Corporate Law Study Guide 2024 PDF

Corporate Law Educor © Bachelor of Commerce in Accounting/Business Management Module: Corporate Law STUDY GUIDE 2024...

Corporate Law Educor © Bachelor of Commerce in Accounting/Business Management Module: Corporate Law STUDY GUIDE 2024 1 Corporate Law Educor © COPYRIGHT © EDUCOR, 2023 All rights reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of Educor Holdings. Individual’s found guilty of copywriting will be prosecuted and will be held liable for damages. 2 Corporate Law Educor © 1. About Brand........................................................................................................................ 8 2. Our Teaching and Learning Methodology........................................................................... 9 Icons.......................................................................................................................... 10 3. Introduction to the Module................................................................................................ 12 Module Information............................................................................................................... 12 Module Purpose.................................................................................................................... 12 Outcomes.................................................................................................................. 12 Assessment............................................................................................................... 12 Pacer......................................................................................................................... 14 Planning Your Studies............................................................................................... 14 4. Prescribed Reading...................................................................................................................... 15 Prescribed Book........................................................................................................ 15 Recommended Books............................................................................................... 15 5. Module Content................................................................................................................. 16 THE LEGAL CONCEPT OF A COMPANY............................................................... 17 Introduction......................................................................................................... 17 Definition of “Company” and Juristic Person............................................................... 18 Legal Personality.......................................................................................................... 18 5.1.4 Exceptions to the Principles of Separate Legal Personality............................... 19 TYPES OF COMPANIES.......................................................................................... 21 Introduction......................................................................................................... 21 Profit and Non-Profit Companies........................................................................ 22 Types of Profit Companies................................................................................. 22 The Private Company......................................................................................... 22 The Public Company.......................................................................................... 23 Personal Liability Company................................................................................ 24 The State-Owned Company............................................................................... 25 Non-Profit Companies (NPCS)........................................................................... 25 External Companies........................................................................................... 27 Domesticated Companies.............................................................................. 27 Close Corporations......................................................................................... 27 Conversion of Companies.............................................................................. 27 FORMATION OF COMPANIES AND THE COMPANY CONSTITUTION................ 29 Introduction......................................................................................................... 29 Incorporation of the Company............................................................................ 30 Company Names................................................................................................ 31 3 Corporate Law Educor © The Memorandum of Incorporation.................................................................... 32 Rules of the Company........................................................................................ 33 Shareholder Agreements................................................................................... 33 The Legal Status of the Memorandum of........................................................... 33 Incorporation and Rules.................................................................................................... 33 The Pre-Incorporation Contracts........................................................................ 33 CORPORATE CAPACITY, AGENCY AND THE TURQUAND RULE.............................................. 35 Introduction......................................................................................................... 35 The Object of the Ultra Vires Doctrine............................................................... 35 Doctrine of Constructive Notice.......................................................................... 37 The Turquand Rule (The Presumption of Compliance with Formal and Procedural Requirements)................................................................................................ 38 Representation and the Authority of the Directors............................................. 39 SHARES, SECURITIES AND TRANSFER............................................................... 41 Introduction......................................................................................................... 41 Nature of Shares................................................................................................ 42 Classes of Shares.............................................................................................. 42 Authorisation for Shares..................................................................................... 42 Authority to Issue Shares................................................................................... 42 Employee Share Schemes................................................................................. 43 Consideration for Shares.................................................................................... 43 Capitalisation Shares......................................................................................... 44 Debt Instruments................................................................................................ 44 Options for Subscription of Securities............................................................ 44 Registration and Transfer of Securities.......................................................... 44 CORPORATE FINANCE........................................................................................... 50 Introduction................................................................................................................. 50 Definition of Contributions by Companies.......................................................... 50 Repurchases (Buy Backs).................................................................................. 54 Acquisition by a Company of Shares in its Holding Company (Indirect Purchases)........................................................................................................................ 56 Financial Assistance for the Acquisition of Securities (NB)................................ 57 Financial Assistance to Directors – Section 45 (NB).......................................... 59 Shareholders Pre-Emption Rights...................................................................... 61 GOVERNANCE AND SHAREHOLDERS................................................................. 63 Introduction......................................................................................................... 64 4 Corporate Law Educor © Shareholders...................................................................................................... 64 Record Date for Determining Shareholder Rights.............................................. 65 Instances where Compliance with Formalities is not required........................... 65 Proxies................................................................................................................ 65 Shareholder Meetings........................................................................................ 66 Conveying a Shareholders’ Meeting....................................................................... 66 Notice of Meetings.............................................................................................. 67 Conduct of Shareholders’ Meetings........................................................................ 67 Voting at Meetings.......................................................................................... 67 Chairperson at Meetings................................................................................. 67 Quorum........................................................................................................... 68 Postponement and Adjournment of Meetings................................................ 68 Shareholder Resolutions (NB)........................................................................ 