GUIDELINES COMPANY LAW EXAM

LU 1

Question 1

Themba lives in Knysna. He is a shareholder of Electrotech Limited. He receives notice of an annual

general meeting of Electrotech Limited to be held in Pretoria. He cannot attend the meeting on that
day, but he feels strongly about certain of the proposed resolutions set out in the notice of the
meeting and wants to express his views on these matters to the board of directors. Themba also
wishes to vote against certain of the resolutions which the company proposes to pass. Advise
Themba of two methods under the Companies Act 71 of 2008, that he could use to exercise his
right to vote and to express his views at the annual general meeting of Electrotech Limited. (10)

Electronic meetings:

The first option open to Themba would be to participate in the meeting electronically (1). This could
be by telephone communication (1) or by video conference. (1) In terms of section 63(2) of the
Companies Act 71 of 2008 a company may hold a shareholders meeting entirely by electronic
communication (1) unless this is prohibited by the Memorandum of Incorporation (1). Electrotech
Limited is a public company. (1) Section 61(10) of the Companies Act 71 of 2008 provides that
every shareholders meeting of a public company must be reasonably accessible within South Africa
for electronic participation in the manner contemplated in section 63(2), irrespective of whether
the meeting is held in South Africa or elsewhere. (1). meeting may be conducted by electronic
communication only if all the persons participating in the meeting are able to communicate
concurrently with each other without an intermediary (1) and to participate reasonably effectively
in the meeting (1). Access to the electronic communication is at the expense of the shareholder
unless the company determines otherwise (1).

Question 2

Pele (Pty) Ltd calls a meeting of its shareholders to vote on the proposed merger of the company
with another company. The notice of the meeting does not state the record date. Discuss the
importance of the record date in this instance, and the consequences of failure to specify the record
date in the notice of the meeting. (10)

Appointment of a proxy

Another option open to Themba would be to appoint a proxy. (1) In terms of section 58(1) of the
Companies Act 71 of 2008 a shareholder may appoint any individual to be a proxy, including a
person who is not a shareholder of the company (1). The proxy may participate in, speak and vote
at the shareholders meeting on behalf of the shareholder. (1). The proxy appointment must be in
writing and must be dated and signed by Themba (1). It is valid for one year. (1) Thus Themba’s
proxy would be able to express Themba’s views to the board of directors and would be able to vote
on his behalf on the resolutions (1).

The board of a company must set a record date to determine which shareholders are entitled to
receive notice of a shareholders meeting (1) and participate in and vote at a shareholders
meeting. (1) The record date must not be earlier that the date on which the record date is
determined. (1) It must also not be more than 10 business days before the date on which the
meeting is scheduled to occur. (1) If the board does not determine a record date for the meeting,
then, in terms of section 59(3) of the Companies Act 71 of 2008 the record date will be the latest
date by which the company is required to give shareholders notice of that meeting. (1)

Since Pele (Pty) Ltd is a private company (1) the notice to the shareholders must be given at least
10 business days before the meeting, (1) unless the Memorandum of Incorporation makes
provision for a longer or shorter record date. (1) Therefore, unless the Memorandum of
Incorporation provides a longer or shorter record date, the record date will be a date which is 10
business days before the meeting (1) since this is the latest date by which Pele (Pty) Ltd is required
to give shareholders notice of the meeting.(1)

LU 2

1. Who and what is a director?

See paragraph 2.2 on pages 6 and 7 of your study guide – read the relevant pages in the text book,
par 12.2, and add that information to your answer. Ensure that you understand the position,
purpose and role of the director. Also see the definition of director in section 1 of the Companies
Act.

2. Who controls the company – the board of directors or the shareholders?

See section 66(1) of the Companies Act – this section specifically provides that the business and
affairs of a company must be managed by or under the discretion of the board. The section also
provides that the board has authority to exercise all of the powers and perform any of the functions
of the company, except as otherwise provided in the Companies Act, or in the MOI of the company.
Therefore the company is controlled by the board of directors. See par 12.3 of the text book.

3. Name the different types of directors recognised by the Companies Act?

See par 2.2 on page 7 of the study guide, and also read and study par 12.2 of the text book.

