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MRL2601 - notes2014 -entrep - PG 29 Study Study Unit 6: Matters to be…

- - - - limited liability of members
        
        LIMITED LIABILITY = estate of the company is assessed apart from the estates of individual shareholders or members, therefore the debts of the company are the company’s debts and separate from those of its shareholders or members.
      - The assets of the company are its exclusive property
        
        assets of the company are its exclusive property and the shareholders have no proportionate proprietary rights therein
      - Where a company is wronged, the company must itself seek redress
        
        No one is qualified by virtue of his or her shareholding to act on behalf of the company. Only those who are appointed as representatives of the company in accordance with the articles (which has been replaced by the Memorandum of Incorporation) can bind the company.
      - Managerial and executive powers are to be exercised by directors
      - Shares in a company entitle holders certain interests in the company.
        
        profits of the company belong to the company and not its shareholders and only after the company has declared a dividend may the shareholders claim that dividend;
      - Court can look passed company's legal personality = LIFTING or PIERCING the veil
        
        The Court can disregard the legal personality to avoid abuse (“lifting” or “piercing the CORPORATE VEIL
        
        exceptional circumstances where the court ignores the separate legal existence of the company and treats the shareholders as if they were the owners of the assets and had conducted the business of the company in their personal capacities
        
        CASE LAW =
        
        no hard and fast rules regarding the lifting of the corporate veil
        
        SECTION 20(9) of the COMPANIES ACT
        
        general principle of piercing the corporate veil
        
        provides that if a court finds that the incorporation of a company or any act by or use of a company constitutes an unconscionable abuse of its juristic personality
        
        court may declare that the company will be deemed not to be a juristic person in respect of rights, liabilities and obligations relating to the abuse.
        
        wording of the section is a combination of section 65 of the Close Corporations Act and the judgment in Botha v Van Niekerk.
        
        It ignores the view expressed in Cape Pacific Ltd v Lubner Controlling Investments (Pty) Ltd that described the test in Botha v van Niekerk as too rigid.
        
        courts will decide what would constitute an unconscionable abuse
  - - - Separate legal personality
        
        estate of the company is assessed apart from the estates of individual shareholders or members, therefore the debts of the company are the company’s debts and separate from those of its shareholders or members.
        
        Limited Liability
        
        the profits of the company belong to the company and not its shareholders
        
        Shareholders only entitled dividends
        
        The assets of the company are its exclusive property
        
        shareholders have no proportionate proprietary rights therein
        
        Only those who are appointed as representatives of the company in accordance with the articles (which has been replaced by the Memorandum of Incorporation) can bind the company.
        
        SHareholders can't act on behalf of the company
    - - The branches or divisions of a company are part of the company itself and do not have their own separate legal existence
- - - - objects must relate to social activities, public benefits, cultural activities or group interests
      - NOT for Profit
      - must be formed by at least 3 persons who will be the company’s first directors
        
        not allowed to obtain any financial gain from the company other than remuneration for the work they performed
      - income and property of non-profit companies are not distributable to its incorporators, members, directors, officers or persons related to any of them.
      - Upon liquidation, income and assets must be paid over to another non-profit company, voluntary association or trust with a similar purpose.
    - - Public companies (Ltd)
        
        Shares may be offered to the public and are freely transferable
        
        company can be listed on the JSE Limited
        
        Can be formed by 1 person
        
        Must have at least 3 directors
        
        Obliged to hold annual general meetings
        
        Obliged to appoint an auditor
        
        Obliged to appoint a company secretary
        
        Obliged to appoint an audit committee
      - Private companies (Pty) Ltd
        
        Its Memorandum of Incorporation prohibits offering of any securities to the public and restricts the transfer of its securities;
        
        CANNOT trade its SHARES publicly on an EXCHANGE
        
        Private companies are no longer limited to 50 shareholders as was the case under the Companies Act of 1973.
        
        section 8(2)(b) of the Companies Act 71 of 2008, a private company’s Memorandum of Incorporation must contain a prohibition against offering of its securities to the public and restrict the transferability of its securities.
        
