CHAPTER 2: FORMATION & REGISTRATION OF COMPANIES

Index a) Categories of Companies b) Registration & Criteria for Names c) Memorandum of Incorporation d) Pre-Incorporation Contracts

A) CATEGORIES OF COMPANIES
Two types of companies may be formed and incorporated under this Act, namely: a) profit companies and b) non-profit companies (NPCs). A profit company can be categorized as: a) a private company [(Pty) Ltd]; or b) a personal liability company [Inc/Incorporated]; or c) a public company [Ltd]. d) a state-owned company [SOC Ltd]; or

a) Private Companies The company is a private company when it is not a state-owned company and its Memorandum of Incorporation (MOI) prohibits it from offering any of its shares to the public and restricts the transferability of its shares

b) Personal Liability Companies A personal liability company is a company which meets the criteria for a private company and its MOI provides that the directors and past directors are jointly and severally liable, together with the company, for any debts and liabilities of the company that were contracted during their respective terms of office. Typically this structure would be implemented for professional service firms, such as attorneys and auditors. c) Public Companies A public company is a profit company that is not an SOC, a private company or a personal liability company. Shares may be offered to public. d) State-owned Companies An SOC is a company under the ownership and control of the government, and either falls within the meaning of a state-owned company in terms of the Public Finance Management Act or is owned by a municipality. Such a company would have, as principle business, the provision of goods or services. Non-Profit Companies (NPCs) This is a company usually incorporated for a public benefit. Its income and property and not distributable to its members, directors, etc. except as reasonable compensation for services rendered. It must set out at least one object that is to the public benefit or related to cultural or social activities. External Companies This is a foreign company that is carrying on business or non-profit activities within the Republic.

B) REGISTRATION & CRITERIA FOR NAMES OF COMPANIES

Registration is effected by signing the MOI by the requisite number of persons and filing the prescribed Notice of Incorporation (NOI). A company is deemed to be a juristic person from the date and time that its incorporation is registered.
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A company name may comprise words in any language, together with any letters, numbers of punctuation marks; any of the following symbols [+, &, #, %, =] and round brackets. The name of a company must not be the same as, or confusingly similar to the name of another company; not misleading or offensive. The name of a company may not include any word, expression or symbol that may constitute propaganda for war; incitement of imminent violence or advocacy of hatred based on race, ethnicity, gender or religion.

C) MEMORANDUM OF INCORPORATION
Each provision of a companys MOI must be consistent with the Act and is void when it is inconsistent or contravenes the Act. The MOI sets out rights, duties and responsibilities of shareholders, directors, etc. The Board of a company can also make Rules on certain matters. The MOI can be amended by a special resolution. The MOI and Rules are binding: Between the company and each shareholder, and Between or among the shareholders of the company, and Between the company and o Each director or prescribed officer of the company, or o Other person serving the company as a member of the audit committee or as a member of a committee of the board. in the exercise of their respective functions within the company.

D) PRE-INCORPORATION CONTRACTS
A person may enter into a written agreement in the name of an entity that is contemplated to be incorporated but does not yet exist at the time of the agreement. Within three months after the date on which a company was incorporated, the Board of that company may completely, partially or conditionally ratify or reject any such preincorporation contract (actual ratification). If the Board neither rejects nor ratifies this contract within three months, the company will be regarded as having ratified the agreement (deemed ratification).
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The ratified agreement (actual or deemed) is as enforceable against the company as if the company had been a party to the agreement when it was made. A promoter is jointly and severally liable with any other such person for liabilities in the pre-incorporation contract if the company is not incorporated or if, after being incorporated, the company rejects any part of an agreement.

CHAPTER 3: CORPORATE FINANCE

Index a) Shares b) Ownership of Shares c) Security Offers

A) SHARES
A share is a personal right that entitles the shareholder to share in the profits should the company declare a dividend, as well as a claim on the net assets on winding-up of the company. Shares are movable property which is transferable. A companys MOI must set out the classes of shares and the number of shares that it is authorised to issue as well as the rights, limitations and other terms associated with those shares. A distinguishing designation must also be given to the different classes of shares. A company may only issue shares up to the number authorised in the MOI or Board. There are two types of shares: shares having a part on nominal value (PV shares) and shares having no par value (NPV shares), the value being fixed upon issue.

