STUDY UNIT 1: QUESTIONS AND ACTIVITIES

1. What African values comprises the concept of ubuntu?

2. What is meant by transformative constitutionalism?
3. What constitutional principles are important for purposes of South African
business?
4. What does corporate social responsibility entail?
5. Explain whether it is possible to enforce the principles of ubuntu and the
constitutional principles in a court of law.
6. Explain the test that is used by the court to determine whether it is necessary
to develop the common law.
7. List the pieces of legon that have an impact on the various forms of business
enterprises in South Africa

1. What African values comprises the concept of ubuntu?

 ‘a person is a person through other people.’

 The ability to show compassion
 Social justice and fairness
 Harmony and humanity
 Recognising the inter-connectedness of people and the accompanying
responsibilities
 Integrity and ethical behaviour
 Open channels of communication and transparency
 Due process and sensitivity in dealing with one another.

2. What is meant by transformative constitutionalism?

A long-term project of constitutional enactment, interpretation and
enforcement to transform the country’s political, legal and social
institutions and power relations in a democratic way.
Transformative constitutionalism is the adaptation of the common law
by the infusion of constitutional value.

3. What constitutional principles are important for purposes of South

African business?
All business enterprises choose a name that should not be offensive,
racist or impinge negatively on any individual or legal persons right to
dignity
 Values of ubuntu must inform the manner in which corporate decisions
are taken by directors.
Compliance with the Bill of Rights in the application of company law. It
enshrines the rights of all people and affirms the fundamental
democratic values of human dignity, equality, and freedom.
Directors of companies can be removed by means of an ordinary
resolution. Certain requirements should be met to ensure ubuntu and
fairness.
The Companies Act also provides protection for minority shareholder.
Principles of majoritarianism ( collectivity and solidarity)
The Companies Act provides for a system of informal dispute
resolution before the Takeover Regulation Panel.
Ubuntu is evident in that humanness is promoted in that agreements
must be respected and honoured by those who conclude them.
The law attaches certain consequences to misconduct committed in
different business enterprises
Remedies provided for in the Companies Act also reflect that resolution
restitution is promoted rather than imposing criminal sanctions

4. What does corporate social responsibility entail?

It seeks to make modern companies responsible members of the
community.
It means integrating economic, social and environmental imperatives
into the companies’ activities, while at the same time addressing the
shareholder and stakeholder’s expectations.
Premised on the idea that the modern company has a wide and diverse
range of stakeholders
Broadly speaking it means that businesses have a responsibility
towards the society in which they operate and that this responsibility
needs to be managed
The involvement of companies in social projects that help to advance
the society and the community in which they operate.

5. Explain whether it is possible to enforce the principles of ubuntu and

the constitutional principles in a court of law.
Yes , it is possible to enforce the principles of ubuntu and the
constitutional principles in a court of law.
 Ubuntu means people are people through others. The explicit
application of ubuntu in our jurisprudence in the highest court was
provided in S v Makwanyane 1995. Madala J noted that ubuntu
advocates social justice and fairness.
In Pharmaceutical Society of South Africa and Others v Tshabalala-
Msimang and Another; New Clicks South Africa (Pty)Ltd v Minister of
Health and Another 2005, Harms JA , described ubuntu as a
relationship of mutual respect.
One of the rule of natural justice is the audi alteram partem rule, this
rule is reflected in ubuntu. Ubuntu dictates that one has to be fair in all
one’s relationships.
The Companies Act reflects a lot of aspects relating to the principles of
ubuntu and the constitutional principles.

6. Explain the test that is used by the court to determine whether it is

necessary to develop the common law.
The constitutional values play an important role in how the court
interprets and applies the legislation, and develops the common law.
Each section should be interpreted in context. Section 39 of the
Constitutions implies that the court must when developing the common
law promote the spirit, purport and objects of the Bill of Rights.
In the case of Everfresh Market Virginia (Pty)Ltd v Shoprite Checkers
(Pty)Ltd 2012, the highest court considered whether the common law
should be developed to require that parties to a contract should be
legally required to contract with each other in good faith and on
reasonable terms. The approach followed by the majority of South
Africans placing a higher value on negotiating in good faith than would
have prevailed under colonial legal tradition.

