COMPANIES.pdf

ODR NOTES Semester Test 2 Date à 18 October 2023 Scope à Study Unit: 13, 14, 15 Exam Date à 20 November 2023 Sc...

ODR NOTES Semester Test 2 Date à 18 October 2023 Scope à Study Unit: 13, 14, 15 Exam Date à 20 November 2023 Scope à Study Unit: 1, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18 GOODLUCK STUDYING! J These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test.  STUDY UNIT 1: INTRODUCTION TO BUSINESS STRUCTURES *** EXAM WORK *** INTRODUCTION TO COMPANIES COMPANIES LEGISLATION - Companies Act 71 of 2008 (CA). LEGAL PERSONALITY - Separate legal entity à separate from owners. SEQUESTRATION OR LIQUIDATION? - Liquidation à assets are sold. MANAGEMENT - S66 CA à Board of directors manage the company. REPRESENTATION - Board of directors OR an agent can enter into contracts on behalf of the company. FORMALITIES - Registering the company. OWNERSHIP - Shareholders own the company - For non-profit companies à members. CREATION - Memorandum of Incorporation (MOI) is compulsory. - Shareholders agreement is optional. PERSONAL LIABILITY - Normally no personal liability à but there are exceptions. PERPETUAL SUCCESSION - Company continues to exist à despite any change in membership. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test.  STUDY UNIT 7: COMPANIES ACT AND SEPARATE LEGAL ENTITY *** EXAM WORK *** INTRODUCTION TO THE COMPANIES ACT Who are the main role players in companies? Shareholders - They do not manage the company à they only invest (using capital) o The investment is in exchange for the right to attend shareholders meetings and vote. Directors / “the board” - S66 CA à they control / manage the company. Creditors - The company owes them money. How does the company function? Decisions are made on majority vote (s1 CA) - Majority vote à ordinary resolution (shareholders holding 51%). In some cases, more than 51% is needed - Special resolution (s1 CA) à shareholders holding 75% o This protects minority shareholders in big decisions. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. SEPARATE LEGAL PERSONALITY Effect of a legal personality Companies have a separate legal personality to their shareholders à meaning: - Salomon v Salomon à an incorporated company is independent of its shareholders (even if 1 person holds all the shares). - Daddoo case à a company owns immovable property (not its shareholders). Piercing / lifting the corporate veil A separate legal personality for a company is not absolute - Courts may disregard it in the case of unconscionable abuse. When can this remedy (piercing the corporate veil) be used? - Common law position à not used anymore o Botha case à strict and rigid approach where unconscionable abuse must be proven (Exceptional remedy). o Cape Pacific case à Botha was too rigid, and this remedy can be used even if other remedies are available (Not exceptional remedy). o Hulse-Reutter case à this is an exceptional remedy which cannot be used while other remedies are available (Exceptional remedy). - Current position à s20(9) CA provides for unconscionable abuse BUT: o Gore case à s20(9) should be interpreted widely, so the remedy can be used as a regular corporate remedy, even where other remedies are available (Not exceptional remedy). These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test.  STUDY UNIT 8.1: TYPES OF COMPANIES *** EXAM WORK *** PROFIT COMPANIES Introduction There are 4 types of profit companies - Purpose à incorporated for financial gain of its shareholders. Securities à include shares but it not limited to shares - So if the CA provides for the MOI to include something about securities, and the MOI only includes something about shares à requirement is not met. Type 1: Private Company (Pty) Ltd S8(2) CA à the MOI must include 2 restrictions - Prohibiting the offer of securities to the public. - Restricting the transferability of securities. S39(2) CA à if a shareholder wants to sell securities - They must be first offered to existing shareholders before a 3rd party. Type 2: Personal Liability Company (Inc.) S8(2) CA à the MOI must include 2 restrictions (same as private company) - Prohibiting the offer of securities to the public. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test.  - Restricting the transferability of securities. The MOI must also state that the company is a personal liability company - S19(3) CA à the directors (and former directors) share joint and several liability with the company for debts contracted during their time in office. Type 3: Public Company (Ltd) This is any company which is not a: - State-owned company. - Private company. - Persona liability company. Type 4: State-owned Company (SOC) All shares are owned by public entities - Control of the company is not with the board à it is with the Department of Public Entities. NON-PROFIT COMPANIES (NPC) Purpose of Incorporation NPCs are incorporated for public benefit / another object listed in item 1(1) Sch 1 CA - The MOI must set out at least one object of the NPC. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. What if the NPC makes a profit? Cunningham case à profit and property of NPC’s are not distributable to its members / directors - All income and property must be used to advance the NPC’s objectives. - The only compensation members / directors get is for services rendered. Membership of an NPC NPC’s do not have shareholders à they have members - BUT à they do not have to have members in order to operate. All members have equal voting power à this can be changed by the MOI - Item 4(2)(d) Sch 1 CA à there can be voting and non-voting shares o Those who hold voting shares à right to vote. o Those who hold non-voting shares à no right to vote. EXTERNAL COMPANIES (EC) Introduction These are foreign companies who carry on business inside SA but are incorporated somewhere else - Requirements for a foreign company to be an EC o At least 1 employment contract in SA. o Engage in activities in SA for at least 6 months. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. DOMESTICATED COMPANIES Introduction An EC can transfer its registration it a domesticated company - Consequence à it will be deemed to have originally be incorporated in SA. Requirements for the transfer All must be met - The law of the country which the EC is incorporated mut allow for the transfer. - The EC must comply with requirements of its jurisdiction for the transfer. - The transfer must be approved by the shareholders. - Most of its assets must be in SA. - Majority of its shareholders must live in SA. - Majority of its directors must be SA residents. - Solvency and liquidity tests must be met. - After domestication à it must no longer be registered in its original country. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test.  STUDY UNIT 8.2: REGISTRATION AND CONVERSION OF COMPANIES *** EXAM WORK *** REGISTRATION When is a company registered? Step 1: - Notice of Incorporation (NOI) is filed with the CIPC o Certificate of registration is given as evidence that the requirements for incorporation have been met. Step 2: - MOI is completed and signed à company is then registered. Name of the company A company’s name must meet the criteria of s11(2) CA - The name must not be the same as an existing company name or trademark. - The name cannot be confusingly similar to an existing name or trademark o Eg. McDonald’s and McRonalds à this would confuse an ordinary person. - The name must not reasonably mislead a person to believe that the company is associated with another organization. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. CONVERSION OF A COMPANY How does a company convert from one type to another? Converting takes place via changing the MOI - S16(6) CA à change the MOI to no longer meet the criteria of one type of company o It rather meets the criteria of another type of company. - The name of the company must be changed o Eg. Tuks Inc. à Tuks (Pty) Ltd. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test.  