LML4806 COMPANY LAW

By

CINDY-LEE VAN ZYL

(35124075)

Submitted in partial fulfilment of the requirements for the degree

BACHELOR OF LAWS

in the

MERCANTILE LAW DEPARTMENT

SCHOOL OF LAW

UNIVERSITY OF SOUTH AFRICA

EXAMINERS: DR V MADLELA
PROF M LOMBARD
PROF TH MONGALO

LML4806 EXAMINATION

(OCTOBER 2022)

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 ACADEMIC DECLARATION OF HONESTY

Declaration: Cindy-Lee van Zyl

1. I understand what academic dishonesty entails and am aware of UNISA’s

policies in this regard.

2. I declare that this Examination is my own, original work. Where I have used
someone else’s work, I have indicated this by using the prescribed style of
referencing. Every contribution to, and quotation in this Examination from the
work or works of other people has been referenced according to this style.

3. I have not allowed, and will not allow, anyone to copy my work with the intention
of passing it off as his or her own work.

4. I did not make use of another student’s work and submitted it as my own.

NAME: Cindy-Lee van Zyl

STUDENT NUMBER: 35124075
MODULE CODE: LML4806
SIGNATURE:
DATE: 31 October 2022

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QUESTION 1.1

Section 20(7) of Companies Act 71 of 2008 (the Act) states that a person dealing with
a company in good faith, other than a director, prescribed officer or shareholder of the
company is entitled to presume that the company in making any decision in the
exercise of its powers has complied with all the formal and procedural requirements in
terms of the Act, its Memorandum of Incorporation and any rules of the company
unless, in the circumstances, the person knew or reasonably ought to have known of
any failure by the company to comply with any such requirement. This provision
applies to internal procedures and formalities even if they are prescribed by the Act.1

The Turquand rule is referred to as the ‘indoor management rule’. This means that this
rule entitles an innocent third party entering into a contract with a company to assume
that the company has complied with all its internal formalities and formal
requirements.2 The Turquand rule results from Royal British Bank v Turquand. The
basis of the Turquand rule is that genuine third parties should not be prejudiced by a
company’s failure to comply with its own formal requirements and internal procedures.

Section 20(7) of the Act seems to codify the Turquand rule by providing the statue that
a person, in good faith, dealing with a company is entitled to assume that the company
has obeyed with all the procedural requirements in terms of the Act, its Memorandum
of Incorporation and any rules of the company. This is, unless the person knew ought
to have known of any failure by the company to comply with its formal and procedural
requirements.3 Section 20(7) of the Act transforms the Turquand rule by stopping a
third-party from invoking the rule where they ought reasonably to have known of non-
compliance by the company. Therefore, Section 20(7) of the Act differs from the
Turquand rule as the Turquand rule is rigid in disallowing a person to have any
suspicion of non-compliance by the company.

Even though Section 20(7) of the Act and the Turquand rule seem similar, the
Turquand rule still exists and has not been abolished by the statutory provision. This
is because Section 20(8) of the Act specifically states that section 20(7) “must be
construed concurrently with, and not in substitution for, any relevant common law
principle relating to the presumed validity of the actions of a company”.4

QUESTION 1.2.1

David is in breach of fiduciary duty. A director may be held liable for any loss, damages
or costs sustained by the company as a consequence of the following:

 any breach by a director or a failure to disclose his or her personal financial

interests;
 improper use of position or corporate information or failure to communicate
relevant information to the company;
 a breach of the duty to act in good faith and for a proper purpose; and
1 Farouk H. Cassim and others The Law of Business Structures (Juta Law 2013) 146.
2 Farouk H. Cassim and others The Law of Business Structures 38.
3 Company Law, only study guide for LML4806 (UNISA), 21.
4 Company Law, only study guide for LML4806 (UNISA), 22.

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  a breach of the duty to act in the best interests of the company.5

Section 76(4)(a) of the Companies Act 2008 states that a director will have satisfied
the duty to act (1) in the best interests of the company and (2) the duty to act with the
degree of care, skill and diligence, provided the three elements of the business
judgement rule is present. The business judgement rule is as follows:

 The director took reasonable steps to become informed about the matter;

 The director had no material personal financial interest in the subject matter of
the decision or had no reasonable basis to know that any related person had a
personal financial interest in the matter or disclosed his interests; and

 The director made or supported a decision in the belief that it was in the best
interests of the company.6

Section 76(4)(b) of the act further states that a director may also rely on the
performance and advice of professional persons, employees and the board
committee. If decisions were made in good faith and with care on an informed basis
where the director truly believed that the interests of the company were taken into
consideration, then the business judgment rule states that a director should not be
held liable for their decisions.

In the case of Robinson v Randfontein Estate Gold Mining, the court held that a
director is subject to fiduciary duties requiring him to exercise his powers bona fide
and for the benefit of the company. A director must not put his personal financial needs
before his fiduciary duties.

In this case, however, David has indeed in breach of fiduciary duty as he has material
personal interest in the appointment of Aerial Lease (Pty) Ltd as he is a majority
shareholder in the company. The board of directors relied on David’s information and
had a reasonable belief that the decision made by David was in the best interest of
the company.

