LML4806 EXAM PACK 2023

LML4806 PAST EXAM PACK ANSWERS () & 2020 BRIEF NOTES. LML4806 - Company Law. Section 61(8) states that the following matters must be discussed at an annual general meeting:1 a. Presentation of director’s report, audited financial statements for immediately preceding financial year and audited committee report b. Election of directors to the extend required by the Act or the company’s Memorandum of Incorporation c. Appointment of auditor for ensuing financial year and appointment of audit committee and d. Any matters raised by shareholders, with or without advance notice to the company. 1.2. In terms of s62 of the Companies Act a public company should issue a notice of a meeting within 15 business days before date of meeting. Also provisions of MOI may prescribe longer minimum notice. The notice must be in writing and including date, time, place and the record date if set. It should include a general purpose of the meeting.2 In instances where a company has failed to give notice or if there has been a defect in giving of the notice, it may proceed if persons entitled to voting rights in respect of any item on the meeting agenda is present at the meeting (in person or proxy) and votes to approve the ratification of the defective notice.3 If material defect relates only to one or more particular matters, any such matter may be taken off the agenda and notice will remain valid for remaining matters, shareholder who is present at a meeting is deemed to have received or waived notice of the meeting.4 1 Companies Act 71 of 2008 section 61(8). 2 Companies Act 71 of 2008 section 62(8). 3 Cassim HI The law of Business Structures (JUTA 2012). 4 Cassim HI The law of Business Structures (JUTA 2012). Downloaded by: olindamyburg | Distribution of this document is illegal S - The study-notes marketplace 4 | P a g e Scarrow Iron Ltd is a public company: Therefore section 62(1)(a) will apply which stipulates that a public company must deliver notice within 15 business days before the meeting begin and the MOI of the company can prescribe a longer or shorter period. Scarrow Ltd’s notice does not inform the shareholders of the purpose of the meeting, the notice will remain valid only if the persons entitled to vote are present at the meeting, acknowledge actual receipt of notice and votes to approve the ratification of the defective notice. 1.3. 1.3.1. In terms of section 19(1)(b) of the companies Act, a company has the legal capacity and the powers of a natural person, except to the extent that a juristic person in incapable of exercising any such power, or the company’s Memorandum of Incorporation provides otherwise.5 Therefore, the capacity of a company is no longer limited by its main or ancillary objects or business. A transaction is not void merely because it is prohibited or restricted in terms of its Memorandum of Incorporation. The fact that the MOI of Educat Group Ltd states that the main business of the company is the development, acquisition and management of independent schools and tertiary education institutions is irrelevant. Therefore, the contract for the yatch is valid and can be enforceable. 1.3.2. Doctrine of constructive notice: The doctrine of constructive notice provides that third parties dealing with the company are deemed to be fully acquainted with the contents of the public documents of the company. Section 19(4) of the Act partly abolishes this doctrine. Thus, third parties contracting with the company will no longer be 5 Companies Act 71 of 2008 section 19(1)(b). Downloaded by: olindamyburg | Distribution of this document is illegal S - The study-notes marketplace 5 | P a g e deemed to have had notice of the contents of the public documents of a company merely because they have been filed with the Commission or are accessible for inspection at the office of the company. But, section 19(5) of the Act provides for two exceptions: Firstly, a person is deemed to have knowledge of any provision of a company’s MOI in terms of section 15(2)(b) of (c), relating to any restrictive or procedural requirement impeding the amendment of any specific provision of the MOI or prohibiting its amendment. This is subject to the condition that the company’s name includes the letters “RF” and the Notice of Incorporation contains a prominent statement drawing attention to such a provision, as required by section 13(3).6 The second exception applies to a personal liability company. This means that a person is regarded as having received notice and having knowledge of the effect of section 19(3) on a personal-liability company. QUESTION 2 2.1. Formalities that Fisher Technology Ltd have to follow before the dividend proposed by the board of directors may be declared and paid: A dividend is a form of a distribution in terms of section 1 of the Companies Act. This is so because a distribution can be defined as a direct or indirect transfer by a company of money or other property of the company, other than its own shares, to or for the benefit of its own shareholders or those of another company within the same group of companies and it can be in the form of a dividend. It is regulated in terms of section 46 of the companies Act which stipulates that a distribution may be made in the following circumstances:7 The board of directors must authorise the distribution, unless it is made in terms of an existing legal obligation of the company or a court or the board of the company, by resolution, has authorised the distribution. It must also 6 Companies Act 71 of 2008 section 13(3). 