The law of Business Structures.pdf

 Preface As university lecturers and legal practitioners we have found that there is a definite need for an advanced commercial law book on business structures, suitable principally for commerce students at all tertiary institutions. Like law students, commerce studen...

 Preface As university lecturers and legal practitioners we have found that there is a definite need for an advanced commercial law book on business structures, suitable principally for commerce students at all tertiary institutions. Like law students, commerce students are required to grapple with the complexities of the law of business structures and to acquire a respectable degree of knowledge and understanding of the subject and its intricacies. The Law of Business Structures will undoubtedly fulfil this need. Both law students and commerce students, including accounting and auditing students, will find the book useful in guiding and assisting them in the study of the law of business structures. In addition, those who teach the law of business structures will find this book to be a useful guide and teaching aid. We hope that The Law of Business Structures will also serve the needs of practitioners, whether attorneys, accountants, auditors or company secretaries, who require a reliable and ready source of information on the law of business structures, and particularly on the new Companies Act 71 of 2008. The Law of Business Structures contains a fairly detailed treatment of the law of partnerships, business trusts, close corporations and companies, whether large or small, and whether formed for a profit- making or a non-profit-making objective. The centrepiece of the book is undoubtedly company law. The reason for the strong focus on company law is quite obvious. Company law in South Africa has been thoroughly and extensively overhauled. Basic and fundamental corporate law doctrines and concepts were deemed to be outdated, obsolete or archaic and to have outlived their usefulness, because they were no longer appropriate to the contemporary economic and business environment. An additional policy factor led to this sea change, namely, the need to harmonise South African company law with that of our main trading partners internationally, in order to ensure that South African companies are not competing at a disadvantage because of an outdated and restrictive company law regime. Hence, the new Companies Act 71 of 2008, with its many innovative legal concepts and new underlying philosophies, was passed. The reader will find in the chapters on company law a detailed discussion and explanation of core company law topics. We have however gone beyond core company law by including a discussion of modern corporate governance best practices, insider trading and market manipulation. Readers of this book will not need to be reminded that the two-year transitional period for pre-existing companies is drawing to a close. It is becoming increasingly important for practitioners and students of the subject to familiarise themselves with the provisions of the Companies Act of 2008. We have purposively avoided excessive theoretical analysis, but without refraining from careful and detailed explanations and analyses of important legal concepts and principles. Case law has been kept to a minimum. However, law and commerce students know full well that legal principles cannot be fully understood without a knowledge and comprehension of the leading cases on a particular topic. Accordingly the reader will find a discussion of the important cases on the subject. We have included a glossary of important terms, which is intended to provide some background and guidance to students who are new to this area of law. We have also included sample questions at the end of each chapter (with the exception of chapter 23 dealing with transitional arrangements). The purpose of these questions is to test the student’s knowledge and understanding of the content of each chapter. We trust that students and lecturers will find these questions both useful and challenging. The Law of Business Structures thus provides a comprehensive but also a simplified treatment of the different types of business structures in South African law. It is by no means an exhaustive treatment, since this field of law is simply much too large. Publishing a book of this sort calls for much editorial skill, efficiency and hard work on the part of the publishers. We take pleasure in thanking Linda van de Vijver and her team for their laborious efforts and exertions in the publication of this book. We would also like to thank them for compiling the index, the table of cases and the table of statutes. We would, furthermore, like to acknowledge our indebtedness to our students who have given us insight into the difficulties that students of this area of law generally experience. Finally, we would like to thank our families and loved ones for their enduring support, encouragement and patience, without which this book could not have been written. The law is stated as at 31 August 2012. Farouk HI Cassim, Managing Editor, on behalf of the authors November 2012  Contents Preface Glossary Chapter 1: Introduction and Overview Farouk HI Cassim 1.1 Introduction 1.2 The forms of business structures 1.2.1 The sole trader (or sole proprietorship) 1.2.2 The partnership 1.2.3 The company 1.2.4 The disadvantages of a company 1.2.5 The close corporation 1.2.6 Some important differences between private companies and close corporations 1.2.7 The business trust Questions Chapter 2: Partnerships Farouk HI Cassim and Maleka Femida Cassim 2.1 The definition of a partnership 2.2 The essential elements of a partnership 2.2.1 Contribution by each party 2.2.2 Carrying on a business in common for the joint benefit of the parties 2.2.3 The object of making a profit 2.2.4 A legitimate contract (or lawfulness) 2.2.5 The subjective intention to form a partnership 2.3 The juristic nature of a partnership 2.3.1 General 2.3.2 Exceptions to the juristic nature of a partnership 2.4 The types of partnerships 2.4.1 The universal partnership 2.4.2 The extraordinary partnership 2.5 The rights and duties of the partners among themselves 2.5.1 The sharing of profits and losses 2.5.2 The right to participate in the management of the partnership business 2.5.3 The duty to exercise reasonable care 2.5.4 The duty of good faith, honesty and loyalty 2.5.5 Partnership property 2.5.6 Partnership accounts  2.5.7 Compensation, refunds and indemnities 2.6 Contracting on behalf of the partnership 2.6.1 General 2.6.2 Contracting in the name of or on behalf of the partnership 2.6.3 The authority of a partner 2.7 The liability of the partners to third parties 2.8 Delictual liability 2.9 Criminal liability 2.10 Legal proceedings between the partners among themselves (inter se) 2.11 The dissolution of a partnership: general 2.12 The causes and grounds of dissolution 2.12.1 Mutual agreement or effluxion of time 2.12.2 Change of membership 2.12.3 The insolvency of a partner 2.12.4 Alien enemy 2.12.5 Frustration 2.12.6 The partnership business may only be carried on at a loss 2.12.7 Notice of dissolution 2.12.8 By order of court for just cause 2.13 The consequences of a dissolution of the partnership 2.14 Liquidation Questions Chapter 3: Business Trusts Richard Jooste 3.1 Introduction 3.2 Nature of a business trust 3.3 No legal personality 3.4 The law governing trusts 3.5 Legal basis of a trust 3.6 The essentials of a trust 3.7 Sham trusts 3.8 Flexibility of a trust 3.9 The rights of beneficiaries 3.10 The discretionary trust 3.11 Who may be a beneficiary? 3.12 Trustees 3.13 Variation or revocation of a trust 3.14 Advantages and disadvantages of a trust Questions Chapter 4: The Legal Concept of a Company Rehana Cassim 4.1 Introduction 4.2 Legal personality  4.2.1 The concept of separate legal personality 4.2.2 Salomon v Salomon & Co Ltd 4.2.3 Legal consequences of separate legal personality 4.3 Exceptions to the principle of separate legal personality 4.3.1 The distinction between ‘piercing’ the veil and ‘lifting’ the veil 4.3.2 The approach adopted to piercing the veil in our common law 4.3.3 Quasi-partnerships 4.3.4 Agency/alter ego doctrine 4.3.5 Company groups 4.3.6 Piercing the corporate veil under the Act 4.3.7 Imposing personal liability on the directors of a company Questions Chapter 5: Types of Companies Maleka Femida Cassim 5.1 Introduction 5.2 Profit and non-profit companies 5.3 Types of profit companies 5.3.1 Introduction 5.3.2 General characteristics of profit companies 5.3.3 Exceptions and special provisions 5.4 The private company 5.4.1 Definition 5.4.2 Other characteristics of private companies 5.5 The public company 5.5.1 Definition 5.5.2 Other characteristics of public companies 5.5.3 Listing the securities of public companies 5.5.4 Differences between public and private companies 5.6 The personal liability company 5.6.1 Definition 5.6.2 Other characteristics of personal liability companies 5.6.3 The liability of the directors in a personal liability company 5.7 The state-owned company 5.7.1 Definition 5.7.2 Other characteristics of state-owned companies 5.8 Non-profit companies 5.8.1 Definition 5.8.2 Other characteristics of non-profit companies 5.8.3 Objects and policies of non-profit companies 5.8.4 Incorporators of non-profit companies 5.8.5 Members of non-profit companies and voting rights 5.8.6 Directors of non-profit companies 5.8.7 Fundamental transactions of non-profit companies 5.9 Conversion of companies 5.10 The impact of the Act on pre-existing companies 5.11 External companies 5.11.1 Definition 5.11.2 Types of external companies 5.11.3 Application of the Act to external companies 5.12 Domesticated companies 5.13 The impact of the Act on close corporations 5.13.1 General 5.13.2 Conversion of a close corporation to a company 5.14 The impact of the Act on partnerships Questions Chapter 6: Formation of Companies and the Company Constitution Maleka Femida Cassim 6.1 Incorporation and registration of companies 6.1.1 Incorporation of the company 6.1.2 Registration of the company by the Companies Commission 6.1.3 The registered office 6.2 Company names 6.2.1 Criteria for company names 6.2.2 Registration of company names 6.2.3 Changing the company name 6.2.4 Reserved names and defensive names 6.2.5 Use of company name and registration number 6.3 The Memorandum of Incorporation 6.3.1 Introduction 6.3.2 Contents of the Memorandum of Incorporation 6.3.3 Amending the Memorandum of Incorporation 6.3.4 The Memorandum of Incorporation of a pre-existing company 6.4 Rules of the company 6.5 Shareholder agreements 6.5.1 General 6.5.2 Shareholder agreements of pre-existing companies 6.6 The legal status of the Memorandum of Incorporation and rules 6.6.1 Introduction 6.6.2 Contractual relationship 6.6.3 Relationship between company and shareholder 6.6.4 Relationship between or among shareholders inter se 6.6.5 Relationship between company and director, prescribed officer or member of a board committee 6.7 Pre-incorporation contracts 6.7.1 Introduction 6.7.2 Section 21 pre-incorporation contracts 6.7.3 The stipulatio alteri or contract for the benefit of a third  party Questions Chapter 7: Corporate Capacity, Agency and the Turquand Rule Farouk HI Cassim 7.1 Legal capacity of the company 7.1.1 Introduction 7.1.2 Legal capacity under the Act 7.1.3 Restricting the company’s capacity under the Act: Overview 7.1.4 The internal consequences of an ultra vires act 7.1.5 Ratification 7.1.6 The shareholders’ claim for damages 7.1.7 The shareholders’ right to restrain acts beyond the company’s capacity 7.1.8 The protection of the bona fide third party 7.1.9 The requirements of good faith and actual knowledge 7.1.10 Conclusion 7.2 The doctrine of constructive notice 7.3 The Turquand rule (the presumption of compliance with formal and procedural requirements) 7.3.1 The common law 7.3.2 The Turquand rule and the Act 7.3.3 The Turquand rule and the delegation of authority 7.4 Representation and the authority of the directors 7.4.1 Actual authority 7.4.2 Ostensible authority 7.4.3 Usual authority 7.4.4 Ratification Questions Chapter 8: Groups of Companies and Related Persons Richard Jooste 8.1 General 8.2 The holding/subsidiary relationship 8.3 Directors’ fiduciary duties and the holding/subsidiary relationship 8.4 The ‘related’ and ‘interrelated’ concepts 8.4.1 The ‘related’ relationship 8.4.2 The ‘interrelated’ relationship Questions Chapter 9: Shares, Securities and Transfer Richard Jooste and Jacqueline Yeats 9.1 General 9.2 Nature of a share 9.3 Classes of shares 9.3.1 Preference shares  9.3.2 Redeemable shares 9.3.3 Ordinary shares 9.3.4 Deferred shares 9.4 Authorisation for shares 9.5 Authority to issue shares 9.6 Consideration for shares 9.7 Capitalisation shares 9.8 Debt instruments 9.9 Options for subscription of securities 9.10 Shareholders’ pre-emption rights 9.11 Registration and transfer of securities 9.11.1 Certificated and uncertificated securities 9.11.2 Equal status of securities 9.11.3 ‘Certificated’ securities 9.11.4 Nominee holdings and beneficial interests in certificated securities 9.11.5 Uncertificated securities Questions Chapter 10: Corporate Finance Richard Jooste 10.1 Introduction 10.2 Distributions 10.2.1 General 10.2.2 The definition of ‘distribution’ 10.2.3 Authorisation of a distribution 10.2.4 The solvency and liquidity requirement 10.2.5 Liability of directors 10.2.6 Recovery of unlawful distributions from shareholders 10.2.7 Prevention of unlawful distribution 10.2.8 Dividends out of profits 10.2.9 Distributions of gifts 10.3 Repurchases (buy-backs) 10.3.1 General 10.3.2 Redemptions and repurchases 10.3.3 Regulation of repurchases by the Act 10.3.4 Enforceability of agreement to acquire shares 10.3.5 Reversal of acquisition 10.3.6 Directors’ liability 10.3.7 Treasury shares 10.4 Acquisition by a company of shares in its holding company (indirect repurchases) 10.4.1 ‘Limit’ 10.4.2 Requirement of s 48(3) 10.4.3 Provisions governing ‘distributions’ applicable 10.4.4 Reversal of acquisition 10.4.5 Directors’ liability  10.4.6 Voting rights not exercisable 10.5 Financial assistance for the acquisition of securities 10.5.1 Background 10.5.2 Overview of regulation 10.5.3 The meaning of ‘financial assistance’ 10.5.4 The meaning of ‘for the purpose of or in connection with’ 10.5.5 Purchase of or subscription for securities 10.5.6 Authority for provision of financial assistance 10.5.7 Requirements of s 44(3) and (4) 10.5.8 Extension to a ‘related or inter-related’ company 10.5.9 Consequences of contravention of s 44 10.6 Financial assistance to directors and others 10.6.1 Introduction 10.6.2 Financial assistance 10.6.3 Who must be financially assisted? 10.6.4 The requirements of s 45 10.6.5 The consequences of contravening s 45 10.6.6 Disclosure in the annual financial statements Questions Chapter 11: Governance and Shareholders Rehana Cassim 11.1 Introduction 11.2 Shareholders 11.2.1 Definition of ‘shareholder’ 11.2.2 Securities register 11.2.3 Beneficial and registered shareholders 11.3 Record date for determining shareholder rights 11.4 Instances where compliance with formalities is not required 11.4.1 Unanimous assent at common law 11.4.2 Companies with one shareholder 11.4.3 Companies in which every shareholder is also a director 11.5 Proxies 11.5.1 Persons who may be appointed as proxies 11.5.2 Procedure to appoint a proxy 11.5.3 Validity of the proxy appointment 11.5.4 Delivery of notices to proxy 11.5.5 Voting 11.5.6 Revocation of the proxy appointment 11.5.7 Company-sponsored invitations to appoint a proxy 11.6 Shareholders’ meetings 11.6.1 Purpose of a shareholders’ meeting 11.6.2 Distinction between a shareholders’ meeting and an annual general meeting 11.7 Convening a shareholders’ meeting 11.7.1 Persons who may convene a shareholders’ meeting 11.7.2 Instances when a company must hold a shareholders’  meeting 11.7.3 Failure to convene a meeting 11.8 Notice of meetings 11.8.1 Period of notice 11.8.2 Content of notice 11.8.3 Defects in the notice 11.9 Conduct of shareholders’ meetings 11.9.1 Location of shareholders’ meetings 11.9.2 Attending and participating in a shareholders’ meeting 11.9.3 Electronic communication 11.10 Voting at meetings 11.10.1 Show of hands and poll 11.10.2 Voting agreements 11.11 Chairperson at meetings 11.12 Quorum 11.13 Postponement and adjournment of meetings 11.13.1 Postponement where quorum is not present 11.13.2 Notice of a postponed or adjourned meeting 11.13.3 Deemed quorum 11.13.4 Voluntary adjournments of meetings 11.13.5 Period of adjournment 11.14 Shareholder resolutions 11.14.1 Proposing a resolution 11.14.2 Ordinary resolutions 11.14.3 Special resolutions 11.15 Written resolutions 11.15.1 Consent of shareholders required 11.15.2 Time within which the consent must be obtained 11.15.3 Restrictions 11.15.4 Informing shareholders of the written resolution 11.16 Company records 11.16.1 Records 11.16.2 Access to records 11.16.3 Exercising the right to access the information contained in the company’s records Questions Chapter 12: Governance and the Board of Directors Rehana Cassim 12.1 Introduction 12.2 Who is a ‘director’? 12.2.1 Definition of a ‘director’ 12.3 The legal position of directors 12.4 Prescribed officers 12.5 Office-bearers of the company 12.5.1 Manager 12.5.2 Managing director  12.5.3 Chairperson of the board of directors 12.5.4 Company secretary 12.5.5 Auditor 12.6 Number of directors 12.6.1 Minimum number of directors 12.6.2 Company with one director 12.6.3 Failure to have the required number of directors 12.7 Appointment of directors 12.7.1 Initial appointment of directors 12.7.2 Subsequent appointments 12.7.3 Consent to be a director 12.8 Terms of appointment 12.9 Record of directors 12.9.1 Information to be contained in the record of directors 12.9.2 Retention of record of directors 12.9.3 Location of record of directors 12.9.4 Inspection of record of directors 12.10 Company rules 12.11 Ineligibility and disqualification of persons to be directors 12.11.1 Application 12.11.2 Qualifications 12.11.3 Distinguishing ineligibility from disqualification 12.11.4 Grounds of ineligibility 12.11.5 Grounds of disqualification 12.11.6 Consequences of ineligibility and disqualification 12.11.7 Exemption from disqualification 12.11.8 Duration of disqualification 12.11.9 Public register 12.12 Delinquent directors and directors on probation 12.12.1 Locus standi 12.12.2 Grounds of delinquency 12.12.3 Grounds of probation 12.12.4 Terms of the order and conditions 12.12.5 Application to suspend or set aside the order of delinquency or probation 12.13 Vacancies on the board of directors 12.13.1 Instances when a vacancy arises 12.13.2 Filling of a vacancy 12.14 Removal of directors 12.14.1 Removal by the shareholders 12.14.2 Removal by the board of directors 12.14.3 Notice 12.14.4 Presentation 12.14.5 Ordinary resolution 12.14.6 Application to court to review the board’s determination 12.14.7 Removal by the Companies Tribunal 12.14.8 Application of the Labour Relations Act 66 of 1995 (‘the  LRA’) to the removal of directors 12.14.9 Breach of contract and damages 12.15 Retirement from office 12.16 Resignation of directors 12.17 Remuneration of directors 12.17.1 No automatic right to remuneration 12.17.2 Remuneration may be prohibited by Memorandum of Incorporation 12.17.3 Special resolution required 12.17.4 Remuneration not contingent on company earning sufficient profits 12.17.5 Disclosure of remuneration in annual financial statements 12.18 Board committees 12.18.1 Appointment of committees 12.18.2 Members of committees 12.18.3 Compulsory committees 12.18.4 Recommended committees 12.19 Board meetings 12.19.1 Calling a meeting 12.19.2 Notice 12.19.3 Quorum 12.19.4 Voting 12.19.5 Minutes and resolutions 12.19.6 Electronic communications 12.20 Decisions taken without convening a meeting 12.21 Loans or other financial assistance to directors Questions Chapter 13: Corporate Governance Rehana Cassim 13.1 Introduction 13.2 Application 13.3 Philosophy of ‘apply or explain’ 13.4 Principles and recommendations of the King III Report and the Code 13.4.1 Ethical leadership and corporate citizenship 13.4.2 Boards and directors 13.4.3 Audit committees 13.4.4 The governance of risk 13.4.5 The governance of Information Technology (IT) 13.4.6 Compliance with laws, rules, codes and standards 13.4.7 Internal audit 13.4.8 Governing stakeholder relationships 13.4.9 Integrated reporting and disclosure Questions Chapter 14: The Duties and the Liability of Directors Farouk HI Cassim 14.1 Introduction 14.1.1 General 14.1.2 The partial codification of directors’ duties 14.2 The fiduciary duties of company directors: general 14.2.1 Who owes fiduciary duties to the company? 14.2.2 To whom do the directors owe their fiduciary duties? 14.2.3 The duty to act in the best interests of the ‘company’ 14.2.4 The pluralist and the enlightened shareholder value approach 14.3 The fiduciary duties of directors and the standards of directors’ conduct 14.3.1 The duty to act in good faith and in the best interests of the company 14.3.2 Proper purpose 14.3.3 The duty to exercise an independent judgment 14.3.4 The duty to act within their powers 14.4 Conflict of interest 14.4.1 The common law 14.4.2 The Act and the duty to avoid a conflict of interest 14.5 Duty of care, skill and diligence 14.5.1 The common law before the Act 14.5.2 The statutory duty of care and skill 14.5.3 Delegation 14.5.4 The business judgment rule (a safe harbour from liability for directors) 14.6 The disclosure of the director’s personal financial interests 14.6.1 Introduction 14.6.2 Proposed transactions 14.6.3 Declaration of an interest in existing contracts 14.6.4 General notice in advance 14.6.5 Disclosure to whom? 14.6.6 Where no declaration of interests is necessary 14.6.7 Failure to comply with the disclosure requirement 14.7 Indemnification and directors’ and officers’ insurance 14.7.1 Introduction 14.7.2 Exemptions, indemnities and insurance 14.7.3 Exemption from duty or liability 14.7.4 Indemnification 14.7.5 Directors’ and officers’ liability insurance 14.8 Condonation and relief 14.8.1 Relief by the court 14.9 The liability of directors and prescribed officers 14.9.1 Breach of fiduciary duty 14.9.2 Breach of the duty of care and skill or other provisions 14.9.3 Liability under s 77(3) 14.10 Fraudulent, reckless and insolvent trading  14.10.1 Introduction 14.10.2 Fraudulent or reckless trading 14.10.3 Trading while unable to pay company debts Questions Chapter 15: The Auditor, Financial Records and Reporting Joanne Shev and Richard Jooste 15.1 Introduction 15.2 Financial records and financial statements 15.2.1 Accounting records 15.2.2 Financial statements 15.2.3 Financial reporting standards 15.2.4 Financial year 15.2.5 Annual financial statements 15.2.6 Responsibility for financial statements 15.2.7 Access to financial statements or related information 15.2.8 Financial Reporting Standards Council 15.3 Annual return 15.4 Audit and independent review 15.5 Independent review and ‘reportable irregularities’ 15.6 The auditor 15.6.1 Appointment of the auditor 15.6.2 Resignation or removal of auditors and vacancies 15.6.3 Rotation of auditors 15.6.4 Rights and restricted functions of auditors 15.7 The Auditing Profession Act 15.7.1 Registration as registered auditors 15.7.2 Registered auditor’s duties in relation to an audit 15.8 Audit committee 15.8.1 Appointment of the audit committee 15.8.2 Duties of the audit committee 15.9 Company secretary 15.9.1 Appointment of the company secretary 15.9.2 Duties of the company secretary 15.9.3 Resignation or removal of the company secretary 15.9.4 Registration of the company secretary 15.10 The King III Report and corporate governance 15.10.1 Audit committees 15.10.2 Company secretary 15.10.3 Integrated reporting and disclosure 15.11 Auditors’ liability 15.11.1 Criminal liability 15.11.2 Civil liability to client and third parties 15.11.3 Auditors’ liability and ‘reportable irregularities’ 15.11.4 Disciplinary liability Questions Chapter 16: Public Offerings of Company Securities Jacqueline Yeats 16.1 Introduction 16.2 Types of offers and the distinction between listed and unlisted securities 16.2.1 Initial public offering 16.2.2 Primary offering 16.2.3 Secondary offering 16.3 General restrictions on offers to the public 16.4 What constitutes an offer to the public? 