CORPORATION LAW
Introduction
- Limited liability company: ‘figment of the imagination’
o shaped society, feature of modern commercialism
- Corporate citizens employ, feed, transport and entertain = spark economic growth,
lead scientific development etc.
o “…organization whose significance rivals that of the state…primary institution for
organizing and employing much of our capital and labour resources and the
primary supplies of goods and services.” – Mary Stoker
- Companies are FALLIBLE: Corruptible by power, greed and inefficiency
Definition of “corporation” or “company”: "a collection of many individuals united into one
body, under a special denomination, having perpetual succession under an artificial form,
and vested, by policy of the law, with the capacity of acting, in several respects, as an
individual, particularly of taking and granting property, of contracting obligations, and of
suing and being sued, of enjoying privileges and immunities in common, and of
exercising a variety of political rights, more or less extensive, according to the design of its
institution, or the powers conferred upon it, either at the time of its creation, or at any
subsequent period of its existence."
Common Characteristics between companies in all jurisdictions – core attributes:
- Legal personality: Company is separate entity in eyes of law (own rights and liabilities)
- Limited liability: Shareholder is only liable to extent of their contribution
- Transferrable shares:
- Delegated management under board structure: In bigger companies, bigger distinction
between shareholders and board
o Smaller companies: e.g. 2 shareholders that are also 2 directors (increased liability)
- Investor ownership: Buying shares in company (less risky)
Regulation: Different complexities of companies’ structures make it difficult to regulate by one
piece of legislation
- Balance between overregulation (costly, time-consuming, less efficient) and under-
regulation (undermining transparency, disclosure etc.)
History
- Roman Law concept of partnership: Example of the early formalization of joint ventures
- Weak forms of ENTITY SHIELDING found early on in 13 th c = followed by representation,
limited liability and tradable shares
- Medieval jurists in 14th c: Developed the theory of corporation as a transcendent body
whose existence amounted to more than simply the sum of its members
- 16th + 17th c: Impossible for existing corporations and strategies to provide capital and
longevity = could not be solved without legal intervention
o Modern limited liability became necessary = 1860’s: joint stock companies
permeated Victorian consciousness
o British trading companies (DEIC) started as charted companies but developed features
of joint-stock companies = traded for their own accounts, boards began to manage
, affairs = marked birth of corporate board as management organ in modern
sense
o Board members greatly invested in company + were elected by investors on
assumption that they would be acting in the company’s best interest (rational choices)
o Boards were not yet developed as monitoring instruments
- Corporations were a privilege granted by state on ad hoc basis
o Generally enabling legislation only became common reality in 18 th c
o Registration process that was governed by legislation was restrictive
1856: Joint Stock Companies Act
1862: Companies Act
Both introduced shift toward facilitative and enabling regime
Although the corporate form has evolved over time, the original concept still
remains at the heart of company law
- Enduring legal mechanisms were devised to regulate corporations: Centered around
certain core attributes of limited liability corporations + are almost identical across
most jurisdictions
o Universal legal principles (e.g. legal personality, limited liability, delegation
management) speak to structures that required legislative intervention and legal
doctrines = could not be defined by contractual agreements
South African Company Law
- Completely based on English law = cases have been influential
- JJ Du Plessis (1977): “Factors like the influence of European company law on the
United Kingdom, a relatively long period of isolation from international influence on
South African company law and a conservative approach as far as a comprehensive
overview of South African corporate law is concerned, resulted in an ironical situation,
namely that South Africa has at the moment probably a more traditional British company
law system than the Brits themselves.”
