KRG 201 Insurance & Business Forms Notes PDF

KRG201 NOTES Exam notes KRG 201 Insurance.......................................................................................... 1 The relevance of insurance.................................................................................... 1 Insurance defined................................................................................................. 1 Sources of South African insurance law.................................................................. 1 The three branches of insurance law....................................................................... 1 Different types of insurance................................................................................... 2 The interest in being protected..........................................................................................2 The duration.....................................................................................................................2 The peril or event insured against......................................................................................2 Essentials of an insurance contract........................................................................ 2 Formation of an insurance contract........................................................................ 2 Agreement or its equivalent..............................................................................................2 Proposal forms.................................................................................................................2 Conclusion of insurance policies by direct marketing........................................................3 Cooling-off period............................................................................................................3 Insurance policies and policy documents..........................................................................3 Legality............................................................................................................................3 Disclosures by the insured................................................................................................3 Disclosures by the insurer or its intermediaries..................................................................4 Insurance claims................................................................................................... 4 Description of the risk insured against...............................................................................4 Interpretation of the terms that describe the risk covered...................................................4 Limitations and exceptions...............................................................................................4 Dimensions of the described risk......................................................................................5 Causal link between the peril and the harm.......................................................................5 Insurable interest.................................................................................................. 5 Insurable interest in indemnity insurance..........................................................................5 Insurable interest in non-indemnity insurance...................................................................5 Manner in which claims must be brought................................................................ 6 Notice and time-bar clauses.............................................................................................6 Fraudulent claims............................................................................................................6 Subrogation, cession and contribution................................................................... 7 Introduction to business forms and partnerships................................ 7 Study unit 1: Introduction to Business Forms.......................................................... 7 Study unit 2: Partnerships...................................................................................... 9 Company law................................................................................... 10 Study unit 1: The company as a business structure................................................ 10 Types of companies:....................................................................................................... 12 Study unit 2: Registering a company..................................................................... 14 Formation and compliance with the law.......................................................................... 14 The effect and process of registration.............................................................................. 14 Process of incorporation................................................................................................. 15 Company rules by the board........................................................................................... 15 Shareholders agreements............................................................................................... 16 Ring fenced companies.................................................................................................. 16 Amending the MOI.......................................................................................................... 16 Alterable and unalterable provisions............................................................................... 17 Anti-avoidance provisions s6.......................................................................................... 17 Substantial compliance.................................................................................................. 17 Study unit 3: Pre-incorporation contracts.............................................................. 17 Study unit 4: The actions of the company: Capacity and representation.................. 18 Capacity and authority of a company.............................................................................. 18 Agency, representation and form of authority................................................................... 20 Study unit 5: Corporate governance – shareholders............................................... 21 Shares........................................................................................................................... 22 AGM vs general meeting of shareholders (s61)................................................................. 26 The resolutions taken at meetings................................................................................... 27 A shareholder’s right to be represented by a proxy........................................................... 28 Shareholders can act other than at a meeting.................................................................. 28 Study unit 6: Corporate governance – Directors..................................................... 28 Board of directors:.......................................................................................................... 28 Common law duties....................................................................................................... 33 Standards of conduct s76............................................................................................... 33 Disclosure s75............................................................................................................... 34 Reckless trading............................................................................................................. 35 Liability of directors........................................................................................................ 36 Exclusion of duties......................................................................................................... 36 Indemnification.............................................................................................................. 36 Study unit 7: Transparency, accountability and integrity; Whistleblowing and miscellaneous matters.......................................................................................... 1 Records/ documents that a company is required to maintain.............................................1 The criteria that accounting records have to comply with (s28)...........................................2 The criteria that financial statements have to comply with.................................................2 The provisions that regulate access to annual financial statements....................................5 The audit and review requirements for annual financial statements....................................5 The requirement of filing of an annual return by a company................................................6 Additional requirements...................................................................................................7 The appointment requirements and duties of the company secretary.................................7 The process for resignation of a company secretary...........................................................8 The auditor of a company.................................................................................................8 The requirements to appoint an audit committee s94...................................................... 10 The role, composition and duties of an audit committee s94............................................ 10 The concept “whistle-blower” in a corporate context....................................................... 11 Breach of confidence s213............................................................................................. 13 Study unit 8: Reckless Trading and Corporate Insolvency....................................... 14 Solvent vs insolvent company......................................................................................... 14 Reckless trading............................................................................................................. 14 The objectives of business rescue................................................................................... 15 The process of business rescue...................................................................................... 16 The role, and requirements for appointment, of a business rescue practitioner................. 18 How a solvent and an insolvent company can be wound-up............................................. 19 The grounds for deregistration......................................................................................... 20 Study unit 9: Group companies............................................................................ 20 Important definitions...................................................................................................... 20 Study unit 10: Corporate Finance......................................................................... 22 The solvency and liquidity test........................................................................................ 22 Financial assistance rendered in order to acquire securities............................................ 22 Financial assistance in the context of company loans...................................................... 22 Financial assistance ito s44 vs financial assistance ito s45.............................................. 