ODR 320

OVERVIEW OF BUSINESS
STRUCTURES
WHAT IS A BUSINESS ENTERPRISE?
→ A business begins with selecting the type of enterprise.
→ Factors influencing this choice include:
a) Formalities.
b) Ownership.
c) Control.
d) Capital.
e) Risk.
f) Perpetual Succession.
g) Personal Liability.

ALL BUSINESSES MUST REGISTER WITH:

a) The Department of Labour
b) South African Revenue Services
c) Local Authorities
d) Other regulatory bodies, depending on the service type.
→ Registration is not required for establishment but is a result of it.
→ Businesses can change from one type to another.

TYPES OF BUSINESS ENTERPRISES

1) SOLE PROPRIETORSHIP
→ The owner and business are the same entity.
→ No legal separation between owner's personal assets and business liabilities.
→ The owner has total control and personal liability.
→ Business ceases upon the owner's death.
→ No formal registration required.

2)PARTNERSHIP
→ Formed by two or more sole proprietors through a partnership contract.
→ Contracts can be expressed or implied.
→ No limit on the number of partners.
→ Partners have fiduciary duties to each other and share profits, losses, and
personal liability.
→ The partnership ends if a partner leaves.
→ No formal registration required.

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3) TRUSTS
→ Created under Trust Property Control Act, managed by trustees for
beneficiaries.
→ Trustees own the trust property and have fiduciary duties.
→ Trust property, not trustees, is liable for debts.
→ The trust’s existence is unaffected by changes in trustees or beneficiaries.

4) CLOSE CORPORATIONS (CCS)

→ Registered under the Close Corporations Act, with separate legal personality.
→ Limited to 10 natural person members.
→ Members have limited liability, not personally liable for debts.
→ Membership changes do not affect the CC's existence.
→ New CCs cannot be formed but existing CCs can continue under Companies
Act.

5) COMPANY
→ Types: Private or public companies with shareholders, formed for profit.
→ Separate legal entities,
→ Ownership and control are divided.
→ Shareholders elect directors who manage the company.
→ No restriction on the number of shareholders.
→ Directors have fiduciary duties to the company, not shareholders.

PURPOSE OF THE COMPANIES ACT

→ Ensures compliance with the Bill of Rights.
→ Promotes economic development by encouraging entrepreneurship,
transparency, and innovation.
→ Balances rights and obligations and supports the use of companies for
economic and social benefits.
→ The Companies Act prevails unless in conflict with other specific legislation.

LEGAL PERSONALITY
DEFINITION AND DETERMINATION OF LEGAL PERSONALITY:
→ LEGAL SUBJECTS: The law determines who qualifies as legal subjects
(bearers of rights 7 duties).
→ NATURAL PERSONS: Humans are legal subjects, subject to certain
qualifications.

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→ RIGHTS OF LEGAL SUBJECTS: Legal subjects have rights in relation to

legal objects, including:
a) Real Rights
b) Personal Rights
c) Intellectual Property Rights
d) Personality Rights

JURISTIC PERSONS
→ ENTITIES AS LEGAL SUBJECTS: Certain entities (companies,
organisations, etc) can also be legal subjects, known as juristic persons.
→ FORMATION OF JURISTIC PERSONS: They can be created by law, such
as through statutes or constitutive documents.
→ Juristic persons generally have same capacity & powers as natural persons.
→ BUT, their powers and capacities can be limited by laws or their founding
documents.
→ SPECIFIC LEGAL PROVISIONS: Some laws provide for the formation of
juristic persons, like universities or companies (Companies Act).

COMMON LAW AND LEGAL PERSONALITY

→ Legal personality can be acquired through conduct under common law.
→ If association of persons acts like legal entity, it may be recognised as such.

REQUIREMENTS FOR ACQUIRING LEGAL PERSONALITY BY CONDUCT:

a) Must have capacity to incur obligations and hold rights.
b) Must maintain separate property from its members.
c) Must have legal standing (locus standi) to sue and be sued.

LEGAL PERSONALITY UNDER THE COMPANIES ACT

→ S 8(3): Legal personality is granted only to registered companies or bodies
formed under other laws.

EFFECTS OF LEGAL PERSONALITY

→ Salomon v Salomon: Companies are separate from their shareholders.
→ A company is an independent legal entity with its own rights and liabilities,
unaffected by the motives of its founders.

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CONSEQUENCES OF INCORPORATION:
→ SEPARATE EXISTENCE: Characteristics of members do not affect legal
entity.
→ PERPETUAL EXISTENCE: Changes in membership do not impact existence
of the entity.

RIGHTS AND DUTIES OF LEGAL ENTITIES:

a) Right to privacy, dignity, and fame.
b) Right to ownership of assets.
c) Duty of liability for its own debts and obligations.
d) Profits and losses belong to the entity.
e) Ability to sue and be sued in its own name.

RESTRICTIONS AND PROTECTIONS OF LEGAL PERSONALITY

→ Legal entity cannot act on its own.
- It acts through appointed agents.
→ S 8(2) of Constitution: Legal entities are bound by provisions of the Bill of
Rights.

PIERCING THE CORPORATE VEIL

PIERCING THE CORPORATE VEIL = legal doctrine where court disregards
separate legal personality of corporation or juristic entity and treating the rights and
obligations of the corporation as those of its shareholders or members.
→ Legal personality is not absolute + may be disregarded in certain cases.
→ Rights and duties of company are treated as those of its shareholders.
→ Characteristics of shareholders are examined for legal purposes.
→ Piercing corporate veil is last resort, used when no other remedy is available.
→ S 20(9) of Companies Act: Provides for piercing the veil as primary remedy.

CIRCUMSTANCES WHERE SEPARATE LEGAL ENTITY IS DISREGARDED:

a) Misuse for fraud or dishonest purposes.
b) When actions result in unconscionable injustice and no other remedy is
available.
c) When determining criminal, delictual liability, or tax purposes.
d) Reckless business conduct (gross negligence or intent to defraud).
e) Acts constituting "unconscionable abuse" of the juristic personality.

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TYPES OF COMPANIES:

COMPANIES ACT PROVIDES FOR INCORPORATION AND FORMATION OF 2

TYPES
→ Profit companies & Non-Profit companies

PROFIT COMPANIES:
→ PROFIT COMPANIES = companies formed to make a profit.
→ They can be classified into several types, including private companies,
personal liability companies, public companies, and state-owned companies.

1) PRIVATE COMPANIES: ALSO KNOWN AS PTY LTD OR "PROPRIETARY

LIMITED".
→ They CANNOT be owned by the state.
RESTRICTIONS ON SECURITIES:
- Their Memorandum of Incorporation (MOI) prohibits them from offering
their securities (like shares or bonds) to the public.
- They may also impose restrictions on transferability of these securities.
→ Private companies NUST include "Pty Ltd" or "Proprietary Limited" at the end
of their name.
RESTRICTIONS ON TRANSFERABILITY:
- Before selling or transferring securities, the holder is required to offer them
to existing holders first.
- The company's directors have the discretion to refuse the transfer or
registration of securities.

2) PERSONAL LIABILITY COMPANIES

 Also known as Incorporated or "Inc."
PERSONAL LIABILITY COMPANIES = companies that meet the criteria for a
private company, and their MOI specifically states they are "personal liability
company."
LIABILITY:
→ S 19(5) of Companies Act:
- All directors (past and present) are jointly and severally liable with the
company for any debts and liabilities incurred while they were in office.
DOCTRINE OF CONSTRUCTIVE NOTICE:
→ This doctrine means anyone dealing with the company is presumed to know
the contents of the company's MOI and the implications of personal liability.
→ This is because the MOI is filed publicly and available for inspection, so there
is a presumption that people are aware of it.

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3) PUBLIC COMPANIES:
→ Public companies are NOT owned by the state.
→ They MUST have "Ltd" at the end of their name.

FEATURES:
- Unlike private companies, public companies are allowed to offer their
securities to the public without restrictions.
- They do not have restrictions on transferability of their shares.

4) STATE-OWNED COMPANIES:
→ These companies are registered under Companies Act and:
- Are either public entities or owned by municipality.
- Similar to entities listed in Schedule 2 or 3 of the Public Finance
Management Act.
→ MUST have "SOC Ltd" at the end of their name.
→ All shares are owned by state entities (eg. government departments).
→ All provisions of Companies Act apply to SOCs unless an exemption is
granted by Minister.
→ Ultimate control is NOT with the board of directors but may rest with a
government department, like Department of Public Enterprises.

NON-PROFIT COMPANIES
NON-PROFIT COMPANIES (NPCS) = companies incorporated for public benefit
or other objectives related to cultural, societal, or community interests.

PURPOSE AND OBJECTIVES:

→ An NPC is incorporated for public benefit, or a specific purpose outlined in its
Memorandum of Incorporation (MOI).
→ The objectives must be related to public benefit, cultural, social activities, or
community interests.

INCOME AND PROPERTY:

→ Income & property of NPC CANNOT be distributed to its members, founders,
directors, or any related persons, except as reasonable compensation for
services provided to NPC.
→ All assets and income must be used to advance objectives specified in MOI.

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MEMBERSHIP:
→ An NPC can be established without any members (meaning it does not have
to have a traditional membership structure).
→ If it has members, they may have specified rights concerning the NPC,
including voting rights.

→ NPC members may have:

- More than one vote per member of the NPC is allowed.
- Veto right of one particular member is allowed.

DISSOLUTION OR WINDING UP:

→ If NPC is dissolved, NO current or past members or directors are entitled to
any part of remaining assets after liabilities are settled.
→ Remaining assets must be distributed to another NPC, voluntary
association, or non-profit trust with similar objectives, as determined
by:
a) The terms in the MOI
b) The members or directors at the time of dissolution
c) A court decision if the MOI or members/directors fail to decide.

VOTING RIGHTS AND MEMBERSHIP CLASSES:

→ Item 4(2)(d) of Schedule 1: NPC may have up to two classes of
membership, consisting of voting and non-voting members.
→ The organization can decide whether or not to have non-voting members.

TAX EXEMPTION:
→ Being registered as NPC does NOT automatically qualify it for tax
exemptions.
→ It must meet specific criteria to obtain such status.

1) EXTERNAL COMPANIES:
EXTERNAL COMPANIES = entities incorporated outside SA but conduct
business or non-profit activities within the country.
→ They are considered conducting business if they have at least 1 employment
contract in SA or engage in activities there for 6 months or more.

→ REGISTRATION:
→ Must register with Companies and Intellectual Property Commission (CIPC)
within 20 days of starting business in SA as either external NPC or an
external profit company.
→ When registered, they receive unique registration number from CIPC.

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→ REGULATORY REQUIREMENTS:
→ CIPC must list jurisdiction in which company is registered if it's not indicated in
foreign registration number.

2) DOMESTICATED COMPANIES:
Domesticated companies = foreign companies that transfer their registration from
foreign jurisdiction to SA.
→ After transfer, company operates as if it was originally incorporated in SA
under Companies Act.

CONDITIONS FOR TRANSFER:

→ Shareholders must approve transfer according to law of the foreign
jurisdiction.
→ The foreign jurisdiction's laws must permit the transfer, and the company must
comply with those requirements.
→ Significant portion of company’s assets or business should be located in SA,
and a majority of shareholders and directors should be SA.

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COMPANIES
LEGAL PERSONALITY

ACQUISITION OF LEGAL PERSONALITY: IT CAN BE OBTAINED THROUGH:

→ Specific Act.
→ General enabling Act.
→ By conduct.

GENERAL INTERPRETATION OF THE ACT (SECTION 5)

→ Section 7 focuses on company law and interpretations from foreign company
laws.
→ Business days calculation and dealing with inconsistencies between different
Acts or statutes are critical aspects.

PURPOSES OF THE ACT (SECTION 7)

THE ACT EMPHASIZES:

→ ECONOMIC GROWTH: Promoting entrepreneurship, innovation, and efficient
business practices.
→ TRANSPARENCY: Encouraging high standards of corporate governance.
→ BALANCE: Maintaining fairness between shareholders and directors while
promoting company rescue mechanisms for distressed companies.

LEGAL STATUS OF COMPANIES (SECTION 19)

→ Companies are juristic persons from the date their registration certificate is
issued.
→ Companies have the same legal powers as individuals, but limitations may
apply due to the Memorandum of Incorporation (MOI).
→ Directors and shareholders may have liability under certain circumstances.

S 24 – REGISTERED OFFICE
→ Registered office or principal place of business
→ Notice of Location of Records

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PRE-INCORPORATION CONTRACTS
→ These are agreements made before a company is officially registered.
→ The person signing the contract remains jointly and severally liable if the
company fails to incorporate or rejects the contract.

S 21
→ Written contract
→ In the name of company to be incorporated
→ NB - Jointly and severally liable
o company not incorporated
o incorporated but rejects contract or part of it
→ Substitution contract - liability is discharge
→ Company may ratify contract within 3 months of date of registration
→ Neither ratified or rejected = deemed ratified
→ Ratified
o contract enforceable against the company
o liability of person who concluded the agreement is discharged
→ Claim for benefit

SECTION 20(9): PROTECTION FROM ABUSE

→ Addresses unconscionable abuse of corporate status, allowing courts to
disregard a company's juristic personality in certain cases.

CATEGORIES OF COMPANIES (SECTION 8)

COMPANIES ARE CLASSIFIED INTO:

o Non-profit.
o Profit: Includes private (Pty Ltd), public (Ltd), state-owned (SOC), personal
liability (Inc), and external companies.

INCORPORATION AND NAME REGISTRATION

o RIGHT TO INCORPORATE (SECTION 13): One person can incorporate a
profit company, and three persons for non-profit.
o COMPANY NAMES (SECTION 11): Restrictions apply to names, ensuring
they aren’t misleading or similar to existing trademarks or company names.
o RESERVATION OF NAMES (SECTION 12): A name can be reserved for six
months, extendable.

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RIGHT TO INCORPORATE AND FOREIGN COMPANY REGISTRATION – S 13

→ Profit company: 1 person needed.
→ Non-Profit Company (NPC): 3 persons needed.
→ Must file Notice of Incorporation (NOI) and pay the fee.
→ Memorandum of Incorporation (MOI): Prescribed form, may include unique
provisions.
→ Foreign companies can transfer registration.

CRITERIA FOR COMPANY NAMES – S 11

→ Name can include words, letters, numbers, and symbols like & # @ % =.
→ Can use a registration number.
o EXAMPLE: #THE TAXI COMPANY (Pty) Ltd

COMPANY NAME REQUIREMENTS – S 11

→ Must include terms like (Pty Ltd), Inc, Ltd, SOC Ltd, or NPC.
→ Use (RF) if restrictions apply (s 15(2)(b) or (c)).

NAME RESTRICTIONS – S 11
→ Name must not be the same as a company, CC, co-op, defensive name, or
trademark.
→ Must not mislead or imply false associations (e.g., government, educational,
foreign organizations).
→ No language promoting war, violence, or hate.

NAME RESERVATION AND DEFENSIVE NAMES – S 12

→ Reserve names with CIPC for 6 months (extendable).
→ Defensive names last 2 years.
→ Abuse, like selling reserved names, is prohibited.

REGISTRATION OF COMPANIES (SECTION 14)

→ Involves assigning a unique registration number and registering the
company’s MOI.

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MEMORANDUM OF INCORPORATION

MOI, SHAREHOLDER AGREEMENTS, AND RULES (SECTION 15)

→ The MOI, which governs company conduct, must be consistent with the Act.
Alterations to the MOI can occur under specific circumstances.
→ BOARD RULES: Additional governance rules can be set but must be
published and filed.

AMENDMENT OF MOI (SECTION 16)

→ The MOI can be amended through a court order, special resolution, or by the
board/shareholders (with a 10% proposal threshold).

SECTION 15(6)
→ Company and each shareholder
→ Shareholders inter se
→ Company and
o directors or prescribed officer
o member of board committee

SHAREHOLDER AGREEMENTS AND ALTERATIONS (SECTION 17)

→ ALTERATIONS: The board can correct minor errors (e.g., punctuation)
without changing substantive content.
→ TRANSLATIONS: Official translations are allowed, and a consolidated
version of the MOI must be maintained.

NB: In test be very specific in terms of amendments and alterations.

→ Alteration is fixing a mistake (section 17)
→ Amendment is a new “part” included (section 16)
→ With an amendment the substance change

THE COMPANY AS A BUSINESS FORM.

LEGAL PERSONALITY
→ A company is a juristic person and has certain capacity and powers of a legal
person. Acts performed outside this capacity or power are ultra vires, but they
are not necessarily void, the enabling Act can provide that those actions are

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valid under certain circumstances. In order to acquire legal personality by

conduct:
→ The property of the members and that of the legal person must be kept apart.
→ The legal person must have the capacity to incur obligations and to have
rights.
→ A legal person must be capable of having locus standi to sue in its own name
and to be sued in that name.

DEFINITION OF A “BUSINESS” AND “GAIN”:

→ Mitchells’ Plain Town Centre v McLeod, ‘BUSINESS’ was defined as: An
occupation or duty which requires attention.
→ “GAIN” was defined as: A commercial or material benefit or advantage, not
necessarily a pecuniary profit.

EFFECT OF LEGAL PERSONALITY IN TERMS OF SALOMON V SALOMON AND

CO LTD
→ It seems to me impossible to dispute that once the company is legally
incorporated it must be treated like any other independent person with its
rights and liabilities appropriate to itself, and that the motives of those who
took part in the promotion of the company are absolutely irrelevant in
discussing what those rights and liabilities are.

THEREFORE:
→ Company has its own separate legal personality
→ A distinction must be drawn between the rights and obligations of the
company and its shareholders.
→ The company is not an agent of its shareholders
→ The shareholders are not liable for the debts of the company.

DADOO LTD V KRUGERSDORP MUNICIPAL COUNCIL

→ “This conception of the existence of a company as a separate entity distinct
from its shareholders is not merely artificial and technical thing. It is a matter
of substance, property vested in the company is not and cannot be, regarded
as vested in all or any of its members.”
→ The property vests in the company and not in the shareholders

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CONSEQUENCES OF LEGAL PERSONALITY

→ Separate existence.
→ Perpetual existence = Change in members = no effect.
→ Entity is a legal subject and can have all the rights of a legal subject,
including:
o Rights of privacy, dignity and fame.
o Being the owner of assets.
o Being liable for debts/ obligations.
o Having profits/losses, which are the ‘property’ of the legal person.
o Suing and being sued in its own name.

PIERCING THE CORPORATE VEIL

→ Botha v Van Niekerk - Strict test was applied. (unconscionable injustice),
must be proven to pierce the corporate veil.
→ Cape Pacific Ltd v Lubner Controlling Investments (Pty) Ltd, ruled: The
test in Botha is too rigid.

SEPARATE JURISTIC PERSONALITY – PIERCING OF CORPORATE VEIL

→ Ex parte Gore = Piercing the corporate veil. Section 20(9) of the Companies
Act.
→ The test is less strict now.
→ Should not be treated as an exceptional remedy.
→ Group of companies that had shares in each other, used same resources, and
in the course of business operated as one entity.

TEST IS FOR:
→ “Misuse” = Fraud, dishonest or improper use.
→ Unconscionable injustice.
→ The actions of “directing the mind and will” of the company towards criminal or
delictual liability.
→ Discrimination against a company in respect of the race of its members.

