Learning unit 2

Legal personality
Lifting of the corporate veil
Types of companies
Formation

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LECTURE 4: FORMATION
 NAMES (1)
• S 11
• May reserve name for 6 months for later use; may extend for longer
period
• May transfer reservation, but may not trade in names anymore
• CIPC can go to Court to prohibit
• May reserve name as defensive name for 2 years, but only if there is a
direct and material interest eg Woolworths and “Woolies”.
 NAMES (2)
• Restrictions have been placed on the name permitted for
a co
• A co must use its registered name at all times = 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’
• Additional rules on business names are contained in
sections 79-81 of the Consumer Protection Act
 NAMES (3)
• S 11(1) basically use any word = need not make sense (like
overseas fcuk ltd)
• May also use registration number followed by (South
Africa) Ltd etc
• May use simbols eg f#!K
• May register swear word
• Same as old act: Names may not be disagreeable
(onwenslik)
 NAMES (4)
• S11(2)(a) name not same as other co/trademark
• S11(2)(b) name may not be confusingly similar

• S11(2)(c) name falsely imply/suggest association

• S11(2)(d) name must not institute propaganda for war, incitement of
imminent violence or advocacy of hatred based on race, gender,
religion, etc
 NAMES (5)
• Required cautionary abbreviations kept:
• (Pty) Ltd
• Ltd
• 3 new ones
• SOC Ltd (state owned company)
• NPC (non profit co)
• RF (ring fenced = red flag) (ss 11(3)+14(2))
 FORMATION (1)
• Simplified process of registration
• File: i) NoI and ii) MoI
• Receive: Registration certificate
• Other documents: Rules and
shareholders agreements
 FORMATION (2)
• Incorporation of profit company: one or more persons
• Incorporation of non-profit company: three or more persons
• Each person must complete and sign the Memorandum of Incorporation.
• A NoI must be filed with CIPC with the prescribed fee and a copy of the MoI
(unless the MoI provided in the Companies Act is used).
• If CIPC accepts the NoI it will assign a unique registration number to the co and
enter the prescribed information relating to the co into the Companies Register.
• If all formalities are in order a Registration Certificate will be issued and
delivered to the co
• The date of incorporation on the certificate is the date upon which the co comes
into existence as a separate legal entity.
 NOTICE OF INCORPORATION (1)
• Content of NoI:

• S 14(2) Name
• S 13(4) Directors
• S 23(3)(b)(i)(aa) foreign co must have an
registered office
• S 27(1) Financial year
• S 13(3), S 15(2)(b) and 15(2)(c)
• S 14(1) Date choose
 NOTICE OF INCORPORATION (2)
• NoI must give pertinent emphasis to any clause in the MoI
that contains limitation eg reduce special vote from 75% to
60%
• Ring fenced (RF abbreviation) = red flag = tells third party
that there is a change in MoI
• Statutory constructive notice (s20 actual knowledge)
 NOTICE OF INCORPORATION (3)
• Section 23 of the Act requires all companies to have a
‘registered office’ in SA, where the co’s records are kept.
Under the 1973 Act, many companies used the address of
their auditors or their attorneys as their registered office,
but under the 2008 Act, the registered office must be a
place where the co conducts business
• NoI must contain address of registered office
 Sibakhulu Construction (Pty) Ltd v Wedgewood Village Golf Country
Estate (Pty)Ltd 27956/10 WCC 16/11/2011

• Application for the winding up of company - effect of subsequent business

rescue application
• The court held that the only court which has jurisdiction in respect of the
business rescue and winding-up of a co is the High court where the co has its
registered office
• Therefore Respondents should have applied for business rescue in Cape Town
High Court and not Eastern Cape High Court and therefore the liquidation
proceedings had not been suspended ito s 131(6) of the Co Act 2008
• S 23 (3) of the Co Act requires co’s to register address of their office with CIPC
on their NoI and if changed, by filing a notice of change of registered office
• The Court held that a company resides for purposes of jurisdiction, as
contemplated in s19 (1)(a) of the Supreme Court Act, only at its registered
office (ito NoI) which for jurisdictional purposes under the Co Act is required to
be the same place as its principal place of business
 Sibakhulu Construction (Pty) Ltd v Wedgewood Village Golf Country
Estate (Pty)Ltd 27956/10 WCC 16/11/2011

