MERCANTILE LAW 292 TERM 4 NOTES:
TOPIC 8: COMPANY GROUPS
Introduction:
Companies are separate legal persons and separate entities
DNH Food Distributors Case “subsidiaries are bound hand and foot to the parent
company and must do just what the parent says’
Salomon v Salomon:
- Subsidiary not representative of holding company
- Separate entities
- Insolvency: no duty to help
Definitions:
S1:
Group of companies: a holding company and all of its subsidiaries
Holding company: in relation to a subsidiary, means a juristic person that controls that
subsidiary as a result of any circumstances contemplated in S2(2)(a) or S3(1)(a)
THUS:
S3(1)(a) a company is subsidiary of another juristic person if that juristic person, one
or more other subsidiaries of that juristic person, or one or more nominees of that
juristic person or any of its subsidiaries, alone or in any combination:
- majority of the general voting rights associated with the issued securities of that
company; or
- the right to appoint or elect, or control the appointment or election of directors.
S3(2) control
For the purpose of determining whether a person controls all or a majority of the
general voting rights associated with issued securities of a company
a) Voting rights that are exercisable only in certain circumstances are to be taken into
account only:
i) When those circumstances have arisen, and for so long as they continue; or
ii) When those circumstances are under control of the person holding the voting
rights
b) & c) AND: if the votes are held by nominee (or other person without full power over
those votes), those votes are deemed to be held by the beneficial interest holder or
other person with power to determine the exercise of the vote
Subsidiary
- Trust can be the holding company but not the subsidiary
- Preference shares with contingent voting rights – added to voting rights in
proportion in terms of S3.
Related and inter-related persons:
Definition – S2
Why? – disclosure of relation- transaction regulation
, Related:
- S2(1)(a): natural person to natural person
Married or living ‘as if married’ (voluntary permanent lifelong relationship) or
No more than two degrees of consanguinity/affinity (blood relatives – (close):
parents, children, siblings, grandparents or grandchildren)
- S2(1)(b): natural person to juristic person control S2(2)
- S2(1)(c): juristic person to juristic person control S2(2), subco S3
Arms length – two parties are not related at all
S2(2): Control:
S2(2)(a): X controls Z (company) if:
- Z is a subsidiary of X
- X, together with related or interrelated persons, can exercise majority of the voting
rights associated with the securities of that company
- X, together with related or interrelated persons, can appoint directors with majority
voting rights on the Board of Z
NB – look at S2(2)(b) and (c)
S2(2)(d): that first person has the ability to materially influence the policy of the juristic
person in a manner comparable to a person who, in ordinary commercial practice,
would be able to exercise an element of control as stated above.
Interrelated:
- S1 – when used in respect of three or more persons, means persons who are related
to one another in a linked series of relationships, such that two of the persons are
related in a manner contemplated in S2(1), and one of them is related to the third in
any such manner, and so forth in an unbroken series.
- Basic example:
Company X is related to Company Y
Y is related to A
A is related to B
B is related to trust C
Trust C is related to CC D
Companies X and Y, A and B, trust C, and CC D are all interrelated.
Consequences of company groups:
Shareholding in group context:
- Subco wants shares in Holdco (indirect buy back)
- S48(2)(b) – a subsidiary may acquire shares of that company subject to the following:
not more than 10% of the company’s shares may be held by the subco
no voting rights
- S48(3) – limited acquisition no other shares than those held by the subsidiary
and/or redeemable/convertible shares
- Holding company will have to comply with the solvency and liquidity test in S46 and
other requirements of that section
- Subsidiary will not receive any voting rights from the shares bought in the holding
company as could cause a conflict of interest
, Loans and other financial assistance intra-group and to certain directors:
- Financial assistance defined in S45(1) – see exclusions
- S45(2): direct or indirect board may authorise
- S45(3): requirements
- S45(4): conditions or restrcitions in MOI – addition for financial assistance
- Exception = if company loans money to director or related person and lent in the
ordinary course of the lending activities of a bank, bank is excluded from the
provisions
- S45 is very similar to S44
- Requirements:
financial assistance must be a part of an employee share scheme or shareholders
through special resolution must have passed
solvency and liquidity test passed
board must be satisfied that the terms are fair and reasonable to the company
- WHEN? S45(2):
except to the extent that the OI of a company provides otherwise, the board may
authorise the company to provide direct or indirect financial assistance to a director
or prescribed officer of the company or of a related or interrelated company, or to a
related or interrelated corporation, or to a person related to any such company,
corporation, director, prescribed officer or member, subject to subsections (3) and
(4)
- S45(5)-(7) all important S45(7) – personal liability read with S77(3)(e)(v) and
S218(2) present at a meeting and failed to vote against despite knowledge.
- If requirements for valid financial assistance to directors or related persons are not
met transaction is VOID.
