16 MAY 2023 EXAM ANSWERS - COMPANY LAW LML4806

QUESTION 1 [20] 1.1 The Memorandum of Incorporation of Generators Unlimited (Pty) Ltd provides that only the board of directors, or any director authorised by the board, has the power to conclude contracts on behalf of the company. It also states that any transaction that exceeds R10 million must first be authorised by the company’s shareholders at a general meeting by way of an ordinary resolution. One of the directors, Nthabiseng, is authorised by the board of directors to conclude contracts on behalf of the company. Nthabiseng enters into a contract with Matthews for the purchase of power distribution transformers to the value of R15 million, without first obtaining the authorisation for the purchase by the company’s shareholders at a general meeting. Matthews is aware of the provision in the Memorandum of Incorporation requiring shareholder approval because he has dealt with the company on previous occasions. However, he does not know that the purchase in fact, has not been authorised by an ordinary resolution of the company’s shareholders. With reference to appropriate authority, discuss whether Generators Unlimited (Pty) Ltd is bound by the contract concluded by Nthabiseng and Matthews. (10) 1.2 Pristine Properties Ltd focuses on the acquisition, development and letting of industrial, retail and residential properties throughout South Africa. A competitor, ACS Real Estate Ltd, has embarked on a disposal of its non-core portfolio of properties in South Africa in order to focus on its overseas business. Mark, a director of Pristine Properties Ltd, is authorised by the board of directors to represent Pristine Properties Ltd in negotiations for the acquisition of certain industrial and retail buildings in Johannesburg from ACS Real Estate Ltd. During one of the meetings between Mark and Thandi, a representative of ACS Real Estate Ltd, Thandi informs Mark that ACS Real Estate Ltd is under pressure to sell the adjacent residential buildings at a discounted price as she believes that Pristine Properties Ltd would also be interested in buying these residential buildings. Mark secretly incorporates a company that purchases the residential buildings from ACS Real Estate Ltd and subsequently divides them into sectional titles owned by himself, his children and his business associates. With reference to the relevant statutory provisions and case law, discuss whether Mark has breached any of his fiduciary duties to Pristine Properties Ltd. (10) CONFIDENTIAL Page 8 of 11 LML4806 May/June 2023 QUESTION 2 [30] You are an attorney at one of the leading corporate and commercial law firms in South Africa. You are approached by Mr Skunk, the chairperson of the board of directors of ATF Ltd, for legal advice. He informs you that ATF Ltd has delivered the notice of its upcoming annual general meeting to all of its shareholders 10 business days before the meeting is to begin. He further informs you that soon after the notice was delivered to the shareholders, certain shareholders of ATF Ltd and their proxies expressed their concerns that: (i) there are material defects in the giving of the notice of meeting, which may taint the proccedings at the annual general meeting, and (ii) all the proposed ordinary resolutions raise serious statutory concerns. Study the relevant notice of the annual general meeting below, including the notes regarding some of the main agenda items in italics, and answer the questions below. NOTICE OF ANNUAL GENERAL MEETING TO SHAREHOLDERS OF ATF LTD Notice is hereby given that the Annual General Meeting of ATF Ltd will be held on Friday, 26 May 2023 at 2:00PM to consider the agenda items set out in this notice and, if deemed fit, to pass the resolutions proposed in this notice. This will be a meeting conducted entirely by electronic communication. PRESENTATION OF FINANCIAL STATEMENTS AND REPORTS The audited annual financial statements, including the directors’ report, the report of the audit committee as well as the report of the social and ethics committee for the financial year ended 31 December 2022 be and are hereby presented to shareholders. Notes: • The above matters do not require formal resolutions. Shareholders may ask questions and make comments about the annual financial statements and the reports. • The summarised financial statements are provided in Annexure A of this notice [assume that the summarised financial statements are indeed provided]. ORDINARY RESOLUTIONS FOR CONSIDERATION AND ADOPTION For ordinary resolutions number 1.1 to 3 to be approved by shareholders they must be supported by more than 50% of the voting rights exercised on the resolution. 1. Election of directors by ordinary resolutions Resolved that the following individuals be and are hereby elected as directors, as required by the Memorandum of Incorporation: 1.1 Mrs Meerkat 1.2 Mr Squirrel CONFIDENTIAL Page 9 of 11 LML4806 May/June 2023 Notes: • Mrs Meerkat previously served as a director of Qhuba (Pty) Ltd. A disciplinary process conducted by the board of directors of Qhuba (Pty) Ltd concluded that Mrs Meerkat had been redirecting company funds meant to pay Qhuba (Pty) Ltd’s suppliers to her personal account. The board of directors of Qhuba (Pty) Ltd therefore removed Mrs Meerkat from her office as a director on 15 January 2020. • Mr Squirrel was declared insolvent by the High Court in 2003. 