        Can be formed by one person
        
        Must have at least 1 director
      - Personal liability companies (Inc)
        
        Must meet the criteria for a private company, mainly used by professional associations (such as attorneys);
        
        Memorandum of Incorporation must state that it is a personal liability company
        
        Directors are jointly and severally liable along with the company for debts and liabilities contracted during their term of office.
        
        Section 19(3) uses the word “contracted” and not “incurred”,
        
        held by the court in Fundtrust (Pty) Ltd (In Liquidation) v Van Deventer to limit directors’ liability to contractual debts, and to exclude delictual and statutory liabilities.
        
        Can be formed by 1 person
        
        Must have at least 1 director
        
        doctrine of constructive notice applies in terms of section 19(5) of the Companies Act.
      - State-owned companies (SOC)
        
        Registered in terms of the Companies Act and either listed as a public entity in Schedule 2 or 3 of the Public Finance Management Act, or owned by a municipality
        
        state-owned companies: ACSA, Denel and South African Airways
        
        majority of the provisions applicable to public companies apply to state-owned companies except if an exemption has been granted by the Minister
        
        Obliged to appoint a company secretary
        
        Obliged to appoint an audit committee
        
        Chapter 3 of the Companies Act applies except to the extent that the company has been exempted by the Minister
- - - - Memorandum of incorporation + RULES
        
        Contains
        
        Details of Incorporators
        
        Number of directors and alternate directors
        
        Share capital (maximum issued)
        
        Content of Memorandum of Incorporation
        
        Alterable and unalterable provisions of the Memorandum of Incorporation
        
        Companies Act imposes certain specific requirements on the content
        
        To protect Shareholders
        
        number of default company rules or alterable provisions are provided for.
        
        Companies may accept or alter the following alterable provisions as long as the alteration remains consistent with the Companies Act.
        
        Memorandum of Incorporation is the sole formal constitutive document
        
        Memorandum of Incorporation must be lodged, at the Commission, before registration of the company together with the Notice of Incorporation
        
        In case of an inconsistency between the Memorandum of Incorporation and the Companies Act, the Memorandum of Incorporation will be invalid to the extent of its inconsistency.
        
        Section 15(2)(b)
        
        Allows Memorandum of Incorporation of a company may contain special conditions applicable to the company and requirements in addition to those stipulated in the Act
        
        allows the Memorandum of Incorporation to prohibit the amendment of any particular provision in the Memorandum of Incorporation
        
        name of the company must be followed by the expression “(RF)”.
        
        To INDICATE the MOI has SPECIAL CONDITIONS
        
        RF = Ring Fenced
        
        Procedure for the Amendment of the Memorandum of Incorporation
        
        The amendment may be proposed by
        
        Board of directors
        
        Shareholders with at least 10% of the exercisable voting rights
        
        As required by Memorandum of Incorporation
        
        Amendment must be adopted by special resolution
        
        THE RULES
        
        Adopted by the board of directors
        
        Must be ratified by an ordinary resolution of the shareholders’ meeting
        
        Subordinate to Memorandum of Incorporation
        
        binding/ creates a contractual relationship
        
        company and each shareholder
        
        among shareholders of the company
        
        company and each director or prescribed officer of the company
        
        company and any other person serving the company as a member of a committee of the board
      - Companies Act, Memorandum of Incorporation and company rules
        
        board of directors may make, amend or repeal any necessary or incidental rules relating to the governance of the company
        
        in respect of matters not addressed in the Companies Act
        
        in respect of matters not addressed Memorandum of incorporation
        
        ONLY if the MOI allows it
        
        A rule must be consistent with the Companies Act and the Memorandum of Incorporation,
        
        otherwise its VOID
        
        Contradictions bn Companies ACT vs MOI
        
        COMPANIES ACT takes preference
      - the order of preference is as follows
        
        Companies Act 71 of 2008
        
        Memorandum of Incorporation
        
        Rules
  - - - Section 21 of the Companies Act outlines the requirements as follows
        
        concluded by a person in the name of, or purporting to act in the name of or on behalf of a company yet to be incorporated in terms of this Act
        
