CML2001 Part 3 sec 38

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CML2001 Part 3 sec 38 Powered By Docstoc
					    COMPANY GROUPS



                            Holding Co.



Holds Majority of Voting
Rights
Right to appoint the
majority of the Board of
Directors                   Subsidiary
Controls the Majority of
Voting Rights




Holds Majority of Voting
Rights
Right to appoint the
majority of the Board of    Subsidiary
Directors
Controls the Majority of
Voting Rights
  COMPANY GROUPS (CONTD.)




                        Holding Co.
AGREEMENT




                     SHAREHOLDERS

               Grand Bridge Trading (Pty) Ltd


                     DIRECTORS
      COMPANY GROUPS



                                         Holding Co.
Holds Majority of
                                                                    Holds Majority of
Voting Rights
                                                                    Voting Rights
Right to appoint the
                                                                    Right to appoint the
majority of the Board of
                                                                    majority of the Board of
Directors
                                                                    Directors
Controls the Majority of
                                                                    Controls the Majority of
Voting Rights
                                                                    Voting Rights



                            Subsidiary                 Subsidiary

                                                                      Holds Majority of
Holds Majority of                                                    Voting Rights
Voting Rights                                                         Right to appoint the
Right to appoint the                                                 majority of the Board of
majority of the Board of                                              Directors
Directors                                                             Controls the Majority of
Controls the Majority of                                             Voting Rights
Voting Rights

                                     Subsidiary
      COMPANY GROUPS



                                         Holding Co.
Holds Majority of
                                                                     Holds Majority of
Voting Rights
                                                                     Voting Rights
Right to appoint the
                                                                     Right to appoint the
majority of the Board of
                                                                     majority of the Board of
Directors
                                                                     Directors
Controls the Majority of
                                                                     Controls the Majority of
Voting Rights
                                                                     Voting Rights



                            Subsidiary                 Subsidiary

                                                                    Holds Majority of
Holds Majority of                                                  Voting Rights
Voting Rights                                                       Right to appoint the
Right to appoint the                                               majority of the Board of
majority of the Board of                                            Directors
Directors                                                           Controls the Majority of
Controls the Majority of                                           Voting Rights
Voting Rights

                                     Subsidiary
                                                               Holds Majority of
                                                               Voting Rights
                                                               Right to appoint the
                                                               majority of the Board of
                                                               Directors
                                                               Controls the Majority of
                                                               Voting Rights
COMPANY GROUPS


   Important for a variety of reasons e.g. Sec 38 and Sec 89.

   Shares held in Fiduciary capacity.

   Shares held as Nominee.

   Position of unincorporated Bodies Corporate.

   Wholly-owned subsidiaries

   Loans by subsidiaries to Holding Companies
   Regulated i.o.t. prevent domination of the sub by the Holding
   Co. w/o sound commercial basis;
   Covers all types of loans and security;
   Must be stated in the Financials of the sub. (disclosure);
   Exceptions: loans in the ordinary course and unanimous
   consent of Shareholders of sub.;
   Director liable
   Note when loan is “unfair”
CAPITAL MAINTENANCE AND THE 1999 AMENDMENTS


   Connection between limited liability and Capital Maintenance.




   Capital Maintenance principle as enunciated in Trevor v
   Whitworth. CMP




   Rules that flowed from this principle:
   Company cannot issue shares at a discount
   Company cannot buy-back its own shares
   Company cannot pay dividends out of capital
CAPITAL MAINTENANCE AND THE 1999 AMENDMENTS


   Company cannot issue shares at a discount
   Why? Because payment must be made in full



    Company cannot buy-back its own shares
     Trevor v Whitworth “ Nothing can be stronger than
      these carefully worded provisions to show how
      inconsistent with the very Constitution of a joint stock
      company, with limited liability, the right to reduce its
      capital was considered to be”


   Company cannot pay dividends out of capital
   Why?
CAPITAL MAINTENANCE AND THE 1999 AMENDMENTS


   Common Law Rules led to Statutory enactments:
   Section 35 of 1926 Company’s Act (alterations without
   reduction of Share Capital)
   Section 44 of 1926 Company’s Act (reduction of Share Capital
   under strict conditions)

