COMPANY SHARES AND CLOSE

CORPORATIONS

MS J GELDENHUYS
&
MS A MTHEMBU
 SHAREHOLDERS & COMPANY
MEETINGS
• Majority rules
• General rule: Resolutions passed at meetings
• Exceptions:
Unanimous assent
- Gohlke and Schneider
- In re Duomatic
Section 57 of Companies Act of 2008:
Section 60 of Companies Act 2008:
- If required majority of shareholders with voting rights agree in
writing, no meeting required.
- As if decision was taken at duly constituted meeting
- Not applicable if matter must be decided on at AGM
 NOTICE OF MEETINGS

Section 62 of Companies Act of 2008:

• In writing
• Must indicate date, time and place
• Must indicate purpose
• Indicate that shareholder is entitled to appoint a
proxy
• Must include a copy of any proposed resolution
• Must be given at least 10 days prior to the meeting
(15 days for public and non-profit companies with
members)
 QUORUM:
• holders of at least 25% of the shares entitled to
be voted iro at least one matter must be present
• If there are more than two shareholders: three
present
Conduct at the meeting:
- show of hands
- poll (voting rights attached to share)
Votes exercised- calculated
• If quorum is not achieved within 1 hour, meeting
must be postponed for a week.
 POSTPONEMENT:

• One hour- may extend in exceptional

circumstances
• One week- quorum
• Notice required if location changes
• No more than 120 days
 RESOLUTIONS:
• Ordinary resolution: 50% of exercised voting
rights
• Special resolution: 75% of exercised voting
rights
• MOI may indicate higher percentage for
ordinary resolution/ lower percentage for
special resolution
• Difference between ordinary and special:
at least 10%
 PROXIES:
• Shareholder may appoint proxy to act on his/
her behalf.
• Appointment must be in writing, dated and
signed by shareholder.
• A proxy can remain valid for a maximum of
one year from date of signature.
 ACTIVITY
The board of directors of Zithulele (Pty) Ltd convened a
meeting to be held on 26 February 2011. Mr Ngcobo a
shareholder of Zithulele (Pty) Ltd was given a notice dated 19
February 2011, to attend the meeting at the board room of
Zithulele (Pty) Ltd at 10:00. The agenda for the meeting is to
discuss Zithulele’s business.

Advise Mr Ngcobo whether he was given proper notice.

 DIRECTORS AND DIRECTORS
COMMITTEES
• Section 66(1) of the Companies Act 71 of 2008

Companies are obliged to have directors:

- Public and non-profit companies – at least 3

- Private and personal liability companies – at
least 1
- MOI may provide for a higher number.
 TYPES OF DIRECTORS:
Types of directors recognised by King Code:
• Executive directors
• Non-executive directors (NB! See Howard v Herrigel)
• Independent directors

Types of directors recognised in Companies Act of

2008:
• Ex officio director
• MOI-appointed director
• Alternate director
• Elected director
• Temporary director
 DISQUALIFICATION:
Ineligible:  (may never be)
• Juristic person
• Unemancipated minor/ under legal disability
• Ineligible in terms of provisions of MOI
Disqualified: (may be with court’s consent)
• Declared delinquent
• Unrehabilitated insolvent
• Prohibited i.t.o. public regulation
• Removed from office of trust for misconduct/
dishonesty
 Disqualified (continued)

• Convicted of fraud, dishonesty, theft or a

related offence
• Disqualified in terms of provisions of MOI

Section 69(12) of Companies Act of 2008:

