Tutorial Letter 201/2/2018
COMPANY LAW
LML4806
Semester 2
Department of Mercantile Law
This tutorial letter contains important information
about your module.
BARCODE
CONTENTS
Page
1. FEEDBACK ON ASSIGNMENT 01 ...................................................................................................... 3
2. FEEDBACK ON ASSIGNMENT 02 ...................................................................................................... 5
3. OCTOBER/NOVEMBER 2017 EXAMINATION ................................................................................... 6
4. FEEDBACK ON OCTOBER/NOVEMBER 2017 EXAMINATION ....................................................... 10
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LML4806/201/2/2018
Dear Student
1. FEEDBACK ON ASSIGNMENT 01
Question (a)
The general principle
In terms of section 38 of the Companies Act 71 of 2008, the board of directors may resolve to
issue shares in a company at any time in accordance with the provisions of and within the
classes authorised in terms of the company’s Memorandum of Incorporation. Thus the approval
of the shareholders is not required for the issue of shares unless the Memorandum of
Incorporation provides otherwise.
The provision of section 41
However, section 41 of the Companies Act requires shareholder approval by a special
resolution for issuing shares in certain cases.
Shareholder approval for issuing shares in certain cases
(i) Chief Executive Officer (prescribed officer)
Legal principle
In terms of section 41(1)(a) of the Companies Act 71 of 2008, the approval of the shareholders
by special resolution is required where the issue of shares is to a present director or prescribed
officer of the company.
Application of legal principle
A Chief Executive Officer of a company is a director or a prescribed officer of the company. The
approval of the shareholders by special resolution will be required to issue the shares to him or
her.
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(ii) Mr Molefe (director)
Legal principle
Section 41(1)(a) of the Companies Act 71 of 2008 provides that the approval of shareholders by
special resolution is required when shares are issued to future directors. Section 41(6) of the
Act provides that a “future director” does not include a person who becomes a director of the
company more than six months after acquiring a particular right.
Application of the legal principle
Mr Molefe would be a future director of the company because he will become a director in three
months’ time. Therefore, shareholder approval will be required to issue the shares to Mr Molefe.
(iii) Employees
Legal principle
In terms of section 41(2)(d) of the Companies Act, the approval of the shareholders of a
company is not required if the shares are issued pursuant to an employee share scheme that
satisfies the requirements of section 97 of the Companies Act.
Application of the legal principle
If the shares are issued to employees in terms of an employee share scheme which does
satisfy the requirements of section 97 of the Companies Act, then the shareholders of Abayomi
Ltd will not be required to approve the issue of the shares. However, if the requirements of
section 97 of the Companies Act are not satisfied, then the approval of the shareholders by
special resolution will be required.
Question (b) – The consequences of non-compliance
Legal principle
In terms of section 41(5) of the Companies Act 71 of 2008, a director of a company is liable for
any loss, damages or costs sustained by a company as a direct or indirect consequence of the
director having been present at a meeting or having participated in the making of such a
decision by written resolution and when such a director failed to vote against the issue of any
shares despite knowing that the issue of those shares was inconsistent with section 41.
Note that the provisions of section 77(3)(e)(ii) may also apply.
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Application of legal principle
Thus in terms of section 41(5) of the Act, the directors of Abayomi Ltd will be personally liable
for any loss, damages or costs sustained by the company if they do not follow the correct
procedures to issue the shares.
Refer to paragraphs 5.4 and 5.4.2 of the study guide and paragraphs 9.5 and 9.6 of the
prescribed textbook.
Question (c) – Payment for the shares
In terms of section 40(1)(a) of the Companies Act 71 of 2008, the shares must be issued for
adequate consideration. The adequate consideration for the shares must be determined by the
board of directors before the company issues the shares.
2. FEEDBACK ON ASSIGNMENT 02
Discussion of key definitions: -
“Insider trading” refers to the sale and purchase of a company’s securities by insiders, persons
associated with the company and who possess price sensitive information which is not
generally available to the public.
