TOPIC 8: CORPORATE FINANCE II
Introduction
- This topic considers how creditors (which includes employees) are protected from
the company abusing its funds, whether for the benefit of the directors or for the
benefit of the shareholders to the extent that there is nothing left for other
stakeholders.
- One way in which the company can harm other stakeholders is by creating
subsidiaries and diverting funds to these subsidiary companies. It is therefore
important to know who subsidiaries are.
Company groups: Holding company and subsidiaries
- Point of departure:
o There is no difference between a holding company holding shares in a
subsidiary and a natural person holding shares in a company. It is the same
principle. Also, exactly the same rules regarding piercing the corporate veil
apply to company groups.
- Definition of a group:
o Section 1 states that a group includes a holding company and all its
subsidiaries. This does not really help us much.
o Section 1 defines a “holding company” as the juristic person that controls a
subsidiary as a result of any circumstances contemplated in section 2 or 3.
§ What is a “juristic person”?
§ Section 1 provides that a “juristic person” includes a foreign company
and a trust.
o Section 3 defines a “subsidiary” as a company (not “juristic person” as with
holding company so a trust cannot be a subsidiary) where a juristic person:
a) Has a majority of the voting rights (not shares) in the company (51%)
§ Par value shares = Nominal value of shares x number of shares.
§ Shares without par value = number of shares held in percentage form.
b) Has the right to appoint or elect or control the appointment or election
of directors of that company who control a majority of the voting rights
at the meeting of the board.
§ Not the right to appoint the majority of directors but to appoint the
directors with the majority of voting rights.
§ Once you control the board, you control the company.
- Votes held by a nominee:
o Section 3(2)(c): Votes held by a nominee is counted towards the BIH.
- What about different classes of shares?
o Certain classes of shares may not necessarily have voting rights.
o Section 37 allows you to take away any class’ voting rights. Say you do this
with regards to preferent shares which means they are only allowed to vote
where their voting rights are affected, or their dividends are in arrears.
, o Section 3(2)(a) provides that voting rights that are exercisable under only
certain circumstances are to be taken into account only when those
circumstances have arisen. Let’s say neither of those circumstances have
arisen.
o Company S has, inter alia, two shareholders: Company H and Company K.
o Company S has 100 authorised shares (91 OS and 9 PS): Company H holds 47
OS and Company K holds the 9 PS. Will Company S be a subsidiary of
Company H?
§ Yes, because you do not take into account Company K’s 9 PS which
means that Company H’s 47 OS out of 91 OS equates to voting rights
exceeding 50%. Thus, Company H holds the majority of voting rights in
Company S and is therefore the holding company of Company S.
§ PS only have voting rights when their rights are affected, so you ae
only going to count their voting rights in those limited circumstances.
In all other circumstances, you are going to exclude it.
o See risk of abuse on page 523 of the notes.
§ 10 minutes of meeting when discussing the preference shares issues,
Company S was not the subsidiary of Company H.
§ After those 10-minute discussion, Company S becomes the subsidiary
of Company H again.
§ See the effect when it comes to financial assistance in terms of
section 44.
- Different scenarios of company groups
o Figure 1
§ Holding company holds 51% of the voting rights in subsidiary.
§ Subsidiary in terms of control over voting rights.
o Figure 2
§ A Ltd who holds 51% of the voting rights in B Ltd and also control the
board of C Ltd (right to appoint two out of the five directors but those
two directors have the majority voting rights).
§ Both B Ltd and C Ltd are therefore subsidiaries of A Ltd.
§ B Ltd holds 27% of the voting rights in D Ltd through a nominee, K.
§ C Ltd holds 24% of the voting rights in D Ltd.
§ D Ltd will be a subsidiary of A Ltd only because section 3(1)(a)
provides that a company is a subsidiary of another juristic person if
that juristic person, one or more other subsidiaries of that juristic
person, alone or in any combination, directly or indirectly control the
exercise of the majority of general voting rights.
• A Ltd voting rights in D Ltd = 27% of B Ltd + 24% of C Ltd = 51%
o Figure 3
§ A Ltd hold 51% of voting rights in B Ltd.
§ A Ltd hold 51% of voting rights in C Ltd.
§ B Ltd holds 25% of voting rights in D Ltd.
§ C Ltd holds 21% of voting rights in D Ltd.
§ A Ltd hold 7% of voting rights in D Ltd.
