COMPANY LAW AND CLOSE CORPORATIONS

1. COMPANY LAW AND CLOSE CORPORATIONS MS J GELDENHUYS & MS A MTHEMBU

2. LEGAL PERSONALITY • Acquired upon incorporation Consequences: (Salomon v Salomon): • Company is a separate legal entity. • Company can contract in its own name. • Company can sue and be sued in its own name. • Members enjoy limited liability. • Profits belong to the company and not its members. • Company assets are company’s property. Members have no proportionate proprietary rights. - No one is qualified by virtue of memberships to act obo company.

3. PIERCING THE CORPORATE VEIL • Corporate personality disregarded. • Substance/ practical realities are recognised rather than the form. • Exceptional circumstancesrequired. • Fraud, dishonesty/ improper conduct. Section 163(4) of the Companies Act 2008: If any act or use of a company constitutes an unconscionable abuseof the juristic personality a court may declare that company is not deemed to be a juristic person in respect of the rights, liabilities and obligations relating to abuse.

4. Case Law: Piercing the Corporate Veil • Botha v Van Niekerk – an “unconscionable injustice” required. • Cape Pacific – rule in Botha is too rigid. Facts of each case and public policy considered. • Hülse-Reutter – Dual test: misuse/ abuse and company must gain unfair advantage. • Le’Bergo Fashions CC – the need to preserve the separate legal personality must be weighed up against the public policy. • Die Dros (Pty) Ltd and another – court may pierce corporate veil where a person abuses a company to avoid a restraint of trade agreement.

5. ACTIVITY John operated a fast food establishment in Durban under a franchise agreement with McTucky’s Ltd. In terms of the agreement, John is not allowed to operate a similar business in the Durban area within 3 years after the end of the franchise agreement. John does not renew the franchise agreement when its term ends, but continues to operate a fast food restaurant from the same premises that he previously occupied. McTucky’s Ltd wants to institute an action against John for breach of the restraint of trade in the original franchise agreement. John’s defence is that the new business is owned by a newly incorporated company Macfries (Pty) Ltd which was not a party to the original agreement. John is the sole shareholder and director of Macfries (Pty) Ltd. Can the court lift the corporate veil?

6. TYPES OF COMPANIES 1. PROFIT2. NO PROFIT • Public : Ltd (NPC) • Private :(Pty) Ltd • Limited liability: Inc • State-owned: (SOC) Different Characteristics

7. COMPANY FORMATION • Notice of Incorporation • Memorandum of Incorporation • Registration certificate CONSTITUTIVE DOCUMENT: Memorandum of Incorporation • INTERNAL REGULATION: Memorandum of Incorporation and Rules. MOI and rules are binding between: (Contractual rights) - Company & shareholders; - Shareholders inter se; - Company & directors; and • Company & prescribed officer, member of audit committee or board committee.

8. Amendment of the MOI • Proposed by board of directors; or • Shareholders holding at least 10% of voting rights. Procedure: - As required by Memorandum of Incorporation. - Adopted by special resolution.

9. PRE-INCORPORATION CONTRACTS Section 21 of Companies Act of 2008: Requirements: • In writing. • Promoter must purport to act as an agent of a company to be incorporated. • Contract must be ratified or rejected within 3 months after incorporation. Consequences: - Promoter jointly and severally liable. - If company fails to adopt or reject the contract, it is deemed to have been adopted it. Promoter escapes liability.

10. ACTIVITY Jack enters into a lease agreement with Mpfari on behalf of a yet to be incorporated company. • What are the requirements in terms of s 21 of the Companies Act of 2008 for the contract to be binding against the company when it is incorporated? • Who will be liable if the company is not incorporated? • Who will be liable if the company only ratifies the agreement partially? • If Jack is held liable, what recourse does he have?

11. COMPANY NAMES • May not be offensive. • May not lead to confusion. • Must not be calculated to cause damage. Is a name offensive or objectionable? (Peregrine Holdings) • Is the business similar? • How sophisticated are the clients? • Generic words?

12. ACTIVITY John was previously a franchisee of McTucky’s Ltd. He wants to incorporate a company with the name MacTuckies Ltd. The new company will run substantially the same business as McTucky’s Ltd. Can McTucky’s Ltd object to the registration of the name?

