Topic 3

• Incorporation of a company

  1. The filing of a notice of incorporation in terms of Section 13

  2. The MOI binds the company and each shareholder, among the shareholders of the company, the company and each director, the company and each prescribed officer of the company, or other person serving the company as a member of the audit committee or as a member of a committee of the board, in the exercise of their respective functions within the company
• Memorandum of Incorporation (MOI)


  • Sets out rights, duties, and responsibilities of shareholders, directors, and others within and in relation to a company
  • Determines the rights, powers, and duties of all stakeholders, as well as the nature of the company (public, private, or another type)
  • Binding on the parties as set out above
• Rules made by the board of directors in terms of section 15


  1. The board of directors may make, amend, or repeal any necessary or incidental rules relating to the governance of the company in respect of matters not addressed in the Companies Act or the Memorandum of Incorporation

  2. A rule must be consistent with the Companies Act and the Memorandum of Incorporation, failing which it will be void to the extent of the inconsistency
• Flexibility within the Memorandum of Incorporation


  • The Act allows a large degree of flexibility with regard to the content of the MOI
  • Each provision in the MOI must be consistent with the provisions of the Act
• Alterable, unalterable, and default provisions in the MOI in terms of the Act

  • Unalterable (the MOI cannot make changes to the provisions nor remove them)
  • Alterable (the MOI can change these provisions based on the needs of the company)
  • Default (these provisions apply automatically where the MOI does not deal with or address a specific matter)
• Amending the Memorandum of Incorporation

  Amendment of MOI may be done by court order, by a board of directors in terms of section 36(3) and (4), or by a special resolution proposed by the board of the company or by shareholders who are entitled to exercise at least 10 per cent of the voting rights
• Ring-fenced companies


  A company’s name must end with the expression “RF” if the Memorandum of Incorporation contains any additional restrictive or procedural requirement that impedes the amendment of any particular provision of the Memorandum of Incorporation or any provision prohibiting the amendment of any particular provision of the Memorandum of Incorporation
• Alterations to correct errors in a Memorandum of Incorporation and rules


  The board of a company, or an individual authorised by the board, may alter the company’s rules or its MOI to correct a spelling error, punctuation, reference, or grammar
• Effective date of amendments of the MOI

  Amendment takes effect after the date and time at which the notice of amendment is filed, after the date if any, set out in the notice of amendment
• Translation and Consolidation of a MOI

  1. A translation of a company’s MOI must be accompanied by a sworn statement by the person who made the translation stating that it is a true, accurate, and complete translation of a company’s MOI

  2. A company may file a consolidation revision of its MOI as so altered or amended at any time after filing its MOI and made subsequent alterations or amendments to it
• Authenticity of versions of the MOI

  The MOI as altered or amended prevails in any case of conflict between it and a translation filed in terms of s18
• Shareholders’ agreement
• Authenticity of versions of the MOI prevails in any case of conflict between it and a translation filed in terms of s18
• Shareholders’ agreement


  The shareholders may enter into an agreement with each other concerning any matter relating to the company. Any such agreement must be consistent with the Company’s Act and the company’s MOI
• Gihwala: 'v Grancy Property Ltd 2017 (2) SA 337 (SCA)'
• Legal Personality is derived by the company upon registration of the incorporation – S19, company thus does not exist prior to S19!
• Before incorporation (that is registration with the companies and intellectual property commission), a company does not exist and it cannot perform juristic acts. More importantly no one can act as the company’s agent, because an agent cannot act for a non-existent principal.
• It will however be necessary in certain instances to have a temporary agreement on legal arrangements prior to the actual act of incorporation of the company as it would make business sense to have ‘business waiting’ for you.
• A contract can be entered into prior to the company coming into existence under both the common law and in terms of Section 21 of the Companies Act 71 of 2008
• Under the common law stipulatio alteri is a method whereby a promoter (acting as principal) enters into a contract with a third party and stipulates in favour of an unformed company the benefits under the contract, which the unformed company upon its formation can accept the benefit.
• Pre-incorporation contracts (section 21)


  This is a written contract entered into by a person who is acting on behalf of a company still to be formed. The person entering into the agreement has the intention that once the company comes into existence the company would be bound by the contract. The person who enters into a pre-incorporation contract will be jointly and severally liable if: the company is not incorporated, once incorporated, the company rejects any part of the agreement, unless the company, after incorporation, enters into an agreement on the same terms as, or in substitution for, the agreement entered into prior to its incorporation
• Once the company is incorporated

  The board of directors may, within 3 months after the date of incorporation, completely, partially or conditionally ratify or reject any pre-incorporation contract. When this 3 month period expires, if the board of directors has not ratified or rejected the agreement, the company will be deemed to have ratified the agreement. If the agreement is ratified, the company will be liable in terms of the agreement as if it had been a party to the agreement when it was concluded. If the agreement is rejected, the person who will incur liability in terms of the agreement will be permitted to recover from the company any benefit that the company has received in terms of the agreement
• If the pre-incorporation contract specifies that the contract is entered into on behalf of a company ‘still to be formed’


  Then the contract cannot subsequently be assigned to a company which was in existence at the time the contract was signed
• Under section 19(1)(b) of the Companies Act of 2008 a company has the legal capacity and the powers of an individual except to the extent that: a juristic person is incapable of exercising any such power the Memorandum of Incorporation provide
• Section 19(1)(b) of the Companies Act of 2008 states that a company has the legal capacity and the powers of an individual
• For a contract to be binding, the company must have had the legal capacity to enter into the contract and the directors must have had the authority to enter into the contract
• Capacity


  Legal competency and powers of the company
• Authority


  Power of a company’s director, officer, or other individual to act on behalf of the company
• Ultra Vires


  Latin phrase meaning "beyond the powers". An act done without legal authority is characterized as ultra vires
• Under previous company laws, the company’s incorporation documents were required to state the main object of the company, defining the main business the company was authorized to carry on
• A company had to have the capacity determined by the main object stated in its incorporation documents, including objects incidental or ancillary to the main object
• According to the ultra vires doctrine, a company existed in law only for the purposes of the objects stated in the object’s clause of its incorporation document
• If a company exceeded its legal capacity as determined by its objects clause, the company ceased to exist as a legal person for the purposes of that contract, making the contract null and void
• Illustrative Example: If a company’s incorporation documents prohibited its capital reserves from being treated as revenue available for the payment of dividends, declaring such a dividend would be ultra vires and null and void
• Externally, between the company and the other party to the ultra vires contract

  The contract was null and void
• Internally, between the company, its directors, and shareholders

  There were repercussions
• External consequence of the ultra vires doctrine

  Contract between the company and the other party could not be enforced
• Internal consequence of the ultra vires doctrine

  Directors who acted could be liable for a breach of their fiduciary duties and liable for damages
• Shareholders gaining knowledge of proposed ultra vires conduct

  Could seek to obtain an interdict restraining the company from acting ultra vires
• Doctrine of Constructive Notice