Class Notes: BUEL6212

Monday 29/07/2024
- revising: q&a we revised Business Structures:

types of business structures (not complete in info):

1. Business trust: how is it formed(2 ways) 1 way is succession: father may
say, the money I have will go to the specific people via a trust.
2. Company: objective is to make money
Different types: State-owed (owned and governed by states)
private (Pty Ltd)
Personal liability (inc)- lawyers, doctors (professionals) you (the owners) are
personally liable. Advantage: np forming a company outside yourself. Easier
to spend the money. (Similar to sole trader) you can decide what to do with
the money.
Private Company (Pty) –
3. Partnerships:
partners are JOINT & SEVERALLY liable
2 types – ordinary & universal
2 or more people, split profit 50 50, each partner needs to contribute
resources equally (contribution can be in various forms e.g. money,
intelligence.
2 theories about partnerships. Aggregate theory and entity theory.
Entity: partnership is separate from the partnership.
Aggregate (followed in Sa law): partners are the pa
Universal: defining feature, Kingdom come- no time clause, to the exclusion of
everyone else. E.g. marriage. All marriages in SA are in community of
property unless excluded by anti-nuptial agreement.
Ordinary:….
Terminate: death, by contract, time-based clause (partnership to build a
school, once completed, the contract is done) getting a new partner.
Fraudulent activity.

2 cases:
1. Butters v Mncora 2012 (4) SA 1 (SCA) – life partners

2. Ponelat v Schrepfer 2012 (1) SA 206 (SCA); [2010] ZAWCHC 196

The principles went to universal p which look a marriage but is not. Held as a
universal partnership as the criteria fit criteria for universal partnership.
Law have extended this definition to life partnerships.

Parties agreed to pool their resources:

STOKVELS
-group of people pooling their resource together
- each person gets all the resources at a specific
- 3 types: individual gain, burials, loan-sharks.

Loan-sharks must comply with FICA and the National Credit Act.

Close- Corporations

- Historically there were 2 types you could have, company or CC.

- CC was designed to make life easier 4 businesspeople.
- In 2011, the Companies Act was promulgated, the law changed regarding
CCs.
- No more CCs allowed, can only form a company.
- 1.9 m registered CCs, they can continue of CCs, up until the members decide
they want to change to companies, if they don’t want to, then they’re still
allowed to be a CC and be governed by the CC Act.
- No new CCs may be formed.

Nature & Members

- Own legal personality ( juristic person and being sued) the company is
separate from its owners. E.g shopright. If a shopright cahsier beats you, you
sue SHopright
- Perpetual succession:
- Founding Statement:
- Members (not shareholders) : 1-10 they will test if you know the if it members
or shareholers
- Only natural persons can be members (we breathe oxygen)
- Trustees can be members of CC.

Relationship to/impact of Companies Act

- As f 1 May 2011, no new CC
- If prior to 1 May 2011, can continue indefinitely.
- Solvency and Liquidity tests applied ( for instance, paying a dividend and
share buybacks)
solvency: are the assets of the company fairly values valued against the
liability of the company Assets fairly valued greater than liability
Liquidity: can this company pay its debts with what is in the bank for 6
months. Can the CC pay its debts due. Can I pay my debt
 - The Close Corporation Act continues to govern the existing CC’s
- No companies can become CCs
- Financial statements comply with IFRS and audited.
- Can have audit committees. ( its optional now, was never required) CCs will
tend to do this in the process of becoming a company – it’s a company
requirement)

Acquisition & Disposal of Members interest:

- New members acquire from existing members or by contribution:
 Proportionate reduction in the existing members interest
 E.g. 10 members, new member buy 20%
 80%/ 10 members= 8% each
- Disposal is by way of the association agreement OR consent of every other
member
- Can be disposed to another member or the CC.
e.g. selling back to CC, everyone % goes. If selling to 1 member, only theirs
go up.

