Study Unit 4: Company formation

?Activity 1
Draft a Memorandum of Incorporation in which you include ten issues that may be
included in a Memorandum of Incorporation. Ensure that the provisions of the
Memorandum of Incorporation give clarity on all the different issues.

See section 15 of the Companies Act. This activity is intended to familiarise you with
issues that are usually included in the Memorandum of Incorporation. Did you check
the provisions to ensure that they are consistent with the Companies Act?

Companies may accept or alter the following alterable provisions as long as the
alteration remains consistent with the Companies Act.

Alterable provisions

 A company enjoys all the legal powers and capacity of an individual, except to
the extent that a juristic person is incapable of exercising any such powers, or
having any such capacity; or the company’s Memorandum of Incorporation
provides otherwise (e.g. it may determine that the company’s activities will be
limited to a specific business).
 Private, non-profit and incorporated companies may elect to comply with the
extended accountability requirements of Chapter 3 (section (2)).
 Shares within the same class have the same rights, limitations and terms,
unless the Memorandum of Incorporation provides otherwise (section 37(1)).
 The Memorandum of Incorporation may exclude the right of first refusal of
current shareholders of a private company in respect of shares issued by the
company (section 39(3)).
 The Memorandum of Incorporation may forbid the board to render financial
assistance to parties wanting to acquire shares in the company (section
45(2)).
 The Memorandum of Incorporation may provide for longer minimum notice
periods for meetings.
 Electronic notice and electronic participation in meetings are allowed unless
the Memorandum of Incorporation prohibits it (section 63(2)).
 Companies may determine a higher number of minimum directors than that
prescribed by the Companies Act (section 66(2)).

?Activity 2
Vanitha and Sandra have just moved to a new town. There they meet a mutual
friend, Wilma, from their days in boarding school. The town has many orphans who
are homeless. Vanitha, Sandra and Wilma have decided to form a non-profit
company that will provide food and shelter to the orphans. They have completed
drafting the Memorandum of Incorporation for the company to be registered as
Hayani NPC. They want to start operating before the winter season arrives. The
directors are Vanitha, Sandra and Wilma. A day before filing their documents with

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the Commission, Vanitha finds out that Sandra has been prohibited by a court of law
from becoming a director. She discusses this with Wilma and together they decide to
proceed with the process of incorporation since looking for someone to replace
Sandra as a director will cause unnecessary delays. They agree that they will look
for someone to replace Sandra after incorporation. They proceed to file a copy of the
Memorandum of Incorporation and the Notice of Incorporation, together with the
prescribed fee with the Commission. How must the Commission deal with this notice
of Incorporation?

Although the Companies Act allows for flexibility, there are circumstances in which
the Commission is compelled to reject the Notice of Incorporation. Read section
13(4) (b) together with section 69(8) of the Companies Act.

?Activity 3
You are a member of the board of directors of Regona (Pty) Ltd. At the last meeting
of the board it became clear that the Memorandum of Incorporation was silent
regarding certain issues relating to the governance of the company. After lengthy
discussions three rules concerning the governance of the company were made.
They were filed with the Commission a month ago. The next general shareholders’
meeting has not taken place yet.
You decide to read the rules thoroughly and you realise that one of the rules is
already addressed by the Companies Act. You also realise that another rule is
actually inconsistent with the Memorandum of Incorporation of the company. You
mention this to the other members of the board. You are then requested to find out if
these rules are valid or not. You are further requested to find out when they will
become permanent and on whom they are binding.

The board of directors has the power to make rules concerning the governance of
the company, provided that they are not addressed in the Companies Act or in the
Memorandum of Incorporation. A rule made by the board which is inconsistent with
the Memorandum of Incorporation or with the Companies Act will be void, but only to
the extent of its inconsistency. Although the rule becomes effective 10 business days
after publication, ratification by an ordinary resolution at the next shareholders’
general meeting is important. The Memorandum of Incorporation and the Rules are
binding :

 between the company and each shareholder;

 between or among the shareholders of the company;
 between the company and each director or prescribed officer of the
company;
 between the company and any other person serving the company as a
member of a committee of the board;
The relationship created in terms of section 15 of the Companies Act seems to be of
a contractual nature.

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?Activity 4
After Exit (Pty) Ltd was incorporated, the Memorandum of Incorporation was
translated into Afrikaans and Tshivenda. The English, Tshivenda and Afrikaans
copies were kept together. There is now confusion regarding the provision that deals
with the frequency of meetings as the three versions state different things. Which
version of the Memorandum of Incorporation should prevail and why?

In the event of a conflict between a provision in the Memorandum of Incorporation

and a provision in the translated version, the provision in the original Memorandum
of Incorporation prevails.