7 Companies Act 71 of 2008 section 46. Downloaded by: olindamyburg | Distribution of this document is illegal S - The study-notes marketplace 6 | P a g e appear that the company will satisfy the solvency and liquidity test immediately after completing the distribution (in this instance after paying the dividend). The board of the company must also acknowledge, by means of a resolution, that it has applied the solvency and liquidity test and reasonably concluded that the company will satisfy this test immediately after completing the distribution. In terms of section 4 of the Companies Act solvency and liquidity test mean the following:8 Solvency test: considering all reasonably foreseeable financial circumstances of the company at that time, the assets of the company, fairly valued, equal or exceed the liabilities of the company as fairly valued. Liquidity test: Considering all reasonably foreseeable financial circumstances of the company at the time, it appears that the company will be able to pay its debts as they become due in the ordinary course of business for a period of 12 months after the distribution (in this instance after the payment of the dividend). 2.2. In terms of section 44 of the Companies Act, the board may authorise the company to provide financial assistance by way of a loan, guarantee, the provision of security or otherwise to any person for the purpose of, or in connection with, the subscription of any option, or any securities, issued or to be issued by the company.9 In terms of section 44(3) of the Companies Act it is stated subject to the company’s MOI, the board may authorise any financial assistance if the following requirements are met: a) The board must authorise the company to provide financial assistance to any person for the purchase of any securities of the company. 8 Companies Act 71 of 2008 section 4. 9 Companies Act 71 of 2008 section 44. Downloaded by: olindamyburg | Distribution of this document is illegal S - The study-notes marketplace 7 | P a g e b) The provision of financial assistance must be pursuant to an employee share scheme that satisfies the requirements of section 97; or the provision of financial assistance must be pursuant to a special resolution of the shareholders, adopted within the previous two years which approved such assistance either for the specific recipient or generally for a category or potential recipients, and the specific recipient falls within that category. c) The board must be satisfied that immediately after providing the financial assistance, the company would satisfy the solvency and liquidity test and that the terms under which the financial assistance proposed to be given are fair and reasonable to the company. d) The board must ensure that any conditions or restrictions regarding the granting of financial assistance set out in the company’s MOI have been satisfied. In order to determine whether financial assistance is given the courts have developed various tests which include the following: Firstly, it must be ascertained whether the intended transaction qualifies as financial assistance. To determine this, the impoverishment test as formulated in the case of Gradwell (Pty) Ltd v Rostra Printers Ltd should be relied upon to determine whether or not financial assistance was provided.10 The impoverishment test considers whether a transaction will have the effect of leaving the company poorer, and if so, then financial assistance was provided. In Lipschits NO v UDC Bank Ltd the court held that if the company buys an asset from a person in order to enable that person to buy shares in the company, it will depend on the facts whether this constitutes financial assistance.11 Secondly, it must be determined whether that assistance was for the purpose of acquiring shares in the company. Factors that have emerged form case law to assist in this regard are: 10 Gradwell (Pty) Ltd v Rostra Printers Ltd 1959 (4) SA 419 (A). 11 Lipschitz NO v UDC Bank Ltd 1979 (1) SA 789 (A). Downloaded by: olindamyburg | Distribution of this document is illegal S - The study-notes marketplace 8 | P a g e a) Whether the company needs the asset in its normal business and; b) Whether the company paid a fair price for it. When a transaction passes the above two phases, it will have to comply with section 44 as discussed above to be valid. 2.3. In terms of section 44 of the Companies Act, the board may authorise the company to provide financial assistance by way of a loan, guarantee, the provision of security or otherwise to any person for the purpose of, or in connection with, the subscription of any option, or any securities, issued or to be issued by the company.12 As discussed above the loan of 10 million will be regarded as a distribution and should be governed by section 46 of the Companies Act. If the company gave Gareth loan for the purpose of financial assistance, it will also have to comply with section 44 of the companies act as well as the two tests that were set in Lipschitz case as discussed above. For the loan to be valid, the company must also satisfy the solvency and liquidate as discussed above in section 4 of the Act which states that it must be able to pay its debts within 12 months as they become due after the granting of the loan. QUESTION 3 3.1. Business judgment rule is regulated in terms of section 76(4). This provision states that a director will be regarded as having acted in the best interests of the company and with the required degree of care, skill and diligence if the director:13 a) Took reasonable diligent steps to become informed about a particular matter, and b) Either the director had no material personal financial interest and had no reasonable basis to know that any related person had personal financial interest or he disclosed the conflict of interest as required, and 12 Companies Act 71 of 2008 section 44. 