Entrepreneurial Law

LWELA 2-11: Wrap-up class

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Week 1:
Introduction

- a company, as a form of business,

- the different forms of companies that may be used to operate a business,
- the legal requirements in the formation of a company,
- the legal capacity of a company and its representatives, and
- the relevance of pre-incorporation contracts.
 The estate of the company is assessed apart from the
estates of individual shareholders or members, therefore
the debts of the company are the company’s debts and
separate from those of its shareholders or members.

The Legal They enjoy limited liability;

Personality
Principle The profits of the company belong to the company and not
its shareholders and only after the company has declared a
dividend may the shareholders claim that dividend;

The assets of the company are its exclusive property and the
shareholders have no proportionate proprietary rights
therein;
The Companies Act, 2008 provides for two types of
Companies:
 Steps to incorporate a company

Complete a Notice of the Memorandum of File it together with the Pay the prescribed fee. The CIPC will assign a Issue a registration The date of
Incorporation; and Incorporation CIPC; and registration number to certificate to the incorporation on the
the company; and company. (The certificate is the date
registration certificate on which the company
is conclusive evidence comes into existence as
that all the a separate legal entity.
requirements for the
incorporation of the
company have been
complied with and that
the company is
incorporated from the
date stated in the
certificate)
 Pre-Incorporation Contracts - Process
Once the company is incorporated
the BOD may within 3 months
completely, partially or
conditionally ratify or reject any pre-
incorporation contract.
In the event that the company rejects
the agreement, the promoter will
incur liability in terms of the
agreement and will be allowed to
recover any benefit from the
company which it has received in
terms of the agreement.
Once agreement has been either
If the BOD does not ratify or reject
partly or completely ratified by the
the pre-incorporation contract after
company, the company is liable in
three months of incorporation the
terms of the agreement as if it has
company will be deemed to have
been a party to the agreement when
ratified that agreement or action.
it was concluded.
The promoter will not be liable where
The promoter will be jointly and the company enters into an
severally liable if: the company is not agreement on the same terms as, or
later incorporated or the company in substitution for the agreement
rejects any part of the agreement. entered into prior to its
incorporation.
 Capacity and Representation
Capacity of a company: the sphere of actions
a company may legally perform.
ULTRA VIRES conduct: the conclusion of the ULTRA VIRES doctrine: refers to acts that fall
transaction is beyond its legal capacity. outside the scope of the company’s powers
as determined in the MOI.
When an act on behalf of the company falls outside its
main and ancillary objects, the company does not exist in
law and consequently such an act is not binding on the
company, it is then described as ultra vires.
Ultra Vires and the Companies Act
• In terms of Section 20 (1) of the Companies Act, 2008, no action of the company is void if the only
reason therefor is that the action was prohibited by a limitation, restriction or qualification in the MOI
or that a consequence of this form of limitation was that the directors who purported to act on behalf
of the company had no authority to authorize the company’s action.
• Section 20 (2) provides for the shareholder, by way of special resolution, to ratify any action taken by
the company that was inconsistent with or in breach of a specified limitation, restriction or qualification
contained in the MOI.
• Even though an ultra vires transaction will be binding on the company, the shareholders are provided
with recourse to claim back their losses from the person who acted beyond the scope of the company’s
capacity.
• Section 20(6) of the Companies Act provides that each shareholder has a claim for damages against any
person who fraudulently, or due to gross negligence, causes the company to do anything inconsistent
with the Companies Act or a limitation, restriction or qualification on the powers of the company as
stated in its Memorandum of Incorporation, unless ratified by special resolution in terms of section
20(2). This is in addition to the remedy provided in section 165.
 Ultra Vires and the Companies Act

• If the company or directors have not as yet performed the planned action
(e.g. concluded the contract) that is inconsistent with a limitation or
qualification of the company’s powers contained in the Memorandum of
Incorporation, one or more shareholders, directors or prescribed officers of
the company may obtain a court order restraining (i.e. preventing) the
company or directors from doing so in terms of section 20(4) and (5).
• A third party who did not have actual knowledge of this limitation or
qualification and acted in good faith will, in such a case, have a claim for
any damages suffered as a result.
Constructive Notice and the Turquand Rule
• Doctrine of Constructive Notice: Third parties dealing with
a company are deemed to be fully acquainted with the
contents of the public documents of the company.
• The consequences of this doctrine could be detrimental to
someone dealing with the company, because the contract could
be a null and void contract if the company acted ultra vires.
• As such, the English courts developed the Turquand rule
to mitigate the harsh effects of the doctrine.
• Section 19 (4) of the Companies Act, 2008 partially
abolished the doctrine of constructive notice, third parties
contracting with the company are no longer be deemed to
have notice of public documents of company merely
because they have been filed with the CIPC or are
accessible for inspection at office of company.
Constructive Notice and the Turquand Rule
However, it is still applicable in terms of Section 19 (5) which
provides two exceptions.
1.A person is deemed to have knowledge of any provision of
company’s MOI in terms of S 15 (2) (b) (relating to special
conditions applicable to company and additional
requirements regarding their amendment). This means
that a third party dealing with a ring-fenced company is
deemed to have knowledge of the applicable restriction/s.
2.The second exception is Personal Liability companies. A
person is regarded as having received notice and
knowledge of the effect of 19 (3) i.e. that directors and
past directors are jointly and severally liable with the
company for debts of company contracted during their
periods of office.
Constructive Notice and the Turquand Rule

• Section 20 (7) of Companies Act, 2008 now codifies

the Turquand rule in a modified form by providing that
a person dealing with a company in good faith is
entitled to assume that the company has complied
with all of the procedural requirements in terms of the
Companies Act, 2008, MOI and any rules of company,
unless the person knew or ought to have known of any
failure by company to comply with its formal and
procedural requirements.
Week 2

• - Corporate finance.
• - The two main forms of
corporate finance are:
• Debt (short-term, long-term
loans, debentures)
• Equity (shares)
• - the process of selling shares,
capital maintenance, and possible
restrictions on the sale of a share.
 How does a company raise finance?

1. Debt (bank loans, debentures)

2. Equity (securities, retained income, options, share capital)Debt

• Debt is money or assets obtained by a company when it does any of the following:

• issues debt instruments such as debentures

• obtains long-term and / or short-term loans

• enters into lease agreements

• obtains credit terms from its suppliers, effectively allowing the company to pay in the

• future for goods or services already received

• obtains overdraft facilities from banks

• Share capital: introduction

• public or private company must still have 2 types of shares: authorised share capital & issued share capital

• authorised share capital: maximum nr of shares that the company is authorised by its MOI to issue

• issued share capital: amount of share capital raised by the company in return for the nr of shares issued by it
What are shares?
• What are shares?