- Knowledge = wide definition
Other consequences:
1. Standard of director conduct:
- S76 requires that a director of holding company owes a fiduciary duty to the
subsidiary and should not knowingly cause harm to that subsidiary
2. Offers to the public:
- S95(1) – an employee share scheme also includes an offer made to subsidiaries of
the company. Often when a company launches a share scheme there is an
intermediary company
3. Alienation of total or larger portion of assets of company:
- S112 and S115 requirements that must be fulfilled before assets can be sold
- Does not apply to a holding company and a wholly owned subsidiary
TOPIC 9: LIQUIDATION, DISSOLUTION, DEREGISTRATION & BUSINESS RESCUE
TOPIC 8: COMPANY GROUPS
Introduction:
Companies are separate legal persons and separate entities
DNH Food Distributors Case “subsidiaries are bound hand and foot to the parent
company and must do just what the parent says’
Salomon v Salomon:
- Subsidiary not representative of holding company
- Separate entities
- Insolvency: no duty to help
Definitions:
S1:
Group of companies: a holding company and all of its subsidiaries
Holding company: in relation to a subsidiary, means a juristic person that controls that
subsidiary as a result of any circumstances contemplated in S2(2)(a) or S3(1)(a)
THUS:
S3(1)(a) a company is subsidiary of another juristic person if that juristic person, one
or more other subsidiaries of that juristic person, or one or more nominees of that
juristic person or any of its subsidiaries, alone or in any combination:
- majority of the general voting rights associated with the issued securities of that
company; or
- the right to appoint or elect, or control the appointment or election of directors.
S3(2) control
For the purpose of determining whether a person controls all or a majority of the
general voting rights associated with issued securities of a company
a) Voting rights that are exercisable only in certain circumstances are to be taken into
account only:
i) When those circumstances have arisen, and for so long as they continue; or
ii) When those circumstances are under control of the person holding the voting
rights
b) & c) AND: if the votes are held by nominee (or other person without full power over
those votes), those votes are deemed to be held by the beneficial interest holder or
other person with power to determine the exercise of the vote
Subsidiary
- Trust can be the holding company but not the subsidiary
- Preference shares with contingent voting rights – added to voting rights in
proportion in terms of S3.
Related and inter-related persons:
Definition – S2
Why? – disclosure of relation- transaction regulation
, Related:
- S2(1)(a): natural person to natural person
Married or living ‘as if married’ (voluntary permanent lifelong relationship) or
No more than two degrees of consanguinity/affinity (blood relatives – (close):
parents, children, siblings, grandparents or grandchildren)
- S2(1)(b): natural person to juristic person control S2(2)
- S2(1)(c): juristic person to juristic person control S2(2), subco S3
Arms length – two parties are not related at all
S2(2): Control:
S2(2)(a): X controls Z (company) if:
- Z is a subsidiary of X
- X, together with related or interrelated persons, can exercise majority of the voting
rights associated with the securities of that company
- X, together with related or interrelated persons, can appoint directors with majority
voting rights on the Board of Z
NB – look at S2(2)(b) and (c)
S2(2)(d): that first person has the ability to materially influence the policy of the juristic
person in a manner comparable to a person who, in ordinary commercial practice,
would be able to exercise an element of control as stated above.
Interrelated:
- S1 – when used in respect of three or more persons, means persons who are related
to one another in a linked series of relationships, such that two of the persons are
related in a manner contemplated in S2(1), and one of them is related to the third in
any such manner, and so forth in an unbroken series.
- Basic example:
Company X is related to Company Y
Y is related to A
A is related to B
B is related to trust C
Trust C is related to CC D
Companies X and Y, A and B, trust C, and CC D are all interrelated.
Consequences of company groups:
Shareholding in group context:
- Subco wants shares in Holdco (indirect buy back)
- S48(2)(b) – a subsidiary may acquire shares of that company subject to the following:
not more than 10% of the company’s shares may be held by the subco
no voting rights
- S48(3) – limited acquisition no other shares than those held by the subsidiary
and/or redeemable/convertible shares
- Holding company will have to comply with the solvency and liquidity test in S46 and
other requirements of that section
- Subsidiary will not receive any voting rights from the shares bought in the holding
company as could cause a conflict of interest
, Loans and other financial assistance intra-group and to certain directors:
- Financial assistance defined in S45(1) – see exclusions
- S45(2): direct or indirect board may authorise
- S45(3): requirements
- S45(4): conditions or restrcitions in MOI – addition for financial assistance
- Exception = if company loans money to director or related person and lent in the
ordinary course of the lending activities of a bank, bank is excluded from the
provisions
- S45 is very similar to S44
- Requirements:
financial assistance must be a part of an employee share scheme or shareholders
through special resolution must have passed
solvency and liquidity test passed
board must be satisfied that the terms are fair and reasonable to the company
- WHEN? S45(2):
except to the extent that the OI of a company provides otherwise, the board may
authorise the company to provide direct or indirect financial assistance to a director
or prescribed officer of the company or of a related or interrelated company, or to a
related or interrelated corporation, or to a person related to any such company,
corporation, director, prescribed officer or member, subject to subsections (3) and
(4)
- S45(5)-(7) all important S45(7) – personal liability read with S77(3)(e)(v) and
S218(2) present at a meeting and failed to vote against despite knowledge.
- If requirements for valid financial assistance to directors or related persons are not
met transaction is VOID.
- Knowledge = wide definition
Other consequences:
1. Standard of director conduct:
- S76 requires that a director of holding company owes a fiduciary duty to the
subsidiary and should not knowingly cause harm to that subsidiary
2. Offers to the public:
- S95(1) – an employee share scheme also includes an offer made to subsidiaries of
the company. Often when a company launches a share scheme there is an
intermediary company
3. Alienation of total or larger portion of assets of company:
- S112 and S115 requirements that must be fulfilled before assets can be sold
- Does not apply to a holding company and a wholly owned subsidiary
TOPIC 9: LIQUIDATION, DISSOLUTION, DEREGISTRATION & BUSINESS RESCUE