An “insider” is a person who has inside information by:
o being a director, employee, shareholder of an issuer of securities listed on a
regulated market to which the inside information relates; or
o having access to such information by virtue of employment, office or profession;
o or have obtained the inside information from a person in circumstances where the
person knows that the information is obtained from my person who is an insider.
“Inside information” is
specific or precise information
that has not been made public and
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which is obtained or learned as an insider and
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.
Application of the relevant definitions
The news about the invention is inside information because it meets the criteria set out above.
The information was obtained by Lerato who is an insider because she is an employee of
Monifa Ltd.
Lerato
Lerato told Fulu about the content of the inside information and therefore is guilty of the
disclosure offence.
Lerato encouraged Thakhani to purchase shares in Monifa Ltd and, even though she did not
disclose the inside information to Thakhani, she is guilty of the offence of encouraging insider
trading.
Fulu
Fulu is guilty of the offence of dealing since she knew that Lerato disclosed inside information to
her and, based on this information, she purchased some shares of Monifa Ltd for herself.
Edward
Edward is not guilty of any offence because he did not have any inside information and bought
the shares in Monifa Ltd independently.
Thakhani
Thakhani is not guilty of any offence because she did not purchase any shares in Monifa Ltd.
Refer to sections 77 and 78 of the Financial Markets Act 19 of 2012 and to learning unit 11 of
the study guide.
3. OCTOBER/NOVEMBER 2017 EXAMINATION
In order to help you with your preparation for the examination, we provide you with examples of
the types of questions that you may expect in the examination paper. Note that these questions
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are merely examples of how questions may be asked in the examination paper. We do not
imply that we will ask these questions in the examination paper. Feedback is also provided in
this tutorial letter. The questions below were taken from the October/November 2017
examination paper.
Please note that this semester’s examination paper will be out of 80 marks.
QUESTION 1 [30]
1.1 The shareholders of Injabulo (Pty) Ltd, a black-economic empowerment company, are
scheduled to hold a shareholders’ meeting at 09:00 at the Head Office of the company.
Injabulo (Pty) Ltd has 20 shareholders. At 10:00, 11 shareholders are present at the
meeting. They are able to exercise in aggregate 24% of all the voting rights that are
entitled to be exercised in respect of the matters to be decided at the meeting.
Two of the shareholders of the company have indicated to the chairperson that they will
attend the meeting, but are delayed in traffic due to bad weather. These two
shareholders each hold 2% of the voting rights in Injabulo (Pty) Ltd.
The chairperson of the board of directors consults you, as the secretary of the company,
on whether the shareholders’ meeting may proceed. With reference to the Companies
Act 71 of 2008, advise the chairperson of the board of directors of his options in these
circumstances. (15)
1.2 Sifiso, a former director of Lerato (Pty) Ltd (“the company”), was convicted of fraud during
his term of office as a director of the company. He was sentenced to 12 months’
imprisonment without the option of a fine by the High Court. He was therefore disqualified
to act as a director of the company and was accordingly removed from office one year
ago. However, Sifiso believes that he has since been rehabilitated and wishes to be
reinstated as a director of the company. Sifiso and Lukas are the only shareholders of
the company. Sifiso has decided to apply to court for permission to be allowed to act as a
director of the company despite his disqualification. Lukas is strongly opposed to Sifiso
being reinstated as director of the company. With reference to the Companies Act 71 of
2008 and relevant case law, advise Sifiso on his prospects of success in obtaining such
a court order. (15)
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QUESTION 2 [20]
2.1 Discuss the doctrine of constructive notice and the exceptions which apply to it. (10)
2.2 Tom (Pty) Ltd holds 25% of the voting shares in Pluto (Pty) Ltd, while Jerry (Pty) Ltd
holds 20% of the voting shares in Pluto (Pty) Ltd. The remaining 55% of the voting
shares in Pluto (Pty) Ltd are held by Mickey (Pty) Ltd.