23 Distributions by a company............................................................................................ 24 Acquisitions of shares as a distribution........................................................................... 25 Capitalisation shares...................................................................................................... 26 Labour law....................................................................................... 26 Study unit 1: General Aspects of Labour Law......................................................... 26 The relevance of labour law............................................................................................ 26 Sources of labour law..................................................................................................... 27 The employment relationship.......................................................................................... 28 The contract of employment........................................................................................... 30 Study unit 2: Legislation....................................................................................... 32 Basic Conditions of Employment Act.............................................................................. 32 Labour Relations Act...................................................................................................... 34 Employment Equity Act.................................................................................................. 39 National Minimum Wage Act........................................................................................... 41 Social protection............................................................................................................ 41 Information law................................................................................ 42 Study unit 1: General aspects pertaining to information law................................... 42 Data protection.............................................................................................................. 42 The Electronic Communications and Transactions Act..................................................... 42 Study unit 2: Protection of personal information act............................................... 43 The Protection of Personal Information Act...................................................................... 43 Study unit 3: Promotion of access to information act 2 of 2000............................... 46 Competition law............................................................................... 47 Study unit 1: General aspects pertaining to competition law.................................. 47 Definition and objects of competition law....................................................................... 47 Competition law in South Africa...................................................................................... 47 The Competition Act....................................................................................................... 48 Agencies responsible for the administration and enforcement of the Competition Act...... 48 Scope of application of the Competition Act.................................................................... 49 Study unit 2: Competition Act 89 of 1998.............................................................. 49 Substantive provisions of the Competition Act................................................................. 49 Exemption from Chapter 2 of the Competition Act........................................................... 50 Procedural matters relating to complaints....................................................................... 51 Remedies and other enforcement actions and procedures.............................................. 51 Insurance The relevance of insurance Losses my occur, such as: - Damage to property. - Destruction of assets. - Legal liability for negligence. - Injury. - Death. Due to uncertain events: - Fire. - Social unrest. - Professional position. - Accident. - Illness. When you are insured, these risks are transferred to the insurer. The insured has to pay a premium. The insurer is to indemnify or provide benefit to the insured if the risk materialises. Insurance defined Insurance is a means of transferring risk by means of contract. The risk is transferred because the insurance contract determines that the insurer will indemnify or otherwise provide a benefit to an insured if a risk defined in the contract occurs. Sources of South African insurance law - The common law - Statutes - Subordinate legislation, ‘soft’ insurance law and alternative dispute resolution The three branches of insurance law Insurance law consists of three branches, namely: - Insurance contract law: A contract between the insurer and the insured, referred to as a policy, forms the basis for the relationship between them. - Statutory regulation of insurers: The law regulated insurers to reduce the risk that they will renege on their undertakings to insured parties. - The law of insurance intermediaries: Intermediaries ordinarily intercede between insurers and insured parties. These intermediaries may facilitate the conclusion of insurance policies, collect and account for premiums on behalf of insurers, or receive, process, or submit claims. 1 Different types of insurance The interest in being protected Indemnity insurance is intended to compensate in whole or in part for a specific financial loss of the insured. The insurer undertakes to indemnify the insured for an economic or financial loss to his or her patrimony. The value of the indemnity will be determined with reference to the actual financial loss caused by the insured event. A common form of indemnity insurance is property insurance or liability insurance. Non-indemnity insurance is not aimed at merely indemnifying the insured for an economic loss at the time when it is suffered. The losses covered by this form of insurance frequently cannot be valued in monetary or at least precise monetary terms. Life and disability insurance are instances of non-indemnity insurance. The duration The Short-term Insurance Act applies only to short-term insurance which equates to indemnity insurance, commonly one year. The Long-term Insurance Act applies to non-indemnity insurance. These policies will not necessarily endure for a very long time. The peril or event insured against Harm caused by events such as fire, death, theft, political instability or motor vehicle accidents is covered in insurance policies. Essentials of an insurance contract The essentiala for an insurance contract are the following: - The insurer must undertake to pay a sum of money or perform some other benefit, - In exchange for an undertaking by the insured to pay a premium or the payment of a premium, - On the happening of an uncertain or unplanned event, and - Which performance will indemnify the insured in the case of indemnity insurance or compensate for materialisation of the risk where non-indemnity insurance is concluded. Formation of an insurance contract Agreement or its equivalent A contract must be concluded by agreement or consensus between the contracting parties. The intermediaries who facilitate the conclusion of insurance contracts will usually not have the authority to conclude insurance contracts on behalf of insurance companies. Insurance contracts are concluded by completing proposal forms or by direct marketing. Proposal forms The form is composed and issued by the insurer but must be completed, signed and submitted by the proposer for insurance. The proposer will answer questions posed in the proposal form that will allow the insurer to determine the risk on concluding the policy. 2 Conclusion of insurance policies by direct marketing Insurance policies are often concluded as a result of direct marketing. The insured will answer a number of questions for example over the phone or on the internet after which a proposal will be made by the insurance company. Cooling-off period The Policyholder Protection Rules allow insured parties to cancel insurance policies, if they decide to do so soon after concluding those policies. (needs to happen within the cooling-off period) For a short-term insurance this period ends 31 days after the date on which post-conclusion disclosures were received. For a long-term insurance, this period ends 14 days after the on which the policy document that must be provided was received. Insurance policies and policy documents An insurance contract does not have to be in writing to be valid. An insurance policy must therefore be distinguished from the policy document that sets out the terms of the policy. The Policyholder Protection Rules require that an insurer must provide the insured with a policy document at the earliest reasonable opportunity after conclusion but no later than 31 days after inception of the policy. Legality If an insurance policy contravenes the common law or legislation, is will not necessarily be void. But and insurance contract must not be illegal or forbidden by statute or be contrary to public policy or to the good morals of society. An illegal policy will be void or at least unenforceable. Disclosures by the insured The law requires that the insured must, before conclusion of the policy, make disclosures to the insurer. If these requirements are not met, the insurer will be able to cancel the insurance contract. Materiality The insurance legislation determines that: ‘a representation or non-disclosure shall be regarded as material if a reasonable, prudent person would consider that the particular information constituting the representation or which was not disclosed, as the case may be, should have been correctly disclosed to the insurer so that the insurer could form its own view as to the effect of such information on the assessment of the relevant risk,’ Within the knowledge of the insured The insured is obliged to disclose all material information that falls within his or her knowledge and all information that he or she should have known if he or she had taken reasonable steps. 