Incorporation and Types of Companies

Question 1

What is the position of Close Corporations under the new Act?

Answer 1

Existing close corporations are free to retain their current status indefinitely, or until such time as their members decide that it is in their best interest to convert the close corporation into a company. No new close corporations may be formed, nor may companies be converted into close corporations.

Question 2

What are pre-existing companies required to do under the new Act?

Answer 2

Given two years to bring their paperwork and names in line with the specifications of the new Act.

Question 3

What are the various kinds of profit companies?

Answer 3

1) private
2) public
3) personal liability
4) state-owned

Question 4

Define a 1) private company

Answer 4

A profit company is a private company if:

• it is not a state-owned company; and
• its Memorandum of Incorporation both
  a) prohibits the offer of any of its securities to the public; and
  b) restricts the transferability of its securities

Question 5

What is the manner and form of this restriction on the transferability of securities?

Answer 5

Rights of pre-emption effectively prohibit an existing shareholder from selling their shares to a non-shareholder, unless the other shareholders of the company have first had an opportunity to purchase the shares. Another possibility is that shares can only be transferred to a non-shareholder with approval from the company’s board of directors. Alternatively, the other shareholders must agree that the shares can be sold to a non-shareholder.

Question 6

What is the effect of a restriction on transferability?

Answer 6

All elements of a transfer are prohibited, including those restrictions listed in a company’s constitution. To effect a transfer of shares by cession would be entirely void. Where an existing shareholder wishes to exercise a right of pre-emption, they must buy the total number of shares offered [Sindler NO v Gees].

Question 7

What is the distinction between pre-emptive rights in Section 8(2)(b) and those in Section 39?

Answer 7

Section 39 confers on each shareholder of a private company a pre-emptive right to be offered a percentage (equal to the shareholder’s general voting power) of any new shares that the company proposes to issue, whereas Section 8(2)(b) concerns the transfer of already existing shares. Unlike Sindler v Gees, a shareholder is permitted to subscribe for fewer shares than the total number offered to them.

Question 8

What are the other characteristics of a 1) private company?

Answer 8

• name must end in (Pty) Ltd.
• must have one director at minimum
• do not need to appoint a company secretary or an audit committee
• may need to appoint a social and ethics committee if their public interest scores exceed the threshold
• annual financial statement only needs to be reviewed, not audited, unless the company holds assets worth more than 5 million, or if the Minister deems its PIS high enough

Question 9

Define a 2) public company

Answer 9

A public company is defined by exclusion in the sense that it is not any of the other types of companies listed in the Act. Unlike a private company, the securities of a public company may be freely offered to the public. This facilitates the raising of capital from the general public. Shareholders can also freely transfer their securities unless restricted by a company in its Memorandum of Incorporation.

Question 10

What are the other characteristics of a public company?

Answer 10

• must end with Ltd.
• must have at least three directors, in addition to those already required
• due to their public nature, the enhanced accountability and transparency requirements of Chapter 3 of the Act apply
• must appoint a company secretary, an audit committee and an independent auditor, have its annual financial statements audited
• if the public interest score is high enough, the company must appoint a social and ethics committee

Question 11

How do public companies list their securities?

Answer 11

Offering shares to the public and listing a public company’s shares on a securities exchange is different. It is safer and beneficial to trade on an exchange such as the JSE.

Question 12

Define a 3) personal liability company

Answer 12

A profit company is a personal liability company if:

a) it satisfies the criteria for a private company; and
b) its Memorandum of Incorporation states that it is a personal liability company

This means that its directors, including past directors, are jointly and severally liable, together with the company, for any debts and liabilities of the company that are or were contracted during their respective periods of office [s19(3)].

Question 13

What are the other characteristics of a 3) personal liability company?

Answer 13

• must end with Inc.
• to be used by associations of professionals, such as lawyers and doctors
• must have one or more directors
• same regulations as a private company
• directors are co-debtors with the company

Question 14

Define a 4) state-owned company

Answer 14

A state-owned company is an enterprise that is registered as a company in terms of the Act and either:

• is listed as a public entity in Schedule 2/3 of the Public Finance Management Act; or
• is owned by a municipality and is otherwise similar to such an enterprise

Question 15

What are the other characteristics of a 4) state-owned company?

Answer 15

• all provisions that apply to public companies generally also apply to state-owned companies
• the Minister has the power to exempt SOC’s from complying with certain provisions either in whole, part or on condition, provided that another appropriate legislative scheme exists to manage such provisions
• must end in SOC Ltd.

Question 16

Define a non-profit company

Answer 16

A non-profit company is a company that is incorporated for:
- a public benefit object; or
- an object relating to one or more cultural or social activities, or communal group interests; and
it is of the essence that the income and property of a non-profit company must not be distributed to its incorporators (minimum of three), members, directors, officers, or persons related to any of them, subject to certain exceptions permitted by the Act.