16.5 What does not constitute an offer to the public? 16.6 Advertisements 16.7 Prospectus requirements 16.7.1 The contents of a prospectus 16.7.2 Consent to use name in prospectus 16.7.3 Variation of agreement mentioned in prospectus 16.8 Secondary offers to the public 16.9 Liability 16.9.1 Introduction 16.9.2 Liability for untrue statements in the prospectus 16.9.3 Liability of experts and others 16.10 Allotments and acceptance of subscriptions Questions Chapter 17: Fundamental Transactions, Takeovers and Offers Maleka Femida Cassim and Jacqueline Yeats 17.1 Fundamental transactions: general 17.2 Amalgamation or merger (the ‘statutory merger’) 17.2.1 The concept of an ‘amalgamation or merger’ 17.2.2 Procedure for a statutory merger 17.2.3 The exceptional requirement of court approval 17.2.4 Appraisal right of dissenting shareholders 17.2.5 Protective measures for shareholders and creditors in the merger procedure 17.2.6 Types of merger structures 17.3 Disposal of all or the greater part of the assets or undertaking of a company 17.3.1 Concept of a disposal of all or the greater part of assets or undertaking 17.3.2 Approval requirements for disposals of all or the greater part of the assets or undertaking 17.3.3 Exemptions 17.4 Schemes of arrangement 17.4.1 Introduction 17.4.2 Proposal for scheme of arrangement 17.4.3 Approval and other requirements for schemes of arrangement 17.5 Takeovers and offers 17.5.1 General 17.5.2 Legislation 17.5.3 Application of the Act 17.5.4 Takeover Regulations 17.5.5 The Takeover Panel Questions Chapter 18: Shareholder Remedies and Minority Protection Maleka Femida Cassim 18.1 Relief from oppressive or prejudicial conduct 18.1.1 Introduction 18.1.2 Persons who may apply for relief under s 163 18.1.3 The requirements for relief under s 163 18.1.4 Available relief under s 163 18.2 The derivative action 18.2.1 Introduction 18.2.2 Persons who have legal standing under s 165 18.2.3 The demand 18.2.4 Application to set aside the demand 18.2.5 Investigation of the demand 18.2.6 Company’s response to the demand 18.2.7 Application to court for leave 18.2.8 The discretion of the court to grant leave 18.2.9 Information 18.2.10 Costs orders, security for costs and remuneration 18.2.11 Other provisions 18.3 Dissenting shareholders’ appraisal rights 18.3.1 Introduction 18.3.2 The appraisal procedure 18.3.3 Disadvantages and shortcomings of the appraisal procedure 18.4 Application to protect the rights of securities holders 18.5 Other shareholder remedies 18.5.1 Restraining the company from contravening the Act, and damages 18.5.2 The common-law personal action 18.5.3 Overlap between shareholder actions and corporate actions 18.5.4 Other remedies Questions Chapter 19: Enforcement and Regulatory Agencies Maleka Femida Cassim 19.1 Introduction and underlying policy 19.2 General principles on remedies 19.2.1 Extended standing (or locus standi) to apply for remedies  19.2.2 Remedies must promote the purpose of the Act 19.2.3 Protection for whistle-blowers 19.3 Regulatory agencies 19.3.1 The Companies and Intellectual Property Commission 19.3.2 The Companies Tribunal 19.4 Alternative procedures for addressing complaints or securing rights 19.5 Complaints to the Companies Commission 19.5.1 Initiating a complaint 19.5.2 Investigation by the Companies Commission 19.5.3 Outcome of the investigation 19.5.4 Compliance notice 19.5.5 Consent order 19.6 Voluntary resolution of disputes 19.7 Companies Tribunal adjudication proceedings 19.8 Offences 19.9 Civil actions (section 218(1)) Questions Chapter 20: Business Rescue and Compromises Farouk HI Cassim 20.1 Introduction: a rescue culture 20.2 The meaning of business rescue 20.3 The commencement of business rescue proceedings: two entry routes 20.3.1 Commencement of business rescue by voluntary board resolution 20.3.2 Commencement of business rescue by order of court 20.4 The duration of business rescue proceedings 20.4.1 The date of commencement 20.4.2 The duration of business rescue and progress reports 20.4.3 The termination of business rescue proceedings: exit route 20.5 The legal consequences of a business rescue order 20.5.1 The moratorium (or automatic stay) 20.5.2 Post-commencement finance 20.5.3 Effect of business rescue on employment contracts and employees 20.5.4 Effect of business rescue on contracts generally 20.5.5 Effect of business rescue on shareholders and directors 20.6 The business rescue practitioner 20.6.1 Appointment 20.6.2 The qualifications of the practitioner 20.6.3 Removal and replacement of the practitioner 20.6.4 The remuneration of the practitioner 20.6.5 Powers and duties of the practitioner 20.7 The business rescue plan 20.8 The rights of affected persons  20.8.1 Employees 20.8.2 Employees’ committees 20.8.3 Creditors and creditors’ committees 20.8.4 The holders of the company’s securities 20.9 The consideration and adoption of the business rescue plan 20.9.1 Consideration of the plan 20.9.2 The effect of the adoption of the plan 20.9.3 Failure to adopt the plan 20.9.4 The termination of business rescue proceedings 20.10 Compromise with creditors 20.10.1 General 20.10.2 The proposal 20.10.3 Adoption of the proposal Questions Chapter 21: Winding-up Jacqueline Yeats 21.1 Introduction 21.2 Winding-up of solvent companies 21.2.1 Voluntary winding-up of solvent companies 21.2.2 Winding-up of solvent companies by court order 21.3 Winding-up of insolvent companies 21.4 The winding-up process 21.5 The liquidator 21.5.1 Powers of the liquidator 21.5.2 Duties of the liquidator 21.6 Dissolution of companies and removal from register 21.7 Deregistration of companies 21.8 Effect of removal of company from register Questions Chapter 22: Insider Trading and Market Manipulation Richard Jooste and Rehana Cassim 22.1 Insider trading 22.1.1 General 22.1.2 Common law 22.1.3 Legislation 22.1.4 The Securities Services Act 36 of 2004 22.2 Market manipulation 22.2.1 Introduction 22.2.2 Objective of market manipulation 22.2.3 The regulation of market manipulation at common law 22.2.4 Market manipulation under the Securities Services Act 22.2.5 Defences 22.2.6 Penalties 22.2.7 The Financial Markets Bill, 2012 Questions Chapter 23: Transitional Arrangements Maleka Femida Cassim and Farouk HI Cassim 23.1 Introduction 23.2 Continuation of pre-existing companies 23.3 Pending matters 23.4 Types of companies and names 23.5 Memorandum of Incorporation 23.6 Rules 23.7 Shareholder agreements 23.8 Pre-incorporation contracts 23.9 Par value shares 23.10 Company finance and governance 23.11 Office of director, company secretary, auditor and prescribed officer 23.12 Right to seek remedy 23.13 Company records 23.14 Restrictive conditions and prohibitions on the amendment of the Memorandum of Incorporation 23.15 Company names and name reservations 23.16 Continued application of the 1973 Act to winding-up and liquidation 23.17 Preservation and continuation of court proceedings and orders; rights, duties, notices and other instruments; investigation and enforcement Chapter 24: Close Corporations Richard Jooste and Joanne Shev 24.1 Introduction 24.2 Features of a close corporation 24.2.1 Legal personality 24.2.2 Members not liable for close corporation’s debts 24.2.3 Perpetual succession 24.2.4 Limited membership 24.2.5 Management and internal relations 24.2.6 Interests of members 24.2.7 Simplicity 24.3 Formation and conversion of a close corporation 24.3.1 Formation 24.3.2 Conversion of a close corporation to a company 24.4 Membership of a close corporation 24.4.1 Restrictions on membership 24.4.2 Acquisition of membership 24.4.3 Nature of a member’s interest 24.4.4 Commencement of membership 24.4.5 Disposal of a member’s interest (section 36) 24.4.6 Using a member’s interest as security 24.5 Contributions (section 24) 24.6 Cessation of membership by order of court 24.7 Acquisition by a close corporation of an interest in itself 24.8 Financial assistance by a corporation in respect of acquisition of members’ interests 24.9 Association agreements and internal relations 24.10 Meetings of members 24.11 Payments to members 24.12 Loans to and the provision of security on behalf of members 24.13 Duties of members 24.13.1 Fiduciary duties 24.13.2 Duty to act with due care and skill 24.14 Members’ remedies 24.14.1 Personal action 24.14.2 Derivative action 24.15 Capacity, authority and contracts of a close corporation 24.16 Pre-incorporation contracts 24.17 Liability of members for close corporation’s debts 24.18 Liability for reckless or fraudulent carrying on of the business of a close corporation 24.19 Gross abuse of the juristic personality of a close corporation 24.20 Winding-up of a close corporation 24.21 Repayments by members on winding-up 24.22 Repayment of salary or remuneration by members on winding-up 24.23 Repayments, payments of damages and restoration of property by members and other on winding-up 24.24 Composition 24.25 Deregistration of a close corporation 24.26 Business rescue 24.27 Accounting records 24.28 Financial year 24.29 Annual financial statements, transparency and accountability 24.30 Audit and independent review of close corporations 24.31 Reportable irregularities 24.32 The auditor 24.33 Accounting officer 24.33.1 Appointment, resignation and removal 24.33.2 Qualifications of accounting officer 24.33.3 Right of access to accounting records and documents 24.33.4 Remuneration of an accounting officer 24.33.5 Duties of an accounting officer 24.34 Audit committee and company secretary 24.35 Annual return Questions Table of Cases Table of Statutes Index  Glossary A accounting officer: a person appointed by a close corporation to report on the annual financial statements if neither an audit nor an independent review of the financial statements is required accounting records: accounts, deeds, writings and other documents as may be prescribed acquiring party (when used in respect of a transaction or proposed transaction): a person who, as a result of the transaction, would acquire (direct or indirect) control or increased control over all or the greater part of a company, or over all or the greater part of a company’s assets or undertaking acting at arm’s length: acting independently (ie without outside