STUDY UNIT 8.3: MEMORANDUM OF INCORPORATION *** EXAM WORK *** MEMORANDUM OF INCORPORATION What does the MOI include? The MOI is registered with the founding document and includes: - Name and type of company. - Authorized share capital à the number of shares the company can issue o This can be increased / decreased by changing the MOI. What cannot be changed in the MOI? Unalterable provisions - Provisions which are inconsistent with the CA are invalid. - Note: you can change unalterable provisions but only to make them more onerous (not less onerous). Restrictive conditions in the MOI Ring-fenced Companies (RF) - S15(2) à for a company to be RF it must include restrictive conditions in the MOI o Requirements outside of those in the CA to amend the MOI. o Prohibitions to the amendment of certain provisions in the MOI. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. Who is bound by the MOI? S15(6) à the MOI is binding between: - The company and shareholders. - Shareholders and shareholders. - The company and directors. - The company and the audit committee. How to change the MOI Altering the MOI - S17 à fixing grammar, punctuation, spelling mistakes o Not for changing the substance of the MOI. Amending the MOI - S16 à changing the substance of the MOI. Process for changing the MOI - Proposal of the change à shareholders / directors holding 10%. - Actually changing the MOI à special resolution (shareholders holding 75%). - Once MOI is changed à file the change with the CIPC. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. SHAREHOLDER AGREEMENTS What is a shareholders’ agreement? S15(7) à shareholders enter into agreements with each other regarding company matters - These agreements must be consistent with the MOI and the CA. Shareholders agreements before the CA If an shareholder’s agreement was entered into before the CA came into effect and it is inconsistent with the CA - Valid for 2yrs after the CA came into force o After that à only the provisions consistent with the CA are valid. Can directors be party to shareholder agreements? Directors cannot be party to shareholder agreements - It affects their independent and impartial judgement. What if a director is also a shareholder? - They can be party to shareholder’s agreements in their capacity as a shareholder. - In their capacity as a director à they must remain impartial o Directors have a fiduciary duty to the company, not the shareholders. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. PRE-INCORPORATION CONTRACTS What is a pre-incorporation contract? When a person concludes a contract on behalf of a company which does not yet exist - There a different routes to conclude pre-incorporation contracts. Common law mechanisms Cessation and delegation - Agent concludes a contract in their own name and transfers the rights to the company once incorporated o Risk à company can refuse / not incorporate, and the liability is on the agent. Nomination - Agent concludes a contract subject to a clause which states that the company can take their place o Risk à company can refuse / not incorporate, and the liability is on the agent. Stipulatio alteri - Contract between the agent and other party which says that the other party will offer the company benefits when formed o No risk à company can decline and no liability for agent. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. Option contract - The general rule is that an offer is not transferable à way around this o Other party keeps an offer for a period of time à when the agent accepts, an option contract exists (which is transferable) and gets transferred to the company. o If company declines à agent just declines the option and no liability. Statutory mechanisms S21(1) CA à requirements for a pre-incorporation agreement - It must be in writing. Once the company is incorporated à they can ratify / decline the contract - Ratify à no liability for the agent. - Decline à the agent is joint and severally liable with the company o If the company is not incorporated à agent is joint and severally liable with the would-be directors of the company. - Company does not choose within 3 months à deemed ratification. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. STUDY UNIT 8 TUTORIAL QUESTIONS AND ANSWERS Q1: Jack wants to incorporate a private company and asks you to draft the memorandum of incorporation for the prospective company. State the two essential statutory requirements that the memorandum of incorporation must comply with for the company to constitute a private company. (2) - Prohibition against offering of securities to the public. - Restrict the transfer of securities. Q2: The memorandum of incorporation of Hatfield Estates Homeowners Association NPC provides that a member is only allowed to keep one dog on each property owned by that member. There is a need to change the memorandum of incorporation to read that a member is allowed to keep one dog and one cat on each property owned by that member. 2.1 Who may propose the amendment to the memorandum of incorporation in terms of the Companies Act 71 of 2008? (2) - The Board (or 10% of the holders of voting shares) can propose a resolution to amend the MOI. 2.2 What type of resolution is required to amend the memorandum of incorporation of Hatfield Estates Homeowners Association NPC and, considering your answer in 2.1, who must take this resolution? - A special resolution of 75% is required, taken by the members. Q3: John wants to incorporate World Travel (RF) (Pty) Ltd and asks you to draft the memorandum of incorporation for the prospective company. Explain when a company will be regarded as a 'RF' company. (2) - s 15(2)(b) à MOI contains restrictive condition + additional requirements apply for the amendment of such condition. - s 15(2)(c) à MOI contains a prohibition against the amendment of any particular provision of the MOI. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test.  STUDY UNIT 9: CAPACITY AND REPRESENTATION *** EXAM WORK *** THE MOI AND CAPACITY When the MOI limits capacity Sometimes the MOI can limit: - The company’s capacity to contract. - The director’s authority to contract. BUT à s20(1) CA provides that these limitations do not solely render a contract void - Eg. The MOI limits director A’s authority to contract but he contracts anyway o The company will still be bound to the contract. S20(1) à The only time that these limitations render actions void is when they are between: - The company and its shareholders / directors / officers. - The shareholders and directors / officers. Can a company ratify actions contrary to the MOI’s limitations? Shareholders can ratify these actions à special resolutions - S20(2) à ratification only has an internal effect o The company will still be bound to the contract in terms of 3rd parties even if they do not ratify the contract à remember limitations by the MOI have no effect on the validity of the contract. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. REPRESENTATION The difference between organs and agents Organs of the company - Do not need authority to act on behalf of the company à they automatically have it o Shareholders. o Board of directors (s66(1) à as a whole, not a single director). o Committees appointed by shareholders. Agents of the company have authority to contract on the following principles (AKA these are ways in which the 3rd party can force the company to be bound): Contractual agency - Actual authority à conferred expressly or tacitly by a certain act. - Express authority à given by the MOI / board as a while. - Implied authority à the agents appear to be exercising authority. - Common law Turquand rule à Royal Bank case o When authority is subject to an internal rule à the 3rd party can assume compliance with this rule. o Requirement à the 3rd party must be bona fide. o Estoppel and common law Turquand cannot be used together. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. Delictual (estoppel) - Company can’t claim lack of authority as they allowed the unauthorized act. - Requirements o Culpable representation by the principal, o Which mislead the 3rd party, o Who is bona fide, o Which is the to 3rd party’s detriment. Ostensible authority à Makate v Vodacom - Ostensible authority is a form of actual authority. - Requirements o The principal, o By words or conduct, o Created an appearance, o That the agent had power to act on the principal’s behalf. - Common law Turquand can apply with ostensible authority. Statutory Turquand - S20(8) à common law and statutory Turquand are different o Common law Turquand à the agent must have actual / ostensible authority. o S20(7) statutory Turquand à 3rd parties can assume the agent had actual authority. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. What happens when an agent’s authority is revoked but they still continue to contract? The 3rd party can be protected by estoppel - Requirements of estoppel must obviously be proven. RIGHTS AND DUTIES OF DIRECTORS Breach of the MOI by directors S26 à shareholders can claim when directors breach the MOI - This is a derivative action à shareholders institute the claim on behalf of the company. When breach of the MOI results in reflective loss à share prices drop due to wrongdoing - Shareholders may not claim for reflective loss à only the company itself may claim against the wrongdoer. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. STUDY UNIT 9: TUTORIAL QUESTIONS AND ANSWERS Q1: Anri, Chris, Noma and Tshepiso are the directors of Supreme Beef Butchery (Pty) Ltd (‘the company’). In terms of the company’s memorandum of incorporation, Chris may conclude a contract on behalf of the company to a maximum value of R50 000, but for any contract that exceeds the value of R50 000 Chris needs to obtain the approval of the shareholders by ordinary resolution. Chris purchased a freezer for the company from James for R100 000. The company failed to pay James the R100 000 owed for the freezer. When James demanded payment from the company, the company’s legal representatives argued that Chris did not have the authority to conclude the contract on behalf of the company as he did not obtain the necessary approval from the company’s shareholders. Advise James whether there are any legal grounds on which the company can be held liable in terms of the contract. (3) - Common law Turquand / statutory Turquand (s 20(7) and (8)) o James bona fide assume that ordinary resolution has been obtained. - Chris has actual authority to bind the company (so common law Turquand requirements are met). - Therefore, James can hold the company liable in terms of the contract. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test.  STUDY UNIT 11: GROUPS OF COMPANIES (UNIT 10 WILL BE THE NEXT ONE à THIS IS THE ORDER WE DID THEM IN CLASS) *** EXAM WORK *** A GROUP OF COMPANIES Concepts Group of companies - A holding company and its subsidiaries o Holding company à juristic person that controls subsidiaries. o Subsidiaries à a company controlled by a holding company (only companies can be subsidiaries, not any other type of juristic person). Why do groups of companies need to be regulated? To prevent abuse of control - The companies must be independently managed and controlled. TYPES OF CONTROL When is a company a subsidiary? The holding company must have 1 out of 2 forms of control of the subsidiary - Form 1 à the holding company holds 51% or more voting rights in the subsidiary o Wholly owned subsidiary. - Form 2 à the holding company appoints directors with 51% or more voting rights in the subsidiary These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test.  o If the holding company does not have power to appoint directors but they have power to dismiss directors à this does not constitute control. Examples of control - H holds 80% voting shares of S à S subsidiary of H. o But if H only holds 20% voting shares of S à S is not a subsidiary of H. - H borrows money to X who uses that money to buy 80% voting shares of S o If X cedes the voting rights to H as security à S is subsidiary of H. o If X does not cede any security to H à S is subsidiary of X. - H appoints 2/3 directors of D and 60% voting rights in E o D holds 30% voting rights in S o E holds 25% voting rights in S o S à subsidiary of H (because D and E are controlled by H and D and E together hold more than 50% of S’s voting rights). - H has 45% voting rights in S and appoints 2/3 directors at D o D has 30% voting rights in S. o S à subsidiary of H (because D is a subsidiary of H and therefore H holds more than 50% of S’s voting rights). - H has the power to dismiss 2/3 directors at S o S à not subsidiary of H (because the power to dismiss does not constitute control, only the power to appoint). These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. Can a subsidiary have shares in a holding company? Yes à requirements - It cannot be more than 10% of the shares. - It must be in non-voting shares. Examples: - S buys 6% non-voting shares in H o This is allowed. - S1 buys 5% non-voting shares in H, S2 buys 6% non-voting shares in H o Not allowed à together, both subsidiaries hold more than 10% of shares. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test.  STUDY UNIT 10: CORPORATE CAPITAL *** EXAM WORK *** FINANCIAL ASSISTANCE (FA) General We have 2 types of financial assistance - Financial assistance for the purpose of acquisition of shares in a company o S44 regulates this. - Financial assistance for all other purposes o S45 regulates this. FINANCIAL ASSISTANCE IN TERMS OF SHARES (S44) When does s44 apply? When a company gives someone FA to purchase shares in their company / group of companies - So s44 does not apply when company A gives FA to some to acquire shares in company B (who is not part of A’s group of companies). Requirements to provide FA in terms of s44 Req 1 à the MOI cannot prohibit FA - MOI is silent on FA à it allows FA. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. Req 2 à the board must approve FA - 2 ways o In the last 2 years à the shareholders adopted a special resolution which approved FA for a specific person / group of people. o FA is part of an employee share scheme under s97. Req 3 à the board must be satisfied that: - After FA à solvency and liquidity tests are passed. - The terms are FA are fair and reasonable. How to prove financial assistance in terms of s44 Impoverishment test - If this FA can’t be proven using impoverishment à commercial test. Gradwell v Rostra Printers à impoverishment test - Is the company in a worse financial position after the transaction? o Yes à s44 applies. Jacobson case à commercial test - The company is in the same financial position, but in a weaker commercial position (AKA the transaction did not make commercial sense) o If a farming company buys a Ferrari from X (to convert his asset into cash so he can buy shares in the farming company) à their financial These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test.  position is the same (instead of the cash, they have a Ferrari) but it doesn’t make commercial sense for a farming company to have a Ferrari so they are worse off commercially. Liability of directors FA agreement is inconsistent with s44 or the MOI à void - The directors who voted for / were silent on FA o Liable for any loss / damage / costs. FINANCIAL ASSISTANCE IN TERMS OF S45 (INSIDER LOANS) What are insider loans? The board may provide FA to directors of their company or group of companies. Requirements for s45 Req 1 à the MOI cannot prohibit FA - MOI is silent on FA à it allows FA. Req 2 à the board must approve FA - 2 ways o In the last 2 years à the shareholders adopted a special resolution which approved FA for a specific person / group of people. o FA is part of an employee share scheme under s97. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. Req 3 à the board must be satisfied that: - After FA à solvency and liquidity tests are passed. - The terms are FA are fair and reasonable. Liability of directors FA agreement is inconsistent with s45 or the MOI à void - The directors who voted for / were silent on FA o Liable for any loss / damage / costs. DISTRIBUTIONS What is a distribution? S1 à distributions are the transfer of property / money by the company to its shareholders - In their capacity as shareholders. Examples of distributions - Dividends. - Share buy back. - Giving assets to shareholders instead of dividends. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. Requirements / steps for making a distribution These are set out in s46 à all distributions must comply with this - The distribution must be authorized by a board resolution (1st board resolution). - It must appear that after the distributions à solvency and liquidity tests will be met. - The board must acknowledge that the solvency and liquidity test has been applied (2nd board resolution). - The distribution must be carried out within 120 business days of the 2nd board resolution o If not à the 2nd board resolution needs to happen again. Liability of directors If distributions do not conform with s46 à voidable by a court - Directors (those who voted in favor / were silent on the distribution) can be held liable for any loss. Share buybacks Share buybacks are a distribution à so it must conform with s46 requirements - S48 à BUT sometimes the board resolution to buy back shares must be approved by a shareholder’s special resolution (this is an extra requirement) o When the shareholder whose shares are being bought back is also a director. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test.  o When share buyback is more than 5% of the shares of a particular class. Liability of directors A contract to acquire shares which is not consistent with s48 à unenforceable - Directors who knew that the contract was in contravention of s46 / s48 and still voted for or who were silent is liable for loss. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test.  STUDY UNIT 12: ACCOUNTING RECORDS, FINANCIAL STATEMENTS AND AUDITS *** EXAM WORK *** GENERAL RECORDS Registered offices S23(3) à all companies must have at least one office in SA - S25(1) à this is where all records are kept. Changes to the office location results in changes to where records are kept - This change must be notified to the CIPC. Company records The company must keep the following records in written or electronic form (s24(1)) - MOI and amendments. - Rules of the company. - Past and present directors. - Annual financial statements and accounting records. - Minutes of shareholders and directors’ meetings. - Securities register à all information relating to the shareholders. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. Who may inspect these records? Any person who has an interest in the securities of the company - Records which cannot be inspected by anyone o Accounting records. o Minutes of director’s meetings. o Info protected by PAIA. FINANCIAL STATEMENTS What must be shown on financial statements? - The state of affairs and business of the company. - Transactions and financial position of the company. - Company assets, liabilities, and equity. - Company income and expenses. Annual financial statements Prepared within 6 months after the end of the financial year - These include o Auditors report. o Report by directors pertaining to the financial state of the company. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test.  STUDY UNIT 13: CORPORATE FINANCE *** SEM TEST AND EXAM WORK *** SHARES What are shares? Shares are movable property which is transferable - S1 à defines shares o One of the units in which proprietary interest in a profit company is divided. Shares versus securities Shares are a form of securities (but not the only form) - S1 defines securities o Shares, debentures, any other instrument issued or authorized to be issued by a profit company. PAR VALUE SHARES Par value (PV) shares PV shares à fixed minimum value at which shares can be traded at - S35(2) à This is no longer allowed. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. What if a company has authorized but unissued PV shares (before the CA came into effect)? - Reg 31(3) à they need to be converted to no par value shares before issuing What about outstanding issued PV shares à these are PV shares which have been sold (so a shareholder owns them) - Companies cannot increase the number of PV shares which have been authorized o BUT à it may issue further authorized but unissued PV shares until there is a proposal to convert shares to NPV in terms of s31(6). o S39(2) à It must first be offered to existing shareholders. o S40 à shares must be issued by adequate consideration by the board. MY UNDERSTANDING OF THIS Authorized but unissued PV shares - There are 10 authorized PV shares which are unissued after the CA (so 0/10 shares are sold) à then a company cannot issue these shares until converted. Outstanding issued PV shares - There are 10 authorized PV shares, of which 4/10 are issued before the CA (aka 4/10 are sold) à then the company can issue (sell) the further 6/10 PV shares BUT they cannot increase the authorized shares to 11 PV shares. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. How to convert par value shares to non-par value shares - The board proposes the conversion. - The board prepares a report for the proposal o Including the minimum information set out in reg 31(7). - The board resolution and report are published to: o Shareholders before their meeting. o SARS and the CIPC. - The shareholders must approve the board resolution by 2 special resolutions: o Special resolution 1 à by shareholders of each class of shares. o Special resolution 2 à by meeting of shareholders. - The company files an amendment to the MOI to effect the conversion. If the company, a shareholder, the CIPC, or SARS is unhappy with the proposed resolution à reg 31(9) states they can approach the court (before the shareholders meeting) - Court à resolution is compliant with the CA o The proposal is put to a vote (so you carry on from step 4) à shareholders still have the right to vote against it. - Court à resolution is not compliant with the CA o The proposal cannot be put to a vote. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. ISSUING SHARES How many shares may be issued? S38(1) à Issued shares cannot exceed authorized shares - If there are 10 authorized shares à there can be no more than 10 issued shares. Who decides how many authorized shares there are? The number of authorized shares is determined by: - The MOI or, - The board à who also has the power to increase authorized shares. What if the company issues more shares than authorized? S38(2) à the issuing can be ratified within 60 business days of issuing by the board / shareholders - If not à issuing is void o Company must return the fair value of consideration received for shares (with interest). o Any evidence of the issuing of shares (entry into securities register) à void. o S77 à director is liable if they voted / failed to vote for issuing. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. When do shareholders acquire rights associated with shares? S37(9) à a person acquires rights when their name is entered into the securities register - Until then à the shareholder only has the right to make the company enter their name into the securities register. The board’s power to issue shares S38 à issuing new shares requires a board resolution - Power subject to fiduciary duties of directors à Petrotank South Africa case. - S41 à Authorization via a special resolution by shareholders only where: o Shares are issued to a director / prescribed officer. o Issued shares amount to 30% of voting shares in that class. o Where the MOI requires. PRO RATA OFFERS Shareholders in private and personal liability companies S39(2) à Every shareholder has the right to be offered and subscribe to shares which: - Are issued / going to be issued, - Which are equal to the shareholders voting power. S39(3) à this right can be limited by the MOI. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. When does this right not apply? This right does not apply to shares issued as: - Options. - Conversion rights. - Consideration. - S47 à Capitalization shares. - During business rescue. SHARES FOR CONSIDERATION Issuing of shares Shares may only be issued as: - S47 à Capitalization shares. - Adequate consideration determined by the board. - A benefit to the company. - S40(1) à Conversion rights. What is consideration? Anything of value given and accepted in exchange for anything else of value - The board has the power to determine whether the consideration for shares is adequate o The only time this can be challenged is in terms of s76 read with s77(2) à when the director breaches fiduciary duty / tries to gain an advantage / knowingly causes harm. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. How does consideration apply to shares? The company can regard consideration for shares to be received when: - S40(4) à shares are issued and fully paid. When the consideration for shares is in the form of something which cannot be immediately given a value - Consideration is only received once the value can be ascertained o BUT à even where consideration is not yet received, shares must be issued and transferred to be held in a trust. Once consideration is received - The company must ensure the shareholders name goes in the securities register. CLASSES OF SHARES Introduction S36(3) à the board has the power increase / decrease / assign / classify preferences, rights, or limitations to shares - “Rights” à used in classification of shares (normally 2 classifications) o Control rights à voting. o Financial rights à dividends. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. Names of classes There can be as many or as little classes of shares as a company would like - S36(1) à BUT classes must be given a distinguishing designation o ie Class X, Y, Z à in order to distinguish between classes. Common classes of shares Ordinary shares - Usually have voting rights. - Dividend rights are not fixed à up to the directors to decide. Preference shares - These shares normally have preference in terms of dividends o When dividends are paid à these shares will be paid first. - Term à shares can be issued for a specific term o Fixed / subject to a condition. o After the term à share can be repurchased by the company (redeemable share)or converted into another class / security (convertible share). - Common law à presumption that preference shares are cumulative o Even where dividends are not declared à dividends will accumulate every year until paid out. o This can be changed by the MOI / a resolution. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. Unclassified shares S36(1) à The MOI can authorize a number of unclassified shares - The board has the power to classify them at a later date. Class rights S36(2) à every share has one general voting right - This can be limited by the MOI à restrictions of limitations include: o If there is 1 class of shares à all shares must have voting rights. o If there is more than 1 class of shares à at least 1 class must have voting rights. o Shareholders with limited voting rights have voting rights on the amendment of anything pertaining to their shares. What if a class of shares does not specify any rights / limitations? - S36(1) à this is allowed BUT the board must determine these rights / limitations before issuing the class of shares. OWNERSHIP OF SECURITIES Transferring of shares vs passing of ownership Shares à personal rights - Ownership passes through cession à consensus is enough o But this does not constitute transferring of shares à it is only a step in the share transfer chain. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test.  - How do shares get transferred? o Agreement to transfer. o Execution of a deed of transfer. o Registration of the transfer Registration of transfer à not a requirement for passing of ownership - If A transfers ownership to B but does not register the transfer o B is the beneficial / true owner. o A is the registered shareholder à who acts as an agent / nominee of B. - BUT à this legal position is subject to s37(9) which says that a person acquires rights associated with shares when: o Their name is in the securities register (for certificated securities). o Determined by the rules of the Central Securities Depository (for uncertificated securities). Nominee / beneficial holdings S56(1) à Issued securities can be held by (and registered in the name of) one person, for the benefit of another person - For public companies à disclosure of beneficial holdings is needed o Identity of all people with a beneficial interest. o Number and classes of securities. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. Obligations of public companies with beneficial holdings - Maintain a register of disclosures. - If required to publish annual financial statements à disclose holdings of more than 5% of the issued number of securities. Rights of beneficial shareholders A person who holds a beneficial interest (not the true owner, the holder) may only have the right to vote where: - The beneficial interest includes the right to vote OR, - The person’s name is on the company’s register of disclosures OR, - The person holds a proxy appointment. Proxy appointment à holder acts on behalf of the beneficial owner - Beneficial owner may demand a proxy appointment by: o Delivering the demand in writing to the holder or, o In terms of the central securities depository. DEBENTURES & DEBT INSTRUMENTS Definitions Debenture à defined in common law - An acknowledgment of debt, - In favor of the holder (as a creditor of the company), - For a specified amount (including interest). These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. Debt instrument - Includes any securities, other than shares, - Irrespective of whether the securities are issued in terms of a security document o Like a trust deed. - S43(1) à does not include promissory notes and loans. Does a debt instrument include a debenture? Uncertainty - Debenture is a security à included in debt instrument. - Debenture is a loan à excluded in debt instrument. Power of the board Board may authorize the company to issue debt instruments - They can also give debt instrument holders special privileges. Debt instrument terms and trustees Security document à document by which a debt instrument is offered - Includes the terms and conditions of the debt instrument. - Includes whether the debt instrument is secured / unsecured. Trustee appointment à holders of the company’s debt instrument - Persons allowed to be trustees: o Any person, including juristic. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test.  - Persons excluded from being a trustee: o Directors. o Prescribe officers. o Any person with an interest / relationship with the company that might conflict with the duties of the trustee. - Requirements for the appointment of a trustee o Board must be satisfied that they have knowledge and experience. o Holders of 75% of value of debt instruments must approve. - S43 à provisions not allowed in trust deeds (provisions are void) o Indemnifying the trustee. o Limiting the liability of the trustee. SECURITY OFFERS Protection of investors Investors in securities are protected by disclosure - The seller must give the following information to the buyer o Whether consideration is fair. o The value of the security. Principle which determines whether there must be disclosure - There must be an offer, - The offer is of securities, - The offer is made to the public. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. Who offers security? If the company issues securities to investors - The sale occurs on the primary market. If the investor, then decides to sell his securities - The sale occurs on the secondary market o This market can be a formal place à securities which comply with certain requirements are listed. o Or it can be informal à a private transaction. Primary market S95 à Primary offering definition - Offer made to the public, - By / on behalf of a company. Who can make primary offerings? - S99 à company (or foreign company). S99(3) à Primary offerings (other than initial primary offerings – IPO) of: - Listed securities à made in accordance with requirements of the relevant securities exchange. - Unlisted securities à must be accompanied by a prospectus (which meets s100). These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. IPO à offering the public securities of a company which has not previously made offers to the public - Requirement for an IPO o Offering must be accompanied by a registered prospectus. S96 à offers not made to the public - These include offers made to no person, other than: o Persons whose ordinary business is to deal in shares. o Public Investment Corporation. o Person / entity regulated by SARB. o An authorized financial service provider. o Any person related to the company (directors, employee, etc.). - Gold Fields v Harmony Gold o Company G offered the shareholders of company H shares in company G. o In return à company G would get shares in company H. o This was to achieve a merger. o This does not constitute an offer to the public. Offers and acceptance - Any application form for securities à attached to a prospectus / written statement o Unless it is not an offer to the public / an underwriting agreement. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test.  - Allotment of securities à made on the application form attached to the prospectus. - S99 à Prospectus must be issued more than 3 months after registration - S107 à offers must be accepted / allotted within 4 months of filing the prospectus Advertisements - An offer includes an advertisement o After prospectus has been published à an advertisement can be released the draw attention of the public to the prospectus. - The advertisement must: o Include a statement clearly stating that it is not a prospectus. o Where and how a person can obtain the full prospectus. o Not contain an untrue statement. o Not mislead a person into thinking the advertisement is a prospectus. o Comply with the CA. Prospectus content - Once the prospectus meets the requirements of the CA à registered with the CIPC. - S100 à the prospectus must contain the following: These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test.  o Prescribed specifications (depends on if the offer is limited (reg 55) or general (reg 56)). o All information which an investor may reasonably require (subjective test). o All material information relating to securities being offered. Prospectus liability - The person responsible for information in the prospectus must correct any error when they become aware of it. - Persons who authorized the issue of the prospectus à other than the company o Liable to pay compensation to any person who acquired securities in good faith à if the person acquired the securities based on untrue statements in the prospectus. Secondary market Secondary offers to the public à must comply with s101 - Secondary offer à definition o Offer to the public, o Of any securities of a company, o Made by / on behalf of a person other than the company. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. What is required to make a secondary offer? - Offer must be attached to o Registered prospectus that accompanied the primary offer OR, o A written statement which satisfies the requirements of s101(4)-(6). How long is the prospectus valid for? - S107 à the prospectus is valid for 4 months after filing o After that à a written statement is required. Written statement à needed, even where a prospectus isn’t - S101(4) à valid for 3 months after registration. - S101 is not applicable if securities are listed on an exchange. When is a prospectus / written statement not needed? - Offer is made by a person acting in capacity as an executor / trustee / liquidator. - Offer is made for the purpose of a sale in execution / public auction / public tender. Liability of untrue statements in: - Prospectus o Person who issued prospectus is liable to pay compensation to any person who acquired securities in good faith à if the person These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test.  acquired the securities based on untrue statements in the prospectus. - Written statement o It is an offence. o No criminal liability if it is not issued. o Liability is mainly under common law / delict. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. STUDY UNIT 13: REVISION QUESTIONS Q1: Allan is the only director in the ABC (Pty) Ltd (‘the company’) and holds 30% of the issued shares in the company. The balance of the shares are held by Ben and Carrington each hold 35% of the issued shares in the company. The company has 500 authorised shares and 100 issued shares. It wishes to issue a further 50 shares to Allan, as part of an employee share scheme. Furthermore, the company wishes to raise capital by issuing 100 shares to a private investor, Fallon. Advise the company on the process it will need to follow in order to capitalize the company through the provision of equity to Allan and Fallon (8 marks) - Allan à an employee share scheme does not require authorization from shareholders o BUT he is a director and the proposed issued shares are more than 30% voting shares in that class à s41 states that these 2 scenarios require a special resolution. - Fallon à These proposed shares are more than 30% voting shares in that class o So s41 states that this requires authorization via a special resolution. Q2: Andre, Tshepo, Jani and Amy are the only existing shareholders of Executive Cars (Pty) Ltd (‘the company’). Each of them holds 25% of the voting rights in the company. The company wishes to expand its operations but needs an additional capital investment. At a board meeting of the company it was resolved that the company will issue all the additional shares in its authorised share capital to Ben, who is currently not a shareholder of the company. Andre, Tshepo, Jani and Amy are unhappy about the manner in which the shares will be issued. They are of the view that they are also entitled to subscribe for the new shares to be issued. Advise Andre, Tshepo, Jani and Amy on whether all the new shares may be issued to Ben. (4) - S39(2) à all shareholders have the right to subscribe to shares which are going to be issued (provided that these shares are equal to the shareholders voting shares) o BUT à s40 says that this right does not apply to capitalization shares. - So à new shares may be issued to Ben. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test.  STUDY UNIT 14: CORPORATE GOVERNANCE – SHAREHOLDERS *** EXAM AND SEM TEST WORK *** SHAREHOLDERS MEETINGS General S57(1) à Profit companies (other than SOC’s) which have 1 shareholder - No formality compliance is needed when it comes to exercising voting rights. - S59-65 does not apply to the governance of such a company. Profit companies (other than SOC’s) in which all shareholders are directors - No formality compliance is needed when it comes to decisions referred by the board to shareholders. - BUT there are requirements (1) All, in their capacity as shareholders, must be present at the board meeting when the matter was referred to them à to satisfy quorum requirements in s64. (2) The resolution is adopted if it meets the requirements of an ordinary or special resolution by shareholders. (3) When acting as shareholders à s73-78 (rights and duties of directors) does not apply to them. MY UNDERSTANDING OF THE REQUIREMENTS (1) All directors must be present at the board meeting which pertains to the matter at hand a. Because all shareholders at directors à the shareholders must be there in THEIR CAPACITY AS SHAREHOLDERS and not directors. b. The amount of shareholders present must meet the quorum requirements. (2) The resolution will be adopted in a board meeting IF: These notes haveshareholders a. The been made(in bytheir KL Davey, capacityplease do not distribute as shareholders) vote for them or resellinthem. the resolution I do the same not claim thisway work as my own, all intellectual credit goes to the author of the prescribed that would be required if the resolution was taking place in a proper shareholders textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / meeting (ie special / ordinary resolution) misinformation, it is your own responsibility to ensure you have studied all the correct (3) When material foracting in their capacity as shareholders à no rights, duties, liability of directors. the test. a. When acting in their capacity as directors à rights, duties etc. apply to them. Profit companies (other than SOC’s) has only 1 director - S57(3) à No formalities when it comes to performing powers and functions of the board. - S73 and s74 does not apply to the governance of the company. Record date The board may set a record date - Purpose à determining the shareholders entitled to: o Receive notice of the meeting of shareholders. o Participate in the meeting. o Vote in the meeting. o Decide matters by written consent / electronic communication. o Exercise pre-emptive rights. o Receive a distribution. o Exercise other rights. Record date à may not be more than 10 business days before the event is set to occur. - If the board does not determine a record date o It is deemed to be the latest date by which companies are required to give shareholders notice of the meeting / date. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. Compulsory annual general meeting (AGM) Public company à must convene the 1st AGM of shareholders - Within 18 months after incorporation date o After à AGM once every year o BUT no more than 15 months after the last AGM à s67(1) unless there is good cause and allowed by the Companies Tribunal. What must be addressed at the AGM? - Director’s report. - Audited financial statements of the past financial year. - Audit committee report. - Election of directors. - The appointment of: o Auditor for the upcoming financial year. o Audit committee. - S61(1) à any other matters raised by shareholders o Regardless of whether notice was given. Meetings applicable to all companies Who may call a shareholders meeting? - Board o S61(11) à If directors are incapacitated / no directors à any person authorized by the MOI can call a meeting. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test.  o S61(11) à No authorized persons à apply to Tribunal to issue an administrative order for a shareholders meeting to be convened. - Any other person in the MOI / rules of the company. When must a company hold a shareholders meeting? - When the board is required by the CA / MOI to refer a matter to the shareholders. - When required by s70(3) to fill a vacancy on the board. - When required by the MOI. - When an AGM of a public company is required (discussed above). - When there is a written / signed demand for a meeting delivered to the company à requirements o Demand describes the purpose of the meeting. o There are demands of the same purpose à made and signed by the 10% of shareholders who are entitled to vote in the meeting. Notice of meetings Form and content - Notice must be in writing and include: o Date. o Time. o Place. o Record date. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test.  o General purpose. o Specific purpose. - Amendment of the MOI is proposed that will materially and adversely affect the preference / rights / limitations of shares à notice must contain: o Info required by s164(2). o Copy of proposed resolution. o Percentage of voting rights required for the resolution to be adopted. o Statement that the shareholder is entitled to appoint a proxy. o S61(3) à Satisfactory identification of the proxy from parties. - Failure to give notice / defect in the notice o Shareholders must unanimously ratify the notice. Notice period - The company must deliver the notice to all shareholder within: o 15 business days à public companies and NPC’s. o 10 business days à any other company. Quorum at meetings Quorum à how many members must be present for the meeting to begin - Votes quorum à Holders of at least 25% of shares who are entitled to vote on the matter o Can be personally OR by proxy. - Person quorum à if a company has more than 2 shareholders o A meeting may only begin until at least 3 shareholders are present. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test.  MORE THAN 2 Needs: SHAREHOLDERS - Person quorum AND - Votes quorum 2 SHAREHOLDERS Needs: OR LESS - Votes quorum - If votes / person quorum is not met within 1 hour after the meeting is supposed to begin o Meeting must be postponed for one week à no additional notice is needed (only need notice if place of new meeting is different). o No quorum at new meeting à present shareholders will constitute a quorum. Person presiding over meeting must: - Verify the shareholders identity. - Verify the right of the shareholder to participate personally or by proxy. Electronic communication A meeting may be concluded electronically - Requirement à persons participating must be able to participate: o Simultaneously AND o Effectively. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. Resolutions A proposed resolution must be: - Sufficiently clear and specific. - Contain sufficient information to allow the shareholder to decide to participate. Types of resolutions - Ordinary resolution à 51% voting rights. - Special resolution à 75% voting rights Voting Voting at a shareholders meeting is conduct by either: - Polling o Shareholders vote is proportional to his shares. o Polling must be used when à demanded by 5 people with voting rights OR 10% voting rights. - Show of hands o 1 hand à 1 vote (regardless of shares). Proxies S58 à A shareholder may appoint ANY individual (even if they aren’t a shareholder) as a proxy - Proxy à participates in shareholders meetings on behalf of the shareholder. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. How to appoint a proxy - Appointed in writing o Dated and signed by the shareholder. - Remains for 1yr after appointment à unless stipulated otherwise. Barry v Clearwater - S58 is unalterable o Wording of the section states that a shareholder may appoint any person, at any time, to be a proxy. o The company cannot state when a shareholder’s proxy must be submitted à it must just be done before the shareholders meeting. Shareholders acting other than at a meeting S60 à a resolution may be adopted by written consent / electronic communication - It will be deemed to be adopted if it has support from shareholders votes constituting an ordinary resolution. - Notice requirements still apply (discussed above). - But there are some instances where written consent is not allowed. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. STUDY UNIT 14: REVISIONS QUESTION Q1: Michael is a member of Pacemaker Running NPC (‘the company’). The purpose of the company is to promote road running in South Africa. The members of the company received notice that the company will be holding its annual general meeting on 13 December 2021. In terms of the notice of the meeting a member who cannot personally attend the meeting may appoint a proxy. However, the appointment of a proxy will be subject to the following conditions: A. A member may only appoint the persons whose names appear on the annexure to the notice of the meeting; and B. The completed proxy form must be delivered to the company by no later than 7 December 2021. After accepting delivery of the notice, Michael appoints Sam to act as his proxy at the meeting. Sam is not a person listed on the annexure to the notice of the meeting. Michael’s duly completed proxy form is only delivered to the company on 10 December 2021. With reference to the facts above and relevant case law, advise whether the appointment of Sam as Michael’s proxy is valid and whether the chairperson of the meeting must recognise the proxy. (6) - S58 & Barry v Clearwater o Any person can be appointed as a proxy (not just those which the company approve). o A company cannot proscribe when a appointment of a proxy must be submitted. o Conclusion à the shareholder is entitled to appoint ANY person at ANY time, regardless of whether the company says different. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test.  