7. List the pieces of legislation that have an impact on the various forms of
business enterprises in South Africa
Companies Act 71 of 2008
Close Corporation Act 69 of 198
Trust Property Control Act 57 of 1988
Insolvency Act 24 of 1936
Income Tax Act 58 of 1962
Broad Based Black Economic Empowerment Act 53 of 2003
 Promotion of Access to Information Act 2 of 2000

Study unit 2: Legal personality and lifting of the veil

1. When does a company acquire legal personality?

2. With reference to case law explain the meaning and effects of separate legal
personality.
3. What does lifting the corporate veil entail? What is the purpose and under
what circumstances can it occur?

1. When does a company acquire legal personality?

Three ways a company can acquire legal personality:
o by registration in terms of the Companies Act
o through registration in terms of other pieces of legislation,
like the University of Pretoria (Private Act) 13 of 1930
o by conduct (common law method)

2. With reference to case law explain the meaning and effects of separate
legal personality.
Separate legal personality - A company is a juristic person with
capacity like the individuals that formed it, it acts on its own.
In case Salomon v Salomon & Co Ltd, it was held that the principle of
separate legal personality has various implications:
The estate of the company is assessed apart from the estates of the
individual shareholders or members.
The debts of the company are the company’s debts and are separate
from those of its shareholders or members. The shareholders or
members enjoy limited liability.
Shares in a company entitle the holders thereof to certain interests in
the company. The profits of the company belong to the company and
not to its shareholders, and also only after the company has declared a
dividend, may the shareholders claim that dividend.
The assets of the company are its exclusive property. The
shareholders have no proportionate, proprietary rights.
No one is qualified by virtue of his or her shareholding or membership
to act on behalf of the company.
 Only those who are appointed as representatives of the company in
accordance with the articles can bind the company. Managerial and
executive powers are to be exercised by directors.
Where a company is wronged, the company must itself seek
compensation. In a recent case Ahmadiyya Ishaati-Islam Lahore
(South Africa) v Muslim Judicial Council (Cape)1983 (4) SA 855 (C),
this was confirmed
In the case Standard Bank v Hunky Dory Investments (No 1)2010 (1)
SA 411 (C), in terms of Chapter 2 of the Constitution, companies are
the bearers of rights as well as duties

3. What does lifting the corporate veil entail? What is the purpose and
under what circumstances can it occur?
What is the purpose ?
Courts have made it clear that they will not allow the use of any legal entity to
justify wrongs, to conceal fraud, or to defend or hide crime. In such cases, the
courts may pierce or lift the corporate veil and hold directors and others
personally liable for acts committed in the name of the company.
In Die Dros (Pty) Ltd and another v Telefon Beverages CC and others, it was
held that, where fraud, dishonesty and other improper conduct are present,
the need to preserve the separate egal personality of a company must be
balanced against policy considerations favouring piercing the corporate veil.
In Le’ Bergo Fashions CC v Lee and another, the court confirmed that it would
pierce the corporate veil according to values of public policy. If a natural
person, who is subject to a restraint of trade, uses a close corporation or a
company as a front to engage in the activity that is prohibited by the
agreement, the corporate veil will be pierced so as to give effect to the
agreement.
Under what circumstances can it occur?
To preserve the integrity of the principle of legal personality, the courts have
said that they will only pierce or lift the corporate veil in exceptional
circumstances where there is no alternative remedy available and where
piercing the corporate veil will prevent an injustice. This measure is used in
exceptional circumstances where there is evidence of fraud, dishonesty, or
improper conduct.

Study unit 6
1. What are the criteria for the names of companies in terms of the Companies
Act 71 of 2008?
2. Is it always necessary for a company to reserve a name before registration?
3. Is it possible to reserve a company name for future use?
4. Would it be possible for one company to transfer a name to a different
company?
5. Which types of companies cannot function without an acceptable name
(cannot be registered under a registration number only by the Commission?)
6. Who can order a name change where a name to be registered is similar to an
existent company’s name?
7. What factors are considered in order to ascertain whether or not a name is
objectionable?
8. How should the name and registration number of a company be used?
9. What happens when the name and registration number of a company is not
reflected properly on its stationery ?

What are the criteria for the names of companies in terms of the Companies
Act 71 of 2008?
The criteria for the acceptance of names have been reformed in order to give
maximum effect to the constitutional right to freedom of expression.
be the same as the name of another company, external company, close
corporation or Cooperative, or the name of a business which has already
been, or a trademark which has been filed for registration
be confusingly similar to a name, trademark, mark, word or expression
give the false impression that the company is associated with the government
or with a particular person or government office, etc.
include any word, expression or symbol that may constitute propaganda for
war, incitement of imminent violence, or advocacy of hatred based on race,
ethnicity, gender or religion, or incitement to cause harm
The date of registration of the companies also play a role

Is it always necessary for a company to reserve a name before registration?