What of an insolvent Member:

insolvent: persons or business that are incapable of paying their debts as they fall
due.
- Sell interest back to CC.
- Members must agree. Helps corporation weed out the good from the bad.
- If you want to sell to an outside. You need approval, you first need to OFFER
TO MEMBERS.
- Right of PRE-EMPTION. (RIGHT OF FIRST REFUSAL)
- Sold to corporation, other members or outsiders who qualifies.
- If to an outsider, right of pre-emption
- If deceased member, then right transfer to an heir: consent of all members
- Executor can also sell member’s interest: consent of all members.

Members’ duties towards CC

- 2 duties:
 Fiduciary:
- member has a fiduciary duty to honesty, good faith (act for the betterment
of company), avoid conflict of interest, power for benefit of the corporation,
not compete, notify of material interest.
 Care & Skill: member is liable, there are standard reasonably expections
with regard to knowledge and experience, results in a loss for corporation.
E.g care

Court proceedings
- Members require consent by resolution – 51%
- On behalf of CC, regardless of holding
- Default by contribution (lose your contribution)
- Liable- breach
- Once instituted, can’t be settled, or withdrawn consent of courts.
Members relationship with 3rd parties
- Each members is an agent of CC
- Section 54
- Pg423: when dealing with 3rd parties, then members become agents. Any act
binds a corporation unless: a member doesn’t have power to bind; person
dealing with the members ought to have known

J&K timbers Ltd t/a Tegs Timbers v GL & S Furniture

principle: Every member is an agents…. Even without authority.
(Authority comes in 2 ways: implied OR actual)

Personal Liability:
- each member is responsible for debts of CC: Compare that with shareholders
- lift the corporate veil (Court orders that it is not a juristic person anymore and the
OWNERS are brought forth, piercing of the corporate veil): happens when there is
Gross Abuse of CC OR Unconscionable Abuse (imagine CC buys bricks, then we
bring in drugs from Asia & we make lots of $- we are abusing the company )
- Ex Parte Gore

Tuesday 30/07/2024

Revision from previous class

- Only natural persons can be members of a CC.
- News members must get permission and bring in contribution.
- Duties of members: fiduciary + care & skill

Cessation of membership via court order

- Membership can be lost in 2 ways:
1. Termination of membership by court order into section 36
2. Section 49 order

Section 36
- Apply to court for cessation of membership: e.g. deadlock ending; self or
others
- Grounds for application:
1. Permanent inability
2. Prejudicial conduct of member
3. Difficult to associate with
4. Just & equitable for member cease. (morally just, correct and fair to all
those involved.

Ebco SA v ebco International

Company comes from overseas
Joined forces and decided to split directorship. 4 directors, 2 from each side,
immediate deadlock. Principle of being just and equitable kicked in.
Section 49

- Unfair prejudicial conduct by CC/members

- Must prove the unfair conduct
- Court: prejudicial conduct is happening; just & equitable to intervene
- Courts won’t allow acquisition of interest by CC if CC can’t pay its debts.

- E.g. company make profit of 1m, owes R900 000. Wants to sell states back to
state for R500000. The company still owes R400 000 if the sale goes through,
THEREFORE the courts won’t allow

This is basically If you want to sell your share percentage due to the members or
something, whaterev reason. If you want to sell back your share. The CC makes
R100 you want to sell fro say R50 and the CC has R90 debt. Courts wont allow you
to sell. (this is my wording so I could better understand)

Acquisition of members interest by CC

- as long as not prejudicing current creditors
- Acquired interest added to interest of other members:
1. Solvency Test: assets fairly valued against liability fairly valued.
2. Liquidity Test: do I have enough money in the bank to pay my
creditors (6 months)
3. Payment must not render the CC unable to pay its debts.

