capacity to bind company to limit of R1m contracts. Everything
outside of the circle of the company are external consequences, everything inside is internal
consequences. If there is a contract agreed upon between company and 3rd party of R10m,
which is completed, this contract remains valid, even if company did not have the capacity
to enter into it. If you are a company with a limitation, and you do not have a Ring Fenced
Company, this would remain valid and enforceable. Here, the MOI has limited the authority
of directors but is not registered as an RF. Thus, the external consequences (the contract
between the company and the 3rd party) remains valid. Previously, this transaction would
have been considered ultra vires and void.

If you are Ring Fenced, however, (and the limitation placed on directors comes from
somewhere other than company capacity – see highlighted portion of next page), the
contract would not be valid. This is a simple registration issue. Just because you have a
limitation does not mean you are Ring Fenced. You have to register as Ring Fenced,
otherwise the limitation is not binding.

It is with the internal consequences where shit starts kicking off. Within this circle, a
shareholder can sue director for breach of authority. Shareholders can get an interdict
against company and force company to breach the contract. In most cases, it will only have
internal consequences and not external:

• So, technically if the MOI restricts capacity by including an objects clause the
company technically does not have capacity to perform the act and in terms of the
ultra vires doctrine the transaction would be void
• BUT
• New Act states no act/agreement is void simply for lack of capacity (and hence
external consequences would remain valid)

• Shareholders may now ratify an ultra vires act
• May take action to prevent directors from acting ultra vires or to hold them liable
for doing so
• So the doctrine now effectively has only internal application safe to say that this
doctrine is only relevant here, with the internal consequences of a breach of
authority.

21 April 2017

Authority NO PROBLEM QUESTIONS

• The board of directors (as a default) has authority implied by law to represent and
contract on behalf of the company They are the day to day management of the
company, and their capacity is limited by the capacity of the company and by the
MOI. The capacity of the company will limit the authority of the director. The
director can only do as much as the company can do, in theory. In practice, directors
act beyond what the company can do (act Ultra Vires). The company cannot say a
contract is void simply due to director breaching authority, should the company not
be ring fenced. If the company’s capacity is limited, you are most likely dealing with a
ring fenced company. In this case, it is due to the fault of the 3rd party. However, if
there is a limitation and there is no RF, the contract is valid and there is no limitation
to the contrary.
• Section 20.1(1)(a) is phrased along these lines: no contract is void for reason only
that A) company lacked capacity or that B) directors lacked authority. This is
irrespective of what company you are, even if you are ring-fenced. It does not
matter. All external consequences remain. Where the Ring fencing becomes relevant
is where the directors’ authority is limited not by the capacity of the company, but
by something else (by the MOI, with a direct provision, or another contract). If the
directors’ authority is limited NOT by a limitation of company capacity, then the
contract can be declared void and you are declaring it void, not due to a lack of
authority due to the capacity of the company, but a lack of authority due to
something else (MOI). This is counter-intuitive, as the capacity of the company limits
the authority of the director, and normally, if you were to lack capacity, the contract
would be void.
 • If, however, a director lacks authority for another reason (MOI) and the company is
ring fenced, then that contract is void or can be proved to be void because the
director lacked authority (i.e., you cannot prove the 5 forms of authority from much
earlier). Companies have capacity that is unlimited generally, but MOI can limit this.
If MOI does that, the directors’ authority must be limited by necessity to what the
company can do. When directors’ authority is limited by company capacity, contracts
are NEVER void. It is when only when directors’ authority is limited directly by the
MOI or other contract.
• The internal consequences remain relevant in either instance. The above paragraphs
relate to external consequences and relationships.
• It is possible to limit the directors’ authority in the company’s MOI
• If a director acts outside of the confines of his authority the company cannot be
bound by the agreement This is not quite true. It is only if he acts outside of the
confines of his authority as defined directly by the MOI, not by the company
capacity.


Brought forward from 12 May 2017:
It is only when you have a restriction in your MOI, do you have an RF.
In any case, if a director, acts outside the authority as determined by the company capacity,
the contract is valid – irrespective of whether you have an RF. There are no external
consequences from a lack of authority as determined by company capacity.

However, you can limit director’s authority outside of an MOI, e.g. an employment contract,
in which case a contract can be declared void for a lack of authority, not as authority as
defined by capacity, but authority of contract. It can be proven that he does not have any of
the 5 forms of authority.

e.g. If the MOI directly restricts the authority of directors, it is an RF company. In this case,
constructive notice will apply. However, where you limit company capacity, you have an RF
company. BUT: Constructive notice doesn’t apply then. If a company’s MOI limits company’s
capacity, no action of the company is void just because of the limitation or as a consequence
of that limitation, the director does not have authority.

Shareholders can ratify the performance of the directors, or shareholders can interdict the
performance of the company of a contract meaning company has to breach the contract.
This pertains to the internal consequences.

• How might a third party respond if a company denies liability due to lack of
authority?
– Turquand rule: gives a presumption to an outsider acting in good faith that
all internal formalities have been complied with (e.g. if requiring shareholder
approval, 3rd party can presume this has been done if in good faith). Stopped
from saying there is not authority.
– Estoppel: proving that the director did have a form of authority
• Is there anything the company could use in return?
 – Constructive notice company can use only if a ring fenced company, and if it
is something other than just company capacity that has been ring-fenced.
The ‘RF’ is a warning light and everyone must know about it, and it is up to 3rd
parties to check what they are. If a director has a limitation on his authority
and the company is ring fenced then the 3rd party cannot claim under
estoppel, as they are taken to know that there was a limitation. Again, only
relevant for Ring Fenced companies.

One Last Thing…

• But what about constructive notice and capacity? In other words, what if you RF an
objects clause? Limiting scope of operations of the company. There are no external
consequences from a lack of capacity. It is only internal consequences that remain
relevant.


Introduction
Why is any of this relevant? Gets technically relevant in distributions, share issuing,
threshold requirements, permission for financial director to buy shares in a company, etc. A
lot of this is not dealt with in this course, but still useful in other aspects of due diligence.
You need to know what entities a company group controls.

• We are going to consider two main areas where one person or entity might control
another
– Subsidiary and holding relationships
– The concept of related persons

Definitions
You can have puzzles of these companies. Unbundling this web of companies and trusts,
partnerships, private companies, special purpose vehicles, all in one big structure which is
termed a group. Most of the big listings, you will see groups of companies.

• ‘‘group of companies’’ means two or more companies that share a holding
company or subsidiary relationship
• ‘‘holding company’’, in relation to a subsidiary, means a juristic person or
undertaking that controls that subsidiary - typically speaking, this is the big one –
the head honcho at the top and the one that has all the assets and liquidity. Why? If
you are structuring your affairs, you want to limit the liabilities to the holding
company as much as possible. Operational company is day to day, and are hence
very risky. They will not have much liquidity and fixed assets. Because of the great
risks of lots of day to day transactions, you don’t want to hold a lot of assets because
you can be threatened on them, holding company can then transfer money and
assets between them. Yes, you will pay some transactions tax and donations tax may
be expensive, you can minimize this cost. Holding company will then ensure that the
subsidiaries enter into contracts, not themselves. Limiting liability makes a company
extremely valuable.
 • A wholly owned subsidiary – a subsidiary (controlled by someone else) and all of its
shares are owned by one person. In terms of control, you look at these factors,
directly from the Act. Need to understand this concept, if you control directly or
indirectly the voting rights of the company, control.

Subsidiaries: Control

• So it is all about control/the fact that the holding company controls the subsidiary
• That begs the question, how do we determine control in this instance?
• How can you control a company?

• X is a subsidiary [sub] of Y if Y, its subsidiaries or nominees thereof:

1. directly or indirectly control or are able to control the majority of the issued securities’
voting rights [VR] in terms of shareholders’ agreement or otherwise (Number of shares
not criterion)
OR

2. has or have 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;
(note you can be a majority with even 35% shareholding). How can you have a majority
shareholding with 35%?

If you can materially impact the policy of a company in any way; control – this is a catch-all.

Company
H





51% = votes at board or GM level



Company
S
This would be form of control. S is controlled by H as they have majority shareholding at
board level. Directors of H are often the directors of S too. But you do get much more
intricate looking webs.

Company
H

Company Company Company

30%
S1 S2 S3
1%
20%

Company
X

Is there control? Company X is controlled by company H. Indirect control over X of 21%,
direct control of 30%. Dependent on control of S2 and S3. A lot of company deals with this,
the simple structuring of business affairs.

 Company
H

Company Company Company

S1 S2 S3
1%
30% 20%

Company
X

Here, you just have indirect control, but the control still rests with the holding company.


• Voting Rights exercisable in certain circumstances are taken into account only when
those circumstances have arisen or when circumstances under control of person
holding the VR – sometimes you do get people holding shares as nominee of another
person. Effectively, nominees are not like proxies, but more akin to trustee.
Someone holds shares on behalf of another. We are not just talking about votes of
share, but shares are wholly held of another. Should you want to hold a lot of shares
but don’t want to be seen as in control, you can transfer shares to nominees. You
still have control over these shares. Why would you not be seen as control? May
affect who invests. Nominees are governed by contracts. If you buy shares for your
child, you are their nominee.
• VR that are exercisable only on the instructions or with the consent or concurrence
of another person are to be treated as being held by a nominee for that other
person.






Consent needed to
exercise voting rights

Company Company
A B

51%

Company
S

This means that…

Company A holds shares as nominee for B

and

Company B holds shares as nominee for A

If you get consent to exercise voting rights, if either A or B need permission of other to
exercise voting rights (shareholders’ agreement between A and B), then they hold shares as
nominee for each other. Why would you have a provision like that? To cut through majority
shareholdings being hidden.
If to secure the control indirectly, there is a shareholders’ agreement in which they require
permission, then they are nominees of each other and both control S. For the purpose of
the Act, they can both be in control of S.

• VR held by a person as nominee for another person are to be treated as held by that
other person
• E.g. A needs consent of B to exercise VR. A holds those shares as B’s nominee. Shares
are to be treated as B’s shares

 Company agency Company
B (P) A Consent needed to
exercise voting rights

51%
This means that…

Company P is treated as the

holder of the shares in Company S
Company
S

In this picture, we have the following, meaning ultimately here the principle is the holder of
shares in company S.


• VR held by a person as nominee for another person are to be treated as held by that
other person
• E.g. A needs consent of B to exercise VR. A holds those shares as B’s nominee. Shares
are to be treated as B’s shares
• VR held by a person in a fiduciary capacity are to be treated as held by the
beneficiary of those voting rights – immediately, you should be looking at this as a
trust. If beneficiary, and trust itself, own majority shareholding, then beneficiary is in
control.

Wholly Owned Subsidiaries

• X is a wholly-owned subsidiary of Y if all of the general VR associated with issued
securities of X are held or controlled, alone or in any combination, by Y, its
subsidiaries or nominees

 Company
Company Y
Y

Company Company
100% N S

35% 25%
40%
Company
X Company
X

Here, you still have a wholly owned subsidiary. The challenge is determining who is in
control of the other. You need to be able to understand this when doing an audit. It impacts
the holding nature, where the profits and losses accrue to.

Related Persons

• One individual is related to another if
– Married (or live together in similar relationship)
– Separated by no more than two degrees of natural or adopted
consanguinity of affinity
• Individual related to juristic person if directly or indirectly controls juristic person
• Juristic person related to another juristic person if directly or indirectly controls
the juristic person or its business


Week 7: Governance & Accountability (A)

25 April 2017

Governance & Accountability




Company
Stakeholders

3rd Parties

Directors
– Shareholders
– Directors





Last week we dealt with the ability of Directors to deal with 3rd parties, and their authority,
and we have dealt with stakeholders. Now we deal with the corporate veil (the yellow
squiggle)

The hallmark of companies is separate legal personality. People within the company are
insulated from liability outside of it. However, their liability is not completely limited though
– there are a few exceptions. But more importantly, however, it is right to think that
shareholders are limited in terms of the amount of their investment. No absolute limitation
for shareholders: if you buy shares/equity in company and company fails, you lose your
equity/investment. You do not get this money back. So although there is liability that can be
lost by shareholders, it is limited to the value of their investment. This is fundamentally
linked to the idea of separate legal personality. The principle of the contract is the company,
a big legal fiction. Shareholders are not principles to the contract.

The law developed around the human need for companies, hence the legal fiction is
created, and this created problems. Humans abuse the company form due to the limiting of
liability, you can abuse the company structure.

Separate Legal Personality

Salomon v Salomon & Co Ltd [1897] AC 22 (HL)
“The company is at law a different person altogether from the subscribers to the
memorandum; and, though it may be that after incorporation the business is precisely
the same as it was before, and the same persons are managers, and the same hands
receive the profits, the company is not in law the agent of the subscribers or a trustee
for them.” – Lord Justice Macnaghten

Dadoo Ltd v Krugersdorp Municipal Council 1920 AD 530
“The conception of the existence of a company as a separate identity distinct from its
shareholders is no merely artificial and technical thing. It is a matter of substance…” –
Chief Justice Innes


All of that aside, separate legal personality is at the heart of company law.

The bottom one (Dadoo) is the one that we need to take notice of with that in mind. A
company has a separate identity from its members (shareholders and directors).

Judge Rose Innis went further: once a company is formed, a veil is formed between the
company, and its directors & shareholders. When misused, the corporate veil is pierced, and
with it the protection given to directors and shareholders. Here, substance takes
precedence over form (at the time, only white men could incorporate companies or hold
shares). The municipality tried to seize the assets as the sole shareholder was coloured. The
Court ruled that company was a separate entity, and not that of the coloured man. This
judgement led to a change in law, but this precedent is still true (apart from the race). A
company is completely separate from members.

‘The Corporate Veil’

– Metaphorical veil drawn between company and its shareholders/directors once it
is incorporated (you contract with the company, not its shareholders – so when 3rd
parties can pierce the Corporate Veil and are permitted to do so, you are removing
the existence of separate legal personality, the hallmark of companies. Your focus
shifts from the company to seeing what lies behind the veil – hence known as
shifting the veil). Disregard separate legal personality: in some very limited
instances, persons who abuse separate legal personality of companies may become
personally liable for contracts or claims against the company. This is an entirely new
concept.
– Possible for this veil to be “pierced” in exceptional circumstances…
– “Separate existence remains a figment of law, liable to be curtailed or withdrawn
when the objects of their creation are abused or thwarted.” – Cameron JA (benefit
you have as shareholder/director of separate legal personality is taken away should
you abuse it, and this “taking away” is piercing the corporate veil. However, this is
quite fundamental, and is therefore hugely restricted. Only 4 cases in the last 100
years).










Piercing the Corporate Veil

Introduction

 • In certain circumstances, the law will withdraw the right of separate legal personality
and hold insiders liable by disregarding the company’s separate existence.
• You have to distinguish between two types of veil piercing: you need to know both.
• We distinguish two types of veil piercing:
– Common law
– Statutory (s20(9) Companies Act 2008)
• Effectively, you have two bites of the cherry. Because the requirements are different
for each, if you fail through the use of the one, you can simply use the other.
• In ONLY James’s opinion, statutory veil piercing is easier. The common law one is
inherently difficult and very tricky. However, this doesn’t mean you can’t use it, it is
just unlikely to win, purely because of the wording. Under the common law, there is
an immensely detailed process for the entire thing. Under the statutory one: what
you have to prove is an unconscionable abuse of the juristic personality.

Separate Existence Taken Seriously

• The separate legal personality of a company is to be recognised and upheld except in
the most unusual circumstances.
• A court has no general discretion simply to disregard the existence of a separate
corporate identity whenever it considers it just or convenient to do so. (Hülse-
Reutter v Gödde)

The default position is that the courts will respect the separate legal personality of
companies: this is the starting point. Linked with that, the following statement MUST BE
THERE: the corporate veil is not readily pierced/done. The corporate veil is only pierced in
the most extreme/unusual scenarios and does not happen often. Courts do not have a
discretion, the courts must rely on either common law or statutory, no general discretion
and they have to abide by specific requirements.

• Courts look at substance over form.
• Measure of last resort – other remedies?

There may also be an inversion of the principle agent relationship – cf. ‘alter ego doctrine’:
The other way you get to the same result is alter ego doctrine: you effectively flip the law of
agency. Where the company doesn’t operate in and of itself, but as an agent of someone
else (shareholders), then you hold the principle (shareholders) liable, not the agent. Again,
this is only where abuse of the separate legal personality is present. This is another case of
substance over form. The company is the alter ego of the shareholders, and operates as the
shareholders. Here you are not piercing the corporate veil, but inverting the law of agency.
However, they are both uncommon as they are altering the nature of the company.



Abusing the Corporate Form

• The circumstances in which a court will disregard the distinction between a
corporate entity and those who control it are far from settled.
 • Much will depend on a close analysis of the facts of each case, considerations of
policy and judicial judgment.
What does the court look for?

• For statutory veil piercing: there must be an unconscionable abuse, i.e. must be very
bad/gross. Under the common law, what provides the thinking is that the courts will
always look at substance over form. This means that they look beyond the veil to see
what is really happening. Affairs can be structured to be very murky, e.g. who does
what etc. You might even look at who the shareholders are, who the proxies are,
what are the shareholder agreements. You need to look at substance over form in
order to see whether to pierce the corporate veil. In order to pierce the veil, you
need to peek around it first. Once you’ve seen what is happening, you then say this
can or can’t be pierced.
• The courts do not allow you to claim in the alternative, i.e. courts will not pierce the
veil if there is another remedy to the applicants – and will avoid piercing veil. This is
where alter ego doctrine comes in: you treat the company as agent, not as principle,
of the shareholders. The policy to taking such a strict approach was very nicely
described: Judge Johan Smalburger: there are 3 words/circumstances to look at
(below) - because, to do otherwise would undermine the principles of separate legal
personality. BUT where fraud and dishonesty/other improper conduct, other
considerations will come into play, one must weigh the forces for and against
piercing the corporate veil.
• There are 2 policies at bay: one side is the law of legal personality, and the other is in
certain circumstances to be allowed to negate it: these circumstances are:
– Fraud
– Dishonesty
– Other improper conduct
• However, from the above paragraph, the exact circumstances are far from settled.
This was 21 years ago. Although there are indicators as provided by this paragraph,
we do not know in what exact circumstances that the veil can be pierced. This means
that because we have no defined context, we have to look at the facts and context.
This should be worrying: because we will be dealing with a set of facts, and have to
make a decision for problem questions.
• Ultimately, what you look for are a few things and it is important to know the
following:
– This is an undecided and controversial area of our law.
– This is a drastic remedy, meaning that courts prefer to respect the separate
personality of companies.
– There must be compelling reasons, but what exactly these are unknown,
hence the 3 above indicators.
– From older cases, you need the following two:
• As a matter of principle, there must be a misuse or abuse of the
corporate identity by those who control it; which
• results in an unfair advantage being afforded to those parties who
control.


Common Law

• The Cape Pacific case sets out a number of general principles / factors that a court
must take into account when exercising discretion…
• Examples of the abuse of Separate Legal Personality
– Separate legal personality was used as a device by a director to evade his or
her fiduciary duties.
– Separate legal personality used to overcome a contractual duty.
• Fraud relevant, but not essential

This case (very famous, and conducted by very clever people) provides the following
principles relating to instances of piercing the corporate veil:
• There is no general discretion by courts
• The case will be decided on a case by case basis
• Courts must avoid to pierce the veil wherever possible
• If there are alternative remedies, courts must not pierce the veil and use alternative
(e.g Alter Ego)
• Where improper conduct occurs, weigh forces for and against piercing the corporate
veil – there is a balancing of policy interests.
• Fraud is not necessary, but relevant. Does not have to be fraudulent.
• Test is not as simple as saying that: because a 3rd party has suffered an injustice, you
are permitted to pierce the veil. An unconscionable injustice suffered by a plaintiff
does not directly allow for a piercing.

Companies Act, s20(9)

“Whenever a court, on application by an interested person, or in any proceedings in which a
company is involved, finds that the incorporation of, or any act by or on behalf of, or any
use of, that company constitutes an unconscionable abuse of the juristic personality of the
company as a separate entity, the court may declare that the company is to be deemed not
to be a juristic person in respect of such rights, obligations or liabilities of the company and
the court may give such further order or orders as it may deem fit in order to give effect to
such declaration.”
… difference between common law and statutory form?

Before this slide, what we have dealt with is the common law, and some of these concepts
will be relevant. What is determinant here is the unconscionable abuse required within
statutory veil piercing. This is simpler. Facts such as whether the plaintiff has suffered an
abuse, fraud etc. will be taken into account. One has to look at the facts. In a problem
question, so far we’ve dealt with what the law is, and applying it to facts. If you do not use
this method, you will get yourself into a mess in the answer. Use IoPAC. An answer without
structure leaves you dead in the water.

Standards of Directors’ Conduct

– Corporate governance is generally understood to mean the way or systems by which
companies are directed and controlled. The systems of corporate governance exist
 for the purpose of effectively restricting and monitoring the powers vested in
decision-makers.” – Tshepo Mongalo
– John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113 (CA)
o “If powers of management are vested in the directors, they and they alone
can exercise these powers. [The shareholders] cannot themselves usurp the
powers which by the [company constitution] are vested in the directors any
more than the directors can usurp the powers vested by the [company
constitution] in the general body of shareholders.”
– The law must therefore seek to protect the interests of the owners whose control
does not extend to the day to day management of the company by holding
accountable those in control.

If there is a veil piercing, it is likely to be due to an abuse of the corporate form by directors.
This does not mean to say that through piercing the corporate veil, you cannot hold a
shareholder liable. You can. In many instances, piercing of the veil is allowed in cases of
directors being shareholders or vice versa. This is where this law comes into play.


26 April 2017
In yesterday’s lecture, we spent time unpacking the common law and general theory of
piercing the corporate veil. Everything there is relevant on common law questions of the
piercing the corporate veil. There is a broad variety of cases showing how fraud etc. is
relevant, and you need to know those ideas with precision.

There is an application on Monday 8 May. Preparation should take two hours maximum,
and this will definitely come up in the exam.

Section 20(9) is a recently introduced statutory veil piercing provision – the focus is on the
unconscionable abuse of the juristic personality. Under Common Law, you had to prove a
disadvantage to claimant. Here, you don’t. Yes, proving a disadvantage to the claimant
would impact determination on whether there has been an unconscionable abuse. or not; a
lot of the elements overlap. However, here it is broader under the Act than under Common
Law. Therefore, it may be easier to prove under the Act than under common law.

Unfortunately, we are still getting to learn what an unconscionable abuse actually means.
Only one case dealt with it in 2013, in Cape Town, and no binding precedent/ratio from the
case was presented. We do not know what the bounds of an unconscionable abuse are
under the Act, but we do know the bounds of common law. But this is different. This needs
to come through in your answer – need to understand gross misconduct. What it means to
be gross means to be very very bad. There has clearly been an abuse, but the threshold
must be high.

From the common law, the following 3 principles will still remain:
• The first is that piercing the veil will be an exceptional remedy, used very sparingly.
This ultimately means that it will be used in only the most extreme circumstances.
• Secondly, this phrase “unconscionable abuse” allows for a much more flexible
interpretation. The whole purpose of the provision of the new Act was to make it
 more flexible than common law. If we were to make it too rigid, it would take away
that aspect.
• Lastly, this potentially provides more certainty. Although we don’t know what quite
is what required, we know it must be an unconscionable abuse, whereas in the
common law, what it comes down to is effectively a balancing of interests. As soon
as you have a balancing, there is uncertainty. Surprisingly, there is still less
uncertainty under the act, even though an unconscionable abuse is not specifically
defined.

Linked with the abuse of the corporate form is directors’ conduct and the principles of
corporate governance (see last point from yesterday).

To wrap up yesterday’s lecture, what you are looking at when piercing the corporate veil, is
looking through the separate legal personality – first you look behind to see what is
happening, and if there is an abuse, you pierce the veil and disregard the separate legal
personality of the company.

Directors’ Duties & Liability
Today’s lecture is about directors’ duties. The first important thing to understand here is
that there is a distinction between the directors’ duties in the common law and under the
Act. In law today, the Act has partially codified the common law. This is a cock-up, as there
are differences between them. Nowhere do we say that the common law description of
directors’ duties is irrelevant. They are still relevant; the problem here is what is said in the
Act vs Common Law.


Directors’ Duties

Overview

• Companies Act has partially codified common law duties.
• Director liability may be:
– For loss, damages or costs sustained:
• Based on breach of fiduciary duty (provisions in the Act)
• Based on negligence (failing to act with reasonable care) (Directors’
Duties).

What we are talking about when we say Directors’ Liability, in broad terms, is a liability
which arises as a result of a director breaching his duties. There are two broad categories of
directors’ duties:
• Fiduciary duties – a director is in a position of trust with the company, meaning that
the director must act in the best interests of the company. This is all based on trust.
• Non-Fiduciary/Delictual duties – care, skill & diligence (not fiduciary duties), but one
based on negligence and the law of delict and fault.

In either case, you can claim for a liability based on those duties. Now, from Bus Law 1, if
you are claiming in delict, you can claim for a financial loss, and non-financial losses.
However, you cannot claim for consequential losses in delict. In delict, your claim is to put
you in a position in which you would be if the delict had not occurred. It is limited to the
harm you suffer, unlike claiming under the law of contract in which you can claim for full
consequential losses.

So, a claim for the non-fiduciary duties would be a claim in delict and is thus limited to
financial and non-financial losses. Liability is limited to mitigating the harm you have
suffered.

– For costs sustained where the director
• Acted on behalf of & bound company without authority**
• Carried on business prohibited by section 22(1)**
• Was party to an act/omission by company despite knowing** that it
was calculated to defraud
• Signed/ consented to/ authorised:
– publication of misleading financial statements
– publication of a prospectus containing an “untrue statement”

However, with fiduciary duties, it is different – fiduciary relationships are non-contractual in
nature, but also non-delictual. So, where do you claim? What is your liability? Your liability is
determined by the following: the scope/amount of the liability, is determined by the Act
itself. Effectively, for our purposes, directors’ liability can accrue from those two things, but
alternatively losses can result from where the director has breached the Act. There are
specific provisions throughout the Act which delineate the bounds of directors’ liability.

The point, therefore, is this: directors’ liabilities are not limited to a breach of the directors’
duties. Directors’ liability can stem from other places, due to the breach of certain
provisions of the Act.

In many instances, directors have to vote on things. You can be held liable as a director if for
instance you are not at the meeting, or alternatively, where you voted positively on a
decision which turned out to be a bad one. You are isolated/insulated from liability where
you vote against the decision which subsequently caused harm.

Throughout the Act, there are certain provisions outlining decisions for which directors can
have liability. Prescribed officers can also be held liable under the following.

Directors also liable for being present at a meeting and
participating in or failing to vote against the following decisions:
• Issuing of unauthorised shares (ito s 36)**
– Also granting options [ito s 42(2)] for such shares**
• Issuing of authorised securities (ito s 44 re fin. assistance)**
• Provision of financial assistance contrary to the Act or MOI**
– either to director or for the acquisition of securities
– to extent that resolution of agreement has been declared void
• Authorising distribution contrary to s 46**
 • Acquisition by company of its shares/shares in holding company contrary to section
46/48**
• Allotment by company contrary to Chapter 4 to extent that allotment has been
declared void**


Application

• Standards of conduct imposed by the Act also apply to prescribed officers, alternate
directors and members of committees – s 76(1)
– This includes provisions dealing with disclosure of personal financial interests
(This is the big one – here there is a relationship where not only directors’
duties, piercing the corporate veil etc. come into play, but with related and
interrelated persons too: directors are in a position of power, which means
that the position is ultimately open to abuse (you can conclude contracts
which benefit yourself/your spouse etc.) – the link here is with related and
interrelated persons. Whether the director has an interest in a financial
transaction or not. This needs to be declared, even if it is to the benefit of the
company. This falls under the fiduciary duty of full disclosure.
– Companies Act uses constructive form of knowledge (if you are in a position
where you should have known something, you will be presumed to know it.
You do not need to have the actual knowledge; if you should have known
then you are presumed to have known.
** knowledge required on the part of director
• Coexisting duties at common law taken into account when giving effect to /
interpreting statutory duties (only partially codified).

Section 76(2)

A company director:
• must not use position of director or information obtained to gain advantage for
himself or for anyone else than the company or a wholly owned subsidiary.
• may not do anything to knowingly cause harm to company or a subsidiary
• must communicate to board any practicable information unless he reasonably
believes that the information is immaterial/generally available to the public/known
by the other directors (up to you as a director to make this final determination based
on reasonable grounds).

These are very generally the fiduciary type of duties.

Section 76(3)

& must exercise all powers and functions of director:
– in good faith for proper purpose (hugely broad)
– in best interests of company (/shareholders, past present and future)
– with degree of care, skill and diligence that may reasonably be expected of
person carrying out same functions and having general knowledge,
 skill and experience of director* (ultimately, you can get a nice problem
question from this. General issues: is a director going to be uneducated?
Under the old law and common law, this determination of care, skill and
diligence was made subjectively. This meant that: you can conduct your
affairs as if you were a moron and still not be in breach of the duty. Today’s
law, an objective determination is made – meaning this: there is a minimum
threshold of a reasonable person of liability objectively determined.
Subjective elements can be used to increase the threshold, but not decrease
it. E.g. 15 years’ experience/degree leads to you being held to a higher
standard to that of an inexperienced director/matriculant. This is a hugely
important provision, as directors are held to a much higher level of
accountability in the new Act than in previous law.

Section 76(4)

The Business Judgment Rule: this is a new law in South Africa, and is problematic. It is taken
directly from America. It states: if your judgment was based on reasonable grounds, you
therefore cannot be held liable – this is a self-harbour from liability. In any business
decision, there is risk. It would not be fair to judge the decisions of directors using the
power of hindsight. Hindsight in perfect in its power, but when you make a business
decision, you only have a certain level of information on which to base this decision. The law
should, therefore, allow directors to make risky decisions. If you don’t make these decisions,
you will not benefit. Removing risk removes reward.

* as far as any matter is concerned, director will have “passed the test” if that director:
1. has taken reasonably diligent steps to become informed about the matter (this
means taking info from other people, see below);
2. has either:
a) no material financial interest in subject matter of decision or
b) disclosed any financial interest in terms of the Act;
3. believes that decision was in best interests of company, and has a rational basis for
holding such belief.

Who can the board rely on?

• Employees reasonably believed to be reliable and competent in functions
performed or information/opinions provided
• Legal council, accountants or other professional persons as to matters involving skills
within the particular person’s expert competence or as to which the particular
person merits confidence
• Committee of the board of which the director is not a member – unless there is
reason to believe the committee does not merit confidence (a board constitutes
various committees known as focus committees, and if you are not a member of that
specific focus committee, you can rely on reports from that committee. The law here
is these last two slides – know the requirements of the business judgement rule as
well as what info this relies upon).

We do not, at this level, go in depth into common law directors duties.

Summary:
Know the two broad categories of directors duties: some based in delict, and some based in
the fiduciary nature, and you need to know what those are and the claims that may result.
As a director, need to know what protects you and what is required to prove that you are
not liable.
























