Contents
Topic 1: Introduction.............................................................................................................................3
What is a Business Entity?.................................................................................................................3
Function of the Law...........................................................................................................................4
Sources of the Law.............................................................................................................................5
2 Types of Business Entities.................................................................................................................24
Sole Proprietorship..........................................................................................................................24
Closely Held Undertakings...............................................................................................................25
Partnerships.................................................................................................................................26
Private Company..........................................................................................................................50
Personal Liability Companies.......................................................................................................74
Close Corporations.......................................................................................................................84
Business Trusts..........................................................................................................................107
Widely Held Undertaking...............................................................................................................126
State-Owned Enterprises...............................................................................................................141
Non-Profit Undertakings................................................................................................................159
3 Juristic Personality..........................................................................................................................195
Introduction...................................................................................................................................195
Characteristics...............................................................................................................................196
Piercing of the Veil.........................................................................................................................231
4 Incorporation..................................................................................................................................260
Introduction...................................................................................................................................260
Company Names............................................................................................................................260
Notice of Incorporation.................................................................................................................261
The Memorandum of Incorporation (MOI)....................................................................................261
Shareholders Agreements.............................................................................................................275
Rules..............................................................................................................................................276
Pre-Incorporation Contracts..........................................................................................................277
5 External Relations...........................................................................................................................290
The Doctrines of Disclosure and Constructive Knowledge.............................................................290
The Capacity of the Company and the Ultra Vires Doctrine..........................................................290
Company Contracts and Representation.......................................................................................299
Liability of a Company for Criminal Acts and Delicts and the “Directing Minds” Doctrine.............329
Locus Standi of a Director to Represent the Company in Court.....................................................329
6 Corporate Governance...................................................................................................................331
Basic Principles of Corporate Governance.....................................................................................331
The Shareholders...........................................................................................................................334
1
, Shareholder Meetings...................................................................................................................335
Written Resolutions.......................................................................................................................339
The Board of Directors: Terminology and Introduction.................................................................342
Fiduciary Duties and Duty of Care and Skill of Directors................................................................374
Prohibition on Reckless Trading.....................................................................................................425
7 Corporate Finance..........................................................................................................................434
Introduction...................................................................................................................................434
Legal Nature of Shares...................................................................................................................436
Rights of Shares.............................................................................................................................438
Duties of Shareholders...................................................................................................................442
Nominees and Beneficial Interest Holders.....................................................................................444
The Securities Register...................................................................................................................456
Share Certificate............................................................................................................................472
Authorised v Issued Share Capital..................................................................................................476
Classes of Shares............................................................................................................................484
Issue of Shares and Capitalization Shares......................................................................................491
Transfer of Shares..........................................................................................................................503
Offers to the Public........................................................................................................................515
8 Company Groups............................................................................................................................517
Introduction...................................................................................................................................517
Definitions: Holding Company, Subsidiary, Related and Inter-Related Persons.............................519
Shareholding Within Groups..........................................................................................................529
9 Corporate Finance II........................................................................................................................532
Liquidity and Solvency v Capital Maintenance...............................................................................532
Distributions..................................................................................................................................538
Financial Assistance for Acquisition of Securities...........................................................................547
10 Liquidation....................................................................................................................................565
Introduction...................................................................................................................................565
Insolvent Company........................................................................................................................566
Court Liquidation: Who May Apply?..............................................................................................566
When is Company Insolvent?.........................................................................................................569
Voluntary Liquidation....................................................................................................................572
Consequences of Liquidation.........................................................................................................577
Dissolution of Company.................................................................................................................577
2
,TOPIC 1: INTRODUCTION
What is a Business Entity?
