Exam (elaborations)
Corporation Law Question & Answer Guide
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CML3001W Q&A guide with applicable cases for answer format.
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FINANCIAL ASSISTANCENuvo Ltd is an construction company. It has four classes of shares (A-, B-, C- and D-shares). There are one thousand (1000)
A-shares, all of which were issued (as ordinary shares) at the time that the company first listed on the JSE. Five hundred
(500) B-Shares were subsequently authorised as participating preference shares, half of which were issued, the remainder
retained by the company. Each of the twelve directors hold ten (10) of the one hundred and twenty (120) total C-Shares,
which are deferred shares. Although one thousand (1000) D-shares have been authorised, none of these have been
issued.
It is the end of the financial year and the board of Nuvo Ltd would like to enter into the following transactions:
A. Extending loans to certain South African investors which the company has identified as potential new holders of the
remaining (250) B-Shares for the purposes of subscribing for these shares;
B. Obtaining a loan from TCA (Pty) Ltd, which is a private equity company, for the purposes of refurbishing the company
(Nuvo Ltd) head office;
C. Providing security for a loan obtained by Mr Shaw for the purposes of purchasing 500 D-shares;
D. Standing surety for a loan obtained by Epco (Pty) Ltd from UBank. 60% of the shares in Epco (Pty) Ltd are owned by
Edwina who is married to the managing director of Nuvo Ltd.
You are a director on the board of Nuvo Ltd and present at the meeting where these proposals are tabled. Consider
whether or not the board is able to proceed with these transactions.
Step 1: Definition + issues related issues to definition = If there is no statutory definition, what does the statute actually tell
us? – e.g. What is FA is not defined, but what isn’t FA is defined (S44)
Dividend/debt repayment questions:
-Gradwell/Rostra; Novair/Comair
-Principles in Lewis decision
-Impoverishment Test = “It is a starting point of a more holistic enquiry…”
Step 2: Apply to facts
Transaction 1: Financial assistance
Transaction 2: NOT financial assistance – loan, but NOT for the purposes of or in connection with subscription of securities
-Assistance not given to director = S44 or S45 DO NOT APPLY
Transaction 3: Likely be assistance (Lipschitz) = Despite company not actually being rendered poorer, the Act states that
securing a loan would constitute assistance (affirmed by case law).
-Aim and purpose is to clearly acquire shares in company
Transaction 4: NOT financial assistance (no S44), but may be within S45 = Determine whether there are ‘related persons’
to consider = compare to S45 wording
Step 3: Set out requirements from provisions
DISTRIBUTIONS
Rand (Pty) Limited is a holding company with two classes of shares: Class A and Class B. Class A shares are ordinary shares
and Class B are cumulative participating preference shares. There are 1000 Class A shares in issue and 500 Class B shares.
There are 10 Class A shareholders and 5 Class B shareholders. All the shareholders are natural persons and they all hold an
equal number of shares. Each share carries one vote.
Rand has two wholly-owned subsidiaries, Cent (Pty) Ltd and Pence (Pty) Ltd.
In January 2013 Rand (Pty) Ltd decides to:
a. Purchase 100 Class A shares and 100 Class B shares from its shareholders on 10 January;
, b. Sell the Class A shares that it has purchased to Cent (Pty) Ltd on 15 January; and
c. Pay a dividend of R 100 000 to its shareholders on 22 January.
The MoI of each company in the Group contains exactly the same requirements as those in the Act. Advise Rand and its
two subsidiaries of the legal implications of what is proposed, the legal requirements they will be expected to comply with
and the legal consequences which may flow if they do not.
Transaction A: Rand is purchasing its own shares = buy-back (Section 48) = THEREFORE: S46 req. to be satisfied…
-Must reasonably appear that the company will satisfy S4 S&L test immediately after it has paid for the repurchased shares
-Board must – by resolution – acknowledge that it has applied the S&L test and reasonably concluded that Rand will satisfy
the test after completing the repurchase.
