TEST 1

Question 1

Does a company have physical existence? If not, how does a company run?

Answer 1

A company does not have any physical existence and can only perform actions through human beings - its shareholders and directors, managers and employees.

Question 2

Which section of the companies act gives power to shareholders to remove directors at any time by ordinary resolution?

Answer 2

Section 71(1)

Question 3

What does s 71(1) of the Companies Act state?

Answer 3

It states that a shareholder can remove a director at any time by ordinary resolution.

Question 4

What does s 61 discuss?

Answer 4

It discusses the shareholder’s meeting and defines what it is as well as what a shareholder is.

Question 5

Define what a shareholder is?

Answer 5

The holder of an issue of a share in a particular company and who enters into such either in the certificated or uncertificated securities register of the company.

Question 6

Define a shareholder’s meeting:

Answer 6

It is a meeting where the holders of a company’s securities are entitled to voting rights in relation to the matter.

There are two types of meetings:
- general meetings
- class meetings

Question 7

When is a shareholders’ meeting properly convened?

Answer 7

A shareholders’ meeting is only properly convened if the prescribed notice for convening the meeting was given by:
- the board of directors
- any other person specified in the company’s MoI.
- The shareholders by written demand. (10% voting rights)

Failure to comply with the prescribed formalities could result in an invalid decision.

Only in certain instances are exceptions made.

Question 8

When must a notice of the meeting be in writing:

Answer 8

Public company: 15 business days prior
Other companies: 10 business days prior

If there is a lack of notice the meeting may proceed if all persons are present or waive notice that they were aware of the meeting.

Question 9

What does s 61 state about AGM?

Answer 9

A public company’s first AGM must be held no more than 18 months after the company has been incorporated and no more than 15 months after the last AGM.

Question 10

What business is to be discussed at the AGM?

Answer 10

• Presentation of director’s reports, audited financial statements, and an audit committee report.
• Elections of directors
• Appointment of an auditor and audit committee.
• Any matters raised by a shareholder.

The general practice of a chairman is to submit a chairman’s report.

Proceedings are regulated by the MoI.

Question 11

What does s 59 of the companies act address?

Answer 11

It discusses matters around the record date.

The board of directors may set a record date for determining which shareholders are entitled to:
- receive notice of a shareholders’ meeting
- participate in voting
- decide any matter by written consent or electronic communication.

Question 12

What does s 62(1) of the CA state?

Answer 12

It states that a company MUST deliver a notice to ALL of the shareholders and failure to do so will render the decision invalid.

Question 13

What does s 58 of the CA state?

Answer 13

This section discusses proxies.
The proxy form must be:
- in writing
- signed by the shareholder who ordered the proxy.
- delivered to the company prior to the proxy exercising their rights.

This is only valid for one year since the signature was obtained.

Question 14

According to what section in the CA, can a shareholder revoke a proxy?

Answer 14

According to s 58 of the CA, a shareholder can revoke a proxy by:
- cancelling the appointment of the proxy in writing
- make a later inconsistent appointment of a proxy.
- delivering a copy of revocation instrument to the proxy and to the company.

Question 15

Quorums and Conducts at meetings are discussed in which section of the CA?

Answer 15

Section 63 and 64.

Question 16

Quorums:

Answer 16

• At least 25% of all voting rights that are entitled to be exercised in respect of at least one matter to be decided at the meeting.
• At least three shareholders must be present at the meeting for it to commence, provided that the members presented makes up 25% of all voting rights that are exercised.
• Any person present including proxies is only entitled to one vote per person, it is not dependent on the amount of shares a specific individual owns.

Question 17

Postponement and adjournment of meetings (s64):

Answer 17

• A meeting is postponed for one week if, within an hour after the appointed time of the meeting, no quorum is presented.
• Where a quorum is not presented at a postponed or adjourned meeting, those present will have to create one themselves.
• A meeting may be adjourned from time to time without further notice on a motion supported by a majority of the voting rights held by all those present at the meeting.

Question 18

Decisions taken at a general meeting: s 65
for ordinary resolutions

Answer 18

• A decision was taken at a general meeting with the support of more than 50% of the voting rights exercised on the resolution.
• The MoI may specify a higher number.
• Provided that there is at least a margin of at least 10% between the requirements for the adoption of an ordinary and special resolution.