3 Disclosures by the insurer or its intermediaries Some of the most significant disclosures that must be made concern: - A reasonable and appropriate general explanation of the nature and material terms of the relevant contract, the type of policy, as well as a reasonable and appropriate general explanation of the relevant policy, - The nature and extent of policy benefits, - The premiums that the insured will pay, how they are constituted, and increases in these premiums, - Fees, charges and commission that will be levied for concluding the policy, - Whether the policy is subject to cooling-off periods, - The insured’s obligation to disclose all material facts, and the consequences if this is not done, and - The fact that the insured must be satisfied about the correctness of information submitted on his or her behalf. Insurance claims Description of the risk insured against A dispute between insurers and insured will have to be resolved by looking at the description of the risk insured in the policy and asking whether the policy covers the risk on which the insured relies for his or her claim. Interpretation of the terms that describe the risk covered It will be considered that the policy was drafted by the insurer. Where the words used in the policy are ambiguous, all other things being equal, the policy will be interpreted in favour of the insured. Where a provision in a policy is ambiguous and one interpretation of the provision in the policy will render it illegal, a court will prefer to interpret it in a manner that will not lead to this result. Limitations and exceptions In the policy, the insurer will describe the risk against which cover is provided. In doing so, the insurer will narrow down the risks for which it becomes liable. Provisions having this effect are limitations of the risks covered. Exception clauses exclude the liability of insurers for situations that would otherwise fall within the description of the risk as limited. In a dispute between the insurer and insured, the onus of proving that a claim is based on an insured risk and is not excluded by a limitation is on the insured. Conversely, the onus of proving that a claim cannot be brought because it falls within an exception is on the insurer. Special insurance risks Insurance policies that cover losses to property mostly exclude liability for harm caused by political unrest and similar risks. 4 Dimensions of the described risk The risk for which the insurer provides cover is usually described with reference to the perils or classes or perils that may cause harm, the object that may be harmed by the peril, and the circumstances in which the risk must materialise. An insurance policy may determine that the insurer will be liable if a particular peril causes particulate harm. Causal link between the peril and the harm Unless the insurance policy states otherwise, it will be accepted that a causal link will exist where an event is the direct or proximate cause of the harm. Where harm is caused by a series of consecutive events, the first of those events will be the proximate cause of the ultimate harm, unless a later cause breaks the chain of events and can be described as the major cause of the harm. Where several events concurrently cause harm, the major cause of the harm will be the proximate cause. It is possible that different events may contribute equally to a loss, in which case they will all be regarded as proximate causes. Insurable interest Insurable interest in indemnity insurance In indemnity insurance, the insured will have an insurable interest in the object insured if he or she stands to lose something of an appreciable commercial value if the object loses its value, or if the insured otherwise loses enjoyment of it. The insured will be allowed to claim the diminution in his or her interest brough about by the peril. Courts are inclined to grant insured parties their claims, because they are usually charged premiums on the bases that they have an interest in the object of insurance or the thing insured. Insurable interests can therefore take on several guises: - An owner of property has an insurable interest to the full value of the property. - A person who has a right to performance also has an insurable interest in that claim. - A person who does not own property but possesses it in good faith, believing that he or she is the owner of the property. - Lawful possession of something has a monetary value even if the possessor does not believe that he or she is the owner of the property. - One spouse will have an insurable interest in the property of the other if they are married out of community of property, if the property is used or controlled by that spouse, or if it is used to benefit the common household. - An insurer will have an insurable interest in restricting increases in his liabilities. Insurable interest in non-indemnity insurance In non-indemnity insurance, the performance of the insurer must make up for the materialisation of the risk, and the interests protected will not necessarily have a commercial value. The insurable interest and its extent will be determined with reference to the time of the conclusion of the policy. 5 - An insured has an unlimited interest in his or her own life and bodily integrity. - An insurer can take out insurance on the life of a spouse for an unlimited amount, and this will probably be extended to other similar relationships. - Parents and children will probably be allowed to take out non-indemnity insurance on each other’s lives. - Partners, shareholders and directors in small companies and employers and employees will also have non-pecuniary interests in each other’s lives. - Creditors have only pecuniary interests in the lives of their debtors. Key-man insurance: Shareholders and directors in a small company or partners in a partnership often take out key- man insurance on the lives of their co-shareholders or partners. These policies primarily serve to ensure that the existing partners, shareholders or members will be able to purchase the interest in the business from the estate of the deceased business associate. Manner in which claims must be brought An insured must meet certain procedural requirements when he or she brings a claim against the insurer. The policy will usually state: - When and how the insurer should be notified of a claim, - When and how a claim should be lodged, and - If the claim is refused or repudiated, the time within which legal proceedings must be instituted. Notice and time-bar clauses A clause that determined a time within which notice of claim has to be given, a claim has to be made, or a claim has to be instituted in court after an insurer has rejected it can cause great hardship on the insured party. Failure to comply with these provisions could mean that the insured will lose his or her claim against the insurer. Where an insurer has decided to repudiate a claim or part of a claim, an insured must be given at least six months after the 90-day period in which he or she may make representations to the insurer to institute proceedings against the insurer. A court is also given the power to condone the late institution of proceedings if it is satisfied, among other things, that good cause exists for the failure to institute legal proceedings and that the clause is unfair to the claimant. Fraudulent claims Insurance claims are often tainted by fraud or dishonesty. The opportunity of earning extraordinary benefits often entices insured parties to commit fraud. - Insured parties may fabricate claims: they may claim losses that they have not suffered or rely on events that gave not taken place. - Insured parties also often exaggerate claims: where an insured risk materialises, the insured may try to claim more than his or her actual loss. - The insured may fabricate evidence to facilitate a legitimate claim. Policy mostly provides that: - A fraudulent insured will lose his or her entire claim if it is tainted by any form of fraud. 6 - He or she will lose all claims against the insurer if he or she makes a claim that is tainted by fraud. - The entire policy will be terminated where the insured commits fraud. Subrogation, cession and contribution The objectives of subrogation include the following: - To prevent the insured from receiving double satisfaction, that is, recovering twice in respect of the same loss, and - To enable the insurer to recoup what has been paid out. Subrogation can operate only if the insured in fact has a remedy against another party to have the insured loss compensated. Three requirements must be met before an insurer can bring a subrogated claim in terms of a duty owed to the insured and brought about by the materialisation of the insured risk: - There must be a valid insurance contract. - The insurer must have indemnified the insured. - The insured’s loss must be fully compensated by the insurer. According to most policies, an insurer is further able to take cession of the insured’s rights against a third party, who has a duty to make good the loss after the insured has been indemnified by the insurer. Cession entails the transfer of a right to performance from one person to another. Where a claim to benefit is ceded to the insurer, the insurer will be the creditor and will have to claim performance in its own name. Contribution occurs where the same risk is insured by more than one insurer, that is, where the insured is doubly insured. An insurer who indemnifies the insured in terms of the right to contribution have a right of contribution for a pro rata part of the amount paid to the insured. Insurance policies will often determine that the insured will have to disclose to the insurer is a risk is also incurred by another insurer. Policies frequently give even wider protection to the insurer. They often provide that an insurer can be held liable only for a pro rata portion of a claim where the risk insured by more than one insurer. Introduction to business forms and partnerships Study unit 1: Introduction to Business Forms Important definitions Sole proprietorship: a business run by a sole person in that person’s own name, and not as a company, close corporation or business trust. Partnership: a relationship resulting from an agreement or a contract; the carrying on of a business, to which each of the partners contributes, in common for the joint benefit of the parties with a view to making a profit. 7 Juristic person: a legal person that does not have a physical existence but possesses its own legal personality which enables it to acquire rights and incur obligations that are separate and distinct from those of the directors and shareholders of the company. Company: a structure that is endorsed by law with the capacity to acquire legal rights and be subject to legal duties. Joint and several liability: when two or more debtors are each liable severally (ie separately), and are all liable jointly, with the effect that the creditor has the option of suing one or more of the debtors severally or all of the debtors jointly for payment of the debt. Limited liability of shareholders and members: the concept that the shareholders of a company or members of a close corporation are not, as such, liable for the debts of the company or the close corporation. Perpetual succession: legal continuity; this term is used to describe the status of a business structure such as a company or close corporation whose legal existence is unaffected by changes in its shareholders or members. Characteristics of a sole trader: - Owner of all assets. - Bearer of all risks. - No separate legal personality. - Raiser of capital. - No registration to start, only one person is needed. - The business dies with the owner. - Payer of tax as individual. Characteristics of a partnership: - Partners share in profit, and their aim is profit. - No separate legal personality. - Shares in risk. - Shares ownership. - Each partner is an agent. - Need a contract to establish and 2+ parties. - Dies with change in partners. - Payer of tax as individual, but VAT as a partnership. Characteristics of a close corporation: - Separate legal entity. - Limited liability. - Members manage the business. - Members have interest within the business. - Each member is an agent. - Incorporation and registration is needed to establish. - Perpetual succession. - Payer of tax. Characteristics of a company: - Separate legal personality. 