Class notes
Company Law (Mercantile Law 471) semester 1
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These notes contain ALL prescribed work (including case summaries) for test 2. As well as class question discussions & test hints.
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Company Law: Semester 1Mercantile Law 471
Table of Contents
1. INTRODUCTION ...................................................................................................................................................................... 3
1.1 WHAT IS A BUSINESS ORGANISATION? ................................................................................................................................................ 3
1.2 WHAT IS THE FUNCTION OF THE LAW IN REGULATING BUSINESS ORGANISATIONS? ....................................................................................... 3
1.3 SOURCES OF THE LAW ................................................................................................................................................................... 11
1.3.1 Origin of common law in the following situations ........................................................................................................... 12
1.3.3 Sources of company law................................................................................................................................................... 13
1.3.4 Enactment of current Companies Act .............................................................................................................................. 22
2. TYPES OF BUSINESS ENTITIES ................................................................................................................................................ 67
2.1 INTRODUCTION ............................................................................................................................................................................ 67
2.2 SOLE PROPRIETORSHIP................................................................................................................................................................... 68
2.2.1 General ............................................................................................................................................................................. 68
2.2.2 Business names ................................................................................................................................................................ 68
2.2.3 Claims for & against SP’s.................................................................................................................................................. 71
2.2.4 Tax .................................................................................................................................................................................... 71
2.3 CLOSELY HELD UNDERTAKINGS ........................................................................................................................................................ 73
2.3.1 Partnerships ..................................................................................................................................................................... 73
2.3.2 Private company ............................................................................................................................................................ 122
2.3.3 Personal liability company ............................................................................................................................................. 186
2.3.4 Business trusts ................................................................................................................................................................ 209
2.4 WIDELY HELD UNDERTAKINGS: PUBLIC COMPANIES ........................................................................................................................... 242
2.4.1 What is a widely held undertaking? ............................................................................................................................... 242
2.4.2 Public company .............................................................................................................................................................. 242
2.5 STATE OWNED ENTERPRISES ......................................................................................................................................................... 266
2.5.1 Introduction & incorporation ......................................................................................................................................... 266
2.5.2 Complex relationships: the state as SH, managers, & public interest in these companies ............................................ 267
2.5.3 Subject to strict rules but difficult to determine relationship between rules ................................................................. 268
2.5.4 State-owned companies regulated in the 2008 Act and subject to strict rules .............................................................. 272
2.5.5 Removal of executives often problematic ...................................................................................................................... 276
2.5.6 Company & Admin Law .................................................................................................................................................. 282
2.6 NON-PROFIT UNDERTAKING ......................................................................................................................................................... 284
2.6.1 Introduction.................................................................................................................................................................... 284
2.6.2 Problems with non-profit undertakings ......................................................................................................................... 285
2.6.3 Soft law .......................................................................................................................................................................... 286
2.6.4 Different forms of NPU’s ................................................................................................................................................ 286
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, 2.6.5 Voluntary association..................................................................................................................................................... 287
3. JURISTIC PERSONALITY ....................................................................................................................................................... 320
3.1 INTRODUCTION .......................................................................................................................................................................... 320
3.2 CHARACTERISTICS ....................................................................................................................................................................... 321
3.2 PIERCING THE CORPORATE VEIL ..................................................................................................................................................... 333
3.2.1 Introduction.................................................................................................................................................................... 333
3.2.2 ‘Piercing of the veil’ in the common law ........................................................................................................................ 334
3.3 STATUTORY PIERCING .................................................................................................................................................................. 354
3.3.1 Main provisions & relationship with the common law .................................................................................................. 354
3.3.2 Interpretation of the test in the Act (s 20(9)) ................................................................................................................. 355
4. COMPANY NAMES, INCORPORATION AND MOI ................................................................................................................. 358
4.1 INTRODUCTION .......................................................................................................................................................................... 358
4.2 COMPANY NAMES ...................................................................................................................................................................... 359
4.3 INCORPORATION ........................................................................................................................................................................ 366
4.3.1 Introduction.................................................................................................................................................................... 366
4.3.2 Notice of incorporation .................................................................................................................................................. 366
4.3.3 The name of the company & the CIPC ............................................................................................................................ 368
4.4 THE MEMORANDUM OF INCORPORATION ....................................................................................................................................... 370
4.4.1 General ........................................................................................................................................................................... 370
4.4.2 Content of MOI ............................................................................................................................................................... 373
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,1. INTRODUCTION
1.1 What is a business organisation?
• Business organisation/ entity:
o It is a legal structure that is used to conduct business.