Explain what is meant by a “group of companies” and discuss the factors one would
consider to determine whether a company is a subsidiary company. Also explain the
concept of a wholly-owned subsidiary. Indicate by giving reasons for your answer,
whether Pluto (Pty) Ltd is a subsidiary of Tom (Pty) Ltd, Jerry (Pty) Ltd and/or Mickey
(Pty) Ltd. (10)
QUESTION 3 [35]
3.1 The directors of Smarties (Pty) Ltd, M & M (Pty) Ltd and Wine Gums Galore (Pty) Ltd
decide that it would be in the best interests of the respective companies to amalgamate
or merge into one new company, Sweets for All (Pty) Ltd. Advise the directors of the
respective companies whether such an amalgamation or merger is permitted in terms of
the Companies Act of 2008, and, if so, of the requirements for such amalgamation or
merger. Also explain the effect of an amalgamation or merger. (15)
3.2 Sandwich Delight (Pty) Ltd provides sandwiches to office outlets in Cape Town. The
company is financially distressed and is under business rescue. The company buys its
bread from a local bakery, Cape Bakeries (Pty) Ltd. They have since found that they can
make sandwiches at a much lower cost by baking the bread themselves instead of
purchasing it from Cape Bakeries (Pty) Ltd.
3.2.1 Discuss whether business rescue proceedings will enable Sandwich Delight (Pty)
Ltd to cancel its contract with Cape Bakeries (Pty) Ltd, and whether Sandwich
Delight (Pty) Ltd will be liable for breach of contract if they do so. (10)
3.2.2 Sandwich Delight (Pty) Ltd has appointed Andile as business rescue practitioner.
Andile is believed to be an excellent choice by the company as he is a former
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director of the company and a good friend of the current directors. Discuss
whether Andile will qualify as a business rescue practitioner of Sandwich Delight
(Pty) Ltd in terms of the Companies Act 71 of 2008. (5)
3.2.3 After 11 months Sandwich Delight (Pty) Ltd is still under business rescue. The
directors are concerned whether this is permissible under the Companies Act 71
of 2008. Advise the directors of Sandwich Delight (Pty) Ltd of the circumstances
under the Companies Act 71 of 2008 when it would be acceptable for business
rescue to endure for a period of 11 months or longer. (5)
QUESTION 4 [15]
Thandeka is the secretary of Veryslim Ltd, a company that manufactures slimming tablets. At a
board meeting at which Thandeka is required to take down minutes, the board discusses the
development of a revolutionary new manufacturing process for slimming tablets. Thandeka
realises that the implementation of the new procedure will influence the profitability of the
company positively. She informs her mother, Veronica, of the new manufacturing process.
Veronica immediately contacts her broker, Sam, and instructs him to purchase shares in
Veryslim Ltd on her behalf. Veronica also buys shares through Sam for her son, Phineas.
Thandeka further advises her friend Bongi to buy shares in Veryslim Ltd. However, Bongi
decides not to buy the shares because Thandeka will not tell her why she should buy the
shares. Beauty, Bongi’s sister, overhears part of the conversation between Thandeka and
Bongi. When she asks Thandeka whether she should buy shares in Veryslim Ltd, Thandeka
tells her that she should not buy shares in Veryslim Ltd because she dislikes Beauty. When the
new manufacturing process is implemented, the price of the shares of Veryslim Ltd increases
dramatically.
Explain whether Thandeka, Veronica, Sam, Phineas and Bongi can be held liable for any
offences under the Financial Markets Act 19 of 2012 regulating insider trading. Do not include a
discussion of the definitions of an “insider” or “insider trading” in your answer and do not discuss
the defences to the insider trading offences. (15)
TOTAL: [100]
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4. FEEDBACK ON OCTOBER/NOVEMBER 2017 EXAMINATION
QUESTION 1
1.1 In terms of section 64 of the Companies Act 71 of 2008 (‘the Act’), a shareholders’
meeting may not begin until sufficient persons are present at the meeting to exercise in
aggregate at least 25% of all the voting rights that are entitled to be exercised in respect
of at least one matter to be decided at the meeting. This is subject to the Memorandum
of Incorporation of the company which may specify a higher or a lower percentage
instead of the 25% requirement.