influence) affected person (in the context of business rescue): a shareholder, creditor or employee of a company or a registered trade union representing the employees of the company affected transaction a term used to describe a number of transactions listed in s 117(1)(c) of the Companies Act 71 of 2008, eg a merger, or a scheme of arrangement alter ego: literally this means ‘the other self’. The alter ego doctrine is used by the courts where the directors of the company or its controlling shareholders treat the company as extensions of themselves instead of treating the company as a separate person. The courts use this doctrine in order to impose personal liability on the directors or controlling shareholders alterable provision: a provision of the Companies Act 71 of 2008 in which it is expressly contemplated that the Act’s effect on a particular company may be altered by that company’s Memorandum of Incorporation, whether by negation, restriction, limitation, qualification, extension or other alteration in substance or effect alternate director: a person elected or appointed to serve as a member of the board of a company as a substitute for another director who has been elected or appointed to the board of directors alternative dispute resolution: conciliation, mediation or arbitration amalgamation or merger: a fundamental transaction whereby the assets and liabilities of two or more companies are, in terms of an agreement, pooled together in a single company (or more than one  company), which may either be a newly formed company or one of the combining companies annual general meeting (AGM): a meeting of the shareholders of a company which is held once a year and at which particular business is required to be conducted anonymous partners: a partnership in which a partner does not directly participate in the management of the business of the partnership. Anonymous partners are not directly liable to creditors of the partnership. They are liable only to their co-partners for their proportionate share of partnership debts and liabilities anti-avoidance measure: a court (on application by the Companies Commission, the Takeover Regulation Panel or a securities exchange) may declare any agreement, transaction, arrangement, resolution or provision of a company’s Memorandum of Incorporation or rules to be primarily or substantially intended to defeat or reduce the effect of a prohibition or requirement established by an unalterable provision of the Companies Act 71 of 2008, and may declare it void to that extent appraisal right (or appraisal remedy): the right of dissenting minority shareholders, who do not approve of certain triggering events, to have their shares bought out by the company in cash, at a price reflecting the fair value of the shares, which value may in certain cases be determined by a court audit: an examination, in accordance with prescribed or applicable auditing standards, of (a) financial statements with the objective of expressing an opinion as to the fair presentation or compliance thereof with a specific financial reporting framework and any applicable statutory requirements; or (b) financial and other information, prepared in accordance with specific criteria, with the objective of expressing an opinion on that information audit committee: a sub-committee of a company’s board of directors, appointed by that company’s incorporators, board of directors or shareholders, which plays an important role in (a) identifying financial risks; (b) managing these risks; (c) ensuring the integrity of internal financial controls; and (d) ensuring the integrity of integrated reporting auditor: a person who performs an audit in terms of prescribed or applicable auditing standards authorised shares: the maximum number of shares that a company is permitted by its Memorandum of Incorporation to issue B beneficial interest: in relation to a company’s securities, other than an interest held in unit trusts or a collective investment scheme, the right of a person through ownership, agreement, relationship or otherwise, alone or together with another person, to (a) receive or share in any distribution in respect of the company’s securities; (b) exercise, or  cause to be exercised, any or all of the rights attaching to the company’s securities; or (c) dispose or direct the disposition of the company’s securities, or any part of a distribution in respect of the securities beneficial shareholder: the person who is entitled to the rights attached to the shares of a company, which shares are held and registered in the name of another person who is the registered shareholder bewindtrust: a trust in which the assets administered by the trustees are owned by the beneficiaries board committee: except to the extent that the Memorandum of Incorporation provides otherwise, the board of directors may appoint any number of committees and may delegate any of its authority to these committees; the board remains liable for the proper performance of the duty delegated board of directors: the organ of a company that is responsible for managing the business and affairs of a company bona fide: in good faith business judgment rule: the rule that protects directors from liability for mere errors of judgment or poor business decisions, provided they have taken an informed decision, without any self-dealing on their part or on the part of a related person, and provided that the directors have reasonable grounds for believing that they were acting in the best interests of the company business rescue: proceedings to facilitate the rehabilitation of a financially distressed company business rescue plan: the rescue plan drawn up by the business rescue practitioner that is designed to resolve the company’s financial distress business rescue practitioner: a duly qualified person who is appointed to supervise the company during the business rescue process and to draw up a business rescue plan C capitalisation shares: shares issued by converting profits into shares, and issued to shareholders instead of paying a dividend capitalise: to convert profits into share capital (capitalisation shares) cash merger: a merger transaction in which certain shareholders receive cash in return for their shares. These shareholders are in effect ‘cashed-out’ so that they do not hold any shares in the merged company Chartered Accountant (South Africa): a member of SAICA who is qualified as an accounting professional, also referred to as a CA(SA) chief executive officer: the chief representative of the company Chinese Wall: an information barrier. In the context of insider trading, it  is a technique or, metaphorically, a wall designed to prevent confidential price-sensitive information from reaching the different departments of a multi-function company, such as a merchant bank or a stock broking company class rights: rights attaching to a particular class of share commanditarian partner: a partner who contributes a fixed sum of money to the partnership and refrains from actively participating in the management of the partnership business on the understanding that his or her liability for partnership debts and liabilities is to be limited to the amount contributed by him or her Companies Commission (Companies and Intellectual Property Commission) (CIPC): a regulatory agency whose functions are, inter alia, to register companies and intellectual property rights, to establish and maintain a companies register and other relevant registers, and to enforce the Companies Act 71 of 2008 Companies Tribunal: a regulatory agency set up by the Companies Act 71 of 2008, whose functions include the adjudication and voluntary resolution of disputes company secretary: the chief administrative officer of the company, who must provide guidance to the board of directors on their duties and similar matters, keep minutes of meetings etc compliance notice: a notice issued by the Companies Commission or the Takeover Regulation Panel to any person who it on reasonable grounds believes has contravened the Companies Act 71 of 2008 (or who assented to, was implicated in, or benefited from a contravention of the Act), requiring the person to cease or correct certain actions; to take any action required by the Act; to restore assets or their value to a company or to any other person; to provide a community service; or take any other steps reasonably related to the contravention and designed to rectify its effect compromise (in the context of Compromises): an agreement between the company and its creditors or a class of creditors to terminate disputes over the rights of the parties which are to be compromised contingent/conditional rights: entitlement to these rights is dependent on a future and uncertain event which may or may not occur (as opposed to ‘vested rights’) convertible share: a share in a company which can be changed into a share of another class corporate governance: the systems, structures and processes associated with management, decision-making and control in organisations. In South Africa the corporate governance principles and practices are set out in the King Report on Governance for South Africa 2009 (‘King III Report’) and the King Code of Governance for South  Africa 2009, which came into effect on 1 March 2010 corporate opportunity: in the context of directors’ fiduciary duties, the duty of a director not to usurp or appropriate for himself or herself any property, asset, opportunity or information that properly belongs to the company corporate veil: the metaphorical veil or curtain that separates the company from its shareholders and directors and protects them from liability for the wrongful acts of the company or for the debts and the liabilities of the company corporeal/incorporeal: a corporeal is something which has a physical form (eg land, a motor car); it is visible and tangible; an incorporeal is something which does not have a physical existence (eg a share, a debenture, a patent) cumulative preference share: a share in a company which gives the holder thereof a prior right to both arrear and current preference dividends curator: someone who attends to the affairs of another, eg a mentally disabled person D D and O Insurance: directors’ and officers’ insurance against claims based on negligence in the performance of their duties de facto director: a person who acts as a director of a company even though he or she is not formally appointed as a director or whose appointment as a director is defective in some way or other de jure director: a person validly and formally appointed to the position of a company director who has freely consented to that appointment debenture: a particular kind of written acknowledgement of indebtedness by a company, irrespective of its form (the holder is a creditor of the company) debt instrument: a form of debt owing by a company, eg a debenture defensive name: a name that is registered by a person with a direct and material interest who registers the name to protect it from use by another company deferred share: a share in a company which entitles the holder thereof to a dividend only after the ordinary shareholders have received a certain sum of money delinquent director: a director who has been declared by a court to be delinquent on one of the grounds set out in the Companies Act 71 of 2008. Such a director is disqualified from being a director of a company. The court order of delinquency may be subject to any conditions the court considers appropriate deregistration (of a close corporation): the