TYPES OF COMPANIES

PRIVATE COMPANY
Requirements S8(2):
→ Not an SOC.
→ MOI prohibits offers of any of its securities to the public [S11].
→ MOI restricts the transferability of its securities.

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PERSONAL LIABILITY COMPANY (INC)

Requirements ito S8(2)(c)
→ Meet the requirements for a private company.
→ S19(3) = Directors and past directors are jointly and severally liable together
with the company for debts incurred during their respective periods in office.

PUBLIC COMPANY
→ A profit company.
→ That is not an SOC.
→ Which is either a private or a personal liability company.
→ With the abbreviation Ltd added to the end.

STATE-OWNED COMPANY
→ Registered ito of the Companies Act.
→ Listed as a public entity in Schedule 2 or 3 of the Public Finance Management
Act; or
→ Is owned by a municipality, as contemplated in the Municipal Systems Act.
→ SOC Ltd must be added to the name.

NON-PROFIT COMPANIES (NPC)

→ Incorporated for a public benefit or other object as required by item 1(1) of
Schedule 1.
→ The income and property of which are not distributed to its incorporators,
members, directors, officers or persons related to any of them except as
reasonable compensation for services rendered.
→ MOI must set out at least one object of the company, and each such object
must be either a public benefit object or an object relating to one or more
cultural or social activities or communal or group interests.

EXTERNAL COMPANIES
DEFINITION: A foreign company that carries on business or non-profit activities
within the Republic.
→ Foreign = Incorporated outside of South Africa.
→ Conducting business in Republic = Is party to at least one employment
contract within the Republic, or reasonably conducted business in the
Republic over the course of 6 months.
→ An external company must register with the CIPC within 20 business days.

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DOMESTICATED COMPANIES
→ A foreign company may apply in the prescribed manner and form,
accompanied by the prescribed application fee, to transfer its registration to
the Republic and thereafter exist as a company in terms of the Act as if it had
been originally incorporated and registered.

THE DIFFERENCE BETWEEN A PARTNERSHIP, CLOSE

CORPORATION AND A COMPANY

PARTNERSHIP
→ A contract
→ Between 2 or more legal persons (juristic or natural)
→ Combining multiple sole proprietorships

CLOSE CORPORATION
→ A juristic person
→ Of a maximum of 10 people.
→ Constituted under the CC Act.

COMPANY
→ A juristic person
→ Registered and incorporated in various forms
→ Under the Companies Act
→ With its business provided for in its MOI

RING FENCED COMPANIES

→ Ring fenced companies are private companies which are subject to a
restrictive condition in the MOI, and ‘RF’ is included in their title and must
appear in the Notice of Incorporation.

THE FORMATION OF A COMPANY, COMPLIANCE WITH THE LAW

AND PRE-INCORPORATION CONTRACTS

REGISTRATION
→ Upon signing of the MOI
→ By the requisite number of persons or organ of state
→ And filing the prescribed Notice of Incorporation.

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CASE LAW ISSUES (POTENTIAL QUESTIONS FOR MCQ)

→ The name of a company as per section 11(c) should not reasonably mislead a
person.
→ Meaning of “reasonably mislead a person to believe” is outlines in Adidas AG
and Another v Pepkor Retail Limited.

APPLICATION FOR THE RESERVATION OF A NAME, AND THE

APPLICATION FOR CLARIFICATION ON “GOOD CAUSE”:
→ High Nutritious Food Company (Pty) Ltd v The Companies Tribunal and
others.
→ Doesn’t only refer to an explanation for delay in bringing the application.

THE MEMORANDUM OF INCORPORATION AND COMPANY RULES

→ How to amend an MOI? S16(1)(c).
→ Application brought by Board or shareholders with 10% or more voting rights.
→ Application passed by special resolution (75%) by members.

ALTERABLE VS NON-ALTERABLE PROVISIONS

→ ALTERABLE = Change as you see fit.
→ UNALTERABLE = Cannot lessen the effect but can increase it.

ALTERATION VS AMENDMENT?
→ S16 = Amendment
→ S17 = Alteration
Only a grammatical change or some other change that does not affect the substance
of the clause. Board can do this alone.

CONSTRUCTIVE NOTICE
→ Common law doctrine of Constructive Notice meant that when documents are
publicly available, 3rd parties are assumed to have knowledge of them. This
does not apply to the MOI of a company.

THE LEGAL STATUS OF THE MOI AND RULES

The rules of the MOI are binding:
→ Between the company and each shareholder; and
→ Between or among the shareholders; and
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→ Between the company and:

o Each director or prescribed officer of the company;
o Other person serving the company as a member of the Audit Committee
or member of a committee of the board, in the exercise of their
respective functions within the company.

The Act does not define this relationship, but the principles of the common law
determine that it is certainly contractual in nature.

SHAREHOLDERS’ AGREEMENTS
→ Shareholders can enter into any agreement between themselves in terms of
the company as long as it is consistent with both the Act and the MOI.

ANTI-AVOIDANCE
→ A court on application by the CIPC or Takeover Regulation Panel, can void
any agreement, transaction, scheme, resolution or provision of a company’s
MOI or rules when it attempts reduce the object of the Act.

SUBSTANTIAL COMPLIANCE
If the Act prescribes a manner of doing something, deviation is only invalid if:
→ Negatively and materially affects the substance; or
→ Would reasonably mislead a person reading the document or to whom the
document is delivered.

PRE-INCORPORATION CONTRACTS
It is sometimes necessary to conclude contracts for a company before it exists (such
as with a promoter). The common law doesn’t allow this through agency but there
are many alternatives in the common law.

COMMON LAW
→ Cession and Delegation = Cede the rights once company is formed, but
conclude in personal capacity first.
→ Nomination = Subject to term to nominate 3rd party, then nominate company
once formed.
→ Contract for the benefit of a 3rd party (stipulatio alteri) = Stiuplans concludes a
contract with the ultimate buyer (promittens).

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→ Option contract = Open for a period of time, where if accepted it can be

transferred.

COMPANIES ACT
→ A person may enter into a written agreement in the name of, or purport to act
in the name of, or on behalf of, an entity that is contemplated or proposed to
be incorporated but does not yet exist at the time of the agreement with the
intention or understanding that the proposed company will be incorporated
and will thereafter be bound by the contract.

THERE ARE RULES HOWEVER. RULES:

→ If company takes a decision on the contract, they must notify the CIPC and
those materially affected.
→ Within 3 months of the incorporation of the company, they can completely
partially or conditionally ratify or reject an pre-incorporation contract [S21(4)].
→ If no action within 3 months, they will be deemed to have ratified it [S21(5)].
→ A promoter is jointly and severally liable.

MISC REULES FOR UNIT 8

ON ALTERABLE AND NON-ALTERABLE PROVISIONS (POTENTIAL
QUESTION)
→ If the ordinary resolution is moved to 65% (prescribed in Act as more than
50%) then she special resolution must be altered to 80% because as per
S65(10)(b) there must be a 15% difference between them.

THE ACTIONS OF A COMPANY: CAPACITY AND

REPRESENTATION

CAPACITY OF A COMPANY
→ From the date and time that the incorporation of a company is registered, as
stated in its Registration Certificate, the company is a juristic person. It exists
continuously until its name is removed from the Companies Register in
accordance with the Companies Act.

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CHANGE TO CONSTRUCTIVE NOTICE

→ A person is deemed to have notice and knowledge any provision of a
company’s MOI under section 15(2)(b) and (c) if the company’s NOI or a
Notice of Amendment has drawn attention to the provision as contemplated in
S13(3).

VALIDITY OF COMPANY ACTIONS ULTRA VIRES

AN ACT OF A COMPANY IS NOT VOID SOLELY BECAUSE:

→ Lack of capacity because MOI restricts them; or
→ Because of such a restriction the directors did not have the authority
[S20(1)(a)].

CANNOT RELY ON THE RESTRICTION TO VOID THE ACTION UNLESS:

→ Between a company and its shareholders, directors or prescribed officers; or
→ Between shareholders and directors or prescribed officers = S20(1)(b).
→ This includes a mala fide person.

THE SHAREHOLDERS MAY RATIFY AN ACTION TAKEN THAT IS

INCONSISTENT WITH THE MOI.

One or more shareholders, directors or interested persons may apply to a court in

order to restrain to restrain a company from doing something, but it must be without
prejudice who:
→ Obtained those rights in good faith; and
→ Did not have actual knowledge of the limit, restriction or qualification.

Each shareholder of a company has a claim for damages against any person who
intentionally, fraudulently or due to gross negligence causes the company to do
anything inconsistent with the Act or with a limit, restriction or qualification unless it
has been ratified by the shareholders.

REPRESENTATION
→ Common law rules in respect of agency and representation still apply but
subject to the Act.
→ S20(1)(a) = A contract concluded by the directors without authority is still valid
if the only reason they didn’t have authority is ONLY because of a limitation,
restriction or qualification on the capacity of the company.

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ORGANS
→ Shareholders acting in meetings = S60.
→ Auditors Committee = S72.
→ Social and Ethics Committee = S94.

AGENTS
→ S66(1) = The Board has the authority to bind the company and a person
dealing with the board (NOT individual directors) can accept that the board is
the agent for the company.

METHODS
1. CONTRACTUAL:
→ Actual Authority
→ Express Authority
→ Implied Authority
→ Turqaund Rule (Explained later).

2. DELICTUAL:
ESTOPPEL (4)
→ Culpable representation by the principal
→ The presentation must be such that it could reasonably have been expected
to mislead the 3rd party.
→ 3rd Party acted on the faith of the representation.
→ The 3rd party acted to their prejudice.

OSTENISBLE AUTHOIRTY (MAKATE V VODACOM) → CONFUSES THE

POSITION:
→ The principal
→ Buy words or conduct
→ Has created an appearance
→ That the agent has power to act on its behalf.
→ Ostensible authority now a form of Actual Authority, and therefore the
Turquand rule can apply.

UNRAVELLING THE TURQUAND RULE AND MAKATE V VODACOM

The Turquand rule is held in S20(7) of the Companies ACT and in a nutshell it is
the following:
→ Where an agent has actual authority to conclude a contract, but that authority
is subject to a restriction or internal requirement, 3rd parties may assume that

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the requirement has been complied with and the contract will remain valid
even if the requirement was not complied with.

TURQUAND RULE EXAMPLE

Bob is the CEO of Bob’s Bricks and has authority to conclude contracts up to R100
on his own. However, he requires approval from shareholders for any contracts that
exceed that value. Bob concludes a contract for Toilet paper valued at R300.
→ Turquand rule applies as it is JUST an internal requirement, and the Toilet
Paper seller can assume he has gotten approval from the shareholders.

ESTOPPEL OR OSTENSIBLE
Bob dealt with Toilet Kings and concluded several deals for years. Unbeknownst to
Toilet Kings, Bob’s Bricks amends its MOI and Bob no longer has authority to
conclude deals on behalf of the company at all, due to the fact that he spends
excessively at Toilet Kings. However, the board of Bob’s Bricks never informs Toilet
Kings and Bob, in a rush to stock up on Toilet Paper concludes a contract on behalf
of Bob’s Bricks.
→ Because Bob’s Bricks omitted to inform Toilet Kings of the change, the
contract can be upheld because they made a representation (by OMISSION)
that Bob still had authority.

YOU CAN USE ESTOPPEL OR OSTENSIBLE FOR THIS QUESTION. USE

OSTENISBLE BECAUSE REQUIREMENTS ARE MORE SIMPLE AND THEN
REMEMBER TO APPLY TURQAUND.

HOW TO TELL THE DIFFERENCE BETWEEN WHEN JUST TO USE

TURQUAND AND WHEN TO USE ESTOPPEL OR OSTENSIBLE?
→ If the principal (company/ board) never made a representation it CANNOT be
estoppel or ostensible authority.

GENERAL POWERS OF COMPANY

→ Business and affairs managed or directed by the Board.
→ There is a positive duty on the Board and Directors to manage the company.
→ The Board has original power and it is not delegated from the shareholders.
→ Means that the shareholders do not have residual power such as the
power to act if the board does not act or to act ‘as the company’, unless
the Act gives that authority.

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 ODR 320

CORPORATE CAPITAL
SOLVENCY VS LIQUIDITY TEST

TO ENSURE A COMPANY REMAINS FINANCIALLY HEALTHY, IT MUST MEET

SPECIFIC CONDITIONS:
→ REASONABLY FORESEEABLE FINANCIAL CIRCUMSTANCES:
Consideration of future financial conditions.
→ ASSETS VS. LIABILITIES: The company’s assets must equal or exceed its
liabilities.
→ FAIR VALUATION: Assets should be fairly valued.
→ DEBT PAYMENTS: The company must appear able to pay its debts in the
ordinary course of business for 12 months after the test.
→ ACCOUNTING RECORDS (S 28): Proper records are required.
→ FINANCIAL STATEMENTS (S 29): Financials should be properly stated or
based on other reasonable valuations

SOLVENCY (OBJECTIVE)
→ Assets >= Liabilities; and

LIQUIDITY (SUBJECTIVE)
→ Company can pay 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.

FINANCIAL ASSISTANCE
The board may, as the MOI allows, provide financial assistance by way of:
→ Loan
→ Guarantee
→ 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 a related or
inter-related company if doing 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 two 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

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 ODR 320

→ the board is satisfied that =

o immediately after giving the financial assistance, the company would
satisfy the solvency and liquidity test; and
o the terms under which the assistance is proposed to be given are fair
and reasonable to the company.
o SAME RULES FOR DIRECTORS.

TO DETERMINE IF FINANCIAL ASSISTANCE WAS “FAIR AND REASONABLE”

CONSIDER:
→ Financial position of the parties = Whether it should ever have been given.
→ If loan = Security (Provision + Adequacy)
→ Consideration for the loan or security, including interest or other benefit.
→ The term of the loan or security.
→ The manner of repayment of the loan or discharge of security.

FINANCIAL ASSISTANCE
S44 = Financial assistance for the subscription of the shares in the company.
→ PURPOSE: help someone to acquire shares in a company.
→ Loan = financial assistance.

REQUIREMENTS:
→ Unless MOI says otherwise you can provide financial assistance to help
someone acquire shares in your company.
→ Board resolution that authorises this financial assistance.
→ Board can only authorise if it is in terms of the employee share scheme (s97);
→ If sanctioned in terms of special resolution for the last two years for a specific
person or group of persons.
→ 2nd Board Resolution = Board must be satisfied that immediately after the
payment of this financial assistance, the company will comply with the
solvency and liquidity test, and that the terms of the financial assistance are
fair and reasonable to the company.
→ Any additional MOI requirements

CHOOSING BETWEEN SECTION 44 AND 45 FOR FINANCIAL ASSISTANCE

→ Section 44 = Sole or main purpose of the transaction is to give financial
assistance.
→ Section 45 = Financial assistance to directors specifically, excluding legal
expenses.

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 ODR 320

TEST FOR FINANCIAL ASSISTANCE

→ Gradwell case: Test for financial assistance, “impoverishment test”. If the
company is poorer after than it was before the transaction, then it constitutes
financial assistance.
→ Jacobson and Lipschitz case: Cannot only look at impoverishment test.
→ Commercial sense test.

DISTRIBUTIONS
Distributions are [S (1)]:
→ dividends (in cash or in kind);
→ payment in cash instead of capitalisation shares;
→ the repurchase of shares by the company;
→ a debt incurred to or for the benefit of a holder of any of the shares; or
→ cancellation or waiver of debt owed to the company in respect of a holder of
any of the shares

IN ORDER TO ALLOW DISTRIBUTIONS: BOARD MUST AUTHORISE BY

RESOLUTION
→ Comply with solvency and liquidity test
→ Board acknowledges that it applied the test

AUTHORISATION:
BOARD RESOLUTION (FIRST): The board must authorise the assistance based on
MOI terms.
o Could be tied to an employee share scheme (s 97) or via special resolution
for specific or general recipients.

BOARD SATISFACTION (SECOND): The board must ensure:

o The company passes the solvency and liquidity test.
o The assistance is fair and reasonable based on factors like financial position,
security, interest, and repayment terms.

NONCOMPLIANCE:
o Breach of fiduciary duties.
o Potential voiding of the transaction.

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 ODR 320

ACQUISITION OF SHARES
The acquisition by a company of its own shares is a distribution which must comply
with the requirements set out above and is effect, usually, by a board decision.
[S48(2)].

ACQUIRED FROM DIRECTOR OR PRESCRIBED OFFICER OR A RELATED

PERSON
→ Board decision must be approved by a special resolution of shareholders.
→ If for more than 5% of the shares of a particular class = Section 114 (scheme
of arrangement) and 115 (fundamental transaction).

SUBSIDIARY BUYING SHARES IN THE HOLDING COMPANY

→ Aggregate shares owned by all subsidiaries cannot exceed 10% as per S48.

COMPANY MAY NOT ACQUIRE ITS OWN SHARES

→ The company may not acquire its own shares.

WHEN NEW SHARES ARE ISSUED

→ Current shareholders have a right of first refusal and should be given the
opportunity to purchase them.

CAPITALISATION SHARES (MCQ QUESTION PERHAPS)

→ A company can issue capitalisation shares to shareholders for no
consideration on a pro rata basis, unless the MOI provides otherwise.
→ Capitalisation shares may be issued across class, unless the MOI provides
otherwise.

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 ODR 320

GROUPS OF COMPANIES
THE CONCEPT OF HOLDING COMPANIES AND SUBSIDIARIES
→ A holding company is the MAIN company that owns a controlling interest in
the subsidiary company. It is possible for one holding company to own
multiple subsidiaries DIRECTLY and to own other subsidiaries INDIRECTLY
through its subsidiaries that are holding companies in their own right.
→ This can take two main forms: Voting Rights & Board Members

HOW DOES A HOLDING COMPANY GAIN OWNERSHIP?

→ By controlling more than half of the board members.
→ By controlling more than 50% (ex 51%) of the voting rights.

DIRECT VS INDIRECT OWNERSHIP

DIRECT
→ The Holding company owns the Subsidiary.
→ Example = A owns B through a 55% voting right share.

INDIRECT
→ The Holding company owns a subsidiary, which owns a different company.
→ Example = A (holding company of B) owns 55% of B (Subsidiary to A; Holding
company of C) which owns 70% of C (Subsidiary of B directly and of C
indirectly).

WHOLLY OWNED SUBSIDIARY VS ORDINARY SUBSIDIARY

→ When the holding company owns and thereby controls 100% of another
company, it becomes a wholly owned subsidiary. This can be direct OR
indirect.

AS PER THE EXAMPLE ABOVE:

→ A owns 51% of B = B is an ordinary subsidiary.
→ B owns 100% of C = Therefore, C is a wholly owned subsidiary of B (directly)
but also a wholly owned subsidiary of A (indirectly).

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 ODR 320

ACCOUNTING RECORDS,
FINANCIAL STATEMENTS AND
AUDIT

ACCOUNTABILITY & TRANSPARENCY REQUIREMENTS FOR COMPANIES:

REGISTERED OFFICE:
→ Every company, including external companies, must have at least 1 registered
office in SA.
→ The address must be provided in Notice of Incorporation and any changes
must be reported.