68 Written Resolutions......................................................................................... 68 Company Records.......................................................................................... 69 GOVERNANCE AND THE BOARD OF DIRECTORS.............................................. 70 Introduction......................................................................................................... 71 Who is a Director?.............................................................................................. 71 Legal Position of Directors................................................................................. 72 Prescribed Officers............................................................................................. 72 Office Bearers of the Company.......................................................................... 72 Number of Directors........................................................................................... 72 Appointment of Directors.................................................................................... 73 Terms of Appointment........................................................................................ 73 Record of Directors............................................................................................ 73 Company Rules.............................................................................................. 73 Negligibility and Disqualification of Person to be Directors (NB).................... 74 Delinquent Directors and Directors on Probation........................................... 74 Vacancies on the Board of Directors.............................................................. 75 Removal of Directors...................................................................................... 75 Retirement from Office.................................................................................... 76 Resignation of Directors................................................................................. 76 Remuneration of Directors.............................................................................. 76 Board Committees.......................................................................................... 76 Board Meetings............................................................................................... 77 Decisions Taken Without Convening a Meeting............................................. 77 5 Corporate Law Educor © Loans or Other Financial Assistance to Directors.......................................... 77 THE DUTIES AND LIABILITY OF DIRECTORS....................................................... 79 Introduction................................................................................................................. 79 The Fiduciary Duties of Company Directors...................................................... 80 The Fiduciary Duties of Directors and the Standards of Directors’ Conduct...... 80 Directors Conflict of Interest............................................................................... 81 Duty of Care, Skill and Diligence (S 76(3) (C))................................................... 82 Disclosure of the Director’s Personal Financial Interest....................................... 83 Indemnification and Directors’ and Officers........................................................... 84 Ratification, Condonation and Relief.................................................................. 84 Liability of Directors............................................................................................ 85 Fraudulent and Reckless and Insolvent Trading............................................ 85 THE AUDITOR, FINANCIAL RECORDS AND REPORTING............................... 87 Introduction..................................................................................................... 87 Financial Records and Financial Statement................................................... 88 Annual Return (Section 33 of the Act and Regulation 30(2) -(4).................... 89 Audit and Independent Review of Companies............................................... 89 Audit and Independent Review of Close Corporations (Pages 607 – 608).... 90 Independent Review and Reportable Irregularities........................................ 90 Auditor............................................................................................................ 90 Auditing Profession Act................................................................................... 92 Audit Committee (Sect 94).............................................................................. 92 Company Secretary........................................................................................ 93 The King III Report and Corporate Governance............................................. 93 Auditors’ Liability............................................................................................. 93 PUBLIC OFFERINGS OF COMPANY SECURITY............................................... 96 Introduction..................................................................................................... 96 Types of Offers and the Distinction between Listed and Unlisted Securities 97 General Restrictions of Offers to the Public................................................... 97 What Constitutes an Offer to the Public......................................................... 97 What Does Not Constitute an Offer to the Public........................................... 97 Standards for Qualifying Employee Share Schemes..................................... 97 Advertisements Relating to Offers.................................................................. 98 Prospectus Requirements.............................................................................. 98 Secondary Offers to the Public....................................................................... 98 Liability............................................................................................................ 99 6 Corporate Law Educor © Allotment and Acceptance of Subscriptions................................................... 99 SHAREHOLDER REMEDIES AND MINORITY PROTECTION......................... 101 Introduction................................................................................................... 101 Relief from Oppressive or Prejudice Conduct.............................................. 101 Derivative Actions (Section 165 of the Act).................................................. 102 Dissenting Shareholder’s Appraisal Rights (Section 164)...............................103 Application to Protect the Rights of Securities Holders................................ 104 Other Shareholder Remedies....................................................................... 104 BUSINESS RESCUE AND COMPROMISES...................................................... 106 Introduction................................................................................................... 106 The Meaning of Business Rescue................................................................ 107 Commencement of Business Rescue Proceedings..................................... 107 Duration of the Business Rescue Proceedings............................................ 108 The Legal Consequences of a Business Rescue Order.............................. 109 The Business Rescue Practitioner............................................................... 110 The Business Rescue Plan........................................................................... 111 The Rights of the Affected Persons.............................................................. 112 The Consideration and Adoption of the Business Rescue Plan................... 112 Compromise with Creditors (Section 155).................................................... 112 WINDING-UP....................................................................................................... 114 Introduction................................................................................................... 114 Winding-up of Solvent Companies............................................................... 114 Winding-up of Insolvent Companies............................................................. 115 The Winding-up Process (Section 346 of the Act)........................................ 115 The Liquidator............................................................................................... 116 Dissolution of Companies and Removal from the Register.......................... 116 Deregistration of Companies........................................................................ 116 Effect of Removing Company from Register................................................ 117 6. References...................................................................................................................... 118 7 Corporate Law Educor © 1. ABOUT BRAND Damelin knows that you have dreams and ambitions. You’re thinking about the future, and how the next chapter of your life is going to play out. Living the career you’ve always dreamed of takes some planning and a little bit of elbow grease, but the good news is that Damelin will be there with you every step of the way. We’ve been helping young people to turn their dreams into reality for over 70 years, so rest assured, you have our support. As South Africa’s premier education institution, we’re dedicated to giving you the education experience you need and have proven our commitment in this regard with a legacy of academic excellence that’s produced over 500 000 world – class graduates! Damelin alumni are redefining industry in fields ranging from Media to Accounting and Business, from Community Service to Sound Engineering. We invite you to join this storied legacy and write your own chapter in Damelin’s history of excellence in achievement. A Higher Education and Training (HET) qualification provides you with the necessary step in the right direction towards excellence in education and professional development. 