• Section 35: share: one of the units in which the proprietary interest in a
profit company is divided
• securities have a much wider meaning than shares - include ordinary
shares, preference shares, stocks, depository receipts in public companies,
derivative instruments, bonds and debentures
• share is personal incorporeal movable property that is the measure of a
shareholder’s interest in a company
• In Short v Treasury Commissioners: share in a company doesn’t imply
ownership of a part of the assets or property of the company. A shareholder
is not a creditor of the company, he is essentially an investor
• Standard Bank of SA Ltd v Ocean Commodities Inc share consist of bundle
of personal rights entitling shareholder to a certain interest in the company,
its assets and dividends
What are classes of shares?
• What are classes of shares?

• Section 36: company’s MOI must state the classes of shares and the number of shares authorised to be issued

• The MOI must also set out w.r.t each class of shares, a distinguishing designation for that class and the preferences, rights, limitations and
other terms associated with that class

• The Companies Act contains an important exception that permits MOI to authorise blank shares with enhanced flexibility

• shareholders have 4 personal rights, comprising both financial and non-financial rights:

1. right to vote
2. right to information
3. right to share in profits of a company that have been duly distributed by the company (dividend)
4. right to share in the net surplus capital of a company on its winding-up

• A company may in its MOI confer different rights on shareholder, particularly in regard to payment of dividends or distributions and the return of
capital on a winding-up – this is what creates different classes of shares.
 • Different classes of shares

• Section 37: class of shares whose holders enjoy preference

over any other class of shares w.r.t. payment of dividends and
sometimes to return of capital on winding up
• usually carry only a modest income return and enjoy few
voting rights

Classes of • dividends are expressed as a fixed % so holder knows in

advance what the dividend amount will be

shares
• company can’t have preference shares unless it also has
ordinary shares or some other class
• -as a general rule of construction, preference shares do not,
on a winding-up, enjoy a right to repayment of their capital in
priority to ordinary shareholders

• Classes can be divided into ordinary shares and preference

shares (NB these are not types of shares, rather classes of
shares). Types of shares include authorized shares, issues
shares, par value and non-par value shares
Class of shares
• Types of preference shares:

• Cumulative preference shares

• Non cumulative preference shares

• Participating preference shares
• Redeemable preference shares

• ORDINARY SHARES
• residual class of share and constituted the equity share capital of the company

• amount of dividend paid to ordinary shareholders is not fixed as for preference shares

• if the preferent shareholders enjoy priority to return of capital on a winding-up (considered

exhaustive), ordinary shareholders are entitled to return of capital and to share in any surplus assets
on a winding-up, unless the company has also issued deferred shares
• usually ordinary shareholders who enjoy a right to vote at general meetings
• possible for companies to create different classes of ordinary (or other) shares with different voting
rights
• Act provides that despite anything to contrary in MOI, every issued share of a company, regardless of
its class,
Classes of shares
• DEFERRED SHARES

• also known as founders’ shares not commonly encountered

• qualify for a dividend after a prescribed minimum dividend has been paid to ordinary shareholders

• usually issued to remunerate promoters of companies for their services in the formation and
incorporation of companies or as vendors’ shares

• CAPITALISATION SHARES:

• A company may have done well financially over the year, and have reserves to issue dividends. However,
the board may decide to use the saved money to expand the business (capitalize). Instead of issuing
dividends, the board will be able to issue shares to existing shares holders – this is called a capitalization
issue and these free shares are often called cap shares in the industry.

• Board of directors may approve the issuing of any authorised shares of the company as capitilsation

• shares on a pro rata basis to the shareholders of one or more classes of shares

• Issue of shares is not regarded as distribution and as such not subject to the solvency and liquidity test
Capitalisation
shares
• BOD can decide to offer to award a cash payment in lieu of a
capitilsation share

May only do so if:

• it has considered the solvency and liquidity test as required by S

46

• the board is satisfied that the company would satisfy the solvency
and liquidity test

• immediately upon the completion of the distribution

• taking of cash instead of shares is a distribution because if a

shareholder chooses to receive cash instead of shares, the assets
of the company are reduced by the payment made by the company
to the shareholder
Issue of • Under 2008 Act, power to issue shares is exercisable by the board of directors instead of the
shareholders in general meeting

shares
• also applies to the power to increase the authorised share capital of the company (subject to any
limitation in the MOI)

• Issue of shares requires shareholder approval by special resolution where share are issued to:

• directors, including future directors, or to certain prescribed officers of the company

• related or inter-related person

• nominee of any of the above persons

• no special resolution required where the issue is

• under an underwriting agreement

• in the exercise of pre-emptive rights

• in proportion to existing shareholders and on same terms and conditions

• in pursuance of an employee share scheme

• in pursuance of an offer of shares to the public

where further shares are issued in a transaction or series of integrated transactions and voting power of the
new shares equals or exceeds 30% of voting power of all the shares of the class held before new issue of
shares issue must be approved by a special resolution
Private companies and
right of preemption
• Section 39

• right of pre-emption is a right conferred on shareholders in private companies to

subscribe for new shares to be issued by the company in proportion to their
voting right

• Therefore, if a shareholder owns shares in a private company they may not sell
them to the public without first offering the shares to the existing shareholders in
the private company.

AIM:

• designed to alleviate the effects on existing shareholders of a new issue of

shares by the company

• rights should not be diluted without their consent

• prevents outsiders from entering the shareholding of a private company without

consent
Pre emptive rights
shareholder in private companies (and personal liability companies) enjoy pre-
emptive rights except for:
• shares issued in terms of options or conversion rights
• capitalisation shares
• allotment or issue of shares for the purposes of an employee share scheme
• shares issued by a company that has been placed under business rescue or
• where the consideration for shares is not payable immediately
• NB: MOI may limit, restrict or negate such pre-emptive rights
 • Under Common Law directors were not allowed to enter into
transactions which would reduce the share capital value of the
company.
• The reduction of share capital placed negative risk on:
1) creditors of the company
2) shareholders of the company.