- Business entity
o A legal structure that is used to conduct business
Legal structure may have to be created by law or sometimes only a structure
recognised by law
Eg company, close corporation
Partnerships are also recognised
Business entity or business structure or business undertaking
Not always entities, sometimes organisational structures
Business entity: entities for economic gain, but can also include
those non-profit entities
o Eg churches, sports clubs, management bodies or
communities
Conduct of business
- List of business entities
o Sole proprietorship
A single person conducting a business
Can be very small
Eg person sells vegetables next to the road
o Partnership
People cooperating for the partnership
No legal limits to the size of partnership but usually used for smaller or
medium-sized enterprises
o Close corporation
Being phased out
Business entity that has specifically been established to attempt to promote
small businesses
o Companies (section 8)
o Common law non-profit
Either make use of Companies Act or common law for non-profit companies
Eg sports clubs or other public benefit organisations
- Different types of companies
o Profit companies
Used to gain profit
Four types:
Private company
o People who conduct business on a closer scale
Public company
3
, o Meant for large businesses where there is a separation
between those who own the company (shareholders) and
those who manage the company (executives and directors)
Personal liability company
o Companies where the directors of the company, those who
conduct the activities of the company, are liable to others
who contract with the company
o Specifically used for professional businesses, like lawyers as
they must be personally liable to their clients
State owned company
o Profit in theory, not practice
o Non-profit companies
Has a different public benefit purpose
One type: non-profit company (previously known as s20 company)
Function of the Law
- Some entities are created by law: juristic persons
o All companies or close corporations
Companies and CC are separate juristic persons
Thus they are recognised by law as if they are persons that exist in
the legal sphere
In other types of companies, the members establish it, not the law
- Regulates the internal relationships of businesses
o Those that participate in the business
o What is internal and external depends on the type of business entity and on the
view that the law takes
Sole proprietorship: perhaps employees to some extent
Not much internal relationship
A sole proprietorship can employ people and thus it is argued that
the relationship between the proprietor and his employees is
internal, but in some respects it is also not internal
Partnership: partners
Establish the entity through agreement
Most important internal relationship is the one that exists between
the partners
The law deems the relationship between partners to be very close
and it is thus regulated in a way that is similar to family
o Partners must act like brothers
Common law non-profits
The internal relationship normally exists between the members of
the non-profit association and those who run the non-profit
association
Eg managers and members of a sports club
4
Topic 1: Introduction.............................................................................................................................3
What is a Business Entity?.................................................................................................................3
Function of the Law...........................................................................................................................4
Sources of the Law.............................................................................................................................5
2 Types of Business Entities.................................................................................................................24
Sole Proprietorship..........................................................................................................................24
Closely Held Undertakings...............................................................................................................25
Partnerships.................................................................................................................................26
Private Company..........................................................................................................................50
Personal Liability Companies.......................................................................................................74
Close Corporations.......................................................................................................................84
Business Trusts..........................................................................................................................107
Widely Held Undertaking...............................................................................................................126
State-Owned Enterprises...............................................................................................................141
Non-Profit Undertakings................................................................................................................159
3 Juristic Personality..........................................................................................................................195
Introduction...................................................................................................................................195
Characteristics...............................................................................................................................196
Piercing of the Veil.........................................................................................................................231
4 Incorporation..................................................................................................................................260
Introduction...................................................................................................................................260
Company Names............................................................................................................................260
Notice of Incorporation.................................................................................................................261
The Memorandum of Incorporation (MOI)....................................................................................261
Shareholders Agreements.............................................................................................................275
Rules..............................................................................................................................................276
Pre-Incorporation Contracts..........................................................................................................277
5 External Relations...........................................................................................................................290
The Doctrines of Disclosure and Constructive Knowledge.............................................................290
The Capacity of the Company and the Ultra Vires Doctrine..........................................................290
Company Contracts and Representation.......................................................................................299
Liability of a Company for Criminal Acts and Delicts and the “Directing Minds” Doctrine.............329
Locus Standi of a Director to Represent the Company in Court.....................................................329
6 Corporate Governance...................................................................................................................331
Basic Principles of Corporate Governance.....................................................................................331
