Chapter 3 Close Corporations Flashcards
What are the characteristics of a CC?
Characteristics:-
A CC has:
1) Capacity of a natural person;
2) No division of powers- members manage;
3) Flexible capital structure, internal relations;
4) Personal liability as enforcement mechanism.
What are Close Corporations?
The Close Corporations Act provides for the formation of CC’s, which are:
- Simple;
- Deregulated; &
- Flexible;
- Limited Liability entities;
- Suitable for small businesses.
How is a CC formed?
Constitutive documents:
1) Founding Statement (CK1)
- Document that establishes a CC; &
- Sets outs certain details of CC, such as:
- Name of CC (ends in CC), financial year, details of members, details of accounting officer and principal place of corporation.
2) Association Agreement (optional) (CK2)
- Members of CC can voluntarily draw up;
- Is an Contract that principally sets out the rights and duties, and relationship between members.
How has the new Companies Act, 2008 affected CC’s?
The Companies Act, 2008 has NB implications for CC’s.
In particular:
- No new CCs will be incorporated under the CC Act after the commencement of the 2008 Act (1 May 2011); &
- No company can be converted into a CC after that date.
CCs that existed on 1 May 2011 are allowed to continue indefinitely, but no new CCs can be formed.
What does membership in a CC entail?
A CC doesn’t have shareholders, but has Members.
- It can have 1-10 members (small business);
- Only natural persons can be members of a CC (member’s interest);
- A trustee of a inter vivos or will trust, can be a member of a CC in capacity of trustee.
What restrictions are there on allowing a trustee of an inter vivos trust to be a member of a CC?
There are certain restrictions on allowing a trustee of an inter vivos trust to be a member of a CC, such as:
- The requirement that no juristic person can be a beneficiary of that trust;
- If at any time the number of beneficiaries of trust added to number of members of CC is greater than 10, the membership of the trustee will cease.
What is a member’s interest in a CC?
Each member of a CC has a member’s interest in the corporation.
The member’s interest is:
- A single interest (per member);
- Expressed as a percentage total;
- It need not correspond with the member’s contribution; &
- Adjustments must be made in case of acquisitions etc.
How is a member’s interest acquired after the registration of the CC?
New members who join after the registration of the CC must acquire their member’s interest, either from:
1) The corporation
- By making a contribution;
- In form of money, property or services in formation (initially);
- Payable within 90 days.
2) An existing member
- In accordance with association agreement or with consent of every other member.
3) Sales by trustee, executor, execution sales
- Subject to pre-emotive right in favour of CC and existing members
4) Security
- Out-and-out cession or pledge.
How can the cessation of membership take place?
1) Voluntary disposal
2) Disposal on sequestration (s34)
3) Testamentary disposal (s35)
4) Attachment and execution (s34A)
5) Deregistration and dissolution
6) Court order (s36)- Application by any member [s49]
What duties do the members owe to the CC?
The Act imposes 2 specific duties on members towards the corporation, as follows:
1) A fiduciary duty (s42(1)); &
2) A duty of care and skill (s43)
What does a member’s fiduciary duty entail?
A member has a fiduciary duty to do the following (s42(2)):
1) Act honestly and in good faith;
2) In the interest and benefit of the CC;
3) Not exceed his powers;
4) Avoid a material conflict of interest;
5) Notify any member of interest in any contract of corporation;
6) Not compete with corporation in its business activities.
What happens if a member breaches a duty arising from his fiduciary relationship?
A Contract where a member didn’t disclose a personal material interest will be voidable at the option of the CC.
- Interested party can apply to court to rule that contract is binding on parties (benefit of 3rd parties).
A member is personally liable to the CC for any loss suffered by the CC.
- Also liable for any economic benefit derived by member.
Conduct won’t constitute breach is there is approval or ratification from all members, with written consent.
What does the member’s duty of care and skill entail?
- Section 43
- As far as the duty of care and skill is concerned, a breach occurs where;
- A member’s negligence;
- Resulted in a loss for the CC (damage);
- Unless there is written approval/ratification from all members who are aware of the material facts.
Care and skill= The care and skill that can reasonably be expected from a person with the member’s knowledge and experience (subjective)
How does the cessation of membership by court order occur?
Any member may apply (s36) on a basis of:
1) Permanent inability to participate in business;
2) Prejudicial conduct in relation to business;
3) Reasonably impossible for others to associate with member;
4) Just and equitable that should cease membership.
What remedy is available to members who are being unfairly prejudiced as a result of an act or omission by the CC or one of it’s members?
The remedy available to members who are being unfairly prejudiced as a result of an act or omission by the CC or one of it’s members, is a Personal action against the CC (s49).
The court will then make a just and equitable order, in terms of:
- The future conduct of business (Gattenby); and
- The purchasing of interest by CC or other members (Da Franca)
