Close Corporations

Close Corporations ONR 314

Chapter 28: Internal Relations • Duties of care and skill • Owe duties to corporation

Fiduciary position of members • Members in close relationship towards each other • CC-Act sets out guidelines • Provisions largely based on principles enunciated by the courts over the years

S 42(2)- Each member, act honestly and in good faith, and exercise powers to manage or represent the CC, in its interest and for its benefit • Not exceed powers • Avoid conflict of interest • Not derive benefit from the CC

May not compete with CC • Failure to disclose a material interest in a contract of the CC =…… • Breach • Ratification possible • Except unratifiable wrong – S42(2)(a)(i)

Duties of Care and Skill • S 43- member act with due care and skill • Breach = liable to CC for loss • Care and skill reasonably expected from person of same knowledge and experience • 2 aspects of importance:

1-Proven loss for the CC • 2-Only liable if did not act with degree of care and skill reasonably expected of from a person of his knowledge and experience • Ratification possible

Association Agreement • AA – written agreement between members • Regulate internal relations • Optional • Informal and flexible • Absent – Act regulates internal relations

In terms of s46 the following apply unless AA states otherwise: • Every member entitled to participate in carrying on of the business • Equal rights in management and representation • Differences decided by majority vote • Number of votes = % interest • Indemnified of expenditure incurred in conducting the business and preserving the assets of the CC • Payments to members in proportion to their respective % interest

Entering into an AA • CC with 2 or more members • Signed by or on behalf of each member • Any matter regarding internal relationships • Must be consistent with the Act • Copy kept at registered office • Only members may inspect

Contractual relationship constituted by AA • Contractual rights and duties • Binds members while members • And when they stop being members • Amendments or cancellation must be in writing

Matters regulated by AA: • Participation in management • Settling of disputes • Voting and proxy votes • Repayment of contributions • Procedure at meetings • Sale or transfer of a member’s interest • Financing • Any other matter that would ordinarily be dealt with in a shareholders’ agreement

Matters NOT regulated by AA: • Matter in which an insolvent member’s interest may be disposed of • Disqualified persons • Power to call a meeting of members • Blanket approval of breach of duties in terms of s42 &43

Matters that require written consent • Acquisition of a member’s interest • Fin assistance • Loans and security • Ratification of pre-incorp contracts • Ratification of breach of fiduciary duties or duty of care and skill

Management • In terms of AA and Act • Unless varied or altered by AA, the following rules apply: • Every member entitled to participate in carrying on the business – equal rights – unless under legal disability or disqualified by court • Matters are decided by majority vote at meetings. • Every member entitled to call a meeting • Notice of meetings • Qworum

Remedies • Distinguish between: • Section 49 – member’s rights • Section 50 – CC’s rights

Payments to members • Rules set out in s 51 govern payments to maintain solvency. • Payment only made if: • After payment assets>liabilities • After payment CC able to pay debts as they become due in ordinary course of business

Prohibition on loans and security • Without the prior express consent in writing of all members, no loan: • To any member • To any CC where a member holds an interest of more than 50% • To any company or other juristic person controlled by one or more members

Close Corporations