Capital
Therefore, the following transactions were not allowed – these
were so called capital maintenance rues:
1. A company selling shares at less than (nominal) value

Maintenance 2.
3.
A company utilizing capital to pay out dividends
A company buying its own shares
4. A company giving assistance to a third party to buy
shares in the company.
The new 2008 Companies Act has abolished the capital
maintenance rules, but has attempted to protect creditors and
shareholders by means of the solvency and liquidity requirement.
The solvency and liquidity test must be
applied: a company satisfies
reasonably
• when a company wishes to provide the solvency and
S 4 of Companies Act foreseeable financial
financial assistance for the subscription of liquidity test at a
2008: circumstances of the
its securities in terms of S 44 particular time if,
company at the time-
• if a company grants loans or other considering all
financial assistance to directors and
others as (a)the assets of the (b)it appears that the
• contemplated in S 45 company, as fairly
company, as fairly
company will be able
• before a company makes any valued, equal or to pay its debts as
valued; and
distribution as provided for in S 46 exceed the liabilities they become due on
• if a company wishes to pay cash in of the the
lieu of issuing capitalisation shares in
terms of S 47 (ii)in the case of a
• if a company wishes to acquire its ordinary course of (i) 12 months after the distribution
own shares as provided for in S 48 business for a period date on which the test contemplated in
Content of the solvency and liquidity test: of- is considered; or paragraph (a) of the
company satisfies the test if it is both definition of
‘solvent’ = by reference to its assets and
liabilities
‘liquid’ = By reference to its future cash ‘distribution’ in
flows section 1, 12 months
following that
distribution
Financial assistance –
s44
• S 44

• Requirements if a company provides financial assistance in

connection with the issue of any of its securities:

1. the particular provision of financial assistance is pursuant to an

employee share scheme
2. pursuant to a special resolution of the shareholders, adopted within
the previous two years, that approved such assistance either for the
specific recipient or generally for a category of potential recipients
and the specific recipient falls within that category
3. the board is satisfied that immediately after providing the financial
assistance the company would satisfy the solvency and liquidity test
4. the terms under which the financial assistance is proposed to be
given are fair and reasonable to the company
5. any conditions or restrictions respecting the granting of financial
assistance set out in the company’s MOI have been satisfied
 Distributions (Payment of dividend,
repurchase of shares by company/
debt/ waiver of debt)

• Section 46 of the Companies Act regulates distributions.

• A distribution is any direct or indirect transfer by a company of money or other
property of the company (except its shares) to one or more of its shareholders
or beneficial holders of shares, whether as the payment of dividends, payment
for the purchase by a company of its previously issued shares, the incurrence of
a debt for the benefit of one or more of the shareholders of the company, or the
forgiveness of a debt owed to the company by one or more of the shareholders
of the company.
• A distribution may be made in the following circumstances:
• The board of directors must authorise the distribution.
• It must reasonably appear that the company will be able to satisfy the solvency
and liquidity test immediately after the distribution has been made
• The board must acknowledge by way of a resolution that it has applied the
solvency and liquidity test and reasonably concluded that the company will
satisfy the test immediately after completion of the proposed distribution.
Shareholders and
company meetings
Shareholder

u S 1 defines shareholder as:

u the holder of a share issued by a company and who is entered as such in the certificated
or uncertificated securities register of the company.
u Part F of Chapter 2 a ‘shareholder’ is
u a person who is entitled to exercise any voting rights in relation to a company, irrespective
of the form, title or nature of the securities to which those voting rights are attached
u A share is part of the securities of a company
u Act defines securities as any shares, debentures or other instruments, irrespective of their
form or title, issued or authorised to be issued by a profit company
u When Act refers to securities, it refers to both shares and debt instruments such as
debentures
u For purposes of Part F, a shareholder could include the holder of a debt instrument who
has been granted voting rights
 Meetings
u shareholders meeting
u a meeting of those holders of a company’s issued
securities who are entitled to exercise voting rights in
relation to that matter
u Shareholders do not generally have duties
towards the company.
u may have duties towards each other in terms of a
shareholder’s agreement
u duty in Companies Act is the duty to abide by
the terms and provisions of a company’s MOI
u Principles that apply to shareholders’ meetings:
u Before a meeting of shareholders can be held, it
has to be properly called and convened
u A meeting is properly convened if
u the prescribed notice for convening the meeting was
given by persons who have the relevant authority to
convene the meeting
u Notice to a meeting must be given to all persons who
are entitled to receive notice of the meeting
u A meeting must be convened for a time, date and
place that is accessible to the shareholders of the
company
u A meeting may commence only if a quorum is present
u A quorum is the minimum number of members who
have to present at the meeting before the meeting can
commence
 Record date
u S 1 defined ‘record date’
u the date on which a company determines the
identity of its shareholders and their shareholdings
for the purposes of the Act
u Important because it is the date that determines
shareholders rights
u right to receive notice of a meeting
u right to vote at a meeting
u Must not be earlier than the date on which the
record date is determined or more than 10
business days before the date on which the
event or action is scheduled to occur and must
be published to the shareholders in the
prescribed manner
u Where BOD does not give the record date, it is:
u the latest date by which the company
is required to give shareholders notice
of that meeting
u the date of the action or event
Calling of shareholders’ meetings

u BOD / any other person specified in MOI / rules may call a shareholder’s
meeting at any time
u Must be called when:
u MOI / Companies Act states that the BOD is required to convene a meeting and
refer a matter to a decision by shareholders
u when a meeting is demanded by shareholders
u must be signed by holders of at least 10% of voting rights on matter to be decided
u it must specify the specific purpose for which the meeting is proposed
u a company / shareholder may apply to court for an order setting aside a demand for a
meeting on the grounds that it is frivolous / already decided / vexatious
u shareholder may withdraw demand for meeting before start of meeting
u could result in the company cancelling meeting if percentage below required percentage
Notice of meetings continued…
u Proper notice continued:
u proposed resolution must accompany the notice
convening the meeting
u indicate percentage of voting rights required for
resolution to be adopted
u AGM: contain a summary of the AFS that will be
tabled at the meeting & procedure to obtain
complete copy
u statement that shareholder can appoint a proxy
in place of shareholder
u participants required to provide proof of identity
at the meeting
u Company failed to give notice /
defect in notice
u meeting can proceed if:
u the persons who are entitled to
vote in respect of each item on
the agenda are present at the
meeting
u acknowledge actual receipt of the
notice
u agree to waive notice of the meeting
u ratify the defective notice
u A shareholder who is present at a
meeting is deemed to have received
or waived notice of the meeting
Postponement and adjournment of
meetings

u Meeting may be postponed or adjourned for a week under following

conditions:
u within one hour of the time the meeting is to start a quorum is not present
u at the next meeting those present will constitute the quorum
u Meeting can be adjourned without further notice on a motion supported by
persons entitled to exercise in aggregate a majority of voting rights held by all
of the persons who are present at the meeting at the time
u either fixed time and place or
u until further notice
u not more than 120 days after the record date or date that is 60 business days after
the date on which the adjournment occurred
u can be altered in the MOI
Representation by proxy