?Activity 5
Punch (Pty) Ltd has made alterations to its Memorandum of Incorporation three
times within the past year. The Companies and Intellectual Property Commission is
concerned about the number of documents that have to be handled each time one
has to read Punch (Pty) Ltd’s Memorandum of Incorporation. How can the problem
be addressed?

The Commission may request the company to file a consolidated revision of its
Memorandum of Incorporation. Remember that there is a sworn declaration that
must accompany this.

?Activity 6
Exit (Pty) Ltd has had several alterations and translations made to its Memorandum
of Incorporation. Some of the alterations were made in respect of the same
provisions. One of the directors approaches you as he is worried about the fact that
the Memorandum is made up of too many documents. He is already confused and
does not know which version should prevail in the event of a conflict and why. Advise
him.

Where there is a conflict between various versions of the Memorandum of

Incorporation, the latest version that has been endorsed by the Commission prevails.
As you advise the director, you may inform him about the possibility of consolidating
the Memorandum of Incorporation.

?Activity 7
Ryno has been appointed as a director of a private company. He becomes aware of
an agreement between the shareholders of the company. As he reads the
agreement he realises that two of the ten provisions contained in the agreement are
not consistent with the company’s Memorandum of Incorporation. He is concerned
about the validity of the agreement. Advise Ryno.

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Although shareholders are allowed to enter into agreements on matters concerning
the company, such agreements must be consistent with the Companies Act and with
the Memorandum of Incorporation. Provisions that are inconsistent are void to the
extent of the inconsistency.

Examples of questions in previous exams dealing with this topic:

QUESTION 1:
Gangnam’s Tile Ltd has decided to translate its Memorandum of Incorporation. The
document is currently being translated into 9 of the official South African languages.
Consequently, there are some variations in respect of the content. Certain concepts
are difficult to explain in some of the languages, often leaving them open to varying
interpretation. Since the translation has taken such a long time, there are currently 3
different versions of the Memorandum of Incorporation. Explain the procedure that
should be followed in order to give effect to the translation. In addition, indicate how
the problem regarding the different versions will be addressed. (5)

Translations of the MOI may be in 1 or more of the official languages. A notice of

translation must be filed with the Commission. A copy of the translation/s must be
filed. A sworn statement by the translator indicating that it is a true, accurate and
complete translation must be filed. A filing fee is payable. In the event of a conflict
between versions of the Memorandum of Incorporation, the original prevails. The
company may consolidate the different versions.

QUESTION 2:
Explain the procedure for amending a company’s Memorandum of Incorporation.
(3)

Changes may be made to the Memorandum of Incorporation, unless the amendment

of a provision is prohibited by the Memorandum itself in terms of section 15(2)(c).

Such amendments may be in the form of

 a new Memorandum of Incorporation, or
 amendments to the existing provisions of the Memorandum of Incorporation

 Note that, if changes are in the form of a new Memorandum of Incorporation,

the new Memorandum of Incorporation will replace the existing Memorandum
of Incorporation.
A company’s Memorandum of Incorporation may be amended
 in compliance with a court order (An amendment in terms of a court order is
given effect via a board resolution and there is no need for a shareholders’ special
resolution.)

 by the board in terms of sections 36(3) and (4) (These allow the board to
amend the authorised share capital of the company, unless the
Memorandum of Incorporation provides otherwise.)

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 by a special resolution of the shareholders proposed by
o the board of directors, or
o shareholders who collectively exercise not less than 10% of the voting rights

There is no need to convene a shareholders’ meeting to adopt this special

resolution. As it is sometimes difficult for some shareholders to attend meetings, the
proposal to amend the Memorandum of Incorporation may be sent or hand-delivered
to the shareholders who are entitled to vote. The proposal will be adopted, if
approved by the required majority who voted in writing, within 20 days after the
resolution was delivered to them (section 60 of the Companies Act).)

 in terms of the procedure set out in the company’s Memorandum of

Incorporation

To effect the amendment, a form CoR 15.2 must be filed. Unless the amendment is
made by a company that existed before the Companies Act came into operation, and
the amendment is pursuant to compliance with the Companies Act, a filing fee must
be paid. A copy of the special resolution (if this is required in terms of a company’s
Memorandum of Incorporation), or a copy of the amended Memorandum, must
accompany the notice.

An amendment may result in a profit company no longer meeting the criteria for that
category of profit company. When this happens, the name and the ending
expression must also be amended in such a way that it reflects the new category
that the profit company falls under.

