These notes have been passed down and sold through 3 generations of Stellenbosch law students. This is my addition to the body of company law notes. I know it can really be a killer but these notes really helped me and I ended up doing really well in my exam. Please do send me an in mail I have ext...
Part 3: Types of companies
Why would you want to incorporate a company?
o Perpetual succession
We have looked at various types of companies already
Questions to keep in mind
Why would you rather start a voluntary association where you want to do charitable work instead
of incorporating a non-profit company i.t.o the Company’s Act?
Does the director of a profit company have a lower fiduciary duty than the director of a non-profit
company in light of the fact that the directors of a profit company need to expose the company to
risk in order to profit?
Is there any difference in company litigation?
Distinction between profit and non-profit companies:
First basic distinction in s 8(1) of the Act is between profit and non-profit companies:
o “Two types of companies may be formed and incorporated under this Act, namely profit
companies and non-profit companies”
o Under the old act, many people tried to incorporate a company as a non-profit when the
actual intention was to conduct a profit company. Cunningham case why would you do
this? Fraud? Escape liability?
Both types of companies are defined in s 1
o A profit company is defined as “a company incorporated for the purpose of financial gain for
its shareholders”
Note: there is a big difference between a shareholder and the beneficial interest
holder in a share. Will focus on in second semester
Shareholder = person whose name appears on the company’s securities
register. Does not necessarily have to be the owner
Owner = beneficial interest holder
o Non-profit company is defined in section 1 with reference to Schedule 1
This will be discussed in greater detail later on
Distinguishing features are that property or profit may not be distributed and that it
must have a public benefit purpose
Remember as was discussed in part I of the course: the prohibition on distributions
are often abused
o If you form a company for the reason of distributing profits to shareholders (i.e. profit
company), then the option of a non-profit company is not open to you
Not only does this defeat the purpose of a non-profit company, but it is actually
illegal (Cunningham) = would be liquidated.
Cunningham cannot hold a shareholder who later finds out that it is illegal to the
scheme.
Think carefully about the tax benefits of paying dividends or distributions and paying value from the
company as salary
o It may be tax beneficial to rather pay salaries than dividends so the prohibition of
distributions may be of little value
One shouldn’t overestimate the role of profit companies
o E.g. Cuninghame v First Ready Development [prescribed]
o Hotel in Gordon’s Bay
o Incorporated themselves as a NPC but ultimately, their purpose was profit
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, o Why would people do this?
Because one of the distinguishing features of a profit company is that you can
declare dividends, and in a NPO you may not make distributions in the form of
dividends
Instead, in a NPC you may pay a reasonable salary
That is where the biggest abuse occurs in NPCs
Donors can question why the NPC is in such a bad state after they have been
constantly making donations
As a donor, you are not forced to make donations, so you can tell management that
unless they drop their salaries, you will cease their operations
o See summary of this case later
Profit companies: (read)
With profit companies, the same or similar argument applies
o Most companies ask themselves: what are the tax advantages of structuring a transaction in
a certain way?
o Traditionally, you would incorporate a company because you could pay out dividends to its
shareholders
Traditionally, dividends would not attract the same tax rate as a salary – taxed at a
much lower rate
Makes sense to take dividends as a form of remuneration instead of taking a salary
However, in the past 5 or 6 years, this financial benefit has become blurred – not
necessarily the case anymore that taking dividends would be more beneficial than
taking a salary
Doesn’t make much difference anymore
o What other benefit can you get from rather being the employee of a company? – i.e. taking
a salary rather than relying on profits being made
Gives you more certainty having a salary – virtually guaranteed monthly cash flow
With a dividend, you don’t know if there will necessarily be a profit
An employee is a creditor; a shareholder who only relies on dividends is at the back
of the queue in terms of Insolvency Law
Employees have a greater benefit from the insolvent estate than a shareholder
Your salary at the end of the month is not dependent on the company’s profitability
Salaries are expenses which a business must incur
One shouldn’t overestimate the above
o Also depends on the reasons why you are buying shares in a company
o Some people make a living out of their own business vs buying shares on the stock exchange
as an investment
o Be mindful when looking at why you would incorporate a company: is it to start your own
business or merely for investment?
