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Who may bring a statutory derivative action ito S165 CA a shareholder a director a registered trade union representing an employee or a person/body representing employees anyone who is granted leave by the court to do so prescribed officers Grounds for the application of statutory derivative action -cpy failed to take steps required -cpy appointed a person/committee who is not independent. -cpy accepted an inadequate report -cpy served a refusal notice Duties of the audit committee -nominate and appoint a registered/independent auditor -determine fees to be paid to auditor and auditor's terms of engagement. -pre-approve any proposed agreement with the auditor to provide non-audit services -consider whether/not auditors independence may have been prejudiced. -prepare a report to be incl in annual financial statements Duties of the audit committee (ACRONYM: Nana Finds Practising Independence Problematic) -nominate and appoint a registered/independent auditor -determine fees to be paid to auditor and auditor's terms of engagement. -pre-approve any proposed agreement with the auditor to provide non-audit services -consider whether/not auditors independence may have been prejudiced. -prepare a report to be incl in annual financial statements ACRONYM: NANA- Nominate and appoint FINDS- fees/terms of engagement PRACTISING- Pre-approve INDEPENDENCE-Independence PROBLEMATIC-Prepare report Three cases that has to do with the common law rule of lifting the corporate veil Botha v Van Niekerk: The corporate veil will only be pierced when the seller suffered "unscionable injustice" In Cape Pacific V Lubner Controlling Investements: - fraud, dishonesty and improper conduct will be justifiable to pierce the corporate veil. - A balance must be struck between the need to persevere the legal personality of the company and the policy considerations in favor of piercing the corporate veil Hulse-Reutter v Godde - there must be evidence of the abuse of the distinction between the legal personality of the company and the person controlling it with a motive to gain a unfair advantage. - What does piercing the corporate veil refer to: 1. the exceptional circumstances in which the court disregards the separate legal personality of the company and treat the shareholders as if they are the owners of the assets and as if they were conducting business in their own personal capacity or 2. when the court attributes certain right or obligations of the shareholders to the company is a CC bound to a contract when one of its members acted in a manner exceeding their powers? -members of a cc acts as agents of a cc -doctrine of constructive notice does not apply to CCs. Third parties therefore have no knowledge regarding the content of the CCs registered documents -in general CCs are bound to any contract concluded with an outside member- regardless of whether or not the transaction falls within the scope of the CCs main business. -CC can escape liability if a third party knew, or reasonably ought to know that a member concluded a contract without the authority to do so. - in the case of J&K Timbers v GL & S Furniture Enterprises CC- a member is a a agent even though no authority, expressly or implied, has been conferred upon him by the CC, and corporation is bound to the related act, unless the third party knew or reasonably ought to know. Factors the court will consider when considering whether a company should change their name and refer to case law Peregrine Group (Pty) Ltd & Others v Peregrine Holdings Ltd and Others The court considered the following factors: 1. the date of the registration of the respective companies. e of the business activities of the respective companies. 3. similarity in the names and whether it will cause confusion. t bases of the respective companies 5. likelihood that members of the public will be confused in the dealings with the respective companies. Factors the court will consider when considering whether a company should change their name and refer to case law Peregrine Group v Peregrine Holdings The court considered the following factors: 1. the date of the registration of the respective companies. e of the business activities of the respective companies. 3. similarity in the names and whether it will cause confusion. t bases of the respective companies 5. likelihood that members of the public will be confused in the dealings with the respective companies. What happens if a member of a cc dies -member of a cc may bequeath his or her interest to a legatee ito a will. -transfer of the members interest can only be done after consent of the other members of the cc was obtained. should the members not consent, then the executor may: 1. sell the member's interest back to the cc 2. sell the member's interest to one of the remaining members. 