This section below is going to be by majority a self-study.

Personal Financial Interests & Reckless Trading
What you need to see within these slides, from a big picture perspective, is effectively the
provisions of the Act which prevent directors from abusing their positions as directors. What
this does is broaden the realm of potential liability of directors. The basis: if you have a
financial interest in the transaction of a company of which you are a director, you have to
disclose it fully. Not only that, you have to take practical steps such as leaving a meeting and
not voting on it. Here, we deal with related and interrelated persons a lot.

In many instances, directors are also going to be shareholders. Then you bump into various
issues. It is a problem, but the Act is flexible enough to take into account these situations.

Personal Financial Interests

Requirements

• If director has any personal financial interest in respect of matter to be considered at
meeting he must disclose the interest and its general nature before matter is
considered.
• In addition, such director:
– Must disclose any material information relating to matter
– May disclose any observations or pertinent insights if requested
– Must then leave meeting immediately
– Must not take part in consideration of matter
– At such meeting, the director is regarded as:
– being present for purposes of determining quorum (to vote on the decision)
– not being present for purposes of determining whether there is sufficient
support to pass the resolution (to make the decision)


• What if agreement or matter has already been approved?
– must immediately disclose to board/shareholders nature & extent of interest
and material circumstances relating to acquisition of interest
• Court may declare transaction valid on application even if requirements have not
been met.
• If person is only director but does not hold all issued securities:
– may not approve/enter into agreement in which he or a related person has a
financial interest
– may not as director determine any other matter in which he or a related
person has personal financial interest
– unless approved by ordinary resolution of shareholders after nature of
interest is disclosed

Exclusions
There are certain exclusions to when you have to disclose things and when you don’t. The
requirements to disclose personal financial interests are those. Shareholders have a right to
information. If you are a shareholder of a company, you are going to want to know if
directors making a decision have an interest in that. This is plain common sense.

Directors can have insurance for breaching their duties, just like car insurance as the safest
car driver. You can take all the care in the world, make a good decision (based upon
evidence and is reasonable) but you take a risk, but turns out badly. Not only is there
business judgement rule to protect you, but you can have insurance and can be paid by
company on your behalf.

• Requirements do not apply:
– To director in terms of a decision that may generally affect
• all of the directors in their capacity as such; or
• a class of persons where director happens to be a member of such.
– In respect of proposal to remove director from office.
– To company or director if one person holds all beneficial interests of all
issued securities and is the only director.

Restrictions on Indemnification

• General limitation: any provision in agreement/ MOI/ rules/ resolution is void to the
extent that it:
– Purports to relieve a director of his duties in terms of sections 75/76
– Purports to relieve a director of his liability in terms of section 77
– Negates/limits/restricts legal consequences arising from act or omission that
constitutes wilful breach of trust/wilful misconduct
– Criminal liability excluded:
company may not pay fine imposed on director on his behalf

Permitted Indemnification
You can insure directors based on their conduct.

Company may…
• advance expenses to director to defend litigation in proceedings arising out of
service to company
– if proceedings are abandoned or director is exculpated or proceedings relate
to matter regarding which director is indemnified
– unless MOI provides otherwise
• indemnify director for liability arising unless it relates to wilful misconduct or wilful
breach of trust or a fine (discussed above)

Reckless Trading

Reckless trading prohibited: A company must not carry on its business recklessly, with gross
negligence, with intent to defraud any person or for any other fraudulent purpose.
• If the Commission has reasonable grounds to believe that a company is (a) engaging
in such conduct, or (b) unable to pay its debts as they become due and payable in
the normal course of business, it may issue a notice to the company to show cause
why it should be permitted to continue to carry on its business / to trade.
• Company then has 20 business days to provide evidence that either (a) or (b) is not
the case (as applicable); failing which the Commission may then issue a compliance
notice to the company requiring it to cease carrying on business / trading, as the
case may be.

This is enforced by the Companies Commission. If the company is found guilty, its
registration is stripped and ceases to be a company. The directors, if found liable, may go to
jail/may pay huge fines (not high security prisons for white collar crimes).

However, the big one as a director, is that you are stripped from being a director and
declared delinquent for up to 15 years and you can’t earn money as a director or
incorporate a company. Hence, you do not want to be found guilty of this.



8 May 2017

The bulk of the work that we do this term is going to be focused on in the exam, the
fundamentals for depth and detail have already been covered. The scope of test 2 will cover
the content since Test 1 to Friday of this week. There is another application on Friday this
week.

Application: Cape Pacific v Lubner Controlling Investments (Pty) Limited 1995 4 SA 790 (A)

Question 1:
The benefit here was to read the summary of the case. It is somewhat difficult to get your
head around, as it has taken a case 200 words and summarized it in 5. The facts of the case
are dealt with in 100 pages.

Under the common law, this area is hugely at flux. This should not matter too much as we
have the new Act which simplifies things a bit.

• Explain what is meant by the terms ‘the corporate veil’ and ‘piercing the corporate
veil’.

The corporate veil is a metaphorical veil drawn between a company and its members, i.e.
shareholders and directors, upon the incorporation of that company. The veil forms the
division between the individual personalities of these members, and the separate legal
personality of the company. Piercing the corporate veil is when, in certain extreme
circumstances, the law withdraws the rights afforded to the company and its members of
separate legal personality, the hallmark of companies, should there be an abuse of its legal
forms. There are two forms of veil piercing, under the common law and statutory veil
piercing.

Effectively, when a company is formed, a veil is drawn between the company and itself and
the members of the company; the concept of separate legal personality. You are effectively
transposing the idea of separate legal personality into a physical element. The privilege of
separate legal personality will be withdrawn should it be abused or if it is not put to
legitimate use. You have to use a company for a legitimate purpose. For instance, for our
knowledge of tax avoidance and evasion, company structures to avoid tax are fine but tax
evasion is not. The same goes for contractual liability. If you are using company only to avoid
contractual liability, that is not an appropriate use of company and that is abusing the
corporate form.

• In this case Cape Pacific Limited requested the Court to pierce the veil between two
companies. Which two companies were they?

Lubner Controlling Investments (Pty) Ltd [LCI] & Gerald Lubner Investments (Pty) Ltd [GLI].

• Explain how piercing the veil between those two companies would assist Cape
Pacific Ltd and what its effect would be.

Due to the separate legal personality of LCI, the contract for the sale of Findon shares from it
to Cape Pacific [CP] is only enforceable against LCI – not Lubner himself (who had total
control of LCI, nor GLI, of which Lubner was the sole shareholder).

Piercing the veil would remove the separate legal personality of LCI, and hold “those
individuals controlling the entity behind the veil” accountable. In other words, the overall
effect would be that the liabilities of LCI would be considered those of the members
themselves, and thus the contract for the sale of Findon shares would be enforceable against
Lubner himself as well as GLI.

What is the problem for Cape Pacific suing one of those companies? When looking at
piercing the corporate veil, there’s typically going to be a practical reason as to why you
want to pierce the corporate veil and not claim against the company. Simplifying this case, if
you strip it down, the companies did not have assets but those behind the veil do. The
company may not be able to satisfy the claim. You have to look at the practical issues here.
Within a problem question, you have to determine what the actual problem is.

• Name 4 general principles did the Court lay down with regard to piercing the
corporate veil?*

Firstly, the court stated that “the circumstances in which it would be permissible to pierce
the corporate veil” are “far from settled”, and that the specific facts of the case had to be
interrogated.

Secondly, the court understood that the “court has no general discretion simply to disregard
a company’s separate legal personality whenever it considers it just to do so”.

Thirdly, the courts found that while the transfer was “clearly improper”, it did not constitute
an “unconscionable injustice” as required in terms of statutory grounds for piercing the
corporate veil.

Finally, the courts found a “need to preserve the separate corporate identity would in such
circumstances have to be balanced against policy considerations which arise in favour of
piercing the corporate veil”.

This question has only asked for 4 general principles, there are roughly 8 from the case:
– No general discretion from courts
– Courts decide case by case basis
– Courts should avoid piercing the corporate veil when possible
– When alternative remedies are available, they should be taken
– When there is improper conduct – courts should weigh the forces for and against
piercing the corporate veil
– Consider substance of transaction
– Fraud not necessary precondition, but is relevant
– Unconscionable injustice suffering not necessary, just suffering/disadvantage to
claimant

 • Did the court pierce the corporate veil as requested by Cape Pacific Ltd? Why did the
Court decide the matter as it did and what was the reasoning behind its decision?*

Yes, the courts did pierce the veils of both LCI and GLI. The majority held that both veils
should be pierced in respect of the Findon Share Transaction. Judges Vivier, Grosskopf and
Van den Heever concurred with the judgment of Judge Smalberger.

Judgment was decided, then the way in law was found. Not a good case, but it is leading
precedent. It is very flexible.

Although we have these considerations and these elements to consider (e.g. fraud), and
there are no fixed categories, it says categorically that this needs to be decided on a case by
case basis.

You need to take the considerations and apply them to your answer. Use FILAC. State the
case name, take the reasoning/ratio from it under “Law” and state it clearly. Then, apply it.
This is a prime example of a problem, where you blend law and application, you get yourself
into an awful mess. Focus on clear statements of principles of law.


Question 2:

On 1 January 2010 Mr Rich entered into a written contract with Ms Bucks for the sale of his
holiday home in Hermanus. The contract described the purchaser as ‘Ms Bucks or her
nominee’. Ms Bucks is the sole director of a small private company called Moneybags (Pty)
Ltd. Ms Bucks also owns one R1 share in Moneybags (Pty) Ltd. Moneybags has no other
shareholders.

It also has no assets, other than its R1 share capital. Ms Bucks exercised her right of
nomination under the contract of sale by nominating Moneybags as the purchaser under
the contract. Moneybags then failed to pay the purchase price by the due date and claims
that it does not have the money to do so.

On 1 July 2010 Mr Rich approaches you for advice on whether he can enforce the contract
against Ms Bucks and hold her personally liable to pay the purchase price. Advise him by
looking at the grounds on which the courts will pierce the corporate veil in terms of the
common law and identifying which of those grounds (if any) would apply in this case. Do
you think the statutory provision could apply?

The contract of sale is originally between Ms Bucks and Mr Rich, however, as Ms Bucks
elects to cede the rights of the contract to Moneybags, her nominee, the duties of the
contract are delegated to Moneybags too. As a result, the contract is only enforceable
against the company itself, as the company has separate legal personality to its members,
and is capable itself of having rights and duties.

Mr Rich will, however, be able to hold Ms Bucks personally liable should his application to
pierce the corporate veil of Moneybags be successful.

The default position of the courts is that they shall respect the separate legal personality of
the company. The corporate veil is not readily pierced, and will only be pierced in the most
extreme scenarios.

The circumstances in which the corporate veil can be pierced by the courts under common
law are still undecided, and as such the facts of each case must be considered in great detail.
Under the common law, the courts will consider the substance of the company structure over
the form. In doing so, they will examine the structure of the firm under scrutiny, i.e. look
behind the corporate veil, before deciding whether the veil should be pierced or not.
However, piercing the corporate veil is a remedy of the last resort, and shall not be utilised
by the courts should there be other remedies available to the plaintiff/appellant.

Moneybags is a one shareholder one director company, which is perfectly legal providing
there is not an abuse of this corporate form. However, on greater inspection, it could be
found that the company itself holds no assets and has no other form of operations. Its
substance is simply an extension of Ms Bucks herself. This could be classified as improper
conduct. However, more clearly, Ms Bucks abuses the corporate form of the company in
order to evade her contractual obligations. There has, therefore, been an abuse of the
corporate form. As a result, and presuming there are no alternative remedies such as the
alter ego doctrine or simply stripping away the company of its registration, the courts would
most likely pierce the corporate veil, and thus Mr Rich will be able to hold Ms Bucks
personally liable for the contract.

The company does not have any fixed assets. Just because there is only a R1 shareholding
does not mean that there is no company.

This is an extraordinary remedy, meaning that the default position is that the courts will
respect separate legal personality, regardless of CL or S.

The contract is between Mr Rich and Moneybags. These personal rights are only enforceable
on those who are parties to the contract.

Mr Rich can sue Moneybags, but Moneybags has no assets and it will not lead to anything.
Ms Bucks would be fine with this, it doesn’t matter to her as she is insulated from liability.
Her liability would be R1. Therefore:

There is a contract between Mr Rich and Moneybags, and is enforceable against the latter.
However, the problem is that this would be pointless as Moneybags has no assets.

According to Section 20(9) of the Act, an applicant must prove that there was an
unconscionable abuse/misuse of the juristic personality. Will Mr Rich be successful in a claim
of s20(9)?

The common law is still relevant. For the simple reason that the reasoning under the
common law is used to interpret the provision of section 20(9), of UA. This means that you
have to detail what is under the common law (e.g. fraud relevant but not necessary etc.,
leading case is Cape Pacific, judges say XYZ etc.).

Only once you have spoken about what the common law says can you start the application
section. Will Mr Rich be successful?

In my humble opinion…
You will/will not be successful for the following reasons. You can go either way. Do not be
afraid of saying that he won’t be successful.

The alter ego doctrine is an alternative remedy and can be used here.*
Ms Bucks would be allowed to elect her nominee.

This is an extraordinary remedy, irrespective of common law or statutory. Mr Rich agreed to
the fact that this could happen. If it was a nominee as agreed to by Mr Rich, then he would
be fine. Has there been an unconscionable abuse here?

Yes. She has used the corporate form to avoid her contractual liability. That is an illegitimate
use of the corporate form. The sole use of the company was to avoid this liability. In my
opinion, this is an unconscionable abuse.

1 – give s20(9) and test
1A – tell test is UA
2- what is the common law and why is it relevant
3 – you will say it is an UA because sole reason of company is to avoid liability on single
contract
4 – Mr Rich will be successful and hold Ms Bucks liable under the contract.


Question 3:

Six Russian citizens incorporate a private company in terms of the Companies Act 71 of
2008. They conduct business on Greenmarket square selling vodka-flavoured frozen
yoghurt and are making huge profits. The City of Cape Town becomes concerned that the
local community is not benefiting from the historic and tourist value of Greenmarket
Square.

The city passes a municipal by-law which provides that only South African business entities
may in future trade on the square. None of the Russian shareholders (who are also the only
directors) can speak English, but their attorney explains the situation to them.

Do they have to cease trading on Greenmarket square? Would your answer be different if
the Russians were trading as a partnership instead? Give reasons for your answer.

According to case of Dadoo vs Krugersdorp Municipality, a company has an entirely separate
legal personality to that of its members, i.e. shareholders and directors. As the company was
incorporated within South Africa, it would be considered a South African resident company
and, therefore, a South African business entity, regardless of the citizenship of the members
of the company within it.

Therefore, they do not have to cease trading on Greenmarket square.V

However, you need to add onto this. There are some laws which might be relevant, e.g.
BBBEE Act. Here, the identity of shareholders does matter, but not relevant here. But the
other thing you rely upon is: under EITHER the common law or statutory provisions, there
has been no unconscionable abuse of the separate legal personality. It has only been
legitimate business.

For the purposes of this case, it would not matter whether the Russians were trading as a
partnership, the same way Dadoo was technically trading as a sole proprietor. For this case,
the partnership would be considered a separate legal entity with South African residency.

Week 8: Governance & Accountability (B)

9 May 2017

Governance and Accountability: Perspective
Today’s lecture and this week is all about the broad topic of governance and accountability.
This means that, on one hand, we will be dealing with corporate governance.

Board Operation and Board Committees
There are effectively 3 pieces/sources in the regulatory universe here:
ü King Code, which is known as a soft law – it is voluntary by default, and only
mandatory for listed companies, and King IV is effectively a code of best principles,
whereas King III was a code of best practices;
ü Companies Act, which details specific topics with a lot of precision, such as
provisions relating to Audit Committees. The Act regulates internal governance;
ü Auditors’ Professions Act (APA), which delineates the roles and duties of auditors,
but also the liability of auditors. There are two forms of liability – criminal and civil.
You can be convicted for not complying with some of these provisions. You also
don’t want to be held civilly liable. We will deal with the bounds of this later this
week..

• Minimum and maximum number of board members for the different types of
companies (hence one needs to know the information from earlier weeks, such as
types of companies)?
• What must the board look like?
• How does the board function?
– Board meetings Look at laws surrounding this
• Quorum
• Participation
– Rules of the board of directors
– Board committees
 • Compulsory committees e.g. when do you have to have an Audit
Committee
• Role and responsibilities of committees e.g. role of Audit Committee

The Solvency and Liquidity Test
You need to know what the solvency and liquidity requirements are in terms of the Act.
Without this, you cannot draw up financial reports. Throughout the Act, solvency and
liquidity comes up a lot. Financing comes up a lot in the act (e.g. share
buybacks/distributions/fundamental transactions). In each of these areas, there is reference
made to the solvency and liquidity provision. You find the tests within section 4 of the Act. It
is just a page and a half.

There are 2 elements to the test, solvency element and liquidity element.
Some things need to be highlighted:
– ‘at a particular time’ – throughout the act the specific provisions delineate what that
time must be, e.g. for distributions, it is at the time and date that distribution is
provisioned for
– ‘considering all reasonably foreseeable financial circumstances of the company at
that point in time’ – very vague, what constitutes being reasonably foreseeable is
highly debatable.
– ‘the assets of the company as fairly valued equal to or exceed the liabilities of the
company as fairly valued’ – this is the test of solvency. No threshold. Both must be
fairly valued.
– ‘appears that company will be able to pay its debts in the ordinary course of business
as they fall due for the period of 12 months’ – this is the liquidity test. Risk
management experts experience black swan events, e.g. Jacob Zuma firing Pravin
Gordhan. Can’t plan for this level of sheer irrationality. This has a deep level of
intricacy to it. What is in the ordinary course of business and what is not? This issue
is intriguing and we will get into this at a later stage.

Company needs to satisfy both elements. Know where they must be used.

This is particularly relevant for distribution, corporate financing, and fundamental
transactions.

Financial distress is not the same test – that is in terms of business rescue.

• Replaces the old capital maintenance system
• What is capital maintenance?
• Test has two components
– Solvency
– Liquidity
• Where and when is the test used?
– Do not confuse it with the test for financial distress

Problem with the Capital Maintenance Doctrine



















Creditors were entitled to assume they had the same amount of investment as shareholders
of the company. This is plainly not the case as company has different levels of gearing.

If you adhere to the capital maintenance doctrine, you will not gear yourself to dangerous
levels. When making any judgement on any financing issues, use solvency and liquidity test.
Doing due diligence tests as auditors play in this ballpark, and this is where auditors can
make things look a lot better than they are.

Financial Reporting and Accountability
• Why is financial reporting regulated/standardised?

This is why you need some sort of a standardized accounting policies. Why is this important?

The simple reason is this was that in 2008, Enron, LeisureNet – all of these companies
collapsed because: there were people trying to make a lot of money, auditors didn’t do their
jobs properly, but most importantly because people did not act ethically. There was no
transparency or accountability for decision making.

Common theme is the same, failure to hold directors accountable for their decisions, and
failures of auditors to do their due diligence.

The Act regulates corporate governance and corporate financing in a lot more detail than
previously.


• Why is financial reporting regulated/standardised?
• What standard of reporting must a company comply with?
– Public company
– Private company
– Public Interest Score – although as a private company, you are not by default
required to have an audit committee etc., if your PIS is high enough,
stakeholders and shareholders must be protected and you must have those
committees. On Thursday, we will deal with this in a lot more detail.


The Auditor and Auditor Liability
Where does liability of auditor come from, Act or somewhere else? What is its nature –
delictual or contractual?

There is a limitation on liability for auditors, in particular to third parties. This is because as a
3rd party, if an auditor was claimed against for every case, they wouldn’t be able to pay
them.

• Which companies are required to have their financial statements audited?
• The auditing committee
– Role and responsibilities of the committee
• Rights and responsibilities of the auditor
– Auditor liability
• To the auditor’s client
• To third parties



10 May 2017

Yesterday we dealt with a few terms, which we will be going through in much greater detail
throughout this week.

Board Operation and Board Committees

What do we mean when we talk about the Board of the company? Who is on the Board?

We are talking about a Board of Directors; this goes without saying. But what does the
board do? What do directors do?

They are in charge of the governance and strategy of the company. Directors sit primarily in
a strategic role. This is noted especially in that of larger companies (not just listed, but for
the most part). Directors come up with the business strategy/strategic profile of the
company. Directors are not by default concerned with the day to day activities of the
company. However, you can have executive directors who are, e.g. Chief Executive Officer.

What is the difference between a COO and a CEO? E.g. Hlaudi Motsoeneng – COO.

A board is concerned with strategy. There is a link between this strategy and the day to day
management of the company through the CEO and COO, the high level management.
Operations are what happens on a day to day basis.

Boards, however, operate intermittently – the meet very sporadically. They are not typically
concerned with day-to-day functioning of the company. An analogy: senior managers and
executive managers look inwards, into how the company runs its actual operations.
Directors sit at the top of the company and look out into the marketplace, e.g. what is the
current state of the economy, and then determine what the strategy of the company will
be.

However, clearly it must be the case that the internal workings and the external strategy of
the company must be aligned, e.g. if strategy is to take the company global, you have to
employ new people and account for this change operationally. Should a change in strategy
be made – we need to account for this operationally. This process is done by the COO and
CEO.

Today we talk about what happens to those few people at a high strategic level. Many of
the board members do not work directly at the company, do not have an office etc.

Number of Directors

Today is about how boards function. They guide the company within the marketplace. There
are different types of companies, and these require different board structures.

• Private/personal liability company – at least 1 board member
 • Public/non–profit – at least 3 board members (often promoters are the first
director)
• MOI may specify higher number in substitution for minimum in Act not only may it
specifiy number, but can specify qualifications and demographic. In many ways it is
warranted by the BBBEE Act. This is not, however, an alterable position as the
minimum number can only be increased by the MOI.

Remuneration
This is a very tricky, sticky issue and imbued with emotion. This is because of the 2008
Financial Crisis – people were unethical. People lost their savings and their houses, “good,
honest people”. However, a lot of the banks that failed still managed to pay multi-million-
dollar bonuses to directors.

People are appointed as directors because they have knowledge, skills and experience. This
does not come cheap. Think of being a CFO. How much have you paid for your education,
the value of your race, your gender, and your time? Hence directors’ remuneration can be
quite high, especially with that of “in-demand” directors (from certain demographics). The
pool of these minorities (e.g. Black Women) is much smaller than others (White Afrikaans
males), hence there is demand for them and they earn greater remuneration.

The remuneration of directors is all done through a remuneration committee. Any package
paid to directors has to be agreed upon via a special resolution by shareholders. This is a
protection mechanism for shareholders, possibly due to an underperformance or a drop in
share value. Remuneration has to be approved by shareholders.

e.g. The CEO of Barclays is sitting at an AGM and is shitting bricks. Barclays is losing market
share and money, fast. The institutional investor is deciding the remuneration of that
director, and his re-appointment.

Are they worth this type of money? They can be. Absolutely, e.g. Whitey Basson, Raymond
Ackerman. It is a tricky issue. We live in a society with massive difficulty regarding how
much money people have. This is a reality in South Africa.

Shareholders have the power to say directors should not be paid as much as they do, but
also to approve amounts that are deserved.

• Except to extent that MOI provides otherwise – company may pay remuneration
to directors
• May only be paid in accordance with special resolution approved by shareholders
within previous two years

Board Committees
There is so much relevant in determining strategy. No one board member can tackle every
issue. Hence, boards delegate authority to specific focus board committees: the primary 2
being the Audit Committee and the Social & Ethics Committee. You can have any number of
focus board committees. Section 72 provides that: except to the extent that MOI provides
otherwise, the board may: A) appoint any number of committees of directors, and B)
delegate any authority of the board to focus committees.

The law mandates for companies to sometimes have specific committees. Although the
board may be delegating its authority, it cannot delegate its responsibility. This means that
the board cannot resolve or insulate itself from liability by using committee structures.

Committees of the board are often not board members. They may not have authority, the
member of that committee does. Do not have a vote. They provide research reports.

• Board may appoint any number of committees of directors
• Delegate to a committee the authority of the board
• Committee may include persons who are not members of the board but
– must not be ineligible/disqualified
– does not have a vote on a matter decided by committee
• Committee may consult with or receive advice from any person

However, while you may have authority of the board as a committee, this does not absolve
liability. The board at all times remains ultimately responsible. The authority has to formally
delegated.

• Committee has full authority of board in respect of matter referred to it
• Creation of committee does not alone satisfy compliance with directors’ duties as
required in section 67 of act!!

If you create a committee and delegate authority in particular matter, e.g. Finance to a
finance committee headed by CFO; If the finance committee signs contracts and takes
strategic decisions, it is the board that is still responsible for a breach of directors duties. It is
irrespective of the delegation.

Therefore, as a committee, you have to provide the board with reports every so often. How
these function depend on the context, founding document relating to the committee, and
MOI. It may be stipulated when reports must be provided, and there is thus usually large
amounts of flexibility.

There is, however, no flexibility in the Social & Ethics Committee, and Audit Committees. In
those instances and where a company has to have those (i.e. if your PIS Score is above
threshold, or you are listed), you may have to have board committees and those must
report on specific things, e.g. Social and Ethics report.

If you look at Social & Ethics Committee’s reports of Lonmin, prior to Marikana, things
looked absolutely fantastic. Lonmin made it sound like everything was great. It wasn’t,
which is why miners were upset. Miners were living in atrocious conditions due to Lonmin.
People lost their lives because committees were not doing their job.

• Minister may require ethics committee for company/category if in public interest
in light of
 – annual turnover
– size of workforce
– nature and extent of activities

Board Meetings

• (s73A:) Authorised director may call meeting of Board at any time Any director, if
authorised to do so, may call a meeting – often the Chairperson of the Board.
• (s73B:) Must call if required by:
– at least 25% of Board if more than 12 directors on the board;
– 2 directors in any other case
• s73.2: MOI may specify higher or lower percentage for the above. This is an
alterable provision, because you can increase or decrease the protection.
• Meeting may be conducted by electronic communication/directors can participate
through electronic communication e.g. conference calling, Skype, for typically
transnational companies with multi-national directors. They can often fly a lot. In
some instances though, where meetings are called on a very short notice, electronic
communications must be used. BUT:
• Facility must enable all persons to participate without intermediary and to
participate effectively

There are people which sit on more than 80 Boards, who fly and are on the phone a lot –
but cannot typically focus on 80 companies on every call.

• Notice of meetings
Board members must be given notice of the meeting
– Board may determine
– Must comply with requirements in MOI or rules of company
– No meeting may be convened without notice to all directors (directors that
are able to vote on a particular matter)
– If no notice is given but all directors acknowledge receipt, are present at
meeting and waive notice of meeting, the meeting may proceed

• Decision making
Boards make decisions as a whole, as a board. It works on a vote. For there to be a
quorum, there must be a majority of directors who can vote on the issue present
before a vote is taken. This threshold can be changed by MOI. The vote is then taken
out of the quorum.
– Majority must be present before vote may be called
– Each director has one vote (if there is a split, there may be a coffee break
and votes are swung. Otherwise, the Chairperson will have a deciding vote).
A quorum will be determined if majority of directors present who are entitled
to vote on particular matter. In the case of multiple votes in one meeting, the
same meeting may have a quorum for Vote A and not Vote B, because
different people are eligible to vote for different things. Hence one decision
can be binding, while another is invalid (not binding).
– Majority of votes is sufficient to approve resolution
 – Tied vote: chair has deciding vote (if didn’t initially have a vote) or matter
fails

You may have 20 directors, but only 8 entitled to vote on financial issues. If 7 present
who can vote, then you have majority. If you have 3, then you can’t. Need majority.
For 8 people, you need 5 to take the vote. Of these, if 3 vote positively, the decision
is passed. But, if you do not attend a meeting, you may be in breach of your
director’s duties.

It is possible to abstain from voting, but you will only be insulated from liability if you
vote against something.

You go around and you vote. You also get what is called a round-robin voting. This
can occur in a number of ways, e.g. electronically “do you agree”, you send it around
by registered mail. Why used? Power dynamic in the board, experienced powerful
board members vs ones with less swing. This detail is not really needed.

However, where you do use electronic form, need written consent of majority of
directors, and consent can be given electronically.

• Resolution may be adopted in writing or electronically
– Must still have written consent of majority of directors
– Consent may be in person or by electronic communication
– Each director must receive notice
– Decision made in this way is the same as an ordinary resolution


11 May 2017

Today’s lecture will be focused on section 26.

Most importantly from this lecture:
26(2) of the Companies Act Regulations:
If you cannot calculate a public interest score (PIS) – you are dead in the water.

Why do you need to be able to do this?
The Act says here in the regulations that companies, regardless of the type of company, if its
PIS is greater than a certain threshold, they must have certain governance structures in
place: i.e. the Social and Ethics Committee, and Audit Committee.

The PIS is hugely important.

At the bottom of the regulations, there is a nice table. The top table deals with state owned
and profit companies, and details the different types of companies down the side, and
details what financial reporting standards are relevant for each (e.g. listed companies use
IFRS). The vital one: Profit companies, other than state owned and public, whose PIS at least
350 – in which case you have to use IFRS or IFRS for SMEs. 100-350, or PIS less than 100 you
can use the first two and GAAP. The same (first two and GAAP) rings true for non-profits.

For specific types of companies, you require certain types of reporting standards, found in
regulations.

Regulation 26(2). Any company, irrespective of type of company, has to calculate its Public
Interest Score every year and must be reported. It is calculated as a sum of these things: (it
is quite easy to work out – 1 point for each thing):

ü 1 point for every employee (number of points equal to average number of
employees in the year)
ü 1 point for every R1m or portion thereof in all 3rd party liability as determined at
financial year end (i.e. R1m and R10 = 2 points, remainder = full point)
ü 1 point for every R1m or portion thereof in turnover from the financial year
ü 1 point for every individual known by the company as: for a profit company, having a
beneficial interest in any of the profit companies (shareholder, but not linked with
number of shares), or for non-profit companies, a member - or if a member is a
representative for someone/a group, it is points for the number of people in the
union/group represented.

The difficulty here, just like when doing an audit, how do you determine the extent of e.g.
3rd party liabilities. Have to look at contracts, interest paid, etc. Extremely intricate process.

As a director of my company, I delegate the responsibility for my audit, i.e. delegate the
authority to compile the audit to the Audit Committee. The auditor is on the audit
committee. Director is responsible. Auditor could be held liable by company for not doing
job properly, but director is liable to provide audit.

The justification for having a PIS and requiring an Audit Committee and Social & Ethics
Committee should be self-evident at this point. PIS aims at determining interest that
company has on society. Very crude way of looking at the impact of the company on society.
It is not precise, but it is what we have got to work with.

The reason is to find out: what companies have what impact on society, and when linked
with place of business, where that impact is happening – important to find where economy
is growing, and how much a company is worth looking at PIS alongside reports.