Financial Assistance by CC
- To obtain a member’s interest
- Prior consent of each member to be obtained.
- Solvency test (assets fairly value v liabilities fairly-valued)
- Liquidity test (pay debts as the become due)

Payment by CC to members
- Can include dividend or repayment contribution.
- Or delivery or transfer of property
- Satisfy solvency and liquidity tests after payment is made.
 - Founding statement amended
- Approval by resolution

Association Agreement
- Regulated relationship between members
- All members participate in management. (Also, should defined who has what
power)
- Having an Association Agreement is not an obligation, but it is desirable:
 Bind new members.
 This association agreement can only be varied by agreement. All
members must be present. Best to be in writing but can be verbal.
(Reason for in writing is the avoidance of doubt)

Trusts Trusts are for the

protection of one’s
assets.

Concept from videos:

- appoint trustee to ensure wishes carried out
- Trusts are like container you put assets (e.g stock, bonds real estate etc.) in.

Trusts
- There to protect assets.
- Created by a founder/donor.
- Assets under control of another person = trustee (you effectively hand over
the control of your assets in the trust to another person and they become a
trustee. They control the assets for the BENEFIT of the BENEFICIARY.
- Benefit 3rd parties, i.e., beneficiaries.
- Duke of Cornwall makes him next in line prince of Wales. (His father got this
job at 21) they created a trust 900 years ago, created for the next in line.
Queen died; duke of Cornwall became a billionaire.

Types and Formation

- During the lifetime (inter vivos -assets handed over during lifetime)
- At the death of founder (testamentary or will trust – here, assets are left to
trustees in terms of a will.
.g. Mr. x died. He wants all assets to fall in the trust. Once they fall in, there
may be further conditions/requirements. E.g., my wife can use and enjoy the
house for as long as she likes, the utilities will be paid from this in the trust
and once she dies the house can go to child Y.
- Ordinary trust (ownership and control of assets sit with the trustees)
 - Bewind Trust: ownership of trust assets is with beneficiaries, but control is
with trustees.

No one owns the assets in the trust, they’re for the benefit of the beneficiaries
and are controlled by the trustees.

if a new trustee is needed, they will be appointed by the trustees.

Pre-incorporation Contracts:

- contract which is entered to by a person who is acting on behalf of a company that

does not exist
- Person is acting as an agent and has the intention that once the company
comes into existence, the company is bound by the provisions

Steps that need to be taken to incorporate:

1. Each person should complete and sign the MOI; and
2.the notice of incorporation must be file with the Commission together with
prescribed fees and a copy of the MOI.

- A person who enters into a pre inc c on behalf of a yet to be formed company
of a yet to be formed company, will be jointly and severally liableif the
company is not later incorporated.
- Or whether the c is incorporated and the company rejects any part of the
agreement

BUT
- Persons will not be liable if the company enter into an agreement on the same
terms or in substitution for the agreement entered into before it came into
existence.
- Company: new boards has 3 months after the incorporation in which to ratify
or reject any pre-incorporation contract

Discussion:

- Having run a successful on-campus sandwich business for a few years, you are
interested in expanding your business and opening a sandwich delivery
service.
- Do you think that you should open a separate business to fulfil your objective?
- Why/why not?
- Do you think that it would be easier to incorporate the delivery services onto
your existingbusiness? Why?
- Do you want to run the delivery business, or just be able to make the big
decisions? What are the benefits to each approach?
They are also now in clothing. (UNIQUE)
They are very much into the business of fruit and veg (fresh mark)} dedicated
wholesaler.
They’re moving into Retail space.

Roman Catholic Church} 2nd biggest landowner in the world.

3rd biggest} King of England.

Definitions:
- juristic entity: a separate legal person
- And economic entity can consist of a number of separate companies or
subsidiary companies that are controlled by a single company, the holding
company.
- Therefore: a juristic entity can be an economic entity
- Holding company as a juristic person that controls the subsidiary.
- A subsidiary company then is a company that is under the control of another
company. They make money for the holding company. The liability is on the
holding company
- Its all about control. If checkers liquor wants to go to Algeria, it is Shoprite
Holding that makes that choice

A holding company has many subsidiaries:

e.g. in the image above:
holding company – Shoprite holdings
Subsidiaries – all the things underneath it in the diagram.

