Companies

Question 1

What is the definition of a company?

Answer 1

• Defined as a legal entity (own legal personality) incorporated in terms of the Companies Act 71 of 2008.
• A company will be registered with the Companies and Intellectual Property Commission (CIPC).

Question 2

What does the CIPC do and what does it stand for?

Answer 2

‘Companies and Intellectual Property Commission.’
The CIPC registration of companies, co-operatives and intellectual property rights (trade marks, patents, designs and copyrights) and maintenance thereof.

Question 3

What is the purpose of the companies act?

Answer 3

• encourage entrepreneurship (especially because of SA’s high unemployment rate of 32.9%) and participation in different sectors of the South African economy
• simplifying the process of registering and managing a company (while maintaining transparency and accountability)
• ensures the rights and obligations of shareholders and directors are aligned with eachother by ensuring companies are managed in a responsible manner
• to ensure non profit companies are established and managed in a manner that will make their functioning more effective, while ensuring accountability at the same time.

Question 4

What is the difference between private and public companies?

Answer 4

• A private company may not be state owned and it’s Memorandum of Incorporation (MOI) has to specify that no shares will be offered to the public and shares are not freely negotiable or transferable.
• A public company must be listed on the Johannesburg securities Exchange (JSE) and offer shares to the general public in order to raise capital.

Question 5

What is a Memorandum of Incorporation (MOI)?

Answer 5

The Memorandum of Incorporation is the founding document of the company and sets out the structure and governance of the company. Matters dealt with in the MOI include the rights, duties and responsibilities of shareholders, directors and others within and in relation to the company.

Question 6

Fill in the blank;
Buying shares presents an ____________ to individuals and other companies.

Answer 6

Investment opportunity.

Question 7

Explain shareholders vs stakeholders.

Answer 7

Shareholders have shares in a company. Because they thus have an interest in the company’s well-being, they are also stakeholders in the company.

A stakeholder in a company is anyone with direct interest in the well-being of the company who will be affected by the company’s successes/failures. Thus, stakeholders are not always shareholders - a stakeholder could be an employee, for example.

Question 8

What are dividends?

Answer 8

Profits divided amounts the shareholders.

Question 9

What do shareholders expect for when investing in shares?

Answer 9

The owners of equities/shares (shareholders) become owners of the business and expect a Return on Investment (ROI). The ROI in a company listed on the JSE will be in the form of dividends or an increase in the share price of the company’s shares.

Question 10

What are blue-chip shares?

Answer 10

They are shares in companies that have proven over a long-term that the company is financially stable, that the share prices don’t fluctuate drastically (which is a risk shareholders make when investing) and that they pay good dividends (ROI).
Investors/Shareholders often have the hopes of making a fairly predictable amount of money over a long period of time when investing in these shares.

Question 11

What are the prescriptions of the Companies Act.71 of 2008?

Answer 11

1. The name of the company
2. Formation procedure
3. The prospectus
4. Meetings
5. Duties of Directors
6. Financial obligations

Question 12

Expand on ‘the name of the company’ as a prescription of the Companies Act.71 of 2008?

Answer 12

• the name must be reserved for the business (provided it is not similar or same to an existing business). The CIPC can do this for the business if they wish to make use of their services
• The name must not be undesirable or hateful to any group of society
• The name must end in the word(s) or letters:
  > private company - Proprietary Limited - (Pty) Ltd
  > public company - Limited - Ltd
  > personal liability company - Incorporated - Inc
  > state-owned company - SOC Ltd
  > non-profit company - NPC

Question 13

What does ‘proprietary’ mean in business? And thus, what does ‘proprietary limited’ mean in a private company?

Answer 13

It is any type of data that the owner wishes to restrict who know about it or its contents. Proprietary information is another way of saying something is a trade secret.
Essentially it is stating that shares are not on offer to the public and are not freely negotiable or transferable.

Question 14

Expand on ‘formation procedure’ as a prescription of the Companies Act.71 of 2008?