For society, the interest of having PIS score is that massive private companies are forced to
have an Audit Committee and Social & Ethics committee. We don’t want companies failing.
Two of the practical methods whereby we as society can have insight into how it is doing,
and holding company accountable, is by having these two committees. This is why every
company has to have a PIS. PIS has to be registered with CIPC.
Solvency & Liquidity, Financial Reporting

Solvency & Liquidity Test – Justification

 • Solvency element:
– advance recognition to ultimate priority that creditors enjoy over
shareholders upon dissolution
• Liquidity element:
– addresses fundamental expectation of creditors to be paid on time

The one is balance sheet, the other is commercial.

What does the test require?

• Considering all reasonably foreseeable financial circumstances of the company at
that time
– Assets of company as fairly valued equal or exceed liabilities of the
company
– Appears that company will be able to pay its debts as they become due in
the ordinary course of business
– for a period of 12 months after the date on which the test is
considered
– or in the case of a distribution, 12 months following the
distribution

Throughout the Act, there is reference to this section 4 of the Act dealing with the Solvency
and Liquidity tests. The applications of it vary within the Act. The big one is in the case of
distributions: where a company declares a dividend that is paid to shareholders. It is a
distribution of profit. Companies are not forced to make distributions – if a company makes
a profit, there is nothing mandating directors to pay a distribution to shareholders. You have
a right to expect dividends to be paid, but no exact right to be paid.

In the case of distributions, the liquidity aspect needs to be foreseen for 12 months, i.e.
company will still be liquid in 12 months from today. This protects creditors and
shareholders. If some businesses were to declare massive dividends, there may be minimal
liquidity to pay debts. You must ensure you can pay debts for 12 months. This can stop
directors from doing what they want.

• Financial information to be considered must be based on
– Accounting records that satisfy the requirements of section
28
– Financial statements that satisfy the requirements of section
29
• Must consider a fair valuation of assets and liabilities including any
reasonably foreseeable contingent assets and liabilities
• May consider any other valuation of the company’s assets and
liabilities that is reasonable in the circumstances

Accounting & Auditing

• Definitions:
 • “Records” – any information contemplated in section 24
• Section 24: lists various records that companies must maintain including
copies of all accounting records required by the Act
• Type of accounting records which have to be kept depend on type of
company and the purpose of the company
• Section 29: arguably the more important of the two
• Financial statements must present fairly the state of affairs and business of
the company and explain the transactions and financial position of the
business of the company.
• Statements must show company’s assets, liabilities and equity, income,
expenses etc

This is assumed knowledge from other courses.

What records are required in terms of section 24?

Shareholders can go and request it, outsiders not necessarily due to privacy. However, listed
companies have increased thresholds of accountability and transparency. However, a large
private company does not.

Compulsory to be kept at reg. place of business, and CIPC:
• Copy of the company’s MOI
• Amendments or alterations to MOI
• Copy of any rules made by Directors
• Record of company’s Directors
• Copies of all reports presented at AGM
• Copies of all annual financial statements
• Accounting records required by the Act

When doing an audit, you have to ensure that all of these are there:
• All resolutions adopted by shareholders
• Any document made available to shareholders in relation to shareholders’
resolutions
• Copies of any written communications sent to any class of shareholders
• Minutes of all meetings and resolutions of directors
• Minutes of directors’ committee meetings including those of audit
committee
• Profit company – securities register


 Records in • Memorandum of
Incorporation
terms of Rulebook
• Rules of the Board
Section 24:
• Written
Game Communications
plan • AGM Reports
• Notices & Minutes

• Register of
Players Directors
• Securities Register

• Annual Financial
Statements
Scorecard
• Accounting
Records

These are the records that have to be kept and are divided into certain subgroups. All of this
stuff, keeping it and maintaining the records, falls under the responsibility of the company
secretary.

The big one here, in particular for determining PIS, are the bottom 2 bubbles – constant
securities register, and annual financial statements and accounting records.


Access to Information

• All companies required to have registered address in SA – record ito section 24
must be maintained at that office (that place acts as a place of record)
• Detail of registered office must be given in notice of incorporation – changes must
be filed
• All records kept in written form or electronic form or other that allows info to be
converted into written form within reasonable time

Financial Statements

• Company must produce financial statements in manner and form that satisfies
prescribed financial reporting standards – consistent with International Financial
Reporting Standards (IFRS) of the International Accounting Standards Board. Why?

We should all know why we require them to have a standard form.

Contents: General

• Statements must comply with relevant financial reporting standards applicable to
company
• Must contain information specifically prescribed ito various sections of Act
• Must present fairly the state of affairs of and business of a company and explain
transactions and financial position of business of company (this is the big one, and
the one people get in trouble for – auditors can have vested interests in providing
murky results, hence issues of ethics)

CALCULATION OF
PUBLIC INTEREST
SCORE
Turnover
1 Point per R 1 Million/part

Shareholders
1 Point per Shareholder

3rd Party Liability

1 Point per R 1 Million/part

Employees
1 Point per Employee



Contents: Specific Requirements

On the first page, you have to show a prominence statement whether statements have
been audited and items are fairly valued.

• Must also:
– show assets, liabilities and equity
– show income and expenses
– show any other prescribed information
– satisfy financial reporting standards
 – on first page – prominent notice indicated whether statements have been
audited and if not if they have been independently reviewed
– include directors’ report with respect to state of affairs, business and profit
or loss

ACCOUNTING RECORDS

ASSETS LIABILITIES

Record of Non-current
Liabilities
loans assets

Revenue & Stock in

Property
expenses trade

Audit & Review

• When will annual financial statements be subject to audit?
– Public company IFRS, but you can have listed and non-listed
– Private company required to have statements audited ito regulations made
provided they fall within certain thresholds, e.g. 100-350 etc.
– Private company that voluntarily chooses to have statements audited or
MOI requires

Audit not necessary?

In some instances in particular, instead of having an audit by an auditor, you can have:

• Financial statements must be “independently reviewed” in manner satisfying
regulations
Minister may make regulations prescribing form and procedures for conduct of
independent review and professional qualifications of person conducting review

At the moment, the thresholds are 100 and 350 – this can be changed by the government
gazette.

Underpinning the auditing profession, are issues of integrity and ethics. A lot of the auditing
profession is underlied by integrity and ethics




12 May 2017

Application: Auditor Liability

Paul Watson has been acting as SpeedyServices Ltd’s auditor for the past 4 years. The
company has recently decided that it wants to list its shares on the Johannesburg Stock
Exchange. While the board is ensuring that the company meets all of the JSE’s
requirements, it stumbles across certain inconsistencies in the financial statements of the
company. It later transpires that one of the directors stole thousands of rands from the
company over a four year period. Because of the fact that the director was also the head of
the company’s auditing committee he was able to hide his activities. The thieving director
has since disappeared. Does the company have any cause of action against Paul Watson?

Immediately, you know you are dealing with a public company.
Is Paul Watson liable or not?

You start with the rights of the auditor. Even better, you could take a step back to the
concepts behind contractual vs delictual claims.
There are base principles as defined by the Act.

Ultimately what you are looking to get to here is: has Paul Watson done his job with
reasonable care and skill? You are not concerned here with his criminal liability. We are
dealing with a claim against him. Look at civil liabilities, this is all that is relevant: is there a
claim in contract or delict?

The Application will be answered and the last few slides will be covered in Monday’s lecture.

Auditors & Company Secretaries

Today we talk about auditors and auditor’s liability. This assumes the knowledge of annual
financial statements.

Audit & Independent Review

In our law, every public and state owned company must have their annual financial
statements (AFS) audited. Determining PIS of these is still relevant for other means.

All other companies (private, CC’s and incorporated’s) must have AFS audited if they fall
within certain thresholds of the Public Interest Score. For 350 points or more – audit done of
AFS. If PIS is between 100 – 350, and your financials are internally compiled, AFS need to be
independently reviewed. Private companies can also voluntarily adopt audit from MOI, in
which case the PIS system becomes irrelevant for the purposes of determining whether the
company must audit their AFS.

• When will annual financial statements be subject to audit?
– Public company
– Private company required to have statements audited ito regulations made
 – Private company that voluntarily chooses to have statements audited or
MOI requires
• What if an audit is not necessary?
• Financial statements must be “independently reviewed” in manner satisfying
regulations
• Minister may make regulations prescribing form and procedures for conduct of
independent review and professional qualifications of person conducting review
• Private companies exempt from review
– Every person who is holder of/has beneficial interest in securities issued is
also director ****

Only those companies falling below PIS must be audited independently or independently
reviewed. Independent reviews (IR) are cheaper, but less effective/comprehensive. Audits
are expensive and time-heavy. Having an IR is less costly and less time expensive and more
efficient. Effectively, bigger companies with higher PIS, greater public interest, require an
audit.

At the moment, 350 points and 100 points have been the thresholds for the last 9 years, but
can be changed.

Private companies are exempt only in certain circumstances. Section 30(2A) – an addition to
the Act in 2011 – states that companies are exempt from AFS being audited or
independently reviewed, if:
ü Every person who holds securities in the company Is also a director, but then
obviously have to be a natural persons.
ü AFS are not required to be audited in the public interest

You are not exempt in the following instances:
ü Any securities held by juristic persons (e.g. companies or trusts). This is not a bad
thing: at least investors can be presented with an auditor’s report, which is valuable.
Shows company is solid financially, and that the company has proper governance
structures in place. Not just using the company as an alter ego.

Auditor: Appointment

• Must be appointed every year at AGM
• To be appointed, person must be registered auditor (run gauntlet of articles and
registered at CASA – at present this is the only body in SA that offers you
accreditation)
• Person must be acceptable to company’s auditing committee as being independent
of the company (the Audit Committee interviews for auditors, proposes certain
persons to become company’s auditor. One of the roles and responsibilities of AC is
to present this to shareholders, and then voted upon. Part
of that is ensuring that the auditor is independent from the
company.)




• Who may not be appointed?
– director/secretary/prescribed officer
– employee or consultant of company engaged for more than one year in
maintenance of financial records or preparation of financial statements
– may not be person who habitually performs duties of accountant or
bookkeeper or related secretarial work for company
– also if was acted in any such capacity for five years immediately preceding
date of appointment

As far as is reasonable, the Act aims to ensure auditors are independent as possible from
the company. This means that the big auditing firms will not go buying shares in companies,
because as soon as they are a shareholder, you cannot audit them.

Related persons? You look at the person and not the firm. If you look at those above, these
relate to the actual individual.

Auditors: Resignation

• Auditor may be automatically re-appointed at AGM without any resolution being
passed, unless the following!!
– retiring auditor no longer qualified for appointment
– no longer willing to accept appointment
– required to cease serving as auditor due to rotation requirements of section
92
– audit committee objects to re-appointment
– company has notice of intended resolution to appoint some other person in
place


Auditors: Rotation

This is where the rolling structure of auditors comes into play. E.g. Deloitte does audit for
Barclays, you as a person can audit Barclays for max 5 years after which someone else must
audit, but this can be someone else at Deloitte. This concept is linked with the individual,
not the firm. But, beware for things infringing on your independence as an individual too.

Applicable to people, and not the firm. Firm itself has to ensure that if the firm is rotating, it
is for stability. Auditors should not rotate at same rate, or at the same time. Work in teams,
e.g. 5 year or two year teams.

• Same person may not serve as auditor of company for more than 5 consecutive
financial years
• If person has served as auditor for two/more consecutive financial years, may not
be appointed again until after expiry of at least 2 further financial years

Rights and Restricted Functions

As an auditor, you have rights of the following such as documents of registered place of
business:

• Right of access at all times to accounting records/books/documents of company
• May require from directors any information necessary for performance of duties
(can be enforced by a court of law, force them to provide with relative information
to fulfil your performance and duties as an auditor)
• Holding company’s auditor: has right to current and former financial statements of
any subsidiary and may require from directors of holding company or subsidiary
any information and explanations necessary to fulfil duties
• Entitled to attend any general shareholders’ meeting and receive all notices of and
communications relating to such meetings
• Entitled to be heard at meeting (can request a timeslot to present information – it is
a very powerful right. They have the undivided attention of all of the shareholders).
• May apply to court for appropriate order to enforce rights of the auditor
• May not perform any services for company that would place auditor in conflict of
interest

These protect auditors themselves as they can be held liable, and for the protection of
creditors and shareholders who rely on the information presented by auditors.

Auditing Profession Act
• Establishes Independent Regulatory Board for Auditors (IRBA) established to,
amongst other things:
– promote integrity of auditing profession
– prescribe standards of professional qualifications, ethics etc
– protect public in their dealings with auditors
– final authority on education, training and professional development.

This is the one you get articles from and write boards under.

Liability

Liability of auditors can take two forms: criminal, they can be held criminally liable in certain
instances all found in APA e.g.
ü fail to report a reportable irregularity (s45 of the APA).*
ü In preparation of AFS, you knowingly or recklessly express an opinion that is false in
a material respect (anything integral to the financial statements)*
ü If they contravene specific provisions of the Act
ü There are 12, but these are the 3 big ones.

You can also have civil liability, which is incredibly interesting from a legal perspective. It can
take the form of liability flowing from contract OR from delict. There will be a contractual
relationship between an auditor and the company that they are auditing, in which case the
contract will define the rights and responsibilities between the two – here you can claim full
consequential loss.

Where things get interesting, is that as an auditor, you are required by law not to act
negligently, fraudulently or maliciously.
“Negligently” = acting without reasonable care and skill. This effectively means that you
need to bare on the work that a reasonable, careful, cautious auditor would use. This is a
purely objective test. This is an implied clause to the contract, hence this will be claimed in
contract.

Auditors, however, can be held liable to 3rd parties, and only in delict. Not in contract,
because you do not have contract between 3rd parties and auditors.

However, importantly, in your course outline (Thoroughbread Breeders vs PwC): at the end
of this case, there is a proposition of law here which deals with apportionment of damages
act. Effectively, it says this: in a case of delict, where somebody has suffered a harm as a
result of their and someone else’s negligence, you apportion the harm accordingly – split
the cost between the people who are negligent. E.g. if two people crash, one runs a red and
the other on the phone, courts say X is 30% responsible, then will be paid 40% by other
(70% - 30%).

This Act is not applicable to claims in contract – from the case above. Cannot apportion
claims in contract. Immediately, you must be thinking this is a problem, because the
reasonable skill and care is delictual in nature but implied in contract. You have to be careful
as to which one you are claiming. The apportionment of damages, interesting when looking
at claim from 3rd party. They can suffer harm. Is auditor or company responsible? Does
company not give auditor specific information required? Was auditor negligent in general?
This forms the basis of the above application.

• Can be either to
– Client
– Third parties
• Client
– Contract
– Delict
• Third parties
– Delict

15 May 2017

See Completed Application Question Above*

What you do not have to address is the criminal liability of the auditor. The question does
not ask if Watson is criminally liable, only civilly liable.

To do so: read summary of Thorough-bread Breeders vs PwC, & Cape Pacific vs Lubner
Investments.

In ‘The Law of Business Structures’, p357: in the case of Thorough-bread Breeders: it was
held that the Apportionment of Damages Act (ADA) does not apply for contractual damages
– this was one of the main ratios of that case. An apportionment of damages is a
contribution of damages, where both parties are at fault. Both parties are negligent in
causing the harm. You apportion the harm based on who is more negligent.

In the case of contractual negligence (which is important because of the implied term of care
and skill in the contract), we are dealing with a breach of contract. Apportionment only
occurs with delict, and therefore, does not apply here.

Therefore, the auditor cannot raise the negligence of the client in the action brought by the
client against auditor. In the aforementioned case: Thorough-bread Breeders (TBB) sues PwC
– PwC cannot say in limiting its claim that TBB was negligent. PwC was the auditor of TBB
since 1990. This dealt case dealt with an issue in 93/ 94, PwC audited TBB’s AFS. TBB alleged
PwC breached auditing agreement by not disclosing that large amounts of money were
stolen multiple times by a director in the 93 financial year. In the 93 Audit: PwC should have
picked up irregularities. Same person stole more money in 94. Had PwC audited with regular
care and skill in 93 audit, resultant losses would not have occurred. TBB instituted claim for
damages. TBB had been aware that director had had a previous conviction for theft, but
employed them anyway – this is what PwC claimed. Also, PwC claimed that they had not
breached the contract. In other words, PwC claimed that it was TBB’s appointment of M
(director) that caused the loss.

PwC argued, therefore, that the claim against them had to be reduced because of TBB’s own
negligence and aimed to use the ADA. However, the auditor had been negligent and thus
breached contract. The damages were thus foreseeable to auditor. Company was itself
negligent in employment of M, and both sets of negligence caused loss, but ADA. was not
allowed and thus PwC were held fully liable.

Even though the client was negligent, it doesn’t matter in determining the claim against the
auditor in contract.

As a 3rd party, your claim can only lie in delict. Can apply ADA in delict only.

Important issue here: court says (a concept from Bus Law 1) that in a claim of delict, one can
only claim losses that are foreseeable. Cannot claim losses too remote from the harm. If you
park your car, get out and get hit – you can claim medical damages etc. and treating
ailments, but not for contracts that “could have happened should X have been healthy”. In
this case, it was foreseeable that the auditor would have seen the damages occurring in
1993. Hence, you can claim from it.

The party who is more negligent in contract is fully liable.

Now to go about answering the question, where do we start?

Firstly, the claim is one in civil law. Criminal liability is not relevant.

The claim instigated would be contractual in nature, due to his contract with the company.
The auditor has various duties under this contract, including auditing AFS with reasonable
care and skill (as defined by IRBA, defined by the standards of the profession). These are
contractual duties, implied by law.

In law, there must be a breach of contract and it must be a material breach of the contract.

According the TBB vs PwC, contributory negligence and ADA does not apply in claim for
contract.

The company may have been negligent, and the audit committee may not have fulfilled its
duties properly – but the auditor is still more negligent than the company. The ADA does not
apply. Therefore, the company has a claim in contract in full against Paul Watson. This
results in full consequential loss plus interest.

If the company had been more negligent than the auditor, then there is no breach of
contract. Here, you have to make an assumption in deciding who is more negligent.

If you are suing your auditor, you always want to claim in contract due to being able to claim
full consequential losses. The ADA does not apply in contract. In a breach of contract, you
have to prove a breach of contract (through reasonable care and skill) and claim damages,
and these damages must be foreseeable.

As a 3rd party, your claim can only lie in delict against an auditor. That claim must also be for
damages that are foreseeable, but the auditor can limit his liability through the ADA.

The Company Secretary
• Secretary = chief administrative officer of company
• Directors must be satisfied that person is suitably qualified ith necessary
experience to perform duties
• Public company/state-owned enterprise must appoint company secretary
• Can be juristic person or partnership
• Person will be disqualified if:
– Court prohibited person from being director/declared him to be delinquent
– Person has been removed from office of trust due to misconduct
– Convicted

Not a director, or a typist. Not a normal “secretary”. This is a chief administrative officer,
and oversees all administration of companies in particular meetings, such as publishing
board meeting minutes.

Company secretary can be a juristic person. Disqualified if you can’t be a director or
convicted.

• Duties include:
– Providing directors with guidance as to their duties
 – Making directors aware of any law relevant to/affecting company
– Reporting any failure on part of company/director to comply with act to the
board
– Certifying annual financial statements need knowledge of facts and figures.

Primarily responsible for holding company records.
You advise board when it comes to compliance issues. They are the single person within
companies ensuring boards operate and comply properly.

Chartered Institute of Company Secretaries. They do not have fiduciary duties.

Test 2 content ends here.

Week 9: Corporate Finance (A)

Corporate Finance and Fundamental Transactions

Perspective Lecture:

Capitalisation
We already know what a share is. However, what is meant by share capitalization?

• Share capital: Finances raised by the company through the issuing of shares.
Nowadays, we talk about securitised capital. The Act does not just talk about shares,
but all securities. Raising share capital means raising equity. However, debentures
are debt financing.
– What is a share? Bundle of rights under the term “share”, form of ownership
and equity in the company.
– MOI sets out different classes & rights attached These categories can be in
voting rights, meeting rights, e.g. preference share vs ordinary share vs
redeemable share etc.
• Authorised share capital Where you find the authorized share capitial of the
company. Shares have to be authorized then issued; you can only issue authorized
shares.
– Certificated vs uncertificated shares: In our law, the distinction is not
relevant anymore. You can have certificated or uncertificated securities. The
term “uncertificated share” thus means: any securities defined as such in
terms of s29 of the Securities Services Act, now called the Financial Market
Act. In that Act: uncertificated securities are those that are not evidenced by
certificate or written instrument, and transferrable without written
instruments. Previously, in old companies, you had to have a certificated
share. This details what shareholding you have, value, and rights. This was in
the early 20th century.
– Now, however, the Act provides that the two (certificated vs uncertificated)
are effectively interchangeable. The rights of the shareholder do not depend
on certification. Anything applying to certificated shares can apply to
uncertificated shares. However, we have moved away from capital
 maintenance rule, to solvency and liquidity tests. The Capital Maintenance
rule guaranteed that the company has liquidity equal to its issued share
capital. This doesn’t work anymore. We do not have Capital Maintenance
rule anymore
– Par value? We also do not have these par value shares anymore.
• Issued share capital
– Process of issuing Directors can only issue shares that are authorized. Can
authorize more shares should shareholders vote so.

Consequences of contravention

Financial Assistance for Subscription
Although a security may look like equity, it may operate as a debenture. Because this is
open for abuse, 2008 Act deals with this. This doesn’t mean that you can’t offer financial
assistance, there are just stringent restrictions around it. In all of these instances, they are
of contravention to the Act.

What happens if you do not comply with the Act?

• What is financial assistance for subscription of shares?
• Why was it prohibited and how does the 2008 Act now deal with the issue?
• What are the requirements set out?
• What are the consequences of contravention?

Financial assistance is hugely valuable for a company, as it means they can structure
finances in certain ways and decide who owns shares e.g. directors.

Distributions: where you declare a dividend, and where a company can also buy its own
shares therefore amounting to a distribution. In the act, it can be a direct or indirect transfer
of money by company. A distribution will also be the incurrence of a debt, the forgiveness of
a debt, and the acquisition of its own shares. This is the most in-depth definition dealt with.
• Three categories of transactions regulated under this heading:
– Declaring a dividend
– Company acquiring own shares
– Subsidiary acquiring shares in holding
• What are the procedural requirements?
• What are the consequences of contravention?

Fundamental Transactions Hugely relevant for exams. Categorised as the following 3 things.
The requirements of which will be dealt with later. They fundamentally alter the company.
• What is a ‘fundamental transaction’? 3 Forms:
– Disposing of a greater part of the company’s assets (more than 50%)
– Schemes of arrangement internal arrangements of the company
fundamentally changed
– Mergers & amalgamations this is the interesting one, dealing with business
structures
 – These are all open to the abuse of majority shareholders. In terms of
regulations, very specific requirements etc.
• How are these transactions regulated?
– Procedural requirements
– Minority protection
– The Takeover Regulation Panel

Raising Share Capital in the greater scheme of things, you have all of these greater financial
actions working together e.g. share buybacks. The difficulty here is determining what the
issue is, and technical body of law for each one of these. IPO & Secondary Offers etc. You
can raise equity capital through a number of methods. We will be focused on IPOs. An IPO is
a listing on a stock exchange and requires a prospectus.
• Why does the legislation regulate this aspect?
• What is an offer to the public?
– Broad definition
– Certain exceptions
– The impact of common law
– What is a prospectus? Information that company puts together about itself.
Any false statements: directors can be sued.
– Procedural requirements
– Consequences of contravention You do not want to contravene procedural
requirements of JSE, or companies Act. Fines are massive, cripple the
company. Can lead to prison time, and this can lead to long periods of time.

16 May 2017

Dealing in Shares
• What is the nature of a contract in terms of which shares change hands?
• Dealing in certificated shares vs dealing in uncertificated shares

Companies trade in shares all the time. Institutional investors are the big players here, not
individuals.

When shares are transferred, the legal mechanism you rely upon is two-fold:
• You do things on the JSE through STRATE, for publically listed shares
• For non-listed shares, you use a cession agreement
Both of these are in fact cessions, not really sales.

In terms of a certificated shares, you have to deliver the actual certificate

Market Manipulation and Insider Trading
• Both matters regulated by the Financial Markets Act Can be found guilty under this.
Regulates with the Companies Act.
• What is Market manipulation & why is it prohibited? Manipulating the price of
shares.
– Consequences of contravention
 • What is insider trading and why is it prohibited? Using the information to the
detriment of someone else.
– Consequences of contravention

Publically listed companies should be open to all investors. Insider trading means that not
everyone is on an equal footing. If one person if has info that the market does not, they will
act on information and make a profit to the detriment of everyone else. The consequences
can be severe.

Engagement 1: Capitalisation

Today’s lecture is all about shares, debentures and options. Securities are what is dealt
within Company law.

Share Capital
These two terms are used in the Companies Act

– ‘‘share’’
– one of the units into which the proprietary interest in a profit company is
divided (S1)
– A share issued by a company is movable property, transferable in any
manner provided for or recognised by the Act or other legislation (S35)

• ‘‘shareholder’’
– the holder of a share issued by a company and who is entered as such in the
certificated or uncertificated securities register, as the case may be
– hold equity in the company

“ A share is the interest of a shareholder in the company measured by a sum of money, for
the purpose of liability in the first place, and of interest in the second, but also consisting
of a series of mutual covenants entered into by all the shareholders inter se”

• Borland’s Trustee v Steel Brothers and Company Ltd
• Remember: ‘bundle of rights’: Voting etc.
• Shares in our law are known as movable incorporeal property. Corporeal is
something you can touch etc., whereas incorporeal is something you can’t. Even if
there is a written form of an agreement, the agreement itself is incorporeal.

Requirement to have Shareholders
All companies, except Non-Profit Companies (NPCs), must have shareholders. NPCs have
members.

• A company may not issue shares to itself: used to be able to hold your own shares,
in the form of Treasury shares. This no longer applies. Shareholders cannot be the
company itself.
• In other words there has to be shareholders other than the company itself
• Remember that NPC does not have to have shareholders.

No Par Value

• Par value - nominal value of a share: link with a specific token value e.g. 5 R10
shares – but this is part of the capital maintenance rule, and thus it is done away
with.
• Somewhat archaic concept
• Share price upon initial offering
• Minimum price
• New act does away with the concept – section 35(2) expressly states: “A share
does not have a nominal or par value

Authorised Share Capital

• Memorandum of Incorporation sets out the Authorised Share Capital
– must set out the classes of shares, and the number of shares of each class,
that the company is authorised to issue
– must set out, with respect to each class of shares the preferences, rights,
limitations and other terms associated with that class
– may authorise a stated number of unclassified shares
– to own a share, the company has gone through the two-step process: the
share is authorised (it exists and is defined by the MOI) (useful in assessing
the potential of growth in company by analysing issued Share Capital and
authorised Share Capital – how many shares the company can issue,
potential for one’s holding to become diluted)
– Does not just set out number of shares, but other qualitative characteristics
– On a sidenote: companies can have an absolutely inordinate amount of
Authorised Share Capital, but investors will not want this as there is a big
chance for your investment to be diluted. You want to own as much possible,
do not want many shares.

Authorisation

• Can the authorized share capital be changed/altered? Yes. The first way is by an
alteration of the MOI – to change the MOI, you just require a special resolution of
shareholders. Immediately, should you change the authorized share capitals, this
may lead to the oppression remedy should the rights of shareholders be drastically
changed: e.g., majority shareholders increase number of shares, proportion of
minority voting power drops – hence minorities can drop out through the Appraisal
remedy. The Board can change the authorized share capital as well. The board must
change the MOI, by filing notice of amendment of MOI. Not only that, but the
decision to do so, directors can be held accountable by shareholders at AGM. In
either of the above two cases, changes are made to the MOI. The amendment is
given to the CIPC.
• How are shareholders protected?

Issuing Shares
You can only issue shares to the market that have been authorised.
• Board may resolve to issue shares of the company at any time but only within the
classes, and to the extent, that the shares have been authorised by company’s MOI
and in accordance with the requirements set out by the act. Board can only issue
shares authorised by the MOI, in accordance with certain procedures.
• Special resolution will be required under certain circumstances
– Shares are to be issued to the directors themselves (this makes sense,
because this is open to abuse if directors are able to consistently issue shares
to themselves)
– If shares are to be issued to a related person of the company or prescribed
officer of the company
– If shares are to be issued to nominee of the director
– if shares are to be issued to a person, who would then assume more than
30% of the voting power. E.g.: if shares in company A are to be issued to
Investec specifically, and Investec holds 10% shareholding already, and
company issues 25% to Investec – this is 35% overall. Shareholders may not
like this for whatever reason. This includes a creep-up provision, not dealt
with in this course (for every 5% of company you own, you need to make a
notice)
• Note, these deal only with shares issued by company. Shares purchased on JSE in
open market are fine, but creep-up provision would still apply.

• What happens if the board issues shares in excess of the authorised share capital?
– Effect on the transaction
• Nullity etc
– Potential liability?
• Director/Prescribed officer
• Present at meeting
• Voted for or failed to vote against
• Despite knowing …

Directors can only issue so many shares that are authorised, not more than what is in
authorised share capital. If you do, the effect of doing so is a nullity – void. The entire
transaction is void, even if some where authorised and some weren’t (how would you
determine which are which?).

The liability for directors doing so is intense. Directors need to ensure what they are doing is
legit. If you issue shares that are not authorised, you are in breach of your directors’ duties.

S77(3)(e)(i): a director of a company is liable for any loss/damages/costs sustained by
company by direct or indirect consequence of: being present at meeting, failing to vote
against unauthorised shares being issued. If you are present at the meeting, and did not
vote against shares that were not issued, still liable. Have to pay these shareholders back
their fee plus interest (directors should know this, it is in the MOI and should act with
reasonable care and skill).

Rights Attached to Shares
 • Right to vote (each share has one vote attached – can be changed in MOI. Each share
has right to vote on amendments of those rights)
• You are entitled to right of information – hugely powerful.
• The right to share in profits in the company that are declared in dividends. No
automatic rights to profit of a company.
• The right to share in net surplus capital of company

Options
Understanding this slide relies on understanding what an Option is. An option contract is to
keep open an offer, i.e.: keep a valid offer irrevocable for a certain period of time. This can
be an offer of buy or sale.

If a company issues an option to buy shares at a future date at a specific price …
S42: Options for subscription of securities

How this works for shares: you pay a company for the option to buy shares. You can
exercise on the option when you see fit. In the offer, there must be a statement as to what
price the shares will be bought, how many, etc.

Granting of a share means that when the shares are exercised upon/purchased, they will be
issued. This will be done if you are a Hedge Fund. A Hedge Fund takes hard and soft
positions. In America, you can force a company to buy your share back. Here you can’t.

E.g. share price now is R40 a share in James’ company. James needs liquidity. Gives option
to buy shares in his company R43, but only pay R10000 today. You can buy shares for R43 at
any time, and you can make massive profits if share price goes up to R100.

• Confers right on holder to buy specified quantity of particular share within stated
time and at stated price
• Company may grant options:
– as payment made
– as remuneration for services
– gratuitously this is not applicable*
• Option holder not member of the company
• Board of Directors determine terms on which shares are issued
 • Liability of Directors

From Bus Law 1, we know that the effect of an option contract is to keep open a valid
offer/to make a valid offer irrevocable for a certain period. If the option holder exercises on
the option, they bring the main agreement into effect.