So why use a group of companies?

- various diverse business services or products: held within one corporate group
of companies
- Reduced business risk: Shoprite, if hungry lion fails, the rest of the group will
still succeed or not be adversely affected. (we tend to find businesses that fail
that are only in 1 line of business)
- Centralised control of independent companies
- Finance the start of new business or existing businesses. (Reduces need to go
out and find space e.g., Shoprite liquor inside or right next to Shoprite) (e.g.,
taking a bit of space of the hungry lion, maximising the spaces of each square
metre. Woolies used to just used sell clothes} now they sell food, home stuff,
toiletries.
- Financial restructuring and acquisition of a new business
- Outside shareholders can acquire shares in the company thereby adding
expertise or financial support. (if you acquire enough shares in the company,
you can become a director- affect the direction of the of the company).

Voting Rights
- Section 3(20) of the Act which is concerned with determining whether holding
controls all or a majority of the voting rights relating to a company shares.
- MOI can also indicate whether voting rights will attach to shares.
- Public company: determined. By % voting right.
- Private company: voting right determined by MOI. (See point 2)

QUESTION:
- Your sandwich business needs an injection of capital to expand and launch a
new franchise. You’d like to find investors to fund the expansion.
- How’re you going to incentivise investors.
- Do you think that growing the business through incurring debt is a good idea?
why/why not?
- Would you prefer to have all the power and say in the business, or would you
be open to directing the business, or would you be open to directing the
business accordingly to your investor’s ideas.

Corporate finance
- Assets to be bough, or to be sold, or how these assets are to be financed, or
invested, that is all corporate finance.
- S42-56 of Act
- Securities= share
- Debt: money / assets obtained by a company, such as debentures, loans, lease
agreements, obtaining of credit terms from suppliers, and an overdraft facility.

Equity
- Money that you bring in.
- Equity= shares & retained income.
- A company in the issues of the shares, it obtains funding for its business
operations.
- At the end of financial periods, shareholders often get what is known as a
dividend. (Somebody paying you to borrow your money=dividend)
- Now these shares can have the same or different rights or be in different
classes. E.g., ordinary shares are lower rating than preference share.
 - E.g., MOI States “this type of share has this type of right or dividend”.
- NB: when a shareholder invests in a company, that shareholder rights are
determined in terms of the MOI and in terms of the rights attaching to the
class of shares that have been issued to that shareholder.

Retained income:
- Retained income is where a company opts to retain any profits it makes instead
of paying it out as dividend.
- Shoprite may opt to invest more money in its operations making them better in
the long run for shareholders.

Shares:
- A share represents an (proprietary = ownership) interest in the company.
- A unit into which the proprietary interest in a profit company is held.
- A security is defined as any shares, debentures, or other instruments.
- Issue: Overcapitalisation (excess amount wanted by company) &
Undercapitalisation (you don’t get the $ that you wanted e.g., when you sell
shares, but people don’t buy them) a company can also sell shares to pay
their debt.
- Overcapitalization: when the amount received or to be received by a company
from the issues of its shares is an excess of its requirements
- Undercapitalisation: occurs when a company finds itself short of fund, so that its
expansion is curtailed, and it cannot seize appropriate business opportunities
or extend credits to consume.

Authorised (maximin number of shares you can issue) and Issued Shares
(shares in the hands of shareholders)
- Directors rather than shareholders to determine a company’s authorised and
issued shares and to declare dividends.
- 1973 Act, there had to be an authorisation in the articles and a special
resolution passed by shareholders before there could be any change in the
company’s authorised shares.
- In 2008 Act- this power is taken away from shareholders and given to
directors.