8 Corporate Law Educor © 2. OUR TEACHING AND LEARNING METHODOLOGY Damelin strives to promote a learning-centred and knowledge-based teaching and learning environment. Teaching and learning activities primarily take place within academic programmes and guide students to attain specific outcomes. A learning-centred approach is one in which not only lecturers and students, but all sections and activities of the institution work together in establishing a learning community that promotes a deepening of insight and a broadening of perspective with regard to learning and the application thereof. An outcomes-oriented approach implies that the following categories of outcomes are embodied in the academic programmes: Culminating outcomes that are generic with specific reference to the critical cross-field outcomes including problem identification and problem-solving, co- operation, self-organisation and self-management, research skills, communication skills, entrepreneurship and the application of science and technology. Empowering outcomes that are specific, i.e. the context specific competencies students must master within specific learning areas and at specific levels before they exit or move to a next level. Discrete outcomes of community service learning to cultivate discipline- appropriate competencies. Damelin actively strives to promote a research culture within which a critical-analytical approach and competencies can be developed in students at undergraduate level. Damelin accepts that students’ learning is influenced by a number of factors, including their previous educational experience, their cultural background, their perceptions of particular learning tasks and assessments, as well as discipline contexts. Students learn better when they are actively engaged in their learning rather than when they are passive recipients of transmitted information and/or knowledge. A learning-oriented culture that acknowledges individual student learning styles and diversity and focuses on active learning and student engagement, with the objective of achieving deep learning outcomes and preparing students for lifelong learning, is seen as the ideal. These principles are supported through the use of an engaged learning approach that involves interactive, reflective, cooperative, experiential, creative or constructive learning, as well as conceptual learning via online-based tools. Effective teaching-learning approaches are supported by: Well-designed and active learning tasks or opportunities to encourage a deep rather than a surface approach to learning. Content integration that entails the construction, contextualization and application of knowledge, principles and theories rather than the memorisation and reproduction of information. Learning that involves students building knowledge by constructing meaning for themselves. 9 Corporate Law Educor © The ability to apply what has been learnt in one context to another context or problem. Knowledge acquisition at a higher level that requires self-insight, self-regulation and self-evaluation during the learning process. Collaborative learning in which students work together to reach a shared goal and contribute to one another’s learning at a distance. Community service learning that leads to collaborative and mutual acquisition of competencies in order to ensure cross cultural interaction and societal development. Provision of resources such as information technology and digital library facilities of a high quality to support an engaged teaching-learning approach. A commitment to give effect teaching-learning in innovative ways and the fostering of digital literacy. Establishing a culture of learning as an overarching and cohesive factor within institutional diversity. Teaching and learning that reflect the reality of diversity. Taking multi culturality into account in a responsible manner that seeks to foster an appreciation of diversity, build mutual respect and promote cross-cultural learning experiences that encourage students to display insight into and appreciation of differences. Icons The icons below act as markers, that will help you make your way through the study guide. 10 Corporate Law Educor © Additional information Find the recommended information listed. Case study/Caselet Apply what you have learnt to the case study presented. Example Examples of how to perform a calculation or activity with the solution / appropriate response. Practice Practice the skills you have learned. Reading Read the section(s) of the prescribed text listed. Revision questions Complete the compulsory revision questions at the end of each unit. Self-check activity Check your progress by completing the self-check activity. Study group / Online forum discussion Discuss the topic in your study group or online forum. Think point Reflect, analyse and discuss, journal or blog about the idea(s). Video / audio Access and watch/listen to the video/audio clip listed. Vocabulary Learn and apply these terms. 11 Corporate Law Educor © 3. INTRODUCTION TO THE MODULE Welcome to Corporate Law Module Information Qualification title Bachelor of Commerce in Accounting/ Business Management Module Title Corporate Law NQF Level 6 Credits 10 Notional hours 100 Module Purpose This module is aimed at providing the student with an overview of the field of Corporate Law in South Africa to enable them to understand the basic concepts of South African Company and Close Corporations Law. In addition it will equip the students with an understanding of the concept of a company and the different types of companies, the formation , registration and administration both internally and externally of a company and close corporations, the role of the various organs and office bearers of a company and CC , the basic principles about shares , share capital , members interests and the role of auditors and accounting officers and protection of minority interest as well as the concept of lifting the corporate veil and exposing the personal liability of office bearers. Outcomes By the end of this module, students should be able to know: The legal concept of a company Types of companies Formation of companies and the company constitution Corporate capacity, agency and the turquand rule Shares, securities and transfer Corporate finance Governance and shareholders Governance and the board of directors The duties and liability of directors The auditor, financial records and reporting Public offerings of company securities Assessment You will be required to complete both formative and summative assessment activities. 12 Corporate Law Educor © Formative assessment: These are activities you will do as you make your way through the course. They are designed to help you learn about the concepts, theories and models in this module. This could be through case studies, practice activities, self-check activities, study group / online forum discussions and think points. You may also be asked to blog / post your responses online. Summative assessment: You are required to do 2 assignment. Mark allocation The marks are derived as follows for this module: Assignment 1 Assignment 2 Exam TOTAL 100% 13 Corporate Law Educor © Pacer The table below will give you an indication of which topics you need to include from the module pacer. Week Topics 1 Unit 1:The Legal Concept Of A Company Unit 2:Types Of Companies 2 Unit 3:Formation Of Companies And The Company Constitution Unit 4:Corporate Capacity, Agency And The Turquand Rule 3 Unit 5:Shares ,Securities And Transfer 4 Unit 6:Corporate Finance 5 Unit 7:Governance And Shareholders 6 Unit 8:Governance And The Board Of Directors 7 unit 9:The Duties And Liabilities Of Directors 8 Unit 10:The Auditor , Financial Records And Reporting 9 Unit 11:Public Offerings Of Companies Securities Unit 12:Shareholder Remedies And Minority Protection 10 Unit 13:Business Rescue And Compromise Unit 14:Winding-Up Planning Your Studies You will have registered for one or more modules in the qualification and it is important that you plan your time. To do this look at the modules and credits and units in each module. Create a time table / diagram that will allow you to get through the course content, complete the activities, and prepare for your tests, assignments and exams. Use the information provided above (How long will it take me?) to do this. What equipment will I need? Access to a personal computer and internet. This module will take you approximately 100 hours to complete. The following table will give you an indication of how long each module will take you. Unit Number Hours 1 5 2 5 3 5 4 5 5 10 6 10 7 10 8 10 9 10 10 10 11 5 12 5 13 5 14 5 14 Corporate Law Educor © 4. PRESCRIBED READING Prescribed Book Contemporary Company Law Cassim, M.F. 2012 Juta Recommended Books The law of Business structures Cassim ,H.I.F 2012 Juta 15 Corporate Law Educor © 5. MODULE CONTENT You are now ready to start your module! The following diagram indicates the topics that will be covered. These topics will guide you in achieving the outcomes and the purpose of this module. Please make sure you complete the assessments as they are specifically designed to build you in your learning. UNIT 1: THE LEGAL CONCEPT OF A COMPANY UNIT 2: TYPES OF COMPANIES UNIT 3: FORMATION OF COMPANIES AND THE COMPANY CONSTITUTION UNIT 4: CORPORATE CAPACITY, AGENCY AND THE TURQUAND RULE UNIT 5: SHARES, SECURITIES AND TRANSFER UNIT 6: CORPORATE FINANCE UNIT 7:GOVERNANCE AND SHAREHOLDERS UNIT 8:GOVERNANCE AND THE BOARD OF DIRECTORS UNIT 9:THE DUTIES AND LIABILITY OF DIRECTORS UNIT 10: THE AUDITOR, FINANCIAL RECORDS AND REPORTING UNIT 11:PUBLIC OFFERINGS OF COMPANY SECURITY UNIT 12:SHAREHOLDER REMEDIES AND MINORITY PROTECTION UNIT 13: BUSINESS RESCUE AND COMPROMISES UNIT 14:WINDING-UP 16 Corporate Law