TAMARA HOPE REDDY

10462392

Entrepreneurial Law
MRL2601
Question 1

1.1. Piercing of the corporate veil

1.2. Founding statement

1.3. Public company

1.4. Ostensible or apparent authority

1.5. Debenture

1.6. Quorum

1.7. Ex officio director

1.8. Association agreement

1.9. Transformative constitutionalism

1.10. Pre-incorporation contract

Question 2

2.1.1. 1When the consummation of the transaction exceeds the firm's legal capacity,
a contract is considered ultra vires the corporation under our common law.
2The ultra vires theory states that a corporation does not exist in law when an

act on its behalf stray from its primary and secondary goals. As a result, the
act is not binding on the firm. An act of this kind is referred to as an ultra vires
act. 3In Attorney-General v. Mersey Railway Co., the court clarified that it is a
factual inquiry as to whether a certain contract is within the company's
authority and competence. Buying a nightclub for a business that produces
toy guns does not make sense and falls outside the scope of the business.

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Entrepreneurial Law study guide, 2017, University of South Africa, p43
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1, p44
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1, p44
 4As per the Companies Act's section 19(1)(a), a company's establishment
transforms it into an independent legal entity. Until the company's name is
struck from the Companies Register, it retains its legal personality. A business
has all the legal capacity and powers of a natural person, according to Section
19(1)(b) of the Companies Act, unless the company's memorandum of
incorporation specifies otherwise, or a juristic person is incapable of
exercising any such power. As a result, a company's ability is no longer
constrained by its primary or secondary goals or lines of activity, and these
goals are not even required to be included in the memorandum of
incorporation.

5According to clause 19(1)(b)(ii), any such limitations wouldn't make a

contract that deviates from them void (section 20(1)(a)). Consequently, even
in cases when the transaction is ultra vires, the contract is nonetheless
enforceable against the corporation and the other party. So the contract is
binding

2.1.2. The shareholders have the option to sue the individual who went outside the
business's authority to recoup their losses, even if the firm will be bound by an
ultra vires transaction. 6According to section 20(6) of the Companies Act,
unless approved by special resolution under section 20(2), each shareholder
has a claim for damages against any person who, through fraud or wilful
negligence, causes the company to do anything that is against the Companies
Act or a limitation, restriction, or qualification on the company's powers as
stated in its Memorandum of Incorporation.

7One or more shareholders, directors, or prescribed officers of the company

may obtain a court order restraining the company or directors from doing so if
the company or directors have not yet carried out the planned action that is
inconsistent with a limitation or qualification of the company's powers
contained in the Memorandum of Incorporation. In accordance with section
20(4), the company's directors, shareholders, prescribed officials, and a trade
union representing its workers may also file legal action to stop the business
from acting in a way that is against the Act. This is in addition to the three
legislative remedies are available to shareholders: section 163 provides relief
from oppressive or detrimental behaviour; section 164 protects the right of
dissident shareholders to an appraisal; and section 161 allows an application
to safeguard the rights of securities holders.

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 2.2.1. 8 The solvency and liquidity tests are set out in section 44 of the
Companies Act, solvency test: That the company's valued assets equal
or exceed its fairly valued liabilities after taking into account all
reasonably foreseeable financial situations at that time. Liquidity test:
The ability of the firm to pay its obligations when they become due in
the regular course of business for a period of 12 months following the
distribution, considering all reasonably foreseeable financial conditions
of the company at that time. The period begins twelve months after the
test was taken into consideration if the distribution took the form of
making a loan to a shareholder or terminating a loan to a shareholder.

2.2.2. 9Section 44 of the Companies Act permits a company to lend financial

assistance, guarantee, provide security, or in any other way to an
individual for the purpose of, or in connection with, the purchase of
shares and other securities in the company, so long as the assistance
is allowed by the Memorandum of Incorporation and meets certain
requirements.

10In addition, Section 44 mandates that the board be persuaded that

the financial assistance will be provided on conditions that are
reasonable and fair to the firm, and that the solvency and liquidity
criteria would be met right away. Financial aid may be subject to
additional restrictions outlined in the Memorandum of Incorporation.
The board is responsible for ensuring that these criteria are fulfilled.