removal of the close  corporation from the register of close corporations derivative action: legal proceedings brought by a person on behalf of a company in order to protect the legal interests of the company designated auditor: the individual registered auditor or registered auditors that is or are selected by the firm to be responsible and accountable for a particular audit de-subsidiarisation: an action which results in a company no longer being a subsidiary of another company director: a member of the board of a company, or an alternate director of a company, including any person occupying the position of a director or alternate director, by whatever name designated distribution: a distribution is defined in s 1 of the Companies Act 71 of 2008 as a direct or indirect transfer by a company of money or property other than its own shares to its shareholders or to the shareholders of another company in the same group of companies. A distribution includes a dividend but is wider than a dividend. A payment by a company for the repurchase of its own shares or the shares of another company in the same group of companies is also a distribution disqualification: the grounds upon which a person is disqualified from holding office as a director or prescribed officer of a company, set out in the Companies Act 71 of 2008. A disqualification, unlike ineligibility, is not absolute as a court has a discretion to permit a disqualified person, in certain limited circumstances, to accept an appointment as a director or prescribed officer dividend: a distribution by a company (usually of profits) doctrine of constructive notice: the doctrine that presumes that persons have knowledge of a document lodged with the Companies Commission that is open to public inspection, irrespective of whether they have actual knowledge of the contents of such document domestic company: a small private company where there is an underlying partnership intention between the shareholders to which a court may give effect domesticated company: a foreign company whose registration has been transferred to the Republic of South Africa E employee share scheme: a scheme devised by a company to incentivise staff by making it possible for them to acquire shares in the company enlightened shareholder value approach: the school of thought that holds that shareholders’ interests retain primacy and that directors may prioritise the interests of other stakeholders only if this is likely to promote the success of the company for the benefit of the shareholders in general ex officio director: a person who is a director of a company as a consequence of holding some other office, title, designation or similar status in the company executive director: a director who is involved in the day-to-day management of the company and is a full-time salaried employee of the company. He or she is generally under a contract of service with the company expropriation: a forced acquisition external auditor: a registered auditor external company: a foreign company registered in a foreign country that carries on business or non-profit activities (as the case may be) within the Republic of South Africa F fiduciary: a person in a position of trust, eg a director, a member of a close corporation, or a trustee of a trust who has the power to act for another, which power must be exercised for the benefit of that other person fiduciary duties: the duties of honesty and good faith imposed by law on fiduciaries, who are persons who exercise legal power on behalf of someone else. Examples of fiduciaries include a director of a company, and a partner or agent who acts on behalf of his or her principal financial distress (in the context of business rescue): a company that is reasonably unlikely to be able to pay all its debts as they become due and payable in the following six months, or a company that is reasonably likely to be insolvent within the next six months financial reporting standards :the reporting standards prescribed in Regulation 27 of the Companies Regulations and s 29(4) of the Companies Act 71 of 2008 Financial Reporting Standards Council :a group of persons responsible for advising the Minister on matters relating to financial reporting standards financial statements: these include (a) annual, provisional, group and consolidated financial statements; (b) interim and preliminary reports; and (c) financial information in a circular, prospectus or provisional announcement of results, which a creditor, holder of securities, the Commission, the Takeover Regulation Panel or any other regulatory authority may reasonably be expected to rely on financial year: annual accounting period foreign company: an entity incorporated (or registered) outside the Republic of South Africa fundamental transactions: these transactions fundamentally alter the nature of the company, and include amalgamations or mergers,  disposals of all or the greater part of the assets or undertakings of companies, and schemes of arrangement G group of companies: companies having a holding/subsidiary relationship guarantee: a form of security whereby a person undertakes to pay the debt of another person if that person defaults in paying the debt I in fraudem legis: fraudulent; a deliberate attempt to disguise a transaction in order to evade the provisions of a statute in securitatem debiti: as security for a debt incorporation: the formation of a company or a close corporation incorporator: the person or persons who incorporate or form a company, ie the founder or founders of a company independent accounting professional: a person who (a) is a registered auditor in terms of the Auditing Profession Act 26 of 2005; (b) is a member in good standing of a professional body that has been accredited in terms of the Auditing Profession Act; or (c) is a person qualified to be appointed as an accounting officer of a close corporation in terms of the Close Corporations Act 69 of 1984; and (d) does not have, and is not related to any person who has, a personal financial interest in the close corporation, a related company or an inter-related company; and (e) is not, or has not in the previous three years, been involved, or related to any person who has been involved, in the day- to-day management of the business of the close corporation independent non-executive director: a director who does not have a relationship with the company outside his or her directorship. He or she is free of any relationships which could materially interfere with the independent exercise of his or her judgement independent review: an examination of financial and other information in terms of ISRE 2400 that aims to provide a moderate level of assurance regarding that information independent reviewer: a person who performs an independent review in terms of ISRE 2400 independently compiled and reported: when financial statements are prepared by an independent accounting professional on the basis of financial records provided by the company or close corporation, in accordance with any relevant accounting standards ineligibility: the Companies Act 71 of 2008 sets out grounds on which a person may be declared ineligible to be a director or prescribed officer of a company. An ineligible person is absolutely prohibited from being a director, unlike a person who is disqualified from holding office as director inter vivos trust: a trust created by a person during the person’s lifetime which comes into existence during that person’s life-time internally compiled: not independently compiled and reported issue at a discount: the issue of par value shares below their par or nominal value J joint and several liability: when two or more debtors are each liable severally (ie separately), and are all liable jointly, with the effect that the creditor has the option of suing one or more of the debtors severally or all of the debtors jointly for payment of the debt juristic person: a legal person that does not have a physical existence but possesses its own legal personality which enables it to acquire rights and incur obligations that are separate and distinct from those of the directors and shareholders of the company. Foreign companies and trusts are defined in the Companies Act 71 of 2008 as legal persons L lifting the corporate veil: when the directorship or shareholding in a company is considered for some legal purpose, but this does not necessarily entail ignoring the separate identity of the company or treating the liabilities of the company as those of its shareholders or directors (see further piercing the corporate veil) limited liability of shareholders and members: the concept that the shareholders of a company or members of a close corporation are not, as such, liable for the debts of the company or a close corporation liquidator: the person(s) appointed by the Master of the High Court to wind up the affairs of a company M managing director: the person who is the direct and immediate representative of the board of directors market abuse: constitutes the offence of insider trading and market manipulation, in terms of the Securities Services Act 36 of 2004 market manipulation: the attempt to interfere with the operation of the stock market, described in the Securities Services Act 36 of 2004 as constituting the offence of engaging in a prohibited trading practice and the making or publishing of false, misleading or deceptive statements, promises and forecasts member of a company: a member of a non-profit company Memorandum of Incorporation: 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, together with various other matters moratorium (in the context of business rescue): the automatic stay or freeze on legal proceedings, on the execution of judgments against the company or its property or assets, and on the legal rights of creditors of the company N no par value shares: shares that do not have any par value or nominal value attached to them nominee: the holder of securities who holds them on behalf of another person known as the beneficial owner nominee director: a director who is appointed to the board of directors by a shareholder who controls sufficient voting power in the company for this purpose, or by a third party, such as a bank or financier, so that the nominee director can represent their interests on the board nominee officii: in an official capacity non-executive director: a part-time director who is not employed full- time by the company. He or she is not involved in the day-to-day management of the company, but is appointed to the board for the purpose of bringing an independent and external perspective to the management of the company, particularly on policy issues non-profit company: a company that is formed for a public benefit object, or an object relating to a cultural or social activity, or a communal or group interest. It is essential that its income and property cannot be distributed to its members or directors Notice of Incorporation: a notice by which the incorporators of a company inform the Companies Commission of the incorporation of the company for the purpose of having it registered O oppression remedy (or relief from oppressive or prejudicial conduct): an application to court by a shareholder or a director of a company who has been oppressed or unfairly prejudiced, or whose interests have been unfairly disregarded, as a result of any act or omission of the company or a related person; the manner in which the business of the company, or a related person, is being or has been conducted; or