QUESTION 1.2.2

Dishonest and fraudulent business decisions are not protected by the business
judgement rule and the lease agreement in this scenario will not be valid and binding
on Free State Airlines SOC Ltd.

The three requirements are that the director must have taken reasonable steps to
become informed about the matter; the director had no material personal financial
interest in the subject matter of the decision or had no reasonable basis to know that
any related person had a personal financial interest in the matter or disclosed his

5 Farouk H. Cassim and others The Law of Business Structures, 319.

6 Companies Act of 2008 76(4).

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interests; and the director made or supported a decision in the belief that it was in the
best interests of the company.7

A decision by the directors was done in good faith however David had material
personal financial interest in the subject matter of the decision and this requirement is
not protected by the business judgment rule as all three of the requirements for the
business judgment rule have not been satisfied.

QUESTION 2

A person who acquired securities on the basis of a prospectus is entitled to recover

any loss or damage that the person might have sustained as a result of any untrue
statement in the prospectus as stated in Section 104(1) of the Companies Act 71 of
2008.

The directors of Value for Money Ltd will be liable if the plaintiff can prove the following
(1) that they acquired shares based on their reliance on the prospectus (2) that they
suffered a loss (3) that loss was caused by an untrue statement in the prospectus.

An untrue statement is defined in 95(1)(p) of the Companies Act as a statement that

is misleading in the form and context in which it is made. In this case an omission from
a prospectus is calculated to mislead by omission constitutes the making of an untrue
statement. This is irrespective of whether the Companies Act requires that matter to
be included in the prospectus or the written statement.8

An untrue statement includes a statement that is misleading. If an untrue statement

appears on the prospectus or incorporated by reference in, or is attached to, or
accompanies a prospectus, written statement or summary directing a person to either
a prospectus or a written statement it will be regarded as misleading. This is important
to note as the untrue statement (or omission) information does not need to appear in
the information document itself such as this current scenario. All of these documents
and statements will need to be tested for accuracy by any plaintiff that requires relief
from an untrue statement. This is relevant to any omitted information as well.9

All information that is relevant to the investment decision of a member of the public
must be included on the prospectus. Furthermore if securities are offered to the public
for subscription or for sale pursuant to a prospectus and every director who authorised
the issue of the prospectus is liable to compensate anyone who acquired securities on
the faith of the prospectus for any loss or damage sustained as a result of any untrue
statement in the prospectus. 10

Simon, John and Mildred will need to prove the provisions of Section 104(3)(f) of the
Companies Act which is based on reasonable belief, reliance on expert opinion or
official documents or lack of consent to the publication of the prospectus.

7 Companies Act of 2008 76(4).

8 Farouk H. Cassim and others The Law of Business Structures, 375.
9 Farouk H. Cassim and others The Law of Business Structures, 375.
10 Farouk H. Cassim and others The Law of Business Structures, 376.

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QUESTION 3.1

A state-owned company, a public company or any other company that has voluntarily
determined in its Memorandum of Incorporation to have an audit committee must elect
at each AGM a committee which must comprise of at least three members. This is
unless the company is a subsidiary of another company that has an audit committee
where the audit committee of the holding company will fulfil the required audit
committee functions on behalf of that subsidiary company.11

The incorporators of the company or by the board may appoint the first members of
the audit committee within 40 business days after incorporation and the vacancies on
the audit committee will need to be filled by a director within 40 business days of the
vacancies arising.12

Each member of the audit committee must be a director and at least one-third of the
audit committee members must also have academic qualifications or experience in
economics, law, corporate governance, finance, accounting, commerce, industry,
public affairs or human resource management at any time. In addition, the audit
committee members must not be or have been at any time during the previous financial
year, involved in the day-to-day management of the company’s business; or have
been at any time during the previous three years, a prescribed officer, or a full-time
employee, of the company or a related or inter-related company; a material supplier
or customer of the company, such that a reasonable and informed third party would
conclude in the circumstances that the integrity, impartiality or objectivity of that
director is compromised by that relationship; or related to any of the abovementioned
persons. 13

It is the duty of an audit committee to nominate a registered auditor for the company
who is independent of the company. A public company may, at an AGM, legitimately
appoint an auditor other than the one nominated by the audit committee provided that
the audit committee is satisfied that the proposed auditor is independent of the
company.14

 The other duties of an audit committee are to determine the auditor’s fees and
terms of engagement;
 ensure that the auditor’s appointment complies with any legislation related
thereto;
 determine the nature and extent of, and pre-approve, any non-audit services
that the auditor may or may not provide to the company or a related company;
 comment, in a report to be included as part of the annual financial statements,
on the company’s financial statements, accounting practices, internal financial
control, how the audit committee carried out its functions, and whether the audit
committee is satisfied that the auditor was independent of the company;

11 Farouk H. Cassim and others The Law of Business Structures, 348.

12 Farouk H. Cassim and others The Law of Business Structures, 348.
13 Farouk H. Cassim and others The Law of Business Structures, 348.
14 Farouk H. Cassim and others The Law of Business Structures, 348.