In this scenario, the offer will be for the subscription/purchase of shares.

If there is an offer for shares by a company, e.g. Standard Bank at R35/share today market
price. Pay company for option of purchasing a 1000 shares at R40 within the next year.
Purchase the right to buy the share at a price higher than it is currently sitting at. Why
would you do this? The shares in Standard Bank may go to R150, in which case you have a
right to buy shares at R40. You can take long and short options. This is all how hedging
works.

The fundamentals of this remain the same: forward looking, to the way things are going to
be.

In this scenario under the Companies Act, what this would require if the option holder
exercises these rights – the companies act says that the director does not have to offer the
shares at the time, this is done automatically when exercising the offer. This is not two step:
board does not have to have a meeting, and then another meeting to issue after shares
exercised – the process is all done in one meeting. If you resolve to do an option, you
simultaneously resolve to issue shares in an option. These things have massive value in the
market.

Securities Other than Shares
Under the act, these securities can take many forms, e.g. debentures.

• Can also obtain capital by means of debt instruments/securities other than shares
of a company
• Security document – debt instrument
• Board may authorize secured/unsecured debt instruments: an unsecured
debenture is, for instance, not a mortgage; it is one where you do not have a
preference on the asset lent. For a mortgage, the debt is secured against the house.
If you go bankrupt, the bank sells the house and they take that value before anyone
else. What happens should there be no preferential right? Proportionate shares of
the asset are dealt with. Just because you are not a shareholder, does not mean you
have some kind of interest in the company – debenture-holders can have certain
rights attached to them. These may not be the same rights as shares, but these
rights are still enforceable on the company.
– May give special privileges
• Appointment of trustee


18 May 2017

Corporate Finance & Fundamental Transactions



Purchase of Shares @...
OFFER Acceptance






OPTION



Financial Assistance for Subscription
When can a company not offer financial assistance, in particular for a subscription of
shares?

Capital Maintenance (Again):

This picture in large part speaks for itself, but just to revise a few issues upfront – the capital
maintenance rule in our law is gone and is no longer relevant, as is the concept of par value
shares (this operated as a reservoir/collection/pool of assets, and that pool of assets would
have remained undisturbed – creditor could presume same amount of asset value of issued
share capital – the idea was to protect creditors and other outsiders. Assets could be
enforced against should you have a claim on the company. However, massive number of
rules and protective mechanism became prohibitory to creditors – hence the rule was
criticized, and replaced by Solvency and Liquidity test).

What is Financial Assistance in this Context?
Under our act, financial assistance is not defined. This means that the common law
understandings of the term will be relevant to determine what it means. Under the act, it is
clear at least that there is no specific technical meaning – using common sense to determine
when financial assistance granted.

Has there been a provision of financial assistance – object of transaction is to offer
assistance to do something. Financial assistance for the purchase of shares for our purpsees,
but there are other examples: e.g. company gives a gift/loan to a director (a gift is a
contract, no reciprocal duty required – you have a transaction). You can also give financial
assistance without giving money. The point is that financial assistance is not inherently
linked with money flowing from company to someone else. If the company has a claim
against you, but says that it will not enforce those rights, that is financial assistance. You
cede these rights, and this may be financial assistance. If you buy an asset you don’t need,
financial assistance. If you have a restraint of trade, that may be financial assistance (if
someone restrains the company from operating in a certain way).

If the company acts in a way where it secures the loan of another, i.e. if it stands as surety
for the debt of someone else (company stands as surety for debt of a director**), then
there may be financial assistance. Money does not have to flow from bank account.


Mortgage
Director Bank


Suretyship!



Company



If a director has a mortgage with the bank. Director purchases house in his personal capacity
and takes out mortgage, but to secure the mortgage, company stands surety. If you have
someone willing to stand as surety for you, your interest rate drops (especially for
accountants, doctors, or other bodies of professionals).

If the director is in default of the loan, under the mortgage, the bank can claim from the
company. It is a win-win, until the director defaults. Although the company is not spending
money, it has still given financial assistance to the director.

• No comprehensive definition in Act for “giving financial assistance”.
• The words have no technical meaning, and “their frame of reference is the
language of ordinary commerce”.
• In essence - to provide another with the financial means to enable him to achieve
his purposes or ends - direct object of the transaction or act is to assist another
financially

We are trying to ascertain whether 3rd party has been given aid to do something.

How do we test for Financial Assistance?
Common sense approach

• Impoverishment test
– Test to determine if financial assistance took place
– Asks the question: “Has the company become poorer as a result of what it
did for the purpose of or in connection with the purchases of its shares?”
– What is the role/status of this test today? This was test under old act, but
under new act, is relevant but not necessary. It is only one of the tests. It is
too narrow to be the only test, but is still very relevant. This may be a starting
point, but not passing this does not mean no financial assistance took place.

There is a huge bank of company law here. Companies in a group give financial assistance to
each other all the time. It can be simplified into what is known as a common sense
approach, but to understand this you have to understand tests. This is not the one and only
test that is relevant; it is not a necessary determinant. Arguably, it is the most important,
yes. But, in other words, you may have instances where company is not adversely affected
but still granted financial assistance. Before the default on the loan, there is still financial
assistance (i.e. before the default). Thus, the Impoverishment Test is not the only one you
need to apply.

Under the impoverishment test, the company that has given financial assistance has become
poorer. However, you cannot say: “as the impoverishment test has not been passed, there is
no financial assistance”.


HOW DOES THE 2008 ACT DEAL WITH FINANCIAL ASSISTANCE FOR SHARES

• Board may authorize assistance ito section 44: board may provide financial
assistance in certain circumstances. S44 is very wide in scope and application: the
board may authorise company through loan, guarantee etc. to any person in
connection with subscription for any securities of the company for a related or
interrelated company (within groups here). You do not need to apply s44 for direct
loans/loan accounts.
– subject to provisions that the MOI may contain: MOI may limit when
financial assistance can be given/in what instances – RF company!
• Section 44(2) is wide in scope and includes:
– shares of company or holding company
– options
– securities
– BUT not loan accounts
• issued or to be issued
• issued by company/related or interrelated

REQUIREMENTS ITO THE ACT



Financial assistance needs to have a relevant basis. These are the ones above.

For the purchase of shares, not as part of employee share scheme, you need a special
resolution authorizing as much. Does not need to be special resolution if it is part of the
employee’s share scheme. Over 2 years, can also be part of employee share scheme.**

An important qualification here under the top one is that there cannot be a general special
resolution in terms of all cases. e.g. Financial assistance to directors for XYZ over 2 years is
fine, but not in any case whatsoever to any person. There needs to be a level of specificity.

Safeguard – company needs to pass solvency and liquidity test, and it must be fair and
reasonable to the company. In terms of application of the solvency and liquidity tests, it
must be on the date that the financial assistance is granted.

The concept behind the second one is that you can’t fleece the company; the company
needs to receive some form of benefit – anything to the company’s benefit. This does not
have to be financial.

If the company’s MOI restricts the granting of financial assistance – you are dealing with a
Ring Fenced (RF) company. If you don’t comply, the contract is void. Potential liability may
apply to directors/prescribed officers for breaching their duties.

IMPACT OF NON-COMPLIANCE
The granting of financial assistance is considered at a board meeting. If a decision is taken,
that is not in compliance with the previous slide, but you as director fail to vote against this
– then you may be held liable.

If breaching MOI, company can sue you as directors, and shareholders can enforce their
rights against you too. This is for granting financial assistance when they were not permitted
to.

• Consequences in terms of:
– the transaction
• void
– Potential liability
• Director/prescribed officer
• Present at meeting
• Failed to vote against/voted in favour of
• Despite knowing…


19 May 2017


1) R
Company Shareholders
What does this
do to value of 4) 2) R (for shares)
Proposition to R value does
not get bigger
Current
Shareholders? 3) shares issued


Distributions
To understand this picture, you need to understand that shares, and the issuing of shares,
are integrally linked to a specific form of financing a company: equity financing! Ultimately
meaning, that you are issuing shares and being paid. Company is being paid for shares being
issued.

A share can only be issued if it is for “fair consideration”, a term dealt with in great detail
within the Act. This ultimately raises this problem with financial assistance, above with
labelling 1 through 4:

You have the company, represented by a box, and this company has a particular pool of
equity (its issued share capital). The company offers financial assistance to a prospective
shareholder. A nominal value of R (rand value) has been used. So, the company loans R or
stands surety for R, for the purchase of its own shares. The company has given the
prospective shareholder a loan for the purchase of shares in the company.

This means that the company has paid a rand value over to the prospective shareholder,
who is then paying that exact rand value back for the purchase of shares. This R value,
therefore, does not change. The R value remains the same, and doesn’t go up. The money
goes out and comes back in.

The company is paying value to a director and then paying again into company. The R Value
remains the same, and doesn’t go up. The money goes out and it comes back in.

Shares are issued on the basis that shareholder is paying for them, ultimately meaning this:
as a current shareholder, the companies R value has not increased but your proportion of
shareholding has decreased with no benefit to you. If the company gets liquidated, you have
less of a claim. You may have less voting rights.

Because current shareholders will lose value in their shares (less of proportion for same R
value), they must be protected. Keep this diagram in mind for this section.

Financial assistance can be a proportion.

The 3 transactions can be as complex as you want, e.g. an option. However, the principle
remains the same – a company must be getting fair consideration for its shares.

At a deeper level, you will always aim to secure the loan to shareholders in the form of a
suretyship agreement or a secured asset.

In all of these financial issues (structuring), starting point in all capital finance is the capital
maintenance rule and the fact that it is not relevant. This rule originated in large part from
distributions.

Distribution can take a wide variety of form. It is effectively the company giving money out.
The capital maintenance rule was useful in this space, because you need to remember that
creditors have no direct claim against shareholders. A creditor cannot claim against
shareholders, due to separate legal personality. Your claim lies with the company. If the
company is to make a distribution, and it distributes 70% of its liquidity to shareholders as a
dividend, creditors would not be paid. In the 70s, companies would get themselves into big
financial problems/contracts, and right before the point of default, they would declare
massive dividends.

Capital Maintenance rule regime permitted to assume as a creditor that company had same
asset base to issued share capital. This protected against the above problem. However, this
is not how companies work. Gearing comes into play, debt v equity. This is the modern way
of doing business. You can no longer assume that PnP has same amount of assets as issued
share capital. If you are a creditor of PnP, you can’t rely on Capital Maintenance, but you
can rely on solvency and liquidity test. This is very relevant; it is this that protects creditors
today and not Capital Maintenance.

In large part, the current Act in applying the Solvency & Liquidity test is seeking to protect
creditors of companies in a similar way to what that the Capital Maintenance used to do.
Creditors can assume that companies are solvent and liquid after the time that the
distribution is made. It is different depending on what type of distribution it is.

Definition of a Distribution
However, the Act does not give wide definitions of distributions. This is a dumbed-down
version of the distribution.

Forms of distributions include:
• Payment/Declaration of a dividend
• Payment of the company in lieu of capitalization share (if the company is in a space
where it needs liquidity, it can issue what is known as capitalization shares – the
issuing of a specific type of share proportion to current shareholding, instead of
dividend). They also have to be issued and authorized. Depends on MOI whether
they have to be the same share that they, the shareholder, currently hold. These
may in some instances not carry voting rights. This does not change the proportion.
• Where the company buys back its own shares. A share buyback is an interesting way
of financing your company. Why? Changing shareholder proportions.
• You pay for the acquisition of shares within your current group of companies, and
may also apply to other groups of company.

Research: can a subsidiary acquire shares in its holding company? See later

• Direct or indirect transfer of money of other property of company whether out of
capital or profits to shareholders in their capacity as shareholders.
– Can be incurrence of a debt or other obligation for benefit of 1/more of
shareholders
Also forgiveness or waiver of debt

ACQUISITION BY COMPANY OF ITS OWN SHARES
Under previous legislation, if a company was purchasing and holding its own shares, they
would be known as treasury shares. They were a very effective way of financing your
company. Instead of having to re-authorise and re-issue etc. with shareholder/board issues,
you could hold them as owner and then sell them.

The issue of treasury shares, was that it was hugely open to abuse. There was little
protection to minority shareholders to what value they are sold at. Treasury Shares
presented a huge problem when it came to presenting the new Act. It was a policy decision
that they were far too open to abuse, and hence they were made illegal.

What does the new Act say? A company can buy back its own shares, but a share buyback
will be a distribution. Because it is a distribution, shareholders and creditors need to be
protected. Section 46: Distributions must be authorized by the board, and the following
process must occur:

A) The board must have an existing legal obligation/duty of the company to buy back
the shares, and the board must resolve to do so.
B) Application of solvency and liquidity test.
C) Must acknowledge that they apply the test and conclude that they will pass it.

The result of company buyback is that they pay for the shares. A company cannot own its
shares – they are de-issued, and they fall into authorized share capital.

• Company may acquire its own shares if the requirements of section 46 are met
• Agreement with company providing for acquisition of own shares is valid
• If company cannot fulfil obligations – must approach the court for an order

REQUIREMENTS ITO THE ACT (s 46)

Must be pursuant to existing legal obligation or board of company authorises by
resolution
Reasonably appears that company will satisfy solvency and liquidity test immediately
after completing proposed distribution
Board, by resolution, acknowledges that it has applied solvency and liquidity test and
reasonably concluded that company will satisfy test immediately after completing
distribution

Important for a problem type question – B and C are separate steps; two-step process.

IMPACT OF NON-COMPLIANCE (with s46)

• Consequences in terms of:
– the transaction: will be declared as void. You then have potential liability.
Any share acquired contrary to provisions of the act – transaction will be
declared void. A dissatisfied shareholder* must approach court within 2 years
to make the order that: 1) the person from whom the shares were acquired
 return the amount paid by the company, 2) the company issues to that
person the equivalent number of shares in the same class (v similar to
restitutio in integrum. You effectively reverse the transaction. The shares
need to be reissued to that person.
• Approach court …

Company à Shareholder R
Shareholder à Company Shares
But if not in compliance, reverse the arrows but REISSUE the shares as shares have become
deissued. It is the equivalent number of shares, but if there is a big change in value, can sue
for loss:

This above, is a contract – if you are forced to sell, you can sue for full consequential losses.
Proportion of shareholding goes back to exactly what it was, but this may lead to you
suffering a harm. This is where full consequential losses come into play – sue to get reissued
the shares. You get the shares back at the market value of the shares. This is a contract that
can be breached, the company will be breaching the contract! If the company suffers a
harm, they sue the directors.

They have the same status of shares that are authorized but not issued. Authorised share
capital stays the same, issued amount changes.

– Potential liability
• Director/prescribed officer
• Present at meeting
• Failed to vote against/voted in favour of
• Despite knowing…


ACQUISITION BY SUBISIDIARY OF HOLDING COMPANY SHARES

• Subsidiary may acquire shares in holding company if the requirements of section
46 are met
• But:
– not more than 10% of number of issued shares of any one class held by /for
all subsidiaries taken together Act limits the number of shares that
subsidiaries can hold
– no voting rights attached while held by subsidiary and subsidiary remains
such , even if subsidiary hands them over to a nominee; substance over form.
– This protects shareholders more than anything


REQUIREMENTS & IMPACT OF NON-COMPLIANCE
• Requirements:
– The same as for acquisition of own shares
• Consequences of non-compliance
– The same as for acquisition of own shares

DISTRIBUTIONS OF PROFIT OR CAPITAL
Distribution of profit is a dividend, and one of the rights of shareholders is to have a
proportion of this dividend.

• Board decision – no shareholder participation
• Requirements:
– The same as for acquisition of own shares
• Consequences of non–compliance:
– The same as for acquisition of own shares

SUMMARY OF REQUIREMENTS

SUMMARY OF REQUIREMENTS:

s46 must be applied in any instance where you have a distribution.

 ADDITIONAL REQUIREMENTS:

Additional requirements for specific situations.

Week 10: Corporate Finance (B)
No perspective lecture, pick up from last week’s work.

22 May 2017

Fundamental Transactions
The fundamental transactions: those that fundamentally have an impact on the company.
There are 3 of them recognised by the Act: amalgamation/merger of companies, disposal
for the greater part of the assets or undertaking of the company, and finally, a scheme of
arrangement – changing the interior profile of the company (e.g. altering shareholder
proportions/voting rights.

Each has different requirements, but there is a certain bank of knowledge/process that
applies across all of them (Solvency and Liquidity).

In the fundamental transactions, you are bumping against shareholder protection remedies.
In every single one of them, there will be increased importance on Appraisal Rights,
Declaration of Rights etc. The big one is the dissenting appraisal rights, but all of the 5 we
discussed a while ago are very relevant. Fundamental transactions link strongly with
shareholder protection.

DISPOSING OF A GREATER PART OF THE ASSETS
This is the easy one.

• All or a greater part of the assets or undertaking
• Refers to either more than 50% of the gross assets measured at fair value or more
than 50% of the business measured as a going concern. They must be measured at
the time that the disposal is made.

In each of the fundamental transactions, there is a deep level of technical detail, which is
only taught at Masters Level. Here, you need to know which type of fundamental
transactions we are dealing with. There are creep-up provisions that apply, but this is the
type of level of detail would be avoided in this course.

The meaning of “disposal”, here, does not deal with liquidation. Insolvency law is something
completely different. Effectively sale.

Company’s assets or undertakings are permanently deprived from the company, rights of
ownerships given to somebody else. The transfer of ownership from company to somebody
else.

On the other hand, if you pass a mortgage bond over the company, you do not have a
disposal. If you stand surety, you do not have a disposal. If you have a cede rights, you DO
have a disposal – but if you rely on a cession in securitatem debiti, you do not have a
disposal. A company cedes its rights for the security of something else. It has the form of a
pledge, you have a right to get it back. This should be known from Bus Law 1.

Only when you are disposing of your assets in terms of ownership or in the form of contract.
Must be to a valuation of 50 or more. Assets or undertakings viewed together.

MERGERS & AMALGAMATIONS
In our Act, we do not refer to mergers and acquisitions!

First things first, what are we talking about: when two or more companies join together to
form one. If Group 5 and Engels were to merge, how do you go about it? You have
subsidiaries, shareholders and directors – what happens to them? And who needs
protection?

You can also have a creation of a monopoly in terms of market forces. What would happen
to the market if PnP were to merge with Shoprite? When merging, you are merging only the
holding companies/specific companies of the agreement, subsidiaries are separate legal
persons. Once you have merged, you have to determine where control lies.

The Act itself recognizes 3 different ways of having a merger: there are 2 specific ones, but
the last one is extremely free in terms of structuring the transaction. There is thus no closed
list.

• Parties must enter into a written agreement
– must set out the terms and means of effecting the merger or amalgamation
 – Amongst other things it must contain the proposed Memorandum of
Incorporation of the company to be formed by the amalgamation or
merger.
• Solvency and liquidity

For our purposes, the formalities that are required is that the parties of the merger must
enter into a written document: this document considers those:

• Name and ID number of each proposed director of new company to be formed,
• and specific detail in which the securities of each merging/amalgamating company
are to be converted into new securities (how will the existing shareholders be
included in the shareholding structure of the new company)

If company X is merging with company Y, amalgamate to form Company A – you have gone
from having 2 companies to having a new one. In this case, you need the points above on
the board and the ones above added.

In terms of Solvency and Liquidity tests, the board of each merging company is tasked with
determining whether the new company is to apply the Solvency and Liquidity test to the
NEW company. Each board has to ascertain, upon the implementation of the merger,
whether the new company will be satisfying the Solvency and Liquidity tests upon
implementation of the merger. This becomes tricky in the merger of two companies, with
one doing very well and the other not.

Why is it done this way? You have to protect the creditors of company X and company Y. If X
is doing well and Y is not, creditor wants to know that claim will be safe upon amalgamation.

If the boards are satisfied that Solvency and Liquidity is met, it is presented at shareholders
meeting of each of the original companies.

SCHEMES OF ARRANGEMENT
This slide speaks for itself in large part. Essentially, a very broad frame of reference. A
scheme of arrangement changes shareholding. The agreement is not between the directors
and shareholders, but company and shareholders. The agreement may include any of these
things. They exclude ones written at time of liquidation or business rescue.

• Refers to any arrangement between the company and holders of any class of its
securities
• May not initiated by the board if the company is subject to business rescue
proceedings or if the company is in liquidation
• Includes:
– the consolidation of securities of different classes
– a division of securities into different classes
– an expropriation of securities from holders
– exchanging any of its securities of other securities
– a re-acquisition by the company of its securities or
– a combination of these methods

REQUIREMENTS APPLICABLE TO ALL:

NOTICE REQUIREMENT
Given to shareholders and creditors

Info given in notice dependent on which type of fundamental transaction. In our case, we
are talking about notices given to meeting.

• Notices for meeting to decide on any type of fundamental transaction
– Must contain prescribed information detailing nature of the transaction *
(merger – solvency & liquidity, and terms of shareholding)
– Must alert shareholders of their right to approach the court if they dissent
– Must alert shareholders of their appraisal rights if they dissent (very
important here)

In certain circumstances, may give info to shareholders in rights of court.

SPECIAL RESOLUTION
Shareholders must pass one for fundamental transaction to pass.

• Shareholders’ meeting to obtain special resolution required
– At least 25% of all voting rights entitled to be exercised on the matter have
to be present in order to form a quorum. Much like directors with an
interest, if you are a party that is to benefit – you must disclose.
– The voting rights of a party who may be acquiring assets from the company
is not to be included when calculating whether the proper quorum was
present, nor are the rights of such a person taken into account to calculate
the percentage of votes in favour of the resolution.

COURT APPROVAL MAY BE REQUIRED
That sits on top of the approval of shareholders. For transaction to be approved after special
resolution

• Apart from obtaining a special resolution court approval is required before the
fundamental transaction can proceed if
– Holders of at least 15% of voting rights oppose the resolution This goes
against the majority rule. Provided you have 15% of the vote against
something, you have an immense degree of power of minority shareholders.
This is holding up many mergers. What happens is minority shareholders use
this as a way of getting out of the company at a MASSIVE premium. If you can
validly threaten a merger, by saying you will enforce your rights in a court of
law, people will buy you out of your shareholding. Companies want to merge
as quickly and efficiently as possible. This is a huge minority shareholder
protection, and is open to abuse by minority shareholders. It is a balancing of
interests between the competing players.
 – Single shareholder approaches the court and meets requirements:
Requirements to be granted leave to do so:
• Shareholder must be acting in good faith (not opposing merger for
own benefit), AND
• The court must see that the shareholder is able to sustain the
proceedings (i.e. pay costs irrespective of how long it takes), AND
• The shareholder alleges facts, which if are true at face value, would
be grounds for setting aside the shareholders’ resolution approving
the fundamental transaction

TAKEOVER REGULATION PANEL
There is a statutorily created panel. Created to monitor companies that are merging with
one another. They implement the Financials Act, Companies Act and Competitions Act.

For instance, the merger between Massmart and Walmart. Makro and Game operate very
similar business models, and used to be controlled by two different companies. Now, you
effectively buy the two under the same roof – and they price how they see fit.

The takeover regulation panel is there to stop that happening and protect society from
monopolies.

They approve a huge number of transactions, not just fundamental transactions. Need to
get approval from this panel before anything can be implemented. They effectively have to
give you a tick in a box. Should they give you an X, you can go to court to challenge their
decision. Someone can apply to the takeover regulation panel can apply to block a merger;
interested persons.

The fact of the matter is this; you merge two companies for a reason. As soon as you talk
about efficiency, you are talking about money and the bottom line. The bottom line has to
shift somewhere, and employees are often the ones who suffer, e.g. Walmart and Massmart
companies receiving minor benefits.

They oversee affected transactions, which involve regulated companies. Company is
regulated, by looking at:

The TRP is there to monitor market forces, and applies a number of different laws. The TRP
is primarily there to oversee issues of Company Law, mergers and acquisitions. To do so
they look at broad number of policies, e.g. monopolization in the market. Balance interests
of merging companies to society’s free and fair marketplace.

The competition commission looks at Competition Law. They operate in tandem with each
other, but we do not cover that in this course. They look at the same policy interests from
different perspectives, one from Company Law and other from Competition Law.

Certain transactions are monitored closely and overseen by the Takeover Regulation
Panel
• The panel must regulate the affected transactions to achieve certain aims
 • The integrity of the marketplace must be protected and fairness to holders of
securities must be ensured
• The necessary information must be provided to holders of securities to allow them
to make fair and informed decisions
• Adequate time must be given for regulated companies and their securities holders
to obtain advice

This is not a court, it is a panel. They deal with instances whereby a regulated company has
entered into an affected transaction. This is where the TRP has oversight. This means that to
determine whether they have oversight or not: A) is company a regulated company?, AND
B) is it an affected transaction. E.g. if I sell shares from one small private company to
another, it wouldn’t fall into oversight jurisdiction.

• The panel oversees ‘affected transactions’ involving ‘regulated companies’
• A regulated company is:
• A public company
• A state owned company
• A private company under certain circumstances
• If more than 10% of the issued securities of the company have
been transferred in the 24 months preceding. It doesn’t have
to be a share issue (from company to shareholders), but
between shareholders. This is a small threshold. Even if shares
are traded to a trust, small companies can be regulated
companies.
• If MOI explicitly says that company’s transactions will be
subject to the takeover regulation panel. Your MOI is subject
to provisions relating to regulated companies. In large part,
there is not really a benefit to this, as the burden of
compliance is quite large. However, as a large SME, then there
is a certain appeal to it.
• Not every private company – only those under certain
circumstances. Very similar to deciding whether they need to
be audited, the difference is you don’t use the PIS Score, but
same thinking.
• An affected transaction includes:
• The fundamental transactions discussed above by default, the 3
dealt with above. Every fundamental transaction is an affected
transaction. Where you have a company involved in the acquisition
of/plan to acquire a beneficial interest/voting securities, or an
announcement of making this investment, of a regulated company
under the following circumstances, whereby you enter into a new
threshold – you have an affected transaction:
• The 5% rule (where buying shares takes you over any 5%
threshold of voting rights: go from 4% to 6%, or 9% to 12% of
voting rights of a particular class) – buying 5% still takes you
over the threshold. (If X owned 19% preference shares and
 bought of 4% ordinary shares, no problem. However, X buys
2% preference shares, then it is)
• Where you will be lessened to a new 5% class

Interesting question:
You have a company, which over the preceding 24 months has seen 4 transactions –
maximum 9% of shareholding traded. Someone has slowly been purchasing, bought one
percent then another etc. …if the same person decides to buy another half of a percent, do
you have an affected transaction? Probably not. Can be purchased either through share
issue or purchase of shares between 3rd parties, transfers. You look at it as a whole.

Once declared as a regulated company, you hold that status for 24 months.

SUMMARY OF REQUIREMENTS:
• You have to look at specific type of fundamental transaction
• Then you look at general requirements for all fundamental transactions.
• Throughout all of this, irrespective of type of fundamental transaction, you have to
be able to apply dissenting shareholders rights/minority shareholder rights.

23 May 2017

Raising Share Capital
In particular, raising issued share capital. This is looking at equity financing of a company,
because we are dealing with shares. This in particular is about offers to the public.

REGULATING OFFERS TO THE PUBLIC
Integrally linked to our primary stock exchange, but 4AX and ZarX. AltX and Main Board both
run by JSE: 4 exchanges and 3 boards.

Because shares are open to trade to the public, there are certain legal requirements that
apply to them. You have increased need for transparency and accountability etc. when
shares are being offered to the public.

Why do we regulate offers to the public? Trading on information provided by the company.
Need to be certain that this information is true, but also independent (no bias). You need to
know where it came from.

• All Public offerings of company securities are regulated by chapter 4 of the
Companies Act.
• Principal aim to protect investors by ensuring they are provided with adequate and
accurate information relating to state of affairs and prospects of a company before
subscribing for or purchasing its shares. Law provides framework whereby investors
who are relying on information is accurate and adequate. The aim of Ch4 of the Act
is not to provide you with information to make the company look good, but to have
accurate information. You are acting almost purely on the information given to you
by the company, hence you need heavy regulation
 • Offers to the public prohibited unless they comply with stringent requirements laid
down in the Act,
• Failure to comply – civil and criminal liability! Can go to jail.

TERMINOLOGY

• Initial public offering:
• Offer to public of securities of company if:
• Either no securities of that company have previously been subject
of an offer to the public, or
• all of the securities of that company that had been issued to the
public have been re-acquired after previously having been subject of
offer (de-issued and offering again, e.g. Alexander Forbes) (share
buyback, delisting and relisting – upon relisting, there is an IPO).
• The IPO, or offer for shares attached to it, can be for the sale of shares
or securities, or both. You cannot make an IPO without a prospectus.
You have to have one for you to offer an IPO.

– Primary offer:
• Offer to the public, made by/on behalf of company of securities to
be issued by that company or another company within a group of
companies of which first company is member…
• A primary offer is effectively divided into two categories: offer of
listed securities and offer of unlisted securities. Primary offer of listed
securities requires compliance with exchange you are dealing with –
securities itself have been listed and already out there, but held by
company within the group, and company is then selling them. Primary
offer of unlisted requires a prospectus. Hypothetically: a subsidiary
wants to issue securities that are already listed (of the holding
company), no prospectus required. However, if unissued securities
issued – need to provide prospectus on subsidiary and holding
company. The idea is that the law says you cannot use another
company to affect the issue of those shares and circumvent the
requirement for a prospectus.
• Can be a seasoned offering

– Secondary offer:
• An offer for sale to the public of any securities of a company or its
subsidiary made by or on behalf of a person other than that
company or its subsidiary
• There is an overlap here between prim and secondary. Secondary
offerings, by implication, are also divided into two categories: offers
for listed vs unlisted securities. Offer for listed securities is regulated
by FILL. An offer listed through an exchange is not an offer to the
public. If you (a subsidiary) sell shares to the public, through an
exchange, it is not regarded as an offer to the public and no
prospectus is required. Where you have listed securities (already in
 the public, already had prospectus etc.), then if you trade on open
exchange, not offer to the public. But if an outside person trades in
unlisted securities, it will be an offer to the public. If you apply to
company to be a shareholder, on an application for shares, for when
shares are issued. You can affect a cession, in which you attach the
prospectus given to you to the person sold to.
• The hallmark of a secondary offer is that it is not made by the
company or its subsidiary, and is thus not a capital raising exercise of
the company. This is only done through primary and IPOs.

WHAT IS AN OFFER TO THE PUBLIC?

• Offer – in relation to securities means an offer made in any way by any person with
respect to the acquisition, for consideration, of any securities in a company
– Includes an offer of securities to be issued by a company to any section of
the public, whether selected as holders of that company’s securities, as
client of the person issuing the prospectus, as holders of any particular class
of property, or in any other manner.
– Does not include an offer made in any of the circumstances contemplated
in section 96 or a secondary offer effected through an exchange
(exceptions!)
– Offer for acquisition for acquisition of any securities of the company

SECTION 96 EXCEPTIONS:
Need to know all of these.