Class Rights Every share, irrespective of its class, has one general voting right associated with it. This voting right can be limited but not excluded. Classes of Shares Ordinary Shares: a shareholder is entitled to a dividend when the company declares a dividend in the manner prescribed after the preferent shareholders have received their dividend. Deferred Shares: these shareholders receive a dividend only after the prescribed minimum dividend has been paid to the ordinary shareholders. Preference Shares: when a dividend is declared, holders of preference shares are entitled to a fixed percentage preference dividend, calculated on the nominal value of the PV preference shares or on the issue price of the NPV preference shares. The most important categories of preference shares are the following: a) Participating Preference Shares: apart from their preference dividend, the holders of these shares also share (with the ordinary shareholders) in any residual profits either pro rata after the ordinary shareholders have been paid in a certain minimum dividend. b) Redeemable Preference Shares: those shares that the company may redeem on or before a certain date or at the option of the company. Shares may be redeemed out of divisible profits that are transferred to the capital redemption reserve fund. c) Convertible Preference Shares: the shareholders may convert these shares, usually at a given date, into ordinary shares. d) Cumulative Preference Shares: if, in the previous financial year or years, the holders of cumulative preference shares have not received a dividend, they enjoy a preference over all other shareholders in respect of their preference dividend at a subsequent dividend distribution. Issue of Shares The Board has the power to issue shares subject to approval by a special resolution if the issue is to a director, prescribed officer, future director or prescribed officer or a person

related or inter-related. The issue also has to be approved if the shares issued amount to more than 30% of the voting power of the shareholders. Persons Related or Inter-related An individual is related to another individual if they: Are married, or live together in a relationship similar to a marriage; or Are separated by no more than 2 degree of natural or adopted affinity;

An individual is related to a juristic person if the individual directly or indirectly controls the juristic person A juristic person is related to another juristic person if Either of them directly or indirectly controls the other Either is a subsidiary of the other A person directly or indirectly controls each of them

2 or more persons are inter-related if the first and second persons are related

B) OWNERSHIP OF SHARES
Shares may be held and registered in the name of one person for the benefit of another person, unless the MOI provides otherwise. If shares in a public company are held as nominee, the registered shareholder must disclose the identity of the beneficial shareholder as well as the number and class of shares so held.

C) SECURITY OFFERS
A person must not offer to the public any securities (shares) of any person unless that second person is a company or a foreign company.
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Primary Market The initial process whereby a company makes shares available to investors is called the primary market. One of the rights associated with a share is the ability to sell shares. Should an investor sell the share(s) to another person and gain income, this falls into the secondary market. A person must not make a primary offering to the public of any listed securities of a company, unless that offer is in accordance with the requirements of the relevant exchange, or make a primary offer of unlisted securities of a company, unless that offer is accompanied by a prospectus that satisfies the requirements of section 100. An initial primary offering is an offering to the public of any securities of a company. Section 100 requires a prospectus that must adhere to the prescribed specifications and contain the following: a) Any information that an investor may reasonably require to assess a company in which a right or interest is acquired, b) Details of the companys assets and liabilities, financial position, profits and losses, cash flow and prospects and the shares and rights attached to them. It should be noted that the test is not based on the reasonable investor; it is based on what an investor would reasonably require, and not what the reasonable investor would require, which makes the test more subjective than objective. Errors, new matters and changes in matters stated in the prospectus that are relevant and material must be registered as a supplement to the prospectus, published to known recipients, and included in future distributions. The 3 determinants to put section 99 into operation are therefore: An offer Of securities To the public

An offer means an offer made in any way by any person with respect to the acquisition of any securities in a company for consideration.

Securities mean all those instruments as defined in section 1 of the Securities Services Act. This definition includes shares. To the public includes an offer of securities to be issued by a company, its subsidiary or a third company to any section of the public. Section 96 provides that an offer is not to the public if: The offer is made to no persons (or a combination) other than: o Persons whose ordinary business, or part of whose ordinary business, is to deal in shares, whether as principles or agents; o The Public Investments Corporation; o A person or entity regulated by the Reserve Bank of South Africa; o An authorised financial services provider; o A financial institution. Etc. (students neednt know the rest)

Any form of application for securities must be attached to a prospectus or a written statement, unless the offer is not to the public or it is in connection with an underwriting agreement. A prospectus cannot be issued more than three months after date of registration. Offers can only be accepted within four months of filing of the prospectus. Advertisement The offer, as stated above, can be made by advertisement if the advertisement complies with all the requirements of a registered prospectus and the making of a prospectus. After a prospectus has been published, an advertisement can draw attention of the public to such a prospectus, but that advertisement must include a statement clearly stating that it is not a prospectus and indicating where and how a person may obtain a copy of the full registered prospectus relating to that offer. The advertisement must not contain any untrue statements, it may also not, by express statement, omission or reasonable implication, reasonably mislead a person into reading the advertisement as if it were a prospectus, or mislead the reader about any material particular addressed in the prospectus relating to that offer.