8 - Limited liability. - Board of directors manage the business. - Shares are issues to gain capital. - Agency is regulated. - Incorporation, registration and compliance is needed. - Perpetual succession. - Payer of tax. Study unit 2: Partnerships A partnership is an association of two or more persons who are contractually bound to one another to operate a business jointly with the main object of making profit for their common benefit, while each partner has to contribute money, property, or services to the joint partnership estate that will be at the disposal of and subject to the risks of the undertaking. Nature of a partnership: Because a partnership has no legal personality, the partnership assets are owned jointly by the partners as co-owners. The partners are jointly liable to the creditors of the partnership. Claims in favour of the partnership must be jointly enforced by all partners. However, partners and third parties are allowed to institute legal proceedings for or against the firm in the name of the firm. Partnership contract: The partnership agreement creates a relationship between the parties that in turn gives rise to continuing rights and duties for the parties inter se. A partner always has the right to represent the partnership and bind the partnership to a contract if the contract is within the scope of the business of the partnership (mutual mandate). There are thus two requirements: 1. the representative of the partnership must be a partner; and 2. the contract must fall within the scope of the business of the partnership. Can be written, oral or tacit. - A consensus needs to be reached about the partnership. - Partners need to have contractual capacity. - Physical and legal possibility. - Formalities: all parties agree. - Suspensive or resolutive conditions need to be met. Two or more parties can enter into a partnership. Share in profit Essentiala = must be shared Incidentalia = how should it be shared Naturalia = default if not agreed (contribution/egal) Share in loss Essentiala = none Incidentalia = exclude all but one + to whom liable Naturalia = default share same way as profit Share in Essentiala = none representation Incidentalia = limit co-partner Naturalia = each partner as long as it is within the scope of the business 9 Share in Essentiala = none ownership Incidentalia = extent of rights + share Naturalia = co-owners in joint undivided shares + default profit If the partnership agreement amended the naturalia of the partnership contract between themselves by way of incidentalia and stipulated that only some of the partners may represent the partnership, the partnership will still be bound to the contract if a partner (even in contravention of the contract) entered into a contract on behalf of the partnership and the contract was within the scope of the business of the partnership. The partnership will not be bound only if the third party knew that the partner with whom he or she interacted did not have the authority to represent the partnership (the third party thus acted mala fides/in bad faith and will "lose" the protection of the application of the mutual mandate that states that a partner can still bind a partnership notwithstanding an agreement to the contrary in the partnership agreement as long as he or she is a partner and the contract is within the scope of the business of the partnership). If the representative is not a partner and/or the contract is not within the scope of the business of the partnership, then the partnership will not be bound to the contract with the third party unless there is express or ostensible authority. Types of partnerships: Universal: - All property owned now and in the future (“marriage”) - All profits derived from all business (“general trading partnership”) Extraordinary: - Protections against liability against third parties. - Silent: protect against personal liability from creditors, but still proportionate towards co-partners. - En commandite: fixed amount of losses + fixed amount of profit Company law Study unit 1: The company as a business structure - Formed as an entity to generate profit or for the public benefit. - It acquires separate legal personality upon incorporation. - Which means it is distinct from its founders and controllers. - It is liable for its own debts. - The assets belong to it. - It can be sued or sue in its own name (separate legal entity). - Shareholders enjoy limited liability. - It enjoys perpetual succession. - Taxed favourable than sole proprietor or partners in a partnership. Separate legal personality: 19 Legal status of companies 10 (1) From the date and time that the incorporation of a company is registered, as stated in its registration certificate, the company (a) is a juristic person, which exists continuously until its name is removed from the companies register in accordance with this Act; (b) has all of the legal powers and capacity of an individual, except to the extent that (i) a juristic person is incapable of exercising any such power, or having any such capacity; or (ii) the company’s Memorandum of Incorporation provides otherwise. Implications of being a separate legal personality: - This means companies are bearers of rights and duties, similar to natural persons. - Companies have rights and duties that are applicable to their nature. - Assets belong to the company itself. - The company is liable for its own debts. - Limited liability of shareholders and directors. - Company’s capacity and power can be limited or restricted by the company’s MOI. Piercing the corporate veil: Section 20(9) (9) If, on application by an interested person or in any proceedings in which accompany is involved, a court finds that the incorporation of the company, any use of the company, or any act by or on behalf of the company, constitutes an unconscionable abuse of the juristic personality of the company as a separate entity, the court may (a) declare that the company is to be deemed not to be a juristic person in respect of any right, obligation or liability of the company or of a shareholder of the company or, in the case of a non-profit company, a declaration; and (b) make any further order the court considers appropriate to give effect to a declaration contemplated in paragraph (a). - This company is viewed separate from shareholders and directors. - Shareholders and directors cannot be held liable for debts of the company, however, in the event that there is an unconscionable abuse (e.g. fraudulent activities) of the company, the courts may suspend or disregard the separate legal personality to see the intentions of the shareholders and directors and to hold them personally liable. Objectives of the companies act: 7. Purposes of Act The purposes of this Act are to (a) promote compliance with the Bill of Rights as provided for in the Constitution, in the application of company law; (b) promote the development of the South African economy by- (i) encouraging entrepreneurship and enterprise efficiency; (ii) creating flexibility and simplicity in the formation and maintenance of companies; and (iii) encouraging transparency and high standards of corporate governance as appropriate, given the significant role of enterprises within the social and economic life of the nation; 11 (c) promote innovation and investment in the South African markets; (d) reaffirm the concept of the company as a means of achieving economic and social benefits; (e) continue to provide for the creation and use of companies, in a manner that enhances the economic welfare of South Africa as a partner within the global economy; (f) promote the development of companies within all sectors of the economy, and encourage active participation in economic organisation, management and productivity; (g) create optimum conditions for the aggregation of capital for productive purposes, and for the investment of that capital in enterprises and the spreading of economic risk; (h) provide for the formation, operation and accountability of non-profit companies in a manner designed to promote, support and enhance the capacity of such companies to perform their functions; (i) balance the rights and obligations of shareholders and directors within companies; (j) encourage the efficient and responsible management of companies; (k) provide for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interests of all relevant stakeholders; and (l) provide a predictable and effective environment for the efficient regulation of companies. Types of companies: 8. Categories of companies (1) Two types of companies may be formed and incorporated under this Act, namely profit companies and non-profit companies. (2) A profit company is- (a) a state-owned company; or (b) a private company if- (i) it is not a state-owned company; and (ii) its Memorandum of Incorporation- (aa) prohibits it from offering any of its securities to the public; and (bb) restricts the transferability of its securities; (c) a personal liability company- (i) it meets the criteria for a private company; and (ii) its Memorandum of Incorporation states that is a personal liability company; or (d) a public company, in any other case. State-owned company: - Owned by the state or government. - Minister of public enterprises is the shareholder. - Ought to be operated like any other business. - Aim to make a profit. - They ought to aid the economic development of the country. - Name ends with SOC Ltd. - It must have 3 or mor directors. - Must appoint auditor, company secretary, audit committee, and social and ethics committee. Public company: 12 - Shares are transferable to the public. - Name ends with Ltd. - It must have 3 or more directors. - Must appoint auditor, company secretary, audit committee, and may be required to appoint the social and ethics committee. - Must comply with IFRS. - Financial statement must disclose remuneration and benefits received by directors and prescribed officers. - It can be incorporated by one person or more. Private company: - MOI prohibits transferability of shares to the public and transfer of shared is restricted. - Name ends with (Pty) Ltd. - Can be formed by one person. - May have one or more directors. - If they are economically and socially impactful because of their annual turnover, size of workforce or activities or hold assets in a fiduciary capacity and the value exceeds R5 million, will be required to have their financial statements audited and appoint the social and ethics committee. Personal liability company: - Meets the criteria of private companies. - MOI provides that current and past directors together with company are jointly and severally liable for liabilities incurred/ contracted during their term of office. - Shares not transferable to the public. - Name ends with Inc. - It is usually used by professional persons. - Can be formed by one or more persons. - Can have one or more directors. - If they are economically and socially impactful because of their annual turnover, size of workforce or activities or hold assets in a fiduciary capacity and the value exceeds R5 million, will be required to have their financial statements audited and appoint the social and ethics committee. Non-profit company: - Aim is not to make profit. - Aim is for public benefit, cultural or group benefits. - Income and property not distributed to members and directors. - Remuneration may be paid for work done, or payment made for goods delivered. - On winding up, net assets are distributed to another NPC that has similar objects. - Generally, not subject to extended accountability and transparency. - Name ends with NPC. - Formed by 3 persons. - Must have 3 directors or more. - Can have members. External companies: - These are foreign companies that are registered in a foreign jurisdiction. 