Transaction B: Cent is acquiring shares in its holding company, Rand = Must meet req of S48(2)(b) and S48(3) [no more
than 10% of the class]
-Purchase = 10% of class A shares, so req. is fulfilled. (S48(2)(b))
-As a result of the acquisition, there must not only be shareholders who are subsidiaries left or only convertible or
redeemable shares. (S48(3)) = this is not the case
o BUT: When Rand repurchased the shares, they lost their status as issued shares and became authorized shares again. =
In order to sell shares to Cent, it would have to re-issue them.
Board has power shares, but because Cent is a ‘related person’ (i.e. subsidiary), the issue will required a special
resolution of shareholders in terms of S41(b).
Transaction C: Rand is making a distribution to shareholders, to it must comply with S46 requirements…
-Must reasonably appear that the company will satisfy S4 S&L test immediately after it has paid for the repurchased shares
-Board must – by resolution – acknowledge that it has applied the S&L test and reasonably concluded that Rand will satisfy
the test after completing the repurchase.
Comment on S&L test as facts allude to application = How will boards conduct be measured?
-Is test objective or subjective?
-Consider timeline
-What info will the board base the test on
In regard to all transactions, if requirements are not met = potential liability for directors in terms of S41(5), S46(6) and
S46(7), provided their actions meet requirements of those sections read with S77(3). Mention limitation on liability
(S77(4)).
FUNDAMENTAL TRANSACTIONS, TAKEOVERS AND OFFERS
Seabreeze Ltd is a wholly owned subsidiary of XYZ Ltd. The holding company has no other assets except its shareholding in
Seabreeze Ltd. Seabreeze Ltd runs a diversified portfolio of business units. Its balance sheet for the financial year ended 31
December 2019 valued its assets as follows:
Asset & Asset value
Poultry Business Unit R 20 000 000
Laundry Business Unit R 8 000 000
Restaurant Business Unit R 7 000 000
Total Assets R 35 000 000
Ms Kate Winslow owns a substantial amount of the issued shares in DMC Ltd but she does not control the company in any
way. Kate is a live-in girlfriend to Steve Johns, who owns 20% of the shares in XYZ Ltd. The two have lived together for the
past ten years.
The directors at Seabreeze want to diversify the company’s business portfolio further. At the next board meeting the
directors propose to adopt a resolution to the following effect: That Seabreeze Ltd transfers the Laundry business unit to
XYZ Ltd and that it sells the poultry business unit to DMC Ltd, a company that is not part of the XYZ group of companies.
, Advise the directors of Seabreeze Ltd of the legal implications what is being proposed including the requirements, if any,
that have to be complied with based on the facts given above. [15 marks]
Definition of ‘disposal’.
Sale of Poultry Unit to DMC:
-Amounts to disposal of greater part of Seabreeze’s assets, as poultry unit is more than 50% of company’s assets.
-S112 + S115: Company may NOT dispose all or greater part of its assets unless certain conditions are met
o Notice: What must it include?
Specific info relating to transactions, incl. of S115 + S164 (remedies) etc.
o Special resolution of company’s shareholders approval of transaction
o Special resolution of company’s holding company if the disposal of the subsidiary’s assets also constitute a disposal of
all or a substantial part of the holding company’s assets (this is the case here, so special resolution of XYZ’s
shareholders is required)
-Relationship between Kate and Steve: What is the impact of this on Steve’s vote to approve transaction?
o S115(4) read with S2(1) – definition of ‘related persons’
-Compliance notice or exemption from TRP req. if takeover regulations are applicable
o In this case, Seabreeze is a public company and this is a regulated transaction = so they are applicable
-Court approval if 15% of voting rights exercised by company’s shareholders OR shareholders of holding company voted
against resolution, and one of those shareholders requires the company to seek court approval
Transfer of Laundry Unit to Holding company:
-On the facts, this disposal would not be a disposal of all or a greater part of the company’s assets as the laundry unit
constitutes less than half of the total assets’ value.
-Discuss definition of disposal + how to calculate value (S1, Standard Bank v Hunkydory)
o Even if it did constitute a disposal of a greater part of the company’s assets, S112 exempts a transaction that would
constitute a disposal between a wholly-owned subsidiary and its holding company (req. of S112 and S115).
TOPIC 4: GOVERNANCE AND BOARD OF DIRECTORS
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