COMPANY RECORDS:
→ Companies must maintain records like:
a) Memorandum of Incorporation and amendments.
b) Records of directors, including past directors.
c) Reports from annual general meetings, financial statements, minutes, and
shareholder communications.
d) Securities register and registers of secretaries and auditors (for profit
companies).
e) Shareholders have the right to inspect most records, except accounting
records and minutes of directors' meetings.

ACCOUNTING RECORDS:
→ Companies must keep accurate accounting records in official language of SA,
as required for financial statements and in prescribed manner.

FINANCIAL STATEMENTS:
→ Financial statements provided by company must meet financial reporting
standards, be fair, and provide accurate view of company's financial status.
→ If audited, they must comply with additional disclosure requirements.

ANNUAL FINANCIAL STATEMENTS (AFS):

→ Companies must prepare AFS within 6 months of end of the financial year.
→ AFS must include auditor's report (if applicable), directors' report, and other
prescribed information.
→ AFS must be approved, signed by a director, and presented to the
shareholders.

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 ODR 320

ACCESS TO FINANCIAL STATEMENTS:

→ Shareholders are entitled to receive notice of AFS publication and obtain
copies. Creditors and trade unions also have rights to access AFS under
certain conditions.

FORM AND CONTENT:

→ Financial statements must not be false, misleading, or incomplete.
→ The Minister can prescribe standards for financial reporting, which must align
with International Financial Reporting Standards (IFRS).

AUDIT AND REVIEW:

COMPULSORY AUDIT AND REVIEW:
AUDIT:
→ Annual Financial Statements (AFS) of public company must be audited.
→ For other profit or non-profit companies, an audit is required if regulations
determine it is in public interest, considering factors like annual turnover,
workforce size, or nature of activities (public interest audit).
→ These regulations specify which private companies need their AFS audited.
→ The following companies must have their AFS audited unless they
qualify for a “closely held” exemption under S 30(2A):
a) Public companies and State-Owned Companies (SOCs).
b) Profit or non-profit companies if they hold assets exceeding R5 million in
fiduciary capacity.
c) Non-profit companies (NPCs) formed by state or for statutory, regulatory,
or public functions.
d) Companies with Public Interest Score (PIS) of 350 or more, or at least
100 if financial statements are internally compiled.

REVIEW:
→ Companies whose AFS are not required to be audited must have them
independently reviewed according to ISRE 2400 if:
a) The PIS is at least 100, by a registered auditor or accredited professional.
b) The PIS is less than 100, by a person qualified to be an accounting officer
of a close corporation.

VOLUNTARY AUDIT:
→ Financial statements may be voluntarily audited if required by Memorandum
of Incorporation or decided by shareholders or board resolution.

'CLOSELY HELD' COMPANY EXEMPTION:

→ A company is exempt from auditing or independent review if all beneficial
interests in its securities are directly held by its directors.

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 ODR 320

→ This exemption does not apply if company is subject to public interest audit or
another law or agreement.

REPORTING STANDARDS FOR DIFFERENT COMPANIES:

→ Different categories of companies, including state-owned, public, and non-
profit companies, must adhere to specific financial reporting standards based
on factors such as size and nature of operations.

INCREASED ACCOUNTABILITY AND TRANSPARENCY:

→ Public companies, State-Owned Companies, and certain private companies
must comply with additional requirements under Chapter 3 of Companies Act.
→ Private companies, personal liability companies, or Non-Profit Companies are
exempt from Chapter 3, unless specified otherwise in their MOI.
→ Key requirements under Chapter 3:
a) Appoint a company secretary.
b) Appoint an auditor.
c) Establish an Audit Committee (AC).

COMPANY SECRETARY:
APPOINTMENT:
→ A company secretary must be appointed by public company or SOC.
→ The secretary must be a permanent resident of Republic or, if juristic person
or partnership, at least one employee or partner must meet this requirement.
DUTIES:
→ The company secretary's duties include providing guidance to directors,
ensuring compliance with Act, keeping accurate minutes of meetings,
certifying the company’s annual financial statements (AFS), and distributing
copies of the AFS.

AUDITOR:
APPOINTMENT:
→ Auditor must be appointed by public companies, SOCs, and certain private
companies upon incorporation and annually at AGM.
→ If not appointed at registration, directors must appoint 1 within 40 business
days.
→ The auditor must be a registered auditor and independent of the company.
RIGHTS:
→ The auditor has right to access all company records and documents, attend
general meetings, receive notices, and be heard at these meetings.

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 ODR 320

RESTRICTIONS:
→ An auditor may not provide services that create conflict of interest or are
prohibited by company’s Audit Committee.

AUDIT COMMITTEE:
COMPOSITION:
→ At each AGM, a public company or SOC must elect Audit Committee (AC)
with at least 3 non-executive directors who are not involved in day-to-day
management or have significant relationships with company.
DUTIES:
→ The AC nominates company auditor, approves fees and terms of
engagement, ensures compliance with Act, determines non-audit services the
auditor may provide, and handles complaints related to auditing.

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 ODR 320

CORPORATE FINANCE
DEFINITIONS OF SHARES AND SECURITIES

SHARE (SEC 1 OF COMPANIES ACT):

→ One of the units into which the proprietary interest in a profit company is
divided.

SECURITIES (SEC 1 OF SECURITY SERVICES ACT):

→ INCLUDE VARIOUS FINANCIAL INSTRUMENTS LIKE:
o Shares, stocks, and depository receipts in public companies (excluding
shares in share block companies).
o Notes, derivative instruments, bonds, debentures.
o Interests in collective investment schemes, both local and foreign.
o Instruments based on index.
o Any of the above-listed securities that are traded on an external
exchange.
o Other instruments declared by the registrar to be securities.

→ EXCLUSIONS:
o Money market instruments (except under specific circumstances).
o Any other security specified by the registrar.

PAR VALUE SHARES:

Par Value (PV) = is an indicator of the minimum value a company will get when
issuing its shares

Companies Act (CA) Section 35(2): Under this law, shares can no longer have a
nominal or par value. This means that new shares issued by companies no longer
have a minimum face value.

FOR COMPANIES THAT EXISTED BEFORE THIS LAW:

AUTHORIZED BUT UNISSUED (RE-ACQUIRED) PV SHARES
→ If a company had par value shares that were authorized (approved but not yet
issued) before the law changed, they can't issue these shares anymore
unless they are converted into shares without par value.
→ This is in line with Regulation 31(3) of the Companies Regulations (CReg).

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 ODR 320

CONVERSION OF PAR VALUE SHARES:

→ The company's board (management) can convert the par value shares into
shares without par value by filing a notice of resolution (using Form COR 31)
after the effective date of the law.
→ Note: A special procedure is required for this conversion process (so the
regular method can't be used).

ISSUED PAR VALUE SHARES:

→ For shares that were already issued before the law, the company cannot
increase the number of authorized par value shares.
→ However, they can issue any authorized but unissued par value shares until
they formally present a proposal to shareholders to convert them, as per
Regulation 31(6).

o Shares in companies can't have a minimum face value anymore under the law.
o Pre-existing companies with authorized par value shares must convert them
before issuing them.
o Already issued par value shares can’t be increased, but any that were authorized
and unissued can still be issued until they’re converted or a proposal to convert
them is presented.

CONVERSION OF ISSUED PAR VALUE TO NO PAR VALUE SHARES

STEP 1:
→ may be proposed by the board at any time and must not be designed to
substantially or predominantly evade applicable tax laws.

STEP 2:
→ resolution and report must be published to the shareholders before the
meeting.

STEP 3:
→ board must prepare a report WRT proposed resolution (this is minimum info
as in reg 31(7)).

STEP 4:
→ will be considered as being adopted if it’s been approved by both a special
resolution by holders of each class of shares and a further special resolution
adopted by meeting of the company shareholders.

STEP 5:
→ Resolution and report to be filed with SARS and the CIPC (Companies and
Intellectual Property Commission.

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 ODR 320

COURT INVOLVEMENT DURING THE CONVERSION PROCESS:

WHO MAY APPROACH THE COURT? (REG 31(9))
→ The company
→ Affected shareholder
→ CIPC and SARS

IF THE COURT DECIDES THAT THE PROPOSED RESOLUTION IS

COMPLIANT
→ Resolution can be put to vote
→ Shareholders are allowed to vote against this resolution (reg 31(11)(a))

IF COURT DECIDES RESOLUTION IS NOT COMPLIANT:

→ Company cannot put the proposed resolution to vote
→ Unless court order provides otherwise (reg 31(11)(b))

ISSUING OF SHARES
→ SEC 38(1): Company can only issue the number of authorized shares as
per the MOI or determined by the board.
→ SEC 38(2): Where unauthorized shares have been issued, may be ratified
within 60 business days after the shares were initially issued, otherwise
regarded null.
→ SEC 37(9)(A): a person acquires the share rights as soon as their name is
entered into the securities register.
→ CDH Invest NV v Petrotank South Africa: The power to issue shares is
subject to the fiduciary duties of directors.
→ SEC 41(1): Where issue of shares is to a director/ prescribed officer = must
be approved by shareholders ITO a special resolution.
→ SPECIAL RESOLUTION also required where issued shares amount to 30%
of the voting power of all shares in the class held by the Shareholders.

PRO RATA OFFER (SECTION 39(2)):

PRO RATA: This means that shareholders in a private company have the right to be
offered new shares in proportion to their current voting power in the company.
→ Example: If you own 10% of the voting shares, you get the right to buy 10%
of any new shares issued.

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 ODR 320

EXCEPTIONS:
THIS RIGHT DOES NOT APPLY TO SHARES ISSUED IN SPECIFIC CASES:
→ Options: Shares given as part of a stock option plan.
→ Conversion rights: Shares issued when converting existing securities (like
bonds or preference shares) into common shares.
→ Consideration: Shares given as payment for something (like acquiring
another company).
→ Capitalization shares: Shares given to existing shareholders without them
paying anything.
→ Business rescue: Shares issued to save a company in financial distress.

MOI RESTRICTION: The company’s Memorandum of Incorporation (MOI) can limit

or restrict this right (Section 39(3)).

CONSIDERATION FOR SHARES:

→ CONSIDERATION: This means anything of value given in exchange for
something else, like property, services, or money (Section 1 of the Companies
Act).

Shares can only be issued as:

→ Capitalization shares: Issued under Section 47, which allows a company to
give shares to existing shareholders without needing them to pay for them.
→ Adequate consideration: The company’s board must decide if what is being
offered in exchange for shares is of enough value.
→ Conversion rights: Issuing shares when converting previously issued
securities (e.g., convertible bonds) into shares (Section 40(1)(a)-(c)).

CHALLENGING THE BOARD’S DECISION: If someone disagrees with the board’s

assessment of whether the consideration is adequate, they can only challenge it
according to Section 76, read with Section 77(2).

ISSUING SHARES: Once the company receives the consideration (receipt), the
shares are fully paid, and the company must update its records to include the
shareholder’s name in the securities register (Section 40(4)).

o Pro rata offers = give existing shareholders a right to buy new shares
proportionate to their voting power, with certain exceptions (like options or
capitalization shares).
o Consideration for shares can be anything of value, but the board decides if it's
adequate, and their decision can only be challenged under specific rules. Once
the shares are issued, the shareholder’s name must be recorded.

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 ODR 320

SHARES: RIGHTS AND CLASSES

CLASSES OF SHARES
BOARD'S AUTHORITY (SECTION 36(3)):
→ Unless the company's Memorandum of Incorporation (MOI) states
otherwise, the board of directors has the power to:
o Increase or decrease the number of shares the company has.
o Classify shares into different categories.
o Assign preferences, rights, or limitations to these shares (i.e.,
deciding what rights each class of shares will have).

SHARE CLASSIFICATION BASED ON RIGHTS:

"RIGHTS" = refer to the specific powers or privileges attached to a share, which help
categorize shares into different classes.

TWO KEY TYPES OF RIGHTS OFTEN USED TO CLASSIFY SHARES:

1. CONTROL RIGHTS (VOTING RIGHTS): These give shareholders the
power to vote on company matters (like appointing directors or making
major company decisions).
2. FINANCIAL RIGHTS (DIVIDENDS): These give shareholders the right to
receive a share of the company's profits (dividends).

→ These rights belong to the shareholder, and they can decide how to use them
(like selling or transferring their shares or voting in shareholder meetings).

COMMON CLASSES OF SHARES:

ORDINARY SHARES: These are the most common type of shares, usually carrying
voting rights and entitlement to dividends, though dividends are paid last after
preference shares.

PREFERENCE SHARES: These shares typically have priority over ordinary shares
when it comes to receiving dividends, but they may not carry voting rights.

o The board of a company can classify shares and give them different rights unless
the company's MOI restricts this.
o Shares are often classified by voting rights and dividend rights.
o Two common types of shares are ordinary shares (regular voting and dividend
rights) and preference shares (priority in receiving dividends but possibly no
voting rights).

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 ODR 320

CLASS RIGHTS
VOTING RIGHTS FOR SHARES (SECTION 36(2)):
→ Usually, each share has a voting right, meaning shareholders can vote on
important company decisions.
→ However, this is subject to:
o The Companies Act (the law that governs companies).
o The company’s Memorandum of Incorporation (MOI), which can set
different rules about voting rights.

MOI'S ROLE IN DEFINING SHARE RIGHTS:

→ The MOI can define the preferences, rights, and limitations of different
classes of shares (what each type of share can or cannot do, such as voting
or receiving dividends).
→ The rights attached to each type (or class) of shares must be listed in the
MOI (Section 36(1)(b)).

UNCLASSIFIED SHARES:
→ The company can have unclassified shares, meaning shares that don’t yet
belong to any specific class. The board can decide how to classify them later
(Section 36(1)(c) and 36(3)(c)).

SHARES WITHOUT PREDEFINED RIGHTS:

→ A company can also create a class of shares without specifying the rights or
limitations at first. The board can decide on these details before issuing the
shares (Section 36(1)(d) and 36(3)(d)).

DISTINGUISHING EACH CLASS OF SHARES:

→ Every class of shares (for example, "Class A" shares) must be given a
distinct designation to tell them apart from other classes (Section 36(1)(b)).

OWNERSHIP

OWNERSHIP OF SECURITIES:

“TRANSFER” IN CONTEXT OF SHARES REFERS TO A SERIES OF STEPS:

STEP 1: there must be an agreement to transfer.
STEP 2: there ought to be execution of the deed of transfer.
STEP 3: there must be a registration of transfer.

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 ODR 320

→ With unregistered transfers, the buyer becomes a “beneficial owner”, whilst

the seller remains the “registered shareholder” (nominee/agent) of the
buyer.
→ Sec 37(9): person acquires rights when their name is entered into the
securities register (Certified securities) OR ITO the rules of the Central
Securities Depository (uncertified securities).

NOMINEE/ BENEFICIAL HOLDINGS:

HOLDING SHARES ON BEHALF OF SOMEONE ELSE (SECTION 56(1)):

ISSUED SHARES (shares that a company has already sold) can be:
→ Held by one person but registered in the name of another person. In other
words, someone can own shares for the benefit of someone else.
→ This is allowed unless the company’s Memorandum of Incorporation (MOI)
says otherwise.

DISCLOSURE OBLIGATIONS FOR PUBLIC COMPANIES:

PUBLIC COMPANIES (companies whose shares are available to the public) have
certain obligations:
→ They must keep a register of anyone who has disclosed that they own
shares.
→ They must also disclose if someone holds more than 5% of the issued
shares (required when they publish annual financial statements).

BENEFICIAL INTEREST HOLDERS:

A beneficial interest holder is the person who enjoys the benefits of owning the
shares, even if the shares are registered in someone else’s name.
→ These beneficial interest holders can: Vote at a shareholder meeting under
certain conditions.

WHAT IS A BENEFICIAL INTEREST?

IT INCLUDES:
1. Rights to vote on company decisions.
2. Being listed in the company’s register or disclosure list.
3. Appointing a proxy to vote on their behalf (a proxy is someone who votes for
you).

DEMANDING A PROXY APPOINTMENT:

→ A beneficial owner can demand that the person holding the shares (the
registered holder) appoint a proxy to vote on their behalf when there is a
dispute.

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 ODR 320

HOW TO DEMAND A PROXY:

→ Send a written demand to the registered holder (following the rules in
Section 56(11) or the requirements of a central securities depository).

DEBENTURES AND DEBT INSTRUMENTS:

→ ITO CL, debenture is an acknowledgement of debt in favour of the holder as
creditor of the company for a specified amount with a right to interest as
stipulated.
→ DEBT INSTRUMENT: any securities other than the shares of the company,
irrespective of whether they are issued in terms of a security document such
as a trust deed (does not include promissory notes and loans (sec 43(1)(a)).
→ The board is authorized to issue debt instruments, unless the MOI provides
otherwise.

DEBT INSTRUMENT TERMS AND TRUSTEES:

→ Security doc
→ Trustee appointment
→ Any provision in a trust deed that indemnifies a trustee/ limits their liability is
void = sec 43(7).

SECURITY OFFERS:

GENERAL:
→ seller must provide info to the buyer
→ security offer may happen in primary or secondary market
→ both markets have certain disclosure requirements
→ three principles are usually used to determine whether there must be
disclosure:
o must be an offer
o of securities
o made to public

PRIMARY MARKET:
→ The primary market is where companies sell new securities (like shares or
bonds) to the public for the first time. This is how companies raise capital by
issuing new securities.

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 ODR 320

PRIMARY OFFER (SECTION 95(1)(I)):

→ A primary offer is when a company (or another company on its behalf) offers
new securities (shares, bonds, etc.) to the public for sale.
o EXAMPLE: If a company issues new shares and sells them to the
public, that’s a primary offer.

EXCLUSIONS FROM PRIMARY OFFERINGS:

There are certain exclusions to initial primary offerings (IPOs):
→ LISTED SECURITIES (securities already traded on a stock exchange): These
must follow the rules of the relevant stock exchange.
→ UNLISTED SECURITIES (not traded on an exchange): These must be
accompanied by a prospectus, which is a document that provides detailed
information about the company and the offering, as required by Section 100
of the Companies Act (CA).

WHO CAN OFFER SECURITIES TO THE PUBLIC?

→ Only a company or a foreign company can offer securities to the public
(Section 99(1)).

IPOS AND PROSPECTUS (SECTION 99(2)):

→ An IPO (Initial Public Offering) is when a company offers its shares to the
public for the first time.
→ IPOs must be accompanied by a registered prospectus, which is a
detailed document that meets the requirements of the Companies Act. This
prospectus helps potential investors understand the company and the risks
involved.

OFFERS, ACCEPTANCE AND ADVERTISEMENTS (PRIMARY MARKETS)

OFFERS IN PRIMARY MARKETS (SECTION 96):

NOT ALL OFFERS ARE MADE TO THE PUBLIC:
→ An offer is not considered public if it falls under the specific circumstances
mentioned in Section 96.
o For example, a secondary offer (the sale of previously issued shares
through a stock exchange) is not considered a public offer.
→ Gold Field v Harmony Gold case clarified that certain offers do not count as
public offers.

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PROSPECTUS AND TIME LIMITS:

1. SECTION 99(11):
o A prospectus (a detailed document explaining the offer and the
company) must be issued within three months of being registered.
This ensures that investors have up-to-date information.
2. SECTION 107:
o An offer to the public can only be made within four months of filing the
prospectus. This means the company has a limited time to make the
offer after the prospectus is submitted.