• But there is no solid definition.
o Why?
▪ Despite being a legal structure for conducting business, it’s not necessarily a legal
structure created by the law itself. Some business organisations are definitely created
for instance companies, close corporations etc., by the law, however sometimes
these structures are much more informally established. Sometimes they are merely
recognised by law. Sometimes they are even more informal, for instance a sole
proprietorship which is difficult to talk about as a structure as it is just 1 person
conducting business.
▪ Not necessarily separate entities from those who conduct the business.
• Companies & CC are recognised by the law as separate entities, but many
other business organisations aren’t separate.
▪ In this context, we use the word “business” in the wide context.
• Some business organisations can also be used for other purposes, like for non-
profit purposes (unlike other business organisations). In these cases, the word
“business” used in wide sense.
o List of business organisations
(a) Sole proprietorship
(b) Partnership
(c) Business trusts
(d) Close corporation
(e) Companies (section 8)
• Companies take on many forms
(f) Common law non-profit
1.2 What is the function of the law in regulating business organisations?
• Some business organisations are created by law, & in fact some of them are separate persons in the
form of juristic persons
▪ Remember distinction between natural person & JP.
3
, • DON’T FORGET THAT THEY DON’T ACTUALLY EXIST AS PERSONS WHICH
INFLUENCES HOW THEY ARE REGULATED.
• In some cases, the law will create these business organisations & in other cases they will simply
acknowledge them
o But then the question is ‘what should the law do beyond that’ or ‘how should the law
engage with juristic persons beyond recognising them or allowing them to be established’.
o This is of course a complex question that is strongly influenced by policy.
▪ Radical believers in free market → the law should create them & then should leave
them alone to do their own thing. At most those that believe strongly in the free
market would say, perhaps business organisation laws should merely create a set of
standard/ default rules that people can use but it should still be left to them to decide
if they want those rules or not.
• Idea is:
o The governing rules should be naturalia (apply by default) but should
not be peremptory.
• Free market view often found in:
o USA, corporate law & company law
▪ Other side of the coin → that business organisations are involved in economic
activities which create wealth & power. That power & wealth must be regulated by
the law because important implications for society.
• Idea is:
o Law protects individuals & business organisations pose risks to the
interests & rights of individuals (in narrow sense: impact on people’s
lives) & therefore, business organisation laws should comprehensively
regulate the businesses to ensure that we all, as citizens, are happy
with what they are doing. Because, simply, we do not trust them
enough to trust that they will do what is in our interest.
• This view is often found in:
o European systems, China, Japan, India
▪ Where there is a stronger sense these activities of business
organisations or companies must in some way be constrained
for the benefit of society
▪ Remember: business organisations are still subject to labour law, environmental laws
etc.
• Business organisation law cannot subsume all these areas of law & even if you
have a completely ‘less than fair’ business organisation law that says they do
not regulate the activities of business organisations in so far as they structure
them, that does not mean they are not subject to all other laws
• They are still subject to labour law, environmental law, consumer law & of
course that is an NB aspect here.
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, • So, in many other ways our law is very regulated, and that also applies to
business organisations.
• But the point here is to what extent should the law of business organisations
ensure that the structures and operations of business organisations itself
protect the interests of others?
• Example:
o Where a business organisation commits fraud, it is fraud & the business
organisation as well as the managers of that business organisations
can be prosecuted & sent to jail. For instance, the mere fact that
money was stolen by the managers of VBS bank does not at all
change the fact that fraud & theft on a massive scale was committed
(or similarly, look at Steinhoff matter).
o And that would be true whether you regulated those business
organisations or not, but the question we will ask in this module is:
▪ Whether you could make rules that determine the structure &
how people in VBS or in Steinhoff act that would stop them or
reduce the risk of them committing fraud or causing harm.
o I.e., the focus in this module is on the question whether you can make
rules that determine the structure & the operation of the organisation
itself that could promote
▪ In terms of the USA: Verimark case
• The US courts said that businesses can do what they want, they can structure
their business organisation however they want, BUT there are all kinds of other
laws that apply to a business organisation & if you do not ensure that you
have the right structural aspects in place in your business organisation to
ensure that it would comply with all those other laws, then that itself is illegal.