• Litigants can not rely on a company’s principal place of business to

determine which court has jurisdiction to hear a matter if that address is
not also the registered address of the company.
• Requirement that a co register its principal office is intended for the
benefit of third parties who may wish to obtain information about the co,
communicate with it, or in any manner formally transact with or in
connection with it and that the registered address of the company is the
address at which this can effectively be done
• The ‘principal office’ of a co ito s23 (3) of the Co Act constitutes for
jurisdictional purposes a company’s statutory residence i) where it must
be ready to perform its corporate functions and ii) where it is regarded
as present at all times ready to conduct and control its administrative
functions
 Sibakhulu Construction (Pty) Ltd v Wedgewood Village Golf Country
Estate (Pty)Ltd 27956/10 WCC 16/11/2011

• Commentary: While the decision in Sibakhulu may be seen as

potentially narrowing or restricting the choice of litigants to initiate
action in a particular jurisdiction, where it may previously have had the
choice of two courts it now has only one (unless of course it founds
jurisdiction on the basis of the place where the cause of action arose)
• The upside of this decision is that companies can no longer rely on
registering addresses which they have little or no connection to in an
attempt to avoid and frustrate potential litigants
 Memorandum of Incorporation (1)
• MoI = “the document, as amended from time to
time ... that sets out rights, duties and
responsibilities of shareholders, directors and
others within and in relation to a company, and
other matters as contemplated in s15 ...”
• Must be consistent with the Act, and any provision
that is inconsistent with, or contravenes the Act will
be void.
 Memorandum of Incorporation (2)
• The MoI may:
 deal with a matter that is not addressed in the Act
 alter the effect of any alterable provision in the Act
 contain any special conditions applicable to the
company
 prohibit the amendment of any provision
contained therein
 Memorandum of Incorporation (3)
• Ito Co Act 2008 s15(6) the MoI and rules are binding on
 the company and each shareholder or among the shareholders of
the company
 the company and each director
 the company and each prescribed officer of the company, or other
person serving the company as a member of the audit committee or
as a member of a committee of the board, in the exercise of their
respective functions within the company
 CONTENT OF MOI (1)
• Must include in MoI:
• Name
• Signing or proxy (S 13)
• Type of company (s 8 and Schedule 1)
• Classes of shares, rights attached to classes, share capital
(ss 36 and 37(4))
• Attach court order pertaining to compromise with creditors
(s 155(8))
• NPC: appointment of directors if no members (Schedule 1)
 CONTENT OF THE MOI (2)
• The Act allows a large degree of flexibility with
regard to the content of the MoI
• In the MoI there are certain:
• Unalterable provisions
• Alterable provisions
• Default provisions
 ALTERABLE PROVISIONS
• S 15(2):
• If not included in Act
• Change or “alterable” provisions.
• “except where MoI provides otherwise”
• Eg s45(2)
• Define as:
• A provision of the Act which expressly contemplates its effect on a
particular company may be negated, restricted, limited, qualified,
extended or otherwise altered in substance or effect by that co’s
MoI
 UNALTERABLE PROVISION
• A provision of this Act that does not expressly contemplate
that its effect on any particular company may be negated,
restricted, limited, qualified, extended or otherwise altered
in substance or effect by a co’s MoI.
 Barry v Clearwater Estates NPC & Others 2017 (3) SA
364 (SCA)
S 1 of the Co Act differentiates between alterable and unalterable provisions

Barry v Clearwater Estates deals with section 15(2)(a)(iii) of the Co Act which states
that the MOI of a co may not contain a provision that negates, restricts, limits,
qualifies, extends or otherwise alters the substance and effect of an unalterable
provision of the Co Act.

Clearwater Estates convened a special general meeting to adopt various resolutions.