ADVERTISEMENTS RELATED TO THE PROSPECTUS:

→ After the prospectus is published, a company can release an advertisement
to let the public know about it. However, the advertisement must follow strict
rules:
1. Clearly state that it is not a prospectus: The ad must make it clear
that it’s just an ad, not the full legal document.
2. Indicate where to get the full prospectus: The ad must tell people
where or how they can get the actual prospectus.
3. No untrue statements: The ad cannot include false information.
4. Not mislead: The ad should not trick people into reading it or mislead
them about the offer.
5. Comply with the law: The ad must follow the rules in Sections 102-
111 of the Companies Act.

o Not all offers are public, like secondary offers through an exchange.
o A prospectus must be issued within 3 months of registration and offers can only
be made within 4 months of filing the prospectus.
o Advertisements about a prospectus must be clear that they’re not the actual
prospectus, tell people where to find the full document, avoid false statements,
and follow the law.

PROSPECTUS CONTENT AND LIABILITY (PRIMARY MARKETS)

REGISTRATION AND COMPLIANCE:

→ Once the prospectus meets all legal requirements and is registered with the
CIPC, it becomes an official document that a company can use to offer
securities (like shares) to the public.

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WHAT MUST A PROSPECTUS CONTAIN?

1. Prescribed specifications: the prospectus must include certain specific
information as required by the law.
2. Relevant information for investors: it must provide all the important details
that an investor would reasonably need to know in order to make an informed
decision.
3. Material information about the securities: this means all significant facts
about the securities being offered must be included, as per the companies
regulations.

DIFFERENT INFORMATION BASED ON THE TYPE OF OFFER:

→ The type of information required in the prospectus depends on whether the
offer is:
1. Limited (reg 55): for a specific group of people or a small audience.
2. General (reg 56): available to the general public.

LIABILITY FOR FALSE INFORMATION (SECTIONS 104 AND 106):

→ If the prospectus contains any untrue statements, the people authorized to
release the prospectus (not just the company) can be held legally
responsible.
→ This includes any false information in the prospectus, reports, or related
documents.

SECONDARY MARKET
→ The secondary market is where existing securities (like shares or bonds)
are traded between investors, rather than being sold by the company that
originally issued them.

KEY RULES (SECTION 101):

→ Section 101: Any transactions or actions in the secondary market must follow
the rules set out in the Companies Act.

PROSPECTUS OR WRITTEN STATEMENT:

→ Section 101(4)-(6):
o If a company issues a prospectus (a formal document with information
about securities) or a written statement about securities in the
secondary market, these documents must be properly registered.

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VALIDITY PERIOD:
→ A prospectus is valid for 4 months after being filed (Section 107).
→ A written statement is valid for 3 months from the date it is registered
(Section 101(4)).

UNTRUE STATEMENTS:
→ If a written statement contains any untrue or false information, it’s
considered an offense under the law.

LIABILITY FOR FALSE INFORMATION:

→ If there is an untrue statement, liability arises under common law through the
delict of misrepresentation.
→ This means someone can be held responsible for making false statements
that mislead others, causing harm or financial loss.

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CORPORATE GOVERNANCE-
SHAREHOLDERS
GENERAL:

SECTION 57(2)
→ When a company has only one shareholder (and it’s not a state-owned
company), that shareholder can exercise all the voting rights on any matter
at any time, without needing to give notice.
→ However, this is subject to the company's MOI (Memorandum of
Incorporation). If the MOI says otherwise, then those rules apply.

SECTION 57(4)
When all shareholders are also directors of a company (again, not a state-owned
company):
→ Any matter that the board would usually need to refer to shareholders for a
decision can be decided by these individuals directly (because they are both
shareholders and directors).
→ These decisions can be made at any time after the board refers them for
shareholder approval, and there’s no need to follow the usual formalities (like
calling a meeting and giving notice).
→ However, certain conditions must still be met:
o All the individuals (shareholders/directors) must be present at the
board meeting.
o There must be enough people present, in their capacity as
shareholders, to meet the quorum requirements (minimum number of
people needed for a valid decision).
o The decision (resolution) must meet the requirements of an ordinary
resolution or a special resolution depending on the nature of the
matter being decided.
→ When these individuals are acting as shareholders, they don’t need to follow
the formalities laid out in sections 73 to 78 of the Companies Act (which
generally deal with board meetings, director's duties, and so on).

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SECTION 57(3)
→ In the case where there is only one director, the company doesn’t have to
comply with the usual formalities that would normally apply to board meetings.

o If there’s only one shareholder or all the shareholders are also directors,
things can be much more flexible in terms of making decisions, without the need
for formal procedures or notices.
o However, there are still some minimum requirements (like quorum and meeting
certain resolution thresholds) that must be met.
o Sections 73 to 78, which usually apply to directors and board meetings, don’t
need to be followed if these individuals are acting as shareholders instead of
directors.

COMPULSORY AGM (SEC 61)

ANNUAL GENERAL MEETING = (AGM)

→ A company must hold its first AGM within 18 months of being incorporated
(starting as a company).
→ After the first one, the company must hold an AGM every year.
→ Each AGM must be held within 15 months of the previous AGM, or within a
longer period if the Tribunal grants an extension (according to Section
61(7)).

WHAT SHOULD BE DISCUSSED AT THE AGM:

1. DIRECTOR REPORTS: The board of directors must present a report about
the company’s performance and activities.
2. AUDITED FINANCIAL STATEMENTS: The company needs to present its
audited financial statements for the previous financial year (to give
shareholders an overview of the company’s financial health).
3. AUDIT COMMITTEE REPORT: A report from the audit committee, which
reviews the company’s financial reporting and internal controls.
4. ELECTION OF DIRECTORS: If the Act or the company’s MOI requires the
election of directors, it must be done at the AGM.
5. APPOINTMENT OF AUDITORS: The company needs to appoint auditors for
the next financial year to handle the audit of its financial records.
6. APPOINTMENT OF AN AUDIT COMMITTEE: The company must appoint an
audit committee to oversee financial reporting.
7. ANY OTHER MATTERS RAISED BY SHAREHOLDERS: Shareholders can
bring up and discuss any other relevant issues during the AGM.

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MEETINGS: ALL COMPANIES (SEC 61)

WHO CAN CALL A SHAREHOLDER MEETING?

→ Section 61(1): The board of directors has the authority to call a shareholder
meeting.
→ Additionally, any other person specified in the company's MOI can also call a
meeting.

WHEN SHOULD A COMPANY HOLD A SHAREHOLDER MEETING?

The company needs to hold a shareholder meeting in the following cases:
→ Whenever the board is required to present a matter to the shareholders.
→ Whenever it's required by Section 70(3), which relates to matters involving
the election or removal of directors.
→ Whenever the MOI of the company specifically requires a meeting to be held.

WHAT HAPPENS IF THERE ARE NO DIRECTORS OR THE DIRECTORS ARE

INCAPACITATED?
→ Section 61(11): If there are no directors available (or the directors are unable
to act due to incapacity), any other person authorized by the MOI can call
the meeting.
→ If no one is authorized in the MOI to call the meeting, the matter can be
referred to the Companies Tribunal, which will decide on calling the meeting.

NOTICE OF MEETINGS

FORM AND CONTENT:

→ The notice must be written.
→ It should clearly state the date, time, and place of the meeting.
→ It must include the record date (the cut-off date to determine who is eligible to
attend and vote).
→ The notice should explain the general purpose of the meeting and any
specific purpose (if applicable).
→ If the meeting involves an amendment to the company's MOI that might
negatively affect shareholders' rights or share limitations, shareholders must
be informed about their rights as per Section 164(2) (this section deals with
dissenting shareholder rights, like appraisal rights).

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 ODR 320

→ The notice must include a copy of the proposed resolution that will be
voted on, along with the required percentage of voting rights needed to
pass it.
→ Information about proxies (a shareholder’s right to appoint someone else to
vote on their behalf) should be provided.
→ Attendees must bring satisfactory identification to the meeting.
→ If the notice is defective (e.g., missing information), it can still be valid if all
shareholders unanimously agree to ratify it.

NOTICE PERIOD:
The company is required to deliver the notice within specific timeframes:
→ 15 business days before the meeting for all public companies and Non-
Profit Companies (NPCs) with members.
→ 10 business days before the meeting for any other company with
shareholders (e.g., private companies).

QUORUM:
DEFINITION: A quorum is met when holders of 25% of all shareholders who are
entitled to vote are present. This includes those attending in person or by proxy (a
person authorized to vote on behalf of a shareholder).

IF THE QUORUM IS NOT MET:

If there aren’t enough shareholders (i.e., quorum) present within 1 hour of the
scheduled meeting start:
→ The meeting must be postponed by one week.
→ No additional notice needs to be given about the new meeting, unless there
is a specific rule in the company's MOI that requires extra notice.
→ If there is still no quorum at the rescheduled (postponed) meeting, the
shareholders present at that time will be considered the quorum,
meaning the meeting can go ahead with whoever shows up.

PERSON LEADING THE MEETING:

The person presiding over the meeting (e.g., the chairperson) must:
→ Verify the identity of the shareholders present.
→ Confirm that each person has the right to participate in the meeting, either
as a shareholder or a proxy.

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CONDUCTING MEETINGS:
→ Electronic Communication.

CONDITION FOR USING ELECTRONIC COMMUNICATION:

The key requirement for using electronic communication is that it must allow
everyone participating in the meeting to:
→ Participate simultaneously (at the same time).
→ Participate effectively, meaning they must be able to hear, speak, and
engage in the discussions as if they were physically present.

MOI EXCEPTION:
→ The company’s MOI may set different rules regarding the use of electronic
communication. If the MOI specifies something else, those rules must be
followed (as per Section 63(3)).

RESOLUTIONS:
Resolutions (decisions proposed for voting) must be clear and specific, and they
must come with enough information for shareholders to understand what they are
voting on.

TYPES OF RESOLUTIONS:
→ ORDINARY RESOLUTION: This passes with a simple majority of 50% + 1
of the votes.
→ SPECIAL RESOLUTION: This requires a higher majority of 75% of the
votes to pass.
o These percentages are based on voting rights, meaning
shareholders' voting power depends on the number of shares they
hold.

WHEN A SPECIAL RESOLUTION IS REQUIRED:

→ A special resolution is required for certain important decisions, like changing
the company's MOI, selling a large part of the business, or altering
shareholder rights.

MOI EXCEPTIONS:
→ The company’s MOI may set different percentages for special resolutions or
for specific matters, as per Section 65(9) and (10).

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VOTING:

METHODS OF VOTING:
Voting can be done either by:
→ Show of hands: Each person gets one vote, no matter how many shares
they own.
→ Poll: Each person can use all the voting rights attached to the shares they
own, meaning the more shares you hold, the more votes you get.

WHEN VOTING BY POLL IS REQUIRED:

A vote must be conducted by poll (where voting rights are based on shares) if it is
requested by:
→ At least 5 people who have the right to vote, or
→ People who control at least 10% of the total voting rights on the matter
being voted on.

PROXIES (SEC 58)

A PROXY is someone a shareholder appoints to act on their behalf at a meeting.
This can be:
→ A person who will participate, speak, or vote for the shareholder at the
meeting.
→ Someone who can give or withhold written consent on decisions made
outside of a meeting, as described in Section 60.

WHO CAN BE A PROXY?

→ The appointed proxy can be anyone, including a non-shareholder (someone
who doesn’t own shares in the company).

REQUIREMENTS FOR APPOINTING A PROXY:

The appointment must be:
→ In writing.
→ Dated and signed by the shareholder.

VALIDITY OF PROXY APPOINTMENT:

→ A proxy appointment is typically valid for one year, unless a shorter or longer
period is specified in the appointment.
→ The appointment can also end earlier if it is revoked or expires before that
time.

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BARRY V CLEARWATER ESTATES

In this case, the court dealt with the issue of proxy appointments at shareholder
meetings and whether a company can impose time limits on when a proxy must be
submitted.

KEY ISSUE:
→ A company cannot require that a proxy be lodged (submitted) before a
specific time in order for it to be valid. In other words, shareholders should not
be restricted by a company's rules to submit their proxy before a set deadline.

SCA (SUPREME COURT OF APPEAL) DECISION:

→ The SCA agreed with the earlier court’s decision (court a quo) on this issue.
→ The SCA ruled that Section 58(1) of the Companies Act is unalterable,
meaning that companies cannot change or override this rule through their own
policies or documents (such as the Memorandum of Incorporation).
→ The court looked at the plain language of Section 58(1)(a) and Section
58(3)(c) of the Act, which clearly state that a shareholder has the right to
appoint a proxy and that companies cannot impose conditions that would limit
this right.

o Companies cannot impose deadlines on when proxies must be submitted.

o Section 58(1) of the Companies Act is a firm rule that companies cannot change.
o The SCA interpreted the law based on its clear wording, confirming the
protection of shareholders' rights to appoint proxies without unnecessary
restrictions.

SHAREHOLDER ACTING OTHER THAN AT MEETING = SECTION 60

SECTION 60 = This section allows shareholders to make decisions without having to

hold a formal meeting.

HOW CAN SHAREHOLDERS ADOPT A RESOLUTION?

→ Shareholders can adopt a resolution by providing written consent. This
means that instead of voting in a meeting, they can agree to a decision by
signing a document.

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WHEN IS A WRITTEN RESOLUTION VALID?

→ A written resolution is considered adopted if it receives support from
shareholders who hold enough voting rights to meet the requirements for an
ordinary or special resolution.
o An ordinary resolution needs more than 50% of the votes.
o A special resolution needs 75% of the votes.

EFFECT OF WRITTEN RESOLUTIONS:

→ A written resolution has the same effect as if the shareholders had voted on it
during a formal meeting.

NOTICE REQUIREMENTS:
→ Even though it’s not a meeting, the resolution must still comply with notice
requirements, meaning that shareholders should be informed about the
content of the resolution.

COMMON LAW RESOLUTIONS:

→ Shareholders can also pass resolutions based on common law by
unanimous consent, which means that if all shareholders agree, they can
make decisions without following the usual procedures.

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CORPORATE GOVERNANCE-
DIRECTORS
GENERAL:

DEFINITION OF A DIRECTOR:
A Director is a member of the board of a company, as described in Section 66 of the
Companies Act.
→ This includes an alternate director (someone acting in place of a director).
→ Anyone who occupies the role of a director or alternate director, regardless of
what title they are given, is considered a director.

SECTION 66(1) – ROLE OF THE BOARD:

→ The company’s board manages the business and affairs of the company.
→ The board has the authority to make decisions and perform any actions for
the company, unless restricted by the law or the company’s (MOI).

MINIMUM NUMBER OF DIRECTORS:

The law sets MINIMUM REQUIREMENTS for the number of directors:
→ One director for a private company or personal liability company.
→ Three directors for a public company or a non-profit company (NPC).

DIRECTOR REMUNERATION:
→ Directors can be paid (remunerated), unless the company’s MOI says they
cannot.
→ The payment (remuneration) must be approved by a special resolution
within the last two years, according to sections 66(8) and 66(9) of the
Companies Act.

TYPES OF DIRECTORS:
There are DIFFERENT TYPES OF DIRECTORS:
→ EXECUTIVE DIRECTORS (involved in day-to-day management).
→ NON-EXECUTIVE DIRECTORS (not involved in daily management, but part
of the board).
→ INDEPENDENT DIRECTORS (have no personal ties or financial interests in
the company).
o No statutory distinction between the three

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ELECTION AND APPOINTMENT

ELECTION OF DIRECTORS:
→ Directors are elected by shareholders who have voting rights in the company.

APPOINTMENT OF DIRECTORS:
→ The company’s (MOI) may include provisions for how directors are appointed.
→ Directors can be named, or their selection determined by rules outlined in the
MOI.
→ Ex officio directors are those who hold the position automatically because
they hold another office or title (e.g., the CEO may automatically be a
director).
→ Alternate directors are appointed to act in place of a director when the main
director is unavailable.

PROFIT COMPANIES:
→ In a profit company, shareholders must appoint at least 50% of the directors.

SEC 66(7): a person becomes eligible to serve as a director once the person is
appointed and delivers written consent

REMOVAL OF DIRECTORS:

SECTION 71(3) – REMOVAL OF A DIRECTOR BY THE BOARD:

If a company has more than two directors, and a shareholder or another director
claims that a director has:
→ Become ineligible or disqualified (unable to serve as a director).
→ Become incapacitated (unable to perform their duties).
→ Neglected their responsibilities or been derelict in their duties (failed to
perform their role properly).
The BOARD MUST INVESTIGATE the matter and can remove the director through
a resolution (a formal decision).

SECTION 71(4) – DIRECTOR’S RIGHT TO DEFEND:

The director being removed must be given:
→ Notice of the decision and the proposed resolution to remove them.
→ A statement explaining the reasons for their removal.
→ An opportunity to present their side before the final decision.

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SECTION 71(5) – TIME TO REVIEW DECISION:

→ The director has 20 business days to review the decision and potentially
challenge it.

SECTION 71(8) – WHEN THERE ARE LESS THAN TWO DIRECTORS:

If a company has less than two directors and a shareholder or director claims a
director is:
→ Ineligible, disqualified, or incapacitated.
→ Has neglected or failed in their duties.

The shareholder or director can apply to a tribunal to make the final decision.

SECTION 71(9) – CONSEQUENCES OF REMOVAL:

After removal, the director may lose:
→ Their position as a director.
→ Any other related office (e.g., if they hold other roles connected to being a
director).

Additionally, common law (CL) or other legal remedies may still apply depending
on the case.

INELIGIBILITY

SECTION 69(7) – WHEN SOMEONE IS INELIGIBLE TO BE A DIRECTOR:

A person cannot serve as a director if:
→ They are a juristic person (like a company or organization, not a natural
person).
→ They are an unemancipated minor (a child who is not legally independent)
or have a similar legal disability.
→ They do not meet the qualifications required by the company's (MOI).

APPLICATION TO OTHERS:
The rules on ineligibility also apply and extent to:
→ Alternate directors (those who act in place of a director).
→ Prescribed officers (key executives with significant responsibilities).
→ Board committee members and members of an audit committee.

MOI CAN ADD MORE INELIGIBILITY RULES:

→ A company’s MOI can include additional reasons that make someone
ineligible to be a director.

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DISQUALIFICATION

DISQUALIFICATION – WHO CANNOT ACT AS A DIRECTOR:

Even if someone is eligible, they are disqualified from being a director if:
→ A court has prohibited them from serving as a director.
→ They have been declared delinquent under:
o Section 162 of the Companies Act.
o Section 47 of the Close Corporation Act.

CONDITIONS UNDER SECTION 69(9) – (12):

A person is disqualified if they are:
→ An unrehabilitated insolvent (someone declared bankrupt and not yet
cleared).
→ Prohibited by a public regulation from serving as a director of the company.
→ Removed from a position of trust due to misconduct involving dishonesty.
→ Convicted of a crime (in South Africa or elsewhere) and either:
o Sent to prison without the option of a fine.
o Fined above a certain amount for specific offenses.