    Current Company’s Act 61 of 1973
    Section 75 (Alteration of Share Capital)
    Sections 83 – 90 (Reduction of Share Capital)

   Section 83-90 (Reduction of Share Capital)
   Company could reduce Share Capital if:
   Authorised by Articles
   On Special Resolution
   Subject to confirmation of the court
   If it involved payments to Shareholders, creditors were
   entitled to object
CAPITAL MAINTENANCE AND THE 1999 AMENDMENTS


  In 1999 the Companies Amendment Act 37 of 1999 deleted
  section 83 – 90 (Reduction of Capital provisions)


  In its place:
  Sec. 81 (Co. may issue shares at a discount
  Sec. 85 - 88 (Company’s repurchases of its own shares (Buy-backs))
  Sec. 89 (Subsidiary acquiring shares in Holding Co)
  Sec. 90 (Payments to shareholders)
  Sec. 98 (Redemption of Redeemable Preference shares)
  Capitalisation Shares **
  Sec. 252 (Repurchases by order of Court)


** Where the Articles so provide a Company may, by ordinary
resolution, capitalise profits or reserves and issue paid up shares to
its shareholders of a nominal value equal to the amount captalised.
WHY WOULD A COMPANY BUY BACK ITS SHARES?


 Providing a market for shares…


  Market manipulation…



  To avert a take-over (greenmailing) (white knight)



  To increase the return on net assets…


  To alter the Co’s debt/equity ratio


  Employee Share trusts…
WHY WOULD A COMPANY BUY BACK ITS SHARES?


 To get rid of odd-lots…


  Management buy-outs and “going private”…



  …
THE SEC. 38 PROHIBITION ON THE GIVING OF FINANCIAL ASSISTANCE


  (1) No company shall give, whether directly or indirectly, and whether by means of
  a loan, guarantee, the provision of financial assistance or otherwise, any financial
  assistance for the purpose of or in connection with a purchase or subscription
  made or to be made, by any person of or for any shares of the company, or where
  the company is a subsidiary company, of its holding company.
  (2) The provisions of subsection (1) shall not be construed as prohibiting—
  (a)
  the lending of money in the ordinary course of its business by a company whose
  main business is the lending of money; or
  (b)
  the provision by a company, in accordance with any scheme for the time being in
  force, of money for the subscription for or purchase of shares of the company or
  its holding company by trustees to be held by or for the benefit of employees of
  the company, including any director holding a salaried employment or office in the
  company; or
  (c)
  the making by a company of loans to persons, other than directors, bona fide in
  the employment of the company with a view to enabling those persons to
  purchase or subscribe for shares of the company or its holding company to be
  held by themselves as owners; or
  (d)
  the provision of financial assistance for the acquisition of shares in a company by
  the company or its subsidiary in accordance with the provisions of section 85 for
  the acquisition of such shares.
THE SEC. 38 PROHIBITION ON THE GIVING OF FINANCIAL ASSISTANCE


  Reason for the prohibition was to prevent an unauthorised
  reduction of capital by the company buying its own shares. It
  aimed at combating the mischief of asset-stripping.

  Financial Assistance: A very wide test and is wider than merely the fact
  that the Company was “impoverished” by the assistance. [Lipschitz v
  UDC Bank]

   The phrase “for the purpose of” qualifies and influences the meaning
   to be attributed to the phrase “in connection with” (see example)

   Section 38 prohibits only assistance for the purpose of or in
   connection with the purchase of the Company’s shares; not any loan
   accounts or debentures.
   Section 38 applies both to a purchase of shares as well as to a
   subscription for shares.
THE SEC. 38 PROHIBITION ON THE GIVING OF FINANCIAL ASSISTANCE


  Company who breach Section 38 (and all its Directors) are
  guilty of a criminal offense.


  Also, a transaction in breach of Sec. 38 (together with all unseverable
  transactions) are void in their entirety.


   Directors could be held liable by shareholders for breaching their
   fiduciary duty.


   The recipient of the assistance and the lender could be forced by the
   liquidator to reverse the transaction.