u Proxy
u a person who is appointed to represent a shareholder at a meeting
u Companies Act allows a shareholder to appoint any individual as his / her proxy
u does not have to be a shareholder in a company
u must be in writing and signed by the shareholder appointing the person
u remains valid for one year after it was signed
u can appoint for a specific period of time
u can appoint two or more in respect of different types of shares
u proxy may delegate authority
u must deliver copy of proxy appointment form to company before proxy can act

u suspended where shareholder acts directly in matter

u shareholder has right to revoke the appointment by cancelling it in writing
u proxy votes as sees fit unless proxy appointment form specifies how proxy must vote
Shareholders acting other than at a
meeting
u S 60 of Companies Act
u possible to take decisions without convening a meeting
u Company must submit a proposed resolution to every person who is entitled to vote on the resolution
u Shareholders are then entitled to exercise their vote in writing within 20 days from receiving the proposed
resolution
u Must return the written vote to the Company
u Adopted if:
u supported by persons entitled to exercise sufficient voting rights for it to be adopted as ordinary / special
resolution
u Can elect a director by written polling
u Company must within 10 days of the vote deliver statement describing:
u results of the vote
u consent process
u AGMs can only be convened by having a meeting and business of the AGM only at meeting as well
Decisions of shareholders and others

u Two types of resolutions

u Ordinary
u Special
u Ordinary resolutions
u Resolution adopted with the support of more than 50% of the voting rights exercised
on the resolution either at a shareholders meeting or by holders of the company’s
securities acting other than at a meeting i.e. S 60
u MOI can make percentage greater (except for removal of directors) and make it
different for different transactions
u Must be 10% difference between ordinary and special at all times
u % determined by number of shareholders present at meeting where there is a
quorum, not shareholders as a whole
Voting rights of shareholders and
others

u Voting power
u with respect to any matter is determined by the voting rights that may be exercised
in connection with any particular matter by a person as a percentage of all voting
rights
u Voting rights
u the rights of any holder of the company’s securities to vote in connection with a
matter
u MOI sets out voting rights
u voting rights differ among shareholders
u differ among transactions
u can also include voting rights held by the owner of a debt instrument
Week 4:

- directors and board committees,

- the meaning of 'directors’,
- consider the different types of directors,
- distinguish between managers and directors, and
- how the board of directors is composed.

- fiduciary duty and duty of care, skill and diligence expected from directors in terms of the Companies
Act, 2008 as well as case law.
MEANING OF A
DIRECTOR –
Section 1
• A director is defined as a member of the board of a company as contemplated in
S66 or is an alternate director.

• Including any person occupying the position of a director or alternate director, by

whatever name designated.

• The definition includes formally appointed directors, as well as a de facto director –

someone who has not been officially appointed but acts as a director.

• S66 -

• recognises different types of directors

• proves that a person becomes a director only knew when that person has given his /
her consent to serve as a director after having been appointed / elected or

• holds an office in accordance with the provisions of S66

 TYPES OF DIRECTORS – Section 66
• ‘the business and affairs of a company must be managed by or under the direction of its board’ which has the
authority to exercise all the powers and perform any of the functions of the company, except to the extent that
the 2008 Act or the Company’s MOI provide otherwise.

• The company’s MOI can implement some limitations in respect of the director’s power.

• PPWAWU National Provident Fund v Chemical, Energy, Paper, Printing, Wood and Allied Workers Union:

o Directors must act independently regardless of the views or decisions of those who appointed them

o A director is not the servant of agent of a shareholder who votes for or otherwise procures his
appointment to the board and in carrying out his duties and functions as a director, he is in law obliged
to serve the interests of the company to the exclusion of the interests of any such nominator, employer
or principal
MOI appointed
director
• Does not have appointed by the shareholders

• MOI can prescribe how and by whom such a director is

appointed

• Example: That debenture holders or other creditors of the

company may appoint a certain number of directors
 Ex officio director
• A person who holds office as a director of a company solely as a
result of that person holding another office or title or status

• Not appointed by the shareholders

• Holds all the same powers and functions as any other director
except as limited in the MOI

• Such a director has all the duties of and is subject to the same
liabilities as any other directors
 Non-executive and executive director
• Executive director –
o a director who is also an employee

• Non-executive director
o are not employee of the company

• The Companies Act and King III endorse a unitary board structure
o this means that a company should have a single board of directors
consisting of both executive and non-executive directors sitting and
making decisions together at the same meeting
Managers and Directors
Manager and Directors
• Manager is an employee of company
• Director does not have to be employee of
company
• Differences contained in table 6.3 in textbook
• A manager who is entrusted with important
functions could be a prescribed officer and be
subject to many of a director’s duties,
liabilities and qualifications. Differences are
not as absolute as stated in the textbook
Managers and Directors
• Regulation 38 of the Companies Regulations, 2011
defines a prescribed officer as any person who:
o exercises general executive control over, and in
the management of the whole or a significant part
of the company’s business and activities; or
o regularly participates to a material degree in the
general executive control over, and management
of the whole or a significant portion of the
business and activities of the company
o It applies to a person who meets these
requirements irrespective of any title given by the
company to an office held by the person in the
company or a function performed by the person
for the company
 BOARD OF DIRECTORS
• According to King IV, the functions of the board of directors are:

o to give strategic direction to the company,

o approve policy and planning that gives effect to the direction so provided,

o oversee and monitor the implementation and execution by management,

and

o ensure accountability for organisational performance by means of, among

others, mechanisms of reporting and disclosure
 DUTIES AND LIABILITIES OF DIRECTORS
• The 2008 Companies Act partially codified the director’s duties

o common law principles remain to the extent that they have not been narrowed by the 2008 Act
o created a statutory defence for directors in the form of the “business judgment test” which can be used by
directors to prove that they have not acted in breach of their duties

• S76 introduced a new statutory law - “Standards of directors’ conduct”

• This forms part of partially codified regime of directors’ duties which includes:

o fiduciary duty
o duty of reasonable care
o supplemented by other provisions addressing:
- conflict of interest (s 75)
- directors‘ liability (s 77)
- indemnities and insurance (s 78)

• must still be read in context of common law and these principles will continue to apply in the absence of any
contrary statutory provision
 Fiduciary duty of directors
• Common law –
• Fiduciary duty to act in good faith to the benefit of the company as a
whole
• To avoid a situation where the director’s personal interest conflicts
with that of the company

• Companies Act confirms director is under a fiduciary duty and that he or she
must act with a certain degree of care, skill and diligence

• S76(3) provides that a director must exercise the powers and perform the
functions of a director:

a) in good faith and for a proper purpose;

a) in the best interests of the company; and

b) with the degree of care, skill and diligence that may reasonably be
expected of a person –

i. carrying out the same functions in relation to the company as those

carried out by that director; and

ii. having the general knowledge, skill and experience of that director
 FIDUCIARY DUTY AND DUTY
OF CARE, SKILL AND
DILIGENCE
• To determine whether a director as acted with the required degree of care, skill and diligence:

• director must pass both objective and subjective test

• objective test: what a reasonable director would have done in the same situation
• subjective test: taking into account, the general knowledge, skill and experience of the
particular director
• facts of each case are important to determine whether or not a person has acted in breach of
the fiduciary duty owed to his or her company
• Employees and managers also have certain fiduciary obligations or responsibilities towards
their company
 BUSINESS JUDGMENT TEST
• Introduced into our law by S76(4)

• provides that a director satisfies his or her obligations if:

o he or she has taken reasonably diligent steps to become informed about a particular matter; and

o either the director had no material personal financial interest in the subject matter of the decision (and had no
reasonable basis to know that any related person had a personal financial interest in the matter), he or she
disclosed the conflict of interest as required by S75 of the Act; and

o the director had a rational basis for believing and did believe that the decision was in the best interest of the
company
o Allows a director to show that he/she is not in contravention of his/her statutory duties

o S76(4)(b) provides that a director is entitled to rely on the performance of certain people or committees

o a director should not be held liable for decisions that lead to undesirable results where such decisions were
made:
o in good faith
o with care
o and on an informed basis
o which the directors believed were in the interest of the company
 DIRECTORS’ PERSONAL FINANCIAL
INTERESTS
• S75 deals specifically with a director’s personal financial interest

• provides that if a director’s personal interest conflict with those of the company, the director should disclose the conflict of interest in the
manner described in S75

• Company where there is more than one director –

o if a director has a personal financial interest in respect of a matter to be considered at a meeting of the board OR

o knows that a related person has a personal financial interest in the matter

o the director must disclose the interest and its general nature before the matter is considered at the meeting
o - The director is compelled to disclose to the meeting any material information relating to the matter that is known to
the director

o may disclose any observations or pertinent insights relating to the matter if requested to do so by the other directors

o must leave the meeting immediately after making any disclosure

 DIRECTORS’ PERSONAL FINANCIAL
INTERESTS
the director
may not
and where the
approve or unless the after the
director does
enter into any agreement is director has
Where not hold all
agreement in approved by disclosed the
company has the beneficial which that the ordinary nature and
only one interests of all
director or a resolution of extent of that
director the issued
related person the interest to the
securities of
has a personal shareholders shareholders
that company
financial
interest

• The meaning of a director has an extended meaning in this respect and includes an alternate
director, prescribed officer, member of the board committee and member of the audit committee.
LIABILITY OF DIRECTORS
• S77 - liability of directors and prescribed officers
• a company may recover loss, damages or costs sustained by
the company from a director under the following
circumstances (page 167 in textbook)
• director will be jointly and severally liable with any other
person who is or may be hold liable for the same act
• proceedings to recover any loss, damages or costs may not be
commenced more than three years after the act or omission
(giving rise to the liability) occurred
• also gives a director a statutory defence – business judgment
test
• S77(9)
• in any proceedings against a director
• court may relieve the director
• either wholly or in part
• from any liability set out in this section, on any terms the
court considers just if it appears to the court that:
• the director is or may be liable, but has acted honestly and
reasonably; or
• having regard to all the circumstances of the case, including
those connected with the appointment of the director, it
would be fair to excuse the director
• does not apply where the director exercised willful
misconduct or willful breach of trust
Indemnification of Directors
• S78 • Company may not directly or indirectly pay any fine that
may be imposed on the director of the company, or of a
• deals with indemnification and directors’ insurance related company, who has been convicted of an offence
in terms of any national legislation
• applies also to former directors of the company
• a company cannot undertake not to hold a director liable
for breach of fiduciary duties • Company may not indemnify a director in respect of
liability arising out of certain circumstances
• any provision that purports to relieve a director of a duty
is void
• company may advance expenses to a director to defend • page 170 of textbook
litigation in any proceedings arising out of the director’s
service to the company
• company can take out indemnity insurance to protect a • S 78 (8) - company can claim restitution form a director of
director against any liability or expenses for which the the company or of a related company for any money paid
company is permitted to indemnify a director by the company on behalf of that director in any manner
inconsistent with the restriction
• company can also take out indemnity insurance to
indemnify itself against any expenses that the company is
permitted to advance to a director or for which the
company is permitted to indemnify a director
 Ineligible Disqualified

absolutely prohibited Except persons being

from becoming a prohibited by a court of
director of a company law
and there are no
exceptions to this
prohibition the other
disqualifications
provided for in the Act
are not absolute, and a
- juristic person court has a discretion as
to whether to allow such
disqualified persons to
be appointed as a
director
- unemancipated
minor / person under
similar legal disability
prohibited by court of law

person who does not

satisfy any person declared to be a
requirement in a delinquent
company’s MOI

unrehabilitated insolvent

person prohibited by
public regulation

convicted / imprisoned
for theft / fraud / forgery
/ perjury

a person disqualified in
terms of a company’s
MOI
 EXEMPTIONS TO DIRECTOR
DISQUALIFICATION
• S69 (11)
• gives a court a discretion to grant an exemption from being disqualified from
appointment as a director
• Following persons may apply to court for such an exemption:
• an unrehabilitated insolvent
• a person who was removed from an office of trust for dishonest
misconduct; or
• a person who was convicted of a crime with an element of dishonesty
• Ex parte application
• Must prove to court that he/she has been rehabilitated from his / her wrongful
ways and can be trusted with the responsibilities of directorship
• Examples on pages 177-178 of textbook
APPLICATION TO DECLARE A PERSON
DELINQUENT OR UNDER PROBATION
• S162 • grounds for delinquency application
• person consented to serve as a director, or acted in the
• A court can declare a person to be a delinquent or to be capacity of a director or prescribed officer, while he or
under probation she was ineligible or disqualified
• the person acted as a director while under probation and
in contravention of such order under the Companies Act,
• Following persons can apply for such an order: 2008 or under S47 of the CC Act
• a company • the person, while a director, grossly abused the position
• a shareholder of director
• a director • the person took personal advantage of information or an
opportunity contrary to S76 (2) the person intentionally
• a company secretary or prescribed officer of a company or by gross negligence inflicted harm upon the company
• a registered trade union that represents employees of or a subsidiary of the company contrary to S76 (2)(a)
the company • the person acted in a manner that amounted to gross
• any other representative of the employees of a company negligence, willful misconduct or breach of trust
• the Commission • the director engaged in unauthorised/reckless or
fraudulent activities
• the Takeover Regulation Panel
• the director failed to vote against a resolution taken at a
meeting although the company did not satisfy the
solvency and liquidity test
• the person acted in a manner materially inconsistent with
the duties of a director
Application for Delinquency
• Commission or the Takeover Regulation Panel • Setting aside Delinquency order
may rely on the following additional grounds:
• Person declared delinquent may apply to court as
• the person has repeatedly been personally subject follows:
to a compliance notice or similar enforcement
mechanism, for substantially similar conduct, in
terms of any legislation • to suspend the order of delinquency and substitute
• the person has at least twice been personally an order of probation with or without conditions,
convicted of an offence, or subject to an any time from three years after the order of
administrative fine or similar penalty in terms of delinquency was made
any legislation
• the person was a director of one or more • to set aside an order of delinquency at any time
companies or a managing member of one or more from two years after it was suspended
close corporations or controlled or participated in
the control of a juristic person, irrespective of
whether concurrently, sequentially or at unrelated
times, that were convicted of an offence or
subjected to an administrative fine or similar
penalty within a period of five years
• Case study : Kukama v Lobelo
 VACANCIES ON THE BOARD