ADDITIONAL GROUNDS SET BY MOI:

The company’s (MOI) can:
→ Include more grounds for disqualification.
→ Set minimum qualifications that directors must meet.

VACANCIES:

WHEN A DIRECTOR’S POSITION BECOMES VACANT:

A person stops/ceases being a director if:
→ Their term expires (if the term is fixed in the company's MOI).
→ They resign or pass away.
→ An ex officio director loses the title or office that made them a director (e.g., if
they were a director because they were the CEO and they stop being the
CEO).
→ They become incapacitated (unable to perform their duties).
→ They are declared delinquent or put on probation.
→ They become ineligible or disqualified.
→ They are removed by:
o Shareholders,
o Directors, or
o A court order.

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HOW TO FILL THE VACANCY:

→ A new appointment can be made to fill the position.
→ The vacancy can be filled at the next Annual General Meeting (AGM).
→ Alternatively, a shareholder meeting can be called to fill the vacancy within 6
months.

MANAGEMENT: MEETINGS

SECTION 74(1) – CALLING A BOARD MEETING:

A board meeting can be called by:
→ An authorized director.
→ 25% of the directors, if the company has 12 or more directors.
→ Two or more directors, if the company has fewer than 12 directors.

MEETING DETAILS:
→ Meetings can happen via electronic communication (e.g., video or phone
calls).
→ Notice of the meeting must be given to all directors.
→ A quorum (the minimum number of directors needed to make decisions) is
the majority of the directors.
→ Each director gets one vote during the meeting.
→ Decisions can be made either by:
o A written resolution, or
o Through electronic communication if not meeting in person.

MEETING MINUTES:
→ Minutes (a written record of the meeting) must be kept.
→ Purpose of minutes:
o To document what was discussed and decided during the meeting.
o To provide a record that can protect the board, showing they acted
responsibly and followed proper procedures.
→ SIGN-OFF: The minutes need to be approved and signed off by the board.
→ RETENTION: The minutes should be kept for a long period (typically as long
as the company exists or according to legal requirements) to ensure there’s a
clear historical record of decisions.

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MANAGEMENT: BOARD AND COMPANY COMMITTEES

SOCIAL AND ETHICS COMMITTEE (REGULATION 43):

This committee is compulsory for certain companies, specifically:
→ Listed public companies (companies that are traded on the stock
exchange).
→ State-owned companies (SOCs).
→ Companies that have 500 or more public interest points in two of the past
five financial years (based on factors like turnover, employee numbers, and
social impact).

AUDIT COMMITTEE (SECTION 94(2)):

An audit committee is compulsory for:
→ Public companies.
→ State-owned companies (SOCs).
→ Any company where the (MOI) requires an audit committee.
These committees are responsible for overseeing the company's financial integrity
and ethical practices.

COMMON LAW DUTIES

COMMON LAW (existing legal principles developed by court decisions) still applies
to directors' duties, as long as it doesn’t conflict with the Companies Act.

FIDUCIARY DUTIES:
→ Fiduciary duties refer to the responsibilities of someone who holds a position
of trust and responsibility in a company.
→ This person must act bona fide (in good faith) and in the best interests of the
company.
o EXAMPLES OF COURT CASES: Da Silva v CH Chemicals and
Novick v Comair.

AVOIDING CONFLICTS OF INTEREST:

→ Directors must avoid any conflict of interest (situations where their personal
interests could clash with the company’s interests).
o RELEVANT CASES: Phillips v Fieldstone.

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DUTY OF CARE AND SKILL:

→ Directors must perform their duties with care, skill, and diligence, meaning
they should act responsibly and use their expertise to make decisions that
benefit the company.

STANDARDS OF DIRECTORS CONDUCT STANDARDS OF CONDUCT

SECTION 76 – STANDARDS OF DIRECTOR CONDUCT:

Directors must not use their position or any information they get as directors to:
→ Gain personal advantage, or
→ Harm the company.

DIRECTORS MUST ACT:

→ In good faith and for a proper purpose.
→ In the best interests of the company.
o FOR EXAMPLE, in Visser Sitrus v Goede Hoop, it was confirmed
that directors must act in the company’s best interest.
→ With a degree of care, skill, and diligence that a reasonable person would
expect from someone in a similar position:
o OBJECTIVE STANDARD: What’s expected from anyone carrying out
the same role.
o SUBJECTIVE STANDARD: Considering the director’s own
knowledge, skill, and experience.

BUSINESS JUDGMENT RULE:

→ Directors who act in good faith and take reasonable steps to be informed
can be protected by the business judgment rule.
o However, misconduct, recklessness, or dishonesty is not
protected by this section (as highlighted in OUTA v Myeni).

VISSER SITRUS V GOEDE HOOP

CASE BACKGROUND:
→ In this case, directors refused to allow a transfer of shares to a shareholder,
and this decision was challenged in court.

COURT'S ASSESSMENT:
→ The court looked into the duties of directors and what it means to act in the
best interests of the company.

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KEY FINDINGS:
To determine if a director is acting in the best interests of the company, the court
applied a SUBJECTIVE TEST. This means:
→ The director’s belief in their actions must have a rational basis (according to
Section 76(4)).
The rationality criterion is OBJECTIVE. The court focused on:
→ The actual purpose for which the directors exercised their power.
→ Whether this actual purpose matched the intended purpose of that power.
→ Ensuring that their actions were in the best interests of the company.
→ Acting with the care, skill, and diligence that could reasonably be expected
from someone in that role.

FINAL HOLDING:
The court concluded that the directors had indeed acted in the best interests of the
company by refusing the share transfer because:
→ They were well-informed about the situation.
→ They genuinely believed they were acting in the company’s best interests.
→ They acted rationally to prevent one shareholder from increasing their
shareholding, which could negatively impact the company.

The court found that the STANDARD REQUIRED under Section 76 had been met,
meaning the directors fulfilled their duties properly.

BUSINESS JUDGEMENT RULE

The business judgment rule allows directors to defend their decisions when
accused of not properly fulfilling their fiduciary duties. It recognizes that directors
should have the freedom to make business decisions without fear of being held
liable, as long as they meet certain criteria.

REQUIREMENTS FOR PROTECTION UNDER THE RULE:

To be protected by the business judgment rule, a director must show that they:
1. Took diligent steps to be properly informed about the situation or
decision they were making.
2. Had no personal financial interest in the matter at hand and complied
with Section 75 of the Act (which governs conflicts of interest).
3. Rationally believed that their decision was in the best interest of the
company.

In the case of OUTA v Myeni, the court clarified that the business judgment rule only
protects directors who act in good faith. This means their intentions and actions
should be honest and aimed at benefiting the company.

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→ In summary, the business judgment rule provides a protection for directors,

but it requires them to be well-informed, conflict-free, and act with good
intentions.

STATUTORY DUTIES – DISCLOSURE

COMMON LAW POSITION (CL): CONFLICT OF (PERSONAL FINANCIAL)

INTEREST
→ Under the act, prohibition of secret profit rule is retained
→ Effect of conflict of interest is modified by the Act = where no disclosure is
made = INVALID CONTRACT

SEC 76(2)(B): GENERAL DUTY TO DISCLOSE

DUTY TO COMMUNICATE: Directors must inform the board about any relevant
information they become aware of as soon as they can.

EXCEPTIONS: There are certain circumstances where a director does not have to
share this information:
→ Immaterial Information: If the information is not significant or relevant to the
company’s operations or decision-making, it does not need to be disclosed.
→ Publicly Available Information: If the information is already available to the
public or known by other directors, the director does not need to communicate
it again.
→ Confidential Obligations: If the director is legally or ethically required to
keep the information confidential (such as trade secrets or sensitive personal
data), they must not disclose it.

In essence, directors have a responsibility to keep the board informed, but there are
specific situations where they can hold back information if it is not important, already
known, or confidential. This duty helps ensure transparency while also respecting
privacy and confidentiality obligations.

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DIRECTORS INTEREST IN CONTRACTS:

WHO QUALIFIES AS A DIRECTOR:

The term "director" is broad and includes:
→ Regular directors.
→ Alternate directors (those who temporarily fill in for regular directors).
→ Prescribed officers (specific high-ranking officials in the company).
→ Members of board committees (those who serve on specific sub-groups of the
board).

DISCLOSURE OF INTERESTS:
When a director (or any of the individuals mentioned above) has a personal financial
interest in a matter that is being discussed (such as a contract), they must:

1. DISCLOSE THEIR INTEREST:

→ Clearly state their interest and describe its general nature. For example, if
they stand to gain financially from a decision, they need to explain this.

2. PROVIDE MATERIAL INFORMATION:

→ Share any important details related to the matter that the board needs to know
in order to make an informed decision.

3. OFFER OBSERVATIONS OR INSIGHTS:

→ If they have relevant insights or observations about the matter, they should
communicate these to the board.

RECUSAL FROM THE MEETING:

→ The director must leave the meeting while the matter is being discussed.
→ Their absence will not affect the meeting's quorum, meaning the meeting can
still proceed and make decisions without them.

PROHIBITION ON PARTICIPATION:
→ The director must not participate in any discussions or decisions related to
that matter, ensuring that they do not influence the outcome in a way that
could benefit their personal interests.

Overall, Section 75 establishes clear rules for directors about how to handle
situations where they have a personal financial interest in a company matter. It
emphasizes transparency through disclosure and maintaining integrity by requiring
directors to excuse themselves from discussions that may conflict with their interests.

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EFFECT OF PERSONAL INTEREST ON CONTRACTS

When a director has a personal financial interest in a transaction or contract, it can
still be considered valid under certain conditions:

APPROVAL UNDER SECTION 75:

→ The transaction must be approved according to the rules set out in Section
75. This means that the director disclosed their interest, and the board agreed
to proceed with the contract despite that interest.

SUBSEQUENT RATIFICATION:
If the transaction was initially approved without the necessary disclosure, it can still
be validated later in two ways:
→ ORDINARY RESOLUTION: The board or shareholders can pass a simple
majority vote (an ordinary resolution) to approve the transaction after the fact.
→ COURT DECLARATION: A court can rule that the transaction is valid,
effectively confirming that it can stand despite the earlier lack of disclosure.
This ensures that important transactions are upheld while still addressing potential
conflicts of interest.

DISCLOSURE TO SHAREHOLDERS:
When a person is the only director of a company but there are other shareholders
who hold beneficial interests (meaning they benefit from the company’s profits or
assets), the director must follow specific rules regarding decisions and agreements
that involve their own interests:

DIRECTOR'S LIMITATIONS:
The director cannot:
→ Approve or enter into any agreement.
→ Make decisions on other matters where they or a related person have a
beneficial interest.

CONDITIONS FOR APPROVAL:

The director can only proceed with such agreements or decisions if:
→ ORDINARY RESOLUTION: They receive approval from the other
shareholders through a simple majority vote (ordinary resolution).
→ DISCLOSURE: Before this vote, the director must inform the shareholders
about the nature and extent of their interest in the agreement or decision.
This rule helps ensure transparency and fairness in company operations, preventing
potential conflicts of interest.

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RECKLESS TRADING
A company should not operate its business in a way that is:
→ Reckless: Acting carelessly or without consideration for the risks involved.
→ Gross Negligence: Showing a serious lack of attention to the company's
responsibilities.
→ Intent to Defraud: Intentionally trying to deceive or cheat someone.
→ Fraudulent Purpose: Engaging in activities meant to commit fraud.

HOWARD V HERRINGEL CASE:

DIRECTOR'S LIABILITY:
→ According to common law (CL), if a director is knowingly involved in fraudulent
activities, they can be held responsible for any losses that result from that
fraud.

LEGAL BASIS FOR LIABILITY:

→ This liability is outlined under Section 424 of the 1973 Companies Act.

ROLE OF CIPC (COMPANIES AND INTELLECTUAL PROPERTY COMMISSION):

→ If the CIPC suspects that a company is involved in fraudulent activities or that
it will not be able to pay its debts when they come due, they can step in and
issue a notice to the company.

CONSEQUENCES FOR DIRECTORS:

→ Directors can be held liable for any losses, damages, or costs that arise from
their actions if those actions involve reckless trading or fraud.

LIABILITY OF DIRECTORS:
Directors have specific duties they must uphold while managing a company. If they
fail to meet these duties, they can be held legally responsible.

REGULATION OF BREACH OF DUTIES:

→ Section 77(1) establishes that breaches of duties by directors (including
alternate directors and committee members) are subject to regulation.

LIABILITY UNDER COMMON LAW (CL):

→ According to Section 77, directors can be held liable based on common law
principles if they breach their fiduciary duties. This means they have a legal
obligation to act in the best interests of the company and its shareholders.

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TYPES OF DUTIES:
Directors can be held accountable for breaching the following duties:
→ DISCLOSURE DUTIES: Failing to provide important information to the board
or shareholders.
→ DUTY TO AVOID CONFLICT OF INTEREST: Not acting in situations where
their personal interests conflict with those of the company.
→ DUTY TO ACT IN GOOD FAITH: Making decisions honestly and in the best
interests of the company, rather than for personal gain.

DIRECTORS CAN ALSO BE HELD LIABLE INTO CL DELICT

Directors can be held responsible for losses, damages, or costs that result from their
actions or failures while performing their duties.

LIABILITY UNDER CL DELICT:

→ Directors may face liability under the common law principle of delict, which
deals with wrongful acts causing harm to others.

BREACH OF SPECIFIC DUTIES:

Directors can be held liable for:
→ DUTY OF SKILL, CARE, AND DILIGENCE: Directors must perform their
roles with the appropriate level of skill, care, and diligence expected of
someone in their position. If they fail to do so and cause harm, they can be
held liable.
→ OTHER PROVISIONS OF THE ACT: This includes any regulations or
requirements in the Companies Act that are not specifically mentioned in
Section 77. Directors must adhere to all relevant laws.
→ PROVISIONS OF THE (MOI): The MOI contains specific rules and guidelines
for the company's operations. If directors violate these provisions, they can be
held accountable for any resulting harm.

INSTANCES OF SPECIFIC LIABILITY:

Directors can be held liable for losses, damages, or costs incurred by the company
due to their actions or decisions in specific situations. Here are the key instances of
liability:

ACTING WITHOUT AUTHORITY:

→ If a director acts on behalf of the company but does not have the authority to
do so, they can be held responsible for any consequences that arise from
their actions.

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RECKLESS TRADING:
→ If a director agrees to let the company continue operating while knowing it is
engaging in reckless trading (meaning it's operating irresponsibly and may not
be able to pay its debts), they can be held liable for any resulting losses.

FRAUDULENT CONDUCT:
→ If a director knowingly participates in actions that are intended to defraud
others (like shareholders or creditors), they can be held responsible for the
negative outcomes of those actions.

FALSE FINANCIAL STATEMENTS:

→ Directors can be held liable for signing or consenting to financial statements
that are false or misleading. This also applies to any prospectus or written
statements that contain untrue information.

FAILING TO VOTE AGAINST IMPROPER DECISIONS:

→ If a director is present at a meeting where certain decisions are made and
fails to vote against actions that are unauthorized or improper, they can be
held liable for those actions. This includes:
o Issuing shares or securities without proper authorization or shareholder
approval.
o Providing financial assistance that does not comply with Sections 44
or 45 of the (MOI).
o Approving distributions that violate Section 46 of the Companies Act.

HOWARD V HERRINGEL
→ In the Howard v Herringel case, a director was not found guilty because they
trusted the company's lawyer, indicating that reliance on legal advice can
sometimes be a defense against liability. However, this does not absolve all
directors of responsibility; each situation is evaluated based on the director's
actions and knowledge.

OTHER LIABILITY

SHAREHOLDER CLAIMS (SECTION 20):

→ Shareholders have the right to seek damages against anyone, including
directors, if that person causes the company to act in a way that violates the
law (the Companies Act) or any limitations set by it.
→ This can happen if the director acts fraudulently or with gross negligence.
However, if the shareholders later approve the action (ratify it), the liability
may not apply.

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BINDING NATURE OF THE (MOI) (SECTION 15):

→ The MOI and any rules established by the company apply to both the
company itself and its directors or prescribed officers.
→ If a director or officer breaches these provisions, they can be held liable under
Section 77(2)(b).

RESTRAINING ACTIONS INCONSISTENT WITH THE MOI (SECTION 20(5)):

→ Shareholders, directors, and prescribed officers have the authority to stop the
company from taking actions that go against the rules set out in the MOI. This
means they can seek to prevent any unlawful behavior by the company.

LIABILITY FOR BREACHES OF THE ACT (SECTION 218(2)):

→ Any person who breaks any part of the Companies Act can be held liable to
others for any loss or damage that results from that violation. This includes
both directors and third parties who are affected by the breach.

HLUMISA INVESTMENT HOLDINGS V KIRKINS

The case involves a legal dispute between minority shareholders and the directors
and auditors of African Bank entities, focusing on losses related to the value of
shares.

BACKGROUND:
→ SCA (SUPREME COURT OF APPEAL): This case was brought by minority
shareholders against the directors and auditors of African Bank.
→ HIGH COURT (HC): The shareholders wanted to sue the directors and
auditors for damages resulting from a decrease in their share value. They
claimed the directors engaged in misconduct, while the auditors failed to
conduct proper audits according to generally accepted accounting principles.

REFLECTIVE LOSS RULE:

→ The High Court applied the rule against reflective loss. This rule means
that if both the company and its shareholders have claims against directors
based on the same facts, the shareholders' losses (reflected in their share
value) are considered merely a reflection of the company's actual losses. In
other words, shareholders cannot claim for losses that arise from a decrease
in share value if those losses are seen as a direct result of the company’s
loss.
→ The court ruled that the shareholders’ claims were not valid since they were
essentially claiming for losses already experienced by the company.

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HIGH COURT DECISION:

→ The High Court dismissed the shareholders' application, meaning they were
not successful in their claim against the directors and auditors.

SUPREME COURT OF APPEAL CONFIRMATION:

→ The SCA upheld the High Court's decision, which limited the application of
Section 281(2) and confirmed the rule against reflective loss.
→ This ruling helped clarify the idea of double compensation, where both the
company and shareholders would seek damages for the same loss, which
could lead to unfair results.

DERIVATIVE ACTION NOT USED:

The shareholders did not use derivative action (a legal action taken by
shareholders on behalf of the company) as outlined in Section 165 of the
Companies Act. This is a key point, as using this method might have allowed them to
bring claims on behalf of the company rather than directly for their personal loss.

OUTCOME:
→ Ultimately, the shareholders did not succeed in their application to claim
damages from the directors and auditors.

DE BRUYN V STEINHOFF

In the case of De Bruyn v Steinhoff, shareholders of Steinhoff alleged that the

company’s directors and auditors failed to fulfill their duties, leading to unlawful
transactions that misrepresented the company’s financial status.

ALLEGATIONS AGAINST DIRECTORS AND AUDITORS:

→ Shareholders claimed that the directors and auditors did not perform their
responsibilities according to common law (CL) duty of care and statutory
duties under the Companies Act.
→ Due to the directors' actions, Steinhoff’s financial statements were
manipulated—assets and income were overstated while liabilities and
expenses were understated.

IMPACT ON SHAREHOLDERS:
→ As a result, shareholders who purchased shares did so at inflated prices,
believing the company's value was higher than it truly was. If they had known
about the unlawful activities, they might have sold their shares instead.