It is not always required of companies to reserve a name, it is preferable, as
the Commission may require a company to change its name if it is too similar
to another already existing company’s name or objectionable for some other
reason.

Is it possible to reserve a company name for future use?

In terms of section 12 of the Companies Act, a name may be reserved for use
at a later stage, to be used for a newly incorporated company, or to be used
as a replacement for an existing name of a company.
 Would it be possible for one company to transfer a name to a different
company?
Someone who has applied for the reservation of a name may transfer the
reserved name to another person by lodging a form CoR 11.1

Which types of companies cannot function without an acceptable name

(cannot be registered under a registration number only by the Commission?)
Non-profit companies

Who can order a name change where a name to be registered is similar to an

existent company’s name?
Disputes regarding names may be referred to the Companies Tribunal or the
Human Rights
Commission in terms of section 160 of the Companies Act.

What factors are considered in order to ascertain whether or not a name is

objectionable?
The names of companies are the same, or substantially similar
Where there is a likelihood that members of the public would be confused in
their dealings with the competing parties, these would be important factors to
be considered in deciding whether or not a name was undesirable
The date of registration of the companies would also play a role

How should the name and registration number of a company be used?

Section 32 of the Companies Act, requires that a company furnish its full
name or registration number to any person on demand.
It further prohibits the misstating of the name or registration number, and the
stating of the name in such a way that it may mislead or deceive a person.
A company must use its registered name at all times, and not a modified
version of such name.
In the case of a profit company, the name may consist of a registration
number only, followed by the words “South Africa”.
 What happens when the name and registration number of a company is not
reflected properly on its stationary etc?
The company will be provided with another opportunity to file a Notice of
Incorporation containing an acceptable name.
Upon receipt of the Notice of Incorporation with the amended name, the
Commission has to enter the new name in the Companies Register.
It must also issue an amended Registration Certificate reflecting the amended
name.

Study unit 7
1. What is meant by the capacity of a company?
2. What is the ultra vires doctrine?
3. Under which circumstances does a person have the authority to represent a
company and bind it to an agreement?
4. What is the purpose of the Turquand rule and how does it operate under the
Companies Act?

What is meant by the capacity of a company?

A company’s capacity is determined by the sphere of actions that it may
legally perform.

What is the ultra vires doctrine?

The rules pertaining to the consequences of a company acting outside the
scope of its powers and competency.
In terms of our common law, a contract is ultra vires the company when the
conclusion of the transaction is beyond its legal capacity.
The ultra vires doctrine is based on the understanding that a company exists
in law only for the purpose for which it was incorporated.

Under which circumstances does a person have the authority to represent a

company and bind it to an agreement?
If a company gives an agent authority to act on its behalf, the agent
possesses actual authority and will bind the company in acts which fall within
the scope of the mandate given to him or her.
Sources of actual authority:
 memorandum of Incorporation
  rules
 express mandate
What is the purpose of the Turquand rule
According to the common law Turquand rule, 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, an outsider contracting with the
company in good faith is entitled to assume that this internal requirement has
been complied with.
The company will be bound by the contract even if the internal formality has
not been complied with.
The Turquand rule was formulated to keep an outsider’s duty to inquire into
the affairs of the company within reasonable bounds.
To trigger the protection provided by the Turquand rule, there must have been
an internal requirement present.
A company’s Memorandum of Incorporation determines who has authority to
act on behalf of the company.
The Turquand rule applies where the authority is subject to an internal
requirement.
How does it operate under the Companies Act?
Section 20(7) of the Companies Act now contains a provision that in some
respects resembles the
Turquand rule by providing that a person dealing with a company in good faith
is entitled to presume that the company, in making any decision in the
exercise of its powers, has complied with all the formal and procedural
requirements in terms of the Act, the company’s MOI and any rules of the
company, unless the person knew, or reasonably ought to have known, of any
failure by the company to comply with any such requirement.
This provision does not replace the Turquand rule, because section 20(8)
provides that subsection (7) must be interpreted concurrently with, and not in
substitution for, any relevant common law principle relating to the presumed
validity of the actions of a company.
Section 20(7) determines that the rule will not apply if the third party knew or
reasonably ought to have known that the internal requirement had not been
complied with.
Activity 1
 The Memorandum of Incorporation of ToyZ Ltd states that the company
only has the power to sell toys. The board of directors of ToyZ Ltd
decides to buy a luxury yacht on behalf of the company.

