AUE1601 - Legal Aspects In Accountancy Study Notes And Revision Questions..

AUE1601 - Legal Aspects In Accountancy Study Notes. Which one of the following statements is false in terms of the Companies Act? (a) A Memorandum of Incorporation and a record of the company directors form part of the company records that every company must maintain. (b) A private company does not have to be audited at all. (c) The annual financial statements of a public company must be audited. (d) A public company must appoint a company secretary who must be a permanent resident of the Republic of South Africa, and must remain so while serving in that capacity. 3 5. Which one of the following statements regarding voting and shareholders' meetings is false in terms of the Companies Act? (a) If there is only one class of shares, those shares must have voting rights in respect of all voting matters. (b) Every share has associated with it one general voting right, subject to the provisions of the Act or the Memorandum of Incorporation. (c) If there is more than one class of shares, the Memorandum of Incorporation must provide that all classes must have voting rights in respect of all voting matters. (d) Subject to any other law, the Memorandum of Incorporation may establish for any particular class of shares, that is, rights that confer special, conditional or limited voting rights. 6. Which one of the following statements regarding meeting requirements is not true in terms of the Companies Act? (a) Unless the Memorandum of Incorporation of a company provides for a lower percentage to constitute a voters' quorum, the quorum for all shareholders' meetings is the presence at the meeting of the holders of at least 25% of the shares entitled to vote. (b) Irrespective of the voters' quorum, if a company has more than two shareholders, a shareholders' meeting may not begin or a matter begin to be debated, unless at least three shareholders are present at the meeting. (c) A shareholder of a company may appoint any individual (including an individual who is not a shareholder of that company) as a proxy to participate in, speak and vote at a shareholders' meeting, on behalf of the shareholder. (d) The Companies Act does not provide for the adoption of any resolution by means of electronic communication. 7. Which one of the following statements regarding voting and shareholders' meetings is false in terms of the Companies Act? (a) A shareholder of a company may only appoint an individual, who is a shareholder of that company, as a proxy to participate in, speak and vote at a shareholders' meeting on behalf of the shareholder. (b) Voting on any matter at a shareholders' meeting may be conducted by polling the persons present and entitled to exercise voting rights on that matter. 4 (c) On a poll, any member (including his/her proxy) must be entitled to exercise all the voting rights attached to the shares held or represented by that person. (d) On a show of hands, a person will only have one vote, irrespective of the number of shares he/she holds or represents. Suggested solutions to multiple-choice questions in section 1.3.3: 1. c – section 1: definition 2. d – section 24 3. d – section 35(3) 4. b – section 30(2)(b 5. c – section 37(4)(a) 6. d – section 61(10); section 59(c) 7. a – section 58; section 63 INTERPRETATION, PURPOSE, APPLICATION AND FORMATION OF ACOMPANY 2.1 Interpretation (sections 1–6 and 8) 2.2 Incorporation and legal status of companies (sections 11, 13–17, and 19–22) 5 Related and interrelated persons, and control (sec 2) and subsidiary relationships (sec 3) (a) Don and Sandra: Don and Sandra have been married for several years and they live in Cape Town. Due to the fact that Don works in Johannesburg from Monday to Friday, he lives in a separate apartment in Melville during those days. (b) Lynette and Master Locks (Pty) Ltd: Lynette owned 100% of the shares in Master Locks (Pty) Ltd before she had recently transferred all her shares in Master Locks (Pty) Ltd to her adopted son, Peter. (c) Anglo Ltd and Naidoo Cash & Carry (Pty) Ltd: Johnny and his brother Kumar both own 50% shares in a company called Naidoo Cash & Carry (Pty) Ltd. Kumar recently purchased R5 000 worth of shares in Anglo Ltd, a company listed on the JSE Limited. Kumar does not control Anglo Ltd directly or indirectly. 6 (d) Blue Hills (Pty) Ltd and Wollongong (Pty) Ltd: Blue Hills (Pty) Ltd appointed Mr Patrice Lumumba and Mr Eugene Wollongong as the directors of Wollongong (Pty) Ltd. Mr Lumumba and Mr Wollongong control the majority of the votes at board meetings. (e) Sonny and Cher: Sonny and Cher are not married, but they have been living together for several years together with their two children. Answers (a) Yes – They are married. It is irrelevant that they are not permanently living together [sec 2(1)(a)]. (b) Yes – Peter directly controls Master Locks (Pty) Ltd and Peter is related to Lynette by means of the second degree of consanguinity [sec 2((1)(a-b)]. Thus, Peter is related to Master Locks (Pty) Ltd. (c) No – Although Kumar is a shareholder of both entities, he does not have control over Anglo Ltd [sec 2(1)(c)]. Therefore, Anglo Ltd and Naidoo Cash & Carry are not related persons in terms of being controlled by the same person. (d) Yes – Blue Hills (Pty) Ltd has indirect control over Wollongong (Pty) Ltd [sec 2(1)(c)]. (e) Yes – Sonny and Cher are living together in a relationship similar to marriage [sec 2(1)(a)]. Solvency and liquidity test (sec 4) 7 Question Mr Joe Soap and Mr John Doe have drawn up a business plan, and now they want to form a new company. They both come from wealthy families and they will provide most of the finance required for the venture. Initially, the two of them will be the only shareholders and directors of the company, but it is expected that over time, a few new shareholders will be found as well as one or two directors appointed. What are the major differences between a public, private and personal liability company, and what type of company should we choose for our purposes? Suggested solution 1. The major differences between the three entities are as follows: 8 1.1 Private companies are prohibited by their founding document (called Memorandum of Incorporation) from offering their shares to the public. (1) 1.2 Private companies restrict the transferability of their shares. For example, if a shareholder wishes to sell his/her shares, that shareholder will usually be required to offer his/her shares to an existing