Person ceases to be a director and a vacancy arises on the board

in the following circumstances:
the person
becomes
the person is
incapacitated
in the case of placed on that person is
to the extent
when the an ex officio probation removed from
that the person director, the office by
period for a under becomes
is unable to
director’s fixed he / she is person ceases conditions that ineligible or resolution of
perform the the person
term contract declared a to hold the are disqualified the
functions of a resigns or dies
expires as delinquent office or titled inconsistent from being a shareholders
director and is
provided for in that entitled with director or resolution of
unlikely to
the MOI the person to continuing to the board or by
regain that
be a directo be a director of order of court
capacity within
the company
a reasonable
time
 Remedies,
enforcement agencies DECRIMINALISING COMPANY LAW

and alternative dispute

resolution REMEDIES AGAINST DIRECTORS WHO
HAVE ABUSED THEIR POSITIONS

STATUTORY REMEDIES OF DIRECTORS

Decriminalising company law
• The previous 1973 Act provided for criminal sanctions as means of
ensuring compliance with its provisions
• Criminal sanctions found to be an inadequate deterrent if not enforced
• Current Act provides for effective private law remedies to discourage
gross mismanagement and abuse of power
Non-criminal (civil) remedies fall under three broad categories:
1. remedies where there has been an abuse of the position of director or
prescribed officer;
2. remedies given to shareholders to protect their own rights; and
3. remedies where there has been an abuse of the separate juristic
personality of a company.
• These remedies assists with the upholding the enforcement of
stakeholders rights
• The 2008 Act decriminalized company law where possible = reduces use
of criminal law and provides for non criminal law to ensure compliance
with the Act and protection of the rights of stakeholders
Decriminalising company law

Criminal
sanctions still
exist for certain
matters

Ie. Ito s 26 of the

2008 Act, it is an • Similarly, ito s214, if any financial
offence to fail to statement of a company is false or
provide access misleading, any person who is a
to any record party to the preparation, approval
that a person or publication of that statement is
has a right to guilty of an offence.
inspect or copy.
Abuse of position of director
or prescribed officer
The first category of non-criminal remedies concerns directors
who have blatantly abused their position.
• Ito s162, an application can be made to declare a director
delinquent or under probation. A court is empowered to
disqualify a delinquent director from serving as a director or
can place a director under probation.
• Ito s165, a shareholder is given a statutory right to bring
proceedings on behalf of a company where the company has
been prejudiced by acts of its controlling directors and where
the company has failed to take the necessary action to call
these directors to account.
• S77 provides for the personal liability of directors and
prescribed officers under a variety of different
circumstances.
• S218 also provides for personal liability of those people who
contravene the provisions of the Act resulting in loss or
damages to others.
The derivative action

• Under the common law, it was accepted that the company itself must act to
have a wrong committed against it redressed.
• This was decided in Foss v Harbottle. In that case, two minority shareholders
alleged that property of the company had been misapplied and wasted by the
directors and that various mortgages were given improperly over the
company’s property.
• The minority shareholders, acting as the plaintiffs in this case, asked that the
guilty parties (the directors of the company) be held accountable to the
company and that a receiver be appointed. The court dismissed the claim
and held that when a company is wronged by its directors, it is only the
company that has standing to sue – not shareholders of the company.
• In effect, the court established the proper plaintiff rule, which states that a
wrong done to the company may be vindicated by the company alone. The
company itself must be the plaintiff, and not shareholders of that company.
The derivative action
ito s165
• a statutory derivative action ito s165 is a more certain
alternative to the common-law remedy.
• S165 provides that the persons who may use the
statutory derivative action are a shareholder, a
director (including a prescribed officer), a
representative of employees (normally a registered
trade union), or any other person with the leave
(permission) of the court.
• The remedy is typically available against an alleged
wrongdoer who is in control of the company.
 The derivative action ito s165
• The following five steps need to be taken to use the s 165 derivative action:
1. The first step is for the person wishing to pursue the derivative action to serve a demand on
the company requiring it to commence or continue legal proceedings to protect the
interests of the company.
2. Unless the company successfully applies to court to set aside the demand on the grounds
that it is frivolous, vexatious or without merit, the company must appoint an independent
and impartial person or committee to investigate the demand and to report to the board
especially on whether or not it appears to be in the best interests of the company to
institute or continue with legal proceedings.
3. Within 60 business days of receiving the demand, the company must either initiate or
continue legal proceedings, or must serve on the person who made the demand a notice
refusing to comply with the demand.
4. if a notice refusing to comply is served on the person who made the demand, that person
may then apply to court for leave to bring or continue proceedings on the company’s
behalf.
5. To grant such leave, the court must be satisfied that the company (in dealing with the
demand and the report) has failed to comply with the statutory requirements and that the
applicant for leave is acting in good faith, that the proceedings will involve the trial of a
matter of material consequence to the company and that it is in the best interests of the
company that leave be granted.
If the shareholders of a company have ratified or approved any particular conduct of the
company, this does not prevent a person from making a demand or applying for leave under s
165, but the court may take the ratification or approval into account in making any judgment or
order
NB! Derivative action should not abuse court process
Remedies available to shareholders to protect
their own rights
• The second category concerns remedies
available to shareholders to protect their
own rights where shareholders are the
victims of oppressive or prejudicial
conduct by the company or a related
person.
• S163 offers relief from oppressive or
prejudicial conduct
• s161 allows for an application to protect
the rights of securities holders, and s164
provides for dissenting shareholders’
appraisal rights
Statutory remedies for
shareholders
• Section 163(1)(c) provides a new ground for relief, which is
when a director, prescribed officer, or other connected party
exercises or has exercised their authority in a way that
oppresses, unfairly prejudices, or disregarded the applicant's
interests.
• This defense is most likely to be invoked when a managing
director, executive director, or other person in charge of the
business abuses their authority and it would be difficult or
unnecessary to demonstrate that the director's actions were
company actions.
• Under s163 of the 2008 Act, the court may make an order if one
of the grounds is proved and if it is just and equitable to do so
Statutory remedies for
shareholders
• Section 163(2) a detailed description of the type of relief that the court
may give,
1. It could be in the form of interim or final relief, including an order
restraining the conduct complained of.
2. An order regulating the company’s affairs can direct the company
to amend its memorandum or create or amend a shareholders’
agreement or
3. The court may appoint replacement or additional directors or
declare any person delinquent or under probation.
4. The court may also order the varying or setting aside of a
transaction to which the company is a party and compensation for
the company or any other party to the transaction or agreement.
5. The court may also direct the rectification of the registers or
records of the company.
Statutory remedies for shareholders
• The purpose of s164 is to provide minority shareholders with a means of
protection against certain actions of majority shareholders, rather than against
actions of the directors.
four situations are covered by s164
1. The remedy is firstly available to shareholders who consider themselves
aggrieved through the company adopting a special resolution to amend its
Memorandum of Incorporation (MOI) by altering the preferences, rights or other
terms of any class of its shares in a manner that is materially adverse to the rights or
interests of the holders of that class of shares
2. Where a company is considering adopting a resolution to dispose of all or
greater part of its assets or undertaking (in terms of s 112 of the Companies Act,
2008
3. Where a company is considering, or an amalgamation or merger (in terms of s
113)
4. Where a company is considering or a scheme of arrangement (in terms of s 114).
NB! s164 does not apply to a transaction, agreement or offer pursuant to a business
rescue plan
Abuse of the separate juristic personality of a
company
• The third category concerns the remedy that effectively allows for the
lifting of the corporate veil and the imposition of personal liability in
instances where there has been abuse of the separate juristic
personality of a company.
• This remedy always existed at common law in South Africa, and the
2008 Act specifically provides for this remedy in s20.
• In terms of s 20(9) of the 2008 Act, whenever a court finds that the
incorporation of, or any act by or on behalf of, or any use of, a company
constitutes an ‘unconscionable abuse’ of juristic personality of the
company as a separate entity, the court may declare that the company
is deemed not to be a juristic person in respect of any right, obligation or
liability of the company, or of a shareholder or member of the company,
or of another person as specified in the declaration.
• Consequently, the court may give any further order it considers
appropriate in order to give effect to such declaration.
Enforcement of rights and ensuring compliance
with the Act