The Shareholders...........................................................................................................................334
1
, Shareholder Meetings...................................................................................................................335
Written Resolutions.......................................................................................................................339
The Board of Directors: Terminology and Introduction.................................................................342
Fiduciary Duties and Duty of Care and Skill of Directors................................................................374
Prohibition on Reckless Trading.....................................................................................................425
7 Corporate Finance..........................................................................................................................434
Introduction...................................................................................................................................434
Legal Nature of Shares...................................................................................................................436
Rights of Shares.............................................................................................................................438
Duties of Shareholders...................................................................................................................442
Nominees and Beneficial Interest Holders.....................................................................................444
The Securities Register...................................................................................................................456
Share Certificate............................................................................................................................472
Authorised v Issued Share Capital..................................................................................................476
Classes of Shares............................................................................................................................484
Issue of Shares and Capitalization Shares......................................................................................491
Transfer of Shares..........................................................................................................................503
Offers to the Public........................................................................................................................515
8 Company Groups............................................................................................................................517
Introduction...................................................................................................................................517
Definitions: Holding Company, Subsidiary, Related and Inter-Related Persons.............................519
Shareholding Within Groups..........................................................................................................529
9 Corporate Finance II........................................................................................................................532
Liquidity and Solvency v Capital Maintenance...............................................................................532
Distributions..................................................................................................................................538
Financial Assistance for Acquisition of Securities...........................................................................547
10 Liquidation....................................................................................................................................565
Introduction...................................................................................................................................565
Insolvent Company........................................................................................................................566
Court Liquidation: Who May Apply?..............................................................................................566
When is Company Insolvent?.........................................................................................................569
Voluntary Liquidation....................................................................................................................572
Consequences of Liquidation.........................................................................................................577
Dissolution of Company.................................................................................................................577
2
,TOPIC 1: INTRODUCTION
What is a Business Entity?
- Business entity
o A legal structure that is used to conduct business
Legal structure may have to be created by law or sometimes only a structure
recognised by law
Eg company, close corporation
Partnerships are also recognised
Business entity or business structure or business undertaking
Not always entities, sometimes organisational structures
Business entity: entities for economic gain, but can also include
those non-profit entities
o Eg churches, sports clubs, management bodies or
communities
Conduct of business
- List of business entities
o Sole proprietorship
A single person conducting a business
Can be very small
Eg person sells vegetables next to the road
o Partnership
People cooperating for the partnership
No legal limits to the size of partnership but usually used for smaller or
medium-sized enterprises
o Close corporation
Being phased out
Business entity that has specifically been established to attempt to promote
small businesses
o Companies (section 8)
o Common law non-profit
Either make use of Companies Act or common law for non-profit companies
Eg sports clubs or other public benefit organisations
- Different types of companies
o Profit companies
Used to gain profit
Four types:
Private company
o People who conduct business on a closer scale
Public company
3
, o Meant for large businesses where there is a separation
between those who own the company (shareholders) and
those who manage the company (executives and directors)
Personal liability company
o Companies where the directors of the company, those who
conduct the activities of the company, are liable to others
who contract with the company
o Specifically used for professional businesses, like lawyers as
they must be personally liable to their clients
State owned company
o Profit in theory, not practice
o Non-profit companies
Has a different public benefit purpose
One type: non-profit company (previously known as s20 company)
Function of the Law
- Some entities are created by law: juristic persons
o All companies or close corporations
Companies and CC are separate juristic persons
Thus they are recognised by law as if they are persons that exist in
the legal sphere
In other types of companies, the members establish it, not the law
- Regulates the internal relationships of businesses
o Those that participate in the business
o What is internal and external depends on the type of business entity and on the
view that the law takes
Sole proprietorship: perhaps employees to some extent
Not much internal relationship
A sole proprietorship can employ people and thus it is argued that
the relationship between the proprietor and his employees is
internal, but in some respects it is also not internal
Partnership: partners
Establish the entity through agreement
Most important internal relationship is the one that exists between
the partners
The law deems the relationship between partners to be very close
and it is thus regulated in a way that is similar to family
o Partners must act like brothers
Common law non-profits
The internal relationship normally exists between the members of
the non-profit association and those who run the non-profit
association
Eg managers and members of a sports club
4