One of the resolutions approved was to increase levy payments by residents. Barry, a
director of Clearwater Estates, challenged the validity of the resolution on account of
the fact that s/h proxies ito MOI, were to be submitted 48 hours before the time
designated for holding the meeting, but were instead submitted on the day of the
meeting.
 Barry v Clearwater Estates NPC & Others 2017 (3) SA
364 (SCA)
In short, it was contended that proxy forms submitted on the day of the meeting
were invalid and therefore that the necessary quorum had not been met. The
board proposed that in order to now meet the quorum requirements, it would vote
on condoning the late filing of the proxies.
Clearwater contended that the articles found in the MOI relating to proxies were in
contravention of the Co Act in that section 58(1) of the Co Act states that:

”at any time, a shareholder of a company may appoint any individual, including an
individual who is not a shareholder of that company …”

It was argued by Clearwater that the articles contained in the MOI were in
contravention of the Co Act, and the requirement in the articles that any proxy be
delivered not less than 48 hours before the meeting was therefore null and void.
As section 58 (1) of the Co Act is an unalterable provision, it may not be altered
by the MOI of the co.
 Barry v Clearwater Estates NPC & Others 2017 (3) SA
364 (SCA)

In contrast to Clearwater’s argument, Barry drew a distinction between

section 58(1) and an alterable provision in the Companies Act being
section 58(3)(c) which states that:
“except to the extent where the MOI of a company provides otherwise, a
copy of the instrument appointing a proxy must be delivered to the
company, or to any other person on behalf of the company, before the
proxy exercises any rights of the shareholder at a shareholders meeting.”
 Barry v Clearwater Estates NPC & Others 2017 (3) SA
364 (SCA)
The court found that although section 58(3)(c) is an alterable provision, the plain
wording of sections 58(1)(a) and 58(3)(c) read together is that a s/h may appoint
a proxy at any time provided that a proxy delivers a copy of the instrument
appointing the proxy before the proxy may exercise any of the rights of the s/h at
the meeting.

Consequently, if the articles in question contravene or are inconsistent with the

provisions of s 58(1), they are void in terms of s 15(1) of the Act.

In conclusion the court held that s 58(1) could not be altered and the articles in
the MOI were null and void being inconsistent with the Companies Act.

If a section in the Co Act is unalterable, it will always prevail over the company’s
MOI.
 ALTERATION OF MoI (1)
• MoI may include:
• Limiting or procedural requirements pertaining to alteration
of provision of MoI in addition to Co Act.
• Or prohibition on such changes
• Result:
• Notice of Inc – prominent statement (s13(3))
• Name “RF” (s11 (3)(b))
• Deemed knowledge (s19(5)) thus constructive notice
• Constructive knowledge only applies to the RF
clauses listed in NoI
 ALTERATION OF MoI (2)
•If the MoI contains:
• any additional restrictive or procedural requirement that
impedes the amendment of any particular provision of the
Memorandum of Incorporation,
• any provision prohibiting the amendment of any
particular provision of the Memorandum of Incorporation,
= the company’s name must be followed by the expression
‘(RF)’ (ring-fenced)
 AMENDMENT OF THE MoI
• Amendments may be proposed by:
 the board of directors
 shareholders having at least 10% of the exercisable voting rights
 in any manner required in terms of the Memorandum of Incorporation
 by order of court.
• Special Resolution: Any proposed amendment must be in accordance
with the Memorandum of Incorporation and must be approved by
special resolution (save where the amendment is made by order of
court)
 REGISTRATION CERTIFICATE
• Conclusive evidence that
• Requirements for incorporation have been complied
with and
• The co is incorporated from date on certificate
• Later conclusive evidence of
• Date of issue of certificate
• Date of NoI (co may choose date)
 SHAREHOLDERS AGREEMENTS
• It is quite common, especially in priv co’s for s/hs to enter into an
agreement inter se themselves ito which they agree on a nr of issues
• A SHA is the means whereby parties who intend to carry on a business
using a co, agree on their rights and obligations between themselves
– For example: In Gihwala v Grancy Property Ltd 2017 (2) SA 337
(SCA) the court held that a shareholders’ agreement dealing with
the right to be appointed as a director was valid and that there was
no reason why such an agreement cannot be enforced.
►SHA between shareholders if not in conflict with Act and MoI (s15(7))
►SHA purpose: to keep certain information private/secret
►Golke & Schneider v Westies (Edms) Bpk 1970 2 SA 685 A: S/hs may avert
from MoI through agreement in terms of SHO unanimous assent = NO,
because in 2008 Act the MoI will prevail not SH
 RULES IN TERMS OF S15(3)-15(6)
►Directors may make, amend or repeal rules relating to the governance of the co
in respect of matters not addressed in the Co Act or MoI without a special
resolution, except if MoI provides otherwise
►A rule must be consistent with the Companies Act and the Memorandum of
Incorporation, failing which it will be void to the extent of the inconsistency
►Rules deal with matters relating to management of the co not dealt with in the
Act or MoI
►Must be published and filed at CIPC
►May not be inconsistent with Act/MoI
►Must be ratified by S/H meeting to be binding
►Binding same way as MoI
 RULES IN TERMS OF S15
The 2008 Co Act now provides that the board may make rules, unless that power is
excluded in the MoI. Co rules ito the 2008 Co Act are subject to various restrictions and
requirements as provided for in section 15 of the 2008 Co Act, and these restrictions or
requirements cannot be amended by the MoI, much less by separate contract. The power to
make, amend or repeal rules, in addition, is similarly subject to the fiduciary duties of
directors, such as in section 76(3), to act bona fide, in the interests of the company and to
act for a proper purpose, and due to the contractual nature of the rules, also to the common
law principles of the law of contract. Ratification of the rules by the general meeting of the
company as required by section 15(5) will not rectify breaches of fiduciary duties of directors
in making or amending a rule, and such ratification must also comply with the general
requirements in the common law and the Co Act in respect of the (proper) exercise of the
power of the majority. Although rules were/are popular due to the fact that making and
amending of the rules were usually perceived to be easier and quicker than amendments to
a SHA or the memorandum of association, there are onerous requirements on different
levels of the co that must be complied with. Failure to comply with these requirements will
have the effect that the rule is void.
PA Delport 2017 (80) THRHR
 S21 PRE-INCORPORATION CONTRACTS (1)