Answer 14

This takes time and is expensive. The person(s) who register the company have to pay the required fee, complete a Notice of Incorporation and register a memorandum of incorporation (MOI). The MOI:
- is the founding statement to start a company
- stipulates different types of shares that will be sold
- describes the duties, responsibilities and liabilities of directors and management of the company
- MOI may be changes by means of a Special Resolution accepted by the shareholders.

Question 15

Expand on ‘the prospectus’ as a prescription of the Companies Act.71 of 2008?

Answer 15

• a written invitation to the public to buy shares or other securities in the company
• all directors must sign, and signatures must be dated
• contains: 1. General info about the company 2. Type of business 3. History of company 4. Annual financial statements (AFS)
  -issued to raise capital for the business

Question 16

Expand on ‘meetings’ as a prescription of the Companies Act.71 of 2008?

Answer 16

• shareholders have an option to attend meetings in person, to attend through electronic media or to give someone a proxy to attend the meeting on their behalf.
• public companies must give 15 business days notice of an upcoming meeting, private companies 10 days.
• the quorum is 25% of attendance in person or online.

Question 17

What is a proxy in business?

Answer 17

The act of giving a 3rd party permission to sign something or be present to something on your behalf.

Question 18

Expand on ‘duties of directors’ as a prescription of the Companies Act.71 of 2008?

Answer 18

• directors have a fiduciary duty to act in the best interest of the company, and may not act in a manner that will benefit themselves and disadvantage the business.
• directors should act on good faith (honesty), displaying skill and due diligence.
• directors are obliged to disclose personal or financial interest to prevent conflict of interest.

Question 19

What does it mean to ensure that directors must act on due diligence within a company?

Answer 19

They must provide accurate information about the company.

Question 20

What does it mean to have a ‘fiduciary duty?’

Answer 20

When someone has a fiduciary duty to someone else, the person with the duty must act in a way that will benefit someone else financially.

Question 21

Expand on ‘financial obligations’ as a prescription of the Companies Act.71 of 2008?

Answer 21

• all companies must prepare annual financial statements (AFS) and meet the requirements of the International Financial Reporting Standards (IFRS) and then file these with the CIPC.
• Public companies must have their AFS audited
• public companies also have to appoint;
  > a company secretary to make the directors aware of relevant legislation, give guidance to directors where needed, make sure minutes of meetings are recorded and that all required documents are filed with CIPC.
  > an internal audit committee
  > an external auditor
• the company must meet solvency and liquidity tests for dividends can be declared or shares bought back.
  > the solvency test will ensure assets (owned) exceed liabilities (owed)
  > the liquidity test will determine that the company is in the financial position to settle its debts in the next 12 months.

Question 22

Fill in the blank:
A private company (Pty) Ltd uses: _______ auditing
A public company uses: ______ auditing

Answer 22

Only internal

Internal and external

Question 23

Give an example of an external auditor.

Answer 23

KPMG, Deloitte.

Question 24

Why do public companies need other use external auditors as well as internal?

Answer 24

Because they are selling shares to the public, and thus auditors must ensure that all is well in the interest of the public.

Question 25

What are the characteristics of a company with a ‘sole proprietor’ as a form of ownership?

Answer 25

• owners have unlimited liability
• owner is the legal entity
  -no continuity of existence
• no special requirements for name
• owners pay tax in personal capacity on profits received
• usually managed by the owner

Question 26

What are the characteristics of a company with a ‘partnership’ as a form of ownership?

Answer 26

• partners have unlimited liability and are jointly and severally liable
• no special name requirements
• no continuity of existence
• Managed by one or more of the partners

Question 27

What are the characteristics of a company with a ‘private company’ as a form of ownership?

Answer 27

• shareholders have limited liability
• business is the legal entity
• name has to end in (Pty) Ltd.
• company pays tax

Question 28

What are the characteristics of a company with a ‘public company’ as a form of ownership?

Answer 28

• business is the legal entity
• name has to end with Ltd
• continuity of existence engaged
• company pays tax
• managed by a board of directors

Question 29

What is continuity of existence?

Answer 29

the principle that the withdrawal, incapacity, bankruptcy, or death of the owner of an entity (especially a corporation) does not end the entity’s existence.