4. How are directors appointed and removed?

See par 2.13 of the study guide. See section 71 of the Companies Act. Directors can be removed
by either the shareholders, or, in some instances by the board of directors. Also see 12.14 of the
prescribed text book.

5. What is the difference between a director and a manager?

See par 2.3 pages 7 and 8 of the study guide. There are many differences between a manager and
a director. For instance, a manager is an employee of the company, and a director does not have
to be an employee. They also play different roles regarding leadership etc. Add to that the content
of the prescribed parts of the text book, see 12.5.1 and 12.5.2 of the text book.

6. When are directors ineligible, and are there exemptions?

If a person is ineligible to be a director – it means that he/she is absolutely prohibited from

becoming a director. See par 2.6 of the study guide – and also the relevant parts of the text book,
par 12.11. Note that there are no exceptions to this prohibition.

7. When are directors disqualified, and are there exemptions?

If a person is disqualified from being appointed as a director – it means that with the exception of
a person who has been prohibited from being a director by a court of law, the person may still be
appointed as a director with the permission of the court. See par 2.6 and 2.7 of the study guide
and the relevant parts of the text book, par 12.11.7 for more information. Also see sections
69(8)(b) and 69(11) of the Companies Act.
8. When can a court declare a director delinquent?

A court can declare a director delinquent in the circumstances provided in section 162 of the
Companies Act. The power given to a court to declare a director either delinquent or under probation
was introduced into South African company law for the first time by the Companies Act. This is in
addition to the power of the courts to prohibit a person from being a director, for which the
Companies Act 61 of 1973 made provision and the Companies Act now also provides. Depending
on the grounds on which a person has been declared to be a delinquent, he or she will subsequently
be either unconditionally disqualified from being a director for the rest of his or her life, or
disqualified for a period of at least seven years, subject to any conditions that the court considers
appropriate. Also see the relevant parts of the text book, par 12.12, for further information.

9. What does an order of probation mean?

An order of probation may not exceed a period of five years and may be made subject to any
conditions that the court considers appropriate, such as a designated remedial program. See the
text book, par 12.12 for further information.

10. What is the purpose of a company secretary, and which companies are obliged to appoint
company secretaries?

The company secretary’s purpose is to be the chief administrative officer of the company. See
section 86-89 of the Companies Act, especially section 88 that sets out the duties of the company
secretary. Public companies and state-owned enterprises must appoint a company secretary. Other
companies are not obliged to appoint a company secretary – but may do so if they wish. See section
8 of the Companies Act, par 2.16 of the study guide, and also see the relevant parts of the text
book, paras 12.5.4, 15.9.1-15.9.2.

LU 3

Question

Tshepo is the director of Healthyheart Ltd, a company that manufactures cholesterol medication.
One of Tshepo’s functions is to manage the company’s distribution of manufactured products to its
clients. In September, Tshepo requested information from the company's various factories on the
demand for the company's products during the preceding year, as well as the projected demand
for its products in 2019. It was reported that the demand in 2019 would probably not exceed the
demand during 2019, because a patent for one of the company’s most profitable cholesterol
products would prescribe in December 2018. As a result of this information, Tshepo did not make
provision for any extension of Healthyheart Ltd’s distribution network.

In November 2018 one of Healthyheart Ltd’s main competitors lost all its manufacturing plants due
to an explosion. Consequently, the demand for Healthyheart Ltd’s products rose substantially and
the distribution network could not meet this demand. Healthyheart Ltd had to make use of outside
contractors to extend distribution, which led to lower profits.

The board of directors of Healthyheart Ltd wants to institute action against Tshepo for breach of
his duty of care and skill. Advise the board of directors on the company’s chances of success,
keeping in mind the common law, relevant case law and the provisions of the Companies Act 71 of
2008.

In your answer you must also include a discussion of the business judgement rule. (15)
Principles that apply in this case:

A director’s duty of care and skill has its origin in common law. In Fisheries Development
Corporation of SA Ltd v Jorgensen [1980 (4) SA 156 (W)] the concepts of care and skill were
examined. The court held as follows:

i. The required degree of care and skill to a large degree depends on the nature of the
company’s business and the specific duties assigned to the director. A distinction must
be drawn between executive and nonexecutive directors in the sense that a nonexecutive
director is not expected to give continuous attention to the affairs of the company.

ii. It is not expected of a director to have special expertise or experience. What is expected
is that the director exercises the degree of skill and care one could reasonable expect
from a person with his or her knowledge and experience. Directors are not liable for
mere errors of judgment.

iii. A director may rely on other officials and management unless there are reasons for
questioning the judgment of such officials or management. A director must however still
give due regard and exercise his or her own judgment in doing so.