3. sell the member's interest to a third party, subject to the other members pre-emptive right to purchase member's interest. Money value of member's interest will thereafter be transferred to the legatee. Requirements for the regsitration of a external/foreign/domesticated company 1. the board of directors must register the business as a "external company" within 20 days of starting to conduct business activities/ np activities with the CIPC 2. they must lodge a CoR20.1 form with the CIPC 3. board of directors need ot take note that not all activities will be regarded as business activities like opening a SA business account acquiring a interest in a property 4. the company can transfer their registration to SA, it will be deemed that the company has been incorporated into in the Republic 5. Company will be known as a dmesticated company Fiduciary duties of a member of a CC act honestly and in good faith, in particular: -not act without or exceed power Avoid a conflict of interest between his/her interests and CC -not derive any personal financial gain -disclose any material interest in a transaction to other members of the CC asap. -not compete with the CC business activities in any way Which body do we use to register a company CIPC Three main differences between a private company (Pty) Ltd and a public company Ltd Public company Profit cpy that can issue shares to the public and shares can be listed at the JSE. Private company A profit company that prohibits the issue of shares to the public and restrict the transfer of the shares in the MOI. Briefly explain what an alterable provision is and give three examples of alterable provisions according to the CA Alterable provisions are provisions that can be altered from the default list of provisions provided for in the MOI. Examples: 1) The MOI may provide for longer minimum notice periods for meetings. 2) Electronic notice and electronic participation in meetings are allowed unless MOI prohibits it. 3.) Companies may determine a higher number of minimum directors than that prescribed by the Companies Act Estoppel applies only when the agent did not have actual authority to bind the company. And when the company made a misrepresentation In Freeman and Lockyer v Buckhurst Part Properties (Mangal) Ltd: the court decided that estoppel could not only arise from the Articles (MOI), but also because the company with full knowledge and approval allowed an ordinary director to act as the managing director and, in this manner, culpably represented that he was entitled to act. Based on such misrepresentation, the company will be prevented from denying liability if the third party can prove that: company misrepresented, intentionally or negligently, that the agent concerned had the necessary authority to represent the company 2. the misrepresentation was made by the company 3. the third party was induced to deal with the agent because of the misrepresentation What would a third party need to prove in order for a company to be held liable on doctrine of estoppel. Refer to case law Determining if a company has provided financial assistance Lipschitz v UDC Bank- must be assessed in two phases. 1. Ascertained whether fin assistance was provided. -in Gradwell v Rostra Printers - impoverishment test was formulated to determine whether financial assistance was provided. -ito test, court considered whether transaction left the company poorer, if it did assistance was provided. -In Lipschitz the court held that exposing a cpy to risk is also fin assistance. For example: 1. obtaining a loan to purchase shares and the cpy stood as surety for the loan 2. If the company buys an asset from the person in order to enable that person to purchase shares in the company. Factors that have emerged from case law to assist in this regard are whether the company needs the asset in its normal business and whether the company paid a fair price for it. 2. It must be determined whether that assistance was for the purpose of acquiring shares in the company. Suppose Company A is a major creditor of Company B. Company A acquires most of the shares in Company B. After the acquisition, Company A causes Company B to grant security over its movable assets to secure the loans. This will be financial assistance in terms of the first test, but it is not in connection with the purchase of shares. The assistance is to secure a loan. When a transaction passes these two phases, it will have to comply with section 44 of the Companies Act in order to be valid. Solvency and liquidy test as per S4 of CA Solvency test: We consider all the companies' reasonably foreseeable financial circumstances at that time We consider if the assets of the company, fairly valued, equal or exceed the liabilities of the company as fairly valued. Liquidity test: That, in considering all reasonably foreseeable financial circumstances of the company at that 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. If the distribution was in the form of giving a loan to a shareholder or forgiving a loan made to a shareholder, the period runs from 12 months after the test was considered. Which Two remedies are available against directors who have abused their position? an application to declare a director delinquent or under probation, S162 CA and the derivative action ito S165 of the CA. an application to declare a director delinquent or under probation, S162 CA- also applies to a CC and the statutory derivative action ito S165 of the CA. Which Two remedies are available against directors who have abused their position? Three grounds under which a application for delinquency may be brought -if the director grossly abused their position -took personal advantage of information or an opportunity contrary to s76(2)(a) -intentionally or by gross negligence inflicted harm upon the company or a subsidiary company, contrary to s76(2)(a) Four duties of the company secretary 1.) providing the directors of the company guidance as to their duties, responsibilities and powers 2.) making the directors aware of any law relevant to or affecting the company reporting. 