• An offer is not an offer to the public if it is made only to: PEOPLE WHO ARE
EXCLUDED
– persons whose ordinary business, or part of whose ordinary business, is to
deal in securities whether as principals or agents
– the Public Investment Corporation
– a person or entity regulated by the Reserve Bank of SA
– an authorised financial service provider
– financial institution (as defined in Financial Services Board Act)

• Offer is not an offer to the public if the offer involves: SUBSTANCE TO THE OFFER
– total contemplated acquisition cost of the securities for any single
addressee acting as principal is equal to or greater than amount prescribed
– if it is a non-renounceable offer made only to existing holders of the
company’s securities or persons related to existing holders of the
company’s securities

• Offer is a rights offer THAT SATISFIES THE FOLLOWING
– that satisfies the prescribed requirements and
– an exchange has granted or has agreed to grant a listing for the securities
that are the subject of the offer and
– the rights offer complies with any relevant requirements of that exchange

TAKEOVER REGULATION PANEL

AGAIN, WHO OFFER IS MADE TO:
• Offer is made only to a director or prescribed officer of the company or a person
related to a director or prescribed officer unless offer is renounceable in favour of
person who is not a director or prescribed officer of the company or a person
related to a director or prescribed officer
• Offer pertains to an employee share scheme that satisfies the requirements of
section 97

• Offer is in writing and:
– not accompanied by/made by advertisement and no selling expenses
incurred
– issue of securities under any one offer in series finalised within 6 months
after offer first made
– offer/series of offers in aggregate accepted by maximum of 50 persons
– subscription price does not exceed in aggregate amount prescribed –
amount determined by minister minimum R 100 000
– no similar offer/offer in series of offers made by company within period
prescribed – Minister may prescribe minimum period not less than 6
months

ultimately getting to this point … this is section 96, a nice summary.

SUMMARY OF REQUIREMENTS:

This is hugely relevant. E.g. AngloGold’s Board was trying to refinance the company in a
certain way, made offer for securities to a specific category of shareholder of the company
itself – that particular category of shareholders happened to be private equity shareholders.
Other shareholders were pissed off: they said that this was an offer to the public, therefore
needed a prospectus. AngloGold argued that they did not and that all the rules had been
complied with at the time.

This judgement that has been hugely criticized; it was before the new Act, and became
binding. This very case led to the technicalities above.

If you provide an untrue statement in a prospectus, you will earn jail time and lose your
license.


PROSPECTUS REQUIREMENTS
What is required of a prospectus.

• Except in regards of securities that are subject of a company’s initial offering,
person must not make primary offer to the public of any of the following (without a
prospectus – prospectus must be attached to the offer, almost stapled on).
– listed securities otherwise than in accordance with requirements of
relevant exchange
– unlisted securities of company unless offer is accompanied by registered
prospectus that satisfies requirements of act

• Except iro securities that are subject of a company’s initial offering, person must
not make secondary offer to the public of any securities of a company unless
– unless accompanied by written statement that satisfies requirements of
section 101 and bears on face of it date on which prospectus was filed
– When you sell shares on open market, you attach a prospectus. If you own a
share that was publically traded, you have the relevant info of the company
attached to it to make informed decisions as a shareholder. You should not
be making a blind investment, but one that is fully appraised of all
information.
– S101: Regulating Secondary Offers to the Public. If you transfer your shares
on an exchange, this doesn’t apply to you. Outside of an exchange: the
registered prospectus for those securities, or changes in material
information, must be accompanying to the shares/offer. If you are making a
secondary offering to the public, the prospectus you received in the primary
offering together with any material change of information needs to
accompany the offer. You can’t make a valid offer without attaching a valid
prospectus.

WHAT MUST A PROSPECTUS CONTAIN

• What information must a prospectus contain?
 – All information that investor may reasonably require to assess assets &
liabilities, financial position, profits & losses, cash flow
– All information that investor may reasonably require to assess securities
being offered and rights attached to them
– Prospectus must adhere to prescribed specifications
– All relevant and material information that an investor may require to
determine whether to invest in the securities or not. This is to protect
investors in the public and the credibility of the company – the market is
dependent on it. It is the company together with independent persons who
prepare a prospectus. It is open to abuse, as you can make the company look
as though a better investment prospect than it really is.
– E.g. Dimension Data, massive private company, very successful. They
underwent an IPO, @R75/share. People jumped at it. People invested their
pensions in it. The shares took off like crazy. Went to R210/share in 3 days.
And then – they plummeted over the course of 3 months, to 75c/share.
There has been a lot of discussion as to whether there was insider trading
etc. Where did things go wrong? No one knows, and no one has ever been
charged for anything. But the company was fundamentally flawed. And yet,
the prospectus was legit and watertight. All the information was out there. A
prospectus is not there to insulate you from taking risk, a prospectus is there
to provide you with sufficient information to make a decision. Law is not
there to protect you from yourself.

SOME FINAL ISSUES
However, the law does protect you from errors in a prospectus.

• Mistakes contained in prospectus
• Liability for untrue statements Massive liability. Having a mistake/error does not
make it void. The person who made the error must be aware of it and change it.
Once your attention is brought to error: 1) correct error, 2) report it to JSE, and
report that you are changing it and how, 3) register the correction as an
amendment/supplement to the prospectus, 4) publish it to all known recipients of
the prospectus. Investors can withdraw their subscription by written notice within
20 business days of knowing about the error/publication of error. This relates to any
material mistakes, impacting on that investment.
• The company has two options on this: accept withdrawal and pay back the person,
or not. In which case a court may order that it is just and equitable to do so. The
court may decide a number of things – court will either agree with company or
shareholder.
– What is considered an untrue statement?
– Who is liable? Liability for untrue statements: depends upon the context and
the facts. Untrue statement is one that is misleading in the form or context
that it is made. If you are fraudulent, you go to jail, but sometimes you have
to hypothesise about market forces. (Dimension Data listed under the old
act, fortunately enough for them). An untrue statement does not just include
lies, but also if you do not include or you omit certain information, and that
omission in itself is misleading. The Act details what information you do have
 to include, and what you don’t. The Act does not require you to include the
information, if the info is material to you making your decision – you include
(even if not mandatory via the Act!) any material information omitted from
prospectus, untrue statement. The issue with these becomes: who is liable,
and what is their liability? A person who becomes a director, a person who
put their name to the prospectus (e.g. auditors), a promoter of the company,
and lastly, the person who authorized the prospectus. The liability is both
civil and criminal in nature, so you can go to jail or be sued. If you are a
director, you will have breached your fiduciary duties.
– Are there any defences? When would you not be liable? If you are a director
who voted against the issuing of a prospectus, or you reasonably rely on
information of an expert, in which case expert may be liable and not you as a
director.
• Liability of experts
– When might an expert be liable?
– Are there any defences? The experts can withdraw their information prior to
publication. If you withdraw information, saying you got it wrong, the expert
is then exempt from liability even if they publish initial information. The only
time frame is prior to publication.

You need to know these details. We will only finish Friday’s application midway through
Monday. It is tough because there is not one single clearly defined issue. In this problem, you
have 6/7 transactions. Draw a mindmap and include the following: capitalization, FA,
distributions, FT, raising of share capital, dealing in shares, insider trading and market
manipulation.

24 May 2017

If a private company sells shares to someone, nothing stops a director of the company for
making an offer to you (a specific person) for the purchase of those shares. For example, if
you want to engage in a startup: “James, I want to invest in your start up” - what they are
talking about an equity portion in the company.

To do that, you have to do one of two things. You sell a proportion of shares as a
shareholder to somebody else, e.g. James has 60% and trust has 40%, makes an offer of 10%
of James/Company shares for R100 000. We agree, and have a contract, and in accordance
with an MOI and are transferred in a cession, and the new shareholder is included in MOI.

The process is extremely complex with public companies, especially those that are listed.
Note: not all public companies are listed.

When dealing with the transfer of shares, of a publically listed company, it is done through a
stock exchange. In this case, we will be dealing in particular with secondary offers, and
primary offers (from group members).

The second way of doing it is to issue more shares: James sells 10% of shares for R100000,
and issues new shares.

For publically listed companies, when you issue shares, is where you get into the immense
level of intricacy: IPOs come into play, and thus prospectuses. You can also deal with
primary offerings here. In either case, you need a prospectus. When you have unlisted
securities to the public, prepare/attach prospectuses.

Effectively what this is all about is the steps that companies have to go through in certain
circumstances, i.e. IPOs, primary offers, secondary offers. Look carefully as to where
prospectuses need to be included or not.

The difficult area of this section is to determine whether the offer itself is an offer to the
public. To determine whether or not is an offer to the public: includes an offer of securities
from company to any section of the public, whether selected as:
• holders of that company’s securities,
• clients of the person issuing the prospectus,
• holders of a particular type of property,
• or in any other manner.

An offer to the public does not include the following things:
• an offer made in terms of section 96 (exceptions) (all summed up in the part of the
family picture)
• a secondary offer effected through an exchange

You need to prepare a prospectus when you have an IPO. With primary offerings, there is a
difference between listed and unlisted securities.

A secondary offer effected through an exchange is not an offer to the public.
Unless buying shares from IPO or Primary Offering, in which case you are being issued shares
by company, it doesn’t matter who is selling you the shares – some person of the public.

How it happens is that you call a broker, saying you want to sell 100 shares in RMB. They will
have a share valuation at that time of day. You are going to want to sell them for more than
they are available at that time. Let’s say this is at 3:15 – price is R25/share. If you want to
sell shares for R27/share, this is listed on STRATE which matches you to a buyer. Broker may
call back with negotiated. You are affecting a transaction with a random person. This is not
an offer for the public.

25 May 2017

By this point, we should happy with the concept of a prospectus.

Dealing in Shares
We are primarily discussing uncertificated shares. Whether dealing with certificated and
uncertificated shares, companies have to maintain a securities register at registered place of
business/company.

CERTIFICATED SHARES
This slide goes into more depth as to what needs to be included into securities register
itself. You cannot just have a cabinet full of random pieces of paper, or box with label titled
share register, etc.

It is mandatory to keep it in a manner that is indexed, it must have indexed reference to
entries within the register, and must keep register within certain security issues – has to be
in a secured place. Must have adequate protection from falsification, damage, theft, loss or
destruction.

Who is responsible for maintaining an indexed securities register? Company Secretary.

If it is digital, the same rules apply should the securities register be in electronic form. You
would have a database. One of the adequate protections within cyber security, is that you
cannot have a backup on the same server as the original files. One with google, one with
Microsoft – that is preferable.

There is another piece of legislation relevant, POPIE? Securities registers have to be indexed
(easily searchable) and must have adequate protection against those mentioned above.

Ultimately, directors are liable – but senior management could be held liable.

• Securities register
– Every profit company must maintain securities register or its equivalent in
the prescribed form
– Must be kept in one of the official languages
– Must contain various details describing classes of shares and persons to
whom the company has issued securities
– Must also include disclosures relating to beneficial interests

TRANSFER – CERTIFICATED SHARES
Certificated share is one whereby you have a document of your shareholding. Typically, this
is now only in the case of a private company. But some listed companies are doing it too.
Can always request a certificate.

The certificate is NOT a share. If you hold a certificate, you do not necessarily own a share in
the company. If you buy and frame old Apple certificates, Lloyds, Dutch India East, HSBC – if
you have one of these, it does not mean you have shares. A share is incorporeal piece of
property.

• Transfer of certificated securities: Companies Act itself contains v little information
in this regard. In large part, you effect a cession. It is not required in terms of a
cession – validity of transfer of cession is not dependent on transfer of actual
certificate. The certificate is not a share. To purchase a share, you cede the rights to
it. You effect a cession. When you transfer the share, you transfer all beneficial
interest and any voting rights. The general rule is that you can transfer shares freely
and unencumbered, but must be in accordance with the MOI. Particularly relevant
for private companies (pty) Ltd.
 • Issue and allotment
• Contract to acquire securities
• Not a contract of purchase
• Referred to as contract of ‘subscription’ or ‘allocation’
• Issue/allotment pursuant to offer to the public regulated by act
• Otherwise – common law rules of contract apply

TRANSFER – UNCERTIFICATED SHARES
Once again, share register required. Some companies may have two for cert vs uncertain,
but remember that they operate exactly the same way. The interesting thing about
uncertain, is one additional requirement: not only does company have to maintain share
register of company, but record must be maintained at central securities deposit (STRATE).

Uncertificated shares (be careful with google) sometimes referred to in practice as
dematerialized shares (American term). If you are changing a share to a certificated to an
uncertificated share, you undergo the process of dematerialization. Very fancy term saying
shares have been dematerialized and are not evidenced by a certificate.

• Brief overview – electronic settlement system
– Registration of uncertificated securities
– Record must be maintained by the CSD or a participant
– Uncertificated securities register
– Forms part of company’s securities register
– Must contain certain details


Market Manipulation and Insider Trading

In James’ humble opinion, dimension data and what happened there is fishy. There is
something that doesn’t look good about it. But, there is no legal provision against this.

If the same thing happened today, the outcome would probably be different. Potentially
because of what we cover today.

Since the listing, there have been new Acts put into place. Up until 2012, there were
problems – many loopholes. Legislature passed the Financial Markets Act which regulates
stock exchanges and financial markets in general. If you want to be a stock exchange in SA,
you have to be in accordance with Financial Markets Act.

INSIDER TRADING

• What is insider trading?
– The sale and purchase of a company’s securities by persons associated with
the company, known as insiders, who are in possession of ‘price-sensitive’
information not generally available and gained as a result of that
association.
– Today: approach is to also regulate ‘secondary insiders’ or ‘tippees’


Operates together with market manipulation.

N.B!!: Insider Trading is NOT the same as market manipulation. They are very similar, but
different concepts, and you need to be clear as to which one you are applying. Don’t mix
them up!

Insider trading is the sale/purchase of a company’s securities by an insider. What do we
mean by an insider?

The financial markets Act not only regulates this concept, also to secondary insiders or
tippees.

Not all information you trade on does not tip you into becoming an insider trader. Only info
that is price sensitive, and not publically available.

WHY IS THIS OUTLAWED?

• Insiders are in a position of trust
• Harmful to the company
• Insider should not be in a position of ascendancy over outsider
• Trading on inside information deters investors

Integrity of the marketplace, allowance for basic economics. In SA, we take the position that
it is not important to not know the person investing in IPO. Anonymity in trading. You can
make informed guesses, but still anonymous. If you start changing that, you remove a lot of
the integrity and security provided by the marketplace itself.

If you are an employee in a managing director position of PnP, and you know PnP is going to
merge with Shoprite, you may know where share price is going. You can either sell or buy
alongside this thought. But the public do not know this. Managing director can make a
massive profit at our expense. If we allow trading on insider information, it would deter
investments! Foreign Direct Investments problems, one of the biggest problems into our
stock exchange is that insider trading happens on a daily basis.

The problem these days is with enforcement.

FINANCIAL MARKETS ACT

• Governs trading on the strength of inside information
– Act considerably broadens scope of offences related to insider trading
• Prohibits three kinds of conduct:
– Dealing
– Encouraging or discouraging dealing
– Improper disclosure
• Act extends liability – also applies to juristic persons, partnerships and trusts

We will deal with the 3 forms of liability. Insider trading can lead to criminal and civil
liability.

WHO IS AN INSIDER?

• Means a person who has inside information through—
– being a director, employee or shareholder of an issuer of securities listed on
a regulated market to which the inside information relates; or
– having access to such information by virtue of employment, office or
profession; or
– where such person knows that the direct or indirect source of the
information was a person contemplated above


Traders often fall foul of insider trading information (profession). If your father tells you
information, and you trade on that basis, you are an insider trader.

WHAT IS INSIDE INFORMATION?

• Inside information:
– Must be ‘specific or precise’
– Must not have been made public
– Must be obtained or learned as an insider
– If it were made public would be likely to have a material effect on the price
or value of any security listed on a regulated market

If any information were to made public, would it be price sensitive? Would it have a
material effect on price?

WHAT IS PUBLIC INFORMATION?

• Public information:
– Published in accordance with rules of relevant regulated market to inform
clients & their advisors
– Contained in public records
– Can be readily acquired by those likely to deal in any listed securities
– Information still public even if it can only be acquired by persons exercising
diligence or observation, or having expertise

Anything in a prospectus = public. It is published.

The last one is an interesting one. In some jurisdictions around the world, if you have
particular skills, and you find information from being sneaky, you can’t trade on it. If you sit
on google maps and track truck movements, and model how effective a factory is. Even
though the records may be purely private, you can still find information through alternative
means.

Another big one is cyber security and hacking, e.g. emails and whatsapp, bluebird terminals.
There are obviously laws preventing this. Can make money on trading on the information
they gather. Russians and IS trade on this, and fund themselves through it.

LIABILITY – CRIMINAL & CIVIL

• Act creates offences:
– The ‘dealing’ offence
– Dealing on behalf of someone else
– The ‘disclosure’ offence
– The ‘encouraging’ or ‘discouraging’ offence
• Penalty
– Maximum – R50 mill fine/prison: 10 years/both
• Civil liability
– Same acts that give rise to criminal liability can give rise to civil liability
(except for ‘discouraging’)

You look at both criminal and civil liability. The consequences are huge.

Dealing in insider information
If person provides you with info together with a purchase
If you are an insider and you sell information
Encourage information to be leaked, or alternatively …

Civil liability based in delict, not necessarily in contract.

MARKET MANIPULATION:

• Objective
– The objective of manipulating the market is to make money dishonestly,
either directly through transactions or by other means.
• Rationale of regulating market manipulation
– To maintain an open and free market where natural forces of supply and
demand determine a security’s price
– To achieve investor confidence in the integrity of the financial markets and
to protect investors from market manipulation

Something a lot subtler a lot of the time. The objective of regulating this area is to maintain
the integrity of the marketplace, and stock exchanges. Important to maintain and open and
free market, wherein market forces S&D allow themselves to determine price, as opposed
to somebody affecting price.

FIN MARKETS ACT: PROHIBITED TRADING PRACTICES

• No person may, either for such person’s own account or on behalf of another
person, knowingly directly or indirectly use or participate in any practice which has
 created or is likely to have the effect of creating a false or deceptive appearance of
the demand for, supply of, or trading activity in connection with; or an artificial
price for, that security
• Also persons who reasonably ought to have known that they are participating in
such activities

You will be found guilty of MM if you create false appearance. What happens is this: What
some brokers do is they do the process without doing an order. What can happen, is that
you as a trader, want to test the waters. Make 10 calls, and then monitor which way the
share goes. This is known as calling back the orders. This gives you an idea of whether to
actually buy or sell.

DEEMED PROHIBITED PRACTICES

• Wash sales
– no change in the beneficial ownership of that security, with the intention of
creating a false or deceptive appearance of the trading activity
• Matched orders
– order to buy or sell a security with knowledge that an opposite order or
orders at substantially the same price, have been or will be entered by or
for the same or different persons with the intention of creating a false or
deceptive appearance of trading activity
• Buying orders at successively higher prices and selling at successively lower prices

Wash Sale: this is linked to the above. Called so because what you do is you trade beneficial
ownership without changing it. You put out a option to sell, e.g. 10000 shares, test the
market or want to shift shares from one company to another. What you are showing is no
legitimate intention to sell, to see what happens to test price. You are presenting a false
view of trading. These deltas become important!

Matched orders: very similar to dark pools. A trader/broker, gets a buyer and seller and set
a price – puts in orders almost instantaneously. Done privately, then effected through an
exchange.

You hold a massive amount of shares, slowly sell them at lower prices etc. you shape the
way a market views the buying and selling activity, thus affecting supply and demand. You
schedule these orders, correspond to a delta, and buy them back. You are stripping away
making an offer to the market.

In any of these practical examples is you are manipulating the price purposely. If you decide
to sell your shareholding, that is legitimate. But if intention is to alter price of something,
that is fraudulent.

Marking the close – entitles you to do the following: put in massive orders for shares right
before the market closes, people speculate overnight. People sell like crazy the next
morning, then buy back later.

 • Marking the close
– approving or entering on a regulated market an order at or near the close
of the market, the primary purpose of which is to change or maintain the
closing price of a security listed on that market
• Auctioning processes or pre-opening session
• Market corner
• Maintaining an artificial price
• Manipulating devices, schemes or artifices


LIABILITY – CRIMINAL & CIVIL

• Penalty
– Maximum – R50 mill fine/prison: 10 years/both
• Defences
– Price stabilisation
– Definitional defences
– Additional defences in other jurisdictions
• Chinese Wall


Much the same as insider trading.
Defences are legitimate, covered tomorrow.

26 May 2017

The video is very important. Talks about 3 people who took down global corporations. Big
scandal.

Enron: The Smartest Guys in the Room – Summary

Enron had grown very slowly, and taken 24 days to collapse. Was into bankruptcy within a
matter of weeks – massive scam, all about pride, greed and intolerance. Blinded by money.
Complete house of cards.

America’s largest corporate bankruptcy. It was not about numbers, but people.

John Cliff Baxter (Enron bankruptcy) committed suicide, related to Enron bankruptcy. Jeffrey
Skilling was the former president and CEO. The board of directors, even within the court
hearing, claimed they continuously worked in the interests of shareholders. So who was
responsible?

Used to be US 7th largest corporation. Skilling, Lay and Fastow were working at the top of
the office, the smartest guys in the room, the captains. But the captains did not go down
with the ship, but gave themselves massive bonuses, and saved themselves. Directors
claimed they hadn’t done anything wrong. Enron also made large donations to Bush’s first
presidential run. Claimed it wasn’t a political run.

Bill Lerach (attorney) found that directors had gotten rid of stock in the days of its failure.
Absolute immediate sense of outrage when these 3 had made such massive profits out of
everything. 20000 employees lost their jobs, and pensions were lost.

Ken Lay: PhD in economics, all about deregulation – Reaganomics. This deregulation led Lay
to found Enron, along government’s decision to let gas prices float within the market. Lay
was extremely close to the Bush family. This is by far the most major relation of presidential
family with a corporation. George Bush Senior helped secure bursaries for Enron, and Lay
secured deregulation position. The Enron oil scandal of 1987, two oil traders made bets on
whether the oil price would fall. Enron oil always seemed to win – but was extremely risky.
These profits were not understandable, something is not legitimate. The president – Louis
Bourgett, had taken money and put it into private offshore accounts – Mr M Yass. Auditors
told Lay destroyed trading records, and falsified records. Enron did not discipline, but asked
them to keep making millions – keep gambling more. Later, they lost.

All of Enron’s reserves had been gambled away, but Lay knew about these reports and was
well aware. Put earnings before scruples. Bourgett only spent one year in jail, Lay needed a
new idea of making money – Skilling.

Skilling idea for Enron was to become a stock market for energy, create stocks and bonds.
Jeff showed this whole new world above pipelines – he recreated the industry. Skilling was
allowed to account by mark-to-market accounting treatment. This was the beginning of the
downfall. It allowed Enron to book future profits, regardless of how much cash came
through the door. The profits were all subjective, and left it open to manipulation. The idea
of booking profits for an idea. Viewed himself as “fucking smart”, all about survival of the
fittest – very Darwinian view. It became how Enron did business. People were ranked in PRC
process, 1-5 and 5’s were fired – 15% of the employees. Absolutely brutal concept. The
traders were by far the most vicious, stepped on each other’s throats to increase
remuneration. Took Lay and Skilling idea and made it an ideology.

Skilling was a massive risk-taker, bred a macho culture.

Lu Pie – not interested in details, only money and strippers. All expensed by Enron. He lost
all interest in running EES when the numbers got high enough. Left Enron with $250m, left
wife for his stripper. Divisions he left behind lost $1bn. Lu Pie became second largest owner
of land in Colorado.

Stock prices were just rising. Enron rode this, as electronic trading came into it. Top execs
push the stock up and then make massive profits. Enron was completely fixed on stock price
to convince investment industry of its strength. Convinced the whole of Corporate America.

In reality, however, profits were not heading up – it was downward performance.
Everything was hidden. Invested massively in India, but India could not afford the energy
produced. Paid out profits to directors with money that wasn’t coming. Failure was not an
option.

Merged with PGE gave Enron access to California. Largest marketer of electricity. The small
time employees invested with them, thinking it was a golden ticket. They trusted the
integrity of financial statements and directors behavior. Skilling completely ran this scam.
Analysts believed anything Skilling told them, sold them anything he wanted to say. John
Olsen was fired for giving an honest analysis, then the bank company was given bonuses for
firing him. The stocks rose while the prices fell.

Enron used bandwidth to trade more energy, as well as bandwidth. Partnered with
Blockbuster, and stock price grew incredibly. The truth is the technology didn’t work, but
mark-to-market broked $50m profits on a terrible idea. Created the illusion of a business
working out, and managers started selling out. The fraud then perpetuated.

Enron then created transactions for trading weather. Skilling had a hard time admitting he
was wrong. Maintained full speed instead of stopping, ignored the warning signs. Ken Lay
just kept going.

Stock plummeted in 2000, after being the poster child for the new economy. Won Fortune
Magazine’s awards. Analyst spotted something was wrong, and that something was going
on in financial statements.

How exactly does Enron make its money? Analyst asked about accounting treatment,
Skilling said he did not know about accounting. Skilling bullied someone asking basic
questions, said it was unethical. Fostow said he didn’t care what he wrote about the
company, just asked not to downplay him. Analyst couldn’t prove it was more than
overpriced. Bethany McClane.

It was a black box stock, couldn’t show how cash was flowing through the company. The
financials didn’t make any sense. Enron aimed to become the world’s largest company.
Andy fastow was Skilling’s prodigy. Fostow was CFO – covered up fact that enron was
becoming a fantasy land. Defied laws of finance. Wanted to please the boss, by keeping the
stock price up by hiding debt. As the quarters went by, the cheating became larger. This
momentum couldn’t be stopped. Fostow created hundreds of companies to make debt
disappear, and investor’s couldn’t see it. Buried debt and losses. E.g. LJM, all for Fostow
himself. Did not have a strong moral compass itself. Boards all signed on this. Fastow sold
LJM to Merryl Lynch. General partner of LJM and CFO of Enron?

Fastow used Enron’s stock as collateral. Premier investment banks of US bought into it.
Fastow and Enron played on Wall Street’s greed.

There are supposed to be checks and balances in the system, but no one who was supposed
to say no said no – and took the profits. The email trail was ridiculously blatant – banks were
knowing participants. Pure accounting sham. Merryl Lynch bought the Nigerian barges, and
then Enron would buy them back – purely illegal.

Cracks started to appear in Skilling’s view of the company – why can it not release a cash
flow or balance sheet. Skilling called him an asshole – lost it. Skilling looked at the numbers
and knew he was in a massive hole, and did not know what he could do to keep the stock
price up. Ken Lay was worried about his private jet, while EES crashed. Always managed to
make the numbers.

California then experienced blackouts – complete energy crisis. Numbers didn’t add up,
supply shouldn’t have been a problem. The deregulation of electricity was bizarre
compromise – the rules were complicated and hard to follow. Inside Enron, California was a
joke. Found tons of loopholes in the new legislation. Tapes showed that Enron cared about
nothing but making money.

Enron even exported power in order to make money. Then, by shutting down, prices rose
even higher. At the flip of the switch, they yanked the California economy on a string. A 100-
year-old company turned everything into a casino. Enron traders never worried about what
they were doing was ethical. Enron had found a way to exploit the bad nature of human
beings. People lost their sense of morality.

The energy crisis cost California billions, Enron blamed it on regulation. Ken Lay at this point
understood the house of cards, but had George W Bush as a trump card. FERC refused to
intervene. Price caps ended energy problem, but not political problems. Schwartzeneggar
won governer election.

Stock prices dropped, and traders had taken over. Everyone one thought Lay was leaving for
Washington, but Skilling left out of the blue. The architect new of the disaster, and left the
sinking ship. Skilling said that he thought the company was in a strong financial position, and
did not think there was any problem. Lay took over as CEO. The flags started going up.
Employees felt betrayed.

Watkins’ discoveries led to the uncovering of Fastow’s businesses. Couldn’t believe it –
fastow had gambled Enron’s future based on fact that stock price would never fall. She
needed to expose this. Watkins was the whiste-blower, and was extremely brave. Took on
Skilling head on. Felt like one loan voice – and within 6 weeks Enron fell out of control. SEC
launched investigation following Fastow’s deals. The Mark-to-Market profits were actually
losses shown by the new financial statements. Enron’s accounting firm, Arthur Anderson
shredded all documents relating to Enron. Lay reassured employees and investors, but
didn’t work in the long run.

Fastow was fired the next day. His actions were not in line with fiduciary duties, or general
ethics. Fastow was considered to be set up as the fall-guy. It wasn’t just a few execs, all the
major banks were involved, there had to have been complicity across the board. It was all to
easy. Lay never took responsibility for anything.

4 months after Skilling’s resignation, Enron declared bankruptcy and let all of its employees
go. Skilling had sold stock a long time ago, while he told employees to invest more in it.
Accounts of rank and file employees were frozen.

Employees left with nothing, while management have $250m in Hawaii. The corporate
culture itself is problematic.

Cliff committed suicide. Fastow pleaded guilty to wire-fraud, on an agreement to talk
against management. Skilling was later investigated, and paid $23m to defend him. Arthur
Anderson, fell alongside with Enron. Enron shareholders suing Enron and banks. Lay also
jailed.

People became victims of their own greed. The larger lesson is what Enron asked of its
employees – ask why?

Employee severance packages were minimal, while management bonuses paid out $55m.
20000 employees lost their jobs. Retirement and pension funds lost. Execs cashed in on
stocks.

Skilling and Lay went to trial in 2006.

The next two days will be dealing with Corporate Governance.
Marks for test 2 will be uploaded shortly.

Problems with the test: people aren’t doing enough, studying/preparing etc. and don’t
know the work well enough. Also not reading the questions.

APPLICATION FOR WEEK 9 & 10
Lame Ltd is an industrial design company that produces parts for a range of electronic and
mechanical equipment. Lame Ltd has four classes of shares (A-, B-, C- and D-shares). There
are one thousand (1000) A-shares, all of which were issued (as ordinary shares) at the time
that the company first listed on the JSE. Five hundred (500) B-Shares were subsequently
authorised as participating preference shares, half of which were issued, the remainder
retained by the company. Each of the twelve directors hold ten (10) of the one hundred and
twenty (120) total C-Shares, which are deferred shares. Although one thousand (1000) D-
shares have been authorised, none of these have been issued.
It is the end of the financial year and the board of Lame Ltd would like to enter into the
following transactions:
A. Payment of a dividend from the profits made by Lame Ltd to its shareholders in terms
of their respective preferences to be paid in 6 months’ time;
B. Extending loans to certain black South African investors which the company has
identified as potential new holders of the remaining (250) B-Shares for the purposes
of subscribing for these shares in 6 months’ time;
C. Securing a loan from Max (Pty) Ltd, which is a private equity company, for the
purposes of refurbishing one of Lame Ltd’s factories;
D. Providing a loan to Ms Manthe (one of the directors of Lame Ltd) to buy a luxury yacht
for her personal use during her annual leave month;
E. Offering 500 of the (as yet unissued) D-shares to a group of twelve (12) private
investors who had approached the company and expressed an interest in subscribing
for these shares (to be sold at R1000 each).
F. Providing security for a loan obtained by Mr Shaw for the purposes of purchasing the
remaining 500 D-shares;
 G. Repurchasing 200 of the A-shares from existing shareholders;
H. Issuing 500 more A-Shares to interested investors via a stock broker.