Question 19

Decisions taken at a general meeting: s 65
for special resolutions

Answer 19

• A decision taken at the general meeting must hold at least 75% support.
• The MoI may permit a smaller percentage.
• Provided that there is at least a margin of 10% between the requirements of adoption of ordinary and special resolution.

It is required for the following decisions:
- Amendment of the Memorandum of Incorporation
- Approving the voluntary winding-up of the company
- Approval of a sale of assets, a merger, an amalgamation or a scheme of arrangement
- Approval of directors’ remuneration
- Any other matter required by the Memorandum of Incorporation,

Question 20

Kaimowitz V Delahunt And Others2017 (3) SA 201 (WCC)

Answer 20

Presents a useful assessment of the limitations of director’s rights.

Kaimowitz was a director and an employee of a respondent firm. On receiving notice that his employment was to be terminated, the applicant’s role within the company had dramatically altered. Importantly, his directorship should be sustained, albeit in a capacity of a non-executive director. While he was entitled to attend director’s meetings, he was prohibited from being involved in the day-to-day runnings of the company.

The court was therefore called upon to determine whether the director, save for when provided in the MoI, is entitled to be involved in the day-to-day runnings of the business.

The courts distinguished between the roles of the directors and a manager, thus aiding on the evidence provided the court ruled that the director is not entitled to be involved in the day-to-day runnings of the business as in accordance with s 66(1) of the act.

The right to such decisions does not r5eside only one individual director. Thus the management is held by the board of directors as a whole and not by individual directors.

Question 21

Kukama v Lobelo and Others

Answer 21

Kukama v Lobelo and Others, Tshabalala J found that the evidence before him indicated that the director in question had,inter alia,failed to refund SARS R39,000,000.00, causing irreparable harm to the company and also exposing the said company and the applicant in that case to criminal liability; and

Failed to alert his co-director and co-shareholder of the fraudulent transaction and a repayment by SARS of R22,000,000.00 into an account of another company over which the applicant held no directorship.

The conduct is, obviously, of an extremely serious nature and the director was declared delinquent in such circumstances.

Question 22

Robinson v Randfontein Estates Gold Mining Co Ltd

Answer 22

Robinson was Chairman of the Board of REGM
REGM held lease in the mineral rights on a farm, Waterval (Waterfall)
Robinson wanted to buy farm from owner for the company, but they could not agree on terms of sale
Then Robinson bought undivided half share of farm through an agent for £60 000
Sold share of farm for £ 275 000 to Waterval Trust Company, which was established by REGM to buy and hold the farm for a period

Innes CJ: “Where one man stands to another in a position of confidence involving a duty to protect the interests of that other, he is not allowed to make a secret profit at the other’s expense or place himself in a position where his interests conflicts with his duty.”

If there was a breach of director’s fiduciary duty, then the company may choose to keep the acquisition and claim a refund of the profit made by the director

Hence, Robinson had to repay the profit of £ 215 000 made by him on the sale of the property to Waterval Trust Company

Question 23

Regal (Hastings) Ltd v Gulliver

Answer 23

Regal (Hastings) Ltd (Regal) owned a cinema.
Regal took out leases on two more cinemas, through a new subsidiary (Hastings Amalgamated Cinemas Ltd), in order to create a viable sale package.
The landlord wanted personal guarantees from the directors. The directors refused to do so. The landlord then offered to up the share capital to£5,000.
Regal itself put in £2,000, but could not any afford more (though it could have got a loan).
Four directors each put in £500.
Mr Gulliver, Regal’s chairman, got outside subscribers to put in £500 and the board asked the company solicitor, Mr Garten, to put in the last £500. The directors sold the business and made a profit of nearly £3 per share.
Shortly after, the buyers brought an action against the directors, saying that this profit was in breach of their fiduciary dutyto the company. The directors had not gained fully informed consent from the shareholders

Was there a breach of the directors’ fiduciary duties to Regal?

Court held that directors must account for activities outside the company if

(i) what the directors did is related to the company in such a way that it can be said to arise out of their management of the co or as a result of their special knowledge as directors; and
(ii) their actions resulted in profits for themselves
“The rule of equity which insists on those, who by use of a fiduciary position make profit, being liable to account for the profit, in no way depends on fraud, or absence of bona fides; or upon such questions or considerations as whether profit would or would otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well-intentioned, cannot escape the risk of being called upon to account.”