Share types:
- Company’s MOI must set out a company’s authorised shares by specifying the
classes of shares and the number of shares in each class.
- Number of issued shares mean the shares which are in the hands of
shareholders.
- MOI set out with respect of each class of shares, the distinguishing designation
for that class and the preferences, rights, limitations, and other terms
associated with that class.
- Ordinary shares: Purchase easily from broker
- Preference shares: it has special allocation, and it may be cumulative or non-
cumulative. (Generally paid first and have better voting rights)
- Unclassified shares: subject to classification by the board of a company
 - Blank shares: not specify any of the associated preferences or rights or
limitations.

Rights that come with shares:

- The shareholder has the right to vote on proposals to amend the rights
attaching to the shares.
- Shareholder also has the right to seek relief if his rights materially and
adversely altered (appraisal rights)
- Appraisal rights – if the company screws you (by going into an unfavourable
transaction, shared price drops from R10 to R5, you lost 50%, dimmish value
of the shares, prejudicial conduct of the company.) if you felt were materially
and adversely affected. 1st go to company and ask them to pay you the fair
value of the shares, if they don’t, go to court and state application, what
prejudicial conduct occurred to lead to right being materially and adversely
affected.
- Only one class of shares then those shares have a right to be voted on every
matter that may be decided by shareholders.
- Holders of those shares are entitled to receive the net assets of the company
upon liquidation.

Debentures: (basically a loan that is almost like a share)

- A debt instrument is defined as including any securities other than the shares of
the company but does not include promissory notes and loans.
- Number of rights attached to it:
1.) Including attending and voting at general meetings
2.) Appointment of directors
3.) Or the allotment of securities.} taking and giving.
- MOI must authorise this issuance.
- 3rd parties, generally banks (they have enough cash) e.g., FNB
it acts in 2 ways.
- Not a loan, but you must pay it back as you have to pay it back.
- Not a share, but it has characteristics of shares.
(the other benefit is that it is a way of loaning money to a business and having a form
of control over it)

Change to Horizon
- Need for changing the number of authorised shares.
- Section 36(3) of the Companies Act, 2008- the directors may increase or
decrease the number of authorised shares of any class, reclassifying any
classified shares that have been authorised but now issued,
- Directors may classify and unclassified shares that have been authorised but
not issued or determine the preferences, rights, limitations, or other terms of
shares in a class of shares.
- Limit to number of shares you can offer – in the MOI.
- The more shares you have the lower the value of the shares.

Issue of shares
- Section 40(2) of the Act
 - Before a company issues those shares, the board must determine the
consideration (the price of the share) for which those shares will be issued.
- The board must consider what is the fair value of issuing more shares.
- Aims to protect the company, the directors, and the shareholders. (They protect
by coming up with a fair value for the share, BOD must act in best interest of
Company)
- Directors may issue shares only for adequate consideration (adequate value,
adequate pricing)
- Shares can also be issued in terms of section 40(5) for future payments, future
benefits or future services (CEO) i.e., the company offers you share options,
the hardest assets to keep the intelligent people, offer these people shares. If
you stay in my company for 3 years, the million shares I offer to you will vest
in 3 years.
- It better to take pay in shares than in money. Income tax for R1mil=45% &
dividend tax R1mil= 20%.

Certificated and Uncertificated Shares

- A company can either issue one of 2

- A certificated security is one that is evidenced by a certificate
- Uncertificated security is on not evidences by a certificate or written instrument.
- Buy from bank?- you get put into a register for uncertificated shares.
- Certificated & uncertificated it does not affect the rights of the shareholders or
their obligations.

Beneficial interest/owner
 - S 26(1) a person who holds or has a beneficial interest in any securities issued
by a profit company has the right to inspect and copy the information
contained in certain records of the company, including the securities
register of a profit company.