Remedies against a breach of the duty of care and skill may be based on contract if a contract was
concluded between the company and the director. Alternatively, a delictual claim for damages
exists. In order to claim for delict, obviously all the requirements must be proven.
Section 76 of the Companies Act of 2008 has partially codified the duty of care and skill and provides
that the director must exercise that degree of care, skill and diligence that may reasonable be
expected of a person carrying out the same functions in relation to the company as those carried
out by the director.

An objective test is applied to determine what a reasonable director would have done in the same
situation. An objective test applied contains subjective elements in that the general knowledge,
skill and experience of that particular director in question are taken into consideration. Therefore,
the Act adopts a dual test.

In terms of the Companies Act 71 of 2008, a statutory business judgment rule is introduced in
section 76(4).

If a director’s actions will be excused if he could prove the following:

• had taken reasonably diligent steps to become informed about the matter
• had no personal financial interest in the matter
• had a rational basis for believing that the decision was in the best interest of the company

Application of the above principles to the facts:

In determining whether Healthyheart Ltd would succeed in instituting an action against Tshepo, the
required degree of skill required from Tshepo, a subjective as well as an objective test must be
applied.

Firstly, one would have to determine Tshepo’s subjective expertise and experience and secondly,
whether under the circumstances one could reasonably say that he exercised the care that one
would expect from a person with his experience. A further aspect for consideration is whether he
made a decision in good faith, with care and on an informed basis. From the facts, it is clear that
Tshepo obtained the necessary information before making any business decisions and that he acted
with the required degree of care in making the decision and that he had no personal interest. For
a company to be successful in its action against Tshepo it has to prove that he failed to obtain the
necessary information before taking a business decision, that he acted with the required degree of
care and skill and that he had a personal interest.
In applying the objective test one would come to a conclusion that a reasonable director in Tshepo’s
position would have acted the way he acted. Clearly the nature of the business and the task laid
upon him requires expertise. But, he had not breached his duty of care and skill since he requested
information from various factories on the supply and demand before taking a business decision.
Thus, his decision is an informed one and since he has no personal interest in the matter, Tshepo
will not be personally liable.

LU 4

The Memorandum of Incorporation of Pure Gold Ltd ('the company') provides that only the
board of directors, or any director authorised by the board, has the power to conclude contracts
on behalf of the company. It also states that any transaction that exceeds R50 million must first
be authorised by the shareholders by the shareholders by way on an ordinary resolution.

Maki, a director who is authorised by the board of directors to conclude contracts on behalf of the
company, enters into a contract with Judith for the purchase of gold processing equipment to the
value of R100 million, without first obtaining the authorisation for the purchase by
the shareholders. Judith knows about the provision in the Memorandum of Incorporation because
she has dealt with the company before. However, she does not know that the
transaction has not been authorised by an ordinary resolution of the company's shareholders.

Question 01

With reference to the relevant provisions of the Companies Act 71 of 2008 and the facts, discuss
whether Pure Gold Ltd is bound by the contract concluded by Maki and Judith. (6)

Important to note in this question the following: -

 Maki has actual authority to conclude contracts on behalf of the company up to R50million.
 Maki has the potential authority to conclude contracts on behalf of the company up to
R100million. This potential authority is subject to the adoption of an ordinary resolutions.
 When third parties such as Judith deals with company it will be difficult to establish whether
the internal requirement (the adoption of an ordinary resolution in this case) has been
complied with. Therefore, the Turquand rule and section 20(7) of the Act finds application.
If the statutory requirements are met section 20(7) allows Judith the presume that the
internal requirement has been complied with.

Conclusion: The company is bound to the contract.

Question 02

Suppose that after seven years the board of directors of the company has withdrawn Maki's
authority to conclude contracts on behalf of the company by way of a board resolution and by
amending the MOl of the company. However, the board of directors has allowed Maki to conclude
contracts on behalf of the company with Judith. One day suddenly the board of directors
argues that Maki is not authorised to conclude contracts on behalf of the company and that the
contract concluded with Judith is invalid.

