Summary Mercantile Law 471

TOPIC 1: INTRODUCTION TO THE LAW OF BUSINESS UNDERTAKING

 Business entity: A legal structure that is used to conduct business
o The legal structure may be created by law or sometimes only be recognised by law.
- E.g. Company, close corporation
- Partnerships are also recognised
o Business entity or business structure or business undertaking.
- Not always separate legal entities but rather organisational structures.
o Conduct of business
- Conduct for financial or economic gain.
- Also include certain entities that can be used to conduct non-profit activities
from churches, sports clubs and management bodies of housing
communities.

LIST OF BUSINESS ENTITIES

 Sole proprietorship
o A single person conducting a business.
o E.g. Person selling vegetables on the side of the road
 Partnership
o Consists of partners operating to create this business through agreement
o No legal limits with regards to size, but usually used for smaller to medium-sized
enterprises.
 Close corporation
o Being phased out
o A business that has been specifically established to attempt to promote small
businesses
 Companies (S 8)
o Various types but distinguish between profit and non-profit companies.
o Profit companies
- Used to gain profit
- Four types:
- Private company
 Conduct business on a closer scale.
- Public company
 Separation between those that own the company
(shareholders) and those that manage the company
(executives and directors).
- Personal liability
 Companies where the directors of the company are liable to
others contracting with the company.
 This type of business is used for certain professions, e.g. law
firms.
- State owned
 Profit in theory, but not in practice.
o Not for profit
- Has a different public benefit purposes
- One type: non-profit company (previously known as S 21 companies).


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,  Common law non-profit
o Either make use of the Companies Act or the common law for non-profit companies.
o E.g. Sports clubs




FUNCTION OF THE LAW

 Some entities are created by law: juristic persons
o All companies or close corporations
- They are separate juristic persons, i.e. they are recognised by law as if they
are persons that exist in the legal sphere.
- The law establishes the business entity, in other types of companies the
members establish it.
o The law regulates the internal relationships of businesses
- Those that participate in the business.
- What is internal and external depends on the type of business entity and on
the view that the law takes.
 Sole proprietorship: Perhaps employees to some extent
 Not much internal relationship that exists.
 Argument that the relationship between the sole proprietor
and his employees are internal but, in some respects, it is
also external.
 Partnership: Partners
 They established the entity through an agreement.
 Most important internal relationship is the one that exists
between the partners.
 The law regards this relationship as very close and is so
regulated in a way similar to family law.
 Partners must act like brothers.
 Common law non-profit
 Internal relationship between the members of the non-
profit and those who run the non-profit organisation.
 E.g. Those involved in sports clubs (members and managers)
or church associations



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,  Close corporations: Members
 As with a partnership, the relationship between these
members are close.
 Companies: Relationship between shareholders inter se and
between shareholders and managers (directors).
 The most fundamental relationship exists between the
shareholders (those with ownership interests in the
company) and managers (directors and other executive
managers).
 The law must regulate these relationships between the
shareholders and managers both vertically and horizontally.
 With non-profit companies there are two possibilities:
 It either has members or it does not.
 However, they also have to have managers and the
internal relationship needs to be regulated.

o The law regulates the external relationships of businesses.
- How do businesses interact with the outside world?
 When can they contract?
 When are they liable in delict and criminal law?
 Relationship with creditors and other stakeholders
 Stakeholders: Persons affected by the activities of the
business.
 Sometimes it is difficult to determine whether a stakeholder
is internal or external to the business.
 Creditors (people who lend the business money) are
normally regarded as external.
 Other stakeholders, such as employees and customers are
more complicated.
 Customers are probably external.
 Employees are on the border between internal and
external.
 Stakeholders in the business – strong view that the
environment must be regarded as one of the
stakeholders in the business.

SOURCES OF THE LAW

Common Law

 Outside of companies and close corporation mostly specifically regulated by common law:
o Sole proprietorship, partnership, business trust, common law non-profits
o Some minor exceptions
- Trust Property Control Act 57 of 1988




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, Statute

 Companies and close corporations are mainly regulated by statute
o Close Corporations Act 69 of 1984
- Enacted to promote small businesses
o Companies Act 71 of 2008; main predecessor Companies Act 63 of 1973
o Must remember that there is also an extensive common law
- Ex parte NBSA Centre Ltd 1987 (2) SA 783 (T)
 The judge had to apply a complex provision in the Companies Act
that dealt with take overs.
 He made this very important point about the relationship between
the statute and the common law:
 “I believe that one’s general approach to company law may
exercise subtle influence on one’s perception on many of its
concepts and the meaning of its well-worn terminology.
 Company law is much more than the current statute that
applies in any particular point in time.
 Like any statute that regulates human interaction, it has its
own form of logic that needs to be identified and mastered.
 It has also developed a number of areas that is like its own
inner common law, which is not found in any specifically
identifiable provisions”
 The legislation itself creates a sort of common law that surrounds
company law.
 However, there is also a common law of companies that applies
when there is no statutory rule on the matter.
- S 158(a)
o Summary
- There is legislation that deals comprehensively with company law.
- The act has its own inner logic which creates a statutory common law.
- When the act does not apply there is a common law of companies that
would be applied.
 This common law is mostly based on English law.

Origin of Companies Act 71 of 2008

 Predecessors were Companies Act 61 of 1973 and 46 of 1926.
 Process to draft a new Companies Act started in 2002 by the Department of Trade and
Industry.
 Eventually a team was put together:
o Project manager Tshepo Mongalo started in September 2003.
o Assisted by Chief Policy Advisor Judge DM Davis and Chief Drafter Phil Knight.
 Department of Trade and Industry published: “Company law in the 21 st century: Guidelines
for Corporate Law Reform May 2004”
o Importance of this document compare the Van Wyk De Vries Commission.




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