Under certain conditions a disqualified person
may act as a director of a private company
without the court’s consent.
Ex Parte Barron: court more lenient in private
companies
 DELINQUENCY:
Grounds:
• Director while disqualified/ under probation
• Grossly abused position of director
• Took personal advantage of information/ an opportunity
• Intentionally/ by gross negligence inflicted harm to
company.
• Acted in a manner that amounts to gross negligence,
wilful misconduct or breach of trust
• Acted in the name of the company or on behalf of the
company, despite lack of authority.
• Reckless trading
 Delinquency (continued)
party to an act or omission by the company knowing
that it was calculated to defraud a creditor, employee
or shareholder of the company, or had a fraudulent
purpose
• Repeatedly personally subject to compliance notices
for similar contraventions
• convicted of an offence/ fined in terms of any
legislation at least twice
• Within a period of 5 years was a director/ managing
member of a company/ companies or a close
corporation/s that contravened legislation.
 Probation:
On the same grounds for delinquency, and also if
director:
• present at a meeting and failed to vote against a
resolution while company is insolvent/illiquid
• acted in a manner materially inconsistent with the
duties of a director
• acted in a way that had a result that was
oppressive or unfairly prejudicial to a shareholder
or another director, or that unfairly disregarded
the interests of a shareholder or another director
 Probation (continued)
• acted in a way that resulted in the business of the
company, or a related person, being carried on or
conducted in a manner that was oppressive or unfairly
prejudicial, or that unfairly disregarded the interests of
a shareholder or another director
• Exercised powers in an oppressive or unfairly
prejudicial way, or that unfairly disregarded the
interests of a shareholder or another director
• Was a director of a corporation that failed to pay debts
 CONSEQUENCES: DELINQUENT/
PROBATION
Court can make the following order/s:
• Remedial education
• Carry out community service
• Pay compensation to person adversely
affected
• Probation – supervision by mentor/ limited
to serving in a private company/ company
of which person is sole shareholder
• Conditions may apply.
 Duties of Directors:
• The duties of directors contained in the
Companies Act 71 of 2008 are subject to and
does not substitute their common law duties.
• The test to determine whether or not a director
acted with the required degree of care and skill
is objective with subjective elements.
• A director has a fiduciary duty towards the
company to act bona fide and for the best
interest of the company.
 Case Law: Fiduciary Duties
•Robinson v Randfontein Estates Gold
Mining Co – Directors must avoid conflicts
of interest.

•Howard v Herrigel - Once a person

accepts an appointment as director, he or
she is obliged to display the utmost good
faith towards the company irrespective of
whether such a person is an ‘executive’ or
‘non-executive’ director.
 Case Law: Fiduciary Duties (continued)
• Regal Hastings v Gulliver – Directors must avoid a conflict of
interest. Previous director who has since resigned can be held liable
for profits made in the course of his performance of duties in
company.
• It makes no difference if the profit is made in good faith with full
disclosure and whether or not the company suffered any loss as a
result of the director’s actions.
• Magnus Diamond Mining Syndicate v Macdonald & Hawthorne –
Directors may not use information acquired in capacity as director for
own personal benefit.
• Industrial Development Consultants v Cooley – Directors may not
use information acquired in their capacities as directors for their own
personal benefit. Even where a person did not wish to contract with a
specific company and then a contract is concluded with a director,
such director could be held liable for profits as he/ she used
information that he/ she gained in his/ her capacity as director for his/
her own benefit.
 STATUTORY DUTIES
Section 75 and 76 of Companies Act 2008:
• Disclose personal financial interest in matters to board
• Not to use the position of director or information obtained
as director to gain an advantage for himself or another
person/ knowingly cause harm to the company or a
subsidiary
• To disclose to the board of directors any material
information that comes to a director’s attention
• To act in good faith and for a proper purpose
• To act in the best interests of the company
• To act with a reasonable degree of care, skill and
diligence
 BUSINESS JUDGMENT RULE
Section 76(4) of Companies Act 2008:
Director will be regarded as having acted in the best
interests of the company and with the required degree of
care, skill and diligence if the director
• took reasonable steps to become informed about the
matter;
• had no material personal financial interest in the subject
matter or knew of anybody else having a financial interest
in the matter, or disclosed his interests; and
• made, or supported a decision in the belief that it was in
the best interests of the company.
•where he or she had a rational basis for believing and
actually believed that the decision was in the best interest
of the company.
 ACTIVITY
Cynthia is a director of Healthline (Pty) Ltd. Healthline
has developed a new treatment for AIDS. Cynthia sold
the formula to a scientist at AIDSCO (Pty) Ltd for R1
M. Healthline is very upset about this. Explain whether
or not the company may take action against Cynthia in
terms of s 162. In your answer refer to:
• The applicants
• The grounds
• The possible order
• The effect of the order
 AUDITORS AND COMPANY
SECRETARIES
Company Secretaries:
Duties:
• Provide directors with guidance about their duties,
responsibilities and powers.
• Make directors aware of any law affecting the company.
• Report to the Board any failure on the part of the company or a
director to comply with the Act.
• Keep minutes of shareholders’ meetings, board meetings and
committee meetings
• Certify the annual financial statements
• Ensure that a copy of the company’s financial statements is
sent to every person entitled to receive it.
• Carry out functions in respect of annual transparency and
accountability report.
 AUDITORS