With reference to the relevant authority/principles and the facts, advise Judith on what she must
prove in order to prevent the company from arguing that it is not bound by the contract. (4)

Important to note in this question the following:

Maki has no authority of any kind to represent the company. Her authority was terminated.
However, the company negligently made a misrepresentation to third parties such as Judith.
Therefore, Judith may rely on the doctrine of estoppel.

For purposes of this questions the requirements of estoppel must be discussed and applied.

Conclusion: Judith may have grounds to hold the company liable (or bound) based on estoppel.

LU 5

Question 1

Hemsworth Ltd is a company trading in cellular networks. Due to a hefty penalty fee imposed by
ICASA, for failing to disconnect deregistered yet active SIM cards, the company is in a poor financial
state. As a finance director of Hemsworth, Sebo advises that to recoup its financial health,
Hemsworth Ltd needs to offer shares to the public. However, in so doing, the company should shy
away from revealing the true financial state of the company, as this may have a detrimental effect
on how the company is perceived.

With reference to the relevant provisions of the Companies Act, provide an opinion on the
implications of Sebo’s advice to the proposed transaction.

The reason why the Companies Act of 2008 regulates public offerings is that, when company
securities offered to the public, the offer must be accompanied by enough information
to enable a prospective investor to make an informed decision on whether this will be a good
investment or not. (2) The prescribed information must be contained in a prospectus or, in those
instances allowed by the Act, in a written statement. (1) The transaction at hand is a primary
offering, whose main purpose is to acquire funds for the company. (1)

The prospectus is the document that must accompany all initial public offerings for unlisted
securities as per section 95(1). (1)

As a general rule, the prospectus must contain all information that an investor may reasonably
require to assess the following:
 Assets and liabilities of a company, financial position, profits and losses and prospects of the
relevant company
 The securities being offered. (Section 100) (2)

The wide-ranging liability in terms of section 102 for untrue statements in a prospectus
is intended to ensure that the public can rely on the information contained in the prospectus
before acquiring securities in a company. (1) In terms of section 104, a person who acquired
securities on the basis of the incorrect/misleading prospectus, is entitled to recover any loss or
damage that the person may have sustained as a result of any untrue statement in the prospectus,
without it being necessary to establish fault. (1)

Persons who may incur liability include directors, promoters and persons who authorised the issue
of the prospectus or who made the offer to the public. (1)

In addition, a director may also be held liable to the company for any loss, damages or costs it
suffered if the director knew that the prospectus contained an untrue, false or misleading
statement (s 77(3) (d)(ii)). (1)
LU 6

Music Galore Ltd is a company specialising in hosting major international music events and
musicians. As a result of its strong international presence, the company has seen an increase in its
profits. Thabo, one of the directors of Music Galore Ltd proposes that the subsidiary of the company,
Sound Galaxy (Pty) Ltd should acquire shares in Music Galore Ltd.

1. Advise Thabo regarding the requirements and conditions that must be met in terms of the
Companies Act 71 of 2008 for the subsidiary to acquire shares in Music Galore Ltd.

2. Advise Music Galore Ltd on the requirements under the Companies Act 71 of 2008 that must
be met if Music Galore Ltd wants to repurchase some of the shares issued to the company’s
shareholders.

Guidelines:

 For purposes of Question 01 and Question 02.

 See the requirements in section 48 of the Companies Act 71 of 2008.
 See specifically sections 48(2) and 48(3) read with section 46.
 Note the difference between the two questions. In question 01 we are dealing with a holding-
subsidiary relationship, while in question two no holding-subsidiary relationship exists
between the company and the shareholders whose shares are acquired (or repurchased).
 Further section 48 sets the conditions for the repurchase of shares. One of the these
conditions is the compliance with section 46. Have a carefully at section 46 as it protects
the interests of creditors by requiring amongst others the application of the solvency- and
liquidity test.

LU 7

Question 1

Legal question: What is a group of companies?

A holding company and its subsidiary companies together is referred to as a group of companies.
In a group of companies, Mzansi (Pty) Ltd controls one or more of the companies, namely Mars
(Pty) Ltd, the companies together may be referred to as a group of companies.