Prospectus Liability Liability for untrue statements follows the structure of the previous companies act. Persons who authorise the issue of the prospectus are liable to pay compensation for any loss or damage sustained by any person who acquired securities on the strength of the prospectus, as a result of any untrue statement in the prospectus, or any report or memorandum appearing on the face of, issued with, or incorporated by reference into, the prospectus. Delictual liability under common law for the directors, experts, company therefore remains, and the innocent party can claim recission (if the misrepresentation is material) and/or damages from the directors or experts or company. Secondary Market A person may make a secondary offer to the public of any securities of a company only if the offer satisfies the requirements of section 101 of the Act. A secondary offering is an offer to the public of any securities of a company made by or on behalf of a person other than that company. The company is not involved in the secondary market. A person making a secondary offer must attach to it either the registered prospectus that accompanied the primary offering of those securities, plus any revisions required to address changes in any material matter since the date of registration of the prospectus, or a written statement that satisfies the requirements of section 101(4) (6).

CHAPTER 4: CORPORATE CAPITAL

Index a) Financial Assistance b) Distributions c) Acquisition of Shares

A) FINANCIAL ASSISTANCE
The Board may, subject to the MOI, 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 or a related or inter-related company, or for the purchase of any securities of the company or related or inter-related company if: The MOI expressly permits such financial assistance and it is in accordance with any conditions or requirements of the MOI, and the financial assistance is either: Pursuant to an employee share scheme under section 97; or Pursuant to a special resolution of the shareholders, adopted within the previous 2 years, which approved such assistance either for the specific recipient, or generally for a category of potential recipients, and the specific recipient falls within that category, and

The Board is satisfied that: Immediately after giving financial assistance, the company would satisfy the solvency and liquidity test, and The terms under which the assistance is proposed to be given are fair and reasonable to the company.

A resolution by the Board to provide financial assistance, or an agreement with respect to the provision of any such assistance, is void to the extent that the provision of that assistance is inconsistent with a provision of the MOI. A company satisfies the solvency and liquidity test at a particular time if, considering all reasonably foreseeable financial circumstances of the company at that time: The assets of the company are equal or exceed the liabilities of the company, and It appears that the company will be able to pay its debts as they become due in the course of business for a period of 12 months after the date on which the test is considered.

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Liability and Validity of Contract Directors, who were present and did not vote against the resolution, can be held liable only for any loss, damage or costs sustained by the company if the resolution has been declared void.

B) DISTRIBUTIONS
A distribution is defined in section 1 as: A direct or indirect a) Transfer, by a company of money or other property of the company, other than its own shares, to or for the benefit of one or more holders of any of the shares of that company or of another company within the same group of companies (i) Whether in the form of a dividend (ii) A payment in lieu of a capitalization share (iii) As consideration for the acquisition (aa) of any of its shares or (bb) by any company within the same group of companies of any shares of a company within that group of or (iv) Otherwise of another company within the same group of companies

b) Incurrence or forgiveness of a debt by a company to or for the benefit of one or more holders of any of its shares or of another company within the same group of companies. The distributions are therefore: Dividends (in cash or in kind); Capitalization shares (or payment in cash instead of capitalization shares); The repurchase of shares by the company;
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A debt incurred to or for the benefit of a holder of any of the shares, and Debt cancellation (forgiveness) in respect of a holder of any of the shares.

It should be noted that if a holding company buys shares in an existing subsidiary or writes of debt of that subsidiary, the transaction is also a distribution. A company must only make any proposed distribution if: The distribution is pursuant to an existing legal obligation of the company, or a court order; or The distribution is authorised by the Board of the company by resolution; and It reasonably appears that the company will satisfy the solvency and liquidity test immediately after the distribution and The Board resolution acknowledges that the Board has applied the solvency and liquidity test and reasonably concluded that the company will satisfy that test immediately after completing the proposed distribution.

Liability and Validity of Contract A distribution in contravention is not void, unless a court declares it void. Directors can be held liable only for any loss, damage or costs sustained by the company.

C) ACQUISITIONS OF SHARES
The acquisition by a company of its own shares is a distribution and must comply with the requirements set out above. A subsidiary can also acquire shares in the holding company, but the aggregate number of shares held by or on behalf of the subsidiary may not exceed 10% of the number of any class of shares. As long as subsidiaries remain subsidiaries, no voting rights attached to those shares may be exercised in respect of the shares so held. The company may not acquire its own shares, and a subsidiary of a company may not acquire shares of the holding company, if, as a result of that acquisition, the only issued shares would be shares held by one of more subsidiaries of the company, or convertible or redeemable shares.
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Liability and Validity of Contract If a company acquires shares contrary to requirements, it may apply to a court for an order reversing the acquisition.

CHAPTER 5: CAPACITY AND REPRESENTATION

Index a) Capacity of a Company b) Doctrine of Constructive Notice c) Validity of Company Actions: ultra vires d) Representation e) Turquand-rule

A) CAPACITY OF A COMPANY
From the date of incorporation, the company is a juristic person. It exists continuously until its name is removed from the Companies Registrar in accordance with the Act. It has all the legal powers and capacity of an individual, except to the extent that a juristic person is incapable of exercising such powers, or having such capacity, or to the extent that the MOI limits, restricts or qualifies the purposes, powers or activities of the company.