If an amendment to the Memorandum of Incorporation of a personal liability

company has the effect that the company falls into another category of company, the
company must give at least ten days prior notice of the filing of the notice of
amendment to any professional or industry regulatory authority that has jurisdiction
over the business of the company, and to any person who may have relied on the
personal liability of the directors in dealings with the company and who could suffer
prejudice if that liability is terminated.
QUESTION 3:
If there is a contradiction between a stipulation contained in the Companies Act 71 of
2008 and a stipulation in the Memorandum of Incorporation, or between a stipulation
in the Memorandum of Incorporation and one of the rules of the company, which
stipulation would enjoy preference? (3)

Rules must not be in conflict with the Memorandum of Incorporation of the company
or with the Companies Act. In terms of section 15(4)(a), where there is a conflict
between a rule made by the board of directors and the Companies Act or the
Memorandum of Incorporation, the rule will be void but only to the extent of its
inconsistency. If a stipulation in the Memorandum of Incorporation contradicts the
Companies Act, that stipulation will be void in as far as it contradicts the legislation.
So, the Companies Act enjoys preference over the Memorandum of Incorporation,
which in turn takes preference over the rules.
QUESTION 4:

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Briefly explain the steps that would need to be taken in order to incorporate a
company. (5)

To register a company, a Notice of Incorporation and a copy of the Memorandum of

Incorporation must be lodged with the Commission and the prescribed registration
fee must be paid. Section 1 of the Companies Act determines that to “lodge” the
documents means to deliver them to the Commission (CIPC), which is responsible
for registration.
QUESTION 5:
What documents need to be lodged in order to register a company, and where
should they be lodged? (3)

To register a company, a Notice of Incorporation and a copy of the Memorandum of

Incorporation must be lodged with the Commission.

QUESTION 6:
Explain the restrictions placed on the choice of the company name in terms of the
Companies Act 71 of 2008. (5)

The Companies Act restricts a company name only as far as it is necessary to

protect the public from misleading names which falsely imply an association that
does not exist and to protect the interest of the owners of names and other forms of
intellectual property (such as trademarks) from other persons passing themselves off
as such owners or coat-tailing on the owners’ reputation and good standing, and
protect the public from names that would fall within the ambit of expression that does
not enjoy constitutional protection because of its harmful or other negative nature

To avoid deception of the public, the name of a company may not be the same as
the name of another company, external company, close corporation or cooperative;
or the name of a business which has already been registered in terms of the
Business Names Act 27 of 1960; or a trademark which has been filed for registration
in terms of the Trade Marks Act 194 of 1993; or a mark, word or expression
protected in terms of the Merchandise Marks Act of 1941;
be confusingly similar to a name, trademark, mark, word or expression as described
above (subject to a few specific exceptions);
give the false impression that the company is associated with the government or with
a particular person or government office, etc., and include any word, expression or
symbol that may constitute propaganda for war, incitement of imminent violence, or
advocacy of hatred based on race, ethnicity, gender or religion, or incitement to
cause harm.

Also note the following:

The Companies Act does not make provision for the registration of a shortened or
translated name. A name reservation in a foreign language must be accompanied by
a certified translation and certificate of translation. In terms of the Consumer
Protection Act 68 of 2008, members of the public are required to register their
business/trading name/sole proprietorship/partnership names with the Commission.
Where, according to the Commission, there is a possibility that the name is similar to
the name of another company or another business undertaking or trademark, or that

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the name gives the impression that there is a connection between the company that
is applying and another entity or state organ, the Commission may compel the
applicant to inform parties that may be interested by serving them with a copy of the
application and name reservation. If the company’s name is to be associated with
another existing business, the Commission will require proof from the applicant
company that the associated company was made aware before registration that a
similar name would accordingly be allowed. The Companies Act also allows any
person who has an interest in the name of a company to apply to the Companies
Tribunal for it to determine whether or not the name is in accordance with the
requirements of the Companies Act.
QUESTION 7:
a. Veronica and Precious want to incorporate a public company called Aspex
Ltd. Briefly state the legal requirements that they must comply with in terms of
the Companies Act 71 of 2008 to register the business. (5)
To register a company, a Notice of Incorporation and a copy of the Memorandum of
Incorporation must be lodged with the Commission and the prescribed registration
fee must be paid. As this is a public company 3 incorporators are required.
b. How would your answer have been different if Veronica and Precious were
incorporating a company called Aspex (Pty) Ltd instead? (2)

As this is a private company only one person can now incorporate the company.

QUESTION 8:
List five matters that must be contained in a company’s Memorandum of
Incorporation. (5)

The Memorandum of Incorporation contains the following information:

 details of the incorporators

 the number of directors and alternate directors
 the share capital (maximum issued)
 the content of the Memorandum of Incorporation
 Unalterable provisions: provisions of the Companies Act which a company’s
Memorandum of Incorporation may not change, except to impose a higher standard,
greater restriction, longer period of time, or any similar more onerous requirement
than contained in an unalterable provision of the Companies Act. For instance,
directors’ duties and responsibilities, and accountability requirements for public and
state-owned companies, cannot be excluded in the Memorandum of Incorporation.
The Companies Act allows for companies to add provisions to address matters that
are not covered in the Companies Act itself. However, all provisions in the
Memorandum of Incorporation must be consistent with the Act (section 15(1)(a) and
(b)).