STUDY UNIT 15: CORPORATE GOVERNANCE – DIRECTORS *** EXAM AND SEM TEST WORK *** DIRECTORS Definition of a director S1 à a director includes any person occupying a position of director or alternate director - Alternate director à steps in when an actual director is not available o They are still a member of the board but do not participate in managing the company unless another director is not available. Role of directors S66 à the board has all management power of the company - Oversight. - Operational à managing staff or stock. - Strategic à how to achieve company goals. Minimum number of directors In addition to the number of directors needed to fulfil requirements of legislation - Private / personal liability companies o 1 director. - Public companies and NPC’s o 3 directors. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. Remuneration of directors Directors may be remunerated à unless the MOI says otherwise - S66 à remuneration should be approved by a special resolution by the shareholders within the past 2yrs. Types of directors Different types of directors have the same rights and duties - Executive directors o Involved in day-today business of the company. o Full time salaried employees. - Non-executive directors o Not involved in the day-to-day activities of the company. o Provide objective insight of the company. o Not a salaried employee. - Independent director o No relationship with the company outside of directorship. o Type of non-executive director but they bring more neutrality to the company. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. ELECTION AND APPOINTMENT Who can elect a director? Shareholders - Shareholders entitled to vote can appoint directors. - Profit companies à 50% of directors must be appointed by shareholders The MOI - Can provide for appointment of directors. - Directors can be named in the MOI. - Can provide for alternate directors Ex officio - They are elected as directors by virtue of office o CEO / CFO / COO etc. à basically anything “chief”. When does a person become eligible to serve as a director A person is eligible once: - Appointed / directed (in the ways discussed above). - S66 à The director delivers written consent. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. REMOVAL OF DIRECTORS Who can remove a director? Shareholders - S71 à shareholders can remove a director by an ordinary resolution o This is an unalterable provision à so the MOI cannot change this. - Requirements o The director must get notice of the meeting of removal. o The director must get the proposal of the resolution of the removal. o The director must be given the opportunity to make a presentation. - Must the director get reasons for removal? o Pretorius case à there must be reasons so that the director can make a proper presentation. o Miller case à the common law must be preserved which says that it is not necessary for reasons to be provided when shareholders exercise their s71 rights. - Audi alteram partem rule o Zulu v Zulu à the requirements for removal must be satisfied (fair procedure). These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. Directors à 2 ways MORE THAN 2 When a director / shareholder alleges that a director has become: DIRECTORS - Ineligible / disqualified. - Incapacitated. - Neglected their performance / functions as a director. S71 à Board can remove the director by resolution à requirements - The director must get notice of the meeting of removal. - The director must get the proposal of the resolution of the removal. - The directors must be given reason for removal. - The director must be given the opportunity to make a presentation. Remedy for the director - S71 à review the decisions within 20 business days. 2 DIRECTORS When a director / shareholder alleges that a director has become: OR LESS - Ineligible / disqualified. - Incapacitated. - Neglected their performance / functions as a director. S71 à the alleging director / shareholder may apply to the Tribunal for removal S71 à Remedies for the director (common law) - Loss of office as a director. - Loss of any connected office. MAIN DIFFERENCE - More than 2 à directors / shareholders make the decision to remove the director. - Less than 2 à Tribunal makes the decision to remove the director. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. INELIGIBILITY When is a person ineligible to become a director? This is a ground for removal - Juristic person à a company needs a natural person who can apply their mind. - An emancipated minor. - A legally disabled person. - S69 à does not satisfy the requirements in the MOI. DISQUALIFICATION When is a person disqualified from becoming a director? This is a ground for removal à keep in mind that a person can be eligible but disqualified from being a director - A person prohibited from being a director by a court. - A person who has been declared a delinquent in terms of s162. - S69 à people who are: o Unrehabilitated insolvent. o Prohibited by public regulation from being a director. o Removed from office of trust because of misconduct / dishonesty. o Convicted and imprisoned without the option of a fine. - A person disqualified by the MOI. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. VACANCIES When does a person cease to be a director? When a director: - Term expired o The MOI can place limitations on the term of directors. o The MOI can state that reelection is needed after a certain period. - Resigns / dies. - Ex officio à they are no longer a CEO / COO / CFO etc. - Incapacitated. - Delinquent / on probation. - Ineligible / disqualified. - Removed by directors / shareholders / Tribunal. How are vacancies filled? Vacancies can be filled through: - New appointment. - At the next AGM. - At a shareholder meeting for the purpose of filling the vacancy o Within 6 months of vacancy. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. MANAGEMENT: MEETINGS Who may call a board meeting? A board meeting can be called by: - Authorized director à normally the chairman of the company. - When there are more than 12 directors à 25% of directors. - When there are less than 12 directors à 2 directors. Electronic communication Board meetings can be called electronically à 2 requirements - Directors must be able to participate o Simultaneously AND o Effectively. Notice The notice for a board meeting can be determined by the board (form and period of notice) - As long as all directors have notice. Quorum For a meeting to begin - Majority of directors must be present à 51%. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. Voting Normally à each director has 1 vote - What if there is a deadlock (tie) o The MOI should have a deadlock mechanism à normally companies let the chairperson have the final say. Sometimes directors’ votes can be weighted à their vote counts more - Normally in the case of nominee directors (representatives of shareholders) o Sometimes they have a weighted vote because they represent a major shareholder. Resolutions Resolution can be taken: - In person at a board meeting. - S74(1) à In written form via electronic communication. Minutes of board meetings Minutes must be kept which contain: - Resolutions. - Conflicts of interests. How long must minutes be kept for? - 7yrs. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material for the test. Purpose of keeping minutes - Protecting the board from liability à if they expressly voted against something. - Institutional knowledge à if a new director comes in then he has context. Minutes must be signed off by: - The chairperson of the meeting. MANAGEMENT: BOARD AND COMPANY COMMITTEES Board committee v company committee Board committee - Established by the board to delegate responsibilities. Company committee - Organ of the company. - Accountable to shareholders. Social and ethics committee Draws board attention to any social and ethical issues which may affect the board - Present yearly. - Reg 43 à Compulsory for: o Listed public companies. o SOC’s. o 500+ public interest points in any 2 previous 5 financial years. These notes have been made by KL Davey, please do not distribute them or resell them. I do not claim this work as my own, all intellectual credit goes to the author of the prescribed textbook, the lecturer, and the University of Pretoria. I am not responsible for any missing / misinformation, it is your own responsibility to ensure you have studied all the correct material f