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B) DOCTRINE OF CONSTRUCTIVE NOTICE

A person is not deemed to have notice or knowledge of the contents of any document relating to a company (MOI) merely because the document has been filed or is accessible for inspection at an office of the company. However, a person is deemed to have notice and knowledge of any provision of a companys MOI if the companys Notice of Incorporation or a Notice of Amendment has drawn attention to the provision.

C) VALIDITY OF COMPANY ACTIONS: ULTRA VIRES

In terms of the common law, the company as a juristic entity can only act through its representatives and therefore certain actions cannot be performed by a company. A transaction beyond the scope of the companys objects clause was ultra vires and void. In terms of the New Companies Act, an act of a company, other than an act that is in contravention of the Act, is not void solely because: The company did not have the capacity to perform the act because the MOI limits, restricts or qualifies the purposes, powers or activities of the company, or The directors did not, as a consequence of a limitation, restriction or qualification, have the authority to perform that act on behalf of the company.

No person may rely on a limitation, restriction or qualification in any legal proceedings to claim that the companys action is void, except proceedings: Between a company and its shareholders, directors or prescribed officers, or Between the shareholders and directors or prescribed officers.

If a companys MOI limits, restricts or qualifies the purposes, powers or activities of the company, the shareholders may ratify any action by the company that is inconsistent with these limits, restrictions or qualifications by a special resolution. This has the effect of amending the MOI, but no Notice of Amendment need be filed. However, this action by the company may be relevant in a subsequent exception on the basis of misrepresentation, due to the absence of the doctrine of constructive notice.

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One or more shareholders, directors or other interested persons may institute proceedings to restrain the company from doing anything inconsistent with any of these limits, restrictions or qualifications, without prejudice to any rights to damages of a third party who: Obtained those rights in good faith, and Did not have actual knowledge of the limit, restriction or qualification.

A third party who obtained rights in good faith and did not have actual knowledge of the limit, restriction or qualification party retains rights. It is uncertain how the bona fide third party will obtain rights if the action is restrained (eg before the contract is concluded). If it is accepted that there is a contract, the contract is valid until declared void by a court. A third party, who was mala fide or had knowledge, does not acquire these rights. Each shareholder of a company has a claim for damages against any person who fraudulently or due to gross negligence causes the company to do anything inconsistent with a limit, restriction or qualification, unless that fraudulent act or act with gross negligence has been ratified by the shareholders. The absence of any indication that there must be a causal link is significant, and will clearly lead to a multiplicity of actions.

D) REPRESENTATION
Subject to the Act, the general principles of the common law in respect of agency and representation should still apply. One issue that will limit the application of the common law principles is the absence of the doctrine of constructive notice, which will lessen the protection afforded to the company. Section 20(1)(a) provides that the contract will be valid only if the directors had no authority to authorise the action by the company only as a result of the limitation, restriction or qualification on the capacity of the company. Therefore, if there is a lack of authority on any other basis, section 20(1)(a) does not apply, and the company is not bound by the contract, even if the third party is bona fide.

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Every company must have a board of directors, and the business and affairs of the company must be managed by or under the direction of its board, which has the authority to exercise all the powers and perform any of the functions of the company, except to the extent that the Act or the companys MOI provides otherwise. If a companys MOI limits the authority of the directors to perform an act on behalf of the company, the shareholders may ratify any action by the company that is inconsistent with any such limit, restriction or qualification (except for an act in contravention of any provision of the Act) by a special resolution. This has the effect that the MOI is amended, but no Notice of Amendment need be filed. However, this action by the company may be relevant in a subsequent exception on the basis of misrepresentation, due to the absence of the doctrine of constructive notice. The possibility of shareholders, directors or other interested persons instituting proceedings to restrain the directors or the company applies to a limitation, restriction or qualification for the purposes, powers or activities of that company. However, section 20(2) also refers to limits the authority of the directors which would then prima facie also give the remedy under these circumstances. The claim of shareholders against any person, who does something inconsistent with the Act, will on the construction above, possibly also apply if there is a limit to the authority of directors.

E) TURQUAND-RULE
Because of its juristic nature, a company can only contract through representatives. According to the law of agency, a company will be bound by the actions of its agent only if the agent acted within the scope of his authority. Should the agent act without authority or should the agent act beyond his authority, the principal can incur liability on the basis on either estoppel or by ratification only. A person (other than a director, prescribed officer or shareholder of the company) dealing with a company in good faith, is entitled to presume that the company, in making any decision in the exercise of its powers, has complied with all of the formal and procedural requirements in terms of this Act, its MOI and any rules of the company unless, in the circumstances, the person knew or reasonably ought to have known of any failure by the
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company to comply with any such requirement. This provision must also be construed concurrently with, and not as substitution for the common law Turquand or other rules. The Turquand-rule protects only bona fide parties.