13 - They do business in South Africa. - They should also be registered as external companies in South Africa. - They are required to submit annual returns to the CIPC (companies and intellectual property commission) - Register and maintain an office in SA. - Discloses names of directors. - Disclose address of principal office outside of RSA. - Provide name of a person who will accept service of documents in SA. Domesticated company: - A foreign company whose registration has been transferred to SA. - This is subject to strict requirements. - Once registration is transferred, the company exist as a company that has been incorporated in terms of the Act. - This does not mean that it is a new entity – perpetual succession is intact. - The application must be accompanied by the prescribed form, fee, MOI and recent financial statements. Study unit 2: Registering a company Formation and compliance with the law The effect and process of registration Section 14 Registration of company (1) As soon as practicable after accepting a Notice of Incorporation in terms of section 13(1), or an application for the domestication of a foreign company in terms of section 13(5), the Commission must- (a) assign the company a unique registration number; and (b) subject to subsection (2) – (i) enter the prescribed information concerning the company in the companies register; (ii) endorse the Notice of Incorporation, and, if applicable, the copy of the Memorandum of Incorporation filed with it, in the prescribed manner; and (iii) issue and deliver to the company a registration certificate in the prescribed manner and form, dated as of the later of- (aa) the date on, and time at, which the Commission issued the certificate; or (bb) the date, if any, stated by the incorporators in the Notice of Incorporation. The effect and process of registration - After the acceptance of the Notice of Incorporation (NOI) by the CIPC (Commission) - The Commission must assign a unique registration number. - Enter certain information in companies register including the company name. - Endorse the NOI and MOI. - Issue and deliver a registration certificate. - The certificate is evidence that registration requirements have been complied with. - Once the certificate is issued the company becomes a separate legal person. 14 Process of incorporation Section 13 Right to incorporate company or transfer registration of foreign company (1) One or more persons, or an organ of state, may incorporate a profit company, and an organ of state, a juristic person, or three or more persons acting in concert, may incorporate a non-profit company, by- (a) completing, and each signing in person or by proxy, a Memorandum of Incorporation- (i) in the prescribed form; or (ii) in a form unique to the company; and (b) filing a Notice of Incorporation, in accordance with subsection (2). (2) The Notice of Incorporation of a company must be- (a) filed in the prescribed manner and form, together with the prescribed dee; and (b) accompanied by a copy of the Memorandum of Incorporation, subject to any declaration contemplated in section 6(14)(b). Notice of incorporation: The purpose is to inform the Commission of the intention to incorporate for the purposes of registration. It contains the following: - Name of the company, - Initial directors, - Registered office, - Date of financial year end, and - Notice of appointment of an auditor. Memorandum of incorporation (S15): - It is the founding document of the company. - It is the sole governing document. - It contains the rights and duties of shareholders, directors and others within the company and in relation to the company. - It deals with matters that are not dealt with by the Act. - It alters alterable provisions of the Act. - It changes unalterable provisions by providing stricter provisions than unalterable provisions. - It regulated powers of the company, amendment of Moi, ability to create rules, securities (shares), shareholders meetings, powers of the board, etc… - The provisions of the Moi must be consistent with the Act. - If a provision if not consistent with the Act, it is invalid. Company rules by the board Section 15(3) (3) Except to the extent that a company’s Memorandum of Incorporation provides otherwise, the board of the company may make, amend or repeal any necessary or incidental rules relating to the governance of the company in respect of matters that are not addressed in this Act or the Memorandum of Incorporation, by- (a) publishing a copy of those rules, in any manner required or permitted by the Memorandum of Incorporation, or the rules of the company; and (b) filing a copy of those rules. 15 Shareholders agreements Section 15(7) (7) The shareholders of a company may enter into any agreement 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 Memorandum of Incorporation, and any provision of such an agreement that is inconsistent with this Act or the company’s Memorandum of Incorporation is void to the extent of the inconsistency. Ring fenced companies Section 15(2) (b) contain any restrictive conditions applicable to the company, and any requirement for the amendment of any such condition in addition to the requirements set out in section 16. (c) Prohibit the amendment of any particular provision of the Memorandum of Incorporation; or… - The MOI of the company may contain restrictive conditions and additional requirements for amendment. - It may also prohibit amendment of any provision of the MOI. - If so, the name of the company should be suffixed with RF (Ring fenced). - NOI must draw third parties to such provisions. - This shows how to doctrine of constructive notice is partially applicable. - A contract that is contrary to the restrictive conditions will be invalid. Amending the MOI 16. Amending the Memorandum of Incorporation (1) A company’s Memorandum of Incorporation may be amended- (a) in compliance with a court order in the manner contemplated in subsection (4); (b) in the manner contemplated in section 36(3) and (4); or (c) at any other time if a special resolution to amend it- (i) is proposed by- (aa) the board of the company; or (bb) shareholders entitled to exercise at least 10 percent of the voting rights that may be exercised on such a resolution; and (ii) is adopted at a shareholders meeting, or in accordance with section 60, subject to subsection (3). (2) A company’s Memorandum of Incorporation may provide different requirements than those set out in subsection (1)(c)(i) with respect to proposals for amendments. (3) … - By order of court or authorisation and classification of shares in terms of section 36. - Ny special resolution. - If proposed by the board or shareholders exercising 10% or more of the voting rights in the matter. - Notice of amendment must be filed. - It must be accompanied by a new MOI or amended MOI. - A fee will be paid. 16 Alterable and unalterable provisions Unalterable provisions: Section 15(2)(d) provides that the MOI may not include any provisions that negates, restricts, limits, qualifies, extends or otherwise alters the substance or effect of an unalterable provision of this Act, except to the extent contemplated in paragraph (a)(iii). - These are provision of the Act that cannot be changed except when made stricter. Alterable provisions: These are provisions that can be changed by MOI to cater for specific needs of the company. Anti-avoidance provisions s6 Section 6 provides that - Agreements, - MOI provisions, - Transaction or resolutions Can be declared to be primarily or substantially intend to defeat or reduce the effect of a prohibition or requirements of an unalterable provision and void to the extent that they defeat and reduce the effect of a prohibition or requirement of an unalterable provision. Substantial compliance Section 6(8) If a form of document, record, statement or notice is prescribed in terms of this Act for any purpose- (a) it is sufficient if the person required to prepare or complete such a document, record, statement or notice does so in a form that satisfies all of the substantive requirements of the prescribed form; and (b) any deviation from the design or content of the prescribed form does not invalidate the action taken by the person preparing or completing that document, record, statement or notice, unless the deviation- (i) negatively and materially affects the substance of the document, record, statement or notice; or (ii) is such that it would reasonably mislead a person reading the document, record, statement or notice. Study unit 3: Pre-incorporation contracts 21. Pre-incorporation contracts (1) A person may enter into a written agreement in the name of, or purport to act in the name of, or on behalf or, an entity that is contemplated to be incorporated in terms of this Act, but does not yet exist at the time. (2) A person who does anything contemplated in subsection (1) is jointly and severally liable with any other such person for liabilities created as provided for in the pre- incorporation contract while so acting, if- (a) the contemplated entity is not subsequently incorporated; or 17 (b) after being incorporated, the company rejects any part of such an agreement or action. (3) If, after its incorporation, a company enters into an agreement on the same terms as, or in substitution for, an agreement contemplated in subsection (1), the liability of a person under subsection (2) in respect of the substituted agreement is discharged. (4) Within three months after the date on which a company was incorporated the board of that company may completely, partially or conditionally ratify or reject any pre- incorporation contract or other action purported to have been made or done in its name or on its behalf, as contemplated in subsection (1). (5) If, within three months after the date on which a company was incorporated, the board has neither ratified nor rejected a particular pre-incorporation contract, or other action purported to have been made or done in the name of the company, or on its behalf, as contemplated in subsection (1), the company will be regarded to have ratified that agreement or action. (6) To the extent that a pre-incorporation contract or action has been ratified or regarded to have been ratified in terms of subsection (5)- (a) the agreement is as enforceable against the company as if the company had been a party to the agreement when it was made; and (b) the liability of a person under subsection (2) in respect of the ratified agreement or action is discharged. (7) If a company rejects an agreement or action contemplated in subsection (1), a person who bears any liability in terms of subsection (2) for that rejected agreement or action may assert a claim against the company for any benefit it has received, or is entitled to receive, in terms of the agreement or action. - 3 requirements: written contract, concluded in the name or on behalf of the company (as an agent), the BoD needs to ratify within 3 months after incorporation. - If the board does not ratify within three months > deemed ratification Study unit 4: The actions of the company: Capacity and representation Capacity and authority of a company Capacity: what a company is able to do in the sphere of business - A company can do anything that a normal human being can do (excluding things that are unique to humans, such as marriage, drafting a will, etc…) - A company is also able to restrict its own capacity. Authority: - A contract between a company and a third party concluded by a person who has the authority to act on behalf of the company is always valid based on the nature of the contract – whether the contract falls within or outside the scope of the business of the company or whether the third party knew that the contract is outside the capacity of the company, is irrelevant. The exception is where the company tries to do something that by its nature is impossible, but then the contract will be void based on physical impossibility. - Ultra vires (outside the scope of capacity): Ultra vires doctrine: - In the past, companies had the capacity to conclude contracts that were provided for in their objects clause. 