Verbatim company law notes for the first semester. All cases discussed in class are included, Side notes explaining important principles are included. Everything you need to know about companies that was discussed in class is all included
Corporation Law Semester 2 - Summaries, lecture notes and cases
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Stellenbosch University (SUN)
Mercantile Law 471
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COMPANIES CLASS NOTES
INTRODUCTION TO THE LAW OF BUSINESS
UNDERTAKINGS
1. List of entities
• Sole Proprietor
• Closely Held
• Widely Held
• SOCs (State Owned Companies)
2. Introduction
What is a business entity?
• It is a legal structure that is used to conduct business
Need to qualify this definition
• Business structure in some cases it means a legal created by the law and in other it
means a structure recognised by the law. Example companies or close corporation is
legal established, partnerships are recognised by law rather than created.
• Small entities are not always separate legal entities, they are organisational structures.
• Most of the business entities concerns the conduct of business for financial or
economic gain. However, we also include in business entities, certain entities that can
be used to conduct non-profit such as churches, sports clubs, management bodies of
housing communities.
List of entities
Sole Proprietor
• Is a small business conducted by a single person eg. A person selling vegetables
alongside the road.
Partnership
• Is a business consisting of people co-operating or partners who created this business
through an agreement?
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• There are no legal limits to the size of the partnership but usually they are used for
conducting smaller or medium sized businesses.
Close corporation (it is being phased out)
• They are business entities that have been specifically established for small business.
Companies
• In the broadest, terms we distinguish between profit and non-profit companies.
a) Profit companies
Refers to those companies used to conduct business for gain. Types of profit
companies:-
• Private – meant for people who conduct business on a closer scale
• Public company – are large business where there is a separation
between those who own (shareholders) the business and those who
manage the company (executives and directors)
• Personal liability companies – are companies where the directors
(those conducting activities of the co.) are liable to others eg these type
of business is specifically used for certain types of professions such as
lawyers.
• State owned companies (profit is referred to in principle) -
b) Non-profit companies
They are having some other public benefit. There is NPC (previously known
for section 21 company).
There are also Common law non-profit companies. Therefore, if you want to
create a non-profit, you can either use a statute or CL.
3. Functions of the law in regulating business entities (what
should the law do)
Some feels that the law should refrain from business dealings (they say that business entities
are a type of contracts therefore, the law should have very little to do with it. On the other
hand, you have systems like the one in Japan where business entities are heavily regulated.
As such, the rationale is that, the law should ensure that these businesses do so according to
certain business principles).
1. The first function is to create some business entities.
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• Companies and close corporation are separate juristic persons. This means that
they are recognised by the law as if they are persons existing in the legal sphere.
For that purpose, they must be created or established by the law.
• The same is with true with some CL non-profits, some business entities are
created but they should meet certain requirements.
• In other respects, previously, the law played the role of recognising business
entities rather than establishing them. Parties were said to establish and the law
recognises these entities.
• With the close corporations and companies, the law establishes, and it does so
because they are separate person.
2. The law regulates the internal relationships of business entities
• It regulates the relationships between those who corporate closely within this
business entity.
• One of the things you would see is that there is a distinction drawn between the
internal (relationships existing within the business) and external (those
relationships existing within the outside world) relationships. However, it is not
easy to distinguish what is internal and what is external.
o Internal relationship
Sole Proprietor
§ For example, a sole proprietor can also employ people and there is
an argument to be made that his relationship with his employees is
internal. On the other hand, in some respects, it is not internal.
There is very little to regulate internally when it comes to a sole
proprietor.
Partnership
§ In a partnership, the most important internal relationship is the
one that exists between the partners. The partners established their
partnership through an agreement, they conduct the business
activities of the partnership, this relationship that exists between
them is an internal. NB to realise that the law regards the
relationship the partners as being close thus, it is regulated in a way
that is similar to family. The law says that partners must act like
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brothers. The law accepts that these relationships are close
therefore they should be managed.
CL non-profit
§ CL non-profit, the internal relationships exists between the member
of the non-profit association and those who run it such as being
involved in the sports clubs, church activities where there are
members who are supposed to corporate. Having management of
the association, the managers of the association has to corporate.
§ Internally a close corporation as members, as with partnership, the
relationship is the same (ie. close).
Companies
§ The most fundamental internal relationship in companies, exists
between the shareholders (those people who have the ownership
interest in the company) and on the other hand, the managers of the
companies (directors or executive managers).
§ The law has to regulate the relationships, both between the
managers and shareholders, i.e. between the vertical relationships.
Corporate governance - The big part of the course will be devoted to it that is, the way in
which companies must be governed. A lot of that concerns these kinds of relationships. When
it comes to companies there are different types namely; non-profit companies which have two
possibilities. Either there could be members or non. In non-profit always have to have
manages and an internal relationship
o External relationship
These refers to relationships between the business and the outside world.
Here we are dealing with things such as how does the business contracts,
when would a business be liable for delicts conducted. In this context, you
need to be careful of the relationship that the business has with the
stakeholders. They are persons who are affected by the activities of the
business.
Stakeholders
It is sometimes difficult to determine whether the stakeholders are internal
or external to the business. Creditors (people lending the business money),
they would be regarded as external. Other stakeholders such as employees,
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