        The contract was concluded in writing
        
        board of that company ratifies the transaction or does not reject the contract within the stipulated 3 month period after its incorporation
        
        LIABILITY under Pre- Incorporatiron Contract under SECTION 21
        
        If nothing is done (company neither rejects the contract nor adopts it)
        
        The CONTRACT will be deemed to be adopted after 3 months
        
        If partly rejected,
        
        person who contracted will be liable for rejected part
        
        Totally Rejected
        
        person who contracted will be liable for the entire contract
        
        Ratified by the Company
        
        company liable
  - - - Protect the public from misleading names which falsely imply an associate that does not exist
      - NO COPYING
        
        Protect the interest of the owners of names and other forms of intellectual property (such as trade marks) from other persons passing themselves off, or coat-tailing, on the owner’s reputation and good standing
      - Protect the public from names that would fall within the ambit of expression that does not enjoy constitutional protection because of its harmful or other negative nature.
    - - be the same as the
        
        another company
        
        external company
        
        close corporation
        
        cooperative
        
        name of a business which has already been registered in terms of the Business Names Act 27 of 1960
        
        trademark which has been filed for registration in terms of the Trade Marks Act 194 of 1993
        
        word or expression protected in terms of the Merchandise Marks Act of 1941
      - be confusingly similar to a name, trade mark, mark, word or expression
      - give the false impression that the company is associated with the government, or with a particular person or government office etcetera
      - may not include any word, expression or symbol that may constitute propaganda for war, incitement of imminent violence or advocacy of hatred based on race, ethnicity, gender or religion, or incitement to cause harm.
    - - name reservation in a foreign language must be accompanied by a certified translation and certificate of translation.
      - Companies Act also allows any person who has an interest in the name of a company to apply to the Companies Tribunal for it to determine whether or not the name is in accordance with the requirements of the Companies Act.
    - - members of the public are required to register their business / trading name / sole proprietorship / partnership names with the Commission.
      - If the COMMISSION finds that the name is TOO similar
        
        another business
        
        Commission may compel the applicant to inform parties that may be interested by serving them with a copy of the application and name reservation
      - If the company’s name is to be associated with another existing business
        
        Commission will require proof from the applicant company that the associated company was thus made aware before registration of a similar name is to be allowed.
- - - - a company has all the legal capacity and the powers of an individual
        
        except to the extent that a juristic person is incapable of exercising any such power
        
        EG Cannot enter into marriage
        
        MOI may impose additional restrictions on the Company's Capacity
        
        Capacity of Company NO LONGER limited to main business object
    - - NO transaction is invalid solely because it exceeds the company’s capacity
      - Shareholders may ratify transaction that breaches a limitation, restriction or qualification by special resolution (s 20(2))
      - Shareholders, directors or prescribed officers may restrain a company from doing anything inconsistent with limitations, restrictions or qualifications
        
        May not prejudice the rights of third parties who contracted in good faith;
        
        They had NO actual knowledge of the limitation, restriction or qualification
        
        Shareholders have a claim for damages against anyone who intentionally, fraudulently or due to gross negligence causes the company to act inconsistent with the Act or a limitation, restriction or qualification of capacity (see s 20(6)), unless ratified by the general meeting (see s 20(2)).
  - - - Sources of actual authority
        
        Memorandum of Incorporation
        
        Rules
        
        Express or implied mandate
      - Ostensible authority
        
        a company may be liable to a bona fide third party if it is represented by someone who does not have actual authority
        
        but the company allows such a person to represent the company as if that person did have authority
    - - A person dealing with company is deemed to know the content of the company’s registered documents.
      - Section 19(4) of the Companies Act 2008
        
        abolishes doctrine of constructive notice, except:
        