In companies with more than two shareholders, at least three shareholders are required
to be present and the 25% requirement (or a different requirement if stated in the
Memorandum of Incorporation) must also be satisfied.
In this situation, assuming that the Memorandum of Incorporation has not changed the
quorum requirements, a quorum is not present because the shareholders present at the
meeting may exercise 24% of the voting rights instead of 25%. The company has more
than two shareholders and 11 shareholders are however present at the meeting.
Therefore, the requirement in section 64(3) has been satisfied.
Section 64(4) of the Act provides that if, within an hour after the scheduled time for the
meeting to commence, the quorum is not met, the meeting may be postponed without
motion, vote or further notice for one week.
In this situation, the one-hour period referred to section 64(4) of the Act has expired and
there is no quorum. Thus the chairperson may postpone the meeting without motion,
vote or further notice for one week.
In terms of section 64(5) of the Act, the person who presides over the meeting that
cannot commence due to the fact that a quorum is not met, may extend the one-hour
period allowed in terms of section 64(4) for a reasonable period on the grounds that:
(i) exceptional circumstances such as weather, transport or electronic communication, have
impeded the ability of the shareholders to be present at the meeting; or
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(ii) one or more shareholders who have been delayed have communicated an intention to
attend the meeting and those shareholders, together with others in attendance, would
satisfy the quorum requirements.
There are two shareholders who have indicated that they will attend the meeting and who
together hold 4% of the voting rights. The two shareholders are held up in the traffic owing to
bad weather which is a reason given in section 64(5) for the chairperson to extend the one-
hour limit for a reasonable period. Therefore, the chairperson may extend the one-hour
period for a reasonable period on the grounds that exceptional circumstances, being the
weather, impede the shareholders from attending the meeting at the scheduled time and/or
when adding the voting rights of the two shareholders who have indicated that they will
attend, the aggregate of the voting will be 28%, which is more than the 25% required.
In conclusion, the chairperson may either postpone the meeting for a week without motion,
vote or further notice or extend the one-hour limit for a reasonable period and wait for the
two shareholders to arrive.
1.2 The circumstances in this question are regulated by section 69(11) of the Companies Act
71 of 2008 (‘the Act’) was considered in the cases of Ex parte Barron and Ex parte
Tayob. In terms of section 69(11) of the Act, a court may exempt certain disqualified
persons from their disqualification. A court is empowered to grant an exemption to a
person who was convicted of fraud and sentenced to imprisonment without the option of
a fine or a fine exceeding the prescribed minimum.
In Ex parte Barron, the applicant had been a director of several private companies of
which he and his wife were the only shareholders. He had tried to circumvent certain
regulations prohibiting the export of ostrich leather. He did this by pretending that the
consignment consisted of ostrich feathers when, in fact, it consisted of ostrich leather.
That constituted fraud and he was tried and convicted on this charge. He was therefore
disqualified to be a director. He subsequently applied to court for authorisation to act as a
director. The court held that the factors that affected the discretion of the court were the
following:
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• the type of offence;
• whether or not it was a first conviction;
• the type of punishment imposed; and
• the attitude of shareholders and whether all the shareholders supported the
applicant’s application
The court held that it could be more lenient in a case where a private company was
concerned because the director of a public company obviously deals with funds
belonging to a vast number of people.
In Ex Parte Tayob the applicants had been convicted of bribery. One year after their
conviction they brought an application for permission to be allowed to act as directors
despite their disqualification. The court held that bribery and corruption pose a serious
threat to an open and honest community. The court therefore concluded that too little
time had lapsed between the date of the conviction and the date of the application to
prove that the applicants had been rehabilitated from their dishonest ways. The
application was therefore refused.
Factors which would support Sifiso’s application are the fact that the company is a private
company and not a public company. It will also count in his favour if this is his first
conviction.
Factors that will count against Sifiso’s application are the fact that Lukas objects to his
becoming a director; this will be taken into account by the court. As in Ex Parte Tayob,
too little time has lapsed in the given scenario between the date of the conviction and the
date of the application.
Based on the factors counting against him, Sifiso will most probably not be successful
with his application.