• S35 in old Act; s53 in CC Act

• Co Act 2008 simplify the statutory formalities for a valid pre-incorporation
contract
• i) Written agreement/contract entered into before incorporation of the co by a
person in ii) the name of or on behalf of the co (that does not yet exist) with iii)
the intention that the co will ratify contract after incorporation
• Agreement and/or action = includes an act e.g. application for liquor license
• New s21 no solution to any problems pertaining to pre-incorporation contracts
• S21(2) agent is jointly and severally liable if co is not incorporated or rejects
agreement/action after incorporation
 S21 PRE-INCORPORATION CONTRACTS (1)

• Once the company is incorporated the board of directors may, within 3

months after the date of incorporation, completely, partially or
conditionally ratify or reject any pre-incorporation contract.
• When this 3 month period expires, if the board of directors has not
ratified or rejected the agreement, the company will be deemed to
have ratified the agreement.
• If the agreement is ratified, the company will be liable in terms of the
agreement as if it had been a party to the agreement when it was
concluded.
• If the agreement is rejected, the person who will incur liability in terms
of the agreement will be permitted to recover from the company any
benefit that the company has received in terms of the agreement.
 S21 PRE-INCORPORATION CONTRACTS (2)

• Co Act = unambiguously imposes personal liability on individuals who entered

into a PIC on co's behalf if the co thereafter rejects the contract in whole/in part
• S21(5) Co 3 months after incorporation to reject contract = if not = ratified!
(even if co did not know about contract(!) as there is no formal process by
which the existence of such a contract is notified to the board
• S21(7) enrichment action for agent if co rejects for any benefits received
• Entering into a PIC on behalf of a co yet unformed is not a step to be taken
lightly because of the personal liability that will be incurred by those who
professed to act on behalf of the company if the co rejects the contract.
• It is not possible for the PIC to state that the personal liability provisions in
section 21(2) in regard to PICs will not apply because the provisions of the Act
are not expressed as being "alterable provisions" = they are not provisions that
ito Act may be altered by mutual agreement by the parties
 S21 PRE-INCORPORATION CONTRACTS (3)