3. )ensuring that a copy of the company's annual financial statements is sent, in accordance with the Companies Act, to every person who is entitled to it. 4.) carrying out the functions of a person designated in terms of section 33(3) (i.e. a person responsible for filing the company's annual return) How will a trustee in a insolvent estate dispose of members interest in a CC? the trustee of the insolvent estate may realise the member's interest and -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 The money value will thereafter be paid over to the creditors. If a member of CC wish to pursue other business opportunities and terminate ties with the CC, the CC can acquire that members interest by meeting the following requirements: Requirements for acquisition of member's interest by a close corporation: -the corporation must have at least one other member - the aggregate members' interest must remain 100% -written consent from all members is required prior to payment - the corporation must be solvent after payment for the acquisition and liquid both before and after payment Can a member of a cc call a meeting if the association agreement says he cannot? No stipulation in contravention of the Close Corporations Act which is included in the association agreement will be valid. The Close Corporations Act clearly sets out certain issues that may not be varied by any agreement between the members. A clause stating that certain members will not be permitted to call a meeting will be void. No. CCs not exempted from financial reporting. Annual financial statement must be drawn up. CC need not ito CC Act, appoint an auditor. But they are obliged to appoint an accounting officer to do financial reporting that complies with GAAP. Is a CC exempt from financial reporting/appointing an accounting officer/appointing an auditor What is the difference between a profit and NP company A profit company aims to make a profit which is to be divided between its shareholders. The purpose for incorporation of a non-profit company is much different. It must be for a cultural, social or public benefit or other object than financial gain for its shareholders. Explain the circumstances in which the name of a company must be followed by the expression "RF" If the MOI of a company contains provisions allowed by section 15(2)(b)or (c), name of cpy must be followed by RF. Abbrevation for the word ring fencing "RF" to warn outsiders dealing with the company that there are special conditions in the MOI. An RF cpy is one of those circumstances were a third party would be deemed to know the restrictions in the MOI. Exception to the rule is that a company is no longer subject to the doctrine of constructive notice in case of a personal liability company. Companies Act, MOI and rules Q1.4 OctNov17 -unless the contrary is stated in the MOI, the board of directors may make, amend or repeal l rules relating to the governance of the company in respect of matters not addressed in the Companies Act or MOI. -a rule must be consistent with the Companies Act, MOI -inconsistency thereof will render rules void. If there are contradictions between the Companies Act, MOI, provisions in the Companies Act will enjoy preference. Order of preference is as follows: 1. CA 2. MOI 2. rules The advantages of a close corporation are the following: relative ease of formation limited liability of the members -it enjoys legal personality ased capital-acquisition potential 4. continuity A close corporation has the following disadvantages: 1. No new close corporations can be formed under the Companies Act. 2. Close corporations are subjected to some of the legislative principles contained in the Companies Act of 2008 in addition to those contained in the Close Corporations Act. 3. Membership is limited to ten. 4. Juristic persons may not be members. A private company ('(Pty) Ltd') 1.Its Memorandum of Incorporation prohibits offering of any securities to the public and restricts the transferability of its securities; 2. Private companies are no longer limited to 50 shareholders . 3. 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. 4. Can be formed by one person 5. Must have at least 1 director A public company Ltd Shares may be offered to the public and are freely transferable; This 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 Explain whether it is possible to register a new close corporation. (2) It is no longer possible to register new close corporations. Existing companies are prohibited from converting into close corporations. Already existent close corporations are permitted to continue and the Close Corporations Act 69 of 1984 is not repealed. Provision is however made for close corporations to convert into companies. Three classes of shares Preference shares, ordinary shares and deferred shares. .What matters must be dealt with in the annual general meeting? 2 appointments 3 presentations 1 any Section 61 of the Companies Act stipulates that at least the following matters must be transacted at the AGM: • appointment of an auditor for the following financial year • appointment of an audit committee • presentation of the directors' report • presentation of audited financial statements for the immediately preceding financial year • presentation of an audit committee report • any matter raised by shareholders Chantal what is the rights that are conferred on a shareholder - the right to vote -the right to information - the right to share in the profits that have been declared as a dividend -the right to share in the assets that are left on the winding-up of a company after the company's creditors have been paid 1. decision 2. employee share scheme or a resolution passed by shareholder. 