        Person is deemed to have knowledge of special conditions in RF company
        
        For purposes of personal liability companies
    - - Common law Turquand rule
        
        derived from Royal British Bank v Turquand
      - if the person acting on behalf of the company has the authority to do so, but this is subject to an internal formality
        
        such as approval by the board
        
        outsider contracting with the company in good faith is entitled to assume that this internal requirement has been complied with
        
        The company will be bound by the contract even if the internal formality has not been complied with.
        
        exceptions
        
        if the outsider was aware of the fact that the internal formality had not been complied with
        
        or if the circumstances under which the contract was concluded were suspicious.
      - THE RULE WAS CREATED COZ
        
        to keep an outsider’s duty to inquire into the affairs of the company within reasonable bounds.
        
        To trigger the protection provided by the Turquand rule there must have been an internal requirement present.
      - Wolpert v Uitzigt Properties (Pty) Ltd
        
        company provided that the board of directors could authorise a person to sign promissory notes on its behalf
        
        One of the company’s ordinary directors signed promissory notes on behalf of the company without authorisation
        
        question arose whether the outsider was entitled to assume that the director was authorised to do so.?????
        
        court found that an outsider with express or constructive notice of the articles could assume that someone was authorised to sign the notes, but not that a specific person was authorised.
      - For the Turquand rule to come into operation, the person who acted must have possessed actual authority, which was subject to an internal formality
      - Turquand Rule does NOT protect
        
        Directors, prescribed officers or shareholders
        
        third party who has relied on a forged document
    - - now contains a provision that in some respects resembles the Turquand rule
        
        by providing that a person dealing with a
        
        company in good faith is entitled to presume that the company, in making any decision in the exercise of its powers, has complied with all the formal and procedural requirements in terms of the Act
      - section 20(8) provides that subsection (7) must be interpreted concurrently with, and not in substitution for any relevant common-law principle relating to the presumed validity of the actions of
    - - Turquand rule applies where this authority is subject to internal requirement
        
        effect of Turquand rule:
        
        A company cannot escape liability under an otherwise valid contract on the ground that some internal formality or procedure was not complied with.
        
        Turquand rule : terms of this rule, third parties who act in good faith may assume that such internal requirement has been complied with.
  - - - misrepresentation made by the company that the person had authority
      - misrepresentation was intentional or negligent
      - third party was induced by the misrepresentation to deal with the purported agent
      - third party suffered prejudice due to the misrepresentation
    - - Freeman and Lockyer v Buckhurst Part Properties (Mangal) Ltd
        
        court decided that estoppel could not only arise from the articles
        
        also because the company with the full knowledge and approval allowed and ordinary director to act as the managing director
        
        in this manner culpably represented that he was entitled to act
- - - - one of the units into which the proprietary interest in a profit company is divided
        
        Shares are movable, transferable property without a nominal or par-value
        
        can be traded
        
        number of shares must be authorised in the Memorandum of Incorporation
        
        Memorandum of Incorporation of a company must set out the classes of shares and the number of each class that a company is authorised to issue
        
        authorised share capital
        
        company may only issue shares that are authorised by the Memorandum of Incorporation.
        
        company’s board of directors may increase or decrease the authorised share capital
        
        They may further reclassify any shares authorised but not issued
        
        CASE LAW
        
        Standard Bank of SA Ltd v Ocean Commodities Inc
        
        1 more item...
        
        CLASSES of SHARES
        
        Preference shares
        
        ordinary shares
        
        deferred shares
  - - - right to a share in the profits of a company (provided that a dividend is declared by the company)
      - right to a share in the net assets of the company if it is wound up.
      - duty to abide by the company’s Memorandum of Incorporation.
    - - a debenture is a debt instrument
        
        older of a debenture has effectively loaned a sum of money to the company on certain terms
      - entitled to repayment of the sum of money loaned to the company and is, therefore, a creditor of the company.
      - Coetzee v Rand Sporting Club 1918 WLD 74
        