18 - Transactions that were outside the scope of the company were void or invalid. - BUT ultra vires was unfair to third parties who contracted with the company. - Section 19 and 20 of the Current Act attempts to remedy the injustice presented by the ultra vires doctrine. - Section 19(1)(b) provides that a company has all the legal powers and capacity of a natural person except to the extent that the company cannot exercise such powers or cannot have such capacity. - However, section 20(1) provides an imperative provision by providing that in instances where the MOI of the company prohibits, limits or restricts any actions by the company or directors do not have the capacity/authority are nonetheless valid between the company and third parties. - Section 20(1) provides that the contract is not valid, because the MOI prohibits a transaction or director lacks authority because the MOI prohibits a transaction. - The transaction is valid between the company and the third party as long as it is not against the Act. - Section 20(1) provides that such contracts are only invalid between company and shareholders, prescribed officers and director or between shareholders and directors or prescribed officers. - This means that the company can use the fact that the contract is prohibited in the MOI to hold a director who acted contrary to the MOI personally liable to damages. In such circumstances, directors will be in breach of their fiduciary duty. Ratification: Section 20(2): If a company‟s Memorandum of Incorporation limits, restricts or qualifies the purposes, powers or activities of that company, or limits the authority of the directors to perform an act on behalf of the company, the shareholders, by special resolution, may ratify any action by the company or the directors that is inconsistent with any such limit, restriction or qualification, subject to subsection (3). Restraint – interdict: Section 20(4): One or more shareholders, directors or prescribed officers of a company, or a trade union representing employees of the company, may apply to the High Court for an appropriate order to restrain the company from doing anything inconsistent with this Act. Section 20(5): One or more shareholders, directors or prescribed officers of a company may apply to the High Court for an appropriate order to restrain the company or the directors from doing anything inconsistent with any limitation, restriction or qualification contemplated in subsection (2), but any such proceedings are without prejudice to any rights to damages of a third party who- (a) obtained those rights in good faith; and (b) did not have actual knowledge of the limit, restriction or qualification. - This does not affect the damages of the third party, provided the third party acted in good faith and had no knowledge that the MOI restricts the transaction. Claim for damages by each shareholder: 19 Section 20(6): Each shareholder of a company has a claim for damages against any person who intentionally, fraudulently or due to gross negligence causes the company to do anything inconsistent with- (a) this Act; or (b) a limitation, restriction or qualification contemplated in this section, unless that action has been ratified by the shareholders in terms of subsection (2). Agency, representation and form of authority - In terms of section 66 of the Act, the board of a company has the power to control and bind the company > the board is an agent of the company. - Companies can also be bound by agents of the company who are granted actual authority which is express authority or implied authority. - Agents can also bind companies based on ostensible authority where the company created a false impression that the agent has authority whereas this is not the case > this is referred to as estoppel. - A company must be represented by a natural person. The person representing the company must have the authority to represent the company otherwise the company will not be bound to the contract. - Nobody but an agent of the company can enter into contract on behalf of a company and bind the company to that contract. A company can therefore enter into any contract, and will be bound to that contract, as long as the representative is authorised to enter into contracts on behalf of the company. - These are two instances where a person will have actual authority: - Where a person is expressly authorised to act on behalf of the company by someone who has the authority to give that authorisation. - Where a person is impliedly/tacitly authorised. Express authority is granted to an agent in the MOI or by a board resolution. Implied authority is when an officer in the company performs the functions of the office. - The board may appoint one director to represent the board in concluding contracts or appoint another officer. - Agents must accept delegation of powers. Estoppel - Agents can also bind companies on ostensible authority where the company created a false impression that the agent has authority whereas this is not the case. Requirements of Estoppel: - The company must have intentionally or negligently misrepresented to the third party. - He misrepresentation must be serious enough to reasonably mislead the third party. - The third party must have been led to act because of the misrepresentation. - The third party must have suffered damages due to acting based on misrepresentation. Doctrine of constructive notice - In the past, third parties concluding contracts with the company, were required to know the contents of the constitutive documents due to the filing at the commission and provisions of access at the office of the company. 20 - It has been partly abolished in the Act. - Some companies’ MOI’s contain restrictive conditions on: - The capacity of the company and authority of those who are representing companies, - Requirements of amendment in addition to section 16 requirements, and - Prohibition of the amendment of any provision in the MOI. - The NOI and NOA should inform third parties about such provisions > draw the attention of third parties to such clauses. - These companies must end with RF > ring fenced. - In personal liability companies, third parties are also deemed to know that current and past directors are jointly and severally liable together with the company for debts that were contracted during their terms of office. Turquand rule in terms of common law A company will still be bound to a contract notwithstanding that an internal rule or process was not complied with – as long as the person representing the company had the actual authority to enter into contracts in the first place, but that authority is subject to an internal condition. The person therefore had potential authority. The abovementioned is called the Turquand-rule and protects third parties by adding compliance with the last requirement to enter into the contract in respect of an internal rule or process that was not followed: third party > representative > company > internal rule. - Common law Turquand rule allows third parties when acting in good faith to assume that the internal requirement has been complied with. - This means that the company will be bound even if the internal requirement has not been complied with. - Third parties need not make further inquiries. - This means the authority of the company’s representative will be defective. - Turquand rule only protects bona fide third parties > if a third party knows or deemed to know that the company’s representative has no authority or circumstances force the third party inquire, there will be no protection. - Turquand will be applicable when the third party concludes a contract with the board, managing director, directors whose position associated with the contract concluded or a subordinate official. Statutory turquand tule (s20(7)): (7) A person dealing with a company in good faith, other than a director, prescribed officer or shareholder of the company, is entitled to presume that the company, in making any decision in the exercise of its powers, has complied with all of the formal and procedural requirements in terms of this Act, its Memorandum of Incorporation and any rules of the company unless, in the circumstances, the person knew or reasonably ought to have known of any failure by the company to comply with any such requirement. > Estoppel and turquand rule will not apply in RF companies. Study unit 5: Corporate governance – shareholders Section 57(1) defines a shareholder as a person who is entitled to exercise any voting rights in relation to a company, irrespective of the form, title or nature of the securities to which those voting rights are attached. 21 Section 1 defines a shareholder as a holder of a share issued by a company and entered as such in the certificated and uncertificated securities register. Companies have two organs: shareholders and the board of directors. The interrelation between the directors and the shareholders of a company: - They each have their prerogatives as organs of the company. - The board is the controlling mind of companies, it is bestowed with the responsibility to manage the business and affairs of the company. - The shareholders also have to a certain extent some powers to control the affairs of companies. - These organs cannot usurp each other’s powers. How do companies raise money/capital to fund business operations: 1. Through securities: - Issuing of shares - Dept instruments 2. Through loans from financial service providers. 