Educor © THE LEGAL CONCEPT OF A COMPANY By the end of this unit, you will be able to: Define the meaning of a company as a form of enterprise Exemplify the meaning of legal personality Discuss a company as a separate entity Learning Outcomes Understand when and how to disregard the separate existence of the corporate entity Understand the legal consequences of separate legal personality Discuss the concept of piercing the corporate veil It will take you 5 hours to make your way through this unit. Time Important Legal person- An individual, company , or other entity which has legal terms and rights and is subject to obligations. definitions Juristic person- A social entity, a community or an association of people which has an independent right of existence under the law Introduction A company has a separate legal personality. Several consequences flow from this concept, such as the privilege of limited liability bestowed on shareholders: perpetual succession of a company; the fact that the property, profits, debts and liabilities of the company belong to it and not to the shareholders. A company may sue and be sued in its own name. 1 This was also confirmed in the case of Salomon v Saloman & Co Ltd.2 The separate legal personality of company has been abused in the past and the doctrine of piercing the corporate veil was introduced In this unit, we will cover: Definition of a company and juristic person Legal personality Exceptions to the principles of separate legal personality It will take you 5 hours to make your way through this unit. 1 Cassim et al 2012 Contemporary Company Law p 35 -40. 2 AC 22 (HL). 17 Corporate Law Educor © Definition of “Company” and Juristic Person A company is defined in section 1 of the Companies Act 71 of 2008 (hereinafter referred to as ‘the Act’) as meaning:3 “A juristic person incorporated in terms of this Act, a domesticated company, or a juristic person that, immediately before the effective date a) Was registered in terms of the – (i) Companies Act, 1973, other than as an external company as defined in the Act; or (ii) Close Corporations Act, 1984, if it has subsequently been converted in terms of Schedule 2; b) was in existence and recognized as an’ existing company’ in terms of the Companies Act, 1973; c) was deregistered in terms of the Companies Act, 1973” Legal Personality Legal persons have the capacity to acquire legal rights and incur legal duties.4 The difference between a legal person and a human being: A legal person is a legal concept and has no physical existence. A legal or justice person cannot perform acts that are inherent in human nature such as entering into a marriage, appearing in court or occupying property Legal consequences of separate legal personality a) Limited liability b) Perpetual succession c) Property and assets of the company belong to the company d) Profits of the company belong to the company e) Debts and liabilities of the company belong to the company f) A shareholder has no right to manage the company’s business or to enter into transactions on its behalf g) Company can sue or be sued in its own name h) Company may contract with its shareholders5 Examples of abuse of separate legal personality6 a) separate legal personality was used as a device by a director to evade his or her fiduciary duty: and b) to overcome contractual duty 3 See s (1). 4 Cassim et al 2012 Contemporary Company Law p 31- 35. 5 Cassim et al 2012 Contemporary Company Law p 35 -40. 6 Cassim et al 2012 Contemporary Company Law p 43-44. 18 Corporate Law Educor © 5.1.4 Exceptions to the Principles of Separate Legal Personality Distinction between piercing the veil and lifting the veil When the court pierces the veil, it treats the liabilities of the company as those of its shareholders or directors, and disregards the corporate personality of the company. When the courts lift the veil, it is merely taking into account who the shareholders and directors are. This does not necessarily entail ignoring the separate identity of the company or treating the liabilities of the companies as those of the shareholders or directors. In Atlas Maritime CO SA v Avalan Maritime Ltd, Straugton LG held that to lift the corporate veil or look behind it, on the other hand, should also mean to have regard to the shareholding in a company for some legal purpose. Piercing the corporate veil under the Act: Section 20(9) of the Act states: “If, an application by an interested person or in any proceedings in which a company is involved, a court finds that the incorporation of the company, any use of the company, or any act by or 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 non-profit company, a member of the company, or another person specified in the declaration; and b) Make any further order the court considers appropriate to give effect to a declaration contemplated in paragraph (a)”7 Key concepts from the provisions of section 20(9) a) Application or proceedings b) Interested person c) Incorporation of the company, use of the company or act by or behalf of the company d) Unconscionable abuse- The principles developed in the context of S 65 of the Close Corporations Act, and Common Law should be used as a guideline to the determine “unconscionable abuse”8 e) Deemed not to be a juristic person f) Rights, obligation or liabilities g) Further order 7 S. 20(9) of the Act 8 Cassim et al 2012 Contemporary Company Law p 62. 19 Corporate Law Educor © Imposing personal liability on the directors of a company9 Some instances where the Act imposes personal liability on the directors: - Acting without authority - Reckless trading - Fraud - False or misleading statements - Unlawful distributions - Causing the company to act contrary to the Companies Act or the Memorandum of Incorporation - Contravening the Companies Act Please refer to Chapter 2 of the prescribed textbook Caselet: Mrs Sweetooth worked for Choccy Chips (Pty)Ltd that produces chocolate chip cookies. Following the termination of her employment with Choccy Chips(Pty)Ltd ,she signs a restraint of trade of agreement in her personal capacity not to compete with Choccy Chip (Pty) Ltd. Mrs Sweetooth subsequently formed a company ,Candy Land (Pty)Ltd of which she was the sole shareholder and director. Candy Land (Pty) Ltd starts producing chocolate chip cookies in competition with Choccy Chip (Pty)Ltd. Advise Choccy Chip (Pty) Ltd of any legal remedies that it may have. Self-Assessment Let’s see what you have learned so far by taking this short self-assessment. 1. Define a legal person 2. Define the term juristic person 3. Name the instances where the Act imposes personal liability on the directors 9 Cassim et al 2012 Contemporary Company Law p 64 – 65. 20 Corporate Law Educor © TYPES OF COMPANIES By the end of this unit, you will be able to: Describe and diagrammatically set out the various types of companies and their characteristics Understand and apply the applicability of close of corporations since the commencement of the new Act. Learning Differentiate between public and private companies Outcomes Explain the concept of a shareholder’s pre-emptive right Differentiate between external and foreign companies Know the requirements for the conversion of a close corporation to a company It will take you 5 hours to make your way through this unit. Time Important Profit – A financial gain ,especially the difference between the amount terms and earned and the amount spent in buying, operating or producing definitions something. Introduction There are many functions and uses of companies. the company structure is available to both a large group of members and the investing pubic in general as well as small groups of members or even a single individual. a company is not limited to profit making – the company structure can be used for conducting public benefit activities or communal, social, charitable or other non-profit activities In this unit, we will cover: Profit and non-profit companies Types of profit companies The private company The public company The personal liability company The state-owned company Non-profit companies External companies Domesticated companies Close corporations Conversions of companies It will take you 5 hours to make your way through this unit. 21 Corporate Law Educor © Profit and Non-Profit Companies There are two broad categories of companies that may be formed and incorporated under the Act:10 - Profit companies (of which there are four types); - Non-profit companies Types of Profit Companies In terms of the Act, profit companies are categorized as follows:11 - The private company (which is the successor to the private company under the 1973 Act); - The public company (which is comparable to the public company under the 1973 Act) - The personal liability company (which is the successor to the incorporated or professional company formed under section 53 (b) of the 1973 Act) - The state-owned company General characteristics of profit companies”12 1. The purpose of a profit company is financial gain 2. Company is formed by one or more persons as incorporators, regardless of the type of Profit Company it is. 3. Profit companies may have any number of shareholders The Private Company Definition:13 A profit company is a private company: - It is not a state-owned company; and - Its Memorandum of Incorporation both: Prohibits the transfer of any of its securities to the public; and It restricts the transferability of its securities. Other characteristics of private companies14 The name must end with the expression ‘Proprietary Limited’ or its abbreviation ‘(Pty) Ltd. Is formed by one or more persons as incorporators Need only one director as a minimum, but is subject to the requirements of the Memorandum of Incorporation. 10 S. 8(1). 11 S. 8(2). 12 Cassim et al 2012 Contemporary Company Law p 71. 13 See s.1 of the Act and read with Section 8(2)(b). 14 Cassim et al 2012 Contemporary Company Law p 73. 