• This sort of upturns the whole applecart because you can say you can do
what you want with your business organisation, but you still must comply with
over all the other laws & you must make sure that you have structure to do
that, then you are already engaging with business organisations on another
level.
• Prof Sutherland thinks this sort of thing is going to become NB in SA as well.
• First thing people are going to ask if the business organisation commits fraud
or does something society regards as unacceptable, they are going to look at
the structure and ask why the structure allowed this to be accommodated for
this to happen.
• In most legal systems, we are moving (and the Americans are coming with)
towards greater business regulation to ensure the promotion of certain
interests.
• In a country like SA, the Constitution also lies at the heart of it, so one has to
promote the Constitutional values
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,• The functions of the law in regulating business organisations:
1 Regulates INTERNAL relationships of business organisations
▪ The law, & certainly the law in SA, regulates the internal relationship of a business
organisation & it regulates how the business organisation internally works.
▪ But now the question is, who is inside & who is outside?
• It is very NB whether you define somebody as an insider or an outsider
because it often will determine the extent to which the activities of that
person will be regulated.
▪ Eg. business owners put in money to run this business & they have employees; they
have employment contracts with these people.
• Are these employees insiders or outsiders?
o Are they simply persons with whom the business contracts as outsiders
or are they regarded as insiders of the business itself?
o If they are outsiders, they can simply be governed by labour law. If
they are insiders, then you have to think more structurally about what
they are within the business & how they should work.
• Will come back to this later on, but if you take the eg. of the Netherlands
o After WW2 (and this happened all over the world) people participated
in the war & when they returned from the war, the idea was that
capitalism was over.
o What they did is that companies must ensure that the workers & the
managers have the same say as to where a company should go &
they make rules that now allows (and these rules still apply in larger
companies) for the workers to sit on the board of a company
▪ Those that participate in the business (what is internal & external depends on the type
of business organisation & on the view that the law takes):
i. Sole proprietorship: Perhaps employees to some extent
o Is a business that is only conducted by 1 person & that means that it
does not require much internal regulation, outside of the small number
of cases where in fact it may be necessary to regulate the relationship
with employees within business organisation law as well.
o Eg. if somebody starts selling vegetables next to the road then they
really are a sole proprietor & they become the business of a sole
proprietor at that stage, but generally there is not much to regulate ito
internal relationship
ii. Partnerships: Partners
o Whereas with partnerships, it is more complicated. Will always have
more than one partner. This immediately means there are more
persons conducting this business & some regulation of this relationship
between the partners is necessary.
6
, o Serves as foundation for more complicated situations. But a lot of
partnership law is concerned with this question of how this relationship
between the partners play out.
o Law is intensely involved in the regulation of this relationship. Basic
principle says that partners should act like brothers.
▪ Law expects a lot of transparency, honesty between partners
in a partnership
iii. Business trusts
o Trusts have a much wider use in our law than simply with wills. In the
business world, people often conduct business in trusts.
o In a trust, have a fundamental distinction between the trustees
(responsible for managing) & the beneficiaries.
o Thus, there are 3 very NB internal relationships that have to be
regulated.
1 Between trustees themselves → often very complicated.
2 Between trustees & beneficiaries → law must make rules to
ensure that the trustees act for the benefit of the beneficiaries.
• A problem that often comes up here: the agency
problem
o In many business organisations the business
organisation is managed by somebody who is
not the person who ultimately benefits from that
activities of that business.
o Often have a conflict between on the one
hand, the people managing & their own
interests & on the other hand, the people who
should actually benefit from the business.
3 Between beneficiaries → less of an issue but still needs some
regulation.
o Trusts are used for many purposes.
▪ Can have testamentary trust where it is only meant for the
assets of a person to skip a generation so they can save tax or
for a person to ensure that his assets would be properly
managed after his death.
▪ But also, idea of the business trust is used to conduct business.
Have the trustees that are generally involved in conducting the
day-to-day business & the beneficiaries ultimately receive the
benefit of the conduct of this business.
iv. Common law non-profits
o Create entities that conduct non-profit activities
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, ▪ Eg. musical society: create a business organisation in the
common law.
o These kinds of business organisations also need internal regulation to
ensure proper operation of those who conduct its activities in the
same way that the trustees of a trust do.
▪ Beneficiaries of these organisations are sometimes inside the
business (member of music society).