- Companies Act of 2008: Drew from American and Australian law = development of new
corporate law tradition
Regulatory Frameworks
Companies Act 71 of 2008
o S5: Interpretation
Must comply with purposes of Act set out in S7
o Agencies established under this Act:
Companies Tribunal (part of DTI): Provides speedy resolution of company disputes,
national jurisdiction, independent (but subject to Constitution + law), functions within
scope of Act, performs fairly and transparently (without fear, favour or prejudice) =
adjudicates disputes about names, exemptions and directorships
Companies Commission (CIPC): Oversees registration and maintenance of
companies, co-operatives and intellectual property rights, keeps reg info, promotes
education and awareness of company + IP law, promotes compliance with legislation,
monitors contraventions, reports + researches + advises Minister on company law + IP
law national policy, key role in company law admin
o Underlying philosophies:
Incorporation as RIGHT, not a privilege
Simplicity: Process of incorporation and management
, Flexibility: One act regulating a large spectrum of companies
Efficiency: Measuring against global standards
e.g. Shift from Capital Maintenance Rule to Solvency and Liquidity Rule
Transparency: Cannot be too onerous
Predictable Regulation: Create legal certainty, balance between over- and under-
regulation
Financial Markets Act 19 of 2012
- Pertains to listed companies only
‘Soft law’ Measures:
King IV Code of Corporate Governance
- Voluntary code of best practices (can be indirectly enforced)
International Mechanisms
Constitution
- DETERMINES INTERPRETATION OF LEGISLATION
Alternative Business Entities
Introduction
- Operating a business without legal formalities = sole trading
o Law does not distinguish between sole trader and their business = COMPLETE LIABILITY
IN PERSONAL CAPACITY (high risk if company is relatively big)
Partnerships
- Legal relationship arising from agreement between at least 2 people in terms of which
each contributes towards a business carried on in common, with the object of
obtaining mutual material benefit (essentialia of contract) = ESSENTIALIA + TRUE
INTENTION
- Not all joint commercial ventures are partnerships: If agreement is to simply regulate
rights of ownership in joint property without object of making profit, then there is no
partnership
- ‘Specific contract’: Certain default rules apply (naturalia) unless parties agree otherwise
- SA follows AGGREGATE THEORY: We do not treat partnership as separate entity in law =
partner will not enjoy limited liability (will be directly liable to personal AND
partnership creditors)
o Consequences: Default is that partner does NOT enjoy limited liability
Aggregate Theory vs Entity Theory
- Entity Theory: Partnership as separate legal entity = can contract in its own name – does
NOT mean limited liability
- Aggregate Theory: Partners make up the partnership
o PARTNERSHIP FUND: Own assets in joint and undivided shares (change of ownership:
individual to partnership)
o EXCEPTIONS:
1. IF PARTNER/PARTNERSHIP IS INSOLVENT= SEQUESTRATE ESTATES
SEPARATELY BUT SIMULTANEOUSLY
, Liquidator will draw up separate Liquidation and Distribution accounts (NOTE:
NATURAL PERSONS ARE SEQUESTRATED, JURISTIC PERSONS (E.G. COMPANIES) ARE
LIQUIDATED – BUT: STILL CALLED L+D ACCOUNT DURING SEQUESTRATION)
Exhaust partnership fund to pay partnership creditors
o If partnership fund has insufficient funds to pay partnership creditors, then
partnership creditor can claim from partners’ personal estates – Partnership
creditor can claim from one partner who has right of recourse against other
partners, OR creditor can claim pro rata from all partners.
Exhaust personal assets to pay personal creditors
o If personal estate has insufficient funds to pay personal creditors, then partnership
fund can be used to pay personal creditors.
e.g. Jane wants to start a business. She owns a car that she will contribute to the
partnership. Thabile contributes money to the business. They want to sell Granny’s sauce.
Granny contributes the actual product and the recipe (intellectual property). All of the
assets contributed are owned in joint and undivided shares, which make up the
partnership fund. Mina is a partnership creditor, so she will claim from partnership fund.
2. VAT: Partnership can register as VAT vender
3. LITIGATION: If we sue partnership during its existence, we must cite each partner
as a defendant – execute against partnership assets.
- Different kinds of partnerships:
o Universal partnerships: Total pooling…
Of all property: More common (e.g. putative marriages = tacit universal partnership
– see Butters)
Of all profit: Niche
o Extraordinary Partnerships
Silent Partnerships: Allow partners to limit their risk by being “invisible” – perception of
being a partner; do not actively participate
Governed by partnership agreement, naturalia applies unless agreement concludes
otherwise
Not directly liable to 3rd parties
Commanditarian Partnerships: Exactly the same as silent partner = BUT: LIABILITY IS
LIMITED TO A PARTICULAR AMOUNT (equivalent to investment)
- Partners own assets in joint and undivided shares
- Relationship based on good faith
o Considered fiduciaries = therefore: FIDUCIARY DUTIES APPLY
Directors of a company also stand in fiduciary relationship with their company
Duties: Protect vulnerable party – partners must act unselfishly in best interest of
partnership, must disclose all info relating to partnership, not allowed to compete with
partnership, must generally in good faith, duty of care and skill (standard of care is low
for historical reasons)
- Joint Liability: Liable according to ownership ratio
o RULE: All parties are JOINTLY LIABLE during existence of partnership = BUT:
when partnership ceases, parties are jointly AND severally liable. (point of
contention)
Counter-argument: After you sued jointly during partnership, court order is issued
against partnership assets. After partnership assets have been fully exhausted,
personal assets may be claimed against.
- Several Liability: Can claim whole amount from one person or from all owners