§ D Ltd will be a subsidiary of A Ltd only because section 3(1)(a)
provides that a company is a subsidiary of another juristic person if
, that juristic person, one or more other subsidiaries of that juristic
person, alone or in any combination, directly or indirectly control the
exercise of the majority of general voting rights.
• A Ltd voting rights in D Ltd = 7% of A Ltd + 25% of B Ltd + 21%
of C Ltd = 53%
o Figure 4
§ A Ltd hold 51% of voting rights in B Ltd.
§ B Ltd holds 51% of voting rights in C Ltd.
§ C Ltd holds 51% of voting rights in D Ltd.
§ Obviously, B Ltd will be the subsidiary of A Ltd but so too will C Ltd
and D Ltd. Once company can have more than one subsidiary/holding
company.
§ A Ltd has three subsidiaries. D Ltd has three holding companies.
§ If, C Ltd only held 47% of voting rights in D Ltd, then the chain would
be broken. D Ltd will no longer be a subsidiary of C Ltd. Thus, D Ltd
cannot be a subsidiary of B Ltd or A Ltd.
Related persons
- Problem:
o Holding companies and subsidiaries is not the only way that funds can be
diverted out of a company.
o Could also be done through relationships other than holding company and
subsidiaries.
o The new act therefore introduced the concept of related and inter-related
persons as provided for in section 2.
- What type of relationships are possible?
1. Individual to individual
o Section 2(1)(a)(i): Persons who are married or lives together in a relationship
similar to a marriage.
o Section 2(1)(a)(ii): Persons separated by no more than two degrees of natural
or adopted consanguinity or affinity.
§ From the perspective of a child, it would include their parents and
grandparents but will not go further than grandparent towards, for
example, an aunt and a first cousin.
2. Individual to juristic person
o Section 2(1)(b): An individual is related to a juristic person if the individual
directly or indirectly controls the juristic person as determined in accordance
with subsection (2).
o When will there be control?
§ Section 2(2): For the purpose of subsection (1), a person (natural
person or juristic person) controls a juristic person when:
• Section 2(2)(a) – Where the juristic person is a company
o Section 2(2)(a)(i): Where the company is a subsidiary of
the person in terms of section 3(1)(a).
§ Obviously, a company cannot be the subsidiary
of a natural person. However, because
Introduction
- This topic considers how creditors (which includes employees) are protected from
the company abusing its funds, whether for the benefit of the directors or for the
benefit of the shareholders to the extent that there is nothing left for other
stakeholders.
- One way in which the company can harm other stakeholders is by creating
subsidiaries and diverting funds to these subsidiary companies. It is therefore
important to know who subsidiaries are.
Company groups: Holding company and subsidiaries
- Point of departure:
o There is no difference between a holding company holding shares in a
subsidiary and a natural person holding shares in a company. It is the same
principle. Also, exactly the same rules regarding piercing the corporate veil
apply to company groups.
- Definition of a group:
o Section 1 states that a group includes a holding company and all its
subsidiaries. This does not really help us much.
o Section 1 defines a “holding company” as the juristic person that controls a
subsidiary as a result of any circumstances contemplated in section 2 or 3.
§ What is a “juristic person”?
§ Section 1 provides that a “juristic person” includes a foreign company
and a trust.
o Section 3 defines a “subsidiary” as a company (not “juristic person” as with
holding company so a trust cannot be a subsidiary) where a juristic person:
a) Has a majority of the voting rights (not shares) in the company (51%)
§ Par value shares = Nominal value of shares x number of shares.
§ Shares without par value = number of shares held in percentage form.
b) Has the right to appoint or elect or control the appointment or election
of directors of that company who control a majority of the voting rights
at the meeting of the board.
§ Not the right to appoint the majority of directors but to appoint the
directors with the majority of voting rights.
§ Once you control the board, you control the company.
- Votes held by a nominee:
o Section 3(2)(c): Votes held by a nominee is counted towards the BIH.
- What about different classes of shares?
o Certain classes of shares may not necessarily have voting rights.
o Section 37 allows you to take away any class’ voting rights. Say you do this
with regards to preferent shares which means they are only allowed to vote
where their voting rights are affected, or their dividends are in arrears.
, o Section 3(2)(a) provides that voting rights that are exercisable under only
certain circumstances are to be taken into account only when those
circumstances have arisen. Let’s say neither of those circumstances have
arisen.
o Company S has, inter alia, two shareholders: Company H and Company K.
o Company S has 100 authorised shares (91 OS and 9 PS): Company H holds 47
OS and Company K holds the 9 PS. Will Company S be a subsidiary of
Company H?