13. CAPACITY OF COMPANIES • Section 19(1) of the Companies Act of 2008: -Company enjoys the legal capacity and powers of an individual -Except : it is a juristic person… • Section 20 of the Companies Act of 2008: • No transaction is invalid solely because it exceeds the company’s capacity. • Shareholders may ratify transaction by special resolution. • Shareholders, directors/ prescribed officers may prevent company from acting contrary to restrictions. • Bona fide third party protected if he/ she was unaware. • Shareholders can claim against person who fraudulently/ due to gross negligence allowed act, unless ratified.

14. ACTIVITY ToyZ Ltd’s MOI states that the main business of the company is selling toys. The board of directors decides to buy a luxury yacht obo the company. • Is this transaction valid? • What if the MOI stated that the company only has the capacity to sell toys? • Would it affect your answer if the seller of the yacht was aware of this limitation in the company’s capacity?

15. REPRESENTATION IN COMPANIES Authority: 1. Actual or 2. Ostensible • Sources of Actual Authority: - MOI - Rules - Express mandate • Ostensible Authority: Company liable if a misrepresentationwas created by the company that a person in fact had authority.

16. Doctrine of Constructive Notice • Person dealing with a company is deemed to know the content of the company’s registered documents. Section 19(4) of the Companies Act of 2008: Doctrine abolished, except: - Person dealing with RF company deemed to have knowledge of the special conditions. - In personal liability companies

17. TURQUAND RULE • COMMON LAW • SECTION 20(7) OF THE COMPANIES ACT OF 2008 Third party dealing with company in good faith may assume that the internal requirements have been met to render contract enforceable. • Internal requirement: Company A’s MOI determines that the board of directors has authority to conclude contracts obo the company. If the amount of the transaction exceeds R50 000 consent must be acquired from the shareholders in a general meeting.

18. Exceptions to Turquand Rule Companies Act of 2008: - If the 3rd party knew that the internal requirements were not complied with; or • reasonably ought to have known e.g. contract concluded with a member

19. ESTOPPEL Company will be bound to a contract entered into by a person without actual authority if: • Company created a misrepresentation; • The misrepresentation was made intentionally/ negligently; • The 3rd party was induced by the misrepresentation to contract; and • The 3rd party suffered prejudice.

20. ACTIVITY The rules of Concord Ceramics (Pty) Ltd (RF) provide that the board of directors have authority to deal obo the company. The rules further provide that for any transaction of which the value exceeds R1 million the approval of the general meeting by way of a special resolution is required. - Are third parties deemed to be aware that consent must be given for transactions exceeding R1m? - A director enters into a contract exceeding R1m without the approval of the general meeting. Will the company be bound?

21. ACTIVITY Mike, a manager, regularly contracts obo the company without a mandate. The board of directors knows this, but allows Mike to contract obo of the company. Mike enters into a contract with Tim. The company argues that it is not bound by this contract because Mike lacks authority. Can the company be held liable?

22. CORPORATE FINANCE • DISTRIBUTIONS: - Return on share capital/ return of share capital - Direct or indirect transfer of money/ property, other than shares to shareholders of the company. - Dividends are amounts declared by the board of directors as a return on their investment. • Section 46 of the Companies Act of 2008: - Board must authorise - Solvency and liquidity - Distribution must be made within 120 days - Non-adherence: Personal liability of directors

23. Financial assistance • Was financial assistance provided? • Gradwell: If company is impoverished by transaction financial assistance was provided. • Lipschitz: Impoverishment test inconclusive. Two elements: 1. Financial assistance provided and 2. Purpose must be to acquire shares in company. • Was the provision of financial assistance valid? Requirements in section 44 must be adhered to.

24. SECTION 44 REQUIREMENTS Assistance to: • employee share scheme or • special resolution by shareholders • person must be in group/ class agreed upon Authorisation by: Board of directors Requirements: - Solvency - Liquidity - Prescriptions in MOI - Financial assistance must be provided within 120 days

25. ACTIVITY At a shareholders’ meeting of Build-a-Book Publishing (Pty) Ltd that took place six months ago, a special resolution was passed that financial assistance may be given to black women as part of the company’s BEE endeavours. ABC Bank Ltd is only willing to extend a loan to Naledi if someone stands surety for her obligations. Naledi wants to use the money she loans to buy shares in Build-a-Book Publishing (Pty) Ltd. • Will it be financial assistance if the company stands surety for the loan? • Who must take the decision obo the company whether or not to stand surety and what must be taken into consideration?

26. END Part 2 to follow.