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  receive and deal appropriately with any concerns or complaints relating to the
company’s accounting practices, internal financial controls, financial
statements or audits;
 make submissions to the board on any matter concerning the company’s
accounting policies, financial control, records and reporting; and
 perform other functions determined by the board, including tasks to improve the
effectiveness of the company’s risk management, control, and governance
processes.15

The company must pay all expenses reasonably incurred by the audit committee in
the discharge of its duties which include the fees of any consultant or specialist. The
responsibilities of a company’s board and the directors are only reduced with respect
to the appointment, fees and terms of engagement of the auditor despite the audit
committee’s duties.16

QUESTION 3.2.1

The type of transaction that is contemplated is a fundamental transaction and in this

case it is an amalgamation or Merger.

QUESTION 3.2.2

I would advise the Commercial Bank of South Africa that they could use the court
approval provisions. These provisions enable the court to keep back a resolution
before it is implemented by the company. In this way Commercial Bank of South Africa
can prevent the fundamental transaction from taking place.

A safeguard for the Commercial Bank of South Africa is the exceptional requirement
of court approval of a merger. It has a different purpose from the appraisal right. Using
the court approval as a remedy must be distinguished from the appraisal remedy. The
appraisal remedy is concerned with determining the fair value of shares in the
company and does not prevent the implementation of the merger while the court
approval requirement is concerned with the review of the merger resolution and the
possible setting aside of the merger. Furthermore, the court approval requirement
generally operates where there are procedural irregularities or unfairness. In such
cases the appraisal right would be an ineffective safeguard. The right of shareholders
to request a court review of a fundamental transaction is in addition to their appraisal
rights. 17

Therefore, the Commercial Bank of South Africa could rely on the court remedy to
prevent the merger being implemented.

15 Farouk H. Cassim and others The Law of Business Structures, 349.

16 Farouk H. Cassim and others The Law of Business Structures, 349.
17 Farouk H. Cassim and others The Law of Business Structures, 391.

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QUESTION 4.1

A compromise is an agreement between a company and its creditors which terminates

a disagreement over the rights of the parties which are to be compromised or their
enforcement.

A compromise will still apply if the company is in liquidation and a company’s board of
directors or the liquidator of the company may propose a compromise to all creditors
in terms of Section 155(2) of the Act.

Section 155(2)(a)(b) of the Act states that the proposal of a compromise is effected by
the delivery of a copy of the proposal and notice of meeting to consider the proposal
to the Companies Commission and to every creditor of the company or every member
of the relevant class of creditors whose name and address is known to or can
reasonably be obtained by the company.

A company may apply to the court for an order approving the proposal. Section
155(7)(b) of the Act states that the court may sanction the compromise as set out in
the adopted proposal if it is just and equitable to do so. For these purposes the court
will take account of the number of creditors of any affected class of creditors who were
present or represented at the meeting and who had voted in favour of the proposal
and in the case of a compromise in respect of a company being wound up, the report
of the Master required in terms of the laws. Section 155(8)(c) of the Act states that
the order of the court authorising the compromise is final and binding on all creditors
from the date on which a copy of the order is filed.

A compromise is appropriate in cases where the normal mechanisms for reaching an

agreement between the company and its creditors are not available. It is intended to
provide the machinery for overcoming the practical difficulty that a company may
experience in obtaining the individual consent of every creditor of the company to the
settlement of their claims.18

QUESTION 4.2

The Financial Markets Act 19 of 2012 regulates insider trading. Inside information is
specific information that has not been made public. This information is obtained as an
insider the consequence thereof is if it were made public would be likely to have a
material effect on the price or value of any security listed on a regulated market.

According to Section 77 of the Financial Markets Act, a director, a shareholder of an

issuer of securities listed on a regulated market, an employee who has access to such
information by virtue of his employment could be an insider.

Insiders would not be guilty of the offence of dealing if they prove that they only
became an insider after they had given the instruction to deal to an authorised user
and the instruction was not changed in any manner after they became an insider.

18 Farouk H. Cassim and others The Law of Business Structures, 505.

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Andrew is an insider because he is an auditor of Electronics Ltd, a company whose
shares are listed on the Johannesburg Stock Exchange and he committed an offence
in terms of section 78 of the Financial Markets Act. This is an insider who knows that
he has inside information. He then advised Ntombi to sell her shares in in Electronics
Ltd. Andrew committed an offence of dealing under the Financial Markets Act. An
insider who knows that they have inside information and who deals directly or indirectly
or through an agent for their own account in the securities listed on a regulated market
to which the inside information relates, or which are likely to be affected by it, commits
an offence. Furthermore another offence that Andrew has committed under the
Financial Markets Act is that of disclosure. An insider who knows that they have inside
information and who discloses such inside information to another person, commits an
offence. Andrew is guilty of these offences. The Financial Markets Act lists various
other insider trading offences.19

19 Farouk H. Cassim and others The Law of Business Structures, 506.

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