Question 2

Legal question: What factors make up the description of a subsidiary company.

According to Section 3(1)(a) a subsidiary company is a relationship where a holding company, its
subsidiaries or its nominees on their own or together in any combination is able to directly or
indirectly control the majority of the general voting rights of the subsidiary. Also, indirectly, and
directly able to control the appointment or election of the directors in the subsidiary who controls
the general voting rights in that subsidiary.

Question 3

Legal question: Can Mars (Pty) Ltd be described as a subsidiary company of John (Pty) Ltd, Jabulani
(Pty) Ltd and or Mzansi (Pty) Ltd?

A subsidiary company is controlled by a holding company, or it is controlled by the holding company

through its subsidiaries. Control is when a company can exercise or can control the exercise of the
majority voting rights in the subsidiary. A majority is more than 50%. John (Pty) Ltd and Jabulani
(Pty)Ltd does not have the majority voting rights on their own or in combination, since they control
25% and 20% of the voting rights in Mars (Pty) Ltd, respectively. Mzansi (Pty) Ltd have 55% voting
shares in Mars (Pty) Ltd, which is more than 50%, and therefor have control over the voting rights
in Mars (Pty) Ltd. Mzansi is a holding company of Mars (Pty) Ltd and therefore is Mars (Pty) Ltd a
subsidiary of Mzansi (Pty) Ltd and not a subsidiary of John (Pty)Ltd and Jabulani (Pty) Ltd.

John (Pty) Ltd holds 25% of the voting shares in Mars (Pty) Ltd, while Jabulani (Pty) Ltd holds 20%
of the voting shares in Mars (Pty) Ltd. The remaining 55% of the voting shares in Mars (Pty) Ltd
are held by Mzansi (Pty) Ltd.

LU 8

Development Properties (Pty) Ltd owns an office building in Johannesburg valued by its auditors in
the previous financial year at R18 million and two buildings in Cape Town valued at R4 million and
R5 million respectively.

The board of directors decided that they should focus on acquiring more properties in Cape Town.
Since the company has received an offer of R20 million for the building in Johannesburg, the
directors want to accept the offer. The board regards the decision to sell the property as a
management decision that they can take on their own, but one of the shareholders disagrees.

Question 1

With reference to the Companies Act 71 of 2008, fully advise the board whether they may contract
to sell the Johannesburg property without involving the shareholders of the company, and whether
they need to comply with any specific statutory requirements.

First you had to recognise that the company is disposing of a major asset. The value of the asset
is more than 50% of its gross assets fairly valued, irrespective of its liabilities. Therefore, the
transaction is a fundamental transaction because the company is dispose of all or the greater part
of its assets or undertaking.

“All or the greater part of the assets” is defined in section 1 of the Companies Act 71 of 2008 as
meaning more than 50% of its gross assets fairly valued, irrespective of its liabilities.
The valuation of the Johannesburg building is more than the combined value of the two buildings
in Cape Town.Therefore, if the company sells the Johannesburg building it will be selling more than
50% of its gross assets.

R18mil (JHB office) + R4mil (Cape Town building) + R5mil (Cape Town building) = R27mil
R18mil (value of the JHB office) / R27mil (total assets of the company) x 100
66.67% of the total assets of the company (greater part or more than 50% of the total asset value).

The relevant provisions of the Companies Act are sections 112 and 115.

If a company wants to dispose of all or the greater part of its assets or undertaking, the
transaction must be approved by a special resolution of the shareholders. The assets must be
valued as at the date of the proposal. Therefore, the shareholders must be involved in the
transaction because the transaction must be approved by a special resolution of the shareholders.

The special resolution must be taken at a meeting specially convened for this purpose. A quorum
of 25% of all the voting rights that are entitled to be exercised on the special resolution must be
present at the meeting, or any higher percentage required by the company’s Memorandum of
Incorporation. The notice of the meeting must include a written summary of the precise terms of
the intended transaction.
Something to think about: How would your answer differ if Development Properties (Pty) Ltd was
a public company? Would the transaction then have been regulated differently?