Must be:
• permanently resident of the RSA.
• registered auditors
• independent
 APPOINTMENT OF AUDITOR
• Public companies and SOC must appoint an auditor
upon incorporation and each year at the AGM.
• If no auditor is appointed upon registration the directors
must appoint an auditor within 40 business days after the
date of incorporation.
• The same individual may not serve as an auditor for
more than 5 consecutive years. (Rotation requirement).
• If a person has served as an auditor for two or more
years and then ceases to be the auditor, he or she may
not be appointed again until the expiry of least 2 further
financial years.
 RIGHTS OF AUDITORS

• Access to accounting records, books and documents;

• Access to information regarding subsidiaries if the
company is a holding company.
• To attend any general meeting of the company;
• To receive all notices and communications relating to
a general meeting that members are entitled to
receive;
• To be heard at any general meeting on any part of the
business pertaining to his/ her duties or functions.
 Resignation of auditor and casual
vacancy

• Resignation effective when notice is filed.

• Declares that no irregularities.
• Board must appoint a new auditor within 40
business days.
• The board must nominate a new auditor within
15 days to the audit committee.
• If the audit committee does not reject the
proposal in writing within 5 business days, the
board may appoint the nominated auditor.
 AUDIT COMMITEE
• Public company and state-owned company obliged to appoint.
• Elected each year at AGM.
• Committee must have at least 3 non-executive directors.

Duties:
• To nominate an auditor for appointment;
• To determine the fees to be paid to the auditor and the terms of engagement
• To ensure that the appointment of the auditor complies with the Act and any other
relevant legislation;
• Determine the nature and extent of any non-audit functions performed by the auditor
• Pre-approve a proposed contract for non-audit services to the company;
• To insert a report on the financial statements
• To receive and deal with complaints
• To make submissions to the board on any matter concerning accounting policies,
financial control, records and reporting and
• Perform any functions determined by the board.
 LIABILITY OF AUDITORS

• civil liability to company (client) and third

party.
• In respect of the company- breach of
contract or delict
• In respect of third parties, - delict or
statutory liability i.t.o. s 58 (2) of the
Auditing Professions Act.
 Remedies, Regulating Agencies and ADR.
• The Companies Act of 2008 provides for
specific remedies for holders of securities.
• The MOI and rules form a contractual
relationship. Therefore the contractual rights of
parties will apply if there is a contravention of
the MOI to the extent that the Companies Act
does not expressly provide otherwise.
• Alternatives to formal dispute resolutions (ADR)
include “voluntary” mediation, conciliation or
arbitration.
 STATUTORY REMEDIES:
1. Against directors:
Section 162 – declaring directors delinquent or placing directors under probation

2. Against Company:
Section 20(2):
The applicant:
• One or more shareholders
• Directors
• Prescribed officers
Grounds:
• If company does something in contravention with the Companies Act of 2008; or
• A person causes the company to do something inconsistent with the Act.
Effect:
Any person who causes the contravention is liable to any other person (including
shareholders) for the loss or damage.
 Security Holders’ Declaratory Order:
Section 161 of Companies Act 2008:
• A securities holder may apply to a court for a
declaratory order determining his or her rights
or;
• Any order to protect his or her rights/ rectify
harm done by the company or directors.