3. solvency and liquidity . 4. terms of fin assistance must be reasonable and fair towards the cpy. 5. any additional restrictions in the MOI for fin assistance must be adhered to. Requirements ito S44 for financial assistance (can also add the test ito case law) Explain the test used by the court that they use to determine whether a director is in breach of his duty to act with care and skill(refer case law) Philotex (Pty) Ltd v Snyman and other; Braitex (Pty) Ltd and others v Snyman and others -objective test -but contains subjective elements in that the general knowledge, skill and experience of the particular director in question are taken into account. - a director who is chartered accountant, will therefore need to be more skilful when it comes to the company's financial affairs than a director who is a electrician by trade. Yes, according to ca they are obliged to Must a public company appoint a auditor Who and by when must a auditor be apointed Upon its incorporation, and each year at its annual general meeting, a public company or state-owned company must appoint an auditor- by the board of directors 1. only a registered auditor may be appointed as the auditor of a cpy. 2. Ito the Auditing Profession Act - the person must have complied with the prescribed education, training and competency requirements and must make arrangements regarding the CPD if not part of professional body. What requirements / qualifications must a person meet in order to be appointed as a auditor? 1. if after one hour of the appointed time, quorum is no present, the meeting will be postponed for one week. 2. In exceptional circumstances the one hour period can be extended. 3.No new notice needs to be issued that the meeting is postponed for one week, unless the venue changed. 4. Shareholders entitled to vote, in the presence of quorum, can decide to adjourn and set a new time and date for meeting, cannot be 120 days later than the adjourned meeting. When must a meeting be postponed or adjourned? Matters dealt with during the AGM Section 61 of the Companies Act stipulates that at least the following matters must be transacted at the AGM: •election of directors to the extent required by the Companies Act or the company's Memorandum of Incorporation •appointment of an auditor for the following financial year •appointment of an audit committee •presentation of the directors' report •presentation of audited financial statements for the immediately preceding financial year •presentation of an audit committee report •any matter raised by shareholders Business judgment rule The principle that a director is not in breach of his or her statutory duties if he or she took reasonably diligent steps to inform himself or herself of the matter in question, had no personal interest, and had a rational basis for believing that his or her decision was in the best interests of the company A director is a member of the board of a company and includes any person occupying the position of a director or alternate director. A person becomes a director only when that person has given his or her written consent to serve as director after having been appointed or elected to hold office in accordance with the provisions of section 66 of the Companies Act The following are absolutely prohibited from becoming a director: a juristic person an unemancipated minor/a person under legal disability a person who is ineligible in terms of the provisions of the Memorandum of Incorporation Can any person be appointed as a company director and that no person is subjected to any additional requirements before he or she may be appointed as director? When and who must appoint the company secretary? The first company secretary of a public company or state-owned enterprise may be appointed by - the incorporators of the company; or, - within 40 business days after the incorporation of the company, by either the directors of the company or an ordinary resolution of the company's shareholders (section 86(3)). - Within 60 business days after a vacancy arises in the office of company secretary, the board must fill the vacancy by appointing a person whom the directors consider to have the requisite knowledge and experience. Requirements for a cpy sec - Every company secretary must be a permanent resident of the Republic and must remain so while serving in that capacity. - can be a juristic person or partnership in which atleast one employee or partner must comply with this requirement. When will a LTD company be required to appoint a Social and Ethics committee? If it has had a public interest score above 500 points in any two of the previous five years List five functions of the Social and Ethics committee? to monitor the company's activities with regard to matters relating to social and economic development good corporate citizenship the environment, health and public safety, consumer relationships, labour employment issues Company contracting and is it binding 1. Capacity of the company to contract for the purchase of timber that has nothing to do with tiling. - S19(1)(b) Companies Act - company has all the legal capacity and powers of an individual - except to the extent that the juristic person is incapable of exercising such power. -Companies MOI may impose additional restrictions on the cpy's capacity. -Capacity of the company is no longer limited to it's main business and this main business must be stated in the MOI. -S20 of companies Act determines that a transaction will not be invalid solely because it exceeds the company's capacity. Keywords: 1. S19(1)(b) 