QUESTION 2 [20]
2.1 The doctrine of constructive notice provides that third parties are deemed to be fully
acquainted with the contents of the company’s public documents whether they have read
them or not. The doctrine of constructive notice has been partially abolished by section
19(4) of the Companies Act. Third parties are no longer deemed to have had notice or
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knowledge of the contents of the public documents of the company merely because they
have been filed with the Companies and Intellectual Property Commission or are
accessible for inspection at the company’s office.
Even though the doctrine of constructive notice has been abolished, the Companies Act
(section 19(5)) introduces two exceptions when the doctrine of constructive notice will
apply. The first is that a person is deemed to have knowledge of any ring-fencing
provisions in the company’s Memorandum of Incorporation. Ring-fencing provisions are
provisions prohibiting any provision of the Memorandum of Incorporation to be amended
or any restrictive condition or procedure for its amendment. This exception applies only if
the company’s name includes the letters “RF” and the Notice of Incorporation contains a
prominent statement drawing attention to such provision.
The second exception where the doctrine of constructive notice applies is in the case of a
personal liability company. Persons dealing with personal liability companies are deemed
to be aware of the effect of the directors’ and former directors’ joint and several liability
for debts and liabilities of the company contracted during their periods of office.
2.2
A group of companies means a holding company and all of its subsidiaries.
Section 3(1) of the Companies Act 71 of 2008 defines a ‘subsidiary company’.
A company is a subsidiary of another juristic person if –
that company or one or more of its nominees or subsidiaries alone or in combination is directly
or indirectly able to exercise the majority of the general voting rights or
- can directly or indirectly control the exercise of the majority of the voting rights or
- can appoint or elect directors who control a majority of the voting rights in board meetings
or
- can control the appointment of such directors
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A wholly-owned subsidiary is a company in which all of the voting rights are held by
another person or persons.
In the facts provided, Tom (Pty) Ltd and Jerry (Pty) Ltd both hold a minority of the voting shares
in Pluto (Pty) Ltd. Pluto (Pty) Ltd is not a subsidiary of Tom (Pty) Ltd or Jerry (Pty) Ltd because
these companies are not able to exercise or control the exercise of the majority of the voting
rights in Pluto (Pty) Ltd.
Mickey (Pty) Ltd holds 55% of the voting rights in Pluto (Pty) Ltd and can therefore exercise the
majority of the voting rights in Pluto (Pty) Ltd. For this reason, Pluto (Pty) Ltd is a subsidiary of
Mickey (Pty) Ltd.
QUESTION 3
3.1 This transaction would constitute an amalgamation or merger in terms of section 113(2)
of the Companies Act 71 of 2008 provided it that the amalgamation or merger of the
three profit companies would result in the formation of a new company, Sweets for All
(Pty) Ltd, holding all the assets and liabilities of Smarties (Pty) Ltd, M & M (Pty) Ltd and
Wine Gums (Pty) Ltd.
Upon completion of the amalgamation or merger, Smarties (Pty) Ltd, M&M (Pty) Ltd and
Wine Gums (Pty) Ltd would cease to exist.
The amalgamation or merger of Smarties (Pty) Ltd, M&M (Pty) Ltd and Wine Gums (Pty)
Ltd is permissible provided that the directors of each company reasonably believe that,
upon completion of the amalgamation or merger, Sweets for All (Pty) Ltd will satisfy the
solvency and liquidity test.
The transaction must first be approved by a special resolution of the shareholders of all
three companies.
The notice of a shareholders’ meeting to consider the resolution must be accompanied
by a copy of the amalgamation or merger agreement or a written summary of the precise
terms of the transaction and details of the proposed special resolution and appraisal
rights.
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The three companies would have to enter into a written agreement setting out the terms
and means of effecting the amalgamation or merger.
In particular, they would have to set out the following particulars in the agreement:
– the memorandum of incorporation of the newly formed company
- the name and identity number of each proposed director of the new company
- the manner in which the securities of each merging company are to be
converted into securities of the proposed new company
- If securities of any of the merging companies are not to be converted into
securities of the merged company, the consideration that the holders of those
securities are to receive instead.