You are a director on the board of Lame Ltd and a majority shareholder of and Max (Pty) Ltd
and are present at the meeting where these proposals are tabled. All twelve directors
(including you) are present. Answer the following questions, taking into account the mark
allocation for each.
(a) What procedure would the board have to follow to conclude Transaction A?
(b) What procedure would the board have to follow to conclude Transaction B?
(c) What would be the implications for the board if the required procedures for
Transactions A and B were not complied with?
(d) What would the impact on each of the transactions (A and B) in the event of non-
compliance?
(e) Assuming that you thought that Transaction C was in the best interests of the
company and the matter was put to a vote, what procedure should be followed?
(f) Following from the above, how many votes would be required to authorise
Transaction C?
(g) Would it be possible to authorise Transaction D? Explain.
(h) Would a prospectus need to be issued to accompany the offer described in
Transaction E? Explain. Would Transaction F amount to financial assistance even
though the company is not impoverished by the transaction?
(i) Would there be any special requirements (over and above those required for
Transaction A) to approve Transaction G?
(j) If a vote was taken on approving Transaction H, how would you vote, and why?

Straight away, we are dealing with a public company. Therefore, as a public company, it
needs to be independently audited.

We have had an IPO already.

Immediately, you have a conflict of interest too.

This is a set of facts, squarely focused on corportate financing issues. Liability of directors
arise generally speaking: with any of these. They are at a meeting, and have failed to vote
against XYZ.

a) There were no mark allocations. This was for four marks. Let’s start with the
basics: this was a distribution (1). Because it’s a distribution, what are the
requirements that need to follow? Application of S&L test, immediately after
completion of the distribution. The one flexible issue here/statement is that:
the Board must reasonably conclude this. This gives a certain level of
flexibility. You’re looking a year into the future – you don’t know for certain
what is going to happen. Many hypotheticals to take into account. It must
 reasonably appear so, if you base your judgement on objective factors and
reasonable information that you have at the time.
The board must acknowledge test has been applied and satisfied.
The board needs to comply with any MOI requirement (e.g. pref shares in
market with preferential interest, or distribution – board notice given to
shareholders, etc.).
All of these marks were simply for going through the process of a distribution.

b) This only asks about the process, not the impoverishment test etc. Has to
follow the 3 mark procedure.
Approved by shareholder resolution etc.
Solvency and Liquidity test.
,,,
MOI

If you do not know anything, just throw in MOI.

The only way you can get a full 3 marks there is if you knew the procedure.
The same thing rings true for questions relating to Business Judgment Rule.

c) Here we are dealing with directors liability. Focus on the implications for the
board, not the validity of the transaction.
What are the implications?
If present at a meeting, and failed to vote against the matter – liable.

d) Now you go from dealing with the directors to the transactions. 2 marks for
this question. A: won’t be void, because the act doesn’t say that it is void, and
B: void, because the Act says so. May be void does not = void.

e) What is Transaction C? Potentially a debt instrument. Assuming in the best
interests of the company, what are the issues: conflict of interest is not a form
of transaction.

When dealing with a conflict of interest, need to fully disclose financial
interest all material facts. Then vacate the room and let the vote take place.
Need 6 votes, majority of 11. This was all 1 mark.

f) Saying yes or no is one mark. This question is 3 marks. This transaction is a
personal loan. Who is the loan being made to? A director. In which case, you
have to explain financial assistance to directors. You are not giving a loan for
the purchase of shares, hence common law does not apply. Applying the Act.
What does the Act require? You require a special resolution etc.

h) This question is 6 marks. Where do you start here? In the question, immediately you need
to look at prospectus. You are dealing with an offer to the public. Need to determine
whether transaction E is an offer to the public. If it is … etc. That is the issue. In terms of the
law, an offer to the public.

The exam is tough. 60 marks of more difficult and more precise content than test 2.

Week 11: Corporate Governance
NOT DIRECTLY EXAMINABLE

31 May 2017

Corporate Governance
Corporate Governance can be taught by so many different groups: accountants, lawyers,
management specialists, environmentalists, etc.

A lot of businesses/lawyers don’t care about corporate governance and the King Code as it
is often not governed by law, and hence they don’t see a need to. They see it as a world of
ethics, wishy-washy rules that shouldn’t really be cared about.

Corporate Governance is interesting because it crosses so many dimensions. From a legal
perspective, if you have been taught that corporate governance is not in law – you have
been lied to. It is similar to IFRS for accountants, while not being created by law, it is a
professional standard. Professional standards are relevant in determining negligence within
Auditors’ liability.

The codes of corporate governance are relevant in the same way to directors’ duties. The
primary link between the codes of corporate governance, and what we will be discussing in
the next two days, and company law, is that the codes of corporate governance are used in
interpreting Directors’ Duties, and arguably more importantly, the treatment of
stakeholders of a company. In particular, the treatment of employees. Some people might
also add in the treatment of society.

Effectively, corporate governance gives practical life into the companies act. It is a practical
guide as to what are in the best interests of a company, how directors should act, what
considerations they should take into account, how they govern risk and business judgement
rule.

We will also discuss the King Code in great detail. It was given the name, not because of a
link to royalty, but after Judge Mervin King, head of the King Commission. Very famous,
forward thinker. He’s over 80 years old, and is very up to date – but also skews now into a
socialist space. Used to be conservative.

King I was published in 1994. It was one of the first global codes of corporate governance,
the first was Cadbury report from 1992 (UK Based). King code is SA Based.

We are now into the IVth one. It became enforceable on April 1st. Companies have to
comply with it now, and is our focus.

Today deals with what corporate governance is all about.

Introduction to Corporate Governance in South Africa

What is Corporate Governance?

• The exact bounds of what constitutes corporate governance is an open debate
globally. It is a very murky area, and that doesn’t matter. Not our focus in discussing
corporate governance. The term ‘organisations’ has been used especially, because
King code does not apply only to companies and CCs, but every organisation: school
governing bodies, universities, trust, etc. Whenever discussing corporate
governance, you have to use the term ‘organisation’ and not company. Yes, it is
geared to being applicable to companies, but it is wrong to say that it is only
applicable to companies. It has a very broad application.
• Tendency has been shifting away from a ‘narrow understanding’ to ‘broader
definitions’: over the course of the last 25 years in which corporate governance has
gained more relevance and publications have been made thereof, this shift has
occurred. In Corporate Governance 1, you often deal with corporate governance on
a very micro level, it is very focused. From a higher level discussion, very general:
corporate governance deals with how to govern a company.
You could say that companies/organisations should be governed as a profit-making
machine – purely to make profit, stuff everything else e.g. society, employees, etc.
This is what companies used to be able to do, but not anymore. Companies are
massive players in the national economy, and the biggest employers of people
within it. And yet, despite there being Employer Relations Act, Labour Relations Act
etc., there’s nothing governing the relationship between a company and society
generally apart from the King Code.
As such, any definition about what corporate governance is really about should
include those things:
• No longer merely linked with “control and management” of companies
• Should include:
• Managing long-term risks (look at risk cycles in CG1)
• Ethical performance (should act ethically)
• Sustainable business practices
• Accountability for the company’s relationships with stakeholders
(this is the important one)

It is probably not right to give a strict definition of what corporate governance is, or what
the bounds thereof are. It is often dependant on every organisation, but more importantly is
that each society will interpret it differently.

The South African understanding of Corporate Governance has to at all times include
Ubuntu. What does Ubuntu mean? I am because we are. There is no I in society. Conduct
our affairs for the benefit of another.

The importance of having a South African understanding of corporate governance has to be
founded around the concept of Ubuntu. Ubuntu is not a legal principle and does not have a
legal definition.

Need to look at this, corporate governance, through the lens of Ubuntu. Do not use US etc.
knowledge. View corporate governance in a decolonised manner.

What defines “good” corporate governance?

• The focus of what constitutes “good” corporate governance is founded within
leadership that is both effective and ethical.
• The two work ‘hand-in-hand’:
“Governance and leadership are the yin and yang of succesful organisations. If you have
leadership without governance you risk tyranny, fraud, and personal fiefdoms. If you have
governance withough leadership you risk atrophy, bureaucracy and indifference” – Mark
Goyder (Founder, Tomorrow’s Company)

Good governance relates to leadership making good and ethical decisions. What is right in
any given situation may be different to each and every one of us. What we believe is shaped
by who we are.

All of that means, that practically speaking – X may take a different decision to you while Y
thinks it is ok. What is important is that you are all viewing it through one lens. What defines
good governance is that leadership, management – none of it can exist without each other.

Hallmarks of good governance/effective leadership: integrally linked with corp gov
principles. Cannot be effective leader without knowing good governance principles.

The purpose of corporate governance

• Good corporate governance is not an end in itself:
• It is a means to support:
• Organisational efficiency
• Sustainable growth
• Financial stability
• It facilitates:
• Companies’ access to capital for long-term investment
• Fair treatment of shareholders and stakeholders
• BOTH contribute to the success of the organisation; so both
should be treated fairly
• Sometimes difficult to balance the interests of the two
‘groups’

Eskom, Transnet etc. do not really care about the King Code.
UCT has a big stakeholder base. You have to manage that effectively.

Sustainable growth is arguably SA’s biggest problem. Corporate governance allows this –
without this, you would have anarchy and non-sustainablity. It supports sustainability.

It facilitates all the good things.

Why corporate governance matters

• Economic power of organisations:
• 2014 survey: 63 of the largest 100 largest economies globally were
corporations; only 37 countries
• Wal-Mart ($488 billion) is roughly 5 times the size of South Africa’s GDP
• Issues to consider:
• Impact to society generally
• Power over economy
• Employees
• Job creation
• South African examples:
• State-owned Companies: Eskom, SABC
• Large Public Companies: Lonmin and Marikana tragedy, entire mining and
minerals sector
• Financial Institutions: Banks, Insurance Companies, Pension Funds

It should go without saying that corporate governance must be relevant. Companies hold
massive economic power and can shape society in large part.

Companies can fail because they have inefficeient boards for too long. If they had
conducted their affairs in line with the King Code, the State Owned Companies would have
been fine. They hamper our development in the economy.

Lonmin and Marikana. People died at the hands of the SAPS. Had Lonmin taken into account
interests of stakeholders to a greater degree, it wouldn’t have happened. Miners were living
in squallar. Lonmin pledged to build 5000 new houses. They declared massive dividends, but
didn’t follow through with housing. Corporate governance is massively relevant.

Banks and Financial Institution: if they were operating with ineffective board structures and
were not compliant, banking sector would be in a mess. The financial institutions are a
shining light in SA, except Africa Bank. The rest of them are solid. AB’s problem – subprime
loans.

Stakeholders

What is a stakeholder?
• No precise definition, but will include the following elements:
• Individuals or groups
• Effect on company or are affected by the company and its operations
• Will include:
• Shareholders
• Employees (and trade unions)
• Indivudals/persons that the company does business with (i.e. creditors and
customers)
• The community in which the company operates
• The environment
 • Government

Debate between stakeholders and shareholders.

Your focus as a shareholder is to make money.
A stakeholder is not defined. If company has effect on person or group; stakeholder. Include
the ones on the board.

In terms of bus analysis etc., arguably the hardest job is to determine the stakeholders of
the company. Whose interests do you include when making a decision. It is vital to
determine stakeholders are, pick them out from a set of facts, Dealt with in the application.

Stakeholder Debate

• There are two primary contrasting viewpoints or theories regarding the role of the
various stakeholders in corporate governance:
1. Stakeholder/Pluralist Approach
• Requires that directors consider the interests of not only shareholders; but
all stakeholders in the company; on an equal footing (i.e. no primacy of
shareholder interests)
• Companies should be controlled for the benefit of all stakeholders
• “The legitimate interests and expectations of stakeholders are considered
when deciding what is in the best interests of the company” – King III Code
2. Enlightened Shareholder/Shareholder-centric Approach
• Companies are entitled to consider the interests of other stakeholders only
to the extent that it would be in the interest of shareholders to do so.
• Theory that developed primarily via Western thought – must question
whether this is still relevant in South Africa!
◦ Decolonisation of the law
◦ Ubuntu
• Theory that is applied by the Companies Act and within the Common Law

There are 2 primary schools of thought on this, in terms of taking into account stakeholder
interests.

Stakeholder/Pluralist Approach
Founded on thinking that corp gov is based on balance of social upliftment – Ubuntu. This
approach focuses on integration and trade-off between various stakeholder interests. You
don’t view shareholder as more important, but one of a number of stakeholders. Their
interests may be prime on a case by case basis.

Enlightened Shareholder
This theory is very popular in UK, US and Australia. It shouldn’t be the theory we rely on
here. View it through an African lens. This should not be appropriate in SA, because it
focuses on profit maximization for shareholders. There is a very valid economic justification
for that: shareholders invest their capital in the company, so they should be entitled to the
profits thereof. Secondly, shareholders, when you wind up a company, are entitiled to a
residual company. They are best positioned to police decisions of directors, can hold
directors accountable (derivative action). Must be given information, can vote for directors.
Thirdly, ultimately if organisation is successful, it means that society benefits indirectly. This
is simple economics. All 3 of these, lack credibility in an African space. There is more to
companies than this. We should require more of companies.
The more appropriate one is the first one

The bottom approach says you first look at interests of shareholders, and only go forward if
there is a benefit of shareholders. First one says you look at shareholders like everyone else.
No single interest is prime. Make a decision on this basis – this is a lot more African.

Why do we say this?

Prior to colonialism, we didn’t have companies. We had stokvels, a pooling of
communitarian assets, but it was used for the good of the community. This is what it was in
large part about. So why is it important now to see a shareholder as more important.

General Context

An integrated approach to corporate governance is fundamental!
(1) Triple Context/Triple Bottom-Line Approach
- Directors must consider not only financial interests; but also the broader social, political
and economic impacts of their decisions.
(2) 5-Level Combined Assurance Model
- More nuanced than Triple Context
- Integrated reporting
- Introduced by King IV

Integrated way of thinking. Through integrated lens. Directors must not be solely concerned
with financial interests but need to consider societal impacts. Made very clear in King Code,
especially IV. III was all about the triple bottom line.

5 level from V goes deeper. Relies on those 3 but more. CG must be about integrated
thinking – do not limit it to 3 issues.

Corporate Governance in South Africa – the King Codes

• The King Codes are the definitive standard for corporate governance in South
Africa.
• The King Committee was formed in 1992 by the Institute of Directors of South
Africa. The purpose was to consider issues such as those discussed already
(accountability, integrity, reporting standards…)
• There have been 4 King Codes
• King IV is the Code that is applicable at present; however King III remains relevant
• Relevance of Ubuntu?

King III still remains relevant, IV doesn’t change that much.
Last point is important. Relevance of Ubuntu. Unfortuantey, only included in King – but not
in the code at all, but in the report. Every time they release a code, they release a report. It
is not given the prime of place that it deserves.

Tomorrow, we will discuss the King Code. Leave with one point today: the king code was
drafted by 5 people. None of them were black south Africans. One of them at best was
coloured. Her name is Ansi Romalo, incredibly clever and wonderful role model. Lead
drafters were Richard Costa, been involved in CG for a long time. What needs to be
understood is that King IV was not drafted by parliament, nor people that we voted for, but
by independent board of directors in SA. IODSA. Primarily funded by Deloitte, Old Mutual
etc. They paid for it. IODSA owns it. JSE applies it. Why is it not drafted by people that we
didn’t vote for, and not public office?

1 June 2017

What’s happening in SA, especially within State Owned, is a disrespect of what corporate
governance requires. Senior execs like Brian Molefe, head of Eskom, and that person is not
acting with integrity and honesty, and not being held accountable for his actions.

Another massive issue is the retirement of Serge Belemant as CEO. One of the founding
members of NetOne, and they are paying him R268m as a resignation package. He has
earned it through a legal contract. They have made R1bn profit for delvering state
payments, and they are paid from people who actually pay the grants. Stakeholder
inclusiveness? This is not ok – to take money irrespective of who it is, taken from the very
poor to go to one person, is the antithesis of what good corporate governance requires. The
worst past about it is it’s not being paid to him here, it’s being paid in New York – paid
R6m/month for not working over years.

Corporate governance is highly relevant.

One of the institutional shareholders in NetOne is AllanGray. AllanGray are hugely irritated
by this, the CEO has released a statement saying this remuneration package will be
challenged in courts. Corporate governance shapes where the country is going.

There are ineffective leaders currently in SA – State Capture. Government cannot be relied
upon for this to the extent that it should. Business is a fundamental player in that space,
without this you don’t have a growing economy. For this to happen, you need good
corporate governance in place. But it’s not being respected because people don’t know
about it.

King IV Code of Corporate Governance

King IV comes on the back of King III (forward thinking and effective code, but problems:
implementation within smaller companies – it was geared towards the governance of big
(listed) companies. Those in a place to shape the economy. The power of our economy is
not at a high level, but where SA needs to grow its economy is within its SMEs. Without this,
you don’t have growth in the economy. King III was too focused on the big company, and
not the small company. Compliance was difficult for SMEs. Foreignors look at companies
that comply with the King Code, hence investments flowed to bigger companies. III was not
sufficiently applicable to SMEs, acted as a handbrake to economic growth. They focused on
creating a code applicable to any organisation, irrespective of size – had to be flectible. This
created foundation for drafting. There is little difference between III and IV substantially.

• King IV was launched on 1 November 2016; but only became enforceable on 1 April
2017
• King IV replaces King III in South Africa:
• Despite being replaced, the practices of King III will remain relevant
• King IV does not represent a significant departure from the philosophical
underpinnings of King III, but rather primarily a redefining and refining of
concepts and approaches
• Ubuntu remains a foundational cornerstone of King IV foundations
of CG have not changed, but there have been some important
changes, dealt with later
• Stakeholder inclusive model of corporate governance
• King IV is a voluntary code (no change from King III)
• Only public listed companies must comply with the King Code only
mandatory for listed companies. It is effectively an opt in. SOCs do not have
to comply. If you are not in compliance, you can be removed from the listing
and JSE. For all other companies – so what?

The King Code is owned by the IODSA. Should it be an act of parliament? Part of legislature?
Probably, but people don’t trust parliament – inefficient, hence business don’t want them.

The King Code is not law, but legally relevant. It is only a code of governance, the same way
IFRS is not law, but a code of ethical practice.

Why is it relevant? Like BM, you could discard it – but you shouldn’t – there’s more to the
law than just adhering to it. There may come a day where it becomes legally binding, and an
act of parliament.

America – it has implemented it by law, Sarbanes Oxley. It is an Act of Parliament. This
means it can be changed by the person in charge, hence Donald wants it done away with.

Objectives

• Promotion of good governance as integral to running a business
• Delivering an ethical culture and enhancing the legitimacy of the company (this is
the important one: NetOne’s reputation is stuffed. They will not have the same place
in the market ever again, having made a profit of the backs of people who need aid
the most in the country. The same with Africa Bank. Yet, they seem to still be making
money because people don’t know about it. Africa Bank still offers loans to those
who need it, hence they are still in business.)
• Boosting the company’s performance
• Enabling better control of the company by the board
 • Wider application as opposed to King III:
• Shift away from ‘companies’ and ‘board of directors’ to ‘organisation’ and
‘governing body’
• Will therefore apply to:
• Retirement Funds
• SOCs
• Non-incorporated entities such as Trusts, School governing
Bodies, Government Departments…

Presentation: Principles not Practices

This is where there are big changes. You can’t apply each practice, need a lot of employees
to do. Hard for SMEs.

• King III is a Code of Best Practices:
• King III included 75 best practices, each with a number of different issues to
consider
• Effectively a set of rules to apply
• Philosophy: “apply or explain” either apply what the practices were, or you
include in your reporting why you didn’t. You could say applied King III.
• Criticism:
• Difficult to apply
• Burden of compliance was immense
• Very technical
• Lack of applicability to SMEs

• King IV is a Code of Best Principles: changes all of the above
• King IV contains 16 (+1) high-level, generic principles there are now only 16,
and very high level in nature. Under each principle, there are very similar
practice points to King III. 17 principles, with more micro-level practices. This
means that with the shift in philosophy, apply 17 principles requires you to
do more and think about what you are doing. Report in a very particular way.
You have to tell people not what you are doing, but also how you are doing it.
(For NetOne, when they release their directors’ remunerations report, not
only do they have to say what they have done, but how and why. They have
to explain the retirement package.) The point to be made is this: this requires
more insight into how you comply with the principles, and why (immediately
a good thing, directors think about why they are doing something. Not just
box ticking, have to substantially engage. It also allows for more flexibility.
You do it how you want, making it more applicable and relevant to SMEs. This
is a proportional application – regardless of size of organisation, you can
apply it.
• Written as aspirational outcomes (i.e. is outcomes based) rather
than a set of rules.
• Simplification
• Proportional applicability and flexibility – NB for SMEs
• Aim: “holistic and integrated set of arrangements”
 • Philosophy: ”apply AND explain”
• Significant shift in thinking

Governance Outcomes

There are 4 key governance outcomes: that apply to the code as a whole. V similar
to King III. Very explicit
1. The development of an ethical culture goes without saying, hugely important
2. Ensuring performance and value creation for stakeholders
3. Ensuring adequate and effective control over the company
4. Building trust, reputation and legitimacy again, the important one. Cash Paymaster
Services haven’t done this.

Viewed as a whole:
GOVERNANCE OUTCOMES (the ‘why’)

PRINCIPLES (the ‘what’)

PRACTICES (the ‘how’)

From a very high level, that is what you will see. Outcome is enforced by principles, and
informed by practices. How do you do something, what are you doing it for, and why?

Key Substantive Changes
Primarily a business outcome.

1. Combined Assurance Model we’ve shifted away: III had Triple Bottom Line:
environment, society, and profit bearing interests taking into account when making a
decision. Now a lot more nuansed than just those things in IV. Can take more into
account.
2. Definition of Independence of Directors The King code has changed the definition of
independence for directors, therefore used as a tool to interpret the Companies Act.
3. Strategy and Performance these must be inseparable to the business – should
understand this distinction. IV says that the two are inseparable, very powerful way
of thinking, all based on the idea of value-creation process: cannot view operations
as independent from strategy.
4. Integrated Thinking and the Integrated Report what do you have to report? What
do you have to do? Effectively, what you have to do under IV, is do a lot more in
terms of reporting. This is a good thing – forces companies and directors to consider
the what, the how and the why. Previously, it was as easy as saying yes we have
complied.

The King code has changed the definition of independence for directors, therefore used as a
tool to interpret the Companies Act.

What is ’new’ in King IV
These won’t be covered in great detail

1. Approach and application: shift to ”apply and explain” from “apply or explain”
2. Remuneration policy implementation & disclosure
3. Deliberate separation of technology and information* this is the interesting one.
We are in an age of Big Data and Big Data Analytics. It is a relatively new concept,
not known prior to the internet and powerful computing. It is a foundational aspect
discussed here, but was not an issue when III was published. Companies need some
form of this within strategy and operations (big data). This recognizes an information
and technology overlap – and despite this overlap, the two are sources of value
creation.
4. Social and Ethics Committee as a prescribed board committee
5. Stakeholder responsibilities
6. Risk and opportunity (King IV doesn’t say you can’t make profits or take risk in
strategy, but does say you have to be responsible in taking risks – having in place
relevant controls, and monitoring. Controlling human resource capital).
7. Auditor independence and the audit committee
8. Group governance

Focus: “Apply and Explain”
The biggest change is in its philosophy, Negates tick-box governance. You used to be able to
go down the list of practices without thinking of how you do it, why you do it, and what the
outcomes of this are. Have to report in a way that applies the principles, but explains them.
Puts a bigger burden on reporting standards. Yes, it costs more. So what? Despite it costing
more, it is good. This is a very powerful change. Not only does it require more insight, but
more flexibility. Flexibility is key, doesn’t say you have to do ABC, but have to do very
generic principles but determine how you do it.

• This is the single largest change that is relevant to any discussion regarding King IV
• Approach to corporate governance: shift away from a ‘tick-box’ method
• Under King III – compliance with the Code was binary (either there was
compliance or not – “apply or explain”)
• King III focused on large, listed public companies
• Practices, not principles
• Lack of flexibility
• Lack of appropriate degree of applicability to SMEs
• King IV
• Principles and practices
• Flexibility, less prescriptive
• Focus on qualitative governance (i.e. must ‘consider’ how to apply
the Code depending on context)
• Greater level of transparency in reporting – must explain how
principles applied not merely whether applied or no
__________________________________________________end of non-examinable section


Week 12: Business Rescue, Compromises, and Winding-Up

5 June 2017

Business Rescue & Winding Up

Perspective

Companies Act Chapter 6 Business Rescue (ss 128-154)…

Under the new act, there is a very significant shift in thinking away from the idea that where
businesses are struggling, they must just end. In jurisdictions across the world, saving the
company has gained importance over liquidation. Companies provide society with
significant benefits. There are a number of stakeholders who have vested interests in the
success of the company – e.g. employees. If the company is liquidated, people lose their
jobs. Vested interest in the sustainability of companies, need to be fostering the idea of how
important companies are in their sustainability. Business rescue is formed from this idea.

Business Rescue is focused on the rescue of viable companies, as opposed to liquidation,
where you focus on the interests of creditors (creditor friendly law) – whereas business
rescue is the opposite; debtor friendly. Rescue instead of liquidating. No business rescue
provisions under the old act, only judicial management – vested too much control in
judiciary and was a mess. Judges have too much to do, cannot manage the company. We
will be dealing with business rescue over the next 2 days.

Business rescue in SA suffers with stigma associated with failing companies. If company goes
into liquidation, stigma attaches to company name, directors name, reputation of those
within the company.

Business rescue aims to save that. Worry about their potential claims against the company.
Liquidation will get a negative outcome as they will not get their full amount, and accept a
compromise of 10c in every Rand owed.

Business rescue seeks to change that thinking. If the company cannot pay its debts. If the
company is in trouble, let’s turn the company around – attaining full benefit for creditors in
the long term. Ultimately, will be paid more than through liquidation.

These provisions seek to change this negative stigma.

• Rescue and recovery of financially distressed companies expressly included as a
goal of the Act
– Interests of all relevant stakeholders must be considered
– Replacement for Judicial Management
• Cheaper, more accessible, better employee protection
 • New broom sweeps clean?
• Aligns with global trends towards striking a balance between rescue
and liquidation
– Similarities and differences
– Negative stigma around corporate bankruptcy and financial distress in
South Africa

…and Compromise with Creditors (s 155)

Business Rescue and liquidation are to separate distinctions.

This is also very different to business rescue. Compromises are nothing new, integral to old
companies act and leverages off that thinking. Effectively, very similar to a scheme of
arrangement, however the big difference is that scheme of arrangement changes
fundamental internal structure, while compromise is outside looking – of what company
owes creditor and creditors interest.

It can be viewed as a business rescue plan because they mutually agree to alter the terms of
the agreement to facilitate the company being able to pay/perform under that agreement.

The fundamental difference between compromise with creditors and business rescue
process is that business rescue: there is the key person/integral member of the process: a
business rescue practitioner – facilitates a lot of the change and roll out/implementation of
a business rescue plan. Compromise: no registered BR practitioner.

With compromises: bank of creditors negotiate compromise between them and the
company, and part of their compromise, was that company employed business consultant,
with the mandate of doing XYZ things. That person was not a business rescue practitioner:
installed in the company acting in the interest of company and creditors.

Under BR process, Act has very strict rules as to the mandate and role of the business rescue
practitioner.

Under compromise with creditors: one is allowed a significant amount of flexibility within
certain bounds. Very technical area of law, but more flexible than business rescue process.

• The s 155 compromise can be seen as a business rescue plan, without the
involvement of an external third party (the practitioner)
– Nothing novel; similar procedure available in 1973 Act, but now grouped
with business rescue in Chapter 6.

Winding-up of Companies

2 Ways: company becomes insolvent, or winding up of solvent companies (the latter is our
focus this week). Our focus is on the winding of solvent companies, as insolvency is dealt
with in Bus Law 2.

 • Winding up of companies:
– Solvent Co’s – governed by Companies Act 2008
– Insolvent Co’s – governed by Companies Act 1973
• Insolvency – Co. unable to pay its debts within 3 weeks of demand or failure to
satisfy a warrant of execution.
• Focus – winding-up of solvent companies

ENGAGEMENT 1: Business Rescue

What is ‘business rescue’?

• Business rescue entails:
– the temporary supervision of the company
– a temporary moratorium on the rights of claimants against the company
– development and implementation of a plan to rescue the company by
restructuring its affairs
– restructuring undertaken in a manner that maximizes likelihood of the
company continuing in existence on a solvent basis (if not achieved?)
– One of the purposes of the Act 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’.

How do you rescue a business in terms of the Companies Act? The focus here is not on
liquidation. When talking about insolvency and liquidation: if you are insolvent, you can’t
pay your debts. There is balance sheet insolvency and commercial insolvency (liquidity) –
both of these things.

As a creditor, your interest if you have a claim against an insolvent company is to get money
back before things are sold. All the assets are pooled together, sold at an auction, and
divided amongst creditors. As a creditor, you can lose out.

Underlying philosophy of BR is not that, not trying to liquidate. Aiming to save. If company
enters into BR, you are aiming to avoid liquidation. Rescue – legal definition: “a
reorganization of the company, to allow the restructuring to lead to the company being
profitable”. Two arms to this word: reorganization, and focus on profitability and financial
success. American way of thinking.

“Major intervention which seeks to avert failure”. Seeking to avert the failure of the
company. What this all entails, averting the failure through restructuring etc., what happens
under this process are the things on the board.

Temporary supervision: falls under supervision of business rescue practitioner.

Secondly, law places upon the company a temporary moratorium: cannot do anything, but a
big fence/wall around the company. Creditors cannot claim during this period – aim is to
give company some breathing space. Company needs to figure out what it needs to do, acts
as a suit of armor. Arguably the most important protective mechanism for distressed
company. Without this, everything under business rescue would fail: if you hear that a
company is about to start business rescue, you would immediately enforce your claim.
Why? Now you have hard evidence that a company is struggling, and you are thus going to
want to claim to get as much value out prior to problems. The moratorium prohibits this
and gives the company breathing space. The length or this moratorium depends on a
number of factors. Ultimately, depends on the business rescue plan itself.

Thirdly, the company together with creditors, shareholders, stakeholders, and Business
Rescue Practitioner, develop a turnaround plan. They develop a business rescue plan by
restructuring itself. Restructuring a company does not necessarily mean restructure
shareholding or management (but can) but more its structures generally.

MUST BE the turnaround of a company. Must be seeking to make the company profitable.
Cannot be aimed at delaying liquidation, intention must be to facilitate the success of the
company itself instead of delaying the inevitable. In this case, you may as well liquidate.