3. Through the provision of goods and services. Securities: means any shares, debentures or other instruments, irrespective of their form or title, issued or authorised to be issued by a profit company. Shares: means one of the units into which the proprietary interest in a profit company is divided. (It is moveable and transferrable ito the Act) Debentures: a written acknowledgement that you owe another person. Shares Form of property: bundle of personal rights. S35 provides that a share issued by a company is movable property, transferable in any manner provided for or recognised by this Act or other legislation. What do you receive in becoming a shareholder: - A right to vote (control and management) - Share in profit when dividends are declared. - Shre in net capital upon winding of the company (residue) How are shares transferred - Where an existing shareholder sells his/her share to a third party, the transfer of ownership occurs through cession because this is how rights are transferred from one owner to another. - As these rights are intangible, the agreement to transfer is enough to validly cede the rights pertaining to a share, as long as there was an intention to transfer the rights and receive. - You do not need to also deliver the share certificate because the share certificate only constitutes proof/evidence. - You might have the rights associated with the shares, but you will not be able to exercise all those rights until you are a shareholder, and for that your name needs to be entered into the register referred to below. 22 - There must be an agreement to transfer, then there must be the execution of a deed of transfer, and then the transfer must be registered. - The transfer must first be registered in the company’s securities register before the shareholder can exercise all the rights associated with the share. - The company may prescribe an instrument of transfer to evidence that the transfer took place, or it can occur by way of operation of law. Different classes of share 1. Preference shares: This type of share can only exist if another class of shares – ordinary – exists against which the rights of this class can be compared and have a higher priority. Preference shareholders receive dividends before all other shareholders, and they receive a fixed dividend. Types of preference shares: - Participating preference shares: right to participate in surplus profit, after all shareholders have received their dividends. - Cumulative preference shares: right to claim dividend of previous year, if the company did not make enough profit. This means that in the year that the company declares dividends, they will receive dividends for all previous years that are in arrears as well as the current year. - A preference in respect of surplus capital: preference in respect of surplus capital when a company is wound up. 2. Ordinary shares: The norm against which other classes of share’s rights are usually compared. These shareholders are entitled to vote, share in profit, and share in the capital and left- over assets after the company has been wound-up. 3. Deferred shares: Founder’s shares, receive dividends after ordinary shareholders. 4. Redeemable shares: These are shares that confer a right to the company or the holder of the shares for the company to repurchase them from the holders. Authorisation of shares (s36) - The MOI of the company must provide the classes of share and number of shares that the company is authorised to issue. - Must set out with respect to each class, the rights, limitations and preferences of those shares. - May set out a number of unclassified shares which can be classified by the board. - May set out a number of shares without rights, limitations and preferences. - The authorised shares, class, number and rights, limitations, may be changed ito of the amendment of the MOI by a special resolution or by the board. - The board may decrease or increase the number of shares, reclassify, classify, determine rights, limitations and preferences of unissued shares. If the board does this, the company must file the NOA of MOI and specifying the effected changes. Issuing of shares (s38) The board of directors issues shares for consideration, but these must be offered in line with the provisions of s36 of the Act and the MOI. 23 Normally, this power to issue shares vests in the board of directors alone by virtue of s38, but ito s41, where there is a risk of abuse, shareholders also have a say in issuing shares – this is where shares are to be issued: - To the company’s director or prescribed officer, a future director or prescribed officer or his or her nominee. - A person related or interrelated to the company or the company’s director or prescribed officer or his or her nominee. Under these circumstances, the shareholders have to approve the issuing of the shares to these persons by way of a special resolution. Subscription of shares 39. Subscription of shares (1) This section- (a) does not apply to a public company or state-owned company, except to the extent that the company’s Memorandum of Incorporation provides otherwise; and (b) applies to a private company or personal liability company with respect to any issue of its shares, other than- (i) shares issued- (aa) in terms of options or conversion rights; or (bb) as contemplated in section 40(5) to (7); or (ii) capitalisation shares issued as contemplated in section 47. (2) If a private company proposes to issue any shares, other than as contemplated in subsection (1)(b), each shareholder of that private company has a right, before any other person who is not a shareholder of that company, to be offered and, within a reasonable time to subscribe for, a percentage of the shares to be issued equal to the voting power of that shareholder’s general voting rights immediately before the offer was made. (3) A private or personal liability company’s Memorandum of Incorporation may limit, negate, restrict or place conditions upon the right set out in subsection (2), with respect to any or all classes of shares of that company. (4) Except to the extent that a private or personal liability company’s Memorandum of Incorporation provides otherwise – (a) in exercising a right in terms of subsection (2), a shareholder may subscribe for fewer shares than the shareholder would be entitled to subscribe for under that subsection; and (b) shares not subscribed for by a shareholder within the reasonable time contemplated in subsection (2), may be offered to other persons to the extent permitted by the Memorandum of Incorporation. - The board of the private company may decide to issue shares in order to fund the operations of the company. - In a private company and personal liability company before shares can offered to outsiders, they should be offered first within reasonable time to existing shareholders pro rate their shareholding in the company before the offer is made. - This does not apply to shares issued in terms of: - Options or conversion rights - S40(5)-(7) – where shares are transferred ito of a negotiable instrument or agreement where the consideration for the shares will be received or realised by the company in the future date. 24 - Capitalisation shares - Business rescue - Shares that are not taken by the existing shareholders can be offered to outsider as per the MOI. - The Moi of the company can negate, limit or restrict the pre-emptive. - The transfer of shares contrary to the pre-emptive right is void. - The aim of the right is to avoid a dilution of the voting rights of the existing shareholders and to have a say as to who joins the company. Consideration for shares and ownership of shares (s40) - The board may issue authorised shares for adequate consideration only. - Adequate consideration is determined by the board. - May only be challenged ito of breach of directors’ duties/standards of conduct as provided in s76 and s77. - When shares are fully paid, the company must transfer the shares and register the shareholder in the shareholders register – ownership transferred. - In the event that the company will receive consideration later, after the date the shares are the be issued, in other words the consideration will accrue to the company later. - The company should transfer the shares to a third party and those shares are to be held in a trust and later transferred to a subscribing party ito of the trust agreement. Holder of beneficial interest in a share - A person on whose behalf shares are held or a person who is married in community of property with the person on whose behalf shares are held. - Or a parent or minor who holds beneficial interest. - Or a person acts in terms of an agreement with another person who has beneficial interest, and the agreement is about cooperation between them for acquisition, disposal or any other matter relating to beneficial interest in that security. - Is holding a company of a company that has a beneficial interest in the security. - Is a person who is entitled to exercise control at the general meeting of a juristic person that has beneficial interest in the security. - In public companies where a share is registered in the name of a person who is not the beneficial holder of the interest, the nominee must: - Disclose the identity of a person on whose behalf the shares are held. - The identity of each person with beneficial interest in the shares so held. Shareholder and a company iro disclosure of shareholding: - A company that knows or has a cause to reasonably believe that any of its securities are held by a nominee on behalf of a person who holds beneficial interests. - May by notice in writing requires such person to: - Confirm or deny - Provide particulars of the extent of beneficial interest held during the three preceding the notice. - Disclose the identity of persons with beneficial interest in securities held by them. - The info should be provided no later than 10 business days after receipt of notice. - Regulated companies which are, public companies and private companies that have transferred more than 10% of shares in the preceding 24 months must: - Establish and maintain a register of disclosures. 25 - Publish in their financial statements if required to be audited, a list of persons with beneficial interest equal to 5% or more of the total number of securities of that class and the extent of beneficial interest. The legal position and requirements for the offering of securities on a primary and secondary market: Primary offering: when shares are offered to the public by the company or on behalf of the company to raise capital. - A primary offering of listed shares should be offered ito of the JSE requirements. - A primary offering of unlisted shares to the public should be accompanied by a document knows as a prospectus (s100). - Prospectus: S100(2) Every prospectus is subject to the requirements and provisions of sections 102 to 111 and, in addition, must- (a) contain all the information that an investor may reasonably require to assess- (i) the assets and liabilities, financial position, profits and losses, cash flow and prospects of the company in which a right or interest is to be acquired; and (ii) the securities being offered, and rights attached to them; and (b) adhere to the prescribed specifications. - Directors will be liable for untrue statements. Secondary offering: when shares of the company are offered to the public by shareholder or on behalf of a shareholder. - Listed shares are offered ito the JSE requirements. - Unlisted must be accompanied by a prospectus that accompanied the primary offering with relevant updates or written statement which contains the state of affairs in the company and the particulars of the offer. - The person who made the offer will be liable for untrue statements. AGM vs general meeting of shareholders (s61) - AGM’s and General meetings are platforms where shareholders exercise their control of companies. They can steer the company to a particular direction. - Annual General Meeting are held once a year and there are specific matters that must be dealt with in the