• The 2008 Act outlines four fundamental options for handling complaints about purported
Act violations or for the enforcement of rights, whether those rights are guaranteed by the
Act, a company's MOI, or other regulations
1. ADR
2. Apply to Companies Tribunal for adjudication (only for matters the CA allows)
3. APPLY TO High Court for a court order
4. File a compliant with the CIPC = Commission after investigating the complaint issuing a
compliance notice
other types of business enterprises
besides companies that exist in South
Africa.

Close Corporations
and business trusts.

partnerships.
 Close Corporations
THE NATURE OF A CC:

CLOSE COPORATION – CK1= FOUNDING

SIMPLE, FLEXIBLE AND STATEMENT THAT SETS OUT
THEY ENJOY LEGAL
LIMITED LIABILITY ENTITIES PERPETUAL SUCCESSION NAME OF THE CC, DETAILS
PERSONALITY
SUITABLE FOR SMALL OF MEMBERS & PRINCIPAL
BUSINESSES. BUSINESS OF CC

MEMBERS OF CC CAN
DRAW UP AN ASSOCIATION MEMBERSHIP BETWEEN 1-
AGREEMENT WHICH IS A CC HAS MEMBERS NOT 10 NATURAL PERSONS –
CONTRACT THAT SETS OUT SHAREHOLDERS EMPHASIS ON SMALLER
RIGHTS & DUTIES OF BUSINESSES.
MEMBERS.
CLOSE CORPORATIONS
• A members interest is a personal right against the corporation, entitling the members to a proportionate
share in the aggregate members’ interests, to participate in a distribution of profits, and to share in the
distribution of the assets on liquidation, once all the creditors have been paid. Members interest is expressed
in a percentage
• The members of a CC must have an association agreement (written agreement) in place.
• CC ACT imposes 2 duties:
• Members of a CC have fiduciary duties:
• act honestly and in good faith
• Exercise powers and interest for the benefit of the cc
• Not exceed powers
• Avoid a conflict of interest
• Duty of care and skill
• Standard of care reasonably expected from a person of a member’s knowledge and experience
CESSATION OF MEMBERSHIP
• Section 36 order of court: a member can apply to court to have another member ceased to be a member:

• Permanent inability to perform his/her part in carrying on the CC

• The conduct of the member is likely to have a prejudicial effect on the carrying on of the business

• Circumstances that make it just and equitable that he/she should cease to be a member.

• Conduct making it reasonably impossible for other members to associate with that person or carrying on of
the business
• Section 49: unfairly prejudicial conduct

• Occurs where a member is unfairly prejudiced by an act or omission by the corporation or members.

• Members will have to prove unfairly prejudicial conduct.

• Court must be satisfied such conduct reasonably exists & that it is just and equitable to intervene
CONTRACTING ON
BEHALF OF THE CC
• Every member of the cc qualifies as an agent of the cc
• Any act performed by a member of cc therefore binds cc, even where the act is
performed for the carrying on of the business of the cc, unless the member had no
power to act on behalf of the cc and the other person reasonably knew the member
had no such power.
• A member can be held liable for the debts of the CC in certain circumstances
• S 65 allows the court to ignore the existence of the CC as a separate legal person and
lift the corporate veil.
• A member can be held personally liable where there is gross abuse of the separate
legal personality of the CC
 Definition of the term
‘partnership’
A partnership is a contract between two or more
persons, in terms of which each partner agrees to
contribute to the partnership business, which is
carried on for joint benefit of the parties and with
the object of making a profit.

If a company is a personal liability company under

the Act, the directors and past directors are jointly
and severally liable, together with the company, for
any debts and liabilities of the company contracted
during their respective periods of office.

A personal liability company is usually formed as an

alternative to a partnership to reap some benefits
of incorporation (such as perpetual succession).
Essentials of a
partnership

• Each party makes an appreciable

contribution to the partnership –
something of commercial value (money,
labour or skills/expertise)
• The business is carried on for the joint
benefit of the partners – should not claim
individual benefits (everyone shares
profits & losses).
• There should be a profit objective
• The contract between the parties should
be a legitimate contract made with the
intention of establishing a partnership.