Question 17

What are the other characteristics of a non-profit company?

Answer 17

• must end with NPC
• must be formed by at least three persons acting in common as incorporators (can include an organ of state or a juristic person)
• is not required to appoint a company secretary, auditor or audit committee
• does not need to have its financial statements audited

Question 18

What is the position of a non-profit companies assets and income?

Answer 18

The income of a non-profit must be applied to advance its stated objects. Subject to this premise, it is permissable for a non-profit company to:

• acquire and hold securities issued by a profit company; or
• carry on any business directly or indirectly, alone or with any other person, as long as such business is consistent with or ancillary to its stated objects

Question 19

What about the financial benefit or gain of a non-profit companies members?

Answer 19

A non-profit compnay must not pay any of its incorporators, members or directors, for obvious reasons. Exceptions for financial remuneration are allowed.

Question 20

What happens to a non-profit companies assets upon winding up or dissolution?

Answer 20

Any value of a non-profit cannot go to its members upon dissolution. Rather, it must be a given to another non-profit of similar purpose.

Question 21

Can a non-profit company receive any tax advantages?

Answer 21

To receive any tax advantages, a non-profit must satisfy the requirements of the Income Tax Act.

Question 22

Elaborate more on the members of a non-profit company

Answer 22

A non-profit can have no members or many. Each member has an equal voting right, unless stipulated otherwise in the Memorandum of Incorporation. The company must keep a membership register. Any process relating to membership fees and suspension/removal of a member must be codified in the Memorandum.

Question 23

Elaborate more on the directors of a non-profit company

Answer 23

Must have at least three directors. If without members, the directors are appointed by the board. If with members, then the members choose the directors. Financial assistance may not be given to the directors of NPCs, unless in support of furthering the interests of the company.

Question 24

Can a non-profit company convert to a profit company?

Answer 24

No. A non-profit company may not convert to a profit company, nor merge or amalgamate with a profit company. It may also not sell its assets to a profit company, unless at fair value and in the interests of the NPC. Where a NPC chooses to dispose with a great part or all of its assets, such a proposal must be voted for approval by the voting members.

Question 25

Define an external company

Answer 25

An external company is a foreign company that carries on its business within South Africa. Such companies are required to register with the Companies Commission and comply with the Act. There are two circumstances in which a foreign company is deemed to be conducting business within South Africa:

1) if it is a party to employment contracts in South Africa
2) if it has been engaged in a pattern of activities within South Africa over a period of at least six months, such as would lead a person to believe that the company intended to continually engage in business within South Africa.

Question 26

What are the other requirements of an external company?

Answer 26

They must continually maintain at least one office in South Africa, provide the names of its directors, the address of the principal office outside South Africa and the name and address of the person in South Africa who has undertaken to accept service of documents on its behalf. Must register within 20 days of conducting business in South Africa.

Question 27

What is a domesticated company?

Answer 27

A foreign company whose registration has been transferred to South Africa.

Question 28

How can a close corporation be converted into a company?

Answer 28

There is a process to convert existing CCs into companies:

1) a written statement of consent by the members holding at least 75% of the members’ interests in the corporation.
2) a Memorandum of Incorporation consistent with the Act
3) a filing fee, which is waived if the conversion took place within three years of the effective date

Question 29

What are incorporators?

Answer 29

These are the founders of the company. One or more for a profit company, but at least three acting in concert for a non-profit company. The default position is that the incorporators become the directors of the company until other directors are appointed or elected. Each promoter must sign the MOI.

Question 30

What is the procedure for incorporating a company?

Answer 30

1) A Memorandum of Incorporation must be signed. This is the sole founding document of the company, setting out the rights, duties and responsibilities of the shareholders, directors and others within and in relation to the company, together with various other matters.
2) A copy of the MOI, along with a Notice of Incorporation and the payment of a prescribed fee, must be filed with the Companies Commission. This must include the name of the company, its initial directors, its registered office and the date of its financial year-end.

Question 31

What is the consequence of registration of a company?

Answer 31

After accepting the filed Notice of Incorporation, the Companies Commission must as soon as practicable register the company. It must:

a) assign a unique registration number to the company
b) enter the company name
c) endorse the Notice of Incorporation and the copy of the MOI
d) issue and deliver a registration certificate to the company

Question 32

What does the certificate of registration do?

Answer 32

Serves as evidence of the incorporation and registration of the company.

Question 33

When may the Companies Commission reject an application for registration?

Answer 33

There are two grounds for a mandatory rejection and one for a discretionary rejection.
Mandatory:
1) if the number of directors is less than is statutorily prescribed
2) if the initial directors are disqualified from being directors, with the result that the remaining initial directors are fewer than that prescribed
Discretionary:
1) if anything is incomplete or improperly completed