CHAPTER 6: MEETINGS
Index a) General b) Notice of Meetings c) Quorum, Conduct at meetings and Resolutions

A) GENERAL
A public company must convene the first Annual General Meeting (AGM) of its shareholders no more than 18 months after the companys date of incorporation. Thereafter, an AGM must be held once in every calendar year, but no more than 15 months after the date of the previous AGM. At least the following must be transacted: The presentation of: o The directors report; o The audited financial statements for the immediately preceding financial year; and o The audit committee report. The election of directors, to the extent required by this Act or the companys MOI, and The appointment of
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o An auditor for the ensuing financial year, and o An audit committee and Any matters raised by shareholder, with or without advance notice to the company.

The Board of a company, or any other person specified in the companys MOI or rules may call a meeting of shareholders at any time. A company must call a meeting with shareholders: When the Board is required by the Act or the MOI to refer a matter to shareholders for decision; Whenever required in terms of section 70 (3) to fill a vacancy on the Board; When otherwise required by the companys MOI, and When an AGM of a public company is required.

The company must also hold a meeting: If one or more written and signed demands for such a meeting are delivered to the company, and The aggregate of the demands for substantially the same purpose are made and signed by the holders of at least 10% (or lower % if permitted by the MOI) of the shares entitled to be voted in respect of the matter that is proposed for consideration at the meeting.

It is therefore possible for one person with 10% of the votes to request such a meeting.

B) NOTICE OF MEETINGS
Notice must be in writing. It must include the date, time and place and the record date for the meeting, the general purpose of the meeting and any specific purpose. In addition, it must contain a copy of any proposed resolution of which the company has received notice
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that is to be considered at the meeting, plus a notice of the percentage of voting rights that will be required for that resolution to be adopted. Failure to give required notice or a defect in the notice may be condoned if: All the holders of shares entitled to be voted in respect of each item on the agenda acknowledge actual receipt of the notice AND Are present at the meeting AND Waive notice of the meeting OR In the case of a material defect in the manner and form of the notice, ratify the defective notice.

The first three requirements are obviously conjunctive, while the last requirement, due to the use of or operate on its own. An immaterial defect in the form or manner of giving notice of a shareholders meeting, or an accidental or inadvertent failure in the delivery of the notice to any particular shareholder to whom it was addressed, does not invalidate any action taken at the meeting. It would therefore appear that a material defect in the manner and form must be expressly ratified by 100% of the shareholders. The company must ensure that the notice is delivered to all of the shareholders with the following notice periods: 15 business days for public companies, and NPCs with members; or 10 business days for any other company.

C) QUORUM, CONDUCT AT MEETINGS AND RESOLUTIONS

VOTES QUORUM The quorum for all meetings is the presence at the meeting of the holders of at least 25% of the shares entitled to be voted in respect of at least one matter to be decided at the meeting. A matter to be decided at the meeting may not begin to be debated unless holders of at least 25% of the shares entitled to be voted on that matter are present at the meeting

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when the matter is called on the agenda. The MOI may set lower percentages; there is no lower limit. PERSON QUORUM Irrespective of the votes quorum, if a company has more than two shareholders, a meeting may not begin or a matter begin to be debated, unless at least 3 shareholders are present at the meeting. If either the vote or the person quorum is not satisfied within one hour after the appointed time at which the meeting is to begin, the meeting cannot begin. It must then be postponed without motion, vote or further notice, for one week. If, at the time appointed in terms of this section for a postponed meeting to begin, or for an adjourned meeting to resume, the vote or person quorum are still not met, the members of the company present in person or by proxy will be deemed to constitute a quorum. RESOLUTIONS A proposed resolution must be sufficiently clear and specific, and must be accompanied by sufficient information to enable a shareholder to decide whether to participate in the meeting. A resolution adopted is either a special resolution, or an ordinary resolution. A special resolution must be supported by the holders of at least 75% of the voting rights exercised on the resolution. An ordinary resolution must be supported by a majority of more than 50% of the voting rights exercised on the resolution. The MOI may provide for a lower percentage in respect of special resolutions and for different, lower, percentages for resolutions in respect of specified matters. It may provide for a higher percentage in respect of ordinary resolutions and for different (higher) percentages for resolutions in respect of specified matters. However, the percentage difference between an ordinary and a special resolution must at least be 10%. VOTING Voting on any matter at a shareholders meeting will be conducted by polling the persons present and entitled to exercise voting rights on that matter. On a show of hands, a person will have only one vote, irrespective of the number of shares he/she holds or represents.
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On a poll, however, 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. PROXIES The 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 SH, or to give or withhold written consent on behalf of the SH to a decision contemplated in section 60. A proxy appointment must be in writing, dated and signed by the SH and it remains valid for one year after the date on which it was signed, or any longer or shorter period expressly set out in the appointment, unless it is revoked or expires earlier.

