ODR 320 Legal opinion PDF

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/ODR 320 Assignment/15/11/LEGAL OPINION TO: Blaque Diamonds Proprietary Limited Dear: Thabo Luthuli (Chief Executive Officer of Blaque Diamonds Proprietary Limited) 1. Introduction You have approached me to provide you with a legal opinion on matters concerning the raising of capital as well as a pr...

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/ODR 320 Assignment/15/11/2021

LEGAL OPINION TO: Blaque Diamonds Proprietary Limited Dear: Thabo Luthuli (Chief Executive Officer of Blaque Diamonds Proprietary Limited) 1. Introduction You have approached me to provide you with a legal opinion on matters concerning the raising of capital as well as a problematic director. 2. Raising of Capital

2.1 Analysis of Facts In order to raise more capital, Blaque Diamonds Proprietary Limited wants to issue 500 unissued shares to their investor Phat Cat Venture Capital. In light of this the company would like to convert all company shares into NPV shares. The shareholding structure of Blaque Diamonds has not been altered since inception in 2001.

2.2 Analysis of Legal Position applicable to the facts In terms of s8(2)(b)(i)(ii), a profit company is a private company if it is not a state-owned company; and its Memorandum of Incorporation prohibits it from offering any of its securities to the public; and restricts the transferability of its securities.1 Private companies must comply with the criteria in terms of s8(2)(b).2

S36(1)(a) provides that a company’s Memorandum of Incorporation must set out the classes of shares, and the number of shares of each class, that the company is authorized to issue.3 S38(1) further holds that the board of a company may resolve to issue shares of the company at any time, but only within the classes, and to the extent, that the shares have been authorised by or in terms of the company’s Memorandum of Incorporation, in accordance with section 36.4 A company may only issue shares in line with number authorised in the MOI or as decided by the board.5

1 The Companies Act 71 of 2008. 2 The Companies Act 71 of 2008. 3 The Companies Act 71 of 2008. 4 The Companies Act 71 of 2008. 5 CDH Invest NV v Petrotank South Africa (Pty) Ltd and Another 2018 1 All SA 450 (GJ).

The power to issue shares is also subject to the fiduciary duties of directors.6 S36(3) states briefly that the board may either increase or decrease the number of authorised shares in a particular class or reclassify shares not yet issued (basically the board’s role in authorised issuing of shares).7 S39(2) states that if a company proposes to issue any shares other than as contemplated, each shareholder of that private company has a right before any other non-shareholder to be offered and to subscribe for a percentage of shares tote offered equal to the voting power of general voting rights immediately before that offer was made.8 Reg(31)(3) states that if immediately before the effective date, a pre-existing company has any authorised class of par value or nominal value shares from which it has not issued any shares before the effective date, the company must not issue any shares of that class on or after the effective date, until it has converted that class of shares in accordance with paragraph (b); and the board of the company may convert that class, or those classes, of authorised shares to shares having no nominal or par value, by adopting a board resolution to do so, and filing a notice of that resolution in Form CoR 31, without charge, at any time after the effective date.9 In order to effect a conversion of PV issued shares of a specific class or classes, an amendment of a company’s MOI is required which may be proposed at any time by the company’s board and all have been adopted only if it is approved by special solution adopted by the holders of each such class of shares to be converted and a further special resolution adopted by a meeting of the company’s shareholders is called for that purpose.10 2.3 Application of law to the facts Blaque Diamonds Proprietary Limited is a private a company and thus complies with the criteria set out in s8(2)(b).11 In terms of s36(1), In order for Blaque Diamonds to issue 500 shares to your investor Phat Cat Venture Capital, the company’s Memorandum of Incorporation must set out the classes of shares, and the number of shares of each class, that the company is authorized to issue.12 Referring to Blaque Diamonds MOI, the company has an authorised share 6 Delport New Entrepreneurial Law (2020) 7 The Companies Act 71 of 2008. 8 The Companies Act 71 of 2008. 9 The Companies Act 71 of 2008. 10 The Companies Act 71 of 2008. 11 The Companies Act 71 of 2008. 12 The Companies Act 71 of 2008.

capital of R1000,00 (one thousand rand) comprising 1000 (one thousand) ordinary par value Shares of R1 (one rand) each, which Shares were created prior to 1 May 2011. The issued share capital of the company is 200 shares.