Moratorium, BR Plan etc. have in the last few years, been abused. Moratorium is very
powerful, a huge bonus. However, if your intention is to delay, then you have a problem. If
law allows you the moratorium, it will be an abuse. Courts are aware of this, hence a strict
interpretation is developing.

The plan must be undertaking of success of solvent company, its profitability etc.

The trigger for BR is only where companies are financially distressed. Ultimately what you
have is a balancing of interests between a number of groups of people. Interest no 1:
shareholders (one group of stakeholder), 2: equally important: creditors, require protection
for functioning market economy, 3: employees: companies provide employment, 4:
directors themselves, not for the fact that they make big bonuses, but that they are best
placed to know whether company is going to be successful or not, 5: community/society as
a whole.

If, for instance, PnP were placed into insolvency and went into liquidation, what would
happen to society? Would it be better to liquidate, or to try and rescue it? Very clearly, the
answer is rescue.

What is ‘financially distressed’?

A company is financially distressed if
– it appears to be reasonably unlikely that the company will
be able to pay all of its debts as they become due and payable within the
immediately ensuing 6 months;
or
– it appears to be reasonably likely that the company will become insolvent
within the immediately ensuing 6 months
** cf: solvency and liquidity test


The trigger event is that company must be financially distressed. Financial distress is the
trigger event allowing companies to go under BR. Can be financially distressed in 2 ways,
both are linked with liquidity. Paying debts as they come due. Do not confuse with the
Solvency and Liquidity Tests!!! Do not apply that test under business rescue. Here you test
for financial distress, which also looks at company’s liquidity.

This is not a test of insolvency (balance sheet nor commercial). You are not yet insolvent,
but you are heading that way. It may end up the case that it is still a downhill process and
still leads to insolvency, but business rescue does not lead to insolvency automatically.

6 June 2017

2 points from yesterday: opposed to the law of insolvency, business rescue is a debtor
friendly process. Insolvency is creditor friendly. The important elements very generally
speaking are those mentioned in the slide above (What is Business Rescue) – especially the
temporary moratorium. It is a protective barrier put around the company, whereby
creditors are not allowed to claim during business rescue (once business has filed for BR or
when they are put under BR). This provides the company with breathing space to
restructure its affairs and make profits.

The length of this moratorium is the length of its BR, and this length depends on the specific
situation. Depends on how long the company is in BR for. This becomes a problem, as it is
open to abuse. BR’s aim is to be swift, quick and effective. You need a company to
restructure its affairs quickly to make profits again. Unfortunately, historically it has shown
to take a long time.

e.g. Africa Bank. It took only 3.5 months for the BR process to take effect. The turnaround
was quite quick. The same BR practitioner is trying to turn around the same company, it is
taking 2 years. BR does not always work, and largely depends on the buy in from creditors
and claimants to be effective. The answer for length of time depends!

The application of the solvency and liquidity test is not relevant here! What is different here
in FD, is the time period. The time period for the former is 12 months (e.g. for distributions),
but for FD it is 6 months. The other difference is here you are primarily focused on liquidity.

The companies which have had their BR fail and are subsequently liquidated have had
liquidity as a problem but also balance sheet insolvency. Solvency: balance sheet and
commercial.

For a company to be FD, you only need one of the requirements on the board. Either or
statement, not or statement.

The trigger event for the initiation of BR rescue proceedings is that the company is FD.

INITIATING BR PROCEEDINGS

Can only do this if company is financially distressed (FD). The second threshold is the
reasonable prospects of success of a rescue. These are the 2 things you require. Only if you
have these 2 very general requirements can BR be initiated. Can be initiated through 2
groups.

Two ways for a business to go into business rescue
• Board resolution by the board itself: known as voluntary business rescue. Board
takes decision on behalf of the company to go into BR. Very proactive measure, as
opposed to reactive.
• Court order known as compulsory business rescue. These persons see the company
heading for liquidation, and apply to court to have the company initiate BR.
– On application by ‘affected person’ AP’s are those below
– Or on its own initiative or in the company’s name.

Two ways of making it happen.

Who are ‘affected persons’?

• Shareholder of the company
• Creditor of the company
• Trade union representing employees of the company
– (where no trade union, individual employees/representatives)

All of these people are integral stakeholders of the company. If there is no registered TU in
the field, employee can register himself. Trade Unions in SA fracturing at the moment, but
there are big ones: innumerable number of them. Union has to initiate business rescue.

The fact of the matter is this: employees can’t just initiate BR proceedings. Need to
ascertain whether they are part of the union or not. Welder cannot initiate BR, union must.
Individual employees must be able to sustain the proceedings, similar to derivative action.

Commencement by board resolution

Certain requirements that board must account for.
Requirements:
Board must have reasonable grounds to believe that:
a) the company is ‘financially distressed’, and
b) there appears to be a reasonable prospect of ‘rescue’ the law here is quite vague. It
is not defined as to what the information must be, must just appear to the board as
to whether success is plausible. At a minimum, some report/information (e.g.
prospective deal, enter into market place) to be able to prove that reasonable
chance of success. Otherwise you can just be sucking your thumb. It must be a
reasonable application.
+ liquidation proceedings must not have been initiated.
Resolution must be filed to have any force or effect.
Objections to resolution (by affected persons) if: board resolution must be filed at CIPC to
have effect. To form a moratorium, and placement of company under supervision, the
resolution on deciding BR must be filed at the CIPC. Furthermore, the board has to be acting
as a whole. Hence the law of board resolutions applies here (quorums, notice periods, etc.).
Thirdly, shareholders do not have a say in the board resolution unless there is an objection –
and once again affected persons may only object to the resolution if company not FD, will
not be successful, or not along proper grounds. They interdict Board from filing
notice/resolution at CIPC.
a) No reasonable basis for believing that co. is financially distressed
b) No reasonable prospect of rescuing the company
c) Company has not complied with procedure

Commencement by court order

This happens on an application to the court. The application procedure does not have any
witnesses because there is no dispute of fact. Enter into court with papers only. Dispute of
fact that may occur is to determine whether BR will be successful.

Similar requirements to BR brought upon by board.

Court application:
Affected person/s must show that:
(i) Company is financially distressed;
(ii) Company has failed to pay over any amount relating to (tax or contract)
– an obligation under or in terms of a public regulation, or
– a contract, with respect to employment-related matters;
employees not being paid. Instead of striking, union
lodges/initiates BR processes. Not paying one employee
doesn’t matter. It must be that employees cannot be paid due
to FD. The second is just evidence of the first. The two go hand
in hand, but proving one doesn’t mean you prove two.
or
(i) It is otherwise just and equitable to do so for financial reasons’ (NOTE THE AND
OR). This one depends on the context.
AND there appears to be a reasonable prospect of rescue.
Again, requirements are very similar – do not get the two mixed up, they are different!

On own initiative:
During the course of liquidation proceedings, or proceedings to enforce a security interest,
may make an order placing the company under temporary supervision. Court can take
initiative to initiate BR procedure, e.g. during insolvency proceedings. If creditor applies to
liquidate company to the court. Courts can see there being another option if there is a
reasonable prospect of success. Can in another proceeding, enter the company into BR.


THE BRP
The Business Rescue Practitioner – oversees BR, reorganizes company, meets creditors and
stakeholders, facilitates BR Plan. Kingpin of success of BR. Minimum qualifications, and lack
of regulations. There is thus a lot of BRP’s that shouldn’t be. They get paid second, after
employees, but after creditors. If they have to fly, then they get paid first. Then employees,
then for BRP services.

As we have said, effectively a kingpin for success. Need him to be effective for business
rescue to work. For that reason, you need to have a licence, by compliance.

• Licenses granted by Commission (now unconditional)
• Minimum qualifications (s 138(1) of Act)
– member in good standing of a legal, accounting or business management
profession accredited by the Commission you don’t need these
qualifications if you have been licenced, but commission is likely to only
licence you if you have a qualification. Say ‘TRUE’.
– has been licensed as such by the Commission
– is not subject to an order of probation in terms of s162 (7);
– would not be disqualified from acting as a director of the company in terms
of s 69 (8), [and not related to such person];
– does not have any other relationship with the company such as would lead
a reasonable and informed third party to conclude that the integrity,
impartiality or objectivity of that person is compromised by that
relationship.
• Lack of comprehensive regulations in general

• Appointment get appointed in particular ways.
– Company if commencement by board resolution
– Otherwise, affected person who obtained BR order this is quite a powerful
right, especially as a creditor. Creditor places company under BR, but then
decides the kingpin is. When boards do it, their aim will be the same thing,
but an affected person will elect someone who is going to benefit you the
most. Fair amount of litigation around this point. The bank of creditors takes
a vote, and once again, you deal with power-plays.
• Duties those that are found in the act
– Formal duties
– Fiduciary duties to the company! Much in the same way that directors do.
Act in best interest of company.
• Powers wide range of power which can be used in certain circumstances, so you can
affect the rescue of a failing company
– Full management control, incl. power to delegate certain mechanisms and
delegations
– Remove/replace/appoint directors/management very powerful
– Suspend contractual obligations that the company was party to at
commencement, that would become due during business rescue; or apply
to court to cancel such agreements.
• Exceptions: employment contracts and Insolvency Act BRPs cannot
be cancelled under the BR. If the company has simply employed too
many people, chances are you will go under liquidation – it depends.
You can do voluntary retrenchment – this employees agree to, but
you can’t make unilateral decisions in this regard.

• Removal of BRP practitioner in certain circumstances. Know this in detail! Again, the
BRP is the kingpin for success. Much in the same way that you have auditors for
sustainability of companies, BRP’s are the same for sustainability of BR.
– Objection to company resolution on grounds that
• Does not satisfy s 138 requirements
• is not independent of the company or its management; or
• lacks the necessary skills, having regard to the company’s
circumstances. If you are trying to rescue a failing bank, do not go and
get someone from retail or agriculture etc.
• Court must appoint new BRP satisfactory to body of creditors if BRP
is removed. Court asks creditors if this replacement is ok and they
take a vote.
– Application to court by affected person on certain grounds
• Incompetence or failure to perform the duties of a business rescue
practitioner of the particular company;
• failure to exercise the proper degree of care in the performance of
the practitioner’s functions; negligence – the law of delict. If there is
a contract between BRP and company – then this could be read into
the contract.
• engaging in illegal acts or conduct;
• if the practitioner no longer satisfies the [minimum qualifications
requirements set out in section 138 (1) you have something stripped
from you
• conflict of interest or lack of independence; or
• the practitioner is incapacitated and unable to perform the
functions of that office, and is unlikely to regain that capacity within
a reasonable time.
• All of these need to be proved, not alleged.

OVERVIEW OF PROCEDURE

What actually happens in BR. BRP does all of these things.

1. Investigation of affairs try and ascertain what has happened. Dealing with a
company that is failing – what is the reason why? It might be because they are
overburdened in terms of rental commercial premises, entered into bad contracts,
poor market forces, poor marketing, etc. there are a number of reasons as to why
company can land up in FD. Always depends on the facts. The process starts with this
investigation.
2. Development & approval of business rescue plan On the basis of the above
investigation, BRP develops a plan. Take the information, create a plan as to how to
make it profitable, and then proposed to stakeholders of the company. Then there is
a vote on the plan by creditors as a bank…
• Proposed business rescue plan will be approved if
 – plan supported by the holders of more than 75% of the creditors’ voting
interests that were voted; and they work out the proportions of claims, so if
you are a creditor who has 80% claim – you have a majority vote
– the votes in support of the proposed plan included at least 50% of the
independent creditors’ voting interests. Independent creditor – not
necessarily linked to each other or the company. If holding company has
claim against subsidiary, although their vote is relevant, not determinant.
50% of the votes need be parties not related/associated with the company,
i.e. no relation other than a normal creditor/debtor relationship
– If a proposed plan alters the rights of any class of holders of the company’s
securities, the plan must further be approved by the majority of the holders
of the securities or classes of securities if you are seeking to change the
rights of shareholders, requires shareholder approval in these instances.
• Where adoption of BR plan fails, a ‘binding offer’ can be made, in terms of which a
a creditor’s claim can be purchased for its liquidation value. Where the plan is not
approved, a binding offer: company effectively buys itself out of the creditors claim
that creditor would have received on liquidation. Creditor either agrees to plan and
is bound, or if you don’t like it you accept binding offer which company cannot
retract. It is an either or. Still beneficial to the company, as buying at a lower price.
Buying themselves out of a claim of what they owe, at lesser value.

Effects of business rescue

The most important one is the moratorium – remains in place for the entire process of the
rescue. There are some exceptions.

General moratorium on legal proceedings
Exceptions:
• with the written consent of the supervisor; you write to BRP to enforce the claim,
regardless of BR, and BRP can give written consent to do so,
• with the leave of the court; apply to court to enforce the claim, regardless of BR (do
not know the detail for what you must prove, just know you have to apply to court).
• as a set-off against any claim made by the co. in any legal proceedings; part of
procedural law, set claims off against each other if proven. In an instance where
company has claimed against you, and you need a claim, set off…
• criminal proceedings against the company or any of its directors/officers; or
Typically, if a company is in FD, directors have done something for which they may
be liable. Being in BR does not insulate claims against the directors.
• proceedings concerning any property or right over which the company exercises
the powers of a trustee.
Disposals of / agreements to dispose of property disallowed, except: need to know these
(e.g. property companies, wouldn’t make sense if you couldn’t dispose of property if it is in
your ordinary course of business. If you are in retail, you need to be able to sell clothes (i).
Cannot have vested interest (ii). Must be improved and in writing. Part of BR plan may entail
disposal of property, BR you are primarily concerned with liquidity issues (iii) important. If
plan to become liquid is to sell illiquid assets, need to be able to do so if part of plan. Why do
we have these general plans? To protect creditors. Why? For the simple reason that the
company may become insolvent, may still fail, may be liquidated. Cannot just sell all
property.
• (i) in the ordinary course of its business; (ii) in a bona fide transaction at arm’s
length for fair value approved in advance and in writing by the practitioner; or (iii)
in a transaction contemplated within, and undertaken as part of the
implementation of, [an approved] business rescue plan

• Management displacement / debtor-in-possession?
Position of:
• Directors?
• Employees? Remains largely the same, rights of employees respected ito BR. But
BRP takes control of the company, therefore directors and their purpose during the
time of BR is changed. Directors are no longer the head honchos and have somebody
to answer to. BRP in practical terms leverage over the directors – directors still know
about the best interests of the company, and strategy and affairs of the company.
Integral members in the creation of a plan.
• Creditors? Also change. Agree to a business rescue plan potential. If a company is a
failing, it must have gotten there for some reason. One reason is that there are too
may creditors or simply that company cannot perform. Rights of creditors are
sometimes changed through a BRP, but all in accordance with a plan itself.

Termination of BR Proceedings

When does BR come to an end? Well, when it becomes profitable is one.

• Court sets aside commencement resolution or converts BR to liquidation
proceedings Courts have an inherent power to instigate BR proceedings itself. Can
liquidate once they see BR hasn’t worked.
• Practitioner has filed with the Commission a notice of the termination typically, the
success of a rescue plan. This one and the one at the bottom are relatively similar.
• Business rescue plan has been—
– proposed and rejected
– adopted and the practitioner has subsequently filed a notice of substantial
implementation BR has been a success, company now in a better place,
prospect of success. Moratorium is thus taken down.

8 Jun 2017

For the rest of the week, we will be finishing off Business Rescue and start Compromise of
Creditors and Winding up of Solvent Companies.

No lecture tomorrow – can’t release an application today and have it done by tomorrow.
The application will be dealt with the corporate governance application, either on Monday
or Tuesday.

ENGAGEMENT 2: Compromise with Creditors

This is different to BR, becuase you do not have to be in FD. You in fact can’t have a CWC if
in BR.

So, there used to be similar provisions under the Old Act – schemes of arrangement. Now, a
scheme of arrangement is a fundamental transaction that changes the internal workings of
a company – they are quick and effective in what they are seeking to do; restructure
company debt.

ENTERING INTO A
COMPROMISE WITH CREDITORS

There is a compromise between the company and creditor or class thereof. Creditors not
defined, effectively have a pecuniary claim against the company. Can use a CWC to appoint
a receiver who instigates the process of liquidation.

• Similar to provisions for schemes of arrangement under Companies Act 1973
– Why are such legislative mechanisms used?
– What’s different in s 155?
• Must be between company and creditors/ class
– Creditors not defined, but must be understood in widest sense of persons
with pecuniary claims
– Class determined in terms of rights held
• May be used to appoint a receiver.

S155 available to any co unless under BR
– Co does NOT have to be financially distressed to rely on CWC.
– Initiated by board or liquidator of co not initiated by shareholders, creditors,
or by single director.
– Entails an arrangement or a compromise of co’s financial obligations
• to all of its creditors; (debt)
or
• to all of the members of any class of its creditors

not available to any company.

• How? What needs to be done procedurally? Process – know specifically.
• By delivering a copy of the proposal, and notice of meeting to consider the
proposal, to proposal for compromise together with notice for the meeting is given
to every creditor of company and CIPC. It needs to be in writing and sent to
registered address. A company may apply for a court order which approves the
proposal, but only after you have had a meeting. The court must consider whether it
is fair to approve the proposal – restructuring debt may lead to a creditor not liking
the plan. Instead of that creditor halting the plan, go to court to have your proposal
approved.
– every creditor of the company, or every member of the relevant class of
creditors whose name or address is known to, or can reasonably be
obtained by, the company; and
 – the Commission
– May apply to court for order approving the proposal
– Court must consider it just and equitable to do so
– (question of substantial compliance with formalities and possible prejudice
to existing legal rights) meaning ultimately you cannot do whatever you
want, and respect the rights of creditors when restructuring debt.
Restructuring for the success of company, and so creditors get the best deal.

Approval of the proposal…

• If supported by a majority in number, representing at least 75% in value of the
creditors or class, as the case may be, present and voting in person or by proxy, at
a meeting called for that purpose. So creditors come to a meeting, you send
proposal and notice for meeting to creditors and CIPC. Have the meeting, gets
approved in that way. You do not need court to approve the compromise if done in
this way, and is filed by CIPC.
If approved by court ito s 155(7)(a)
• Proposal is final and binding on all of the company’s creditors or all of members of
the relevant class of creditors as from date of filing*. If you require approval by the
court only. Not from the date of judgment, but by filing of master of the HC. This
may take time.
* of court order

It is a very quick and effective method of solving a problem. Can be used for companies that
are not in FD, and by companies that are in liquidation! Cannot be used by companies that
are in Business Rescue. We think that the slide is wrong.

12 June 2017
Optional lectures on Monday-Wednesday next week. Test 1 and 2 feedback, and
Wednesday preparation.

ENGAGEMENT 3: Winding up of solvent companies

We are not dealing with the winding up of insolvent companies (liquidation). Here, it is the
winding up of solvent companies – doesn’t seem to be a purpose of having that company
any longer.

A compromise with creditors can apply outside of business rescue. You need to comply with
s155 of the Act as per the slides.

Voluntary winding-up
This is very different. It occurs outside of liquidation – you do not have to financially
distressed or insolvent to wind up a company. Some of the more practical reasons are when
you have a deadlock at board level with no casting vote. Another is if you have a
shareholder bank blocking resolutions, in which case the company cannot function.

Winding-up initiated by company or its creditors If it is done by company, done through
shareholders
– Special resolution if done by shareholder vote, done through special
resolution. If that does happen, you have to grant security to the master of
the HC that would’ve been enforced to the company for the next 12 months.
This is done to ensure that you do not wind up the company do avoid paying
creditors.
– Security to Master for payment of Co. debts (within 12 months after
commencement of winding-up) or can’t wind up company to evade paying
debts. If you have no claims/going to be no claims, then master can waive
this security – e.g. shell companies or old companies.
– Consent from Master to dispense with security.
• Liquidator appointed during the winding up of the company, once shareholders have
voted. What he can and cannot do will be dealt with later.
• Company must cease carrying on business it fulfils its current obligations but ceases to
take on new business.
• Limitation of powers of directors can no longer bind the company to any debt.
Effectively, you are closing down the company. This is the Voluntary winding up.

Winding-up by court order arguably more important. In the Companies Act, an application
may be made by one or more of the company’s creditors, to apply for the winding up of a
company. The reasons why it would happen are those:

• Court has discretion to grant winding-up order meaning they can do it in cases
where it is just and equitable to do so.
• Winding-up order may be granted where: certain circumstances. A few select ones
of these will be discussed later and raise a few issues.
– Company – passed resolution to be wound up by court; or
– Company asks court to continue its voluntary winding-up.
– Business Rescue Practitioner – no reasonable prospect for rescue and thus
applies for winding up of the company
– Creditors alleges that it is ‘just and equitable’ to wind-up Co.** This is the
important one. The just and equitable basis is the most tested one, as you
have to determine what it means
– Co./directors/shareholders – deadlock in management / ‘just and
equitable’ board can’t take a vote, no directors to vito each other – company
comes to a standstill. Happens very rarely.
– Shareholder – fraud/illegal actions by directors/ waste of assets you can
then apply to wind up the company, and allege that directors be declared
delinquent
– CIPC/Panel - fraud/illegal actions by directors (+ no compliance) these are
the reasons a shareholder can apply for it to happen.

During the process of winding up, you are also liquidating. Winding up – the company may
be solvent/liquid, but you are liquidating it. The end result is the same in that the company
ceases to exist – this is winding up not due to insolvency, meaning you are likely to get more
out of this.

The points above are just scratching the surface, and the ones that occur most regularly. For
our cases, we just need to know the ones above.

However, even if you adhered to one of the general contexts above, a court can still refuse
to do it in the certain circumstances below:

• Court may decline to grant a winding-up order requested by shareholders:
– Unless shareholder has been a shareholder continuously for at least 6
months simultaneously immediately before application can’t ping in and out
of shareholding
– Where director(s) complained of (fraud or illegality) has resigned or is
removed; or
– One of the shareholders has applied to have the director(s) complained of
declared delinquent

If you are a shareholder, and of the above has happened, immediately need to write that
court may … but if not happening, prospects of success are greater.

However, for this to occur, it must be:
‘Just and equitable’ as basis for winding-up in the interests of justice, it must be fair.
However, what is fair in one instance is not necessarily fair to another. It is very flexible, and
thus hugely depends on the context. Courts have developed guidelines, but no general rule
or starting point. Need to look at entirety of facts and context to make decisions. These
things do not stand in isolation, you need to look at the law, facts and fairness.

Different case law has looked at this interpretation in the context of winding up: analogous
to what is just and equitable in other contexts.

• No general rule
• Not facts, broad conclusion of law, justice & equity
• Meaning not limited to:
– Analogous grounds to others mentioned elsewhere
– Cases where substratum of company disappeared the reason for the
company to be in existence is no longer there. This thinking is in large part
defined by 73 Act. Under that act, companies were required to have an
objects clause, but we don’t anymore. If the object of a company was to
facilitate a merger, and that merger has happened, the object of the
company no longer exists and thus you wind it up. The same would be true
for one company to use another company as its investment platform to limit
liability. Once the company’s use is finished, you wind it up.
– Cases of complete deadlock can happen at board level or shareholder level
(refuse to appoint directors/directors can’t act because shareholders won’t
approve something), and typically happens in smaller companies. Company
wound up where shareholders are not in agreement, e.g. company between
2 people as 50/50 shareholders, and 50/50 vote at board level if one is CEO
and other is CFO. Families fight.
 • Recognised categories:
– Disappearance of company’s substratum
– Illegal objects / fraudulent purpose
– Deadlock in administration
– Irretrievable destruction of relationships in a domestic company (‘quasi-
partnership’)

These are the categories – very similar to the above. Again, this is not a closed list. It helps
to put context into one of them, but just because it doesn’t doesn’t mean not. The main test
is whether it is just and equitable, the rest just interpret this.

The Liquidator
Liquidation means to pool assets and make them liquid, i.e. to sell. Why would you go under
liquidation in this context? What is one of the most fundamental rights of shareholders?
Proportional rights to proceeds leftover. Yes you are liquidating to pay creditors, but that is
under insolvency – here you are liquidating so that shareholders get a proportional share of
what is left. For that to happen, you have to liquidate.

• Appointment – by Master once winding-up order is granted.
• Usually nominated by creditors but Master may decline to appoint. Typically the
creditor or the person applying for the winding up of the company. Typically, the
Master doesn’t do so.
• Master may remove liquidator for failure to perform duties satisfactorily.
• Entitled to reasonable remuneration. Can be individual or company, and can be
remunerated for their services.

Powers of Liquidator

• Wide general powers:
– Bring or defend legal proceedings
– Settle with debtors
– Compromise or admit claims against Co.
– Carry on or discontinue business of Co.
– Sell property of Co. this is the big one, what liquidation is all about
– Approach court for leave to perform any act not expressly authorised to the
liquidator

Also hugely broad, dependent on context.

Duties of Liquidator

• General duties to:
– Recover all assets of Co. every single asset. They get a big box of stickers, put
stickers and catalogue everything there. Every car, every piece of movable
and immovable property. It gets catalogued, audited and sold. Money
transferred to trust account, which then satisfies creditors’ claims. The
money is placed in trust, not a legal trust.
 – Sell assets to satisfy creditors’ claims
– Then distribute the balance to those legally entitled to it.

The juristic personality ceases only once process of liquidation has been finalised. This
makes sense, because the company has to sell its assets and recover funds in its own name.
An active/thriving company, typically, will not be wound up - only a shell of a company will
be wound up.

Voluntary winding up is not insolvency – FD etc. is not required.

APPLICATION

Business Rescue & Compromise Application

Blaze (Pty) Ltd has two wholly-owned subsidiaries, Blaze Active (Pty) Ltd (a company that
operates a number of small gyms around Cape Town), and Blaze Apparel (Pty) Ltd, a clothing
manufacturer specializing in active wear.
During 2016, a member of one of the Blaze Active gyms sustained severe injuries when one
of the gym machines collapsed on him, and not only did this cost Blaze Active (Pty) Ltd R3
million in terms of a legal settlement with the injured member, but this also created a large
amount of bad publicity and resulted in a significant decrease in new members over the
second half of 2016.
Blaze Apparel (Pty) Ltd remained extremely productive and the group still made a significant
net profit at the end of the 2016/17 financial year as a result of the business of the Blaze
Apparel brand. The profit was partly as a result of the employees of clothing manufacturer
not being paid performance bonuses that they were promised by management, which
became due at the time that the group financial statements for the 2016/17 financial year
were prepared. None of the companies in the group have paid any tax for the 2016/17
financial year.

1. Blaze Active (Pty) Ltd is having liquidity problems and the board has decided to
consult a strategy specialist about rebranding. A number of its creditors have send it final
warnings, threatening legal action.
• A. Explain fully whether there is anything that the board of Blaze Active (Pty)
Ltd may be able to do to give it an opportunity to delay facing legal action while it
reorganizes.
• B. Assume that the board of Blaze Active (Pty) Ltd takes this action, but the
directors of Blaze (Pty) Ltd (holding company) disagree with the decision. How
could this decision by the board of Blaze Active (Pty) Ltd’s be challenged by the
holding company, and what factors would be relevant? (3)

2. The disgruntled employees of Blaze Apparel (Pty) Ltd ask you whether it would be
possible for them to place the company under business rescue.
A. Explain whether this would be possible, and how likely it would appear
from the information provided. (4)
B. Assume that Blaze Apparel (Pty) Ltd is placed into business rescue, and that
Mr McDuck is appointed as the business rescue practitioner. A majority secured creditor
of Blaze Apparel (Pty) Ltd (a bank that holds 80% of the overall debt of the company, and
100% of the secured debt) is not worried about the company going into
business rescue, but does not trust Mr McDuck, because he does not have any
business experience, and had been declared insolvent during 2009. How could this creditor
go about having Mr McDuck removed, and would either of these concerns be valid
grounds for objecting to the appointment of Mr McDuck? The creditor is also
concerned that there will be an unknown replacement and asks whether there is any
reassurance about this potential problem that you can give. (6)
c. Another creditor of the company, which holds 50% of the unsecured debt of
the Blaze Apparel (Pty) Ltd asks you whether she would have more control in relation to
the approval of the business rescue plan, or a compromise concluded in terms of s 155.
Advise. (2)

3. Is there any risk of a business rescue application being brought against Blaze (Pty)
Ltd? (2)

Blaze is a private company, with two subsidiaries: Active and Apparel. You need to know
which company you are dealing with. If you are dealing with BR of Blaze Apparel, do not talk
about the other two.

Question 1
Today, we are just looking at Question 1. You are effectively that strategy specialist.
A) Out of 6 marks. What is the focus going to be? The focus of this is proving that the
company is in FD. Without this, you can’t prove business rescue. The answer needs
structure. The starting point: what is business rescue. You need to get to the
moratorium, which is only possible if the company goes into BR. You then have to
apply FD and who can apply. Then speak about moratorium, providing breathing
space, which allows the company to restructure its affairs. You are explaining this all
to the board, keep that in mind. This is because there are a number of ways that the
board can enter into BR.
This question was all about entering BR voluntarily and the moratorium. Need to
give the law step by step

B) The commencement of business rescue of Blaze Active in this example is by board
resolution. In order for Blaze (Pty) Ltd, the holding company, to challenge this
decision, they would have to ensure that one of the requirements for business
rescue commenced via a board resolution has not been met. One of the
requirements is that any objections to the board resolution, by affected persons,
must be heard, ito of:

a) No reasonable basis for believing that co. is financially distressed
b) No reasonable prospect of rescuing the company
c) Company has not complied with procedure

The holding company is an affected person of the Active company AS DEFINED BY TH
ACT.. The board could argue that there is no reasonable prospect for rescuing the
company, as it has suffered massive losses from legal claims, and no new revenue is
 being made in the new financial year. Furthermore, the holding company could
prove that a procedural formality has not been met.

Blaze Pty Ltd is the shareholder of Active, therefore, they are an affected person in
terms of the Act. From there, you show the same requirements relevant under A.

Question 2:
A) We are dealing with the commencement of business rescue via a court order.
The application for business rescue can be brought upon by an affected person.
The term affected person only relates to a trade union to which the employees
belong to, however, should they not be members of a trade union, individual
representatives would be able to apply. Therefore, regardless of it not being
apparent whether the employees are represented by a trade union, either the
trade union or employees of the company would be able to bring this application
forward.

In the court application, the TU/employee must show that, either:

(iii) Company is financially distressed;
(iv) Company has failed to pay over any amount relating to (tax or contract)
– an obligation under or in terms of a public regulation, or
– a contract, with respect to employment-related matters;
employees not being paid. Instead of striking, union
lodges/initiates BR processes. Not paying one employee
doesn’t matter. It must be that employees cannot be paid due
to FD. The second is just evidence of the first. The two go hand
in hand, but priving one doesn’t mean you prove two.
or
(ii) It is otherwise just and equitable to do so for financial reasons’ (NOTE THE AND
OR). This one depends on the context.
AND there appears to be a reasonable prospect of rescue.
Again, requirements are very similar – do not get the two mixed up, they are different!

The company has clearly failed to pay over contractual amounts relating to a contract, with
respect to employee-related matters. However, there must also be a reasonable prospect of
rescue. While the company is currently struggling, a business rescue plan focused on
revamping the company’s image may be successful in rescuing the business. Hence it could.