Types of Partnerships
• Universal-involves partners contributing all their property or all
their profits to the partnership, usually for an open-ended
period and for wide-ranging purposes, with a commensurate
sharing of profits of their enterprises.
• Particular-is more temporary and focused arrangement, in terms
of which partners contribute their resources for a particular
defined purpose only and share only in profits from that
particular project together.
• Ordinary-partners are jointly and severally liable for all the
debts of the partnership.
• An ordinary partnership must be contrasted with an
extraordinary partnership in which the liability of certain
partners are limited in some way. There are three forms of
extraordinary partnership in which the liability of certain of the
partners to third parties may be limited.
• Much depends on the type of contract entered into between the
partners
• Extraordinary partnerships with limitations of liability for some
partners:
• Anonymous- two or more persons agree to share in the
business which will be conducted by one of them in his/her
own name and not in the name of the anonymous partner
(does not take an active role in the partnership business).
Has at least one partner whose name is not disclosed to
the public and who is not liable to third parties (creditors)
for the debts of the partnership, but is liable to the other
partners to the extent agreed between the partners.
(Liable for a pro rata share of ALL p/s debts or that which
was expressly agreed).
• Partnership en commandite- Partnership is carried on in
the name of one or more ordinary partners, whilst the en
commandite partners are not disclosed to the public or liable
to creditors. Has undisclosed partners who make a fixed
contribution and receive certain shares of the profit and
who are not liable to other parties beyond that fixed
commitment (liability is limited to the amount of capital
they have contributed to the partnership). If there is no
profit but only loss, the partner is liable to other parties to
the extent of their fixed agreed capital contribution.
• Special partnership-has general partners who are jointly
and severally liable for the debts of the partnership and are
the only persons authorized to transact the business of the
partnership and special partners (make a specific
contribution in cash payment and not personally liable for
any p/s debts beyond the amount they have paid) whose
names are not disclosed and who are not liable beyond an
agreed specific contribution. (NOW REPEALED)
Legal nature of
partnership

• South African law has adopted the aggregate theory of

partnership as opposed to the entity theory. The
entity theory of partnership views a partnership as an
entity separate from its members, so that it becomes
the holder of rights and obligations and can continue
existence, notwithstanding a change of the members of
the partnership.
• The aggregate theory of partnership, which does not
regard the partnership as having separate legal
personality from its members. The partners own the
partnership property as co-owners and the rights and
liabilities of the partnership are also the individual
partners’ rights and liabilities. Thus, a change of
partner destroys the identity of the partnership.
• Incorporated company enjoys legal personality whilst a
partnership does not.
Relationship
between partners
• A partnership is a contract of the utmost good faith.
This means that the relationship between the partners
must be based on mutual trust and utmost confidence.
• The value of utmost good faith can be employed
to give content to four separate duties as
described below:
• Duty to accept and fulfil the obligations of the
partnership agreement
• Duty to acquire benefits for partnership (and
not for their own personal interest) Fiduciary
Duty towards partners.
• Duty to guard against a conflict of interest
• Duty of disclosure (a partner has a duty to
disclose to all co-partners all information in his
or her possession that affects the partnership).
 MEANING OF A TRUST
A trust can be used to protect assets. It can also be used for
business or trading purposes in the place of a company or cc.
Two of the main advantages of a trust are its flexibility and lack
of formality in its creation and operation.
§ Definition- a trust is a legal relationship that is created in a
trust deed. There are three main parties to a trust
§ The Act defines it as: an arrangement through which ownership
in property of one person is bequeathed to the trustee by
Business virtue of a trust instrument which is to be administered or
disposed according to the trust instrument for the benefit of the

Trusts beneficiaries.
§ Founder/Donor
§ Trustees and
§ Beneficiaries.
§ The creator of the trust is the founder. The founder places
assets under the control trustee/s. This can be done either
during the founder’s lifetime (an inter vivos trust) or on the
founders death (a testamentary trust-also known as a will trust).
The purpose of the exercise is to benefit third persons (the
beneficiaries).
Types of trusts
• Trusts therefore aim to protect the weak – beneficiaries, as well as
safeguard the interests of others – the founder
• Ordinary Trust is where ownership AND control of trust assets lies
with the trustees. However this is a non-beneficial ownership as
trustees are required to control and administer these assets on behalf
of the beneficiaries. Trust property does not form part of the personal
estate of the trustee unless the trustee is a beneficiary.
• Bewind trust is where the beneficiaries have ownership of trust
assets but these are under the control of the trustees. (EXAMPLE:
Kanye bequeaths assets to North (minor child) but they are placed
under the control of the trustee
• A bewind trust is a trust where the founder makes a bequest to the
beneficiaries and vests the administration of the assets in the
trustees. The beneficiaries acquire ownership of the assets, while the
trustees only have the administrative control thereof
A trust is recognized as a juristic person for the purposes of
the Act.
Trusts and Close Corporations
A trustee of a trust can be a member of a CC in the capacity
of a trustee.
However, there are certain restrictions on allowing a trustee
to be a member, such as the requirement that no juristic
person can be a beneficiary of a trust.
Close corporation may only have natural persons as
members.
Therefore the trustee himself/herself will be the member of
the CC and not the trust itself.
A juristic person cannot be a beneficiary of a trust
 Legal nature of a trust
• A trust is either created by a contract or a
LEGAL NATURE testamentary document. A trust must be reduced
to writing.
AND
CONSEQUENCES Consequences of forming a trust
OF A TRUST
Trusts
• How to form a valid trust
• An intention of an obligation by the founder to create a trust
• The object of the trust must be lawful;
• Trust property must be defined with certainty
• A trust must have at least ONE beneficiary who is ascertained
or ascertainable;
• Must be reduced to writing
• At least one trustee should be appointed either in terms of the
trust deed or if no appointment is made, the appointment
must be made by the Master of the High Court. The Master
must give a trustee the authority to act.
• Authorisation of trustees
• The Trust Property Control Act provides that any person can only
act as a trustee once they have authorized by the Master to act as
such.
• Trustee must receive written consent from the Master.
• No legal consequences (actions are void) follow from the acts of a
trustee who does not have authorisation.
• Duties of trustee
A trustee must act with care, skill and diligence.
A trustee must open a separate trust account
Trustee must keep proper records
A trustee must not destroy documents and keep them for at
least 5 years
A trustee must not expose the trust to undue risk.
A trustee must invest trust property productively.
A trustee must account to the beneficiaries.
A trustee must act within the powers of the trust deed.
A trustees powers are restricted to the trust deed.
If a trust deed makes no provision for a particular power then
it is deemed that the trustee does not have that power – used
to protect trust assets and to minimise any risk.