ITS BETTER TO BE AN OWNER THAN A CUSTOMER

SHAREHOLDER’S Rights
- S71 of Act enables shareholders to remove a director at any time by ordinary
resolution
- If shares are to be issued to specific persons, then the approval of shareholders
by special resolution is required.
- The Shareholders have to vote on remuneration

Definitions
- Securities: any shares, debentures or other instruments, irrespective of their
form or title, issued or authorised to be issued by a profit company
- Securities register: the register required to be established by
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Solvency & Liquidity:

When a company is going to take a decision that has a financial impact on it, it must
take into account the solvency & liquidity of that company
- Solvency: the company’s assets fairly valued exceed its liabilities fairly valued
- Liquidity: asks whether a company will be able to pay its debts as they become
due and payable in the ordinary course of business for a period of 12 months,
i.e., money on hand
- So one tests looks at how much you own v how much you owe- solvency
- And the other tests looks at the ability for you to pay debts- liquidity

Capital Maintenance

- In 1973 Act- CM insured that the contribute share capital of a company had to
be maintained/ preserved for a number of reason, amongst which was the
protect
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Distribution
- Can mean a lot of things including cash & other assets given over by the
company to the shareholders
- Distribution can be done by way of a dividend or payment in leui of
capitalisation shares or as payment for any share buyback.
- Requirements b4 payment:
1. The distribution is be
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Share Buyback
 - Sometimes companies will buy their own shares meaning that if a company has
1000000 shares out and buys back 100 000, then the shareholders who are
left, have an increase in value of their shares.
- Repurchasing back those shares is know as share buy-back
- Determination made by the board
- Board solvency and liquidity tests and the company will be fine after the buying
back of shares
- Buys back shares from a director pres

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Financial Assistance
Connection with the issue of any of the securities of the company
- Requirements
1. If the finan

Class: 09/09/2024
Definitions
- Shareholders meeting: a meeting of those holders of the company’s issued
securities who are entitles to exercise voting rights in relations to that matter.
- Quorum: minimum number of person or members or shareholders who must be
present at the meeting before the meeting can continue
- Record date: the date on which a company determines the identity of its
shareholders and their shareholding for the purpose of the act.
- Put in another way: cut off time by when one can be considered a shareholder
of a company.
- Why is this important: you must determine when a X person hold Y number of
shares.

Calling of a shareholders meeting

1- It has to be properly called and convened.
2- The prescribed notice to be given by people who have the relevant authority
to convene the meeting.
3- The notice convening the meeting must be given to all persons who are
entitled to receive it.
4- A meeting must be convened for a time, date and place accessible for the
shareholders of the company.
5- A meeting may commence only if a quorum is present.

Calling of the meeting:

1. Directors or any other person specified may call a shareholders meeting
2. Required to convene a meeting and refer matter for the decisions by
shareholders.
3. When shareholders demand a meeting provided that the demand is signed
by holders if at least 10% of the voting rights entitled.
4. Must specify the SPECIFIC PURPOSE for which the meeting is called.
 5. Company or any shareholder may apply to a court for an order setting
aside a demand or it calls for a meeting on a matter already decided. (It
would be an urgent application)

Voting
- conducted by a show of hands or through a poll
- By show of hands, each person has only
- By poll, any member or proxy must be entitled to exercise all the voting rights
attached to the shares held or represented by that person
- E.g. if a proxy is carrying 500 votes then the proxy is allowed to cast all 500
votes in a vote by poll.

Proxy
- Appointed to represent ta shareholder at a meeting
- Does not have to be a shareholder to be appointed
- Appointment must be in writing and signed by the shareholder
- Remains valid for a period of 1 year from date was signed
- May delegate his authority to act on behalf of their shareholder to another
person

At the meeting a proxy is entitled to votes a they think fit, unless the shareholder is
indicated on the proxy appointment form how the proxy should vote.

Record date
- The date on which a company determines the identity of its shareholders and
their shareholdings for the purpose of the act.
- Set by the BOD
- 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 occurs.
- If no record date is set by the BOD, the record date is in the case if a meeting,
the latest by which the company is required to give shareholders notice of that
meeting, or the date of the action or event.