InBrief

Whats happening in the legal sector

November 2014

Private companies
and the restriction on
transferability of shares

Plus

Digitise the paper trail?

Taking cession of claims that are the
subject of litigation
 InBrief 1

Welcome to Private companies and the

InBrief
restriction on transferability of
shares
When drafting a Memorandum of Incorporation It could be argued that where the Act stipulates
(MOI) the question often arises as to which that the MOI of a company is to deal with a
provisions should be dealt with in the MOI and certain subject matter, then to deal with that
which should be agreed upon in the subject matter in the MOI and then to
shareholders agreement. Section 8(2)(b)(ii)(bb) supplement it in a shareholders agreement
of the Companies Act 71 of 2008 (the Act) potentially renders the shareholders agreement
Im always amazed by the extent states the following: inconsistent with the MOI. An example of this
to which life and law intermingle. would be where an MOI restricts the
On the one hand we are debating A prot company is transferability of shares by requiring director
Oscar, the concept of dolus approval, and a shareholders agreement
(a) ... restricts transferability by recording pre-emptive
eventualis and the reasonable man
(b) a private company if rights in favour of existing shareholders.
test and on the other hand we are
researching the complex set of (i)... The intention of the legislature could be
laws surrounding the (ii) its Memorandum of Incorporation interpreted to be that a third party should be
transferability of shares in private (aa) ... entitled to rely on a companys MOI as the sole
companies and whether or not (bb) restricts the transferability of its record of all provisions which the Act stipulates
our clients POPI policies are securities; should be dealt with in the MOI. If this
sufciently far reaching to argument is sound, then in the aforesaid
encompass the transfer of data in This means that in order for a prot company to example the pre-emptive rights in the
cross border transactions. Makes qualify as a private company, its MOI must shareholders agreement would be invalid as
for interesting times and ironically, restrict the transferability of its securities being inconsistent with the MOI.
(shares are included in the denition of
we are often more caught up in
securities in the Act). To achieve this, it is There are accordingly two reasons for recording
the legal matters which affect us
clearly insufcient for an MOI merely to record pre-emptive provisions in an MOI and not in a
the least.
that the transferability of its securities is shareholders agreement:
restricted. The manner in which these
restrictions apply must be set out in the MOI. 1. To ensure compliance with the
Wynne Kossuth
A requirement of the previous Companies Act of provisions of section 8(2)(b)(ii)(bb);
Partner 1973 was that a private companys Articles of
Association had to restrict the right to transfer 2. To remove any possible argument
its shares. Henochsberg points out that the that dealing with pre-emptive rights
concept of restricting the right to transfer in a shareholders agreement leads to
shares is a more limited concept than a an inconsistency between the MOI
restriction on the transferability of shares and the shareholders agreement, and
(Henochsberg on the Companies Act 71 of 2008 the resultant invalidity of the pre-
at p 50). emptive rights.

Editor in Chief There are a number of ways in which the It is arguable that forced sale and come along
transferability of securities can be restricted. clauses do not restrict the transferability of
Wynne Kossuth Examples are the recordal of pre-emptive rights shares, but rather that they oblige a shareholder
in favour of existing security holders or requiring to dispose of its shares under certain
the directors of a company to approve the circumstances. These types of clauses, however,
Editor
transfer of securities. Henochsberg is critical of are usually so intertwined with pre-emptive
Rowan Stafford using the approval of directors as a requirement provisions and tag along clauses that they too
for the transfer of securities. He argues that this should be included in the MOI of a company,
creates uncertainty in that the decision of the and not in a shareholders agreement.
Publishing and Design directors must be subject to their duciary duties
(Henochsberg 51).
Leanne Cherry

In many instances, pre-emptive rights provide

Distribution the only restrictions on the transferability of
shares agreed to by the shareholders, in which
Leanne Cherry case these provisions would need to be in the
companys MOI in order for the company to
qualify as a private company. Also relevant to
Contributors
this discussion is section 15(7) of the Act. In Monique Gresse
Monique Gresse terms of this section, a shareholders agreement
must be consistent with the Act and the Candidate Attorney
Tomiwa Toriola companys MOI, and any inconsistency is void
Chris Richardson to the extent of the inconsistency.
 InBrief 2

Digitise the paper trail?

