Chapter 16 - Close corporations

Question 1

What is a founding statement?

Answer 1

It is a sole consecutive or registration document for close corporations. (Form CK1)

Question 2

What does perpetual succession mean?

Answer 2

Indicating independence from the members of the close corporation., meaning the close corporation will continue to exist even if the members change.

Question 3

How many members are close corporations limited to?

Answer 3

10 (Ten)

Question 4

Who is excluded from membership in a close corporation?

Answer 4

1. Juristic persons

Question 5

Who may be a member of a close corporation?

Answer 5

1. Natural persons
2. A minor, or a person under legal disability ma become or remain a member of a close corporation with the necessary assistance from a guardian, trustee or court.

Question 6

What is an amended founding statement?

Answer 6

The document, which must be lodged should the particulars of members or the business change after registration of the founding statement, (Form CK2)

Question 7

What is a member’s contribution?

Answer 7

A contribution must be made by each member. ( I consist of money, a thing or services contributing to the business of the close corporation.)

Question 8

Under the Companies Act, is it still possible to register a close corporation?

Answer 8

No, however, it may still be necessary to acquire information regarding a close corporation or to amend the founding statement by lodging a Form CK2 with CIPC.

Question 9

What particulars of the business are indicated in the founding statement?

Answer 9

1. The full name of the business.
2. The principal business.
3. The number of members.
4. The date of the end of the financial book year.
5. The aggregate member’s contribution.
6. The postal address
7. The address of the registered office
8. The name and postal address of the accounting officer
9. The particulars of the founding members
10. The member’s interest of each member expressed as a percentage

Question 10

What are the characteristics of a member’s interest?

Answer 10

1. Member’s interest is expressed as a percentage (out of 100%) in the founding statement.
2. Member’s interest may not be jointly held.
3. The aggregate members’ interest must at all times be 100%.
4. A member’s interest in a close corporation is similar to a share in a company.
5. Member’s interest is an incorporeal, moveable thing.
6. Member’s interest is a personal right to share in the close corporation’s profits after its creditors have been paid.

Question 11

How can a member’s interest be acquired?

Answer 11

By:
1. Acquiring member’s interest from existing members.

2. Making a contribution to the close corporation.

Question 12

What are the requirements for the disposal of the member’s interest?

Answer 12

1. It must be made in accordance with the association agreement.
2. The consent of all members is required.

Question 13

In the event of death, what should happen if members do not consent to the transfer of interest to the heir or legatee?

Answer 13

The executor of the estate may:

1. sell the member’s interest to the close corporation.
2. sell the interest to other members.
3. sell the member’s interest to a third party, subject to the other members’ pre-emptive right to purchase the member’s interest.

The money will thereafter be paid over to the heir/legatee.

Question 14

In the case of insolvency of a member, how may the trustee of the insolvent estate handle the member’s interest?

Answer 14

1. sell the member’s interest to the close corporation.
2. sell the member’s interest to the other members.
3. sell the member’s interest to a third party, subject to the other members’ pre-emptive right to purchase the member’s interest.

The money will thereafter be paid to the creditors.

Question 15

What duties do members owe to the corporation?

Answer 15

1. Fiduciary duty
2. A duty of care and skill.

Question 16

What is a fiduciary duty?

Answer 16

1. To act honestly and in good faith
2. Avoid a conflict of interest between his or her own interests and those of a close corporation.

Question 17

What is the duty of care and skill?

Answer 17

A member will be liable for breach of the duty of care and skill only if the corporation suffers a loss as a result of the breach of his or her duty.

Question 18

What are remedies in the case of breach?

Answer 18

1. Statutory derivative action
2. Cessation of membership by a court order.

Question 19

What is statutory derivative action?

Answer 19

Section 50 of the Close Corporation Act provides for an action to be instituted by a member against fellow members on behalf of the close corporation for a liability to the company on the specified grounds, including a breach of a fiduciary duty or the duty of care and skill. Therefore, this is a statutory derivative action.

Question 20

What is the cessation of membership by a court order?

Answer 20

1. Section 36: order of court terminating membership.
2. Section 49: assistance from the court regarding unfairly prejudicial conduct.

Question 21

In terms of Section 36, what must the member(s) prove to apply for termination of another member’s membership by order of court?

Answer 21

1. The member is unable to perform his/her part in carrying on the business.
2. The member’s conduct is likely to have a prejudicial effect on the carrying on of the business in the close corporation.
3. The member’s conduct has made it reasonably impossible for other members to associate with him or her in carrying on the business of the close corporation.
4. In the circumstances, it is just and equitable that such a person should cease to be a member of the close corporation.

Question 22

What are the requirements for the acquisition of a member’s interest by the close corporation?

Answer 22

1. The corporation must have at least one other member.
2. The aggregate members’ interest must remain 100%.
3. Written consent from all members is required prior to payment.
4. The corporation must be solvent after payment for the acquisition and liquid both before and after payment.

Question 23

What is an association agreement?

Answer 23

A non-compulsory agreement to arrange internal affairs within the close corporation.

Question 24

What are internal relationships?

Answer 24

The relationships between members amongst each other and the relationship between the close corporation and its members.

Question 25

What may be arranged in terms of an association agreement?

Answer 25

1. The rights of the members to carry on business and manage the close corporation 2. What the requirements are for making a decision and voting? 3. The procedure and proportions for payments to members.

Question 26

Who represents the close corporation?

Answer 26

Section 54 of the Close Corporations Act states that every member has the authority to conclude contracts on behalf of the close corporation in relation to a person who is not a member.

Question 27

How are payments made to the members by the corporation?

Answer 27

In terms of Section 51, no payment may be made to members in their capacities as such if the solvency or liquidity criteria are not complied with and the other members have not all provided their written consent for such a payment.

Question 28

Can the corporation offer loans to and security on behalf of members?

Answer 28

The Close Corporations Act contains prohibitions against the provision of loans and security to members. Only if all other members consent in writing may such a loan or security be extended. Should the requirements of Section 52 not be adhered to, any loan or security provided will be invalid, and members who permitted the transaction will incur liability.

Question 29

How is financial reporting carried out in a close corporation?

Answer 29

An annual financial statement must be drawn up. A close corporation need not, in terms of the Close Corporation Act, appoint an auditor, however, an accounting officer must be appointed who must conform to generally accepted accounting practice. Accounting records must be kept and approved by members holding at least 51% of the member's interest in the close corporation annually.

Question 30

List advantages associated with close corporations.

Answer 30

1. The relative ease of formation. 2. The limited liability of the members by virtue of the fact that it enjoys legal personality. 3. Increased capital-acquisition potential. 4. Continuity

Question 31

List disadvantages associated with close corporations.

Answer 31

1. No new close corporations can be formed under Companies Act. 2. Close corporations are subject to some legislative principles contained in the Companies Act of 2008 in addition to those contained in the Close Corporations Act. 3. Members are limited to 10 (ten). 4. Juristic persons may not be members.