22 Corporate Law Educor © Restriction on transferability of securities of private companies15 a) Manner or form of restriction a. Manner or form of restriction The Memorandum of Incorporation of a private company restricts the free transferability of its securities. The Act does not prescribe the manner or form of restriction. b) Effect of a restriction on transferability In Smuts v Booysens, and Markplaas (Edms) Bpk v Booysens16- it was held that the restricted transferability of shares is an essential attribute of a private company. The court held that all the procedures comprising a transfer are restricted. c) Distinction between pre-emptive rights in terms of s 8(2)(b) and s 39 The rights of pre-emption in terms of s 8(2) (b) of the Act relates to the securities of a private company that must be restricted from the free transferability. The pre-emptive rights that shareholders in a private company enjoy in terms of s 39 of the Act, confers on each shareholder of a private company a pre-emptive right to be offered (and within reasonable time to subscribe for) a percentage (that is equal to the shareholder’s general voting power immediately before the offer is made) of any new shares that the company proposes to issue, before those shares may be offered to a non-shareholder. The Public Company Definition Section 1 states that a public company is a profit company that is not a state-owned company, nor a private company, nor a personal liability company 17 Other characteristics of public companies18 They raise their share capital from members of the public. There is thus a more demanding disclosure and transparency regime. It is mandatory for a public company to appoint a company secretary, and audit committee and an independent auditor and to have annual financial statements audited.19 Listing the securities of public companies20 The offer by a public company of shares to the public must be distinguished from the listing of a public company’s shares on a securities exchange, such as the JSE limited. 15 Cassim et al 2012 Contemporary Company Law p 75. 16 2001(4)SA 15(SCA) 17 Cassim et al 2012 Contemporary Company Law p 78. 18 Cassim et al 2012 Contemporary Company Law p 78. 19 Cassim et al 2012 Contemporary Company Law p 79. 20 Cassim et al 2012 Contemporary Company Law p 80. 23 Corporate Law Educor © Difference between public and private companies21 The essence of a private company is that its Memorandum of Incorporation must both: restrict the transferability of its securities and prohibit it from offering its securities to the public Public companies may offer their securities to the public and may, but need not, restrict the transferability of their securities. The name of a public company must end with the term ‘Ltd’ or ‘Limited’ while that of private company must end with the expression ‘(Pty)Ltd’ or ‘Proprietary Limited’ The minimum numbers of directors on the board of directors of a public company is at least three directors In view of the public nature of public companies, the Act imposes more onerous legal duties of disclosure, accountability and transparency on public companies. Public companies are generally required to have their annual financial statements audited A public company is obliged to convene an annual general meeting. This no longer applies to private companies. The existing shareholders in a private company enjoy pre-emptive rights. Personal Liability Company 22 Definition A profit company is a personal liability company if: - it satisfies the criteria for a private company; and - its Memorandum of Incorporation states that it is a personal liability company23 Other characteristics of personal liability companies A personal liability company must have the word ‘Incorporated’ or its abbreviations ‘ Inc’ suffixed as the last word of its name The personal liability company is expected to be used primarily by association of professional persons, such as attorneys, stockbrokers, public accountants, auditors etc. who wish to have the convenience and advantage of separate legal personality, especially perpetual succession. The personal liability company need only have a minimum of one director on the board of directors, subject to the Memorandum of Incorporation. A personal liability company is formed by one or more persons as incorporators. A personal liability company is subject to similar accountability and transparency requirements as the private company. It need not appoint a company secretary The appointment of an auditor is only necessary if the Memorandum of Incorporation so requires. Pre-existing section 53 (b) companies The Act states that a pre-existing section 53 (b) company is deemed to have amended its Memorandum of Incorporation as at the general effective date of the Act. 21 Cassim et al 2012 Contemporary Company Law p 80. 22 Cassim et al 2012 Contemporary Company Law p 81 23 S. 1 read with s 8(2)(c) 24 Corporate Law Educor © The liability of the directors in a personal liability company The Act states that the directors of a personal liability company are jointly and severally liable, together with the company, for any debts, and liabilities of the company that are or were ‘contracted’ during the respective period of office. The State-Owned Company Definition State owned companies are now recognized as a separate type of company. Public entities are entities that are directly or indirectly controlled by the state. Other characteristics of state- owned companies All provisions of the Act that apply to public companies generally also apply to state owned companies. But the Minister has the power to grant exemptions to state-owned companies. Pre-existing (state-owned) companies Pre-existing companies that were registered under the 1973 Act and fall within the definition of a state-owned company under the Act are now deemed to have amended their constitutions to have changed the ending expressions of their names to ‘SOC Ltd’ as at the general effective date of the Act.24 Non-Profit Companies (NPCS) Introduction The Act exempts non-profit companies from certain provisions of the Act-25 - capitalization of profit companies - securities registration and transfer - remuneration and election of directors - company secretaries and audit committees, except to the extent that an obligation to appoint a company secretary, auditor or audit committee arises in terms of a requirement in the Company’s Memorandum of Incorporation - public offerings of company securities - right of shareholders to approve a business rescue plan - dissenting shareholders’ appraisal rights The definition of a non-profit company:26 - a non-profit company is a company that is incorporated for: o public benefit object; or o an object relating to one or more cultural or social activities, or communal or group interests; and - it is the essence that the income of the property of a non-profit company must not be distributable to its incorporators, members, directors, officers or persons related to any of them. - Both of the essential requirements must be satisfied for a company to constitute a Non- profit 24 Schedule 5 item 4(1)(c). 25 Deloitte Companies Act 2008: An overview of key elements p 7. 26 Cassim et al 2012 Contemporary Company Law p 86. 25 Corporate Law Educor © Other characteristics of Non-Profit Companies The company name of a non-profit company ends with the expression ‘NPC’ A non-profit company must be formed by at least three persons acting in common as incorporators. An organ of state or a juristic person may also incorporate a non-profit company. Objects and Policies of Non-Profit Companies27 The Memorandum of Incorporation of a non-profit company must set out at least one object of the company. Each object must either be: - a public benefit object; or - an object relating to one or more cultural or social activities, or communal or group interests. Please refer to the discussion on assets and income, financial benefit or gain, winding-up or dissolution and tax on pages 90 – 91. Incorporators of Non-Profit Companies A non-profit company is incorporated by three or more persons acting in concert, as opposed to a profit company which may be incorporated by even one person. An organ of state or a juristic person may also incorporate a non-profit company. The incorporators of a non-profit company are its first directors and its first members, if any. Members of Non-Profit Companies and voting rights A non-profit company may be incorporated with or without members. The term member in this context means a person who holds membership and specified rights in the non-profit company. A non-profit company with members may have voting members or non-voting members. No more than these two classes of members may be provided for in the Memorandum of Incorporation. Where there are voting members, each voting member has at least one vote. Directors of Non-Profit Companies A non-profit company must have at least three directors Fundamental transactions of Non-Profit Companies A non-profit company is prohibited from converting to a profit company. A non-profit company may not amalgamate or merge with a profit company. 27 Cassim et al 2012 Contemporary Company Law p 89. 26 Corporate Law Educor © 27 Cassim et al 2012 Contemporary Company Law p 89. 