CHAPTER 7: DIRECTORS
Index a) General b) Rights and Duties c) Liability

A) GENERAL
Every company must have a Board of directors, comprising: At least 3 directors in the case of public companies and non-profit companies; or At least 1 director in the case of private companies and personal liability companies.

A companys MOI may provide for a higher number of directors. The company may pay remuneration to directors for their service as directors, except if MOI provides otherwise.
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B) RIGHTS AND DUTIES

1. MANAGEMENT The business and affairs of a company must be managed by or under the direction of its Board, which has the authority to exercise all of the powers and perform any of the functions of the company, except to the extent that tis Act or the companys MOI provides otherwise. 2. DUTIES: STANDARDS OF CONDUCT The standards of conduct prescribed in section 76 of the Act apply to a director, including an alternate director, a prescribed officer, or a person who is a member of a committee of a Board of a company, or a member of the audit committee of a company, irrespective of whether the person is also a member of the companys Board. The section does not exclude the common law; therefore the common law duties that are not expressly amended by this section or those that are not in conflict with the section will still apply. A court needs to declare an agreement, resolution or provision to be void. 3. COMMON LAW FIDUCIARY DUTIES Directors must at all times act honestly and in good faith towards the company and must avoid a material conflict of interest. As a director owes a fiduciary duty to the company, he is expected to perform his duties bona fide and in the interest of the company. Should a director act dishonestly, he commits a breach of trust. The test to determine whether a director had acted honestly or not is an objective one. The fact that he subjectively thought that he was acting honestly, is irrelevant. This may be explained with reference to the following situations: a) Directors must exercise their powers in the interest and to the benefit of the company as a juristic person. This duty entails that directors must prefer the interests of the company as a juristic person, to the exclusion of the interests of the employees, creditors or majority of SH. b) Directors must act within the limits of their powers. A director, who acts beyond his authority or contrary to the MOI, may be liable to the company.

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c) The directors must maintain and exercise an unfettered discretion. The directors should at all times be free to make a decision that they think is in the best interest of the company. d) Every power must be exercised for the purpose for which it was vested. Even if the directors are convinced that it is in the best interests of the company, they may not issue shares to themselves or to other groups in order to secure their own positions or to prevent a take-over. e) No unauthorized proprietary benefits. 4. POSITIVE DUTIES 3.1 General A director of a company (when acting in the capacity of director) must exercise the powers and perform the functions of a director: In good faith and for a proper purpose; In the best interests of the company; and With the degree of care, skill and diligence that may reasonably be expected of a person o Carrying out the same functions in relation to the company as those carried out by that director, and o Having the general knowledge, skill and experience of that director. 3.2 The business judgment rule A director will have satisfied the obligations of acting in the best interests of the company and with the required care and skill if: He/she has taken reasonably diligent steps to become informed about the matter; and Either o He/she had no material personal financial interest in the subject matter of the decision, and had no reasonable basis to know that any related person had a personal financial interest in the matter; or

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o He/she complied with the requirements of section 75 in respect of any interest contemplated in the immediately preceding point; and He/she made a decision, or supported the decision of a committee or the Board, with regard to the matter, and had a rational basis for believing, and did believe, that the decision was in the best interests of the company; and

Is entitled to rely on The performance by any of the persons o Referred to in section 76(5); or o To whom the Board may reasonably have delegated, formally or informally by course of conduct, the authority or duty to perform one or more of the Boards functions that are delegable under applicable law; and any information, opinions, recommendations, reports or statements, including financial statements and other financial data, prepared or presented by any of the persons specified in section 76(5).

3.3 Duty to Disclose The director must communicate to the Board at the earliest practicable opportunity any information that comes to his/her attention, unless he/she reasonably believes that the information is immaterial to the company; or generally available to the public; or known to the other directors; or he/she is bound not to disclose that information by a legal or ethical obligation of confidentiality.