- the manner of payment of any consideration instead of the issue of fractional
securities
- details of the proposed allocation of the assets and liabilities of the merging
companies
- details of any arrangement or strategy necessary to complete the merger; and
- the estimate cost of the proposed merger.
3.2.1 In terms of section 136(2) of the Companies Act 71 of 2008, the business rescue
practitioner will not have the power to cancel any provision of a contract. He may,
however, apply urgently to the court to cancel either entirely, partially or conditionally any
obligation of the company on terms that are just and reasonable in the circumstances.
A court may not cancel any provision of an employment contract or an agreement to
which section 35A or 35B of the Insolvency Act would have applied, had the company
been liquidated.
The other party to the contract that has been partially or entirely cancelled may only claim
damages from the company and not, for instance, specific performance of the contract.
Sandwich Delight (Pty) Ltd will therefore not have the right to cancel the agreement but
the business rescue practitioner will have to apply to court to cancel the agreement. A
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court will cancel the agreement only if the terms are just and reasonable in the
circumstances. Cape Bakeries (Pty) Ltd will have the right to claim damages from
Sandwich Delight (Pty) Ltd if the contract is cancelled.
3.2.2 In order to be a business rescue practitioner, the person must not have any other
relationship with the company that would lead a reasonable and informed a third party to
conclude that his or her integrity, impartiality or objectivity is compromised by that
relationship. The fact that Andile is a former director of the company and a good friend of
the current directors could lead a reasonable and informed third party to conclude that
his integrity, impartiality or objectivity is compromised. Therefore, Andile will most
probably not qualify to be a business rescue practitioner of Sandwich Delight (Pty) Ltd.
3.2.3 If a company’s business rescue proceedings have not ended within three months after
the start of those proceedings or such longer time as the court on application by the
practitioner may allow, the practitioner must –
prepare a report on the progress of the business rescue proceedings and update it at the
end of each subsequent month until the end of those proceedings and
deliver the report and each update to each affected person and to the court (if the
proceedings have been the subject of a court order) or to the Companies and Intellectual
Property Commission in any other case
Therefore, it is acceptable for the business rescue proceedings to endure for eleven months
provided that the business rescue practitioner complies with the above requirements.
QUESTION 4
In terms of the Financial Markets Act 19 of 2012, an insider who knows that he or she has
inside information and who deals directly or indirectly or through an agent (for example, a
stockbroker) for his or her own account in the securities listed on a regulated market to which
the inside information relates, commits an offence (s 78(1)).
An insider who knows that he or she has inside information and who deals directly or indirectly
or through an agent (for example a stockbroker) for any other person in the securities listed on
a regulated market to which the inside information relates, commits an offence (s 78(2)).
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A person who deals for an insider directly or indirectly or through an agent in the securities
listed on a regulated market to which the inside information possessed by the insider relates or
which are likely to be affected by it, who knew that such person is an insider, commits an
offence. (s 78(3))
An insider who knows that he/she has inside information commits an offence if he or she
discloses that information to another person (s 78(4)(a)). Even if the other person does not
commit any insider trading offence after the disclosure, it is still an offence to disclose it.
It is also an offence for an insider who knows that he or she has inside information to encourage
or cause another person to deal or to discourage or stop another person from dealing in the
securities listed on a regulated market to which the inside information relates or which are likely
to be affected by it (s 78(5)).
Thandeka is guilty of disclosing inside information to her mother, Veronica, and friend, Bongi.
Thandeka is also guilty of discouraging Beauty from buying shares because she told Beauty not
to buy shares in Veryslim Ltd.
Veronica is guilty of dealing through an agent (Sam) for her own account and on behalf of her
son Phineas based on inside information.
Sam is not guilty of an offence provided he did not have knowledge of the inside information
and provided he did not know that Thandeka was an insider.
Phineas is not guilty of any offence because he had no knowledge of the inside information.
Bongi is not guilty of an offence because she did not have knowledge of the inside information
and she did not buy any shares.
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