2. MOI additional restriction on cpy capacity 3.Capacity no longer limited to main business 4.S20 2.The fact that the person only has capacity to conclude contracts below a certain value and required prior consent from board of directors was not obtained. -S20(7) of the CA contains a provision that resembles the common law turquand rule -S20(7) provides that a third party dealing with a company in good faith is entitled to presume that the company is making any decision in exercise of its powers has complied with the formal and procedural requirements ito CA, MOI and rules of the company, unless the third person knew or ought to reasonably known that the person did not comply with such requirements Keywords: 1. S20(7) resembling the CL Turquand rule 2. Say what S20(7) says. Company contracting and is it binding 1. Capacity of the company to contract for the purchase of timber that has nothing to do with tiling. - S19(1)(b) Companies Act - company has all the legal capacity and powers of an individual - except to the extent that the juristic person is incapable of exercising such power. -Companies MOI may impose additional restrictions on the cpy's capacity. -Capacity of the company is no longer limited to it's main business and this main business must be stated in the MOI. -S20 of companies Act determines that a transaction will not be invalid solely because it exceeds the company's capacity. 2.The fact that the person only has capacity to conclude contracts below a certain value and required prior consent from board of directors was not obtained. -S20(7) of the CA contains a provision that remembles the turquand rule Pre incorporation contracts requirements ito s21 of the CA to become binding 1. the contract must be concluded in writing. 2. the contract must be concluded by a person in the name of a company, or a person acting on behalf of a company that is yet to be incorporated 3. the board of directors must ratify the transaction or not reject the contract within the stipulated 3month period of the incorporation 1 and 2 is complied with and after incporp the board does nothing (did not ratify or reject)- it become binding on the company In what circumstances will X incur liability for a pre-incorporation contract created under the CA 1. Partial rejection of the contract- X becomes liable for the rejected part fo the contract. 2. total rejection- X becomes liable for the whole contract/entire transaction Is it possible for shareholders to pass resolutions without holding a general meeting of shareholders Yes. Can be passed without a gen meeting. Common Law: mous assent is possible 2. certain decision can be passed without convening a meeting 3. all members must be fully aware of the facts and assent to it. S60 companies Act: 1. A resolution may be submitted to shareholders in writing. 2. if it is adopted in writing by the majority - will have the same effect as if it was adopted at a duly convened meeting. 3.It is impossible to decide on any matters that must be decided in the AGM ito S60. Name 3 circumstances in which dissenting shareholders would be able to use the appraisal remedy as provided for ito s64 - cpy considering merging with other companies -cpy considering entering into a scheme of arrangement -cpy contemplating adoption of a resolution concerning the disposal of the greater part of the assets of the company. Feni v Gxothiwe This has to with application of S36 and S49 of the CCA: In terms of section 36 of the Close Corporations Act, a member(s) may apply for the termination of another member's membership by order of court. In order to do so the member(s) will have to prove: • That the member is unable to perform his/ her part in carrying out the business. • That the member's conduct is likely to have a prejudicial effect on the carrying on of the business of the close corporation. • That the member's conduct has made it reasonably impossible for the other member(s) to associate with him/ her in the carrying on of the business of the close corporation. • That In the circumstances it is just and equitable that such a person should cease to be a member of the close corporation. Section 49 of the Close Corporations Act is available to a member whose rights are unfairly prejudicially affected, or aware of other members so affected by the close corporation's conduct or the conduct of one or more of the other members. The court m REQUIREMENTS OF THE NP COMPANY 1. not formed with the intention to make profit. advancement of a social, cultural, public benefit 3. NP has members and not shareholders 4. formed by atleast 3 persons who will be the companies first directors. Is a contract binding on a company- CC vs Company When it comes to a company: 1. Capacity -S19(1)(b) CA - cpy has same capacity and powers as individual to the extent.... 2. MOI additional restrictions. 3. Capacity no longer limited 4. S20 -invalidity 2.Contracting above allowed value without prior consent - S20 (7) resembles to Turquand rule - S20(7) Conclusion When it comes to a CC 1. agents 2. doctrine of constructive notice does not apply 3. in general 4. cc can escape liability- 5. J&K Timbers Turquand rule reword S20(7) Advise X on the CL alternatives to conclude pre-incorporation contracts and why will it be better to conclude it in one of these manners. Agency (impossible) 1. Option 2. nomination/cession 3. concluding a contract for the benefit of a 3rd party 4. delegation Why better? - Because then C will not be held liable for the pre-incorporation contract should the company not come into existence