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COMMON LAW CLAIM:

→ DIRECTORS’ FIDUCIARY DUTY: Directors owe their fiduciary duties to the
company itself, not directly to shareholders. This principle was reinforced by
the Foss v Harbottle rule, which states that only the company can claim for
wrongs done to it, not individual shareholders.
→ Thus, shareholders must depend on the company to pursue claims against
directors for breaches of duty. In this case, since the loss in share value was
linked to the directors' conduct, the court found that no wrongdoing was
proven, and therefore no common law liability was established against
Steinhoff.

STATUTORY CLAIM:
→ SECTION 218(2): This section allows for statutory claims but does not grant
shareholders a right to action against directors based on the alleged
contraventions.
→ SECTION 20(6): The court confirmed that this section holds individuals liable
for causing loss to the company but does not allow shareholders to directly
sue Steinhoff or its directors.

OTHER CLAIMS:
→ The shareholders also had potential claims based on misrepresentation and
false statements made in the company’s prospectus, but this aspect was not
fully addressed in the decision.
→ The request for class action certification was denied.

EXCLUSION OF DUTIES
This section explains the rules regarding the responsibilities of directors and the
limitations on any agreements or company documents that attempt to exempt
directors from their duties.

VOID PROVISIONS:
→ Any part of an agreement, Memorandum of Incorporation (MOI), company
rules, or company resolutions that tries to excuse a director from their
responsibilities is void (invalid). This includes:
o SECTION 75: Relating to personal financial interests of directors.
o SECTION 76: Establishing the standards of conduct for directors.
o SECTION 77: Addressing liability for breaches of fiduciary duties.

LIMITATIONS ON DIRECTORS' DUTIES:

→ Company documents cannot negate, limit, or restrict any legal consequences
that result from a director's actions or failures if those actions are considered:

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o WILLFUL MISCONDUCT: Intentionally engaging in wrongful acts.

o WILLFUL BREACH OF TRUST: Deliberately violating the trust placed
in them as a director.

INDEMNIFICATION

INDEMNIFICATION refers to the protection or compensation provided to directors by

a company against legal liabilities they may face in their role. This is generally done
through insurance or direct payment of legal expenses.

WHAT IS INDEMNIFICATION?
→ Indemnification means that a company provides insurance or compensation to
protect a director from liabilities or losses incurred while performing their
duties.

LEGAL BASIS (SECTION 78(1)):

→ Section 78(1) of the Companies Act allows companies to indemnify
directors, which includes directors broadly defined (not just those on the
board).

LIMITATIONS ON INDEMNIFICATION:
→ A company can indemnify its directors for most liabilities unless the (MOI)
states otherwise. However, indemnification cannot be provided for:
o ACTING WITHOUT AUTHORITY: If a director acts in the company’s
name without the required authority.
o RECKLESS OR NEGLIGENT BEHAVIOUR: If a director engages in
the company’s business recklessly, with gross negligence, or with
fraudulent intent.
o FRAUDULENT MISCONDUCT: If the director engages in fraud or
wilful misconduct/breach of trust.

LITIGATION EXPENSES:
→ The company may cover legal costs related to a director’s service to the
company. This includes:
o Paying for legal expenses incurred in lawsuits against the director.
o Indemnifying the director for these expenses if the legal proceedings
are either:
1. Abandoned (the lawsuit is dropped).
2. Determined that the company is allowed to indemnify the
director.

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COURT RELIEF:
→ A director has the right to apply to the court for relief if they seek
indemnification or if they face legal challenges.

DELINQUENCY

GROUNDS
Declaration of delinquency is set out at SEC 162(5): provides the grounds upon
which a person may be declared delinquent.
→ Delinquent director is barred from being a director in any company.
→ The court may impose the conditions on delinquency declarations under Sec
162(5)(c) -(f) and will last for at least 7 years (or longer- at discretion of the
court).
→ Person declared delinquent may apply to court 3 years after declaration for
suspension of such order.
→ Can also be set aside after a further 2 years.

WHO CAN APPLY:

PERSONS WITH A STANDING
→ Company
→ Shareholder
→ Director
→ Company secretary
→ Prescribed officer
→ Registered trade union that represents employees of the company
SEC 157: extending standings persons may also bring the application under the
CIPC (OUTA v Myeni).

GIHWLALA V GRANCY PROPERTY LTD

→ The case of Gihwlala v Grancy Property Ltd involves Grancy Property
taking legal action against directors of a joint venture, including Mr. Gihwala,
for their misconduct. The court ultimately found the directors delinquent for
failing to fulfill their responsibilities and for acting in a way that harmed the
company.

BACKGROUND:
→ Grancy Property was involved in a joint venture and sued other parties for
damages due to breaches of an investment agreement that governed their
relationship.

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→ The company also sought a court order to declare the directors of the joint
venture, including Mr. Gihwala, as delinquent under Section 162(5)(c) of the
Companies Act.

DELINQUENCY DECLARATION:
→ The court found that Mr. Gihwala and another director, Mr. Malala, were
delinquent. They were ordered to pay certain amounts to Grancy Property
based on their breach of the agreement.

APPEAL TO THE SCA:

The directors appealed to the Supreme Court of Appeal (SCA), which upheld the
delinquent order. The SCA justified its decision by highlighting the directors' failures,
including:
→ FAILURE TO MAINTAIN UPDATED RECORDS: They did not keep an
updated register of shares.
→ NEGLIGENCE IN ACCOUNTING: They failed to ensure the investment
company maintained proper accounting records.
→ GROSS NEGLIGENCE IN LOAN AUTHORIZATIONS: They authorized loans
that violated the previous Companies Act, causing financial loss to the
company.
→ BREACH OF FIDUCIARY DUTY: They failed to uphold their duties to the
investment company and Grancy Property, benefiting personally at the
company's expense.
→ WILLFUL MISCONDUCT: Their actions were intentional and showed a clear
disregard for their obligations.

CONSTITUTIONAL CHALLENGE:
The directors also challenged the constitutionality of Section 162(5)(c), arguing that:
→ The provision did not allow the court discretion to refuse a delinquency order if
the criteria were met.
→ It mandated a minimum seven-year ban without the option for the court to
impose a lesser penalty.
→ This rigidity could infringe on their constitutional rights, such as dignity and
access to courts.

COURT’S DECISION ON CONSTITUTIONAL CHALLENGE:

The court rejected the constitutional challenges, stating that:
→ The purpose of Section 162(5)(c) is to protect the investing public from
misconduct and ensure accountability among directors.
→ The provision is a reasonable means to achieve this aim.
→ Although the minimum exclusion is seven years, the court can, in appropriate
cases, reduce the period after three years and place the person on probation.

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OUTA V MYENI
→ Organisation Undoing Tax Abuse v Myeni

The case OUTA v Myeni involves former South African Airways (SAA) CEO, Dudu
Myeni, and her actions regarding two significant deals—one with Emirates and
another with Airbus. The court found her conduct to be delinquent, violating various
provisions of the Companies Act (CA).

RELATION TO SECTION 162:

→ The case is closely tied to Section 162 of the Companies Act, which outlines
grounds for declaring directors delinquent.

EMIRATES DEAL:
→ Myeni’s actions in blocking a deal with Emirates Airlines were deemed to
satisfy multiple grounds of delinquency under Section 162(5)(c) of the
Companies Act.

KEY FINDINGS:
→ Myeni’s conduct caused substantial harm to SAA, either intentionally or
through gross negligence.
→ Her late attempts to justify her actions demonstrated that she acted
dishonestly and not in good faith or in the best interests of SAA and the
country.

AIRBUS DEAL:
→ Myeni was found to have knowingly and willfully made misrepresentations to
Airbus and the Minister of Finance.
→ Her actions were characterized as deliberate dishonesty and a gross abuse of
her position as CEO, falling under Section 162(5)(c)(i).

UNAUTHORIZED ACTIONS:
→ Myeni also sent a letter to Airbus that constituted another breach of Section
77 (which concerns a director’s duties) in conjunction with Section 162.
→ She acted in the name of SAA while fully aware that she lacked the necessary
authority to do so.

DELINQUENCY FOR LIFE:

→ As a result of her actions, Myeni was declared a delinquent director for life,
meaning she is permanently barred from serving as a director of any
company.

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PROBATION
Certain grounds can lead to a director being placed on probation if they do not fulfil
their responsibilities appropriately while serving as a director.

PROBATION OF DIRECTORS:
→ A director may be placed on probation for specific reasons related to their
conduct in office.

KEY GROUNDS FOR PROBATION:

→ FAILURE TO VOTE AGAINST A RESOLUTION: If a director was present at
a meeting and did not vote against a resolution, even when the company did
not meet the solvency and liquidity (S&L) test (which assesses whether a
company can pay its debts), this could be a ground for probation.
→ INCONSISTENT CONDUCT: If the director acted in a way that significantly
contradicted their duties as a director, this could lead to probation.
→ SUPPORTING OPPRESSIVE CONDUCT: If the director acted in or
supported a decision that was deemed oppressive under Section 163 of the
Companies Act, they could face probation.
→ MULTIPLE COMPANY FAILURES: If, within a 10-year period, a director
was involved with more than one company or close corporation (CC), and two
or more of those entities failed to pay their creditors or meet their obligations,
this could also serve as grounds for probation.

PERSONS WHO MAY APPROACH COURT FOR PROBATION ORDER:

Certain individuals and entities are allowed to approach the court to request a
probation order against a director under Sections 162(7)(a) and 162(8) of the
Companies Act.

WHO CAN APPROACH THE COURT FOR A PROBATION ORDER?

→ COMPANY: The company itself can request a probation order against one of
its directors.
→ SHAREHOLDER: Any shareholder of the company has the right to approach
the court for a probation order.
→ DIRECTOR: Other directors of the company can also seek a probation order
against a fellow director.
→ COMPANY SECRETARY: The company secretary is allowed to bring a
request for a probation order.
→ PRESCRIBED OFFICER: Any prescribed officer of the company (a senior
official or manager) can also approach the court for this order.

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→ REGISTERED TRADE UNION: A registered trade union that represents the

company's employees can request a probation order on behalf of its
members.
→ COMPANIES AND INTELLECTUAL PROPERTY COMMISSION (CIPC): The
CIPC, which oversees company regulations, can also seek a probation order
against a director.

CONDITIONS: (CONSEQUENCES OF PROBATION)

When a director is placed on probation, certain conditions and consequences are put
in place to address their misconduct and ensure they improve their behaviour.

PROGRAM FOR REMEDIAL ACTION:

→ The director may be required to complete a program aimed at correcting their
behaviour or addressing the issues that led to probation. This could include
training or education related to their duties as a director.

DESIGNATED COMMUNITY SERVICE:

→ The director might be ordered to perform community service. This service is
intended to benefit the community and demonstrate accountability for their
actions.

COMPENSATION TO PERSONS AFFECTED:

→ The director may be required to pay compensation to individuals or entities
who were harmed by their actions while serving as a director. This ensures
that affected parties receive some form of restitution.

PROBATION SUPERVISION:
→ The director will be under supervision during their probation period. This could
involve working with a mentor or having certain limitations placed on their
ability to make decisions on behalf of the company, ensuring they are guided
in their actions.

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FUNDAMENTAL TRANSACTIONS
KEY SECTIONS TO NOTE
→ Section 112: Disposal of Assets or Business
o This section addresses the process of selling or transferring a
significant part of a company’s assets or business.
→ Section 113: Amalgamation or Merger Proposals
o This section outlines how companies can propose to merge or combine
their operations with another company.
→ Section 114: Arrangements
o This section covers various arrangements that companies can make,
potentially affecting their structure or operations.
→ Section 115: Approval for Fundamental Transactions
o Fundamental transactions require approval according to this section or
must follow a business rescue plan.
→ Section 116: Implementation of Amalgamation or Merger
o This section details how to execute an amalgamation or merger once it
has been approved.

WHAT IS A FUNDAMENTAL TRANSACTION?

OVERVIEW: Fundamental transactions are significant actions that require specific
approvals due to their potential impact on a company’s structure or assets. They
must either receive approval under Section 115 or occur as part of a business
rescue plan.

TYPES OF FUNDAMENTAL TRANSACTIONS INCLUDE:

→ Selling all or most of the company’s assets.
→ Merging or amalgamating with another company.
→ Creating a scheme of arrangement to reorganize the company’s affairs.

SECTION 112: DISPOSALS

A COMPANY CANNOT SELL:

→ All or a substantial portion of its assets or business unless:
o The shareholders approve the sale through a special resolution
following the procedures in Section 115.
o The company meets all other requirements outlined in Section 115.

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DEFINITION OF "ALL OR THE GREATER PART":

→ FOR ASSETS: More than 50% of the company’s total assets (valued fairly).
→ FOR AN UNDERTAKING: More than 50% of the overall business operation.
→ If the transaction is regulated, an independent expert must value the assets.

UNDERSTANDING "DISPOSAL"
Standard Bank v Hunkdory Investments
→ The term "disposal" generally refers to permanently giving up ownership of
an asset.
→ If an asset is used as security for a loan, it typically isn’t considered a
disposal. However:
o If it’s transferred outright with the condition that it will revert back upon
debt repayment, it is classified as a disposal.

PROCEDURE FOR SHAREHOLDER MEETINGS

NOTICE REQUIREMENTS:
→ A notice must be sent out to shareholders in a specific manner and within a
set timeframe to discuss the proposed resolution.
→ This notice should include:
o A detailed summary of the transaction(s).
o A summary of relevant sections (S115 and S164) that affect the
transaction.

MEETING REQUIREMENTS:
→ A quorum of 25% of voting rights is required to hold the meeting (though it can
be set higher).
→ A decision on the transaction requires a 75% approval from those present and
voting.
→ The acquiring party (the one looking to purchase) cannot vote on the matter.

APPROVAL FROM HOLDING COMPANY:

→ If applicable, a special resolution is also needed from the holding company
as per Section 115(2)(b).

MERGERS AND AMALGAMATIONS (S113)

DEFINITION: Mergers and amalgamations involve transactions that lead to the
formation of one or more new companies. These new entities will hold the assets of
the companies involved in the merger.
→ STRUCTURE VARIABILITY: The way these mergers are structured can differ
based on the specifics of the transaction.

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MERGER REQUIREMENTS ("PICNIC AND EAT")

FOR A MERGER AGREEMENT, THE FOLLOWING ELEMENTS MUST BE

INCLUDED:
→ Proposed MOI (Memorandum of Incorporation) of the new company.
→ Conversion of securities (how the existing shares will be converted).
→ New proposed directors: List names and ID numbers of those who will lead
the new company.
→ Consideration: Details about how payments will be made for the merger.
→ Allocation of assets and liabilities: How assets and debts will be distributed
among the new companies.
→ Estimated cost of the amalgamation/merger.
→ Arrangements and strategies: Plans to complete the merger or
amalgamation.
→ Details of cancellations of shares held by other merging companies.

SOLVENCY AND LIQUIDITY TESTS

→ REQUIREMENT: The Board of Directors of each company must perform
solvency and liquidity tests.
→ CONFORMANCE: Every company involved must meet these tests.
→ TIMING: These tests should be satisfied after the merger occurs.
→ BOARD'S RESPONSIBILITY: The Board must ensure that all companies can
pass the tests.

SHAREHOLDER APPROVAL
→ NECESSITY: Approval is required from shareholders of each merging
company.
→ BOARD ACTIONS: The Board must notify shareholders about the meeting
and provide relevant information, including summaries of Sections 115 and
164 of the Companies Act.
→ QUORUM REQUIREMENT: At least 25% of voting rights must be present
(the MOI may allow for a higher percentage).
→ VOTING THRESHOLD: A 75% approval (special resolution) is required for
the merger to proceed.

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IMPLEMENTATION OF MERGER OR AMALGAMATION

NOTICE TO CREDITORS:
→ Creditors have 15 business days from receiving notice to object if they
believe the merger will harm them.
o The court can uphold their objection if:
o The creditor is acting in good faith.
o They will face real harm.
o There are no other remedies available.
→ The company must wait for the court's decision before proceeding.

STEPS TO IMPLEMENT THE MERGER ( "MAC IN CHEESE(S)"):

→ Prepare MOI for the new company.
→ Obtain necessary approvals from regulatory authorities (e.g., Competition
Commission, banking authorities).
→ CIPC (Companies and Intellectual Property Commission) will deregister
companies that are not surviving the merger.
→ File a notice with CIPC, including:
o Confirmation of compliance with Sections 113 and 115.
o The new MOI.
o Proof of approvals from regulatory authorities.
→ The CIPC will issue a registration certificate for the new company and
deregister those companies that did not survive the merger.

EFFECTS OF THE MERGER

→ Pending Matters: Ongoing legal matters (civil, criminal, administrative) are
unaffected by the merger.
→ Liabilities: Each new or surviving company inherits:
o Any provisions from the merger agreement.
o Compliance with solvency and liquidity tests as outlined in Section 113.
o Any other agreements made during the merger.
→ Property Regulations: If any property is regulated by public laws, a merger
notice must be filed to comply with the regulations.

SECTION 114: ARRANGEMENTS

→ Section 114 outlines the process for a company to propose arrangements with
its shareholders. This can involve various actions, and these arrangements
need to be approved by the shareholders through specific procedures.

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TYPES OF ARRANGEMENTS ("CEDER-C")

The arrangements can include:
→ CONSOLIDATION OF SHARES: Merging different classes of shares into
fewer classes.
→ EXPROPRIATION OF SHARES: Taking shares from shareholders, often for
compensation.
→ Division of shares: Splitting existing shares into different classes.
→ EXCHANGE OF SHARES: Swapping one class of shares for another.
→ RE-ACQUISITION OF SHARES: The company buying back its own shares.
→ COMBINATION OF METHODS: Using a mix of the above methods for the
arrangement.

KEY POINTS TO REMEMBER

PROPOSAL AND APPROVAL:

→ The Board of Directors proposes the arrangement to the shareholders.
→ Shareholders must approve the arrangement through a special resolution at
a meeting specifically called for this purpose.

MEETING REQUIREMENTS:
→ Quorum: At least 25% of the voting rights must be present for the meeting to
be valid.
→ Approval: The arrangement must be approved by 75% of the voting rights
present at the meeting.

INDEPENDENT EXPERT REQUIREMENT:

→ An independent expert must be appointed to prepare a report on the
proposed arrangement. This expert should be:
o Qualified, competent, and experienced.
o Impartial (no conflicts of interest).
o Unrelated to the company and not involved with it as an employee or
advisor in the past two years.

CONTENT OF THE INDEPENDENT EXPERT’S REPORT ("SIDES - I")

THE REPORT MUST INCLUDE:
→ STATED INFORMATION: All relevant details about the value of the securities
affected by the arrangement.
→ IDENTIFICATION: All types and classes of security holders (including
insiders) impacted by the arrangement.

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→ DESCRIPTION: The material effects of the arrangement on the rights and

interests of insiders.
→ EVALUATION: Any significant adverse effects on the compensation for those
impacted, and potential benefits of the arrangement for the company's
business and prospects.
→ STATED INTERESTS: Any material interests of directors or trustees for
security holders, and how the arrangement affects those interests.
→ INCLUSION OF LEGAL REFERENCES: A copy of Sections 115 and 164 of
the Companies Act should also be included in the report.