§ Yes, because you do not take into account Company K’s 9 PS which
means that Company H’s 47 OS out of 91 OS equates to voting rights
exceeding 50%. Thus, Company H holds the majority of voting rights in
Company S and is therefore the holding company of Company S.
§ PS only have voting rights when their rights are affected, so you ae
only going to count their voting rights in those limited circumstances.
In all other circumstances, you are going to exclude it.
o See risk of abuse on page 523 of the notes.
§ 10 minutes of meeting when discussing the preference shares issues,
Company S was not the subsidiary of Company H.
§ After those 10-minute discussion, Company S becomes the subsidiary
of Company H again.
§ See the effect when it comes to financial assistance in terms of
section 44.
- Different scenarios of company groups
o Figure 1
§ Holding company holds 51% of the voting rights in subsidiary.
§ Subsidiary in terms of control over voting rights.
o Figure 2
§ A Ltd who holds 51% of the voting rights in B Ltd and also control the
board of C Ltd (right to appoint two out of the five directors but those
two directors have the majority voting rights).
§ Both B Ltd and C Ltd are therefore subsidiaries of A Ltd.
§ B Ltd holds 27% of the voting rights in D Ltd through a nominee, K.
§ C Ltd holds 24% of the voting rights in D Ltd.
§ D Ltd will be a subsidiary of A Ltd only because section 3(1)(a)
provides that a company is a subsidiary of another juristic person if
that juristic person, one or more other subsidiaries of that juristic
person, alone or in any combination, directly or indirectly control the
exercise of the majority of general voting rights.
• A Ltd voting rights in D Ltd = 27% of B Ltd + 24% of C Ltd = 51%
o Figure 3
§ A Ltd hold 51% of voting rights in B Ltd.
§ A Ltd hold 51% of voting rights in C Ltd.
§ B Ltd holds 25% of voting rights in D Ltd.
§ C Ltd holds 21% of voting rights in D Ltd.
§ A Ltd hold 7% of voting rights in D Ltd.
§ D Ltd will be a subsidiary of A Ltd only because section 3(1)(a)
provides that a company is a subsidiary of another juristic person if
, that juristic person, one or more other subsidiaries of that juristic
person, alone or in any combination, directly or indirectly control the
exercise of the majority of general voting rights.
• A Ltd voting rights in D Ltd = 7% of A Ltd + 25% of B Ltd + 21%
of C Ltd = 53%
o Figure 4
§ A Ltd hold 51% of voting rights in B Ltd.
§ B Ltd holds 51% of voting rights in C Ltd.
§ C Ltd holds 51% of voting rights in D Ltd.
§ Obviously, B Ltd will be the subsidiary of A Ltd but so too will C Ltd
and D Ltd. Once company can have more than one subsidiary/holding
company.
§ A Ltd has three subsidiaries. D Ltd has three holding companies.
§ If, C Ltd only held 47% of voting rights in D Ltd, then the chain would
be broken. D Ltd will no longer be a subsidiary of C Ltd. Thus, D Ltd
cannot be a subsidiary of B Ltd or A Ltd.
Related persons
- Problem:
o Holding companies and subsidiaries is not the only way that funds can be
diverted out of a company.
o Could also be done through relationships other than holding company and
subsidiaries.
o The new act therefore introduced the concept of related and inter-related
persons as provided for in section 2.
- What type of relationships are possible?
1. Individual to individual
o Section 2(1)(a)(i): Persons who are married or lives together in a relationship
similar to a marriage.
o Section 2(1)(a)(ii): Persons separated by no more than two degrees of natural
or adopted consanguinity or affinity.
§ From the perspective of a child, it would include their parents and
grandparents but will not go further than grandparent towards, for
example, an aunt and a first cousin.
2. Individual to juristic person
o Section 2(1)(b): An individual is related to a juristic person if the individual
directly or indirectly controls the juristic person as determined in accordance
with subsection (2).
o When will there be control?
§ Section 2(2): For the purpose of subsection (1), a person (natural
person or juristic person) controls a juristic person when:
• Section 2(2)(a) – Where the juristic person is a company
o Section 2(2)(a)(i): Where the company is a subsidiary of
the person in terms of section 3(1)(a).
§ Obviously, a company cannot be the subsidiary
of a natural person. However, because