2. Election of the audit committee by ordinary resolutions Resolved that the following individuals be and are hereby elected as members of the audit committee: 2.1 Mrs Fox 2.2 Miss Wolf 2.3 Mr Coyote Notes: • Mrs Fox is a non-executive director of ATF Ltd. She served as the financial director of ATF Ltd’s wholly-owned subsidiary called Britz (Pty) Ltd until she resigned from that position on 31 July 2022. • Miss Wolf is the managing director of ATF Ltd. • Mr Coyote is not a director of ATF Ltd. The board believes that the election of Mr Coyote to the audit committee will benefit the company as he has over 10 years’ experience as a partner of one of the big accounting and auditing firms. 3. Re-appointment of auditor by ordinary resolution Karoo Inc. is hereby re-appointed as the independent registered auditors until the next Annual General Meeting (noting that Mr Civet is the individual registered auditor who will undertake the audit in respect of the ensuing financial year) as recommended by the audit committee. Notes: • Mr Civet has undertaken the audit of ATF Ltd as the individual registered auditor of Karoo Inc. continuously since July 2017. SPECIAL RESOLUTION FOR CONSIDERATION AND ADOPTION For special resolution number 1 to be approved by shareholders it must be supported by more than 75% of the voting rights exercised on the resolution. 1. Repurchase of shares by the company and/or subsidiary Resolved that ATF Ltd and/or any subsidiary of ATF Ltd be and are hereby authorised to acquire up to 5% of the issued ordinary shares of ATF Ltd upon such terms and conditions as may from time to time be determined by the board of directors. ANY MATTERS RAISED BY SHAREHOLDERS The meeting will also consider any matters raised by shareholders, with or without advance notice to ATF Ltd. CONFIDENTIAL Page 10 of 11 LML4806 May/June 2023 Date:[dated] [signed] SIGNATURE OF THE CHAIRPERSON OF THE BOARD The Memorandum of Incorporation of ATF Ltd has not changed the default statutory provisions regarding the convening of shareholder meetings. With reference to the relevant statutory provisions, the facts and the information provided in the notice of the annual general meeting above, advise Mr Skunk on the following matters: 2.1 Whether the claim that there are material defects in the giving of the notice is valid and whether the defects, if any, would have any impact on the proceedings and validity of the annual general meeting of ATF Ltd. (10) 2.2 Whether the claim that all the proposed ordinary resolutions raise serious statutory concerns has any merit. (12) 2.3 Apart from the requirement of approval of the transaction by a special resolution of the shareholders, advise Mr Skunk on the statutory requirements and formalities that must be complied with for a repurchase of shares by ATF Ltd and/or any of its subsidiaries to be executed legally. You should also indicate the implications for ATF Ltd’s directors if the shares are repurchased contrary to those requirements. (8) QUESTION 3 [15] 3.1 Brawny Drills Ltd and Power Tools Ltd both specialise in drilling devices. They wish to combine their businesses, by entering into a transaction in terms of which the entire assets and liabilities of both of these companies will vest in a newly formed company called Newco Ltd automatically by operation of law. Both Brawny Drills Ltd and Power Tools Ltd will cease to exist, pursuant to the transaction. With reference to the relevant statutory provisions and the facts provided, advise Brawny Drills Ltd and Power Tools Ltd on the following matters: 3.1.1 The type of transaction that is proposed in the scenario above. (2) CONFIDENTIAL Page 11 of 11 LML4806 May/June 2023 3.1.2 The approval and procedural requirements that must be complied with in order to give effect to the proposed transaction. (8) 3.2 Assume for the purpose of question 3.1 above that, as a result of manufacturing defects in the drills of Brawny Drills Ltd, serious injury has been caused to users of these drills. A few days before the implementation of the above transaction, legal proceedings were initiated against Brawny Drills Ltd for delictual liability. At the time of entering into the above transaction, Power Tools Ltd was unaware of this potential liability of Brawny Drills Ltd. Discuss the impact of the above transaction on both the liability of Brawny Drills Ltd and the legal proceedings against it. (5) QUESTION 4 [15] Thandeka is the personal assistant to the chief executive officer of Likarolo Ltd, a company listed on the Johannesburg Stock Exchange. At a board meeting, the chief executive officer asks Thandeka to bring some documents to the meeting that he forgot in his office. When Thandeka enters the board room with the documents, she overhears the company’s auditor telling the board that the company is suspected of overstating its profits and falsifying its financial statements, that it is going to be investigated for fraud, and that news of this investigation will be released publicly the next day. Thandeka immediately sends a message to her brother Sipho, her best friend Pule and her father in which she states as follows: “There are better places to invest your money. Sell all your shares in Likarolo Ltd immediately. Delete this message and do not mention it to anyone.” With reference to the above facts and the relevant statutory provisions, discuss Thandeka’s position in relation to “inside information”, the relevant insider trading offence(s) and liability for the relevant insider trading offence(s). (15)