shareholder or to someone of whom the other shareholders approve. (1) 1.3 Personal liability companies have the same restrictions (as in 1.1 and 1.2 above) but in addition, must include in its Memorandum of Incorporation a statement that it is a personal liability company. In effect, this means that the directors will be jointly and severally liable with the company for the liabilities of the company in their personal capacities (for example, an auditing firm where the auditors wish to practise their profession in the form a company). (1) 1.4 Public companies have no such restrictions with regard to offering shares to the public or transferring shares. Directors are not jointly and severally liable (as in 1.3 above). (1) 1.5 In terms of Chapter 3 of the Companies Act, 2008, as amended, public companies are required to appoint ● a registered auditor to perform an annual audit ● an audit committee ● a company secretary (1) 1.6 Private companies, including personal liability companies, are not obliged to make these appointments but may do so voluntarily or to satisfy the requirements of the Memorandum of Incorporation, where it contains such a requirement. The company you would like to form would be a private company. 2.1 A private company will suit your existing size, shareholding and growth expectations. (1) 9 2.2 You do not intend to go "public" and you have the necessary funding to meet your requirements. (1) 2.3 Groups offering professional services, for example, accountants usually form personal liability Companies Question 2 You are the auditor of Patchwork Ltd, a public company that owns a number of panelbeating and related operations. You are enjoying a cup of tea with the financial controller, when he states, "I understand that Patchwork Ltd will now be categorised as a profit company". Which companies are profit companies and what purpose does this categorisation serve? Surely, there is no such thing as a loss company! (6) (Adapted – Gowar & Jackson 2010) Suggested solution 1. Yes. Patchwork Ltd will be categorised as a profit company and no, there is no loss company category. (1) 2. Companies are categorised as "profit companies" and "nonprofit companies", and the distinction has been made to facilitate the difference in the intention for forming a company.(1) 3. For profit companies intend to make profits, whilst nonprofit companies are formed for the public benefit or for an object relating to cultural or social activities or communal or group interests. (1) 4. For profit companies are further classified into public, private, state-owned or limited liability companies. (1) 5. Because of this categorisation and classification, the various companies are subject to different regulations and provisions in terms of the Companies Act, 2008, as amended, for example as follows: 5.1 Public companies must appoint an audit committee. (1) 5.2 Non-profit companies cannot pay dividends ("profits" are utilised for the object of the 10 INCORPORATION AND LEGAL STATUS OF COMPANIES 2.2.1 Memorandum of Incorporation (MOI) (sec 15–16) The founding document of a company under the Act will be the MOI. This single document has replaced what is currently known as the memorandum and articles of association. It is important to know that sections 15 and 16 do not only deal with the MOI, but that they include rules of a company and shareholder agreements. The Companies Act, 2008, as amended, provides that a company's MOI is subject to the Act and must be consistent with its provisions. To the extent that a provision of the MOI contravenes or is inconsistent with the Act, it is void (sec 15(1)). However, the Act recognises that not all its provisions are suitable for all companies and therefore, section 15(2) permits a company's MOI to − include matters that are not addressed in the Act − alter the effect of any "alterable" provision − impose on the company a higher standard, greater restriction, longer period, or any similarly more onerous requirement, than would otherwise apply to the company in terms of an unalterable provision of the Act − contain any restrictive conditions applicable to the company, and any requirement for the amendment of any such condition in addition to the requirements for amendments of MOIs set out in section 16 − prohibit the amendment of any particular provision of the MOI, provided that the MOI does not include any provision that negates, restricts, limits, qualifies, extends or otherwise alters the substance or effect of an unalterable provision of the Act, except to the extent contemplated in the third bullet point above. An "alterable" provision is a provision of the Act "in which it is expressly contemplated that its effect on a particular company may be negated, restricted, limited, qualified, extended or otherwise altered in substance or effect by that company's MOI" (sec 1). Some examples of alterable provisions are as follows: 11 • Annual financial statements – "The annual financial statements must … be … audited voluntarily If the company's Memorandum of Incorporation, or a shareholders resolution, so requires or if the Company's board has so determined …" - section 30(2)(b)(ii)(aa)). • Notice of shareholder meetings – "A company's Memorandum of Incorporation may provide for longer or shorter minimum notice periods than required by subsection (1)" (sec 62(2)). • Special resolutions – "A company's Memorandum of Incorporation may permit — (a) a lower percentage of voting rights to approve any special resolution; or (b) one or more lower percentages of voting rights to approve special resolutions concerning one or more particular matters, respectively, provided that there must at all times be a margin of at least 10percentage points between the highest established requirement for approval of an ordinary resolution on any matter, and the lowest established requirement for approval of a special resolution on any matter" (sec 65(10)). (Adapted from Webber & Wentzel 2011 – a list of alterable provisions as published on SAICA's website.) Section 15(3) provides that unless the MOI states otherwise, the board of the company may make, amend or repeal any necessary or incidental rules relating to the governance of the company in respect of matters that are not addressed in the Act or in the MOI. The steps, which the board must follow in this regard, are set out. An example would be a company that does not need to be audited in terms of the Act, but which the board voluntarily decides must be audited.