MRL2601-ENTREPRENEURIAL LAW EXAM PACK 2021/2022. QUESTION 1
1.1 Ann, Jack and Sam are three friends who wish to start their own
publishing company. While driving one Sunday afternoon, Jack comes
across the perfect office building. He wishes to purchase this building
on behalf of the proposed co...
100 marks
24 hours (plus additional time for submission)
QUESTION 1
1.1 Ann, Jack and Sam are three friends who wish to start their own
publishing company. While driving one Sunday afternoon, Jack comes
across the perfect office building. He wishes to purchase this building
on behalf of the proposed company. Advise Jack what the
requirements are that would need to be adhered to in terms of the
Companies Act 71 of 2008 in order to conclude a valid and binding
contract on the company’s behalf before its incorporation. Also list
the different common law alternatives that Jack could consider
instead. (12)
In terms of section 21 of the Companies Act 71 of 2008, any person wishing
to establish a company can enter into a contract with a third party on behalf
of a company that is not yet formed. After that company has been formed,
then the entered contract will be transferred to the company. In this case, as
Jack wishes to purchase the building on behalf of the proposed company, he
can make use of this section.
In terms of section 21 of the Companies Act, the contract will be valid and
binding if:
➢ it is entered by a person wishing to start a company on behalf of a
company that does not exist yet. In this case Jack would be doing so.
➢ the contract is in writing.
➢ the board of the company approves and accepts the terms and conditions
of the contract within a period of three months after its formation.
, In terms of common law, it is impossible for any person to enter into a
contract on behalf of a company that does not exist yet. However, there are
other alternatives available under common law Jack could consider. They
are;
(i) Cession and delegation
(ii) Nomination
(iii) Option
(iv) Contract for the benefit of a third party
1.2 Woodinn (Pty) Ltd has two shareholders, Tom and Sue who each
hold 50% of the issued share capital. Tom, Sue and Jack are
appointed as the company’s directors.
The Memorandum of Incorporation determines that Woodinn (Pty) Ltd’s
main business is manufacturing furniture. In addition, it stipulates that Jack
may conclude contracts not
exceeding the value of R500 000 on the company’s behalf. For any contract
exceeding this amount, Jack is required to get prior permission from the
board of directors.
The company was registered early in 2018. No annual general meeting has
been held as yet.
Answer the following questions with reference to the Companies Act 71 of
2008 and the facts provided above:
1.2.1 Jack buys a load of timber to the value of R2 million from Xander.
Jack does not seek permission from the board of directors as
required. Xander does not take the trouble to find out what the
company’s Memorandum of Incorporation determines but does not
suspect any irregularity in the agreement. Is the company bound to
the transaction?
(5)
In terms of section 20(1)(a) of the Companies Act, even if the Memorandum
of Incorporation of a company may restrict some powers on the legal
capacity of the company, that will not invalidate any contracts concluded by
the directors of the company. This technically means that any contract that
, is concluded contrary to the Memorandum of Incorporation by the directors
of the company is valid. In this case Jack concludes a contract of R2 million
with Xander (contrary to the R500 000 limit imposed by the Memorandum
of Incorporation) without seeking permission from the board of directors.
Consequently, this contract is still valid.
Hence the company is bound to the transaction.
1.2.2 Is the company required to hold an annual general meeting? (3)
“In terms of the Companies Act, only public companies have a statutory
obligation to convene annual general meetings.” Other companies may do
so voluntarily. Since Woodinin (Pty) Ltd is a private company, it is thus not
required to hold an annual general meeting, it may do so voluntarily.
1.2.3 What matters must be discussed at a company’s annual general
meeting? (4)
In term of section 61(8) of the companies Act the following matters must be
discussed at a company’s annual general meeting:
➢ presentation of the directors’ report
➢ presentation of audited financial statements for the immediately preceding
financial year
➢ presentation of an audit committee report
➢ election of directors to the extent required by the Companies Act or the
company’s Memorandum of Incorporation
➢ appointment of an auditor for the following financial year
➢ appointment of an audit committee
➢ any matter raised by shareholders
1.3 List four (4) grounds on which an application can be brought against
a director for an order declaring him or her delinquent in terms of
section 162 of the Companies Act 71 of 2008. (4)
In terms of section 162(5) of the Companies Act 71 of 2008, the grounds
for delinquency order are that the person:
➢ served as a director while disqualified, or
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