▪ But these kinds of non-profit activities are often conducted for
many people who aren’t inside the business organisations.
• Eg. If we have a nonprofit CL organisation that provides
shelter to homeless people, then those homeless
people won’t necessarily be regarded as internal in
that sense.
o But of course, as you can imagine, considerable
amount of regulation would be necessary to
ensure that this business organisation is properly
run for their interest.
v. Close corporation (NOT “closed”, it is “close”): Members
o People work closely together. It is not closed off.
o CC’s are created for small businesses (in RSA).
o Idea: members of business are very much like the partners of a
partnership. And the internal regulation of the relationship between
them is very much like the regulation of a partnership.
o We used to have a Close Corporation Act: legislation enacted in mid
80s. But when current Companies Act came into effect (2012) the idea
of a CC was suffocated.
▪ I.e., no longer possible to create a NEW CC. But there are still
many CC’s out there.
vi. Companies: relationship between shareholders inter se & between
shareholders & managers (directors)
o In all companies, always have those who manage the company &
above them, you have the board of directors.
▪ Any company that is for profit will at least distinguish these two
things.
o The board of a company which is at the top of the management of
the company, consists of the directors
▪ there again you can imagine a considerable amount of
regulation is needed to ensure that the relationship between
those directors operate properly.
▪ And when directors of a company are in conflict, the
company has major problems.
8
, o Regulation to ensure relationships between directors (horizontal)
▪ If there is conflict between directors themselves, then the
company will have major issues.
▪ Eg. Big case: Old Mutual & Peter Moyo
• Moyo was a managing director of OM. There was
conflict between him & other members. He was
removed as director. He disputed it. Went to court.
• Situation actually affected share value of company.
• Moyo has recently lost the substantive part of his case
→ court found he was properly dismissed.
o Can have conflicts between shareholders & board (vertical)
▪ In the case of profit companies, always have shareholders
▪ Shareholders hold a great interest in the company
▪ Agency problem often arises here.
o Conflict between the shareholders themselves
▪ If you have conflict between them, it can undermine a
company (especially in a small company). Whereas in a large
company like Old Mutual, individual shareholders don’t care
much for the others. But if an individual has a large share in a
company, then they might care about the other shareholders.
▪ But typically, the conflicts between shareholders arises in
smaller companies.
▪ These companies can take on many forms
• Eg. normally legal practices are conducted in
companies. In those companies the directors of the law
firms are on the one side, but those directors are also
shareholders in that company & the conflict can arise
on both levels & has to be governed as well.
2 Law has to regulate EXTERNAL relationships of businesses
▪ How do these business organisations interact with the outside world?
• Two NB questions:
(1) When & how does a business organisations contract?
▪ Most NB case → Makate v Vodacom
• Facts: Makate worked for Vodacom. He developed
Please-Call-Me. He dealt with the company and the
court found that the company had agreed to pay him
a certain amount for his idea.
• Question at the core: When does Vodacom conclude
contracts with persons like Makate? What has to
happen for it to conclude a contract?
9
, • Decision: The CC created new law to allow the CC to
come to the conclusion that the company created a
contract with Makate. Because in terms of old rules,
there was no conclusion of a contract.
(2) When does a business organisation commit a delict/ crime?
▪ When are they liable in delict?
• Eg. Truck driver is an employee of a particular business
organisation. He causes an accident.
o Can you only hold him liable, or can you hold
the business organisation liable?
o Very NB question, because it often is the
difference between getting money & not
getting money (companies have bigger
pockets) & the same applies to criminal law.
▪ When are they liable in terms of criminal law?
• Companies can commit crimes.
• In SA, business organisations that are juristic persons, for
e.g., companies can commit crimes.
o Look at weapon transfer fraud cases, will see
that there is only one person in court, but there
are a lot of accused parties & the reason for
that is many of the other accused are
companies.
• But when?
o This can become very NB when it comes to
things like environmental crime.
o Or as well in terms of corporate manslaughter
o There is a lot of law in the UK regarding
corporate manslaughter
▪ Because of the activities of a company,
somebody gets killed.
▪ Then it becomes clear, that this business
organisation allegedly did not put in
place proper systems & they can thus be
prosecuted.
3 The internal-external distinction is NB.
▪ In business organisations, these parties who are close to the line are called
stakeholders.
• But how should these stakeholders be regulated?
▪ Types of stakeholders:
• Creditors (specifically long-term creditors)
10
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