The employees (employees union) is an affected person. No payment shows FD, and must
show business rescue.

B) A creditor to the company, is an affected person of the company due to his
creditor relationship (regardless of the 80%). An affected person can apply to
court for the removal of the BRP, Mr Duck, upon certain grounds, including the
fact that the BRP does not meet the s138(1) requirements. These points need to
be proven and not alleged.
 This includes the fact that the BRP must be a member in good standing of a legal,
accounting or business management profession accredited by the Commission,
and thus be licenced. With no prior business experience, it is unlikely that that
they will be licenced, and can thus be removed. His insolvency in the past is
irrelevant.
Furthermore, the creditor shouldn’t be worried as the new BRP can only be
appointed should the bank of creditors agree, on which the creditor has a
majority vote. They can thus effectively pick whichever candidate that they like.
The fact that they hold greater than 75% debt only assists them in rejecting the
BRP’s plan.

– Application to court by affected person on certain grounds
• Incompetence or failure to perform the duties of a business rescue
practitioner of the particular company;
• failure to exercise the proper degree of care in the performance of
the practitioner’s functions; negligence – the law of delict. If there is
a contract between BRP and company – then this could be read into
the contract.
• engaging in illegal acts or conduct;
• if the practitioner no longer satisfies the [minimum qualifications
requirements set out in section 138 (1) you have something stripped
from you
• conflict of interest or lack of independence; or
• the practitioner is incapacitated and unable to perform the
functions of that office, and is unlikely to regain that capacity within
a reasonable time.

If you are an unrehabilited insolvent, not allowed to be a BRP. Does the creditor have
protection? Yes, although limited to a certain degree, must be satisfactory to the body of
creditors. Can apply to have him removed.

C) No, 75% of debt ownership required overall, hence prior creditor has majority
vote and can overrule.

Here, very clearly asked to contrast requirements to compromise vs requirements to
protecton of creditors under BRP. This deals with proportion of unsecured credit. The fact
that she falls within a particular group of creditor, in which case under s155, the
compromise provision is that you need 75% of a particular class. That, she does not have.
Hence, answer is no. Requires more under s155, hence has more power under BR where she
requires 50%.

Question 3:
Business rescue applies to legal personalities. The holding company is has a completely
separate legal personality to that of its subsidiary going under BR, hence there is no risk of
holding going under BR.

The company has failed to pay an amount to SARS in terms of a government regulation,
hence grounds for BR. SARS will apply.

Week 13: Close Corporations
NO PROBLEM QUESTIONS

13 June 2017

Close Corporations
A CC is not recognized as a company, but something else; its own thing.

Perspective

Introduction
Were very popular. No longer possible to be formed, but those that exist from previous act
can continue to do so. They operate very similar to partnerships. They are a hybrid forms of
a business entity, that encouraged small business. Parliament passed this act to facilitate
the growth of small business. Underlying approach was to fix problems in the economy of
70s 80s, economy was not in a good place and legislature needed something to get the
economy going somewhere. CCs were cheap, less formal and easy to form – hence they
were very popular.

Under new Act, there was a mind-shift: flexibility, ease of corporation and access. It was
hoped that you could have one shareholder and one director company, to simulate CCs but
it has not had that desired effect. People continue to use CCs because they are cheap and
easy.

• Why was a new type of legal structure created?
– Desire to encourage small business
– Private company structure regarded as unsuitable for small business
– Less complicated, less formal and inexpensive than a company
• Governed by Close Corporations Act 69 of 1984
• Companies Act 2008 promotes simplicity and flexibility (also caters for ‘one man’
companies) - likely to render CC’s redundant.
• NOTE that it is no longer possible to form a new CC

Features of a CC

• Separate juristic person
– A corporation formed in accordance with the provisions of this Act is on
registration in terms of those provisions a juristic person and continues,
subject to the provisions of this Act, to exist as a juristic person
notwithstanding changes in its membership until it is in terms of this Act
deregistered or dissolved.
• Members not liable for CC debts
 – Since a CC is a separate legal person capable of having its own assets and
liabilities, its members are generally not liable for its debts. Me only talk
about members here, but the benefits here are similar to that of companies.

Hallmark was that member number limited to 10. Can have only one member, similar to one
shareholder company.

• Perpetual succession
– A change in membership of a CC does not affect its existence.
– Limited membership (Simplicity?)
– Only natural persons can be members of a CC
– A CC may have only 1 member
– Number of members limited to 10

• Ownership and Management this is where things are different between CC and
company
– Members in principle both own and manage a CC

• CC has no share capital – only merely members’ contributions
• Member holds an interest, not shares – proportional interest, acts like a share as
movable property and can be transferred
– The interest of any member in a corporation shall be a single interest
expressed as a percentage and shall be moveable property which shall be
transferable in the manner provided by this Act.
• Distributions determined by liquidity and solvency requirements where this is
applied to S&D for company, but theoretically and reasons for it remains much the
same.

• A CC is a hybrid form of a business structure that borrows from principles of
company law and partnership.
• Also has unique features that are foreign to companies and partnerships These are
the focus

Similar to company, similar to partnership but entirely unique and different from these two.
If you can’t incorporate a CC anymore, why are we worried? They are everywhere. “CC TA
…”

Very popular amongst florists, restaurants, taxi operators, dentists etc.

All of these have the same thing in common – usually small, family run companies. Going
about their business, need some form of mechanism to be able to facilitate this. This is
where the CC. Now, you have to form single director single shareholder company. However,
new Act does not require you to convert CC to company. If it works for you, profitable etc.,
no need to change.

In auditing, CCs can come up a lot.

Engagement 1 – Formation, Members Interest

This set of slides goes more in depth with the specifics.

Formation

• No new CC may be formed.
• Existing CCs have founding statements:
– Full name of the corporation, principal business to be carried on
– Postal address and address that is the office of the corporation
– Full name of each member, ID number and residential address
– Size (%) of each member’s interest
– Amounts of money and description and fair value of any property or
services contributed
– Name of person - consented to appointment as accounting officer
– Date of end of financial year of corporation

No way in the way we had promoters and pre incorporation contracts for companies, don’t
have for CCs. CCs formed by founding statement, similar to MOI. Companies have MOI, CCs
have founding statements: needed to have info required from the slide:

Founding document also delineates the internal operation of the CC. They are one in the
same thing here. The important difference though, is that the statement needs to include
size and proportion etc.
Limited to 10, and can only have 100%. Therefore, the CC’s beneficial interest is a piece of a
pie, not a number of shares. You can only have 100% of this pie.

The Founding Statement

• Amending the founding statement
– If any change is made iro any matter’ particulars of which are stated in a
founding statement of a corporation, the corporation must lodge amended
founding statement with the Registrar
– Signed by or on behalf of every member of the corporation and by or on
behalf of any person who will become a member
• Inspection
– Corporation must keep copy of founding statement and proof of
registration at registered office of CC
• No constructive notice
– No person deemed to have knowledge of any particulars merely because
such particulars are stated in founding statement or other document
regarding a corporation registered by the Registrar or kept at registered
office of corporation.

Can be amended in the same way that MOIs can be amended. Amendment needs to be
signed by specific people. 17yo needs to be 21 to become a member.

Much like companies under the new act (excl RF) no constructive notice about what the
founding statements contain; no estoppel based on founding statement info.

Members’ Contributions & Interest

• Contribution
– Every person who is to become a member of a corporation upon its
registration, shall make to the corporation an initial contribution of money,
of property (whether corporeal or incorporeal), or of services rendered
– Contribution must be included in founding statement
• Interest
– Intangible moveable property giving rise to a bundle of rights (distributions
& voting) and obligations (fiduciary duties)
– Interest expressed in % - must always be 100%
– Two or more persons shall not be joint holders of the same member's
interest in a corporation.

In company, typically granted number of shares. Shares under the companies act have no
par value.
Contributions of members to a CC based on portion of a pie.

Property (e.g. lease), or providing cc with a service.

e.g. 3 brothers have a construction company. One is a rain maker (very popular, social skills,
brings in business). Two is a construction worker himself (knows the trade, services). Three
is an accountant, rich and invests as a member.

What is the problem? Working out the percentage stake of the contributions is tricky.
Luckily, not relevant anymore as you can’t form CCs, but still a problem when CC is being
wound up.

The founding statement needs to include reference to the contributions that are being
made and proportion they amount to.

Members have fiduciary duties, which do prove to be tricky at times. Interest expressed as
%, and sum to 100%.

Cannot have X and Y simultaneously holding the same interest/share. You can have
nominees, but you can’t have interest held by a juristic entity, covered below.

Membership of a CC

• Limit on number of members
– A corporation may at its incorporation have one or more members, but at
no time shall the number of members exceed ten
• Who may be a member?
– Only natural persons
 – Juristic persons (Co or CC) can not hold interest in CC directly or indirectly –
Representative capacity?
– Trusts (inter vivos or mortis causa) provided:
• Juristic person not beneficiary of such trust
• Total number of members including trust beneficiaries does not
exceed 10.


Limit clear, cannot have more than 10 members. Nothing said about proportions of the
interest, can have 0.01% interest and 99,9% interest. Who may be a member? Only natural
persons. Juristic cannot hold interest in CC directly or indirectly.

Trusts are an exception to this rule. Trusts do not have separate legal partnership. Can
partnerships be a member of a CC? EXAM Q.

If trusts can be members of a CC, and have beneficial interest, provided that there is no
juristic entity as beneficiary of the trust, meaning that beneficiary of a trust must all be
natural persons (probably family trust) and total number of members including trust
beneficiaries not greater than 10. Trust is not counted, only look at number of trust
beneficiaries.

Disposal of a Member’s Interest

• General position
– In accordance with the association agreement (if any); or
– With the consent of every other member of the corporation
• Court will order membership to cease under following circumstances:
– Member is permanently incapable, because of unsound mind or any other
reason, of performing his or her part in the carrying on of the business of
the corporation
– Member has been guilty of such conduct as taking into account the nature
of the corporation's business, is likely to have a prejudicial effect on the
carrying on of the business

Court will order membership to cease under following circumstances:
• Member is permanently incapable, because of unsound mind or any other
reason, of performing his or her part in the carrying on of the business of
the corporation
• Member has been guilty of such conduct as taking into account the nature
of the corporation's business, is likely to have a prejudicial effect on the
carrying on of the business
• Member so conducts himself or herself in matters relating to the
corporation's business that it is not reasonably practicable for the other
member or members to carry on the business of the corporation with him
or her
• Circumstances have arisen which render it just and equitable that such
member should cease to be a member of the corporation


Can dispose interest with consent of every other member, which is a red flag. May never be
able to get out, unless you go to court on some basis of fairness and equality. Go back to the
CC of three brothers: accountant wants to get out? Makes an offer for the two brothers, buy
me out, but others can’t? Takes you time to get out. Even if you come with a replacement,
other members may not like it.

Court can order membership of CC to come to end under circumstances
Second one – effectively very naughty.

Distributions to Members

• Any payment by a CC to any member by reason only of his or her membership,
may be made only-
– if, after such payment is made, the cc's assets, fairly valued, exceed all its
liabilities;
– if the cc is able to pay its debts as they become due in the ordinary course
of its business; and
– such payment will in the particular circumstances not in fact render the cc
unable to pay its debts as they become due in the ordinary course of its
business.


How do you distribute the profits?

Payments only made to members because they are a member. Only if exceeding of assets
after FV.
Second one – no defined time limit of able to pay debts.

14 Jun 2017

Although similar to a company, you have to have specific solvency and liquidity in place –
and is not the same as the test from previous sections. V sim to companies act as to when
company makes distr.

The big consideration here is the time frame of solvency and liquidity, no time limit – unlike
companies with 12 months. Makes it more flexible and simple. Makes it easier to apply, less
burdensome on compliance.

Buying back members’ interests

• CC buying back members’ interests only if:
– Previously obtained written consent of every member other than member
whose interest is being acquired
– After payment made – assets fairly valued exceed liabilities
– CC able to pay debts as due in ordinary course of business
 – Payment will in the particular circumstances not in fact render the cc
unable to pay its debts as they become due in the ordinary course of its
business

Buying back interest, not shareholding. Proportion of remaining members of pie changes
accordingly.
CC must remain solvent and liquid.
Written consent is the important one, and is tricky – changing proportion of interest may be
to detriment of some members, hence some argument, but CC is expending capital if not all
members agree with valuation of the interest. Leads to a lot of problems, especially in the
family business space.

Financial Assistance

• A CC may give financial assistance for the purpose of, any acquisition of a
member's interest in that cc by any person, only if requirements are met:
– Previously obtained written consent of every member other than member
whose interest is being acquired
– After payment made – assets fairly valued exceed liabilities
– Corporation able to pay debts as due in ordinary course of business
– Payment will in the particular circumstances not in fact render the
corporation unable to pay its debts as they become due in the ordinary
course of its business.

Requirements!!
Written consent* of all members, again difficult to attain

Conversion of CCs

• A CC may convert to a company
• Notice of conversion
– Written statement of conversion
– Approved by at least 75% of those holding members’ interest
– MOI
• Effect of conversion
– Juristic personality continues
– All assets, liabilities, rights of CC vest in Co
– Any legal proceedings before conversion may be continued against the new
Co

CC was given opportunity to convert to company. Interest to shares, members to
shareholders. Members, not only the owners, but the managers! And potentially creating a
problem of not every member not being a director. There is no director of a CC, only
members.

When you convert a CC, any right or duty of the CC is automatically vested in the company.
Can’t use to avoid debt, everything follows you.

The effect of a conversion is that members interest are converted into shares proportionally
affecting each other. Can have different categories of shareholding in this conversion. All
members of CC will be the first directors of the company.

To do so, notice of conversion needs to be approved and appended to it the new MOI of the
company (details as to directors, make up and categories of shareholding, etc.). 75% of
interest, not members.

DTI wants people to convert CCs to companies, to track companies (have to be registered
with CC, registered info, CC’s don’t require it). Why do it if a member of a CC? You probably
wouldn’t. CC’s can’t list, because they don’t have shares. However, if you want to grow, you
need to convert to company. Converted from CC to company, was a CC for a while. But most
of the CC’s in SA haven’t because they don’t need to.

James’s answer – easier to track, and company business structure provides possibility for
significant growth. CCs are limited in size by their nature. Can’t invest in it if you are a
company, for example.

Engagement 2 – Management & Control

Internal Management and Control

• The members of a cc having two or more members may at any time enter into a
written association agreement signed by or on behalf of each member, which
regulates-
– any matter which in terms of this Act may be set out or agreed upon in an
association agreement; and
– any other matter relating to the internal relationship between the
members, or the members and the corporation, in a manner not
inconsistent with the provisions of the Act.

Every member has a controlling interest in a CC, therefore, the internal dynamic within CCs
is very different to that of companies.

The big defining feature of int man. Of CC is the founding document of the CC. Operates
very similar way to MOI for companies.

Cannot have anything not consistent with the provisions of the Act, e.g. negate rights under
act as members of the CC.

Contents of Association Agreement

• The following rules in respect of internal relations in a corporation shall apply in so
far as the Act or an association agreement in respect of the corporation does not
provide otherwise:
 – Every member shall be entitled to participate in the carrying on of the
business of the corporation
– Members shall have equal rights in regard to the management of the
business of the corporation and in regard to the power to represent the
corporation in the carrying on of its business
• BUT
…re changing certain ‘fundamental’ terms of the agreement…

• consent in writing of at least 75 per cent shall be required for-
– a change in the principal business carried on by the corporation
– a disposal of the whole, or substantially the whole, undertaking of the
corporation
– a disposal of all, or the greater portion of, the assets of the corporation
– any acquisition or disposal of immovable property by the corporation

• differences between members as to matters connected with a corporation's
business shall be decided by majority vote at a meeting of members of the
corporation;
• at any meeting of members of a corporation each member shall have the number
of votes that corresponds with the percentage of his or her interest in the
corporation


Much the same as companies, shareholders invited to vote and attend certain meetings.
Every member invited to participate in moving forward of the CC.

Members are simultaneously directors and shareholders, and all have equal right by default
in management of the agreement.

Where you change fundamentals of agreement, such as: … (with MOI, you need special
resolution, so here you need it too) 75% of interest
Florist to construction
For the last point, if a CC owns immovable property, it is significant in comparison to
companies.

50% of interest +1
Number of votes correspond to scale of interest. Members can be held liable by the
corporation for their conduct.

There is a proper plaintiff rule in place – wrong done to corporation, corporation needs to
sue. This is done from principle from the fact that CC’s have independent legal personality.

Management of a CC

• Liability for negligence
– A member of a corporation shall be liable to the corporation for loss caused
by his or her failure in the carrying on of the business of the corporation to
 act with the degree of care and skill that may reasonably be expected from
a person of his or her knowledge and experience
– Written approval?

To sue on behalf of CC, open ended. Need majority.

Members’ Fiduciary Duties

• Scope of duties
– Each member of a CC stands in a fiduciary relationship to the CC.
– Implies that member must in relation to the CC act honestly and in good
faith
– Exercise powers as he or she may have to manage or represent the CC in
the interest and for the benefit of the CC

• Must avoid any material conflict between his or her own interests and those of the
CC and specifically:
– Personal economic benefit to which he or she is not entitled by reason of
his or her membership of or service to the CC
– Notify every other member, at the earliest opportunity, of the nature and
extent of any direct or indirect material interest
– Not compete in any way with the corporation in its business activities
– Any particular conduct of a member shall not constitute a breach of a duty
arising from his or her fiduciary relationship to the corporation, if such
conduct was preceded or followed by the written approval of all the
members where such members were or are cognisant of all the material
facts

Each member has fiduciary duty, regardless of size of interest, owed to the CC. Implied that
every member must act honestly, and in good faith, and that each member needs to
exercise their power in a manner in the best interest of CC and not themselves.

They have separate juristic personality. This can be abused, especially by controlling
members. Similar to companies. Protect yourself from liabilities. Where small business
persons and use CC as vehicle to do it, where you only have one member, it is very open to
abuse, as your interests are very closely aligned to interest of CC itself, and very easy to act
in interests of yourself as CC.

You could do the alter ego doctrine here. Piercing the veil/alter ego is thus relevant here.
The dynamic of scope of duties is between the CC and its members.

Owed fiduciary duties regardless of whether you control day to day activities or
management. Only to CC, not to each other, unless in agreement. This would only be done
by contract, not in law.

Avoid material conflict.

Power of Members to Bind Corporation

• Any member acts as an agent
• act of a member shall bind a corporation whether or not such act is performed for
the carrying on of the business of the corporation
– unless the member so acting has no power to act for the corporation in the
particular matter and the person with whom the member deals has, or
ought reasonably to have, knowledge of the fact that the member has no
such power.

Members have immediate right of agency of the CC (v sim to partnership).

Not when can be bound “UNLESS”

Abuse of Juristic Personality

• Whenever a Court on application by an interested person, or in any proceedings in
which a cc is involved, finds that the incorporation of, or any act by or on behalf of,
that CC, constitutes a gross abuse of the juristic personality of the CC as a separate
entity, the Court may declare that the CC is to be deemed not to be a juristic
person iro such rights, obligations or liabilities of the CC, and the Court may give
such further order or orders as it may deem fit in order to give effect to such
declaration.

You can pierce the veil. V important, gross abuse of juristic personality, and court have very
flexible determination to make. Company law is looked at to determine what a gross abuse
is.

CC’s are effectively a hybrid between partnerships and companies.

Partnerships are thus highly important for the exam.

Articles of association and PIS will determine whether they need an audit of their AFS or
not. More likely to depend largely upon which business area the CC operates in, e.g. CC is
construction industry, to have certain licences, you need to have AFS audited.

Articles of Association = Founding Statement

CLOSE CORPORATIONS APPLICATION

The memo for these questions will be provided on vula.

QUESTION 1
Answer whether the following statements are true/false and provide an explanation for
your answer.
a) The members of a close corporation owe fiduciary duties to the close corporation
and to each other.
 b) A close corporation can be a shareholder of a company and vice versa.
c) A close corporation’s association agreement binds those members who signed it and
members who join the corporation thereafter, even if they did not sign it.
d) Every person dealing with a close corporation is deemed to be fully acquainted with
the contents of not only its founding statement, but of any other document
regarding the close corporation registered with the Registrar or lodged with him, or
which is kept at the registered office of the close corporation.
e) Mr & Mrs Jones want to jointly acquire a 50% member’s interest in Asanda CC. This
is permissible under the Close Corporations Act 1984.
f) The Companies Act 2008 provides that all existing close corporations must convert
into companies within a period of two years from the date that section 13 of the
Companies Act 2008 comes into effect.
g) The aggregate members’ interest in a close corporation must at all times be 100%.

QUESTION 2
Duduzwane, Ajul and Jacobs are members of Azania CC. The assets of the close
corporation were valued at R1 000 000 and its total liabilities at R1 500 000 as at March
2017. In May 2017, Azania was awarded a government tender worth R500 000 which it
delivered in May. Members are now planning a vacation to Dubai with their families and
want the close corporation to pay each of them one-third of the income received
by the close corporation during May. Advise Ajul on the possibility of making such a
payment.













19 June 2017

REVISION LECTURES

Exam:
• Week 1 is not examinable directly
• Week 3: is not examinable directly (Promoters & PIC)
• Week 11 is not examinable directly
• Week 2 will not be tested in Problem Questions
• Week 13 will not be tested in Problem Questions
• Trusts and CCs will only be MCQs and T/Fs
• There will be no problem questions on Capacity & Authority
 • Partnerships are not examinable directly

Structure:
• Section A – 20x MCQs (20)
• Section B – 5x True/False Questions with Explanations (10)
• Section C – Problem Questions (30) – combinations of applications, problems, theory
etc.
• 60 marks
• 2 Hours
• 15 Mins Reading time
• more info to follow in announcements

MCQ
10 marks: Trusts, CCs, Capacity & Authority
10 marks: Rest of Syllabus

Advice: look at the application lectures, make sure you are comfortable with them. Make
sure you are comfortable with level of detail required of you.

It goes without saying that you will be focusing on the content in your learning from Week 9
onwards. Beginning of Corporate Financing, the rest was examined in Tests 1 & 2. However,
fundamental transactions are a triggering event for minority protective remedies. Can’t
have one without the other. E.g. Appraisal rights still relevant.

For the purposes of the revision lectures, we will work through the earliest sections and
move forward.

From Bus Law 1, know about: contract and requirements, terms such as “void”, “authority”,
“agency”, “liquidation”, etc.

Focus has to be on work covered after test 2 content.

Week 2: (this was discussed prior to the removal of Partnerships from the exam)
In particular partnerships and trusts.

The fundamental issue/principle for both of them is that neither of them have separate
legal personality. Can’t pierce the veil of a trust; no veil to be pierced. However, with trusts,
you can get what you call sham trusts: the distinction between benefit and ownership is
disregarded. People abuse the protection afforded to them. The trustees and beneficiaries
are one and the same.

Trusts
The hallmark of a trust is that there is a separation between ownership and benefits, with
the exception of bewind trusts. Without this, you don’t have a trust: trust is a sham. It is,
therefore, recognized that you must have independent trustees. At a minimum, you need
one. Need some sense of independence.

There are 3 different types of trust: inter vivos (set up by people who don’t die, people in
life, living: e.g. FAMILY TRUST), mortis causa (reason of the trust is death, one where
somebody has died and left assets to be administered by trustee in interest of beneficiaries:
e.g.: TESTAMENTORY TRUST), and bewind trust (odd exception whereby there is a blurring
of the distrinction between ownership and benefit.

Trusts are set up via a founding document, there are no regulations to comply with. To
validly act as trustee, you need certificate: go to master of High Court, and he needs to see
written trust deed. For trustee to pay, he needs certificate. If trustee acts without authority?
What is the legal answer when a trustee acts without a certificate? ***

When does a trust cease to exist? Well what are the requirements for there to be a valid
trust? First and foremost, you need a trust deed – need something that acts in effect as a
founding document, which can be verbal. Something to give trust life. You also need a
trustee or trustees, to operate the trust. The trustee is the owner of the trust property, and
own it in their capacity as trustee. Money paid to trustee is not trustee’s money, and does
not form part of trustee’s personal estate, but does vest in trustee’s capacity as trustee’s
estate. If someone sues James, they can’t attach the trust assets. It is a separate estate.
The third one: beneficiaries. Not the trustee that benefits.

Partnerships
No separate legal personality. The fundamental issue of partnership is the whole idea of an
aggregate theory of partnership. There is a creation of partnership fund, relevant for
insolvency. Partnership agreements, each partner by default has authority to bind the other
partners.

Regular Partnership
Silent Partnership
En Commendite Partnership (subcategory of silent)

Hallmarks of silent partnership? Silent vs named partners. Silent partners cannot be held
directly liable as they cannot be named, but then the named partners sue silent partner for
share of loss. If the claim is for R500 000, and she has invested R100 000, her liability is
limited to R100 000. Can’t be sued for R125 000. This is because it is stipulated in their
contract, the partnership agreement. Bound by this contract. If the contract says you are
only liable up to that amount. In partnerships, you have 2 contracts: between partners
themselves, and partnership and 3rd party. Partners themselves bound by the first contract.
If you make an investment into partnership, but you say that partners cannot claim from
you under any circumstances, then you are not a partner: not sharing in profits and losses.
Silent partnerships, generally, is where you have a silent partner – no limitation generally on
their liability. Still cannot be sued directly.

Commenditarian partnerships: a subcategory of silent partnerships, where there is a
limitation of liability. Limited to what you invest in, and cannot be sued directly.

If James has a claim against a partnership for R1 000 000, but there is only R500 000 in
partnership fund of assets. James still has R500k claim, and can sue one of the partners.

All silent partners can’t be claimed against directly, only commenditarian partners have
their liability limited.

There are a few procedural exceptions: litigation, tax, and insolvency. For the purposes of
litigation, you do not have to name each partner in court, can be sued in the partners name.
For tax purposes, the taxation of partnerships, and insolvency. Partnership not taxed
separately. Can still register for VAT. A trust is governed by Trust Properties Control Act, and
they are taxed at a flat rate of 41% or so, unless you apply for an exemption (e.g. non-
profits).

If a partner exceeds their mandate from the other partners, the other partners sue the
partner.

20 June 2017

Piercing the Veil

Need to understand that there is a veil in the first place; separate legal personality. Barrier
between company itself and internal workings of company: shareholders and directors. All
founded on concept of separate legal personality and limited liability. Company liable for its
own debts, can’t claim against shareholders unless company structure has been abused in
some ways.

To pierce veil of CC’s, it is different to companies. Similarities: require there to be an abuse,
but the test is different. Company law: under the act, “unconscionable abuse” of the
corporate form. CC’s: “gross abuse” of the corporate form.

The difference? Very little between these words. The underlying concept is the same. Under
company law, you can also pierce the corporate veil by relying on the common law. The
important case: Cape Pacific, which details the requirement for you to pierce the veil. The
common law is still relevant, in interpreting what is meant by the term “unconscionable
abuse”.

Minority Shareholder Rights
• Require shareholding
• Have to rely upon the Act (e.g. derivative action, can no longer look at common law)
• Have to know specific detailed requirements for each (e.g. derivative action from
test 2)
These are the common requirements for all types. One of the triggering events for the big 3
(appraisal, derivative & oppressive/prejudicial conduct) are the fundamental transactions. In
any fundamental transaction, you have shareholder approval (special resolution) on
transaction itself, meaning that as a minority, majority can abuse the rights. That is why the
fundamental transactions are triggering events for those protective mechanism.

Need to know what oppressive and prejudicial conduct constitutes.

The derivative action: company does not enforce its own rights, and an interested person
(e.g. shareholder) applies to court to enforce the company’s rights, on behalf of the
company. It is still the company enforcing the rights, but it is affected by somebody else.

Appraisal remedy: dissenting shareholder right. Need to know requirements: you are
dissenting, given notice that you dissent and that you will do so. Then you file a demand.
Etc. Need to know when to value shares and at what value. Company then makes an offer to
buy the shares back from the shareholder, share buyback.

Auditor Liability

Client audited by auditor. This is defined by a contract, meaning you can claim for a breach
of contract. Part of the contract, that is implied by the operation of law, is the duty of care,
skill and diligence. This is the term of the contract. To determine what it entails practically,
you need to look at professional standards. Linked with all of this is that, not only do you
have a contract in place, but the auditor owes this duty in delict as well. However, the
primary claim would lie in contract because you cannot apportion in contract. No
apportionment: because the courts say so. Pwc vs Thoroughbread Breeders.

There is also a 3rd party to Client. There is no contract here. Hence, you can only claim here
in delict. To claim in delict, you have to prove two things: there has been a breach of the
duties of care, skill and diligence as defined by professional standards AND (more
importantly) Auditing Professions Act states that there must be foreseeability, of 3rd party
relying on auditor’s audit to cause that person harm. Only if you can prove these can you
hold auditor liable. You cannot apportion the harm here either. You can only apportion
harm if the two parties of the relationship are both negligent in delict. When both parties
are at fault, in delict.

Limitation on auditors liability linked to foreseeability of the harm.

Distributions by the Board
A distribution (definition), including dividends (definition)

TRUST
What is the legal case where the trustee acts without certificated authority? VOID. Trust
Property Control Act.

If director issues shares that are not authorized – liable. If the director issues authorized
shares not according to s41 (e.g. prescribed officers), for which you require special
resolution of shareholders.


What is a Prospectus? (2)

AFS are included in a prospectus, but they are not one in the same. A prospectus is a
document/piece of information that gets issued to prospective shareholders/investors i.e.
people who are yet to invest. The purpose of which is to allow investors to make an
informed decision as to whether to invest in the company or not. What information must it
can contain and why?

Linked with the prospectus is liability for untrue statements.

A primary offer is when issuing shares to the public. When listing on an exchange, IPO. Every
IPO and primary offering needs to have a prospectus.

Secondary offerings are when things become a lot more tricky: do not necessarily need a
prospectus to be attached for every secondary offering.

An offer to the public: IPOS, Public Offerings and Secondary Offerings. We are dealing with
issuing of public securities. You probably have to explain IPO, Primary and Secondary.

An IPO is offering to the public, first time shares/security being offered to the public.
Primary: listed vs unlisted. Primary Listed: requires compliance with rules of JSE. Prim
Unlisted: requires prospectus alongside the ACT. Offer made to public by company or group,
or amalgamation.
Secondary: offer made for sale to public made by on behalf of other than that company.
Divided too into listed vs unlisted. Requires written statement; synopsis of affairs of the
company. Offer being made by someone NOT the company. Not a public offer if made on
the stock exchange itself.

Offer to the public: what do we mean by public? Under our law, it is possible to make offer
to small group of people instead of world at large, and that can still constitute an offer to
the public.

Each case decided on its own merits to extent that it is not public. Can have offers made to
public exempt for prospectus needs.

Business rescue
When BR happens voluntarily, only from filing of board resolution. Moratorium doesn’t
mean rights are extinguished or lapsed, they still need to perform under the contracts. It is
only that they cannot enforce against the company.