Types of Companies

LU1 – Theme 3
 Types of companies
Object = financial gain for
its shareholders

Non-profit
profit companies Profit companies

Public

Private

Personal
liability
External
State-
owned

THEME 3: Types of Companies

 “LIMITED” /
LTD
e.g. Eatwell Ltd.

Public
companies
Shares may
Shares are
be offered
freely
to the
transferable
public
 The Memorandum of
(“Proprietary) Incorporation
Limited” / prohibits it from
(PTY) Ltd making any offer of its
E.g. Andrews Transport securities to the
(Pty) Ltd public and RESTRICTS
their transferability.

Private
companies
 “SOC Ltd”

State-
owned
company
Falls within the
meaning ‘state-
E.g. The South owned enterprise’
African Bureau of ito the Public Finance
Standards (SABS) Management Act or it
is owned by a
MUNICIPALITY.
 “Incorporated”
/ “Inc”

Certain professions,
MOI MUST state e.g. attorneys, allow
that it is a personal their members to form
liability company. this type of company
instead of practising in
partnerships.
Personal
Liability
company

Directors and former

E,g. Andersons directors are jointly and
Incorporated / severally liable , together with
the company, for the debts and
Andersons Inc. liabilities incurred during their
periods of office.
 “NPC”

Non-
profit
companies

Income and property Its objects must

of NPC are to be relate to social
applied solely to the activities, public
promotion of the benefits, cultural
non-profit company’s activities or
main object group interests
 External company
Is a FOREIGN company conducting business
or non-profit activities in SA.

Must continuously maintain at least one

office within the Republic.

Foreigners who are contemplating investing in

the South African economy by establishing a
business or by investing in an existing business in
the country must apply for a business
permit. As an applicant, you will be required to
invest a prescribed financial capital contribution
 THEME 4:
Company Formation, membership and Types of contracts

Companies Act requires:

NOTICE OF INCORPORATION and

MEMORANDUM OF INCORPORATION to be filed

with the Companies and Intellectual Property Commission
for the registration of a company.
 Notice of incorporation
Memorandum of
Incorporation This form is attached to
the Memorandum of
Sets out the relationship Incorporation (MOI) and
with it you need to bring
between the COMPANY certified copies of the IDs of
and its SHAREHOLDERS, the applicant, the founders
DIRECTORS, OTHER and the members. Includes:
PARTIES WITHIN THE The name of the company,
COMPANY & THIRD The incorporation date and
PARTIES. The financial year end should
be filled in the Notice.
The registered address of the
main office,
the number of directors and
the (approved) company name
should be listed too.
 Shareholders of a company exercise their rights and the
functions entrusted to them in the Companies Act or
the MOI by adopting RESOLUTIONS at shareholders’
meetings.
Is passed by an ORDINARY resolution

Is a resolution by a SIMPLE MAJORITY of

the members present and entitled to VOTE A shareholders’ meeting may be
and which constitutes a QUORUM. called by the BOARD / by any
person authorised by the MOI.

A meeting MUST be convened IF required by the Act/MOI

or demanded by shareholders holding at least 10% of the
voting rights that may be exercised at that meeting.
Company law is based on the common-law principle
of MAJORITY RULE.

Shareholders may act AGAINST directors who

have ABUSED their powers.

Personal liability may also be imposed where the

separate juristic personality of a company has
been abused.
 Pre-incorporation contracts

What is a pre-incorporation contract?

A pre-incorporation contract is a contract that is entered

into on behalf of a company that does not yet exist.

The Companies Act 71 of 2008, defines a pre-incorporation

contract as being one that is ‘entered into before the
incorporation of the company by a person who
purports to act in the name of or on behalf of the
company with the intention that the company will be
incorporated and thereafter be bound by the
agreement.’
The act permits the Major DISADVANTAGE
conclusion of PRE- of pre-incorporation
INCORPORATION contract:
CONTRACTS, obo of a A person who ENTERS into
company to be such a contract is JOINTLY
incorporated. and SEVERALLY LIABLE for
liabilities emanating from the
This is an EXCEPTION to pre-incorporation contract if
the common law rule that incorporation DOES TAKE
there CANNOT be an agent PLACE or the company does
iro a NON-EXISTENT NOT RATIFY a part of the
principal. contract AFTER incorporation.
Why would someone need to enter into a pre-
incorporation contract?

A business opportunity arises- such as the opportunity to

purchase property on a going-concern business - which he
or she would like to take up in the name of a company,
but they do not have a company available to sign the
agreement.

One way of overcoming the problem is:

To immediately purchase a "shelf company“
an existing but dormant company that an accountant or attorney has
formed, and which is immediately available to enter into the
transaction.
The person entering into the agreement has the intention
that once the company comes into existence the company is
to be bound by the provisions of the pre-incorporation
contract.
The only legal formalities for a valid pre-incorporation contract
under the new Companies Act:
are thus that the contract must be in writing and
must be entered into in the name of or on behalf of the
company still to be formed.
However, assuming that the contract is acceptable to the
Company, within 3 months after the date on which a
company was incorporated, the board of the company may
by way of a directors’ resolution, completely (or partially)
ratify (retrospectively approve) the pre-incorporation
contract. Failure to do so will result in the company being
deemed to have ratified the contract.
What must a company do if it still wants to pursue the
contract after it has been incorporated?

Within 3 months after the date on which a company was

incorporated the board of that company may:
completely, partially or conditionally ratify or
reject any pre-incorporation contract or other action purported
to have been made or done in its name or on its behalf.
Who is liable for performance under the contract, if
the company rejects the contract after incorporation?
The new Companies Act deals with this situation explicitly, by
providing in section 21(2) that anyone who enters into a
contract on behalf of a company not yet formed- is jointly and
severally liable with any other such person for liabilities
created as provided for in the pre-incorporation contract while
so acting, if-
the contemplated entity is not subsequently incorporated; or
after being incorporated, the company rejects any part of such an
agreement or action.

The new Companies Act thus unambiguously imposes

personal liability on the individuals who entered into the pre-
incorporation contract on the company's behalf if the company
thereafter rejects the contract in whole or in part.