Question 24

Industrial Development Consultants Ltd v Cooley

Answer 24

Architect (Cooley), who was managing director of IDC Ltd (a construction co), negotiated with a gas board on behalf of IDC to develop gas depots.
Negotiations did not succeed, but in private meeting with representative of gas board, Cooley learned that there may be personal business opportunities for himself to develop a particular depot.
Thus, he claimed he suffered from ill health to secure a speedy release from his position as MD of IDC Ltd.
Subsequently appointed as project manager on four projects with gas board.
When IDC Ltd found out about this, instituted action for plaintiff to account for profits he made as a result of what they alleged was a breach of his fiduciary duty to IDC Ltd.
Court held:

“It seems to me plain that throughout the whole of May, June and July 1969 Cooley was in a fiduciary relationship with the plaintiffs. From the time he embarked upon his course of dealing with the Eastern Gas Board,… he embarked upon a deliberate policy and course of conduct which put his personal interest as a potential contracting party with the Eastern Gas Board in direct conflict with his pre-existing and continuing duty as managing director of the plaintiffs. That is something which for over 200years the courts have forbidden.”

Irrelevant whether IDC Ltd would have secured the contract with the gas board had Cooley not withheld information.

Question 25

Fisheries Development Corporation of SA Ltd v Jorgensen; Fisheries Development Corporation of SA Ltd v AWJ Investments (Pty) Ltd

Answer 25

In Fisheries Development Corporation of SA Ltd v Jorgensen; Fisheries Development Corporation of SA Ltd v AWJ Investments (Pty) Ltd, held that:

1. the extent of a director’s duty of skill and care largely
   depends on the nature of the company’s business;
2. that the law does not require of a director to have special
   business acumen;
3. that directors may assume that officials will perform their
   duties honestly

Question 26

Insider Trading and the Companies Act of 2008

Answer 26

The Companies Act of 2008 does not deal directly with insider trading.
The core concept of insider trading is the fiduciary relationship in which the insider stands in relation to the company.
Under the common law a director may not use confidential information of a company for personal purposes. The Companies Act of 2008 codifies certain provisions of the common law dealing with fiduciary duties.
A director will be disqualified from acting as a director if he/she is convicted of insider trading under the FMA.

Question 27

Insider Trading and the King IV Report

Answer 27

The King IV Report does not change the position on insider trading and does not deal with it directly but contains the following guidelines relevant to the concept of insider trading:

The personal interests of directors or those closely associated with them should not take precedence over the interests of the company.
The board of directors should ensure that the company complies with applicable laws, which includes the FMA.
Every listed company should have a policy of prohibiting dealing in its securities by directors, officers and other selected employees for a specified period before the announcement of its financial results or in any other period considered sensitive.

Question 28

Insider Trading and the JSE

Answer 28

The King IV Report does not change the position on insider trading and does not deal with it directly but contains the following guidelines relevant to the concept of insider trading:

The personal interests of directors or those closely associated with them should not take precedence over the interests of the company.
The board of directors should ensure that the company complies with applicable laws, which include the FMA.
Every listed company should have a policy of prohibiting dealing in its securities by directors, officers, and other selected employees for a specified period before the announcement of its financial results or in any other period considered sensitive.

Question 29

What is corporate governance?

Answer 29

Corporate governance can be described as the system by which an entity is directed and controlled with a view to ensuring the achievement of its objectives in a sustainable manner within an environment of accountability to its stakeholders.

Question 30

Aim of the King IV Code?

Answer 30

• create an ethical culture in organisations;
  improve the organisation’s performance and increase the value they create;
• ensure there are adequate and effective controls in place;
  build trust between all stakeholders;
• ensure the organisation has a good reputation; and
• ensure legitimacy

Question 31

Define insider trading?

Answer 31

Regulated by Financial Market Act (FMA)

Section 78(1)(a) of the FMA:
“An insider who knows that he or she has inside information and who deals directly or indirectly or through an agent for his or her own account in the securities listed on a regulated market to which the inside information relates or which are likely to be affected by it commits an offence.”

An insider is a person who has inside information:
through
being a director, employee or shareholder of an issuer of securities listed on a regulated market to which the inside information relates; or
having access to such information by virtue of employment, office or profession
where such person knows that the direct or indirect source of the information was a person contemplated in paragraph above

‘Inside information’ is specific or precise information which has not been made public.
It is obtained or learned as an insider.
If it were made public, it would be likely to have a material effect on the price or value of any security listed on a regulated market.

