GROUPS OF COMPANIES

Chapter 3
 A group of companies is defined as two or more companies
that are related or inter-related (section 1 of the Companies
Act of 2008).

Group of companies
A company is related to another company if:
Either company directly or indirectly controls the other or controls the business of the other
Either company is a subsidiary of the other.
 Why would a group of
companies be formed?
• There are many business reasons to create a group of companies, for example to enable centralised control of
independent companies which have common ownership.
• From a legal point of view, however, the most important reason to form a group is to reduce business risk,
because if one business conducted by a company within the group fails, it will not affect the other businesses;
every company within a group structure is a separate juristic person with its own rights and liabilities.
 Why regulate company
groupings?
• To account for the stake of the holding company in the issued share capital of the subsidiary.

• To regulate transactions between the holding company and the subsidiary in order to curtail any
abuse.
Control (section 2(2)(a))
Company H controls company S or its business if:
Company S is a subsidiary of company H.
Company H together with any related or inter-related person is:
Directly or indirectly able to exercise or control the exercise of a majority of the
voting rights associated with the securities of company S.
Company H has the right to appoint or elect, or control the appointment or
election of, directors of company S who control a majority of the votes at a
meeting of the board.
 Holding company and
subsidiary relationships
(section 3)
A holding company in relation to a subsidiary means a company that controls that subsidiary
as set out in section 2(2)(a) or section 3(1)(a) of the Companies Act 71 of 2008.
Company S is a subsidiary of company H if company H or one or more other subsidiaries of
company H or one or more nominees of company H or any of its subsidiaries (alone or in
combination):
Is directly or indirectly able to exercise, or control the exercise of, a majority of the general voting
rights in company S; or
Has the right to appoint or elect, or control the appointment or election of directors of company S
who control a majority of votes at board meetings
(section 3(1)(a) of the Companies Act 71 of 2008).
 Wholly-owned
subsidiary (section 3(1)
(b))
A company will be a wholly-owned subsidiary of another
company if that company or one or more of its
subsidiaries or one or more of its nominees or any of its
subsidiaries (acting alone or in combination) holds or
controls all the voting rights in the company.
 Control of voting rights
(section 3(2))
In order to determine whether a person controls all or a majority of the
voting rights:
Voting rights that are exercisable only in certain circumstances are to be taken
into account only when those circumstances have arisen or when those
circumstances are under the control of the person holding the voting rights.
Voting rights that are exercisable only on the instructions or with the consent
or concurrence of another person are regarded as being held by a nominee for
that other person.
Control of voting rights
(continued)
In order to determine whether a person controls all or a majority of the voting
rights:
Voting rights held as a nominee for another person are regarded as being held by that
other person.
Voting rights held by a fiduciary are regarded as being held by the beneficiary of those
voting rights.
Control is determined by an analysis of voting power and not by the number of shares.
Examples of groups of
companies

H Ltd

S Ltd
H Ltd

S1 Ltd

S2 Ltd
 H Ltd

S1 Ltd S2 Ltd

S3 Ltd
 Subsidiary as a member
of its holding company
(section 48(2)(b))
A subsidiary may acquire shares in its holding company to a maximum of
10% in the aggregate of the number of issued shares of the holding
company.

No voting rights attached to those shares may be exercised while the

shares are held by the subsidiary, and it remains a subsidiary of the
company whose shares it holds.
 Legal consequences for
groups of companies

A subsidiary company may acquire shares in its holding company

Acquisition of shares provided the acquisition does not amount to more than 10% in
aggregate of the number of issued shares of any class of shares of the
Each company in a group ofcompany
holding companies is a separate legal person but a group
of companies as such does not have separate legal personality
A director’s
The following dutyflow
consequences not from
to use his position
groups as director or any
of companies:
information obtained while acting in this capacity to gain an advantage,
Directors’ conduct applies also with respect to the holding company and
subsidiary of the company that the director serves
 Legal consequences for
groups of companies
(continued)
An employee scheme is defined so as to treat an employee of a
company also as an employee of a holding company or
Public offerings subsidiary company for the purposes of the scheme
A secondary offering of shares is regulated in the Companies Act
of 2008 as if the shares were those of a group of companies

Disposal of all or
The reference to a disposal of a greater part of the assets or of
the greater part
of assets or the undertaking of the company does not apply to a disposal
undertaking concluded between companies in the same group of companies
 Legal consequences for
groups of companies
(continued)
Holding companies must apply the solvency and liquidity test to
Solvency and
their consolidated balance sheet in order to comply with the
liquidity test
Companies Act
Since holding companies are related to subsidiary companies the
Financial restrictions on companies providing financial assistance for the
assistance subscription or purchase of shares and loans to directors may apply
also in relation to other companies in the group
Group and annual
Listed companies are required by International Financial Reporting
financial Standards to prepare consolidated (group) financial statements
statements
 Groups and lifting the
corporate veil
• In a group situation, in some circumstances, the corporate veil of the
group may be pierced, so that the group is viewed as a single entity,
as opposed to a collection of different corporate entities.
• See: Ex parte Gore NNO 2013 (3) SA 382 (WCC)