• These remedies are not available to members

of non-profit companies.
Oppressive or prejudicial conduct or abuse of
the separate juristic personality
Section 163 of the Companies Act of 2008
Applicant:
• Shareholder or
• Director

Grounds:
• Any act/ omission of the company or a related person that is oppressive or
unfairly prejudicial or unfairly disregards the interests of the applicant;
• The company’s business is being carried on in a manner that is oppressive
or unfairly prejudicial, or
• The powers of the directors of the company or related person are being or
have been exercised in a manner which is oppressive or unfairly prejudicial
to or unfairly disregards the interests of the applicant.
 Oppressive or prejudicial conduct or
abuse of the separate juristic personality
The order:
• Restrain the conduct complained of;
• Appoint a liquidator if company is insolvent;
• Place company under supervision/ commencing business rescue
proceedings;
• Regulating the company affairs by amending the MOI or amending
a shareholders’ agreement;
• Directing an issue or exchange of shares;
• Appointing directors in place of or in addition to all directors in office,
or declaring any person delinquent or under probation;
• Directing the company or any other person to repay the
consideration that the securities holder paid for shares with or
without conditions;
• Varying or setting aside a transaction/ contract.
 Oppressive or prejudicial conduct or
abuse of the separate juristic personality
• Requiring company to produce financial statements to
the court or an interested person;
• To pay compensation to an aggrieved person;
• Directing rectification of the registers or records of the
company or
• For the trial of any person.

• If there has been an unconscionable abuse of the juristic

personality of the company as a separate entity, court
may order that the company is to be deemed not to be a
juristic person in respect of the rights, obligations or
liabilities of the company, or of another person specified
in the declaration. Court may give any order it deems fit.
 Derivative actions:
3. On behalf of Company:
Section 165 of the Companies Act of 2008
• Abolishes any right at common law of a person other than a
company to bring or prosecute any legal proceedings on behalf of
that company.
• Demand (notice) to company:
A person can deliver a notice to a company demanding it to institute
legal proceedings or take other steps to protect the company’s legal
interests.
Who can deliver demand?
• a shareholder/ person entitled to be registered as a shareholder;
• a director
• a prescribed officer;
• a registered trade union that represents employees, or another
representative of the employees;
• or any person who is granted leave by the court to do so.
 Derivative action (continued)

• The company may apply to court within 15 days to have the demand set
aside if it is frivolous, vexatious or without merit.
• If demand is not set aside, the company must appoint an independent
person or committee to investigate the demand.
• This person or committee must report to the board.
• Within 60 days (or as long a court permits) action must be instituted or a
refusal notice must be served on the person who made the demand.
 Personal derivative action:

The person who made the demand may apply to the court for leave to
continue with proceedings in the name of or obo the company if:
• The company failed to take steps as required;
• The company appointed a person or committee who is not independent;
• The company accepted an inadequate report
• The company acted in a way inconsistent with the reasonable report of an
independent, impartial investigator or
• The company has served a refusal notice.
 Dissenting securities holders’ appraisal
rights:
Section 164 of the Companies Act of 2008:
• A remedy for dissenting shareholders who are aggrieved by the variation of
class rights.
• Remedy only becomes available when the resolution which detriments the
shareholders is taken.

If a company (except under a business rescue plan) has given the

shareholders notice of a meeting to consider adoption of a resolution
to:
• Amend its MOI by altering preferences, rights, limitations or other terms of
any class of shares adverse to the rights or interests of the holders of the
class of shares; or
• Enter into a transaction for the disposal of substantially all assets of the
undertaking, or a merger or amalgamation or a proposed scheme of
arrangement
 Appraisal rights Procedure:
• Dissenting shareholders may send a written objection prior to the meeting.
• Within 10 business days after adoption of the resolution, the company must
send a notice that the resolution has been adopted to each security holder who
filed an objection or voted in favour of the resolution.
• Shareholders may demand payment of a fair value for the shares held.
• The demand must be sent within 20 business days after receiving notice from
the company or after learning that the resolution has been adopted if no notice
is received.
• Written offer by company to pay a fair value within 5 business days.
• The offer made to dissenting shareholders must all be on the same terms.
• The offer must be accepted within 30 business days after it was made.
• The company must pay within 10 business days of acceptance of the offer and
share certificates must be tendered or shares transferred.
• If the company fails to make an offer of the offer is inadequate the shareholder
may apply to court to determine a fair value and for an order requiring the
company to pay the shareholder fair value.
 Alternative Dispute resolution:
Alternative remedies:
• Alternative dispute resolution i.t.o. Part C of
Chapter 7 of the Companies Act 71 of 2008
• Applying to the Companies Tribunal or lodging a
complaint to another accredited entity for
conciliation or arbitration.
• If the dispute was resolved through ADR, the
parties can submit the order to a court to be
confirmed as a court order.
 CIPC or TRP

Complaints to the Companies and Intellectual Property

Commission or the Take-over Regulation Panel:
Any person may lodge a complaint is a person has acted in a
manner inconsistent with the Act or has acted in a way that
infringes the rights of the complainant.