26 Corporate Law Educor © Pre-existing section 21 companies The Transitional Arrangements of the Act provide that pre-existing companies that were incorporated under section 21 of 1973 Act are recognized as non-profit companies under the new Act. External Companies Introduction “Foreign company’’ means an entity is incorporated in some other jurisdiction outside the Republic of South Africa Where a foreign company carries on business or non-profit activities within in South Africa, it then qualifies as an external company. Types of external companies28 - External profit companies - External non-profit companies Application of the Act to external companies Since foreign companies are incorporated in another jurisdiction outside South Africa, the Act does not apply to foreign companies, save for those that qualify as external companies. Pre-existing external companies The Transitional Arrangements of the Act provide that pre-existing external companies that were registered as such under the 1973 Act are regarded as having been registered as external companies under the new Act. Domesticated Companies A domestic company is a foreign company whose registration has been transferred to South Africa. Close Corporations While existing close corporations are permitted to continue indefinitely, no new close corporations may be formed. Conversion of a close corporation to a company Please note the requirements for the conversion of a close corporation to a company. Conversion of Companies The Act preclude the conversions of a non-profit company to a profit company As for profit-companies, the Act states that where a profit company amends its Memorandum of Incorporation in such a manner that it no longer meets the criteria for its particular category of profit company, the company must at the same time also amend its name by altering the ending expression, as appropriate to reflect the category of profit company into which it thereafter falls. This suggests that a conversion of one type of Profit Company to another type 28 S. 23(1). 27 Corporate Law Educor © of company is effected by amending the company’s Memorandum of Incorporation, generally by way of special resolution. Please refer to Chapter 3 of the prescribed textbook REFERENCE Caselet: Bentley and Benze wish to form a company to conduct a panel-beating business. Bentley and ben will be the sole shareholders and directors of the company. they do not wish to offer the shares of the company to the general public. it is important to them that it be stated in the company’s memorandum of incorporation that if either of hem wishes to sell his shares, the shares may be sold and transferred to any purchaser he chooses. Advise Bentley and Benze of the type of company that would be most suitable to meet their needs. Self-Assessment Let’s see what you have learned so far by taking this short self-assessment. 1. Discuss the 4 different types of profit companies in detail. 28 Corporate Law Educor © FORMATION OF COMPANIES AND THE COMPANY CONSTITUTION By the end of this unit, you will be able to: Know the procedure for the incorporation of companies Describe how the memorandum of incorporation can be amended Explain the need for pre-incorporation contracts Learning Identify the different ways and requirements of entering into a Outcomes pre-incorporation contract Elaborate on the content and purpose of a memorandum of incorporation Understand the statutory provisions relating to the registration of a company name It will take you 5 hours to make your way through this unit. Time Incorporate - Constitute as a legal corporation Important terms and definitions Introduction Under the companies act of south Africa the formation of a company is regarded as a right, as opposed to a privilege bestowed upon by the state. one of the objectives of the companies’ act is to promote development in the south African economy by creating flexibility by forming and maintaining companies.in our companies act the regulatory oversight of the formation and registration of companies have been reduced. In this unit, we will cover: Incorporation and registration of companies Company names The memorandum of Incorporation Rules of the company Shareholder agreements The legal status of the memorandum of incorporation and rules Pre-incorporation contract It will take you 5 hours to make your way through this unit. 29 Corporate Law Educor © Incorporation of the Company The Act provides for a simplified registration process. In terms of the new provisions, one or more persons may incorporate a profit company, and three or more persons may incorporate a nonprofit company. Incorporation entails the adoption of a Memorandum of Incorporation (the only governing document of the company) and the filing of a notice with the Companies and Intellectual Property Commission (the Commission). 29 The Act imposes certain requirements for the Memorandum of Incorporation which are necessary to protect the interests of shareholders in the company. It further provides a number of default rules which companies may accept or alter as they wish to meet their needs and serve their interests. a) The incorporators The ‘incorporators’ (i.e. the founders of the company) are responsible for the incorporation of the company. One or more incorporators may incorporate a profit company, regardless of whether it is a public or a private company, while at least three persons acting in concert are required for the incorporation of a non-profit company. b) The procedure for incorporation In order to incorporate a company now, in terms of the Act, the incorporators must first complete and sign a Memorandum of Incorporation, either in person or proxy. The next step is for the incorporators to file with the Companies and Intellectual Commission (‘the Companies Commission’) the following:30 - The Notice of Incorporation; - A Notice of the appointment of the first company secretary, auditor or audit committee may be filed as part of the Notice of Incorporation; - A copy of the Memorandum of Incorporation; and - Payment of the prescribed fee c) What is the Memorandum of Incorporation? It is the sole founding or governing document of the company, setting out the rights, duties and responsibilities of shareholders, directors and others within and in relation to the company. It may further contain any special conditions applicable to the company, and any special requirement for the amendment of any such condition. The Memorandum of Incorporation may prohibit the amendment of any particular provision.31 29 Deloitte Companies Act 2008: An overview of key elements p 17. 30 S. 13(1)(b). 31 Deloitte Companies Act 2008: An overview of key elements p 16. 30 Corporate Law Educor © d) Registration of the company32 After accepting the filed Notice of Incorporation from the incorporators, the Companies Commission must as soon as possible register the company. The students need to be able to explain the registration of a company under the following headings: a) Registration certificate b) Rejection of the Notice of Incorporation by the Companies Commission c) Registration of external companies e) The registered office Section 23(3) of the act states that each company and every external company must continuously maintain at least one office in South Africa and register the address of its office Company Names a) Introduction Name reservation is not a requirement for incorporation. The proposed name of the company may be submitted in the Notice of Incorporation, which is filed with the Companies Commission. b) Criteria for company names33 A company name may consist of words in any language. The name may also include any letters, numbers or punctuation marks, and/ or round brackets. Certain symbols are also permitted. c) Registration of company names and disputes concerning names A company may register without reserving a name, and where the chosen name is not available, the company will be registered using its registration numbers as a temporary nature until a suitable name is identified. A proposed company name that is unsuitable, inappropriate or incomplete does not prevent or delay the process of incorporation and the registration of the company. See the paragraph above. The Act restricts a company name as for as necessary to: Protect the public from misleading names, which falsely imply an association that does not in fact exist; Protect the interests of the owners of the names and other forms of intellectual property from other persons misappropriating the first persons; and Protect the society as a whole from names that are hateful or otherwise negative. d) Changing the company name A change in name of a company is generally effected in the same way as any other alteration to the Memorandum of Incorporation, i.e. usually by way of special resolution. After changing its name, the company must file with the Companies Commission a Notice of Amendment, including a copy of the amendment. 32 Cassim et al 2012 Contemporary Company Law p 105. 33 Cassim et al 2012 Contemporary Company Law p 116. 31  Corporate Law Educor © e) Name reservation and defensive names A name may be reserved for later use either for a newly incorporated company or for an amendment to the name of an existing company. The Companies Commission will reserve the name for an applicant provided that the name requested to be reserved has not already been reserved nor is the registered name of another company. f) Use of company name and registration number A company must have its name and registration number stated in legible characters in all notices and other official publications of the company, including those in electronic format and all letters and negotiable instruments, orders for money or goods and business documents such delivery notes, invoices, receipts, and letters of credit of the company. Failure to do so is an offence. The Memorandum of Incorporation a) The contents of the Memorandum of Incorporation34 The Memorandum of Incorporation deals with matters such as the powers of the company; the amendment of the Memorandum of Incorporation; the ability to create rules of the company; securities of the company and debt instruments, shareholders, shareholders’ meetings and procedures, the composition of the board of directors; authority and powers of the board of directors; board meetings and committees of the board; compensation and indemnification of directors, and in the case of non-profit companies, the disposal of the company’s assets upon dissolution of the company. The Memorandum of Incorporation must be consistent with the provisions of the Act. b) Restrictive conditions and prohibitions on the amendment of the Memorandum of Incorporation35 A special resolution generally suffices for the amendment of the Memorandum of Incorporation, it is permissible for the Memorandum of Incorporation to prohibit the amendment of any of its particular provisions. The Memorandum of Incorporation may also contain restrictive conditions available to the company, and additional requirements for their amendments. c) Amending the Memorandum of Incorporation (IMPORTANT) The Memorandum of Incorporation of a company may be amended at any time by means of a special resolution. The amendment may be proposed either by the board of directors or by shareholders holding at least 10 percent of the voting rights that may be exercised on the matter.36 A special resolution to amend the Memorandum of Incorporation may be adopted at a formal meeting of shareholders or may be submitted for consideration to shareholders to be voted on in writing. An amendment to a Company’s Memorandum of Incorporation can be required by court order. 