In terms of s38(1) the board of Blaque Diamonds may issue shares at any time provided that the shares being issued are in line with the number set out in the MOI which in this case is 1000 ordinary shares – 200 issued shares = 800 unissued shares.13 So Blaque Diamonds has 800 unissued shares available to issue. Before a subscription contract takes place between Blaque Diamonds and its prospective shareholders its important that s39(2) is highlighted.

In terms of s39(2), before Blaque Diamonds issues the 500 shares to Phat Cat Venture Capital, each shareholder namely Aaron Holdings Proprietary Limited, Betha Incorporated and Cocomelon Proprietary Limited has a pre-emtative right before any other non-shareholder to be offered and to subscribe for a percentage of shares tote offered equal to the voting power of general voting rights immediately before that offer was made.14 In light of converting all the company shares into NPV shares, since Blaque Diamond is a preexisting company, its 800 authorised shares is subject to the board converting this class of shares to shares having no nominal or par value by adopting a board resolution to do so as well as filing a notice of that resolution in form CoR 31, without any charge at any time after the effective date.15

In order to effect a conversion of PV issued shares of a specific class or classes, an amendment of a Blaque Diamonds MOI is required which may be proposed at any time by the company’s board and all have been adopted only if it is approved by special solution adopted by the holders of each such class of shares to be converted and a further special resolution adopted by a meeting of the company’s shareholders is called for that purpose.16

2.4 Conclusion/Recommendation In order for your company to issue the 500 shares to Phat Cat Venture Capital, s38(1) in accordance with s36 must be followed as guidelines as well as s39(2) regarding your current 13 The Companies Act 71 of 2008. 14 The Companies Act 71 of 2008. 15 The Companies Act 71 of 2008. 16 The Companies Act 71 of 2008.

shareholders. With regards to converting all the company’s shares to NPV shares Reg 31 sets out the procedure for preexisting companies to convert both unissued and issued shares to NPV shares.17

3. Problematic Director

3.1 Analysis of Facts Susan Grootman director of Blaque Diamonds and chairperson of the company’s investment committee has been using her position as director to solicit opportunities for another company in which she is a sole director. 3.2 Analysis of Legal Position applicable to the facts In terms of s71(1) an Elected director may be removed be by an ordinary resolution adopted at meeting of shareholders by the persons entitled to exercise voting rights in an election of that director, subject to subsection 2.18 However, s71(2) further states that such a director must be given notice and resolution as well as be given the opportunity to make a presentation.19 S71(3)(a)-(b) states that when there is more than one director in a company, and a shareholder or director alleges that a director of a company has neglected, or been derelict in the performance of, the functions of director, the board must determine the matter by resolution and is permitted to remove the director concerned.20 S71(4) states that before the board of a company may consider a resolution contemplated in subsection (3), the director concerned must still be given an opportunity to receive a copy of notice and proposed resolution and an opportunity to make a presentation at the meeting prior to the resolution being put to vote.21 S71(5) provisions for a 20 business day time limit to review the decision of the board. It is important to note that the director will have common law or other remedies available for loss or damage that result from removal in terms of s71(9).22 3.3 Application of law to the facts

17 The Companies Act 71 of 2008. 18 The Companies Act 71 of 2008. 19 The Companies Act 71 of 2008. 20 The Companies Act 71 of 2008. 21 The Companies Act 71 of 2008. 22 The Companies Act 71 of 2008.

The steps needed to be taken against Susan Grootboom are set out in s71, which entails the removal of Susan Grootboom as one of the directors of Blaque Diamond.23 In terms of Baque Diamonds MOI it states that a director may only be removed from the board by special resolution. It is thus important that the board of your company provide Susan with notice of the meeting and the resolution as well as the opportunity to make a presentation before the resolution is put to vote.

Since there are more than 2 directors in Blaque Diamonds, and you as a director alleged that Susan has neglected, or been derelict in the performance of, the functions of director, the board must determine the matter by resolution and is permitted to remove the director concerned in terms of s71(3)(a)-(b).24 However, before this can take place it is important once again that Susan be given the opportunity to receive a copy of notice and proposed resolution as well as the opportunity to make a presentation at the meeting prior to the resolution being put to vote.

3.4 Conclusion/Recommendation In order for Blaque Diamonds Proprietary Limited to take action against Susan Grootman, the procedure set out in s71 of the companies provides a step-by-step process of what is needed to take place in order for the removal of a director to take place.25

23 The Companies Act 71 of 2008. 24 The Companies Act 71 of 2008. 25 The Companies Act 71 of 2008.

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