AUE1601 SUMMARISED
NOTES 2022/2023
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Topic 2: Interpretation, purpose, application and formation of a company
Study unit 2.1
Related and interrelated persons, and control (Sec 2) and Subsidiary relationships (Sec 3)
Consanguinity: blood relationship
o First degree: children (incl. adopted) and parents
o Second degree: brother, sister, grandparents, grandchildren – there is at least one
generation between you and a person related to you in the second degree
Affinity: due to valid marriage
o First degree: husband and wife or living together similar to marriage
o Second degree: same as the underlying degree of relationship by blood
An individual related to juristic person:
o Individual directly/indirectly controls juristic person
A juristic person related to another juristic person:
o Either of them directly or indirectly controls the other or the business or the other, or
o Either is a subsidiary of the other, or
o A person directly or indirectly controls each of them or the business of each of them
From revision slides:
Relationship between individual and juristic person (company)
• Individual holds majority of shares in company (51% or more)
• Individual together with related/inter related person holds majority of shares (e.g. John, his wife, and
his brother together holds 51% or more)
• Individual’s wife or brother or child or parents holds 51% or more (even though the individual may
hold nothing)
• Individual, although holding 0% or less than 50% of the shares, has the right to appoint or choose
directors who controls the board.
From revision slides:
Relationship between juristic person and juristic person (company and company)
• Company A holds 51% or more of the shares in Company B
• Company A is able to appoint or choose the directors that controls the board of Company B
• John and/or his wife together holds 51% or more of the shares in both Company A and
Company B
• Company A holds 51% in Company B and Company B holds 100% in Company C (all three are
related and part of the same group).
A person controls a juristic person or its business if:
o If the juristic person is a company:
The juristic person is a subsidiary of the first person (refer to first section under
subsidiary relationships), or
The first person together with a related or interrelated person is
Able to directly or indirectly exercise or control the majority of voting
rights of securities of the company, whether pursuant to a shareholder
agreement or otherwise, or
Has the right to (or control of right) appoint or elect directors of the
company who control the majority of the votes at a board meeting
o If the juristic person is a close corporation:
The first person owns the majority of the members interest, or controls directly or
has the right to control the majority of the members votes
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o If the juristic person is a trust:
The first person is able to control the majority of the votes of the trustees or to
appoint the majority of the trustees, or to appoint the majority of the beneficiaries
of the trust
o If the first person has the ability to materially influence the policy of the juristic person in a
way similar to a person, in ordinary practice, would be able to exercise control referred to
in the above 3 bullet points
A court, Companies Tribunal or the Panel may exempt a person from application of a provision of
the Act that would apply to someone because of a relationship (as stated in previous page), if the
person can show that there is sufficient evidence proving that they acted independently of the
related or inter-related person
Subsidiary relationships:
A company is a subsidiary of another juristic person if one or more subsidiaries of the juristic
person, or one or more nominees of the juristic person or any of its subsidiaries, alone or in any
combination:
o Is able to directly or indirectly exercise or control the majority of the general voting rights
of issued securities of the company, whether pursuant to a shareholder agreement or
otherwise, or
o Has the right to appoint or elect (or control appointment or election) of directors of that
company who control a majority of the votes at a board meeting, or
A wholly-owned subsidiary of another juristic person if all of the general voting rights of the issued
securities of the company are held by or controlled, alone or in any combination, by persons
stated in the above section.
To determine whether a person controls all or a majority of the general voting rights of issued
securities of a company:
o Voting rights that are exercisable only in certain circumstances are taken into account
only
When those circumstances occur and for as long as the occur or
When those circumstances are under control of the person holding the voting
rights
o Voting rights that are exercisable only on the instructions of another person are to be
considered as held by a nominee of the other person,
o Voting rights held by
A person as a nominee for another person are treated as held by the other
person,
A person in a fiduciary capacity are to be treated as held by the beneficiary of
those voting rights
Solvency and Liquidity Test (Sec 4)
Solvency test:
o Assets fair valued are equal to or exceed liabilities fair valued of the company or group of
companies
Liquidity test:
o The company will be able to pay its debts as they become due in the ordinary course of
business for a period of twelve months after the date of the test
The tests are used for:
o Share capital reduction (share buyback)
o Share capitalisation
o Financial assistance for purchase of own shares
o Financial assistance to directors or related persons
o Issue of dividends
o Other compensations
Any director will be held liable if approving any situation while not satisfying the tests
Categories of companies (Sec 8)
Non-profit companies
Profit companies
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Non-profit companies
o Purpose of public benefit
o Reasonable compensation for services rendered, income and property not distributable
o Assets and income used to advance objectives
o Min of three incorporators
o Min of three directors
o Eg SPCA
Profit companies
o State-owned companies
o Public companies
o Private companies
o Personal liability companies
State-owned companies
o Owned by municipality
Public companies
o Unrestricted transferability of shares
o Offers to public permissible
o Min of one incorporator
o Min of three directors
Private companies
o Less disclosure and transparency requirements
o Transferability of securities restricted
o Min of one incorporator
o Min of one director
Personal liability companies
o Meets criteria of private company
o MOI states that it is a personal liability company
General interpretation of the Act *
A court may consider foreign company law
To calculate number of business days
o Exclude day on which first event occurs
o Include day on which second event occurs
o Exclude public holiday, Saturdays and Sundays
If this act is inconsistent with other legislation, both should be applied concurrently. If it is
impossible to apply both concurrently then unless stated otherwise the Companies Act will prevail
Anti-avoidance *
A court, on application by the Commission, Panel or an exchange in respect of a company listed
on that exchange, may declare any agreement, transaction, arrangement, resolution or provision
of a company’s MOI or rules
o To be primarily or substantially intended to defeat or reduce the effect of a prohibition or
requirement established by or in terms of an unalterable provision of this Act and
o Void to the extent that it defeats or reduces the effect of a prohibition or requirement
established by or in terms of an unalterable provision of this Act
The following sections do not apply to non-profit companies *
• Capitalisation of profit companies
• Securities registration and transfer
• Remunerations and election of directors
• Company secretaries and audit committees, except when it is an obligation
• Public offerings of company securities
• Takeovers, offers and fundamental transactions
• Rights of shareholders to approve a business plan
• Dissenting shareholders appraisal rights
