LML4806 PORTFOLIO MEMO - SEMESTER 2 - 2022 - OCT./NOV. - UNISA - (WITH DETAILED FOOTNOTES AND A BIBLIOGRAPHY)

QUESTION 1 1.1 Discuss the relevant section of the Companies Act 71 of 2008 that appears to be a codification of the common-law Turquand rule and highlight the similarities and the differences between the provisions of that particular section and the common-law Turquand rule. (10) 1.2 David is a non-executive director and chairperson of Free State Airlines SOC Ltd, a company that operates commercial flights between Johannesburg and Bloemfontein. David is also one of the major shareholders of Aerial Lease (Pty) Ltd, an aircraft leasing company. In a meeting chaired by David, and by a resolution proposed and supported by David, the board of directors of Free State Airlines SOC Ltd decides to lease three commercial aircrafts from Aerial Lease (Pty) Ltd. David does not inform the other directors of Free State Airlines SOC Ltd about his existing shareholding in Aerial Lease (Pty) Ltd. The entire board of directors of Free State Airlines SOC Ltd considers and approves the relevant lease agreement with Aerial Lease (Pty) Ltd. However, the other directors of Free State Airlines SOC Ltd subsequently become aware of David’s shareholding in Aerial Lease (Pty) Ltd and they now want to retract the lease agreement. With reference to the relevant provisions of the Companies Act 71 of 2008, advise the board of directors of Free State Airlines SOC Ltd on the following matters: 1.2.1 Whether David has breached any specific duty that he owes to Free State Airlines SOC Ltd by not informing the board of directors about his shareholding in Aerial Lease (Pty) Ltd. (10) 1.2.2 Whether the lease agreement in this scenario is valid and binding on Free State Airlines SOC Ltd. (5) QUESTION 2 Simon, John, Mildred and Thabane are the directors of Value for Money Ltd. The company wants to make an initial public offering of its shares. The directors have prepared a prospectus that provides the public with the prescribed information. In the prospectus, there is reference to an attachment, which attachment omits a matter that is not specifically required by the Companies Act 71 of 2008 to be included in the prospectus or in the attachment. Thabane insists that the matter should be included in the attachment as it may assist the public to make an informed decision on whether or not to invest in the company. However, Mildred reassures Simon, John and Thabane that the omission of the matter is not serious because: (i) the matter was not omitted from the prospectus itself; (ii) the matter falls outside the categories of information prescribed by the Companies Act 71 of 2008 and the Companies Regulations, 2011 to be included in the prospectus or in the attachment; and (iii) the inclusion of the matter might discourage some potential investors from acquiring shares in the company. Simon, John and Mildred consent to the issue of the prospectus. However, Thabane does not consent to the issue of the prospectus. The prospectus is subsequently registered and issued. Write a legal opinion in which you comprehensively advise the directors of Value for Money Ltd on the correct legal position regarding the matter that has been omitted and the legal consequences for the directors arising from the above factual scenario. (15) QUESTION 3 3.1 Discuss the appointment and composition of the audit committee. (12) 3.2 Pricecutter Ltd has been experiencing operational and financial challenges over the past five years due to increasing working capital requirements. As a result, Pricecutter Ltd obtained an unsecured loan of R60 million from the Commercial Bank of South Africa Ltd in order to finance its working capital requirements. Pricecutter Ltd has not yet repaid the loan, which is now due and payable. A successful company called Fresh Produce Ltd has concluded an agreement with Pricecutter Ltd, in terms of which Fresh Produce Ltd will acquire and hold all the assets and liabilities of Pricecutter Ltd (‘the Transaction’). Upon receiving notification of the Transaction, the Commercial Bank of South Africa Ltd is concerned that if the Transaction proceeds, it may potentially lose its right to claim repayment of the loan. It is clear from the agreement that, subsequent to the implementation of the Transaction, Pricecutter Ltd will be deregistered and will cease to exist. The agreement also stipulates that the directors who had procured the loan will cease to be directors with effect from the commencement of the Transaction and that Fresh Produce Ltd will not be liable for payment of any debts incurred by Pricecutter Ltd. The Commercial Bank of South Africa Ltd is deeply concerned that it might never be able to receive full payment of the loan granted to Pricecutter Ltd. With reference to the Companies Act 71 of 2008 and the facts provided: 3.2.1 Identify the type of Transaction that is contemplated in the scenario above. (2) 3.2.2 Advise the Commercial Bank of South Africa Ltd on the legal steps it may take to prevent the implementation of the Transaction. (6) QUESTION 4 4.1 Thabang is a director of T-Shirts World (Pty) Ltd. The company has been experiencing financial difficulties and its business has declined. It owes money to a large number of creditors and is in financial distress. Thabang is considering placing the company in business rescue but approaches you first to advise him as to whether entering into a compromise is an option he could pursue. Thabang is also concerned that one of the creditors of T-Shirts World (Pty) Ltd may apply to court to liquidate the company and wants to know whether a compromise will still apply if the company is in liquidation. He is reluctant to go to court and wants to know whether a compromise may be concluded without involving the court. Advise Thabang on these matters. (8) 4.2 Andrew is the designated auditor of Electronics Ltd, a company whose shares are listed on the Johannesburg Stock Exchange. During the course of auditing the company’s financial statements, Andrew becomes aware of confidential information relating to the overstatement of the company’s financial statements that has been going on for three years. Andrew sends his friend, Ntombi, a text message advising her to sell all the shares she holds in Electronics Ltd. Ntombi immediately sells all the shares she holds in the company. The following week, Electronics Ltd makes a public disclosure of accounting irregularities involving overstatement of its annual financial statements for the past three financial years and the resignation of its senior executive directors who are directly implicated in the accounting irregularities. The company’s shares have lost 80% in value since the company’s public announcement of the accounting irregularities and the resignation of its senior executive directors. Ntombi realises that she would have lost R40 million if she had not sold the shares and she gives a total of R5 million to Andrew to express her gratitude for Andrew’s advice to sell the shares. With reference to the provisions of the Financial Markets Act 19 of 2012 and the facts provided, advise Andrew on his position in relation to inside information, the relevant insider trading offence(s) and liability for the relevant insider trading offence(s). (You should not deal with the defences to any insider trading offence(s) in your answer.) (12)