SECTION 115
→ Section 115 of the Companies Act focuses on fundamental transactions
that require special approval to protect shareholders’ rights during significant
corporate changes. Here’s a simplified breakdown:

FUNDAMENTAL TRANSACTIONS:
→ These are major corporate activities, like mergers or asset sales, that
significantly affect the company and its shareholders.
→ They must be approved either under Section 115 or as part of a business
rescue plan.

APPROVAL REQUIREMENTS:
→ A special resolution is needed, which typically requires a higher voting
threshold from shareholders.
→ If at least 15% of shareholders oppose the transaction, the company must
seek court approval.

PROCESS FOR APPROVAL

❖ IF LESS THAN 85% APPROVAL:
→ If the transaction does not receive more than 85% approval from
shareholders:

15% OPPOSITION:
→ The company must apply to the court within 10 business days after the vote.
→ The company must cover the costs of this application.
→ If the company does not apply, the resolution is treated as null and void
(meaning it is not valid).

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❖ MORE THAN 85% APPROVED:

→ If the majority (more than 85%) approve the transaction, shareholders who
voted against it can challenge this within 10 days:
o They must also cover the costs of the application.
o The court can allow the review if the opposing shareholder:
▪ Acts in good faith (honestly and sincerely).
▪ Is prepared and able to support their case.
▪ Presents allegations (claims) that could justify the court’s
intervention.

GROUNDS FOR COURT INTERVENTION:

The court can set aside (cancel) the resolution if it finds that:
→ The voting process was unfair.
→ There were issues like:
o Conflict of interest (a situation where someone has competing
interests).
o Inadequate disclosure (not providing enough information).
o Failure to comply with the Companies Act, the company's
Memorandum of Incorporation (MOI), or other relevant rules.
o Any other significant material irregularity (serious issues affecting the
integrity of the process).

SHAREHOLDER’S APPRAISAL RIGHTS (SECTION 164)

→ If a shareholder disagrees with the transaction (dissenting shareholder):
o The company is required to buy back their shares.
→ Important steps for dissenting shareholders:
o When notified of the meeting to vote on the transaction, they must:
▪ Inform the company in writing of their intention to oppose the
transaction before the meeting.
▪ Attend the meeting to express their opposition.
▪ Vote against the transaction.

TAKEOVERS AND REGULATIONS

→ Takeovers involve the acquisition of one company by another and are
regulated to ensure fairness and integrity in the marketplace for shareholders
of regulated companies.

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KEY POINTS

REGULATED COMPANIES:
→ Regulated Companies are generally public companies or state-owned
companies (with some exceptions) and can include private companies if
specific thresholds are met regarding the transfer of securities.
→ Affected Transactions are specific types of transactions that involve
regulated companies, such as:
o Selling most of the company’s assets.
o Mergers or amalgamations involving at least one regulated company.
o Schemes of arrangement with shareholders.
o Acquiring significant voting rights in a regulated company.
o Offers to acquire remaining voting securities or mandatory offers under
specific sections.

PURPOSE OF REGULATION
The regulation of takeovers serves several important purposes:
→ MARKETPLACE INTEGRITY: To ensure fair trading practices.
→ INFORMED DECISION-MAKING: To provide necessary information to
shareholders, enabling them to make informed decisions.
→ ADEQUATE TIME FOR ADVICE: To give companies and shareholders
enough time to seek advice on takeover offers.
→ PREVENT FRUSTRATION OF OFFERS: To prevent actions that could
obstruct or undermine legitimate takeover offers.

REGULATION OF AFFECTED TRANSACTIONS

→ Compliance Requirements: Affected transactions cannot proceed unless:
o A compliance notice is issued, or
o An exemption from the regulations is granted.
EXEMPTIONS: The Takeover Regulation Panel (TRP) can provide exemptions if:
→ There is no potential for prejudice.
→ The costs of compliance are disproportionate.
→ The exemption is reasonable and justifiable.

WHAT IS A REGULATED COMPANY?

→ A regulated company refers to a business entity that is subject to specific
regulations, particularly in the context of corporate transactions. Here are the
main types of regulated companies:

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PUBLIC COMPANIES:
→ Companies whose shares are available to the general public and traded on
stock exchanges.

STATE-OWNED COMPANIES (SOCS):

→ Companies owned by the government, unless they are specifically exempt
from regulations under section 9.

PRIVATE COMPANIES:
→ A private company can be regulated if:
o TRANSFER OF SECURITIES: More than 10% of its issued shares
have been transferred within the last 24 months, excluding transfers
between related parties or shares bought back and canceled.
o MEMORANDUM OF INCORPORATION (MOI): The company’s MOI
explicitly states that it is subject to specific parts of the Companies Act
and Takeover Regulations.

IMPORTANT EXEMPTION:
→ Companies in business rescue (a form of legal protection from creditors) are
not considered regulated for transactions involving mergers, disposals, or
amalgamations under section 118(3).

REGULATION OF AFFECTED TRANSACTIONS/OFFERS

→ Affected transactions cannot proceed unless:
o A compliance notice is issued, or
o An exemption is granted for the transaction (as per section 121).
→ The TAKEOVER REGULATION PANEL (TRP) can grant exemptions based
on:
o No reasonable potential for prejudice to shareholders.
o The cost of compliance being disproportionately high.
o Other reasonable and justifiable grounds.

DISCLOSURE OF SHARE TRANSACTIONS (SECTION 122)

→ PURPOSE: To notify shareholders about significant share transactions.
→ NOTIFICATION REQUIREMENT: If a person acquires or disposes of a 5% or
more beneficial interest in securities, they must notify the company within 3
business days.

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REGULATED COMPANY'S RESPONSIBILITIES:

→ After receiving a disclosure notice, the company must:
o File the notice with the TRP.
o Inform the other shareholders, unless the transaction is less than 1% of
the class of shares.

MANDATORY OFFERS (SECTION 123)

APPLICABLE SITUATIONS:
→ When a regulated company reacquires voting securities or when a person
acquires enough voting rights to hold 35% or more.

PROCESS:
→ Within one business day after the acquisition, the company must notify
remaining shareholders and make an offer to buy their securities.
→ A written offer must be delivered within one month after the initial
notification.

COMPARABLE OFFERS (SECTION 125)

→ If a regulated company has multiple classes of securities, an offer must be
made for each class of shares if someone makes an offer that could result in
holding more than 35% of voting rights.

PARTIAL OFFERS (SECTION 125)

→ These offers are for less than 100% of the voting securities.
→ They must:
o State the exact number of shares being sought.
o Be approved by independent shareholders controlling more than 50%
of the class.

COMPULSORY ACQUISITIONS AND SQUEEZE-OUTS (SECTION 124)

COMPULSORY ACQUISITIONS
→ When 90% of the shareholders accept a buyout offer within 4 months, the
company must notify the remaining shareholders.
→ Rights of Remaining Shareholders:

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o Within 3 months of receiving this notice, the remaining shareholders

can demand that the offeror (the person making the offer) buy their
shares as well.
o The offeror must then buy these shares under the same terms as the
original offer, resulting in a compulsory acquisition.

SQUEEZE-OUT PROCESS
→ After the initial acceptance, within another 4 months:
o The offeror must notify the remaining shareholders that:
▪ The offer has been accepted by 90% of shareholders.
▪ The offeror wants to buy all remaining shares (this is called a
coercion notice).
o The offeror is legally required to acquire these remaining shares under
the same terms as before, leading to a squeeze-out.

SHAREHOLDERS’ RIGHTS AFTER COERCION NOTICE

→ If shareholders receive a coercion notice, they have 30 days to:
o Apply to the court to block the acquisition or to impose conditions on it.
(Example case: Vlok v. Sun International South Africa).

COURT INTERVENTION WHEN LESS THAN 90% ACCEPTANCE

→ If less than 90% of shareholders accept the offer:
o The offeror can seek court permission to issue a coercion notice. The
court can grant this permission in specific situations.

POST-COURT ORDER PROCEDURES

WITHIN 6 WEEKS AFTER:
→ The court order is pending, or
→ The offeror receives a demand from shareholders,

THE OFFEROR MUST:

→ Submit a notice to the regulated company (along with necessary transfer
documents).
→ Transfer payment or shares to the company.
→ The company must then register the offeror as the holder of those securities.

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RESTRICTIONS ON FRUSTRATING ACTIONS (SECTION 126)

When a genuine offer is made or expected, the company's board of directors cannot
take actions that might hinder the offer or deny shareholders the chance to consider
it. Specifically, they cannot:
→ Take any actions that could frustrate the offer.
→ Issue new shares or options without prior approval.
→ Sell or acquire significant assets outside normal business activities.
→ Enter into contracts outside of regular business operations.
→ Make unusual distributions in timing or amount.

APPROVAL REQUIREMENTS FOR ACTIONS

→ These restrictions can be lifted only if:
o The Takeover Regulation Panel (TRP) gives prior written approval.
o The relevant shareholders approve it.
o There is an existing obligation or agreement that justifies the action.

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REMEDIES, ENFORCEMENT OR
RIGHTS AND REGULATORY
AGENCIES
KEY SECTIONS FOR SHAREHOLDER RIGHTS AND CORPORATE ACTIONS

SECTION 163 – OPPRESSIVE OR PREJUDICIAL CONDUCT:

→ This section allows shareholders or directors to apply to the court if they
believe the company’s actions are oppressive, unfairly prejudicial, or
disregard their interests.
→ The court can issue orders to address such behavior if the applicant proves it
harmed their interests.

SECTION 164 – DISSENTING SHAREHOLDERS AND APPRAISAL RIGHTS:

→ Shareholders who disagree with major corporate changes (e.g., mergers,
significant sales, or changes to share classes) can “dissent” and ask the
company to buy their shares at fair value.
→ This right provides a financial exit for shareholders uncomfortable with
fundamental decisions.

SECTION 165 – DERIVATIVE ACTION:

→ This section allows shareholders (or others with standing) to demand that the
company take legal action if it has suffered harm but management refuses to
act.
→ If the company ignores this demand, the shareholder can pursue the action on
the company’s behalf.

COMMON LAW PRINCIPLES IN SHAREHOLDER DISPUTES

MAJORITY RULE:
→ Generally, majority shareholders control company decisions, and minority
shareholders are bound by these, provided they’re legal.
→ However, actions that break company laws, the Memorandum of
Incorporation (MOI), or involve fraud on minority shareholders can be
challenged.

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EXCEPTION - ILLEGAL OR UNLAWFUL ACTIONS:

→ Shareholders can challenge decisions that are illegal, violate the company’s
constitution (MOI), or constitute “fraud on the minority.” In such cases, they
can seek remedies through personal or representative action (on behalf of
others affected).

THE FOSS V. HARBOTTLE RULE:

→ Under this rule, if someone suffers loss from a corporate decision, they must
bring any legal action personally or through derivative action (if the company
is harmed).

SECURITY HOLDERS AND DECLARATORY ORDERS (SECTION 161)

→ Security holders can ask the court for a declaratory order to:
o Protect their rights.
o Rectify harm done by company actions or omissions that violate the
Act or MOI.
→ The court can issue orders to uphold shareholder rights if company actions
breach these obligations.

OPPRESSIVE OR PREJUDICIAL CONDUCT – SECTION 163

RIGHTS AND TEST:

→ Shareholders or directors can seek relief if they find company actions
(business conduct, director decisions, etc.) are oppressive or disregard their
interests unfairly.
→ The court uses a test of “unfairness” and “interest harmed” to decide.

OUTCOME:
→ If proven, the court may grant interim or final relief deemed appropriate to
resolve the dispute.

DERIVATIVE ACTIONS (SECTION 165)

DEMAND PROCESS:
→ Shareholders can demand the company take action against wrongdoers.
→ If the company dismisses this demand as frivolous or without merit within 15
days, it must justify this.

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INVESTIGATION AND RESPONSE:

→ If the demand isn’t dismissed, the company has 60 days to investigate, report
costs and facts, and decide if legal action is warranted.
→ If ignored, the shareholder can take action directly on the company’s behalf
with court approval.

PURPOSE OF SECTION 165

→ Section 165 allows shareholders, directors, and certain other individuals or
groups to take legal action on behalf of the company. This “derivative action”
applies when someone within the company notices that a wrongful act has
been committed against the company, but the company itself (typically its
directors) refuses to take action. The goal is to protect the company’s
interests and ensure any harm done to it is properly addressed.

WHO CAN MAKE A DEMAND FOR DERIVATIVE ACTION?

1. SHAREHOLDERS – Including shareholders of related companies.
2. DIRECTORS – Including directors of related companies.
3. PRESCRIBED OFFICERS – Senior management roles, even if they’re from
related companies.
4. REGISTERED TRADE UNIONS OR EMPLOYEE REPRESENTATIVES –
Especially if the harm affects employees.
5. COURT-APPOINTED INDIVIDUALS – Other individuals given permission by
the court.
These people can serve a statutory demand on the company to compel it to act
against any party that has wronged it.

WHEN CAN A DEMAND BE MADE?

A DEMAND FOR DERIVATIVE ACTION CAN BE MADE IF:
1. A Wrong Has Been Committed Against the Company – This can include
actions by directors, managers, or third parties that harm the company
financially, legally, or otherwise.
2. The Wrongdoer Prevents the Company from Taking Action – If the person
responsible for the wrong also blocks the company from responding (e.g.,
directors who don’t want to sue themselves), the need for derivative action
becomes more pressing.

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COMPANY’S RESPONSE TO THE DEMAND

UPON RECEIVING A DEMAND:
1. Option to Apply for Dismissal – Within 15 business days, the company
can ask the court to dismiss the demand if it believes the request is frivolous,
vexatious, or without merit.
2. Investigation Requirement – If the demand isn’t dismissed, the company
must:
o Appoint an independent and impartial person or committee to
investigate the issue.
o This investigation should cover costs, relevant facts, and whether or
not the company should pursue the action.
3. Final Response Within 60 Days – After the investigation:
o If the investigation supports action, the company must begin or
continue with legal proceedings.
o If the investigation rejects the demand, the company sends a
“refusal notice” to the person who made the demand.

OPTIONS FOR THE PERSON MAKING THE DEMAND

If the company does not act appropriately, the person who made the demand can
seek court approval for personal derivative action. This is allowed if:
→ The company fails to take reasonable steps to address the demand.
→ The appointed investigator lacks independence or impartiality.
→ The company’s response or report is inadequate.
→ The company’s refusal to act appears inconsistent or unjustified.

COURT’S ROLE IN GRANTING DERIVATIVE ACTIONS

THE COURT HAS THE DISCRETION TO ALLOW A DERIVATIVE ACTION IF:
→ THE APPLICANT IS BONA FIDE – The person demanding action must
genuinely seek to protect the company’s interests.
→ THERE’S A SERIOUS QUESTION OF CONSEQUENCE – The issue at hand
must be significant and materially impactful.
→ ACTION IS IN THE COMPANY’S BEST INTERESTS – The court will
consider if pursuing this legal action benefits the company overall.

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EXCEPTIONAL CIRCUMSTANCES FOR COURT-APPROVED ACTION WITHOUT

A PRIOR DEMAND
In urgent situations, a court may approve derivative action without the usual demand
process if:
→ DELAY WOULD CAUSE IRREPARABLE HARM – Prolonged inaction could
significantly damage the company.
→ RISK OF SUBSTANTIAL PREJUDICE – There’s a high chance of harm to
the applicant or other parties if no immediate action is taken.
→ COURT’S DISCRETIONARY REQUIREMENTS ARE MET – All other
standards for court intervention are satisfied.

REBUTTABLE PRESUMPTION AGAINST GRANTING LEAVE

There’s a presumption against allowing a derivative action if:
1. The Company Decides Against or Ends Proceedings – For instance, if it
chooses not to sue a third party or decides to settle.
2. Directors Acted Properly – If all directors who made this decision:
o Acted in good faith and with a proper purpose.
o Had no personal financial interest in the decision.
o Were well-informed about the situation.
o Reasonably believed the decision was in the company’s best
interests.

→ In these cases, the court may presume that it’s not in the company’s best interest
to proceed with the derivative action unless proven otherwise.
→ This structured approach under Section 165 seeks to balance protection for the
company against frivolous claims while allowing action when genuine harm is
involved.

WHISTLEBLOWER PROTECTIONS

WHO CAN REPORT:

→ Shareholders, directors, officers, employees, suppliers, and others associated
with the company can report issues.

THE ABOVE GROUPS CAN:

→ Disclose information
→ CIPC, Companies Tribunal, regulatory authority, an exchange, legal advisor,
director, prescribed officer, company secretary, auditor, committee

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REPORTABLE CONCERNS:
→ Whistleblowers can report non-compliance with laws, health risks,
discrimination, or other legal breaches.

PROTECTIONS:
→ Whistleblowers are protected from retaliation, including threats or adverse
treatment.
→ If harmed, they may be compensated.

A WHISTLE BLOWER IS ENTITLED TO COMPENSATION FROM A

PERSON WHO:
→ Engages in conduct to the detriment of the Whistle Blower
→ Directly or indirectly threatens them and:
o Intends for them to fear the threat
o Is reckless in causing them fear, even if they didn’t fear it.

APPRAISAL REMEDY – SECTION 164

PURPOSE OF SECTION 164

→ Section 164 of the Companies Act allows shareholders who disagree with
major company decisions to demand payment for the fair value of their
shares.
→ This right applies when the company is undergoing a significant change,
known as a "fundamental transaction." This remedy is mainly to protect
minority shareholders who do not agree with such large changes.

WHEN CAN SHAREHOLDERS USE THIS REMEDY?

Shareholders have the right to an appraisal remedy if they disagree with a resolution
to approve a fundamental transaction, such as:
→ DISPOSAL – Selling a substantial portion of the company’s assets.
→ MERGER – Combining with another company.
→ SCHEME OF ARRANGEMENT – Reorganizing the company's structure,
often involving creditors or shareholders.
→ CHANGES IN SHARE CLASSES VIA MOI – Modifying the terms for different
share classes as outlined in the company’s Memorandum of Incorporation
(MOI).

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STEPS FOR SHAREHOLDERS AND THE COMPANY’S REQUIRED ACTIONS

Shareholders who disagree with a proposed resolution can follow a formal process
to demand fair compensation:
1. Shareholder Objection Before or During the Meeting
→ Shareholders should express their disagreement in writing before or during
the meeting where the resolution is discussed.
2. Company’s Obligation to Notify Shareholders
→ Within 10 business days after adopting the resolution, the company must
notify each dissenting shareholder who:
o Objected to the resolution in writing,
o Has not withdrawn their objection, or
o Did not vote in favor of the resolution.

Cilliers v LA Concorde Holdings Ltd Case

→ This case confirmed that the appraisal remedy is also available to
shareholders of a holding company (parent company), not just the specific
company directly involved in the transaction.

STEPS FOR SHAREHOLDERS TO CLAIM APPRAISAL RIGHTS

The formal process a shareholder follows to demand fair value for their shares
includes four main steps:

STEP 1: SHAREHOLDER DEMAND

→ Within 20 business days of either:
o Receiving notice from the company about the resolution adoption, or
o Learning independently of the adoption,
→ The shareholder can submit a written notice (demand) to the company
requesting the company to buy their shares at a fair value.