        A debenture is a document issued by a company acknowledging that it is indebted to the debenture holder in the amount stated therein
      - may have a right to attend and vote at general meetings and to appoint directors, and have special privileges regarding the allotment of securities, unless the Memorandum of incorporation provides otherwise
  - - - shareholders of private companies have a right of pre-emption to new shares issued by the company
        
        when the company issues new shares, these shares must be offered to existing shareholders first, pro rata to their current shareholdings.
  - - - also play a role in mergers and acquisitions.
    - - Assets >= Liabilities
        
        Solvency TEST
      - The company is able to pay its debts during the course of normal business for a period of 12 months
        
        Liquidity TEST
  - - - the 12 month solvency test
- - - - The majority makes the decision
    - - corporate decisions are to be taken at properly constituted meetings of the company and not by separately obtaining the individual assent of members.
    - - Gohlke and Schneider v Westies Minerals (Pty) Ltd
      - re Duomatic
    - - unanimous assent unnecessary. A decision may be taken by the required majority of shareholders in writing.
        
        This does not apply in matters which must be decided upon at an AGM.
    - - may decide on any matter to be referred by the board at any time, without notice or compliance with any internal formalities
        
        except when the Memorandum provides otherwise
        
        Every director must be present at the board meeting when the matter is referred to them in their capacity as shareholders.
        
        quorum must be present at the meeting and the resolution passed must be accepted for it to be either an ordinary or a special resolution.
- - - - means that the entity exists separately from its members and changes in membership will not influence its future existence
    - - A company or another close corporation may not be a member of a close corporation
      - A minor, insolvent or person under legal disability may become or remain a member of a close corporation with the necessary assistance from a guardian, trustee or the court.
      - trustee in his or her capacity as trustee of a testamentary or inter vivos trust may become a member of a close corporation. However, the restriction in membership to the maximum of 10 members still applies.
  - - - controlled by the members
      - Requirements for disposal of a member’s interest
        
        must be made in accordance with the association agreement
        
        or by consent of all members
    - - member may bequeath his or her member’s interest to his or her heir or legatee in a will.
      - Transfer of the member’s interest to the heir/ legatee may however only occur with the consent of the other members.
        
        Should the members not permit such transfer, the executor of the estate may
        
        sell the member’s interest to the close corporation
        
        sell the member’s interest to other members
        
        sell the member’s interest to a third party subject to the other members’ pre-emptive right to purchase the member’s interest.
        
        The monetary value will thereafter be paid over to the heir or legatee
    - - Section 34(1) of the Close Corporations Act 69 of 1984 prescribes a mandatory Procedure for disposal of insolvent member's interest
        
        purpose is to balance the rights of the other members against the rights of creditors of the insolvent member’s estate.
      - If a member becomes insolvent, the TRUSTEE may realise the member’s interest and do one of the following:
        
        sell the member’s interest to the close corporation
        
        sell the member’s interest to the other members
        
        sell the member’s interest to a third party subject to the other members’ pre-emptive right to purchase the member’s interest.
        
        After the sale the cash will be paid over to the Creditors
    - - Section 34A of the Close Corporations Act 69 of 1984
        
        applies in instances where a member’s interest has been attached after judgment is taken against the member
        
        sell the member’s interest to the close corporation
        
        sell the member’s interest to the other members
        
        sell the member’s interest to a third party subject to the other members’ pre-emptive right to purchase the member’s interest
  - - - Regulate internal relations
        
        association agreement is NOT a prerequisite for the formation and running of a close corporation.
        
        members of the corporation may change provisions to suit their specific needs in an association agreement
        
        changes MUST not be inconsistent with the CC ACT
        
        Association agreements must be signed by all members
      - Certain matters are unalterable
        
        Disposal of insolvent member’s interest
        
        Who is disqualified from participating in management
        
        The right to call a meeting
      - Alterable provisions include
        
        The rights of the members to carry on business and manage the close corporation
        
        The requirements are for making a decision and voting
        
        The procedure and proportions for payments to members
        
        The manner in which members will settle disputes
        
        The procedure to be followed at meetings