What is a pre-incorporator per section 1?
A ‘pre-incorporation contract’ is a written agreement entered into before incorporation of a company by a person who purports to act in the name of, or on behalf of, the proposed company, with the intention or understanding that the proposed company will be incorporated, and will thereafter be bound by the agreement (s1 of the CA)
What are the three important parties in a pre-incorporator contract?
Three important parties in a pre-incorporation contract:
* The company that is not yet in existence;
* The ‘promoter’ who acts for the company that will come into existence
* The other contracting party who is contracting in the hope the company will come into existence
What are the problem in the common law of agency?
Problem in the common law of agency: a person can not act for a principal that is not yet in existence (Kelner v Baxter)
What happens to third parties if there are no pre-incorporation contract?
If an incorporator enters into a transaction pre-incorporation and the company isn’t formed, he is held liable for the items and will possess it.
What is a stipulatio alteri?
A contract can be entered into for the benefit of the third party (stipulatio alteri), although the incorporator enters into a contract as a principal, the benefits accruing from the contract will be directed to the company on its incorporation. When the company is ultimately
incorporated and it adopts the legally binding contract.
What are the factors of stipulatio alteri?
Factors of a stipulatio alteri:
* The Stipulans (promoter) acts as the principal
* It is agreed between the stipulans and the promissor (other contracting party) that the latter will make performance to the third party (company)
* The third party (company once it is incorporated) brings a contractual relationship into existence by notifying the promissor that it accepts the benefit
* There are two contracts – between the promissor and the stipulans and then between the promissor and the company, if the company accepts the benefit.)
* Risk for other contracting party that the company may not come into existence or if it does, it may not accept the offer
* Promoter will be liable only if stated in the original contract (McCollough v Fernwood Estate Ltd)
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What exception does section 21(1) of the CA provide?
Section 21(1) provides an exception to the common law rule that no person can act as an agent for a principal who does not exist. It holds that a person may enter into a written agreement in the name of, or purport to act in the name of, or on behalf of, an entity that is contemplated to be incorporated in terms of this Act, but does not yet exist at the time
What are the requirments of a section 21 pre-incoprorated contract?
Requirements of section 21 per-incorporated contracts:
* The contract must be in writing - A written agreement can be interpreted to cover an oral contract subsequently reduced to writing (Pledge Investments (Pty) Ltd v Kramer)
* It must have been entered into by a person acting in the name, or on behalf of an entity yet to be incorporated - this must be in writing
* The agent (promoter) liable for the liabilities in the pre-incorporation contract if the company is not incorporated or if the company rejects any part of the agreement
* Ratification or rejection of the agreement or action - Ratification in full or partially must happen within 3 months, inaction will mean acceptance
What are the consequnces of section 21?
Consequences of section 21:
* The agent (promoter) liable for the liabilities in the pre-incorporation contract if the company is not incorporated or if the company rejects any part of the agreement (Section 21(2))
* The agent will not be liable if the company enters into the agreement (or one on the same terms). Further, it can either ratify or reject the contract. (section 21(4))
* The company must ratify or reject the agreement within three months of its incorporation; if it fails to do so, the contract will be deemed to be ratified (section 21(5)) . Ratification is when you make the contract valid retrospectively.
* Upon ratification, the company is liable (Section 21(6))
What does section 21(2) of the CA hold
Section 21(2) provides that a person who concludes a written agreement in the name, or purported name, of the company, is jointly and severally liable with ‘any other person’ in respect of liabilities that arose from the pre-incorporation contract if the entity is not incorporated or, once incorporated, the company rejects any component of the contract or action taken.
If the company enters into the same subsequent agreement or in subsitution, the liability in section 21(2) is discharged
What are the two organs that perform the corporate functions?
Two ‘organs’ that perform the corporate functions:
* The general meeting of shareholders
* The board of director
What is the relationship between the board and shareholders?
The relationship between the board and the shareholders is a contractual one based on a MOI and company rules, which determine the extent to which powers are conferred on the board (Automatic Self-Cleansing v Cuninghame)
What gives directors power?
MOI vests powers to manage the company in the hands of directors in accordance with section 66(1) CA. If the board of directors has been given the power to run the company, the shareholders cannot override the decisions made by management. Shareholders can limit this authority, which may be limited in the MOI
Can shareholders amend the MOI?
Shareholders determine the content of the MOI, they can always amend it, and managerial powers can be allocated in almost any manner that shareholders please (s16 of the CA)
How must directors exercise their duties?
- Directors of a company must exercise their duties in the best interest of the company and the company alone; they must act in the best interest of the shareholders and are only accountable to them.
- Directors act on there own, as per the directives in the shareholders meeting, however fundamental transactions cannot happen without the shareholders direct input per the shareholders’ meeting. The requirement to obtain shareholder approval can arise through MOI & statute, section 115 CA.
What are two types of meetings?
Shareholders have the right to attend and vote at meetings. Two types of meetings of companies: (s115 CA)
* Meetings for attendance by shareholders (general meetings)
* Meetings of the board of directors.
What are the powers of general meetings?
General meetings (members/shareholders) has power :
* Amend MOI
* Election of (50%) of directors (s 66(4))
* Removal of directors. Section 71 read with s 65(8): ordinary resolution enough to remove a director, despite anything to the contrary in the MOI or in shareholders’ agreements. (Threshold for ordinary resolution may not be raised for this purpose)
* Fundamental transactions
* Winding up
What are the powers of shareholders?
The powers of the shareholders
* Certain transactions can only if approved by shareholders
* Directors may be removed by ordinary resolution s71 (an unalterable provision)
How do members in meetings think?
Members in meetings exercise their voting powers by passing resolutions in a general meeting. The ordinary procedure is that it is determined by a vote on a show of hands, where one hand =one vote. However, if a member can ask for a vote by poll (ballot), where one vote = the number of shares a person holds.
How can an AGM be called?
Both shareholders and directors can call an AGM. However, the shareholders calling an AGM must must up atleast 10% of the company’s shares unless the MOI states otherwise.