• Venalex (Pty) Ltd v Vigraha Property CC [2015] 2 All SA 645 (KZD)

confirms s21
• If the PIC is concluded ito the Act, the individual(s) will be acting as an
agent of a company not yet incorporated.
• Such individuals will in turn become “jointly and severally liable” if the
contemplated company is not subsequently incorporated or fails to fully
ratify the PIC post incorporation
• All agents will be liable for any loss suffered by the third party because
of the company’s repudiation. This is an unalterable provision of the Act
meant to protect the third party to the PIC and means that agents
cannot avoid such liability when using section 21 PICs
 S21 PRE-INCORPORATION CONTRACTS (4)

In Venalex (Pty) Ltd v Vigraha Property CC and Others [2015] 2 All SA 645 (KZD) the facts were as follows.
The applicant (the purchaser) contended it bought immovable property from the respondent (the seller). The
purchaser sought orders declaring the agreement binding, directing the seller to do all things necessary on its
part to bring about transfer of the property to the purchaser, and for costs.
The purchaser took occupation of the property. The price was secured, and transfer of the property ought to
have taken place. But for some reason, which un-contradicted by the seller – the purchaser puts down to
‘seller’s remorse’ – the seller did not wish to proceed with the sale. It, accordingly, adopted the view that there
was no binding agreement with the applicant because it was a company already in existence when the
original agreement was signed. The seller’s argument was primarily that the signatories for the purchaser had
not purported to represent the purchaser, an existing company at the time. They had sought to conclude a
pre-incorporation contract as contemplated by s 21 of the Companies Act 71 of 2008 (the Act). Because the
purchaser was already at the time incorporated it did not qualify as a company entitled to ratify the agreement
and take on the rights and obligations of purchaser under it.
 S21 PRE-INCORPORATION CONTRACTS (5)

The purchaser approached the court on the basis that, while it was correct that it was
intended that a company would be ‘formed’, and that it would take on the mantle of
purchaser, and receive transfer of the property, there was no reason to jump to the
conclusion, as the first seller had, that the relevant contractual provisions
contemplated the engagement and implementation of the provisions of s 21 of the
Act. The purchaser argued that on a fair and proper construction of the provisions of
the contract what was contemplated was a stipulatio alteri, which envisaged the rights
and obligations of the purchaser in terms of the contract being taken up either by a
company already incorporated or by one not yet incorporated.
 S21 PRE-INCORPORATION CONTRACTS (6)

Olsen J held that the three businessmen who signed the contract on behalf of the
purchaser acted in their individual capacities, but stipulated for the substitution of a
company in their place if that could be achieved by a fixed date. The question as to
whether the company was one which existed or did not exist at the time of conclusion
of the contract was, therefore, irrelevant. The remaining question was whether the
contract itself rendered it relevant, with the result that only a company incorporated
after the conclusion of the original agreement could take on the rights and obligations
of the purchaser under the agreement. The court could not find support for the latter
contention.
The application was thus successful and the court ordered the agreements to be
binding and valid.
• Do the activities on Blackboard (it will help you to summarise the
most important aspects of Learning Unit 2)
• Watch the youtube clips (it will take you less than one hour)
• Study the power point slides
• Read the additional material on Blackboard (this is background to
the Learning Unit)
 SUMMARISE AND STUDY THE FOLLOWING:

Sibakhulu Construction (Pty) Ltd v Wedgewood Village Golf

Country Estate (Pty) Ltd (Nedbank Ltd Intervening)
2013 (1) SA 191 (WCC)
Venalex (Pty) Ltd v Vigraha Property CC [2015] 2 All SA 645 (KZD)
SUMMARISE AND STUDY THE FOLLOWING:

 Cassim “The Companies Act 2008: An overview of a few of its core provisions” 2010
SA Mercantile LJ 157;
 Katz “Governance under the Companies Act 71 of 2008: Flexibility is the keyword”
2010 Acta Juridica 248;
 Morajane “The binding effect of the constitutive documents of the 1973 and 2008
Companies Acts of South Africa” 2010 Potchefstroom Elec LJ 171;
 Ncube “Pre-incorporation contracts: Statutory reform” 2009 SALJ 255;
 Davis Chapter 2 (read and use this to add to the power point summary).

You must summarise the articles for questions of 10-15 marks. You will also be able
to use the articles when answering other questions. Most of the articles are
prescribed in more than one Learning Unit. Summarise what is applicable to the
specific Learning Unit.