Will the contract of purchase and sale be valid?

Although the company’s Memorandum of Incorporation may limit, restrict or
qualify the purposes, powers or activities of the company (in other words,
impose restrictions on the legal capacity of the company) in terms of section
19(1)(b)(ii), any such restrictions would not render any contract invalid that
conflicts with these restrictions (section 20(1)(a)).
Therefore, the contract remains valid and binding on the company and the
other party to the contract even if it is an ultra vires transaction.

Do the shareholders have any remedies against the board of directors?

Even though an ultra vires transaction will be binding on the company, the
shareholders are provided with recourse to claim back their losses from the
person who acted beyond the scope of the company’s capacity.
Section 20(6) of the Companies Act provides that each shareholder has a
claim for damages against any person who fraudulently, or due to gross
negligence, causes the company to do anything inconsistent with the
Companies Act or a limitation, restriction or qualification on the powers of the
company as stated in its Memorandum of Incorporation, unless ratified by
special resolution in terms of section 20(2).
This is in addition to the remedy provided in section 165.

Activity 2
Steelbelts Railway Carriages (Pty) Ltd’s Memorandum of Incorporation
provides that only the board of directors, or any person authorised by
the board, has the power to conclude contracts on behalf of the
company. In addition, any transaction that exceeds R100 000 must first
be authorised by the company in general meeting by way of ordinary
resolution. Mr Buckley, one of the directors, is authorised by the board
of directors to act on behalf of the company. Mr Buckley concludes a
contract with Mr Matthews for the purchase of equipment that will be
used in the process of manufacturing railway carriages to the value of
R150 000 without the authorisation of the company in general meeting.
Mr Matthews knows about this provision because he has dealt with the
company before. He however assumes that the approval of the general
meeting has been obtained since it had always been obtained for
previous transactions.
Is the company bound by the contract concluded by Mr Buckley?
According to the common law Turquand rule, 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, an outsider contracting with the
company in good faith is entitled to assume that this internal requirement has
been complied with.
The company will be bound by the contract even if the internal formality has
not been complied with.
A company cannot escape liability under an otherwise valid contract on the
ground that some internal formality or procedure was not complied with.
The Turquand rule does not protect – directors, prescribed officers or
shareholders or anyone who should have been aware whether the internal
requirements had been complied with.

Activity 3

The Memorandum of Incorporation of Concord Ceramics (Pty) Ltd (RF)

provides that the board of directors have authority to contract on behalf
of the company subject to the condition that if the value of a contract
exceeds R1 million the approval of shareholders by special resolution is
required. The Memorandum of Incorporation further provides that this
last-mentioned provision may only be amended by unanimous approval
of all the shareholders.
(a). Are third parties deemed to be aware that the consent of the
general meeting is required for transactions in excess of R1
million?
Third parties would be deemed to be aware of the fact that the consent
of a general meeting is required for transactions in excess of R 1
million if RF follows the name and if, in terms of section 13(3),the
company’s Notice of Incorporation specifically draws attention to the
requirement.

(b). To what extent is the doctrine of constructive notice still

applicable to this company?
Section 19(4) of the Companies Act determines that a third party is not
deemed to know the contents of a company’s documents just because
they have been filed with the Commission.
But, in terms of section 19(5), the doctrine of constructive notice still
applies to RF companies and personal liability companies. The effect
 would be that the company could escape liability for the ultra vires
contract if the general meeting did not consent.

Activity 4
Suppose that Mike, a site manager on one of the company’s plants,
regularly contracts on behalf of the company without having a mandate
to do so. The board of directors takes note of this behaviour, but never
takes any steps to caution Mike against contracting on behalf of the
company. Mike enters into a contract with Timothy for the purchase of
raw materials. The company now argues that Mike did not have authority
to enter into the contract and that it is not bound to the contract. Advise
Timothy on whether the company can be held bound to the contract.
Mike, in the facts above, did not have actual authority. However, the
company has allowed him to conclude binding contracts on behalf of
the company on previous occasions.
Estoppel can be raised if a company denies liability based on the fact
that Mike lacked actual authority, because, here, the impression was
created that he was in fact so authorised. This gives rise to ostensible
authority.
The result is that the company will be held to the misrepresentation
which it had made previously by having allowed Mike to conclude
contracts in the company’s name.
If it had been Mike who made the misrepresentation and the company
had been unaware of it, the contract would not have bound the
company, as Mike would not have had any form of authority.