34 Cassim et al 2012 Contemporary Company Law p 125. 35 Cassim et al 2012 Contemporary Company Law p 128. 32 Corporate Law Educor © 36 S. 16(1)(c). 33  Corporate Law Educor © The students must have knowledge of the under- mentioned items. a) Correction of patent errors in the Memorandum of Incorporation b. Translations of the Memorandum of Incorporation c. Consolidations of the Memorandum of Incorporation d. Authenticity of version of the Memorandum of Incorporations Rules of the Company The Act provides that subject to the Memorandum of Incorporation, the board of directors of a company may make, amend or repeal any ‘necessary or incidental’ rules relating to the governance of the company, and dealing with matters that are not addressed in either the Act or Memorandum of Incorporation.37 Shareholder Agreements Section 15 (7) of the Act expressly provides that the shareholders of a company may enter into any agreement with one another concerning ‘any matter relating to the company’. The agreement must be consistent with the Act and the Memorandum of Incorporation. A shareholder agreement is a private document and need not be submitted to the Companies Commission and is not available for inspection by the public. 38 The binding force of the shareholder agreements stems from the normal principles of the law of contract. Take note that the shareholder agreement binds only those shareholders who are party to it. The Legal Status of the Memorandum of Incorporation and Rules In terms of Section 15 (6) of the Act, a company’s Memorandum of Incorporation and any company rules are binding as follows: - between the company and each shareholder; - between or among the shareholders of the company inter se; - between the company and each director or prescribed officer, in the exercise of his or functions within the company; and - between the company and any other person serving the company as a member of a committee of the board, in the exercise of his or her functions within the company The Pre-Incorporation Contracts Introduction The purpose of section 21 is to put persons (or promoters) acting as agents, in a position to contract on behalf of the company, even though the company does not exist. It does so by permitting the company once formed to ratify a pre-incorporation contract entered into by an agent. 37 S. 15(3). 38 Cassim et al 2012 Contemporary Company Law p 138 34 Corporate Law Educor © Liability of the promoter for a section 21 contract A person who does anything contemplated in subsection 1 of the Act 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 the entity is not subsequently incorporated or after being incorporated, the company rejects any part of such agreement or action.39 Please refer to chapter 4 of the prescribed textbook Caselet: A group of incorporators wish to have a public company incorporated and registered under the name Red Flag Ltd.The incorporators have completed and signed the memorandum of incorporation which states that clause 2.2 and 3.4 are entrenched and are entirely prohibited from being amended. a) Advise the incorporators of any additional requirements for the name of the company and the notice of incorporation of the company b) Explain whether the doctrine of constructive notice will apply in this situation Self-Assessment Let’s see what you have learned so far by taking this short self-assessment. 1. What is the criteria for choosing a company name ? 2. What are shareholder’s agreements ? 39 See s 21(2) of the Act 35 Corporate Law Educor © CORPORATE CAPACITY, AGENCY AND THE TURQUAND RULE By the end of this unit, you will be able to: Understand the application of the ultra vires doctrine and the Learning Turquand rule Outcomes Understand and explain the legal capacity of a company and the authority of directors for representations. It will take you 5 hours to make your way through this unit. Time Important terms and Ultra vires- Acting or done beyond one’s legal power or authority definitions Legal capacity - A person’s authority under the law to engage in a particular undertaking or maintain a particular status Introduction In order to understand the modern approach to corporate capacity , it is necessary to examine the ultra vires doctrine and to have regard to its historical development. This unit will be dealing with the legal capacity of a company the ultra vires doctrine , the doctrine of constructive notice and the Turquand rule. In this unit, we will cover: Legal capacity of the company The Doctrine of constructive notice The Turquand rule Representation and the authority of the directors It will take you 5 hours to make your way through this unit. The Object of the Ultra Vires Doctrine - To protect investors and shareholders of the company so that they would know the purposes for which their money can be used. The consequences of an ultra vires contract - Internal – Directors will incur liability for breach of a fiduciary duty and that the shareholders are entitled to restrain the company from entering into or performing an ultra vires contract. 36 Corporate Law Educor © Legal capacity under the Act (s 19 and 20) A company has the legal capacity and the powers of an individual. There are certain acts that a company cannot perform, for example to enter into a contract of marriage, to obtain a driver’s license etc. From the date and time that the incorporation of a company is registered, as stated in the registration certificate, the company is a juristic person, which exists continuously until it is removed from the companies register. The company has all of the legal powers and capacity of an individual except to such extent the company’s Memorandum of Incorporation provides otherwise.40 Restricting the company’s capacity to act Section 20 (1) states that if a company’s Memorandum of Incorporation limits, restricts or qualifies the purposes, powers or activities of that company, as contemplated in s 19 (1)(b)( ii)- a) No action of the company is void by reason only that- (i) The action was prohibited by that limitation, restriction or qualification; or (ii) As a consequence of that limitation, restriction or qualification, directors had no authority to authorize the action by the company. The ultra vires doctrine is preserved internally as a form of shareholder protection and protection for the company. The Companies Act of 2008 abolishes the ultra vires doctrine externally, but has preserve it internally to the extent that a lack of capacity may be raised only as between the company, its directors, prescribed officers and its shareholders. Even though a company’s Memorandum of Incorporation may impose restrictions on the capacity of a company, these restrictions operate in effect as though they were restrictions on the authority of the directors to enter into certain types of contracts on behalf of the company. The ultra vires doctrine operates now as an internal control mechanism. A breach of these constitutional restrictions or limitations is, in some ways, nothing more than a breach of the company’s Memorandum of Incorporation, which in turn is a breach of the fiduciary and statutory duties of the directors of the company. Further discussion on section 20(1) (a) (i) “Acts” of the board of directors or shareholders in general meetings are “acts’’ of the company. The word only in the sections indicates that illegal or unlawful contracts are excluded from the ambit of the section. The section applies to an action or contract of the company that is void by reason only that it was prohibited by a limitation, restriction or qualification on the company’s purposes, powers or activities in its Memorandum of Incorporation. Please note that section 20(1) (b) (i) and (ii) preserves the internal consequences of the ultra vires contract. 37 Corporate Law Educor © 40 See s 19(1)(b)(ii). 38 Corporate Law Educor © Ratification (s 20(2) and (3)) Section 20(2) states that, if a company’s Memorandum of Incorporation limits, restricts or qualifies the purposes, powers or activities of the company, or limits the authority of the directors to perform an act on behalf company, the shareholder may apply by special resolution, to ratify any action of the company or the directors that is inconsistent with any such limit, restriction or qualification. But no action may be ratified if it is against the provisions of the Act. The shareholders’ claim for damages (s 20 (6)) Section 20(6) of the Act provides that 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) the companies Act, or (b) a limitation, restriction or qualification contemplated in terms of section 20(2), unless it has been ratified by a special resolution of the shareholders in terms of section 20(2). The shareholders ‘right to restrain an unauthorized act’ (s 20(4) and (5)) Shareholders have a right to institute legal proceedings to prevent the company or its directors from contravening the relevant provision of its Memorandum of Incorporation. The shareholder action is preserved in section 20(5) of the Act. Section 20(4) provides that one or more shareholders, directors or prescribed officers of a company, or a trade union representing the employees may apply to the High Court to restrain the company from doing anything contrary to the act. Protection of the bona fide third party Section 20 (5) of the Act is, however, subject to the right to damages of a third party who: a) obtained the rights in good faith, and (b) did not have actual knowledge of the particular limit, restriction or qualification. If the third party is in good faith and without actual knowledge of a limitation, restriction or qualification on the purposes, powers or activities of the company, he or she will be entitled to damages in the event of a restraining action contemplated under section 20(5). 