What constitutes specific or precise information was dealt with in the case of Zietsman v the Directorate of Market Abuse 2016 (1) SA 218 (GP).

The court held that, in order for information to be ‘specific’ even if it is not precise, it need not be in a final form. Information relating to circumstances or an event in an intermediate phase of a transaction could still be specific and even precise and could therefore qualify as inside information if its effect on the share price would be likely to be material.
Regulated market’ is any market, whether domestic or foreign, which is regulated in terms of the laws of the country in which the market conducts business as a market for dealing in securities listed on that market.

Question 32

Insider Trading (scope of prohibition)

Answer 32

Although section 78(1)(a) is where most offences occur, the prohibition goes much wider.
Section 78(4)(a): “An insider who knows that he or she has inside information and who discloses the inside information to another person commits an offence.”
Section 78(5): “An insider who knows that he or she has inside information and who encourages or causes another person to deal or discourages or stops another person from dealing in the securities listed on a regulated market to which the inside information relates or which are likely to be affected by it commits an offence.”

Question 33

Insider Trading (Enforcement)

Answer 33

Insider trading activities are monitored by the Directorate of Market Abuse, which is a section of the Financial Sector Conduct Authority (previously called the Financial Services Board).
The DMA/FSCA uses sophisticated computer software to track and analyse every trade in every share on the JSE to detect possible insider trades. Suspect trades are then investigated.
Note that details of enforcement procedures were previously contained in chapter 9 of the Securities Services Act, but are now contained in section 6 of the Financial Institutions (Protection of Funds) Act 28 of 2001 (as amended by the Financial Services Laws General Amendment Act 22 of 2008, and further amended by the Financial Markets Act).
The Financial Institutions (Protection of Funds) Act establishes an Enforcement Committee which may impose an administrative penalty for breaches of section 78 of the Financial Markets Act.

Question 34

Insider Trading (Penalties)

Answer 34

The FMA provides for both administrative and criminal penalties for insider trading.
The FSCA may impose an administrative sanction or pursue a wrongdoer criminally, or both.
Criminal penalties are contained in section 109(a):
“… liable on conviction to a fine not exceeding R50 million or to imprisonment for a period not exceeding 10 years, or to both such fine and imprisonment.”
Section 82 of the FMA, read with sections 6D-6E of the Financial Institutions (Protection of Funds) Act allows the Enforcement Committee of the FSCA to impose an administrative sanction in insider trading cases, to recover:
the actual or notional profit made as a result of the insider trading;
a penalty of R1 million plus up to 3 times the actual or notional profit;
interest on these amounts; and
costs of suit.

Question 35

Insider Trading (Civil Claims)

Answer 35

Section 87 of the FMA confirms that notwithstanding enforcement action taken in terms of the FMA, anyone who has suffered loss as a result of market abuse may bring a civil claim against the wrongdoer, but the amount of damages received will be reduced by an amount equivalent to any compensation received in terms of section 82.

Question 36

Insider Trading (defences)

Answer 36

The FMA makes provision for four defences to insider trading:
Absence of knowledge that the information was inside information
Instruction to deal preceded becoming an insider
Insider is an authorised user acting on instructions
Disclosure as part of employment or profession.

Question 37

Define business rescue?

Answer 37

• Section 128 contains the definitions specifically relevant to business rescue.
• Business rescue = proceedings to facilitate the rehabilitation of a company that is financially distressed by:
• temporary supervision of the company
  a temporary moratorium on the rights of claimants against the company (creditors)
  development and implementation of a rescue plan.

Question 38

Define business rescue:

Answer 38

proceedings to facilitate the rehabilitation of a company that is financially distressed by:
–temporary supervision of the company
–a temporary moratorium on the rights of claimants against the company (creditors)
–development and implementation of a rescue plan.

Question 39

When a business is financially distressed:

Answer 39

Financially distressed means that there is a reasonable likelihood of the company failing the solvency and/or liquidity test within the next 6 months or company will become insolvent in next 6 months
•If the board has reason to believe that the company is financially distressed, it must either:
–commence business rescue proceedings, or
–explain to shareholders and

Question 40

Adopting business resolution:

Answer 40

business rescue resolution may not be adopted in this way if liquidation proceedings have already been initiated.