If the CIPC or TRP receives a complaint it can:

•Refuse to investigate because the complaint is frivolous or
vexatious (except for ministerial complaints)
•Refer the complaint to the Companies Tribunal or other ADR
agent or
•Direct an investigator to investigate the complaint.
 Investigator’s Report

• Upon receipt of the report from the investigator the CIPC or TPR can:
• Excuse any person as a respondent;
• Refer complaint to Companies Tribunal, or CIPC or TPR;
• Issue a notice of non-referral, with a statement advising the complainant of
any rights he or she may have to seek a remedy in court;
• The CICP can propose that the person meets with the Companies Tribunal or
CICP to resolve the matter by consent order
• Commence proceedings in court in the name of the complainant, if the
complainant:
• Has a right in terms of the Companies Act to apply to the court and
• Has consented to the CIPC of TRP doing so; or
• Report the matter to the National Prosecuting Authority if the person
committed an offence under other legislation or
• The CICP may issue a compliance notice or
• The TRP may refer the matter to te Executive Director who may issue a
compliance notice.
 Compliance Notices

A compliance notice may require the person to:

• Cease, correct or reverse any action in contravention of
the Companies Act of 2008;
• Take any action required by the Companies Act of 2008;
• Restore assets or their value to a company or any other
person;
• Provide a community service (for CICP notices) or
• Take any other reasonable necessary steps to rectify the
effect of the contravention.
• The person who received the compliance notice may
object thereto within 15 business days of receipt.
 CLOSE CORPORATIONS

• Provide more simple less expensive and flexible legal form

for small enterprise

Characteristics:
-juristic personality
-capacity and powers natural person
-single person form
-minimum formalities
-flexibility among members
-every member participates in management
-no shares and no share capital
-equal say management
-fiduciary duties codified
-accounting and disclosure less extensive
 Membership of CC

• Maximum 10 members
• Expressed as %, Total 100%
• Not jointly held
• Similar to share
• Incorporeal, right to profit
• Natural persons
• No Juristic person , trust or trustee but
beneficiary not juristic person
• Each member contributes
 Formation of CC

• Legal personality from registration

• Certificate of incorporation
• Founding statement
• Association agreement (optional)

Acquiring members’ interest:

• registration, existing member, or pursuant
to contribution: pre-emptive right
• death or insolvency member
 Internal relations of CC

• Fiduciary duties: s 42: honestly, good faith,

exercise powers to benefit of company,
avoid conflict of interest and disclose any
direct or indirect benefit.
• Duty of care and skill: s 43:liable for any
loss due to failure to act degree of care
and skill reasonable expected of person
his knowledge and experience
• Possibility of ratification
 Management of CC

Remedies:
Statutory actions:
 Personal action: s 49: rights of member
has been affected. Case Law: Gatenby
and De Franca
 Derivative Action :s 50: corporations rights
affected
• Payments to members subject to s 51
 Association agreement

• Regulates internal relations

• Signed by all members
• Doctrine of constructive notice not
applicable
• Certain matters unalterable: insolvents
interest, disqualified, right to call meeting
• Variable: management, majority vote and
payment to proportion interest
 External relations

• CC enjoys capacity of a natural person, except it is a juristic person…

REPRESENTATION:

Section 54 of Close Corporations Act:

every member agent: except other party knowledge /ought to
irrespective outside business sphere
doctrine of constructive notice : not applicable

J&K Timbers (Pty) Ltd v GL&S Furniture Enterprises CC:

A member is an agent even though no authority, express or implied,
has been conferred upon him/ her by CC and the CC is bound by the
related act, unless the third party knew, or reasonably ought to have
known of the absence of such power.
 Personal liability for debts of CC

Personal Liability s 63:

• use of identifying abbreviation
• delivery of contribution
• Membership
• payment in respect of member’s interest
• financial assistance
• management by disqualified person
• accounting officer

Reckless and Fraudulent Trading: s 64

Abuse of Corporate Juristic Personality: s 65

 END

Good Luck with Your Studies