41 Doctrine of Constructive Notice The doctrine of constructive notice is a doctrine that has existed for many years in South African law. In terms of this doctrine, persons dealing with a company are regarded as having knowledge of a company’s constitutional documents as they are registered and open for inspection at a public registry. The new legislation abolishes this doctrine and provides that the mere fact that the Memorandum of Incorporation and Notice of Incorporation of a company are registered in a public registry will not result in third parties being deemed to have knowledge of those documents or their contents. Section 19(5) provides that a person would still be regarded as having notice and knowledge of the restrictive provision or prohibition the company’s Memorandum of Incorporation if the 41 Cassim et al 2012 Contemporary Company Law p 176. 37 Corporate Law Educor © company’s name includes the expression “RF” and the Notice of Incorporation (or the notice of Amendment) has drawn the attention to the relevant provisions as contemplated in Section 13(3) of the Act. The Turquand Rule (The Presumption of Compliance with Formal and Procedural Requirements) Section 20(7) of the Act states that 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 the formal and procedural requirements in terms of the Act, its Memorandum of Incorporation and any rules of the company unless, in the circumstance, the person knew or reasonably ought to have known of any failure by the company to comply with such requirement. The Turquand Rule and the Act (s 20(7) and (8)) Section 20(7) provides for the codification of the Turquand Rule. Section 20(7) determines that: “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 existence of its powers, has complied with all of the formal and procedural requirements in terms 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”42 Section 20(7) applies to internal procedures and formalities even if they are prescribed by the Companies Act. It also applies to all of the company’s formal and procedural requirements in terms of the company’s Memorandum of Incorporation or rules. Take note that subsection 7 must be construed concurrently with, and not in substitution for, any relevant common law principle relating to the presumed validity of the actions of the company in the exercise of its powers.43 The doctrine of constructive notice has been abolished. Section 19(4) explains that a person must not be regarded as having knowledge of the contents of any document relating to a company merely because the document has been filed with the Companies and Intellectual Property Commission or is available for inspection. It may thus not be assumed that bona fide third parties have knowledge of internal procedures, formalities or requirements. 44 The inclusion of the Turquand rule in the Companies Act, 2008 addresses the intention of the legislature to ensure the accountability and transparency, and to protect bona fide third parties. Directors, prescribed officers and shareholders may not rely on the rule of protection. Take note that the rule will not apply where the third party “ought to have known”. The test is an objective one. 42 See s.20(7) of the Act. 44 See s. 19(4) of the Act. 38 Corporate Law Educor © 43 S. 20(8). 44 See s. 19(4) of the Act. 38 Corporate Law Educor © Representation and the Authority of the Directors 45 A company cannot act on its own and acts through the medium of its directors and officers. Section 66(1) of the Act states that the business and affairs of its board must be managed by or under the direction of the board, which has the authority to exercise all the powers and perform any of the functions of the company, except to the extent that the Act or company’s Memorandum of Incorporation provides otherwise. It also confers on the board the authority to exercise all the powers of the company subject to the company’s Memorandum of Incorporation. The board of directors is likely to delegate its powers to manage the business of the company to individual directors and officers of the company, and particularly to the managing director of the company. If such persons enter into contracts on behalf of the company, whether or not the company will be bound by such contracts must depend on the law of agency, which requires such individuals to have authority to contract on behalf of the company. According to agency law, if an agent contracts with a third party on behalf of the company, the contract will bind the third party and the principal as if concluded personally between them. The agent is an intermediary. The director or any other agent must have the authority to act on behalf of the company. Such authority may be:46 -actual authority -ostensible authority -or it may be given ex post facto in the form of ratification Please refer to chapter 5 of the textbook Caselet: The memorandum of incorporation for Infinity Ltd. provides that the management and control of the company are vested in the board of directors, which has the power to delegate its authority to any director of the company. This power of delegation is never exercised by the board but Eager, a director of Infinity Ltd enters into a contract on behalf of the company with Janet. a) Under which circumstance , if any, will infinity be bound by the contact. 45 Cassim et al 2012 Contemporary Company Law p 187. 46 Cassim et al 2012 Contemporary Company Law p 188 – 192. 39 Corporate Law Educor © Self-Assessment Let’s see what you have learned so far by taking this short self-assessment. 1. Explain the doctrine of constructive notice 40 Corporate Law Educor © SHARES, SECURITIES AND TRANSFER By the end of this unit, you will be able to: Understand the meaning of a share Learning List and explain the different classes of shares Outcomes Distinguish between the authorization and issue of shares Analyse the transfer and registration of shares It will take you 10 hours to make your way through this unit. Time Important terms and Share - The proprietary interest that a person holds in a company is a definitions share Introduction The activities of a company are financed through the issue by the company of securities in the company or by borrowings by the company. In this way funds are made available to the company through investments made in securities in the company or by loans made to the company. In this unit, we will cover: Nature of shares Classes of shares Authorisation of shares Authority to issue shares Employee share schemes Consideration for shares Capitalisation of shares Debt instruments Options for the subscription of securities Registration and transfer of shares It will take you 10 hours to make your way through this unit. 41 Corporate Law Educor © Nature of Shares The proprietary interest that a person holds in a company is a share.47 Classes of Shares 48 a) Preference shares b) Redeemable shares c) Ordinary shares d) Deferred shares 5.2.1 General background information to shares If a share certificate issued by a pre-existing company does not comply with the requirements in the 2008 Act, this does not constitute a contravention and does not invalidate that share certificate. Transfers of all securities must be noted in the securities register together with certain prescribed information. Note that under the 2008 Act, no time limit is prescribed within which a certificate evidencing the securities must be issued. Authorisation for Shares A company’s Memorandum of Incorporation must set out the classes of shares, and the number of shares of each class, that the company is authorised to issue. The Memorandum of Incorporation must further set out with respect of each class of shares, a distinguishing designation for that class and the preferences, right, limitations and other terms associated with that class.49 The Memorandum of Incorporation may authorise a stated number of unclassified shares. Please further study the provisions of section 36(2) and 36(3). Authority to Issue Shares The Board of Directors are given the authority by section 38 to issue shares (shareholder approval not necessary except in the circumstances of section 41) The Board of a company may resolve to issue shares at any time and to the extent that the authorisation has been granted in terms of the Memorandum of Incorporation and section 36. If a company issue shares that have not been properly authorised, in terms of section 36, or in excess of the number of authorised shares of any particular class, the issuance of those shares may be retroactively authorised within 60 business days after the date on which the 47 Cassim et al 2012 Contemporary Company Law p 213. 48 Cassim et al 2012 Contemporary Company Law p 216-220. 49 Cassim et al 2012 Contemporary Company Law p 222. 42 Corporate Law Educor © shares were issued. Where unauthorised shares are issued, and not retroactively authorised:50 - the share issue is not valid; - the company must return to any person the fair value of the consideration received by the company in respect of that share to the extent that it is nullified; - Any share certificate and any entry in a securities register in respect of such an issue is void; and - The directors of t