2022 OCTOBER EXAM SOLUTIONS - Entrepreneurial Law (MRL2601)

QUESTION 1 1.1 Briefly explain to two prospective entrepreneurs, Thandeka and Mike, whether or not the requirements for the piercing of the corporate veil in terms of the Companies Act 71 of 2008 and the Close Corporations Act 69 of 1984 are identical. Refer to case law in your answer. (5) 1.2 Frank is an Information Technology (IT) specialist. He wishes to incorporate a company for his business. He does not want to offer any securities to the public. 1.2.1 Advise Frank on the type of company that would be the most suitable for his needs and briefly explain to him what the characteristics of such a company are. (5) 1.2.2 List the information that must be contained in Frank’s prospective company’s Notice of Incorporation. (6) 1.2.3 Briefly explain the procedure that Frank must follow in order to register the company. (4) TOTAL: [20 marks] QUESTION 2 2.1 Agnes, Phineas and Sam are three friends who wish to start their own publishing company. While driving one Sunday afternoon, Sam comes across the perfect office building. He wishes to purchase this building on behalf of the proposed company. Advise Sam what the requirements are that will need to be adhered to in terms of the Companies Act 71 of 2008 in order to conclude a valid and binding contract on the company’s behalf before its incorporation. (5) 2.2 Woodco (Pty) Ltd has two shareholders, Thabang and Precious, who each hold 50% of the issued share capital of the company. Thabang, Precious and Jackson are appointed as the company’s directors. The Memorandum of Incorporation determines that Woodco (Pty) Ltd’s main business is manufacturing furniture. In addition, it stipulates that Thabang may conclude contracts not exceeding the value of R500 000 on the company’s behalf. For any contract exceeding this amount, Thabang is required to get prior permission from the board of directors. The company was registered early in 2022. No annual general meeting has been held as yet. Answer the following questions with reference to the facts provided above: 2.2.1 Thabang buys a load of timber to the value of R2 million from Xander. Thabang does not seek permission from the board of directors as required. Xander does not take the trouble to find out what the company’s Memorandum of Incorporation determines but does not suspect any irregularity in the agreement. Explain whether the company is bound to the contract. (9) 2.2.2. Explain whether Woodco (Pty) Ltd is required to hold an annual general meeting. (2) 2.3 List three (3) grounds on which an application can be brought against a director for an order declaring him or her delinquent in terms of section 162 of the Companies Act 71 of 2008. (3) 2.4 Figozo Ltd showed an increase in profits for the 2022 financial year. At a board meeting, the directors decide that dividends should be paid out to the company’s shareholders. Indicate what the requirements are in terms of the Companies Act 71 of 2008 that must be adhered to before the dividends may be declared and paid. (6) 2.5 African Solar (Pty) Ltd wants to appoint auditors. The board of directors is very concerned about the corporate governance of their company. African Solar (Pty) Ltd has heard that the Companies Act 71 of 2008 disqualifies certain persons from being appointed as auditors. List the persons that are disqualified in terms of the Companies Act 71 of 2008. (5) TOTAL: [30 marks] QUESTION 3 3.1. Mr Schmitds (a German citizen), Mr Ells (an English citizen) and Mr Dube (a South African citizen) are the only shareholders of West Meets South (Pty) Ltd, a company registered in South Africa with its head office located in Sandton. Due to the time and financial costs involved in travelling from Europe to South Africa each time there is a meeting, especially less important meetings, Mr Schmitds and Mr Ells ask you for advice whether or not it is possible for resolutions of shareholders to be passed without holding any shareholders’ meetings. Advise them whether this is possible under the common law and under the Companies Act 71 of 2008. (10) 3.2 Briefly distinguish between the circumstances in which someone would be ineligible to be appointed as a director and would be disqualified to be appointed as a director. Also provide examples of each instance. (5) 3.3 The Memorandum of Incorporation of ABC (Pty) Ltd contains the following provision: (1) Directors hold their office for life. Azaria is a director of ABC (Pty) Ltd. The board of directors removes Azaria as director. Indicate whether or not she can invoke the provisions in the Memorandum of Incorporation to prevent her removal. Also indicate whether she could claim damages for her premature removal based solely on the provisions as contained in the Memorandum of Incorporation. (7) 3.4 Instead of applying for relief to a court, a person entitled to relief or to file a complaint may refer it to various other forums in terms of the Companies Act 71 of 2008. Name 3 alternatives provided for in the Act. (3) 3.5 Phumudzo is a newly appointed director of Teebo Ltd. He has no previous experience as a director and no special management qualifications. His son, Sifiso is a second- year law student. Sifiso told Phumudzo that he need not be concerned about his new appointment since the business judgment rule has been adopted into the South African corporate law. Phumudzo requires some additional information regarding the application of this rule. Briefly explain what this rule entails and what needs to be proven to rely upon this rule. (5) TOTAL: [30 marks] QUESTION 4 4.1 List five (5) characteristics of a member’s interest in a close corporation. (5) 4.2 Good Food CC’s main business is catering. The close corporation has five (5) members: Annastacia, Beauty, Carol, Daniel and Elvis. Each member holds a 20% members’ interest. The association agreement determines that only Daniel is authorised to represent the close corporation. Annastacia enters into a contract for the purchase of a racehorse on behalf of the close corporation with Beauty. Explain whether the close corporation is bound to the transaction. (5) 4.3 Saraphina is a member of Mend & Sew CC. The other members, Alphi and Botsego feel that Saraphina has not been complying with her management duties. Advise them regarding the grounds upon which the court may, in terms of the Close Corporations Act 69 of 1984 order that a member shall cease to be a member of a close corporation. (5) 4.4 Lesedi and Simphiwe are the members of Private Investigators CC. Upon formation of the close corporation, they agree that their respective membership contributions will consist of cash only. Each member was required to contribute R100 000 and these amounts were duly recorded in the founding statement. Apart from the monetary contribution, Lesedi also entered into a lease agreement in terms of which he rents out a building he privately owns to the close corporation for use as an office. Simphiwe, who is a part-time student at UNISA, also enters into an employment contract with the close corporation. In terms of the contract of service he is required to be in the office to attend to the corporation’s day-to-day business. At a meeting of the members, Lesedi and Simphiwe decide that due to a lack of profits generated from sales, the close corporation will repay each member 2% of their respective contributions to enable them to provide for personal needs. They further agree that the close corporation will make some payments to them in respect of their respective rental and employment agreements. Advise the members of Private Investigators CC whether these payments meet the requirements in terms of the Close Corporations Act 69 of 1984.