   It is widely acknowledged that the consequences of section 38 hamper
   commercial activity and are, to that extent, too harsh.
    SEC. 38 (2) (d)


    (Sec. 38 does not prohibit) the provision of financial assistance for the
    acquisition of shares in a company by the Company or its subsidiary in
    accordance the provisions of S. 85 for the acquisition of those shares


            (Sec. 38 does not prohibit) the provision of financial assistance by
Version 1   the Company or its subsidiary in accordance the provisions of S. 85
            for the acquisition of those shares




            (Sec. 38 does not prohibit) the acquisition of shares in a company
Version 2   by the Company or its subsidiary in accordance the provisions of S.
            85 for the acquisition of those shares
             (Sec. 38 does not prohibit) the provision of financial assistance by
Version 1    the Company or its subsidiary in accordance the provisions of S. 85
             for the acquisition of those shares


            SHARES                              SHARES
              BUY-BACK




                                                    BUY-BACK
                         Financial
                         Assistance

             CO.                                   CO.         Financial
                                                               Assistance




                                                  SUB
             (Sec. 38 does not prohibit) the acquisition of shares in a company
Version 2    by the Company or its subsidiary in accordance the provisions of S.
             85 for the acquisition of those shares


            SHARES
              BUY-BACK




                                                      SHARES


                         Financial
                         Assistance
                                      Share
             CO.                      Acquisition        CO.


                                                                      Financial
                                                                      Assistance

                                                        SUB
SEC. 38 (2006 DRAFT AMENDMENT)

  (2A) Subsection 1 does not prohibit a company from giving financial
     assistance for the purchase of or subscription for shares of that company
     or its holding company, if –
  (a) the company’s board is satisfied that –
     (i) subsequent to the transaction, the consolidated assets of the company
     fairly valued will be more than its consolidated liabilities; and
     (ii) subsequent to providing the assistance and for the duration of the
     transaction, the company will be able to pay its debts as they become due
     in the ordinary course of business; and
  (b) the terms upon which the assistance is to be given is sanction by a special
     resolution of its members.
  (2B) For the purposes of paragraph 2 (A) (a), the directors must consider any
     contingent liabilities which may arise to the company, including any
     contingent liability which may result from giving the assistance.
  [Added by Corporate Laws Amendment Bill of 2006 ]
SEC. 38 (2006 DRAFT AMENDMENT)


  Intention is shareholder diversification (particularly to assist
  BEE transactions)


  Requires fulfillment of solvency and liquidity requirements and a
  Special Resolution.


   Solvency and liquidity test is “to the Board’s satisfaction”; thus no
   objective reasonableness or factual determination.


   Unclear what is meant by “duration of the transaction”
SEC. 40 (FINANCIAL ASSISTANCE: 2007 DRAFT BILL)

   (1) A company must not give direct or indirect financial assistance to a person for the
        purchase of or in connection with the purchase of a share or option issued or to be
        issued by the company or a related or inter-related company -
   (a) If the company’s Memorandum of Incorporation expressly prohibits giving such
        financial assistance, as contemplated in subsection (2) (b); or
   (b) In any other circumstances, unless all of the applicable following conditions are
        satisfied:
        (i) irrespective of the status or category of the company concerned, the board must be
        satisfied that –
              (aa)     immediately after giving the financial assistance, the company would be in
        compliance with the solvency and liquidity test, and
              (bb) the term under which such assistance is proposed to be given are fair and
        reasonable to the company.
        (ii) Any conditions or restrictions respecting the granting of such assistance set out in
        the company’s Memorandum of Incorporation, as contemplated in subsection (2) (c),
        must be satisfied.
        (iii) The financial assistance must be –
              (aa)     pursuant to an employee share scheme that satisfies the requirements of
        section 62; or
              (bb)     pursuant to a special resolution of the shareholders, adopted within the
        previous 5 years, which approved such assistance either for the specific recipient, or
        generally for a category of potential recipients, and the specific recipient falls within that
        category; or
              (cc)     in the case of a closely held company, pursuant to a specific authorisation
        set out in the company’s Memorandum of Incorporation
SEC. 40 (FINANCIAL ASSISTANCE: 2007 DRAFT BILL)


   Doesn’t identify specific types of transactions (presumably the
   Sec. 38 ones apply)

   Can Company assist itself?


   Is subscription covered?


   “Related of inter-related companies” covers subsidiaries

   No exception for money-lenders

				
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