4.3.1 Conflict of personal financial interest The common law principle is that all contracts between a director and the company are voidable at the instance of the company, based on the principle that there shall be no conflict of interest and also, flowing from that, that a director cannot make a secret profit.
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4.3.2 Interest in future contracts If a director of a company has a personal financial interest in respect of a matter to be considered at a meeting of the Board, or knows that a related person has a personal financial interest in the matter, he/she Must disclose the interest and its general nature before the matter is considered at the meeting; Must disclose to the meeting any material information relating to the matter, and known to him/her; May, presumably at his/her discretion, disclose any observations or pertinent insights relating to the matter if requested to do so by the other directors; If present at the meeting, must leave the meeting immediately after making any disclosure; Must not take part in the consideration of the matter, except as in the second and third points above;

4.3.3 Interest in existing contracts If a director of a company acquires a personal financial interest in an agreement or other matter in which the company has a material interest, or knows that a related person has acquired a personal financial interest in the matter after the agreement or other matter has been approved by the company, the director must promptly disclose to the Board, or to the shareholders in certain circumstances, the nature and extent of that interest, and the material circumstances relating to the director or related persons acquisition of that interest. 4.3.4 Effect on contract A decision by the Board, or a transaction or agreement approved by the Board, is valid despite any personal financial interest of a director or person related to the director, if it was approved after full disclosure as in section 75 or it has been ratified by an ordinary resolution of the shareholders. If the director does not declare the interest as required by section 75, a court, upon application by any interested person, may declare valid a transaction or agreement that

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has been approved by the Board, despite the directors failure to satisfy the requirements of this section. If none of the above applies, the common law rule that the contract is voidable at the instance of the company should apply. 4.3.5 Exclusions The disclosure of the personal financial interests does not apply to a director: In respect of a decision that may generally affect all the directors of the company in their capacity as directors, or affect a class of persons, despite the fact that the director is one member of that class of persons, unless the only members of the class are the director or persons related or inter-related to the director. Resolutions in terms of section 71 to remove a director are also excluded. Or a company if one person holds all the beneficial interests of all the issued securities of the company and is the only director of that company.

4.3.6 Disclosure to shareholders If a person is the only director of a company, but does not hold all the beneficial interests of all the issued securities of the company, he/she may not approve or enter into any agreement in which he/she or a related person has a personal financial interest, or as a director determine any other matter in which the person or a related person has a personal financial interest, sunless the agreement or determination is approved by an ordinary resolution of the SH after the director has disclosed the nature and extent of that interest to them. 5. Negative Duties A director of a company must not use his/her position as director, or any information obtained while acting in the capacity of director, to gain an advantage for himself/herself or for another person other than the company or a wholly-owned subsidiary of the company to knowingly cause harm to the company or a subsidiary of the company.

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C) LIABILITY
BREACH OF DUTIES A director will be liable in accordance with the principles of the common law relating to the breach of fiduciary duty, for any loss, damages or costs sustained by the company as a consequence of any breach of duty by him/her To disclose a personal financial interest (section 75); or To avoid a conflict of interest (section 76(2)); or To act o In good faith and for a proper purpose, or o In the best interests of the company. Liability for any breach by the director of: The duty to act with the required degree of care, skill and diligence, or Any provision of this Act not otherwise mentioned in this section, or Any provision of the companys MOI,

Is in accordance with the principles of the common law relating to delict for any loss, damages or costs sustained by the company as a consequence thereof. SPECIFIC ACTIONS: LIABILITY SECTION 77 - A director is liable to the company for any loss, damage or costs arising as a direct or indirect consequence of him/her: Acting for on behalf of the company despite knowing that he/she lacked authority to do so; or Agreeing to carrying on the business of the company while knowing that is prohibited under section 22; or

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Being a party to an act or omission by the company despite knowing that it was calculated to defraud a creditor, employee or SH of the company, or had another fraudulent purpose; or Having signed, or consented to the publication of a financial statement that was false or misleading in a material respect, or publication r a prospectus, or a written statement contemplated in s101, that contained an untrue statement as defined in section 95, knowing that, or with reckless disregard as to whether, the statement was false, misleading or untrue, as the case may be.

If a director took part in a meeting (formal or informal) and failed to vote against: The issuing of any unauthorized shares or options on those shares, despite knowing that those shares had not been authorised under section 36; or The issuing of any authorised securities without SH approval under section 41; or The provision of financial assistance to any person in the acquisition of securities of the company, knowing that the financial assistance is in contravention of section 44 or the companys MOI, to the extent that the resolution or agreement has been declared void in terms of section 218(1); or The provision of financial assistance to a director under section 45, knowing that it was in contravention of the Act or the companys MOI, to the extent that the resolution or agreement has been declared void in terms of section 218(1); or A resolution approving a distribution, despite knowing that the distribution was contrary to section 46; or The acquisition by the company of any of its shares, or the shares of its holding company, despite knowing that the acquisition was contrary to sections 46 or 48, or An allotment by the company despite knowing that the allotment was contrary to any provision of Chapter 4, to the extent that the allotment or an acceptance is declared void under section 109(1) read with section 218(1).