–The company must notify every ‘affected person’ of the resolution within five business days.
–‘Affected persons’ mean shareholders, creditors, registered trade unions and employees not represented by registered trade unions.
–The company must appoint a business rescue practitioner within five business days after resolution filed. The Commission and affected persons must be so notified.
–Failure by the company to comply with these requirements renders the business rescue resolution null and void.

Question 41

Setting aside a resolution or appointment of a practitioner:

Answer 41

Any affected person may apply to court, on a number of specified grounds, to set aside:
–the business rescue resolution
–the appointment of the particular business rescue practitioner.
•Procedure and powers of the court.
–Included in the procedure are onerous provisions for the affected person making the objection.
–This is likely to deter affected persons from relying on these provisions.

Question 42

Commencement of business rescue by court order (s13):

Answer 42

If the board does not pass a business rescue resolution, an affected person may apply to court for an order to commence business rescue.
–All affected persons must be notified and have the right to participate in the hearing.
–The court may make the order if it is satisfied that:
–the company is financially distressed
–the company has failed to pay any amount in terms of an obligation under a public regulation, or contract, with respect to employment-related matters
–it is just and equitable to do so for financial reasons
–there is a reasonable prospect for rescuing the company.

Note that the court has a discretion whether to grant the application. Clearly, the court should grant the application if it is shown that the company is financially distressed and can be rescued.
•The court will then appoint an interim business rescue practitioner.
•If it is clear that the company cannot be rescued, the court may make an order placing the company into liquidation.

Question 43

What is reasonable prospect?

Answer 43

Propspec Investments v Pacific Coast Investments 2013 (1) SA 542 (FB):

–“The term ‘reasonable prospect’ in the phrase ‘there is a reasonable prospect of rescuing the company’ in section 131(4)(a) of the Companies Act 71 of 2008 indicates something less than a reasonable probability … a prospect means an expectation. An expectation signifies a possibility, and a possibility is reasonable if it rests on a ground that is objectively reasonable. A reasonable prospect means no more than a possibility that rests on an objectively reasonable ground or grounds.”

The concept of ‘reasonable prospect’ nevertheless remains contested, with different courts taking different approaches on a case by case basis.
•For example, in Tyre Corporation Cape Town (Pty) Ltd v GT Logistics (Pty) Ltd 2017 (3) SA 74 (WCC) the court gave very little weight to the ‘reasonable prospect’ requirement and emphasised that a company could be placed in business rescue on the alternative ground found in section 131(4)(iii) that it is otherwise just and equitable to do so for financial reasons.

Question 44

Business rescue plan:

Answer 44

Prepared by the business rescue practitioner after consultation with the management of the company, creditors and affected persons.
–Must contain the prescribed contents, including:
–Part A: Background
–Part B: Proposals
–Part C: Assumptions and Conditions, and a certificate by the practitioner
–all other information required to assist affected persons to decide whether to accept or reject the plan.
–Publication of the plan must take place within 25 business days unless a court or the majority of creditors agree to a time extension.

In drawing up the plan, there must be substantial, but not necessarily strict compliance with the provisions of section 150 of the Companies Act.
–Commissioner, SARS v Beginsel 2013 (1) SA 307 (WCC)
(This case also shows the court weighing up the pros and cons of business rescue vs. insolvency proceedings.)

If the plan is supported by more than 75% in value of all the creditors who voted, and at least 50% in value of the independent creditors who voted, and no rights of any shareholders are altered, the plan is regarded as finally approved.

Question 45

Rejection of business plan:

Answer 45

If the plan is rejected by the creditors or, where applicable, by the shareholders, the business rescue practitioner may either:
–seek approval from the holders of voting interests (in other words, the creditors) to prepare and publish a revised plan; or
–inform the meeting that the company will apply to court to have the result of their votes set aside on the grounds that the majority decision was ‘inappropriate’.
•Unfortunately, different courts have taken different approaches in interpreting the term ‘inappropriate’.

Question 46

Termination of business rescue proceedings:

Answer 46

If a company’s business rescue proceedings have not ended within three months (or such longer time as the court may allow), the practitioner must prepare a monthly progress report.

–There are a number of ways of terminating the proceedings:
–A court order setting it aside.
–A court order converting the rescue into liquidation proceedings.
–A notice of termination filed with the Commission.

Question 47

Define the 4 regulatory committees:

Answer 47

• CIPC
• Financial Reporting Standards Council
• Companies Tribunal
• Take-over Regulation Panel