Question 2

Two shareholders of the company who are unhappy about the proposed sale of the Johannesburg
property, have indicated that if the sale goes ahead, they will no longer be interested in owning
shares in the company and that they will expect the company to buy their shares. The directors of
Development Properties (Pty) Ltd want to know if these shareholders can force the company to buy
their shares. With reference to the Companies Act 71 of 2008, advise the directors whether these
two shareholders may force Development Properties (Pty) Ltd to buy their shares.

A proposed fundamental transaction is one of the triggering actions for the appraisal remedy. This
remedy entails that a dissenting shareholder must send the company a written notice of his
objection to the resolution. The written notice must be sent to the company before the resolution
is voted upon.

The dissenting shareholder must be present at the meeting and he must vote against the special
resolution.

Accordingly, if the two shareholders who are unhappy about the sale of the Johannesburg property
follow the prescribed procedure, the company will be compelled to acquire their shares at fair value.
See specifically section 164 of the Companies Act 71 of 2008

LU 9

Question

Lion Cub (Pty) Ltd (Lion Cub) has 23 employees and regularly orders goods on credit from seven
suppliers. Over the past year Lion Cub has been experiencing problems with cash flow, mainly due
to the failure of some of its customers to pay it timeously. On two occasions during the previous
year, Lion Cub has been unable to pay its suppliers for goods purchased from them on credit on
the due date. However, on each occasion it was able to pay the suppliers as soon as its cash flow
improved, within approximately 10 days of the missed payment. In addition, on another occasion,
Lion Cub was unable to pay its employees their salaries on time, owing to an important customer
failing to settle its account with Lion Cub in full. However, the employees were paid what was owed
to them a week later after the customer had settled its account.

The board of Lion Cub feels that it is not necessary to pass a resolution to initiate business rescue
proceedings, as the company is generally in a sound financial position and its cash flow problems
will be resolved when the general economy improves.

Discuss whether, under these circumstances:

 The directors of Lion Cub are entitled to refuse to pass a resolution commencing business
rescue proceedings, and
 The prospects of success of an affected person approaching the court for an order that
business rescue proceedings be initiated in respect of Lion Cub?

The directors of Lion Cub:

Lion Cub is not ‘financially distressed’ as this term is defined in the 2008 Companies Act. Refer to
the definition of financially distressed in section 128 of the Companies Act. The section provides
that a company is financially distressed where it is reasonably likely that it will be unable to pay all
of its debts in the next six months, or it is reasonably likely that the company will be insolvent
within the next six months.
In this case, Lion Cub has been unable to pay some, but not all, of its debts when they became
due. There is no indication that the financial situation at Lion Cub is so bad that it is reasonably
likely that it will be unable to pay all of its debts as they become due in the next six months.
Therefore, the board will on the facts provided, not be able to take the resolution in terms of section
129 of the Companies Act 71 of 2008. In addition, the facts do not indicate that Lion Cub is
reasonably likely to become insolvent within the next six months. On the contrary, the facts indicate
that the company is generally in a good financial position, although it has experienced occasional
problems with cash flow. The facts indicate that when Lion Cub was unable to pay its suppliers or
its employees, it was able to rectify the situation reasonably quickly, which would suggest that its
financial problems are not deep-rooted and do not pose an insolvency risk.

Accordingly, in the circumstances the directors of Lion Cub would not be entitled to pass a resolution
to initiate business rescue proceedings.

As an aside, it should however be borne in mind that the court in Tyre Corporation Cape Town (Pty)
Ltd v GT Logistics (Pty) Ltd (Esterhuizen intervening) 2017 (3) SA 74 (WCC) held that commercial
insolvency is not a bar to being placed under business rescue. Lion Cub’s inability to pay its
creditors from time to time is an indication of commercial insolvency.

Affected person:

An affected person, such as a creditor of Lion Cub, (you could briefly explain who affected persons
are, and refer to the relevant section) who approaches the court for an order that business rescue
proceedings be initiated and Lion Cub placed under supervision would have good prospects of
success in bringing such an application. The provisions of the 2008 Companies Act dealing with
applications to court by affected persons are broader than those applicable to the directors of
companies. Briefly refer to and discuss section 131 of the Companies Act, especially the
requirements in section 131(4)(a) of the Act, and explain why these are broader than the
requirements in section 129 of the Act.