the manner in which the powers of a director or prescribed officer of the company or a person related to the company are being or have been exercised ordinary resolution: a resolution supported by more than 50 per cent of the voting rights exercised on the resolution (ie 50% + 1) or such higher percentage of voting rights as determined by the company’s Memorandum of Incorporation at a shareholders’ meeting or by written resolution owner-managed company: a company in which every shareholder (or every person who is a holder of or has a beneficial interest in any  securities of the company) is also a director. Ownership and control is not split in owner-managed companies P paid-up capital: funds received by a company on the issue of its shares parent company: an alternative term for a holding company par value shares: shares of a company that have a nominal or par value attached to them. This value bears no realistic relationship to the market value of the shares participating preference share: a preference share in a company, which entitles the holder thereof to share in the dividends of the company with ordinary shareholders, after the preference shareholders’ preference dividend has first been paid perpetual succession: legal continuity. This term is used to describe the status of a business structure such as a company or close corporation whose legal existence is unaffected by changes in its shareholders or members personal liability company: a profit company that satisfies the criteria for a private company and additionally states in its Memorandum of Incorporation that it is a personal liability company. The directors, including past 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 their respective periods of office piercing the corporate veil: the corporate personality of the company is disregarded and the protection afforded to shareholders and directors from liability for the debts and wrongful acts of the company is removed. Personal liability is attributed to a shareholder or director who abuses the principles of separate legal personality. See further lifting the corporate veil pledge of shares: a way in which payment of debt can be secured. The debtor transfers (cedes) the shares to the creditor to cover the debt if the debtor defaults pluralist approach: the approach that companies have a social responsibility to society and that its directors have a duty to balance the interests of shareholders and stakeholders, and to give independent value to the interests of stakeholders (other than shareholders) whose interests are not necessarily subordinate to those of shareholders post-commencement finance (in the context of business rescue): new finance given to a financially distressed company that is under the business rescue process pre-emptive right: a right of first purchase which gives the shareholder the right to subscribe for a proportionate amount of a new issue of shares before the shares may be acquired by others preference shares: a class of shares that confers on its holders a preferential right to the payment of dividends before ordinary shareholders receive their dividends. The additional rights of preference shareholders, such as priority as to the return of their capital on a winding-up or the right to participate in additional dividends over and above their preferential dividend, depend on the company’s Memorandum of Incorporation or the terms of issue of the shares pre-existing company: a company formed in terms of the Companies Act 61 of 1973 that still existed when the Companies Act 71 of 2008 came into force pre-incorporation contract: in terms of s 21 of the Companies Act 71 of 2008, a written agreement entered into before the incorporation of a company by a person who purports to act in the name of, or on behalf of, the proposed company, with the intention or understanding that the proposed company will be incorporated, and will thereafter be bound by the agreement prescribed officer: a person who (a) exercises general executive control over and management of the whole, or a significant portion, of the business and activities of the company; or (b) regularly participates to a material degree in the exercise of general executive control over and management of the whole, or a significant portion, of the business and activities of the company price stabilisation: a defence to market manipulation, which usually involves trading by issuers, underwriters or those participating in the offer of securities to prevent the offer from failing private company: a profit company that is not a state-owned company and that, by its Memorandum of Incorporation, both prohibits the offer of any of its securities to the public and restricts the transferability of its securities probation order: a director may be placed under a probation order by a court on various grounds set out in the Companies Act 71 of 2008. Such a director may not serve as a director except to the extent permitted by the order of probation. The probation order may be subject to any conditions the court considers appropriate profit company: a company that is formed for the purpose of financial gain for its shareholders. The four types of profit companies are the public company, the private company, the personal liability company and the state-owned company proprietary interest: an interest in the property of, for example, a company (the proprietary interest a person holds in a company is a ‘share’) prospectus: the detailed information document which must be distributed to prospective shareholders when a company offers its shares to the public proxy: a person appointed by a shareholder or a member to attend, participate in, speak and vote on his or her behalf at a shareholders’ meeting or a members’ meeting where that other person is unable to be present public company: a profit company that is not a state-owned company, a private company, or a personal liability company. A public company may offer its securities to the public, and need not restrict the transferability of its securities public interest score: a score calculated at the end of each financial year (a) to determine whether or not a company or close corporation requires an audit or independent review, the appropriate financial reporting standards for the financial statements, and the person eligible to report on the financial statements; (b) to determine whether or not a company is required to appoint a social and ethics committee; and (c) for the purposes of the provisions of the Companies Act 71 of 2008 dealing with business rescue and particularly the tariff of fees for business rescue practitioners public offer: an offer of the securities of a company to the public, including a section of the public. It may require the issue of a prospectus or some other form of information disclosure in terms of the Companies Act 71 of 2008 or exchange requirements puppet director: a person who has been placed on the board of directors with the intention that he or she should simply follow the instructions of his or her controller Q quorum: the minimum number of qualified persons whose presence at a meeting is necessary before any business may be validly transacted at the meeting R ratification (of an unauthorised act): validation of an unauthorised act or contract after it has been carried out record date: the date that must be set by the board of directors of a company for the purposes of determining who is entitled to receive notice of a shareholders’ meeting, to participate in and vote at a meeting, decide matters by written consent or electronic communication, to exercise pre-emptive rights, to receive distributions and to be allotted or exercise other rights registered auditor: individual or firm registered as an auditor with the IRBA registered office: the office of a company (or external company) that is registered in terms of s 23 of the Companies Act 71 of 2008 where, amongst other things, service of process of court may be effected and where the company’s accounting records must be kept registered shareholder: the person in whose name a company’s shares are held and registered, for the beneficial interest of another person registration certificate: the certificate (or where relevant, an amended certificate) issued by the Companies Commission as proof of the incorporation and registration of the company (when the term is used in relation to a company incorporated under the Companies Act 71 of 2008) registration number: the unique number assigned by the Companies Commission to a company upon its registration rehabilitation (of an insolvent): removal of the status of being an insolvent reportable irregularity: for the purposes of an auditor, any unlawful act or omission committed by any person responsible for the management of the business structure, which (a) has caused or is likely to cause material financial loss to the structure or to any member, shareholder, or creditor; (b) is fraudulent or amounts to theft; or (c) represents a material breach of any fiduciary duty owed by such person; for the purposes of an independent review, any act or omission committed by any person responsible for the management of a company, which (a) unlawfully has caused or is likely to cause material financial loss to the company or to any member, creditor or investor of the company; (b) is fraudulent or amounts to theft; or (c) caused the company to trade under insolvent circumstances reserved name: a company name that is reserved for use by the company at a later time resolution: a formal decision of the board of directors or the shareholders of a company, as the case may be retroactive: applicable from a prior date to the present, eg legislation passed today which is applicable from an earlier date (retrospective) ring-fenced (RF): the term describes a company whose Memorandum of Incorporation restricts or prohibits the amendment of any of its provisions. To alert third parties to these restrictions the company’s name must be suffixed with the letters ‘RF’ rules: rules made by a company relating to its governance in respect of matters that are not addressed in the Companies Act 71 of 2008 or in its Memorandum of Incorporation S SA GAAP: South African Standards of Generally Accepted Accounting Practice, as adopted by the Accounting Practices Board share: incorporeal movable property that is a measure of a shareholder’s financial and non-financial interest in a company. A share entitles the shareholder to certain interest in the company, its assets and dividends (or distributions) scheme of arrangement: a fundamental transaction (usually used in the context of a reorganisation of a company) which results in a binding agreement between the company and the holders of its securities securities: this term has a much wider meaning than ‘shares’, and includes any shares, debentures or other instruments, irrespective of their form or title, issued or authorised to be issued by a profit company security: (1) an instrument which gives the holder a right related to the assets of a company, eg a share or a debenture; or (2) an external means to enable a person to enter into a contract to secure the contractual performance of the other party to the contract (eg a mortgage bond, a pledge, a suretyship, a guarantee) securities register: a register of the issued securities which a profit company must maintain and which contains information about each class of securities that has been issued. A non-profit company is required to maintain a register of members shadow director: a person in accordance with whose directions or instructions the directors of the company are accustomed to act share capital: the money raised by a company through the issue of shares share option: a right to acquire a share at a certain price within a certain period Share Transactions Totally Electronic (‘STRATE’ or ‘Strate’): the electronic settlement system used in the listed trading environment shareholder: a person who holds at least one share issued by a company and whose name is entered as a shareholder in the securities register of the company shareholder agreement: agreement entered into between the shareholders of a company concerning any matter relating to the company provided that it is consistent with the Companies Act 71 of 2008 and the company’s Memorandum of Incorporation shareholder approval: in the absence of anything to the contrary, approval of a majority (more than 50%) of shareholders at a properly convened meeting, or the unanimous consent of all shareholders shareholders’ meeting: a meeting of the shareholders of a company at which the shareholders are given an opportunity to debate and vote on matters affecting the company sole proprietorship: a business run by a sole person in that person’s own name, and not as a company, close corporation or business trust special resolution: a resolution supported by at least 75 per cent of the voting rights exercised on the resolution, or such different percentage of voting rights as determined by the company’s Memorandum of Incorporation at a shareholders’ meeting or by written resolution stakeholder-inclusive approach: the approach adopted by the King III Report that holds that the board of directors should strive to achieve the appropriate balance between its various stakeholders in the best interests of the company state-owned company: an enterprise that is registered as a company in terms of the Companies Act 71 of 2008, and that is either listed as a public entity in Schedules 2 or 3 of the Public Finance Management Act 1 of 1999, or is owned by a municipality in terms of the Local Government: Municipal Systems Act 32 of 2000 and is otherwise similar to such an enterprise statutory merger: see amalgamation or merger subscribe for securities (eg shares): apply to a company for securities in the company T Takeovers Regulation Panel (TRP): a juristic person established by the Companies Act 71 of 2008 to regulate takeovers and offers Takeover Regulations: regulations prescribed by the Minister, in consultation with the TRP, which apply to takeovers and offers temporary director: a person appointed by the board of directors to serve as a director on a temporary basis until a vacancy has been filled by a director who is elected by the shareholders testamentary trust: a trust created in a person’s will which comes into existence after that person’s death Transitional Arrangements: the provisions of Schedule 5 to the Companies Act 71 of 2008 that deal with the arrangements for the transition of pre-existing companies as at the date on which the Act came into operation, ie 1 May 2011 treasury share: a share in a company that has been repurchased by the company. A treasury share is held by the company for re-issue at a later stage, instead of being cancelled on its repurchase by the company triangular merger: a merger involving three companies whereby the target company, instead of merging with the acquirer, merges with the wholly-owned subsidiary of the acquirer. The effect is that the target company becomes the whollyowned subsidiary of the acquirer triple bottom line: the approach adopted by the King III Report that companies should act with economic, social and environmental responsibility and that the board of directors is responsible not only for the company’s financial bottom line, but also for the company’s performance within the triple context in which it operates trust mortis causa: see testamentary trust Turquand rule, also called the ‘indoor management rule’: the rule  that entitles an innocent third party entering into a contract with a company to assume that the company has complied with all its internal formalities and formal requirements U uberimmae fidei: utmost good faith ultra vires: an act or transaction that falls outside the powers of the company. An act that is ultra vires is by definition beyond the legal capacity of a company unalterable provision: a provision of the Act that does not expressly contemplate that its effect on any particular company may be altered, whether by a company’s Memorandum of Incorporation or by its rules. This includes a negation, restriction, limitation, qualification, extension or alteration in any other manner, whether in substance or in effect universal partnership: a universal partnership of profits which consists of all profits from whatever source that is made by the partners, or a universal partnership of property in which the partners undertake to contribute all the property owned by them uncertificated securities: securities which are dematerialised and are therefore not evidenced by a share certificate but rather in the form of electronic records unclassified shares: authorised but unissued shares, the terms of which have not yet been determined underwriting undertaking: a undertaking whereby someone agrees to take up shares in a company which are not taken up by others undistributed profits: profits that are retained by a company and not distributed to shareholders as a dividend or as capitalisation shares V vested rights: rights to which a person is unconditionally entitled (as opposed to conditional or contingent rights) vicarious liability: liability of one person for the act of someone else void: a complete nullity that cannot be validated or ratified voluntary winding-up of a close corporation: winding-up or liquidation of a close corporation or a company at the instance of the entity itself voting power: the voting rights that a particular shareholder (or securities holder) may exercise on any matter to be decided by the company, expressed as a percentage of the total voting rights on that matter voting rights: the rights of a shareholder (or securities holder) to vote on any matter to be decided by the company W wasting asset: an asset that deteriorates or decreases in value over time, eg a mine, a machine winding-up: the legal process in which the financial and administrative affairs of a company are ‘wound-up’ ie finalised equitably and in an orderly, regulated fashion written resolution: consent by shareholders in writing to a resolution without holding a shareholders’ meeting; also known as a ‘round robin resolution’  Chapter 1 Introduction and Overview [*] Farouk HI Cassim 1.1 Introduction 1.2 The forms of business structures 1.2.1 The sole trader (or sole proprietorship) 1.2.2 The partnership 1.2.3 The company 1.2.4 The disadvantages of a company 1.2.5 The close corporation 1.2.6 Some important differences between private companies and close corporations 1.2.7 The business trust Questions 1.1 Introduction One of the first steps to be taken by persons who set out in business is to decide on the legal entity or type of business structure best suited to their business. This is an essential decision that will affect the risk to which they will subject their personal estate, the ease with which they will be able to raise capital that may be required for the growth and the expansion of the business that they decide on, the legal formalities that they must comply with, the legal continuity of their business and, of course, their tax liability. Apart from the essential legal attributes of each type of business structure, some of the factors that must be considered when choosing the type of business structure are: Who bears the risk? How is the capital raised? What is the management structure? Who exercises control over the business activities of the structure? Does it have perpetual succession? Can it accommodate growth and expansion? The taxation liability of the particular type of business structure; and The legal and administrative formalities and the costs associated with these. 1.2 The forms of business structures In South African law, there are five established forms of business organisations or business structures: The sole trader or sole proprietorship A single investor personally owns all the assets of the business and is alone personally liable for all the debts and liabilities of the business. The partnership A number of investors together as joint co-owners own the assets of the partnership and are ultimately jointly and severally liable for the debts of the partnership. The company This entails the formation and the registration of a company, known as the incorporation of the company. The company is a separate legal person and its shareholders as a general principle have limited liability. The close corporation This structure is very similar to a company but with some essential differences (discussed further below). The business trust In South African law, a trust is not a separate legal person, although in practice, it may enjoy the benefits of separate legal personality and limited liability. Under the Companies Act 71 of 2008 (‘the Act’), however, a trust is regarded for the purposes of the Act as a juristic person with separate legal personality. A less formally regulated type of business structure is the stokvel. A stokvel is an informal investment vehicle encompassing a mutual benefit or savings society. Many stokvels have a large membership and control very large sums of money, although there are, of course, smaller stokvels. There are many different types of stokvels ranging from simple grocery stokvels to savings clubs, investment groups and burial societies. Stokvels are similar to rotating credit and savings organisations. The core essential features of each type of business structure are as follows: 1.2.1 The sole trader (or sole proprietorship) Sole traders are alone the legal owners of their businesses. They are in control of the business. Sole traders provide their own capital and alone bear the legal responsibility for running the business. They alone share in the profits of the business and they alone are liable for the losses incurred by the business. Employees or assistants incur no personal liability for the debts and liabilities of the business unless they explicitly undertake personal liability. Sole traders are personally liable in full for the debts of the business.  Since sole traders do not enjoy limited liability. if the business runs into financial difficulties, all their personal assets must be utilised for the payment of the debts of the business. The personal assets of sole traders are not distinguished from their business assets. In general there are no registration requirements for sole traders. This depends on the type of business that is to be conducted. The distinct disadvantages of this type of business structure, apart from personal liability for the debts of the business, are the limited potential for growth and expansion because of limited capital and, even more important, the lack of legal continuity or perpetual succession. This means that in the event of the death of the sole trader, the business comes to an end and may continue in law only if a new business is formed. Apart from limited potential for growth and the lack of perpetual succession, there is, in certain circumstances, a much heavier and more onerous tax liability, which is calculated on the basis of a sliding scale applicable to individuals which, in the financial year 2012-2013, could go up to a maximum tax rate of 40 per cent on income in excess of R617 000.00. In contrast, a company or a close corporation would pay income tax at a rate presently set at 28 per cent. However, sole traders do not need to have their financial statements audited. 