Formation of Companies

Question 1

Definition of a company

Answer 1

A company is a legal person incorporated in terms of the Companies Act 71 of 2008.

Question 2

What is MOI ?

Answer 2

The memorandum of Incorporation (MOI) is the founding document of a company – i.e. it is the document by which the company is incorporated. It sets out rights, duties and responsibilities of the shareholders, directors and other persons within (e.g. employees) and in relation to (e.g. third parties with whom the company does business) a company, and other matters as contemplated in section 15 of the Act.

Question 3

How many people can incorporate the following companies?
•Private company 
•Personal liability 
•Public company
•NPO

Answer 3

Unless the Memorandum of Incorporation (MOI) states otherwise:
o Private companies may be incorporated by one or more person(s);
o Personal liability companies may be incorporated by one or more person(s);
o Public companies may be incorporated by three or more persons;
o Not for profit companies may be incorporated by three or more persons.

Question 4

Company name requirements?

Answer 4

• May not offend persons of a particular race, ethnicity, gender, or religion.
• Must not infringe the law against passing off (may not falsely pass itself off to be connected to another entity)
• May not be the same or confusingly similar to the name of another company. (e.g. Kentucky Fried Chicken (KFC) – Kelly’s Fried Chicken (KFC)).
• May not make false suggestions about the company’s associations, status or educational designation (e.g. part of the “global group of companies”);
• Must indicate its type by ending with the designation required by law (e.g. Ltd or Pty Ltd ect.)

Question 5

Steps of Incorporating a company?

Answer 5

the incorporation of a company comprises of different steps. Those steps include:
• Signing of the MOI by the requisite number of persons;
• Filing of the prescribed Notice of Incorporation (NOI) and MOI;
• Assigning of a company registration number;
• Issue of a Certificate of Registration by the CIPC (Company and intellectual Property Commission).
The Registration certificate is conclusive evidence that the requirements for incorporation have been complied with, and that the company is incorporated in terms of the Companies Act.

Question 6

The consequences of incorporating a company ?

Answer 6

The consequences of incorporation are that:
• The company exists a separate legal entity;
• The company acquires legal rights and duties;
• The company may litigate in own name;
• The company has continued existence (perpetual succession).

It is therefore important to note that:
• The estate of the company exists separately from the estates of it’s members: The sequestration of a member’s estate will not lead to the liquidation of the company’s estate and vice versa (the other way around). For taxation purposes, the company estate is assessed apart from the estates of the individual members
• The assets of the company are not the assets of the members: Only on liquidation can members share in a division of assets
• The profits of the company are not the profits members: Only after the company declared dividends, may the members claim their share of the profits
• The losses of the company are not the losses of the members: (This is referred to as “limited liability” of the shareholders – their liability is limited to the amounts they paid for their shares). Thus, the members are not liable for the company debts. Exceptions to this rule exists: e.g. piercing of the corporate veil and personal liability companies.(See below and Learning Unit 4).

Question 7

What determines the governance of the company?

Answer 7

who can act as the company in respect of a particular matter is determined by the:
• The Act;
• MOI; and
• Rules of the company (made by the directors)

Question 8

What are the organs of the company?

Answer 8

The organs of the company are.
o The board of directors;
o The general meeting of members.
•The Board of directors
Subject to limitations placed on it by the Act or the company’s memorandum of incorporation (MOI), the powers of the company resides in the Board of Directors.
•The general meeting of members
When certain matters have been assigned to the board of directors, by the MOI and/or rules, the general meeting cannot usurp the power of the board of directors or prescribe to the directors how to exercise those powers. If the members are not satisfied with the manner in which the board of directors exercise their power their remedies are to amend the MOI and restrict the powers of the directors or to elect new directors.

Question 9

Discuss the exceptional powers of the general meeting?

Answer 9

There exists exceptional circumstances when the general meeting of members may interfere with powers of the board of directors:
• When the board of directors refuse or is unable to institute action on behalf of the company
• When the board of directors cannot or will not exercise the powers reserved for it, e.g. a deadlock has developed between directors or quorum cannot be obtained
• Where certain powers have been reserved for the board of directors, but a certain act is voidable because they exceeded or abused their powers e.g. borrowing powers.