Summary Mercantile Law 471 (Company Law) Year Notes 2020

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

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, 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




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,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




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, 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

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