OTHER LIABILITY SECTION 20 Each SH of a company has a claim for damages against any person, including a director, who fraudulently or due to gross negligence causes the company to do anything
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inconsistent with the Act or a limitation, restriction or qualification in terms of section 20, unless the action has been ratified by the shareholders. SECTION 15 the MOI, and any rules of the company, are binding between the company and each director or prescribed officer of the company. Therefore, the contractual rights of parties vis--vis the directors will apply in a contravention of the provisions of the MOI to the extent that the Act does not expressly provide otherwise. One or more SH, directors or prescribed officers may also institute proceedings to restrain the company or the directors from doing anything inconsistent with any limitation, restriction or qualification contained in the MOI. SECTION 218 it is not necessary for conduct to be fraudulent or carried out with gross negligence towards the company for a SH to have a claim against the directors (for example), as any person who contravenes any provision of this Act is liable to any other person for any loss or damage suffered by that person as a result of that contravention.

CHAPTER 8: GROUPS OF COMPANIES

Index a) General and Definition

A) GENERAL AND DEFINITION

In its most simple and straightforward form, a group consists of one holding and one subsidiary company. It is, however, possible that the group can consist of an unlimited number of holding and subsidiary companies. The basic characteristic of such a group is that the management of the various and independent holding and subsidiary companies is subject to uniform control thus the companies are run in such a way that benefits the whole group. A group of companies means two or more companies that share a holding company of subsidiary relationship. A holding company in relation to a subsidiary means a juristic
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person or undertaking that controls the subsidiary. There is no definition of undertaking, although the term is used extensively in the Act. A subsidiary company excludes a trust or a partnership. The holding company must: Hold a majority of the voting rights in the subsidiary Have the right to appoint or remove directors holding a majority of the voting rights at meetings of the Board Have sole control of a majority of the voting rights, whether pursuant to an agreement with other members or otherwise, or Be a subsidiary of any company which is a subsidiary of that other company, or Where the holding company and/or its subsidiary hold the voting rights referred to in (a) to (c).

CHAPTER 9: BUSINESS RESCUE

Index a) Definition b) Initiation

A) DEFINITION
A business rescue is defined as: Proceedings to facilitate the rehabilitation by its management of a company that is insolvent, or may imminently become insolvent, by providing for
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The temporary supervision of the management of the affairs, business and property of the company; A temporary moratorium on the rights of claimants against the company or in respect of property in its possession; and The development and implementation, if approved, of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities, and equity.

B) INITIATION
VOLUNTARY The Board of a company may resolve that the company voluntarily begin business rescue proceedings and place the company under supervision, if the Board has reasonable grounds to believe that: The company is financially distressed, and There appears to be a reasonable prospect of rescuing the company.

A company is financially distressed if it: Appears to be reasonably unlikely that the company will be able to pay all of its debts as they fall due and payable within the ensuing 6 months, or Appears to be reasonably likely that the company will become insolvent within the immediately ensuing 6 months.

COURT ORDER An affected person can apply to court for an order to place the company under supervision and to commence business rescue proceedings. A copy of the application must be served on the Commissioner of the CIPC and every affected person must be notified. The court can grant the order if it is satisfied that: The company is financially distressed;

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The company has failed to pay over any amount in terms of an obligation under or in terms of a public regulation or contract, with respect to employment-related matters; or It is otherwise just and equitable to do so for financial reasons, and There is a reasonable prospect for rescuing the company.

CHAPTER 10: WINDING-UP

Index a) Introduction

A) INTRODUCTION
Winding-up is the process of dealing with a companys affairs prior to its dissolution by ascertaining and realizing its assets and applying them, first, in the payment of creditors of the company according to their order of preference and, secondly, in the distribution of the residue among the SH of the company in accordance with their rights. This should not be confused with deregistration with does not affect the existence of the company, but only deprives it of its legal personality; in which case it will still exist as an association whose members are liable for its debts. Dissolution takes place after a company has been wound up and the companys name will be removed from the Companies Register. Both solvent and insolvent companies may be wound up. In solvent companies, a company may be wound up voluntarily. Here, the process is initiated by a special resolution of its SH. A court may also order a solvent company to be wound up. The following persons may can apply for a voluntary wound up of the company: The company itself: a special resolution has to be passed OR company can apply for winding-up on the grounds of a deadlock {directors are deadlocked in the management of the company and SH are unable to break the deadlock with irreparable damage to company as a result of this}

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The business rescue practitioner: on grounds that there is no reasonable prospect of the company being rescued. The creditors: on grounds that the companys business rescue plan has been rejected and the practitioner has filed a notice of termination OR the business rescue plan has been proposed and rejected and it is just and equitable for the company to be wound up OR it is otherwise just and equitable for the company to be wound up The SH: on grounds that there is a deadlock and with leave of the court, that the companys assets are being misapplied or wasted OR that the directors, or persons in control of the company, are acting in a manner that is fraudulent or otherwise illegal. The directors: on basis of a deadlock.

Regarding insolvent companies, the Insolvency Act applies.

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