Study unit 8
1. What is the legal definition of a share?
2. What types of preference shares may be issued by a company?
3. When must the board of directors obtain the approval of the shareholders
before issuing shares?
4. What are the differences between shares and debentures?
5. What is meant by the pre-emptive rights of shareholders in private
companies?

1. What is the legal definition of a share?

A share is a corporeal movable and transferable property.

 2. What types of preference shares may be issued by a company?

Cumulative, Participative, and preferential right to capital on winding up

preference shares

3. When must the board of directors obtain the approval of the

shareholders before issuing shares?
Where they want to issue shares to current or future directors or
prescribed officer.

Where shares are to be issued to persons related or interrelated to the

company, a director, or a prescribed officer of the company.

Where shares are to be issued to a nominee of a director or a prescribed

officer.

Where shares are to be issued to a nominee of a brother, sister, child,

parents and grandparents

Where the voting power of the shares to be issued will exceed 30% of the
voting power of the shares of that class held immediately before the issue.

4. What are the differences between shares and debentures?

Shares are equity whereas debentures are debt instruments.

5. What is meant by the pre-emptive rights of shareholders in private

companies?

Section 39 of the companies’ act says every shareholder in a private

company has the right before any other person who is not a shareholder of
the company to be offered and to subscribe within reasonable time for a
percentage of any shares issued or proposed to be issued equal to the
voting power of that shareholders general voting rights immediately before
the offer is made.

Activity 1
The directors must request shareholders’ approval.
Section 39 of the companies’ act says every shareholder in a private company
has the right before any other person who is not a shareholder of the
company to be offered and to subscribe within reasonable time for a
percentage of any shares issued or proposed to be issued equal to the voting
 power of that shareholders general voting rights immediately before the offer
is made.

Activity 2
Prosperity Ltd wants to decrease its issued share capital by a
repurchase of shares.
(a) Advise the board of directors of Prosperity Ltd of the requirements
that ought to be complied with, before they may proceed with this
transaction.
(b) Suppose that it emerges after the transaction is approved by the
board of directors that one of the company’s main debtors is
insolvent and will not be able to pay its debts to the company. This
means in turn that Prosperity Ltd will not be able to pay its debts
after the repurchase of the shares. Advise Prosperity Ltd on possible
steps it may take to remedy the situation.
They can reduce in line with the MOI.
A distribution may be made in the following circumstances: The board of
directors must authorise the distribution. x It must reasonably appear that the
company will be able to satisfy the solvency and liquidity tests immediately
after the distribution has been made. The board must acknowledge by way of
a resolution that it has applied the solvency and liquidity tests and reasonably
concluded that the company will satisfy the tests immediately after completion
of the proposed distribution.

Activity 3
David wants to subscribe for shares in Free-4-All (Pty) Ltd. He does not
have money available, but he offers to sell some computer equipment
left over from a previously unsuccessful business to the company. He
will then use this money to pay for the shares in Free-4-All (Pty) Ltd.
Advise the board of directors of Free-4-All (Pty) Ltd whether the
company must comply with the requirements of section 44 of the
Companies Act before they may enter into this agreement with David.
In terms of section 44 of the Companies Act, a company may give financial
assistance by way of a loan, guarantee, provision of security, or otherwise to
a person for the purpose of, or in connection with, the acquisition of shares
and other securities in the company, provided that such assistance is not
prohibited by the Memorandum of Incorporation and that certain requirements
are met.

Activity 4
Vusi, a shareholder and director of Securities (Pty) Ltd agrees to sell his
shares in the company to Jonathan for R20 000. To enable Jonathan to
acquire the shares, Securities (Pty) Ltd agrees to lend Jonathan the sum
of R20 000. Explain whether this transaction amounts to financial
assistance and if so, what requirements have to be satisfied in order for
it to be a valid transaction.

Firstly, it must be ascertained whether there was financial assistance. In

Gradwell (Pty) Ltd v Rostra Printers Ltd, the “impoverishment test” was
formulated to assist in determining whether financial assistance was provided.
In terms of the impoverishment test, one considers whether a transaction will
have the effect of leaving the company poorer. If so, financial assistance will
have been provided
Secondly, it must be determined whether that assistance was for the purpose
of acquiring shares in the company.
Suppose Company A is a major creditor of Company B. Company A acquires
most of the shares in Company B.
After the acquisition, Company A causes Company B to grant security over its
movable assets to secure the loans.
This will be financial assistance in terms of the first test, but it is not in
connection with the purchase of shares.
The assistance is to secure a loan