A court may make an order placing a company under supervision and commencing business rescue
proceedings if it is satisfied that there is a reasonable prospect of rescuing the company, and that
the company has failed to pay any money due in terms of a contractual obligation of the company
(e.g. a salary to an employee or other monies owed to a creditor arising out of a contract). Refer
to section 131(4).

Accordingly, in the present matter, as Lion Cub has failed on two occasions to pay its suppliers and
has on one occasion failed to pay its employees their salaries, a court would be entitled to make
an order that business rescue proceedings be initiated in respect of Lion Cub, notwithstanding the
fact that the company is not financially distressed for the purposes of the 2008 Companies Act.

Sections 128-131 of the Companies Act 71 of 2008.

See study guide 9.2 and 9.3, and textbook 20.3.

LU 10

Question

Peter is the chair of the board of Straws (Pty) Ltd (‘the company’). The core business of the company
is the manufacturing and distribution of plastic straws. Peter and the board of the company is
concerned of the trend to move away from the use of plastic straws towards straws made of paper.
The company is not insolvent, but its cash flow is under pressure. The company contemplates in
entering an agreement with the creditors of the company in which the company will offer to its
creditors the payment of 80c in a rand for the full and final settlement of each creditor’s claim
against the company. The company anticipate that most of the creditors will accept the offer except
for a small minority of creditors that will reject the offer.

Advise the board on whether there is a specific procedure in the Companies Act 71 of 2008 that
makes provisions for binding all creditors to a settlement agreement when such an offer is as
accepted by most of the creditors. You most specifically advise the board on: -
 The most suitable procedure to follow. Further discuss the legal requirements that must be
met (You do not have the discuss the contents of the documentation); and
 The effect of such transaction, if approved, and the requirements that need to be met after
approval.

Introduction

When reading the question, you must have identified that the prescribed work in learning unit 10,
which deals with compromises, may be relevant to the question. More specifically the question/s
deals with the statutory requirements and effect of the procedure.

Question A:

The position is regulated by section 155. Section 155 deals with compromises.

In terms of section 155 a company may enter into a compromise with its creditors, or specific class
of creditors, whether the company is in financial distress or not, unless it is in business rescue.

Requirements:

 The delivery of a copy of the proposal and a notice of meeting to consider the proposal to
the CIPC and every creditor, or class of creditor, whose name and address is known to the
company and can be reasonably obtained by the company.
 The proposal must contain the minimum prescribed information.
 The proposal must be adopted by the majority of creditors.
 Thereafter, an application must be made to court for the sanctioning of the compromise.

Question B

If the compromise is sanctioned by a court, the compromise is final and binding on all creditors or
the specific class of creditors the compromise applies to, from the date a copy of the order is filed.
It is important that the sureties of a company are unaffected by the sanctioning of the compromise.

LU 11

Read, learn and understand the definitions of insider, inside information, and insider trading in
order to understand the content of Learning Unit 11. Please see the study guide and the relevant
sections of the Financial Markets Act for this information, and summarise this in your own words.

Now, explain in your own words why market abuse provisions and sanctions are necessary?

Busi is a stockbroker with inside information regarding impending transactions in ABC (Ltd). He
encourages his brother Sam, to purchase securities in ABC (Ltd) without disclosing the inside
information to Sam. Sam purchases 10 000 shares in ABC (Ltd). Discuss whether Sam is guilty of
insider trading? Consider whether Busi, who did not disclose any inside information to Sam, is guilty
of insider trading. If you are of the opinion that Sam is guilty of insider trading, discuss whether
there are defences available to Busi in these circumstances?
See the relevant parts of the study guide and text book. Also see sections 77 and 78 of the Financial
Markets Act.

2. The purpose of the insider trading provisions is to:

 prevent market abuse, improve the efficiency, competitiveness, and fairness of financial
markets, and
 ensure that financial markets and the transactions on regulated markets are transparent.

3. Where Sam deals with the securities for himself he will not be guilty of an offence, as this is not
covered by section 78(5). However, when he deals with the securities on behalf of Busi – this
action will be covered by section 78(3).

Section 78(5) provides that an insider who knows that he has inside information, and encourages
or discourages another to deal in securities listed on a regulated market to which the insider
information relates, or are likely to be affected, is guilty of an offence, even where no actual inside
information was disclosed to the other person. Therefore, Busi is guilty of insider trading. The Act
does not provide any defences in these circumstances.