Different types of profit companies:
o State-owned companies s 8(2)(a)
o Private companies s 8(2)(b)
o Personal liability companies s 8(2)(c)
o Public companies s 8(2)(d)
The Act draws some basic distinctions between profit and non-profit companies
o Section 10 sets out a number of provisions that will apply to profit but not to non-profit
companies
Go and read this section – the whole of s 10(2) is relevant
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, o Section 58-65 (concerning meetings of shareholders) only apply to non-profit companies
with members:
In these cases members will be the equivalent of shareholders
The provisions will operate subject to contrary provisions in Schedule 1 (s 10(3) read
with 10(4))
Section 13 determines who may incorporate companies (s 13(1))
o This provision determines that:
One or more persons or an organ of state may incorporate a profit company
An organ of state, a juristic person, or three or more persons acting in concert may
incorporate a non-profit company
o S 13(1) has a strange formulation:
This provision determines that:
One or more persons or an organ of state may incorporate a profit company
An organ of state, a juristic person, or three or more persons acting in
concert may incorporate a non-profit company
Profit companies – regardless of whether public or private
A ‘person’, included in both parts, normally includes a juristic person, but the second
part of s 13(1) says ‘three or more persons’, which would include a juristic person,
and then also talks about a juristic person on its own
Makes no sense to require three persons, and in the same sentence say one
juristic person may incorporate a NPC
What if two juristic persons want to incorporate a NPC? Does that satisfy the
requirements of the Act? Because it seems as though the minimum is one
It is not clear from the provision whether a single juristic person may
incorporate a non-profit company: as this part of the provision is a lex
specialis it should perhaps override the more general provision regarding
persons and should allow for one juristic person to incorporate a non-profit
company
o But that perhaps is not what the legislator wanted
In practice, to be safe, have three persons – whether natural or juristic
Section 24(4)(a) allows for all profit companies to have securities registers and for non-profit
companies with members to have registers of members
o Where a non-profit company does not have members no register naturally will be required
(see also s 10(2)(b))
Section 29(5)(c): different reporting standards may be set for profit and non-profit companies
o Different standards have been set in accordance with regulation 27
o Must know these financial requirements
o For accounting purposes a company must calculate a public interest score (see reg 26(2))
(see private companies for the manner in which this is determined)
o Regulation 27 then determines sets out the obligations of NPC’s as follows:
Category of Companies Financial Reporting Standard
Non profit companies that are required in terms `IFRS, but in the case of any conflict with any
of regulation 28 (2)(b) to have their annual requirements in terms of the Public Finance
financial statements audited. Management Act, the latter prevails.
Non profit companies, other than those One of––
contemplated in the first row above, whose (a) IFRS; or
public interest score for the particular financial (b) IFRS for SMEs, provided that the company
year is at least 350. meets the scoping requirements outlined in the
IFRS for SME’s.
Non profit companies, other than those One of––
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, contemplated in the first row above–– (a) IFRS; or
(a) whose public interest score for the particular (b) IFRS for SMEs, provided that the company
financial year is at least 100, but less than 350; or meets the scoping requirements outlined in the
(b) whose public interest score for the particular IFRS for SME’s; or
financial year is less than 100, and whose (c) SA GAAP
financial statements are independently compiled.
Non profit companies, other than those The Financial Reporting Standard as determined
contemplated in the first row above, whose by the company for as long as no Financial
public interest score for the particular financial Reporting Standard is prescribed.
year is less than 100, and whose financial
statements are internally compiled.
o The different reporting standards are defined in reg 27
Reg 27(b), (c) and (g) are relevant
o Regulation 28 is made in terms of s 30(2) and determines when a company other than a
public company must be audited
In most respects NPCs will be treated like other companies that are not public
companies (see private companies below)
However, the regulation contains one special rule for NPCs: they will also have to be
audited if certain requirements are met – see reg 28(b)(i) and (ii)
State-owned companies: (read)
Many of the difficulties of state-owned companies have already been discussed in part I and will be
discussed under fiduciary duties
Definition of state-owned companies has already been discussed in part I. But just to recap:
o “means an enterprise that is registered in terms of this Act as a company, and either—
o (a) is listed as a public entity in Schedule 2 or 3 of the Public Finance Management Act,
1999; or
o (b) is owned by a municipality, as contemplated in the Local Government: Municipal
Systems Act, 2000 (Act No. 32 of 2000), and is otherwise similar to an enterprise referred to
in paragraph (a).”
We have already discussed examples of SOCs: SABC, Eskom, Denel/Armscor, Oil and Gas
Exploration Corporation
Most important provision is s 9(1) which determines that provision in the Companies Act that
applies to a public company will also apply to a SOC. There will be two exceptions:
o The Minister may grant exemption in terms of s 9(3)
o Where other legislation trumps the Companies Act in terms of s 5(4) and 5(5) and they have
specific provisions that apply to SOCs that are different from the Companies Act, then those
provisions would prevail (see the self-study on s 5(4) and think again about the cases of SOS
Support Public Broadcasting Coalition v South African Broadcasting Corporation and
Minister of Defence and Military Veterans v Motau that were discussed in Part I)
The name of a State-owned company will have to be followed by the abbreviation SOC Ltd: s 11(3)
(c)(iv)
There are some special accounting and auditing requirements for SOCs, although they would for
the most part be dealt with in the same way as public companies
o Reg 27 issued in terms of s 29(5)(c)
It determines that IFRS will apply here, “but in the case of any conflict with any
requirement in terms of the Public Finance Management Act, the latter prevails”
In terms of the PFMA other standards will often apply
Remember that in terms of s 5(4) the PFMA trumps the Companies Act
In terms of s 72(4)-72(10) certain companies will have to appoint Social and Ethics Committees
o This is determined in regulation 43
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