AGM. - General meetings are held as and when there is a need, for instance to refer a matter to shareholders, where the MOI requires it or where there is a demand from shareholders to hold such a meeting. - A public company must hold its AGM no more than 18 months after its date of incorporation. - Subsequent AGM should be held once a year and not be more than 15 months after the last AGM. Matters to be transacted at the AGM meeting: - Directors report. - Audited financial statement for the preceding financial year. - Audit committee report. - Election of directors ito the Act or MOI. - Appointment of an auditor for ensuing year. 26 - Appointment of an audit committee. - Any matter brought by shareholders. The required quorum for a meeting (s64): - For a meeting to be properly constituted or to be compliant with the quorum, at least holders of 25% of voting rights in a particular matter should be present. - Despite the presence of holders holding 25%, in a company with more than two shareholders, you need at least three shareholders for a meeting to start. - If 25% is not met within 1 hour after the appointed time of the meeting, the meeting is postponed for next week without the provision of another notice provided the venue remains the same. This can be changed by the MOI. Votes quorum vs persons quorum: Votes quorum: voting rights present 25% of the voting rights. Persons quorum: persons required to be present in meeting. The resolutions taken at meetings Resolution to be voted on by shareholders should be sufficiently clear and specific and should include sufficient information to allow a shareholder to decide whether to take part or not. Decisions or resolutions are taken by voted in person or by proxy. Special resolutions: - Major decisions such as amendment of MOI and amalgamation or winding up. - Requires 75% voting rights or more. - This can be increased or decreased in the MOI. - However, there should always be a difference of 10% between special resolution and ordinary resolution. - Note for matters that require a special resolution in terms of the Act, the required votes for special resolution cannot be decreased as that would amount to an alteration of unalterable provisions. - We know that when you alter an unalterable provision, you have to provide a higher standard. Ordinary resolution: - Simple resolutions in meetings. - 51% or more. - Can be increased in the MOI. - However, there should always be a difference of 10% between special resolution and ordinary resolution. The rules to set a higher or lower requirement for a special resolution: - There should always be a difference of 10% between special resolution and ordinary resolution. 27 - Note for matters that require a special resolution in terms of the Act, the required votes for special resolution cannot be decreased as that would amount to the alteration of unalterable provision. - When you alter an unalterable provision, you have to provide a higher standard. A shareholder’s right to be represented by a proxy A shareholder who is not able to attend meetings can appoint a proxy to act on behalf of the shareholder. The proxy will be able to participate, speak and vote on behalf of the shareholder. The proxy also has the authority to give consent or withhold consent on behalf of the shareholders in terms of section 60. Proxy appointment should be in writing, dated and signed by a shareholder. It is valid for 1 year. It may be longer or shorter. It can be revoked or expire before lapse of 1 year. Shareholders can act other than at a meeting A company can circulate a resolution to its shareholder for them to decide on a resolution in writing or through electronic communication. The shareholders will decide by a written consent or through electronic communication. Communication by shareholders should be provided within 20 days after resolution was submitted to them. Such decisions will be adopted if they have been supported by the required majority. The decisions taken in this manner have the same effect as decisions decided in a meeting. Study unit 6: Corporate governance – Directors A director is a: - Person who is a member of the board as intended in s66 of the Act. - An alternate director. - Person who occupies the position of a director or alternate director. - The latter widens the scope and thus includes de facto and de jure directors. A prescribed officer is a person who exercises executive control over or management over the whole or significant portion of the business of the company. Board of directors: - Directors as they are bestowed with the management and control of companies, work together as a group. - The BoD is a group of directors acting together as a unit in managing and controlling a company. - They can appoint one of the directors as managing director to act on behalf of the company with third parties. 28 The role of the board of directors: Subject to the MOI and the Act, - Directors act on behalf of companies as agents. - Directors hold assets of the company as trustees (fiduciary capacity). - Directors, like managing partners, control/manage companies. - Although their role and position are analogous to the above their relationship with the company is sui generis (unique). They ensure that companies achieve their objectives by ensuring there is/are: - Leadership - Strategy - Organisational structure - Decision making - Ethics and values They have to comply with the prescribed standards of conduct when fulfilling their function The role of the memorandum of incorporation (MOI) in relation to the directors: - The fulfilment of the functions of directors is subject to the MOI. - The MOI is the constitutive document of a company. (It is subject to the Companies Act, 2008). - MOI may curtail some powers of directors. The composition of the board of directors: (2) The board of a company must comprise- (a) in the case of a private company, or a personal liability company, at least one director; or (b) in the case of a public company, or a non-profit company, at least three directors, in addition to the minimum number of directors that the company must have to satisfy any requirement, whether in terms of this Act or its Memorandum of Incorporation, to appoint an audit committee, or a social and ethics committee as contemplated in section 72(4). (3) A company’s Memorandum of Incorporation may specify a higher number in substitution for the minimum number of directors required by subsection (2). (7) A person becomes entitled to serve as a director of a company when that person – (a) has been appointed or elected in accordance with this Part, or holds an office, title, designation or similar status entitling that person to be an ex officio director of the company, subject to subsection (5)(a); and (b) has delivered to the company a written consent to serve as its director. (8) Except to the extent that the Memorandum of Incorporation of a company provides otherwise, the company may pay remuneration to its directors for their service as directors, subject to subsection (9). (9) Remuneration contemplated in subsection (8) may be paid only in accordance with a special resolution approved by the shareholders within the previous two years. The election of directors: - A person is elected as director by holders of shares who can exercise voting rights. 29 - The term can be indefinite or set out in the MOI. - The board may also appoint an eligible person to fill vacancy until election is held. - The MOI can provide that shareholders of a profit company other than SOC, can elect 50% of directors and 50% of alternate directors. - The MOI can provide the name of a person who can appoint or remove directors. - The MOI can provide that a person can be an ex-officio director by virtue of holding another office in the company. E.g. CFO is automatically a director of the company. Qualifications: - The Act prescribed no specific qualifications. - However, the MOI may stipulate specific qualifications. - A director should be elected and provide consent to act as a director. Removal of a director: 71. Removal of directors (1) Despite anything to the contrary in a company’s Memorandum of Incorporation or rules, or any agreement between a company and a director, or between any shareholders and a director, a director may be removed by an ordinary resolution adopted at a shareholders meeting by the persons entitled to exercise voting rights in an election of that director, subject to subsection (2). (2) Before the shareholders of a company may consider a resolution contemplated in subsection (1)- (a) the director concerned must be given notice of the meeting and the resolution, at least equivalent to that which a shareholder is entitled to receive, irrespective of whether or not the director is a shareholder of the company; and (b) the director must be afforded a reasonable opportunity to make a presentation, in person or through a representative, to the meeting, before the resolution is put to a vote. (3) If a company has more than two directors, and a shareholder or director has alleged that a director of the company- (a) has become- (i) ineligible or disqualified in terms of section 69, other than on the grounds contemplated in section 69(8)(a);or (ii) incapacitated to the extent that the director is unable to perform the functions of a director, and is unlikely to regain that capacity within a reasonable time; or (b) has neglected, or been derelict in the performance of, the functions of director, the board, other than the director concerned, must determine the matter by resolution, and may remove a director whom it has determined to be ineligible or disqualified, incapacitated, or negligent or derelict, as the case may be. The ineligibility and disqualification of directors: 69. Ineligibility and disqualification of persons to be director or prescribed officer (2) A person who is ineligible or disqualified, as set out in this section, must not- (a) be appointed or elected as a director of a company, or consent to being appointed or elected as a director; or (b) act as a director of a company. 30 (3) A company must not knowingly permit an ineligible or disqualified person to serve or act as a director. (4) A person who becomes ineligible or disqualified while serving as a director of a company ceases to be entitled to continue to act as a director immediately, subject to section 70(2). (7) A person is ineligible to be a director of a company if the person- (a) is a juristic person; (b) is an unemancipated minor, or is under a similar legal disability; or (c) does not satisfy any qualification set out in the company’s Memorandum of Incorporation. (8) A person is disqualified to be a director of a company if- (a) a court has prohibited that person to be a director, or declared the person to be delinquent in terms of section 162, or in terms of section 47 of the Close Corporations Act, 1984 (Act No. 69 of 1984); or (b) subject to subsections (9) to (12), the person- (i) is an unrehabilitated insolvent; (ii) is prohibited in terms of any public regulation to be a director of the company; (iii) has been removed from an office of trust, on the grounds of misconduct involving dishonesty; or (iv) has been convicted, in the Republic or elsewhere, and imprisoned without the option of a fine, or fined m

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