1.2.2 The partnership In the case of an ordinary partnership, a number of partners, which prior to the Act had to consist of a minimum of two and a maximum of 20 persons, form an association to conduct business with the object of making a profit. As a general rule, all the partners participate in the management of its business, and all partners must share in the net profits of the partnership. A partnership is formed by a partnership agreement, which may be in writing or in an oral agreement, or may even be implied from the conduct of the parties. A partnership in South African law does not have a separate legal personality, with the result that the partners jointly are the legal owners of the assets of the partnership (in undivided shares). Immovable property owned by the partnership must be registered in the names of the partners. In a partnership the liabilities of the partnership are the liabilities of the individual partners. The partners are thus ultimately liable, jointly and severally, for the debts and liabilities of the partnership to the extent that the partnership is unable to pay. Net profits are shared in accordance with the proportion agreed upon by the partners or the value of their contributions, or failing such agreement or valuation, then equally. If the partners had made no agreement on the proportion in which the profits are to be shared, the profits are shared in accordance with the value of the contributions made by each party, and where this is not possible, for instance where one party contributed labour or skill, then the profits are shared equally. A partnership is a business structure that is aimed at the making and the sharing of profits. Accordingly, the intention of the partnership must be to conduct business in common with the object of making a profit. This does not mean that a profit must be made. It means that the making of profits must be an object of the partnership. There can be no valid partnership without a profit-making objective. It follows that a partnership cannot be formed for a charitable or social purpose, such as a social club. Like sole traders, partnerships are not required to register as such. There is no register of partnerships or sole traders. With effect from 1 May 2011, when the Companies Act came into effect, the maximum limit of 20 persons for a partnership was abandoned. While a partnership must still consist of at least two persons, it may now consist of a larger number of persons. However, for strong practical reasons it may be sensible to limit the number of partners. A partnership does not have perpetual succession. Any change in the membership of a partnership, whether due to the death, insolvency, resignation or retirement of a partner, or the admission of a new partner, results in law in the automatic dissolution of the partnership and the formation of a new partnership. The entry or the exit of a partner thus disrupts the legal continuity of the partnership. This is a major disadvantage, particularly for a large partnership. A partnership as such is not subject to income tax. Instead, the profits of the partnership that have accrued to the individual partners are taxed in their hands. For the purposes of value-added tax (‘‘VAT’’), however, a partnership is treated as a separate entity, ie for VAT purposes a partnership is deemed to carry on an enterprise as a ‘person’ separate from the membership of the partnership. Like sole traders, partnerships do not need to have their financial statements audited. 1.2.3 The company It is surprising that there still is no standard or generally acceptable definition of a company. A company is generally understood to refer to a structure that is endorsed by law with the capacity to acquire legal rights and be subject to legal duties. The distinctive features of a company, in sharp contrast to a sole trader or partnership, is that a company (and also a close corporation, discussed below) has a separate legal personality distinct from the shareholders or members who compose it. As a separate legal person, the company itself, and not its shareholders, is the legal owner of the business that it carries on and of any property or asset purchased by it. The courts have repeatedly ruled that property owned by the company belongs exclusively to the company itself and not to its shareholders, not even to its sole shareholder in the case of a one-man company. Property owned by a company is registered in the name of the company and not in the names of the shareholders of the company. Likewise, the profits made by the company belong to the company and not to its shareholders. As a separate legal person, a company may sue or be sued in its own name. (For a full discussion see Chapter 4: The legal concept of a company.) From this, it follows that the debts and liabilities of the company are, as a general principle, the debts and liabilities of the company itself and not those of its shareholders. This gives rise to the concept of the limited liability of the shareholders of the company. Limited liability connotes that the shareholders or members of a company or a close corporation are not personally liable for the debts and liabilities of the company. In its most basic form, limited liability means simply that, as a general principle, if a company cannot pay its creditors, the creditors cannot claim payment from the shareholders or members of the company or of the close corporation. Limited liability is clearly an important legal privilege of the shareholders of the company. It was developed in English law during the nineteenth century and is thus a relatively recent development. There are however a number of circumstances in which a court or statute may disregard the separate legal personality of the company and hold its shareholders personally liable for the debts and the liabilities of the company. The two legal concepts discussed above, namely separate legal personality and limited liability, are separate and distinct. They must not be confused. Apart from separate legal personality and limited liability, companies have perpetual succession or legal continuity. This means that the legal existence of the company is unaffected by changes in the shareholders. The company continues to exist despite changes in the individual shareholders that comprise it. A company may consequently exist indefinitely. It is not unknown for a company formed in the eighteenth century or earlier still to be in existence. A company ceases to exist only when it is formally wound up. The perpetual succession of a company also enables the shareholders of a company to sell their shares in the company without affecting the legal existence of the company. As a result of the transferability of shares and the ability to offer its shares to the public, a public company is able to raise capital for growth and expansion simply by the device of offering more shares to the public. In a private company restrictions must be imposed on the transferability of its shares. The essential difference between a public company and a private company is that a public company is usually formed to raise large sums of money from the public in return for shares issued to them. A private company would usually be formed where the shareholders contribute their own funds to the capital of the company in return for shares that cannot be freely transferable. There are further advantages that companies are able to offer. Large companies offer the advantage of a structured management. In large public companies ownership and control may be split, so that management of the affairs and the business of the company is left in the hands of a small group of persons, known as the board of directors. The company is managed not by the shareholders but by the board of directors. In large companies there are too many shareholders for them to be managers as well. The shareholders of large companies tend also to be too widely dispersed throughout the country for them to play an active role in the management of the company’s affairs. The facility of a structured management offers to shareholders the advantage of being part of a company and of participating in its profits and growth without having to be burdened with the daily management of the company. Another advantage of a company, as well as of a close corporation, relates to tax. Companies and close corporations are currently subject to tax at a rate of 28 per cent, but sole traders or partners could pay tax at a maximum marginal rate of 40 per cent on income exceeding R617 000 per annum. It is not surprising that companies and, in particular, close corporations are the most popular forms of business structures. As a result of the Act, more flexibility has been accorded to companies. For instance, it is now possible to form a public company with one shareholder. In contrast, a partnership requires a minimum of two persons. Moreover, unlike a partnership, companies may have non- profit objects. The Act provides for a diversity of companies that may be formed to suit differing needs. A sole proprietor may, by forming a private company, enjoy all the benefits of this type of legal structure and still remain fully in control of the company or the close corporation, as the case may be. 1.2.4 The disadvantages of a company There are, however, a number of disadvantages of conducting business through the legal form of a company. These disadvantages may perhaps be seen as the price that must be paid for the valuable advantages of separate legal personality, limited liability and perpetual succession. Unlike a sole proprietorship or a partnership, the formation of a company (or a close corporation) requires compliance with a number of legal formalities. The company must be registered with the Companies and Intellectual Property Commission (the ‘Companies Commission’). The formation of a company requires a constitution, known as the Memorandum of Incorporation, which must be lodged or filed with the Companies Commission. The procedure for the formation of a company and the types of company that may be formed are set out in the Act (see Chapter 5: Types of companies, and Chapter 6: Formation of companies). After its formation, the company is subject to regulation throughout its existence. Apart from the regulatory burden, there are many other administrative burdens, and transparency and accountability requirements, that companies must comply with, the financial cost of which is borne by the company. Public companies and certain significant private companies and even some close corporations must have their annual financial statements audited. These advantages and disadvantages must be carefully balanced before choosing a company as a legal form for a business. 1.2.5 The close corporation The close corporation was introduced by the Close Corporations Act 69 of 1984 in order to make it easier for a sole proprietor or a small partnership, by forming a close corporation, to obtain the benefits of separate legal personality, limited liability and perpetual succession. The close corporation closes the gap between a sole trader or a partnership and a company. The provisions of the previous Companies Act 61 of 1973 and ar