STEP 2: COMPANY RESPONSE

→ The company must respond by sending a written offer to each shareholder
who made a demand.
→ This offer must include:
o A fair value amount for the shares.
o A statement explaining how this fair value was determined.
→ The offer must be sent within 5 business days of one of the following:
o The resolution becoming effective,
o The deadline for submitting demands, or
o The shareholder learning of the resolution adoption.

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STEP 3: SHAREHOLDER CHOICES SHAREHOLDERS CAN DECIDE TO:

→ Accept the Offer – If they accept, they must:
o Submit their share certificates (if they have physical certificates) or
initiate a transfer process (for uncertificated shares).
o The company then has 10 business days to pay the agreed-upon
amount after receiving the shares.
→ Approach the Court – If the shareholder finds the offer insufficient or the
company fails to make an offer, they can request the court to:
o Determine a fair value and
o Order the company to pay this amount.

STEP 4: COMPANY VARIATION ORDERS

→ If the company cannot fulfill payment obligations, it may apply to the court for
an order to modify these obligations if:
o Paying the shareholders would prevent it from paying its debts as they
become due.

DISPUTE RESOLUTION OPTIONS

ALTERNATIVE DISPUTE RESOLUTION (ADR):
→ Options include ADR, adjudication by the Companies Tribunal, or
approaching the High Court.

REGULATORY COMPLIANCE:
→ Complaints can be made to regulatory bodies like the CIPC or TRP,
depending on the nature of the dispute.

SUMMARY OF REMEDIES FOR SHAREHOLDERS AND STAKEHOLDERS

→ In instances of oppression or unlawful conduct:
→ Shareholders may approach courts for direct intervention (Section 163).

→ If corporate harm is ignored:

→ A shareholder can act on behalf of the company through a derivative action
(Section 165).

→ Disagreement with fundamental changes:

→ Shareholders may exercise appraisal rights to exit the company and claim the fair
value of shares (Section 164).

→ Protection for whistleblowers:

→ They are safeguarded against retaliation and may receive compensation if
harmed.

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BUSINESS RESCUE AND

COMPROMISE
KEY SECTIONS FOR BUSINESS RESCUE (BR)

SECTION 129: VOLUNTARY INITIATION OF BUSINESS RESCUE

WHEN: THE BOARD CAN INITIATE BR IF IT BELIEVES:

→ The company is financially distressed (cannot pay short-term debts or risks
insolvency).
→ There is a reasonable chance of saving the company.

PROCESS:
→ File with CIPC (Companies and Intellectual Property Commission).
→ Notify affected parties within 5 business days.
→ Appoint a Business Rescue Practitioner (BRP), notify CIPC within 2 days, and
affected parties within 5 days.

SECTION 131: COURT-ORDERED BUSINESS RESCUE

AFFECTED PARTIES: CAN APPLY TO THE COURT TO START BR IF:
→ No solid evidence of financial distress.
→ No realistic chance of saving the company.
→ Procedural rules not followed.
COURT DECISION:
→ If the court approves, it can halt liquidation and order BR if financial distress is
proven and rescue is possible.

BUSINESS RESCUE INITIATION

WHEN THE BOARD CAN START BUSINESS RESCUE:

→ The board of directors can start business rescue if they believe:
o The company is financially distressed (can't meet debts or may soon
become insolvent).
o There’s a reasonable chance that the company can be saved.

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DEFINITION OF FINANCIAL DISTRESS:

→ A COMPANY IS FINANCIALLY DISTRESSED IF: It cannot pay its short-term
debts or when it’s likely to become insolvent in the near future.

REQUIRED STEPS AFTER BUSINESS RESCUE RESOLUTION:

Once a resolution is passed, the company must:
→ FILE THE RESOLUTION with the Companies and Intellectual Property
Commission (CIPC).
→ NOTIFY AFFECTED PARTIES (e.g., creditors, employees) within 5 business
days.
→ APPOINT A BUSINESS RESCUE PRACTITIONER (the professional who will
manage the rescue).
→ FILE THE PRACTITIONER’S APPOINTMENT NOTICE with CIPC within 2
days.
→ SEND THE NOTICE OF APPOINTMENT to affected persons within 5
business days.

RIGHTS OF AFFECTED PERSONS:

Affected persons (e.g., creditors, employees, shareholders) can:
→ Object to the initiation of business rescue if they disagree.
→ Apply to court to set aside the board’s resolution if they believe:
o The company isn’t truly financially distressed.
o There is no reasonable chance of recovery.
o Procedures in section 129 of the Act were not followed.

COURT GROUNDS FOR SETTING ASIDE RESOLUTION:

The court can cancel the resolution if:
→ There is evidence the company isn’t financially distressed.
→ The company can’t reasonably be saved.
→ Procedures were not followed, or it is just and fair to do so.

CHALLENGING THE PRACTITIONER:

→ Affected persons can apply to remove the practitioner if:
o They don’t meet qualification standards (per Section 138).
o They aren’t independent.
o They lack the necessary skills for the company’s situation.
→ Affected persons can also request that the practitioner provide security
(financial guarantee).

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COURT ORDER FOR BUSINESS RESCUE:

→ Affected persons may request a court order to:
o Place the company under supervision.
o Begin business rescue proceedings.
→ If this order is requested, it pauses any ongoing liquidation (Section
129(2)(a)).

COURT REQUIREMENTS FOR APPROVAL:

→ The court will grant the order if:
o The company is financially distressed.
o The company failed to meet certain payments or contractual
obligations.
o Granting the order is fair and reasonable.
o There is a reasonable chance the company can be saved.
CASE EXAMPLE: Oakdene Square Properties v Farm Bothasfontein illustrates
that court decisions must be based on solid evidence, not mere speculation.

BUSINESS RESCUE (BR) COMMENCEMENT

WHEN BUSINESS RESCUE (BR) STARTS:

BR begins when:
→ The company files a resolution to start BR.
→ The company applies to court to get permission to file the resolution.
→ An affected person (creditor, employee, shareholder) applies to court for BR.

BUSINESS RESCUE PRACTITIONER (BR PRACTITIONER):

→ The BR Practitioner is the person managing the BR process.
→ They must:
o Be in good standing (not disqualified, not on probation).
o Have no conflict of interest or close relationship with the company.

TYPES OF PRACTITIONERS BASED ON EXPERIENCE:

→ JUNIOR PRACTITIONER: Can work alone with small companies or as an
assistant in larger cases.
→ EXPERIENCED PRACTITIONER (5+ YEARS): Can manage small or
medium companies alone or assist in large cases.
→ SENIOR PRACTITIONER (10+ YEARS): Can handle small, medium, or large
companies independently.

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PRACTITIONER’S ROLE AND RESPONSIBILITIES:

→ Has full management control of the business during BR.
→ Develops the BR plan to guide the company back to stability.
→ Must notify relevant regulatory authorities that the company is under BR.
→ Compensation follows set tariffs in regulations, though additional pay is
possible with agreement.

INVESTIGATION

INVESTIGATION OF THE COMPANY:

→ The BR Practitioner must examine the company’s:
o Affairs (general operations and activities),
o Business (day-to-day and strategic operations),
o Property (assets owned by the company), and
o Financial situation (debt, cash flow, and other financial aspects).
→ GOAL: To determine if the company has a reasonable chance of recovery.

IF RECOVERY IS UNLIKELY:
→ The Practitioner must:
o Notify the court, the company, and affected persons if there is no
prospect of recovery.
o Apply for liquidation: Request a court order to stop BR and move to
liquidate the company.

IF FINANCIAL DISTRESS ENDS:

→ If the company is no longer distressed, the Practitioner:
o Informs the court and affected persons.
o Applies to terminate the business rescue.
o Files a notice of termination if the issue has resolved without needing a
court order.

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MEETINGS DURING BUSINESS RESCUE

TIMELINE FOR MEETINGS:

→ Within 10 business days after appointment, the Practitioner must:
o Hold a meeting for creditors and employees.
o Form a committee for each (if needed) to represent their interests.

COMMITTEE FUNCTIONS:
→ Committees may:
o Consult with the Practitioner (though they cannot direct actions).
o Review reports on the BR process.
o Act independently to protect the interests of their members, ensuring
fair representation.

AFFECTED PERSONS IN BUSINESS RESCUE

→ "AFFECTED PERSONS" INCLUDE = creditors, employees, and security
holders.
→ Each group has specific rights aimed at ensuring they are informed, involved,
and have a say in the rescue process.

RIGHTS OF CREDITORS (SECTION 145)

EACH CREDITOR HAS THE RIGHT TO:

→ RECEIVE NOTICES: Be informed of significant events like court decisions,
meetings, and progress updates.
→ PARTICIPATE IN COURT: Engage in any court proceedings related to
business rescue.
→ ENGAGE IN BUSINESS RESCUE PROCEEDINGS: Take part formally in the
company's rescue process.
→ SUGGEST PROPOSALS: Provide suggestions for the business rescue plan.
→ VOTE ON THE RESCUE PLAN: Amend, approve, or reject the proposed
plan.
→ PROPOSE ALTERNATIVES: If the plan is not approved, creditors can
suggest an alternative rescue plan or offer to buy out other affected persons.

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RIGHTS OF EMPLOYEES (SECTION 144)

EMPLOYEES, REPRESENTED BY A TRADE UNION OR CHOSEN

REPRESENTATIVES, HAVE THE RIGHT TO:
→ RECEIVE NOTICES: Be informed of important events in the rescue process.
→ PARTICIPATE IN COURT: Engage in court proceedings related to the
business rescue.
→ FORM A COMMITTEE: Create a committee of representatives to represent
employees' interests.
→ BE CONSULTED ON THE RESCUE PLAN: Review and give feedback on
the proposed rescue plan.
→ MAKE SUBMISSIONS: Share their perspectives before any vote on the plan
is taken.

RIGHTS OF SECURITY HOLDERS

HOLDERS OF SECURITIES (LIKE SHAREHOLDERS) ARE ENTITLED TO:

→ RECEIVE NOTICES: Be informed about major decisions, court proceedings,
and meetings.
→ PARTICIPATE IN COURT: Join any court proceedings connected to the
business rescue.
→ FORMALLY PARTICIPATE IN PROCEEDINGS: Engage in the business
rescue process.
→ VOTE ON THE PLAN: Approve or reject (not amend) the proposed plan if it
affects their class of securities.
→ PROPOSE ALTERNATIVES: If the rescue plan is rejected, they can suggest
an alternative or offer to buy out creditors or other security holders.
NOTE: Debenture holders (those holding company debt instruments) may be
treated as creditors if they hold a claim against the company.

BUSINESS RESCUE PLAN - KEY COMPONENTS (SECTION 150(2))

→ A business rescue plan is designed to provide essential information to help
creditors, employees, and shareholders decide if they should accept or
reject the plan.
→ It is organized into three main sections: Background, Proposals, and
Assumptions & Conditions.

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PART A - BACKGROUND
This section provides a clear picture of the company's current situation:
→ ASSETS: A full list of the company’s assets, highlighting which ones are
secured by creditors.
→ CREDITORS: Details on all creditors, categorized by security (secured,
preferent, or concurrent) based on insolvency laws, and a list of creditors who
have verified their claims.
→ LIQUIDATION COMPARISON: Estimated payout (dividend) for creditors if
the company were liquidated instead.
→ SECURITIES HOLDERS: List of all shareholders or holders of issued
securities.
→ PRACTITIONER’S FEES: Copy of the agreement about the business rescue
practitioner's fees.
→ INFORMAL PROPOSALS: Whether the plan includes any proposals
suggested informally by a creditor.

PART B - PROPOSALS
This section outlines what the business rescue plan proposes to achieve and how it
will impact the company and creditors:
→ DEBT REPAYMENT MORATORIUM: Any suspension on debt payments.
→ DEBT ADJUSTMENTS: Details if debts will be written off or converted into
equity.
→ COMPANY’S ONGOING ROLE: How the company will continue operations
and handle existing agreements.
→ ASSET ALLOCATION: Which assets will be used to pay off creditors.
→ PAYMENT PRIORITY: The order in which creditors will be paid.
→ BENEFITS OF RESCUE PLAN VS. LIQUIDATION: Comparison of the
benefits for creditors if the company is rescued versus liquidated.
→ IMPACT ON SHAREHOLDERS: How the plan affects each class of
shareholders.

PART C - ASSUMPTIONS AND CONDITIONS

This final section lists the assumptions and conditions for the plan’s success:
→ CONDITIONS FOR PLAN SUCCESS: Requirements for the plan to start and
be fully implemented.
→ EMPLOYEE IMPACT: Changes in the number of employees or their
employment terms.
→ END CONDITIONS: Situations where the business rescue plan might end.
→ FINANCIAL PROJECTIONS: A projected balance sheet and income
statement for the next three years assuming the plan’s adoption.

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BUSINESS RESCUE PLAN PUBLICATION AND MEETING

PLAN PUBLICATION:
→ The practitioner must publish the business rescue plan within 25 business
days of their appointment.

MEETING WITH CREDITORS AND STAKEHOLDERS:

→ The practitioner arranges and oversees a meeting with creditors and voting
interest holders to discuss the rescue plan.

AT THE MEETING:
→ The rescue plan is presented, detailing the chances of the company being
rescued.
→ Employee representatives participate, and attendees discuss and then vote
on the plan.

APPROVAL REQUIREMENTS:
→ The plan needs 75% approval from creditors, with at least 50% from
independent creditors.

ADOPTED PLAN:
→ Once approved, the plan becomes binding on the company, creditors, and
security holders.
→ A notice of substantial implementation is filed with the Companies and
Intellectual Property Commission (CIPC).

EFFECT OF THE BUSINESS RESCUE PLAN

LEGAL PROCEEDINGS:
→ Legal actions against the company are paused during rescue, except:
o With written consent from the practitioner.
o By court order with specific terms.
o For criminal proceedings or certain property claims.
→ EXAMPLE CASE: Legal holds apply to arbitration as well, as seen in Chetty
t/a Nationwide Electrical v Hart.

PROPERTY DEALINGS:
→ Company property can be handled if:
o It’s in the ordinary course of business, or
o Fairly and with prior written approval from the practitioner.

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→ Property disposal requires consent from secured parties, unless proceeds

cover debts owed to them.

SECURED CLAIMS:
→ If property with a security interest is sold, the company must ensure proceeds
cover related debt or provide reasonable security to the secured party.

COMPANY CONTRACTS:
→ The practitioner can suspend certain company obligations from pre-existing
contracts, except for:
o Employment contracts.
o Contracts covered by specific insolvency laws.
→ Practitioners may also ask the court to cancel some obligations, with affected
parties limited to claims for damages.

ROLE OF DIRECTORS:
→ Directors remain in their role but must operate under the guidance of the
practitioner.
→ They follow section 75 (conflict of interest) rules and are exempt from
section 76 (fiduciary duties) if acting on practitioner instructions.

EXISTING DEBT:
→ Pre-existing debt can potentially be discharged under the plan’s terms.

POST COMMENCEMENT FINANCE

→ FINANCING DURING BUSINESS RESCUE:
o A company can secure financing while undergoing business rescue
proceedings.
→ SECURING FINANCING:
o Lenders can use any unencumbered (not already pledged as
collateral) assets of the company to secure loans.
→ PAYMENT OF CLAIMS:
o After paying the practitioner’s fees and necessary costs, the order of
payment for claims is as follows:
▪ FIRST: Payments for practitioner’s remuneration,
reimbursement of expenses, and employment-related claims.
▪ SECOND: Payments for post-commencement finance, which
take priority over other unsecured claims.

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TERMINATION

BUSINESS RESCUE CAN END IN THE FOLLOWING WAYS:

1. COURT INTERVENTION:
o If the court sets aside the business rescue resolution or order.
2. LIQUIDATION CONVERSION:
o If the proceedings convert into liquidation (a process where the
company’s assets are sold off to pay creditors).
3. NOTICE OF TERMINATION:
o When the practitioner files a notice of termination with the CIPC
(Companies and Intellectual Property Commission).
4. REJECTED BUSINESS RESCUE PLAN:
o If the proposed business rescue plan is put forward and rejected by the
creditors.
5. ADOPTED PLAN IMPLEMENTATION:
o If the business rescue plan is adopted, and the practitioner files a
notice confirming substantial implementation of that plan.

3 MONTH RULE
→ Time Limit on Proceedings:
o If business rescue proceedings continue for more than 3 months,
certain steps must be taken.
→ Progress Report:
o The practitioner must prepare a report on the progress of the business
rescue efforts.
→ Monthly Updates:
o This report should be updated at the end of each subsequent month.
→ Distribution of Reports:
o The practitioner must deliver these reports and updates to affected
parties, the court, and the CIPC.

COMPROMISE

WHAT IS A COMPROMISE?
→ The board of directors or liquidator can propose a plan to settle the
company’s financial obligations to all creditors or a specific group of creditors.
This is called a compromise.

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NOTIFICATION PROCESS:
→ The board or liquidator must send:
o A copy of the proposal.
o A notice of the meeting to every creditor in the relevant class and the
Commission.

APPROVAL REQUIREMENT:
→ A certificate confirming the proposal must be obtained.
→ At least 75% of the creditors must approve the proposal for it to be valid.

COURT APPLICATION:
→ Once approved by the creditors, the company can apply to the court for an
order to formally approve the compromise proposal.

COMPANIES TRIBUNAL

WHAT IS THE COMPANIES TRIBUNAL?

The Companies Tribunal adjudicates various types of applications, including:
→ Extensions for holding annual general meetings (AGMs).
→ Removal of directors.
→ Resolving disputes over company names.
→ Exemptions from appointing a Social and Ethics Committee.
→ Requests for substituted service.
→ Reviewing decisions made by the CIPC (Companies and Intellectual Property
Commission).

FILING PROCEDURE FOR APPLICATIONS:

To file an application, one must:
→ Complete CTR 142 form.
→ Provide a sworn statement or affidavit outlining the facts of the case.
→ Include any supporting documents needed for the proceedings.
→ Submit proof of authority showing that the applicant has the right to make
the application.

ALTERNATIVE DISPUTE RESOLUTION (ADR):

→ Under Section 166 (1) of the Companies Act, parties can resolve disputes
through mediation, conciliation, or arbitration instead of going to court.

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DISPUTE RESOLUTION PROCESS:

→ The applicant must file CTR 132.1 form along with a statement of claim.
→ The applicant can choose the method of resolution (mediation, conciliation, or
arbitration).
→ Legal representation is optional.
→ The Registrar will help coordinate the date for the resolution process.
→ During mediation:
o The mediator clarifies their role.
o A conducive environment is created for both parties to reach a
settlement.
o The mediator explains procedures and confidentiality.
→ If no resolution is reached, a certificate will be issued indicating the process
has failed.
→ If successful, a settlement agreement is signed and can be made an order of
court.

BENEFITS OF USING THE TRIBUNAL:

→ COST-EFFECTIVE: Services are offered at no charge, and legal
representation is not required.
→ INFORMAL AND FLEXIBLE: Can adapt to various challenges and find
creative solutions.
→ PRESERVES BUSINESS RELATIONSHIPS: Important for ongoing business
operations.
→ CONTROL OVER OUTCOMES: Parties have more control, reducing financial
risks and uncertainties.
→ COURT ENFORCEMENT: Successful settlements can be made court orders,
saving time and cost.

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