Question 3

3.1. Section 162 of the Companies Act allows for the declaration of delinquency or
probation for a director. In accordance with this provision, the Commission is
required to maintain a public registry of individuals who are subject to a court
order. Declaring a director delinquent may also be applied for under specific
circumstances by the Commission, the Takeover Regulation Panel, or a state
body.

11A person who has been found to be a delinquent may be permanently

barred from holding any position as a director or may be barred for a minimum

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 of seven years, subject to any terms the court deems suitable, depending on
the circumstances surrounding the declaration. Conversely, a probation order
can have a maximum duration of five years and be subject to whatever
requirements the court deems suitable, such participating in a specific
rehabilitative program.

Grounds for delinquency:

12The person.

• Served as a director while disqualified.

• Acted as a director while under probation in a manner that contravened
the order of probation.
• Grossly abused the position of director.
• Took personal advantage of information/an opportunity.
• Intentionally or because of gross negligence inflicted harm on the
company.
• Acted in a manner that amounts to gross negligence, wilful misconduct,
or breach of trust.

13Ina delinquent order, the court may mandate that the individual:
• Undergo remedial education.
• Carry out a designated programme of community service.
• Pay compensation.

I believe that there is grounds to declare Mpho delinquent.

3.2. 1. Ordinary resolution- a choice made at a shareholders' meeting and

approved by the memorandum of incorporation or by more than 50% of the
voting rights that were exercised.

Special resolution- a choice made in accordance with the terms of the

Memorandum of Incorporation or with the endorsement of more than 75% of
the voting rights exercised.

3.2.2. 14A section 62 notice of a meeting must:

• Be in writing.
• Indicate the date, time and place of the meeting.
• Indicate the general purpose of the meeting.
• State that a shareholder has the right to choose a proxy, who will be
able to represent the shareholder at the meeting and cast a vote.

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 • Make it clear that attendees must present identification as proof
identification.
• Be accompanied by a copy of any proposed resolution to be discusses
at the meeting.
• Be provided at least ten days in advance of the meeting, or fifteen days
in the case of non-profit and public corporations that have members.
15Ifthere has been a major flaw in the notice that was given, the meeting
can only go on if all those eligible to vote on any item on the agenda are
present and vote in favour of ratifying the flawed notice. A business may
arrange for an electronic means of communication to be used for
shareholder meetings. If a business permits electronic participation in
meetings, notice of the meeting's convening must notify shareholders or
their proxy of the possibility of doing so.

3.3. A company strategy known as "corporate social responsibility" aims to benefit

all stakeholders in the economy, society, and environment while also
promoting sustainable development. 16The goal of corporate social
responsibility is to turn contemporary businesses into accountable community
members. Incorporating economic, social, and environmental imperatives into
a company's operations while simultaneously meeting stakeholder and
shareholder expectations is the common understanding of the phrase
corporate social responsibility (CSR). Corporate social responsibility is the
idea that companies have an obligation to the communities in which they
conduct business, and that this obligation must be handled. It alludes to
businesses becoming involved in charitable endeavours that improve the
society and local area in which they do business.

17CSR proponents contend that there are several ways in which businesses
may profit from CSR, including the following:

• Socially conscious businesses might gain from government support

and preferential procurement under South Africa's Broad-Based Black
Economic Empowerment policy.
• A business that treats its workers with respect and has a solid social
record will probably draw and keep a motivated, productive, and
devoted staff.
• CSR might increase a business's capacity to create long-term value by
fostering connections with stakeholders that benefit both parties.When
it comes to business prospects, a variety of stakeholders, including

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 community organizations, regulators, and buying authorities, may favor
socially conscious enterprises, which might increase their potential for
profit.
• A business that treats its workers with respect and has a solid social
record will probably draw and keep a motivated, productive, and
devoted staff.

Question 4

4.1. 18Turquand v. Royal British Bank is where the Turquand rule originated. The
common law Turquand rule states that an outsider entering into a contract
with the company in good faith is entitled to assume that this internal
requirement has been complied with if the person acting on behalf of the
company has the authority to do so, but this is subject to an internal formality,
such as approval by the board. Despite noncompliance with the internal
formality, the corporation will still be held accountable for the terms of the
contract. Except in scenarios when the contract was signed under dubious
circumstances or when the outsider knew that the internal formality had not
been followed.