13 Companies Act 71 of 2008 section 76(4)(a). Downloaded by: olindamyburg | Distribution of this document is illegal S - The study-notes marketplace 9 | P a g e c) The director had a rational basis for believing, and did believe, that the decision was in the best interests of the company. The business judgment rule will also apply in terms of section 76(4)(b) of the Act if the director is entitled to rely on performance of certain people or committes:14  On one or more employees of the company whom director reasonably believes to be reliable and competent in the functions performed;  On the information, opinions, reports or statements provided by legal counsel, accountants, or other professional persons retained by the company; and  On the board or a committee as to matters involving skills or expertise that the director reasonably believes are matters within the particular person’s professional or expertise that the director reasonably believes are matters within the particular person’s professional or expert competence or as to which the particular person merits confidence, or a committee of the board of which the director is not a member, unless he has reason to believe that the actions of the committee do not merit confidence. If a director’s conduct comply with the requirements of business judgment rule as contemplated above, he will escape liability and he will be assumed to have acted in the best interest of the company as contemplated in section 76(3)(b). 3.2. It must be noted that section 76 requires a director to act in good faith and in the best interest of the company. A director should act with the degree of care, skill and diligence that may reasonably be expected of a person carrying out such functions and having the same skill and experience of that director. Directors are also required to disclose any personal financial interest. They may not use their position as director or information gained as a director to make a secret profit or gain advantage for themselves or someone else or to cause harm or detriment to the company. In the given set of facts, as Lexie and her husband Vishal are related persons, it is clear that Lexie had a material personal interest in the appointment of 14 Companies Act 71 of 2008 section 76(4)(b). Downloaded by: olindamyburg | Distribution of this document is illegal S - The study-notes marketplace 10 | P a g e Premium Marketing CC. The other members of the board relied upon the information that Lexie gave them, and had a rational belief that the decision was in the best interest of the company. Accordingly, as Lexie did not disclose her interest, he cannot rely upon the business judgment rule. QUESTION 4 4.1. In terms of section 94(7), five statutory duties of an audit committee are to:15 a) Determine the auditor’s fees and terms of engagement; b) Ensure that the auditor’s appointment complies with any legislation related thereto; c) Determine the nature and extend of, and pre-approve, any non-audit services that the auditor may or may not provide to the company or related company; d) Receive and deal appropriately with any concerns or complaints relating to the company’s accounting practices, internal financial controls, financial statements or audits; and e) make submissions to the board on any matter concerning the company’s accounting policies, financial control, records and reporting. 4.2.1 Five offences relating to insider trading:  An insider who knows that he or she has inside information and who deals directly or indirectly or through an agent (for example a stockbroker) for his or her own account in the securities listed on a regulated market to which the insider information relates, commits an offence. 16  An insider who knows that he or she has inside information and who deals directly or indirectly or through an agent for any other person in the securities listed on a regulated market to which the inside information relates, commits an offence.17 15 Companies Act 71 of 2008 section 94(7). 16 Financial Markets Act, 2012 s78(1). 17 Financial Markets Act, 2012 s78(2). Downloaded by: olindamyburg | Distribution of this document is illegal S - The study-notes marketplace 11 | P a g e  It is also an offence for an insider who knows that he or she has inside information to encourage or cause another person to deal or to discourage or stop another person form dealing in the securities listed on a regulated market to which the insider information relates or which are likely to be affected by it.18  Any person who deals for an insider directly or indirectly or through an agent in the securities listed on a regulated market to which the insider information possessed by the insider relates or which are likely to be affected by it, who knew that such person is an insider, commits an offence.  An insider who knows that he/she has inside information commits an offence if he or she discloses the information to another person. Even if the other person does not commit any insider trading offence offence after the disclosure, it is still an offence to disclose it.19 4.2.2 Thabiso committed an offence of insider trading. Thabiso is an insider because he obtained inside information through being a director and he used this information to deal in his own account through an agent (stockbroker). He used the information to deal on his wife’s account through an agent which makes him guilty of the offence. Thabiso has also committed an offence because he encouraged (urges) John (who also acted upon the information) to sell all his shares that he holds in the company relying on the information that he got through the office of a director. 4.2.3. In term of section 78(3),20 the stockbroker may be held liable for an offence relating to insider trading because he knew that the person on whose behalf he is dealing, is an insider.