Financial Assistance: Shares Flashcards
what does S44 essentially state with regards to financial assistance ?
A company may assist a person in acquiring shares and securities provided the assistance is not prohibited by the MOI and certain requirements are met.
Who are the 3 main interest groups we have to consider when regulating company finances?
- The board
- Shareholders
- Creditors
How does regulating company finances affect the board?
The board of directors is in charge of authorising and conducting business and affairs of the company
How does regulating company finances affect shareholders?
- Shareholders only have an expectation to receive a return on the funds that they contribute, they only have a right to whatever remains of the assets on dissolution.
- Repayments to shareholders must be regulated to protect all relevant interest groups.
How does regulating company finances affect creditors?
- Creditors risk losing funds if the business becomes insolvent
- Used to be protected by capital maintenance rule
- creditors have no right of recourse against s/h
- Now protected by S & L test
What famous decision emphasised the capital maintenance rule?
Trevor v Whitworth
Why are creditors potentially vulnerable stakeholders
- They have no right of recourse against comp. s/h (sep legal personality + ltd liability)
- They can only rely on company’s assets
What did the capital maintenance rule aim to achieve?
It tried to protect creditor’s vulnerability by creating a reservoir of assets that could not be diminished. The company could not pay its shareholders using funds from this reserve. You could not do anything to distort the funds.
What was the idea behind the capital maintenance rule?
Creditors would be protected regardless of if the company went under because the reservoir of funds would satisfy their claims.
What 2 rules were based on the capital maintenance principle?
- Companies could only pay dividends from profits
2. Company prohibited from giving financial assistance to outsiders to acquire shares in the company
What is the idea behind the principle of solvency and liquidity
A company should be able to enter into any lawful transaction that its MOI allows provided it will remain solvent and liquid after completion of the transaction.
What could capital be used for under the capital maintenance rule
Legitimate business needs and expenses –> in the ordinary course of business i.e investing in infrastructure . If used for this purpose there is no obligation for the company to replenish it.
What were the main drawbacks of the capital drawbacks
- It did not effectively protect creditors
- you could not pay shareholders from the reserve but you could use it for ordinary course of bus. and deplete it anyway
- The reserve would not keep up with potential exposure i.e in 1980’s shares were R2 but now R200 , reserve would not be enough
Do we have a minimum capital requirement in SA
no
What section of the company’s act contains the solvency and liquidity test
S4
What does the solvency and liquidity test achieve in place of the capital maintenance rule to protect creditors
As long as the company is solvent and liquid, creditors cannot be prejudiced even if capital of the company is used for reasons other than ordinary business expenses
What artificial distinction does the solvency and liquidity test do away with?
The distinction between types of capital or funds and where the funds come from
According to Helena what does the solvency and liquidity test really focus on?
The commercial reality and the ability of the company to meet its obligations
What 2 perspectives do we look at the solvency and liquidity test from?
The factual and commercial perspective
What is the factual perspective on the solvency and liquidity test
Looks at solvency - a pure balance sheet exercise. Based on all reasonably foreseeable financial circumstances are the assets in excess of the liabilities.