19The Turquand rule was developed to maintain the acceptable boundaries of

an outsider's obligation to investigate the company's activities. There had to
have been an internal necessity in place for the Turquand rule to protect. The
rule is applicable in situations when an internal requirement limits an
individual's ability to act on behalf of the company, as specified in the firm's
memorandum of incorporation. 20If a third party were to enter into a contract
with the firm, they would still need to look into whether the shareholders gave
their approval, even if the Memorandum of Incorporation is publicly accessible
and recorded. This is irrelevant due to the Turquand rule, which states that
third parties acting in good faith may presume that such internal requirements
have been met. A business cannot claim that it did not follow an internal
protocol or process to avoid obligation under an otherwise enforceable
contract.

4.2. 21Duties of the company secretary

• Giving direction to the company's directors on their roles,
responsibilities, and authority both as a group and as individuals.

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 • Making the directors aware of any law relevant to or affecting the
company.
• Making certain that everyone who is eligible receives a copy of the
company's yearly financial statements in compliance with the
Companies Act.
• Notifying the board of the company of any infraction of the Companies
Act committed by the company or any of its directors.
• Carrying out the functions of a person designated in terms of section
33(3).

Question 5

5.1. There are two remedies for members against other members:

A member or members may request that another member's membership be

terminated by court order in accordance with section 36 of the Close
Corporations Act. 22To do this, the member must demonstrate:

• That the member is unable to perform his/her part in carrying on the

business.
• Due to the member's actions, it is now almost difficult for the other
member to collaborate with them in running the close corporation's
company.
• That the member's actions are probably going to negatively impact the
close corporation's ability to perform business.
• that it is fair and reasonable given the circumstances for such an
individual to no longer be a member of the close company.

A member whose rights are unjustly and adversely impacted by the

close corporation's actions or by the actions of one or more other
members may pursue recourse under section 49 of the Close
Corporations Act. To correct the problem, the court may issue any
orders it sees proper. 23The case of Gatenby v Gatenby established
that the court has broad discretion in determining the appropriate order
to give relief to the victim of oppressive behavior. In this instance, the
court mandated that the corporation's only asset be sold in order to
raise the necessary funds for the close corporation to purchase the
stake of a disgruntled member.

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5.2. 24According to section 51, if the solvency and liquidity requirements are not
met and the other members have not all given their written agreement for
such a payment, no payment may be made to members in their individual
capacities. The conditions outlined in section 51 must be met before any
distribution is made to members in their role as members. These guidelines
won't apply if a payment has to be made to a member in their role as a
creditor. The close corporation will be accountable if a creditor demands
payment before it is due and payable. If the closed corporation is unable to
pay, a creditor may request that the company be wound up.

5.3. Members owe two duties to the close corporation, the fiduciary duty terms of
section 42 of the Close Corporations Act 69, and a duty of care and skill. In
this instance Barbera breached the fiduciary duty.

25The Close Corporations Act provides that a member should:

• Act honestly and in good faith, and:
• – exercise powers to manage or represent the corporation in the
interest of the corporation
• – not act without or exceed such powers.
• Prevent putting their own interests and the interests of the tight
corporation at odds with one another. In particular:
• – not obtain any financial benefit for themselves to which they are not
legally entitled as a close corporate member.
• – Inform the other members of a close company as soon as you
become aware of any material stake in a transaction.
• – not compete with the close corporation’s business activities in any
way.

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 Bibliography

Entrepreneurial Law study guide, 2017, University of South Africa

Legislation

Companies Act 71 of 2008

Close Corporations Act 69 of 1984

DECLARATION
I declare that this assignment is my own original work. Where secondary material
has been used (either from a printed source or from the internet), this has been
carefully acknowledged and referenced in accordance with departmental
requirements. I understand what plagiarism is and am aware of the Department’s
policy in this regard. I have not allowed anyone else to copy my work.

Signature: T H Reddy