The hard copy retention of records is timeworn. Food for thought simply because, although ECTA
For the progressive and tech-savvy ofce enables the electronic retention of records, certain
manager, the notion of storage rooms piled high legislation, for example, the Protection of Personal
with les can be daunting. Where certain Information Act No 4 of 2013 requires personal or
legislation requires the retention of records for up de-identified information to be destroyed if no
to 15 years, one can easily imagine situations longer required for the purpose for which it was
where the hard copy retention of such records is retained and SARS has set out encryption
simply not practical or cost effective. considerations which must be taken into account
when storing records electronically.
Most businesses have transformed to digital
record management practices. With just one click, Such policy would need to ensure that your
all your records are available digitally, be it value- record management practices are in line with
added tax documentation to substantiate a zero- applicable laws and in the event of a SARS audit
rating claim or annual nancial statements or where records are required by third parties,
required for an audit. that you are compliant with best record retention
practices.
Aside from the practicability of such an exercise,
the legal aspects thereof must also be considered. A bit of a quagmire we would suggest!
Section 16 of the Electronic Communications and
Transactions Act No 25 of 2002 (ECTA) provides
that where a law requires any information to be
retained, that requirement is fullled by retaining
such information in the form of a data message
(i.e. an electronic record), provided that:

the information contained therein

remains accessible so as to be capable
of use for subsequent reference; Tomiwa Toriola
the electronic record is retained in the
Candidate Attorney
form it was originally generated, sent or
received, or in a format which can be
demonstrated to represent accurately,
the information generated, sent or
received; and
the origin/destination of the electronic
record and the date and time it was sent
or received can be determined.

Have you already implemented an electronic

record management system? No problem, but
have you considered introducing a record
management policy which governs the electronic
storage of your records and ensures compliance
with applicable legislation?
 InBrief 3

Taking cession of claims that are the subject of

litigation
In the recent matter of Natal Rubber It was further argued that: As the subject matter of the cession was the
Compunders (Pty) Ltd v Bernard Fisher subject of litigation, the cession itself does not
(13172/2010) [2014] KZD in which Eversheds without such notice of amendment, Z transfer the right to prosecute the action to the
acted, the court was asked to decide on the would not have been able to claim cessionary, as that right only accrues to it when
effects of cession in relation to claims that are payment of the debt and that the the Court substitutes it as the plaintiff. As Y did
the subject of litigation. notice of amendment and substitution not object to the substitution of X by Z, Y was
of Z as plaintiff constituted a process deemed to have consented to the substitution.
In the matter, X instituted action against Y whereby Z commenced its
within the prescription period of three years
proceedings; The Court agreed with Z that the substitution of
after the debt being relied on became due. After
the process commenced by X, X by Z did not result in the original interruption
the close of pleadings and after the prescription
embodied in the combined summons, of prescription being extinguished in very much
period, X entered into an agreement with Z in
terms of which Z purchased and took cession of had lapsed upon Xs cession of the the same way as when an executor, or a curator,
the claims of X against Y, including the claim right of action to Z and/or the ling of is substituted as plaintiff in the place of a
arising out of the action which X had instituted the notice of intention to amend deceased, or insolvent, or disabled person. He
against Y. and/or the resultant substitutions of X steps into the shoes of that person in respect of
for Z; any claim already instituted by that person prior
In accordance with the agreement, Z was in order to preserve the interruption of to his death, insolvency or disability and the
substituted as plaintiff in the action between X prescription constituted by the service prior appointment of the executor or curator.
and Y. The substitution was effected by way of a of the combined summons on Y, X was Once Z had been properly substituted in place
notice of intention to amend and a subsequent
required in terms of the provisions of of X, Z inherited all rights and obligations
notice of amendment. Y did not object to the
Section 15(2) of the Prescription Act, to invested in X at the time of the substitution,
substitution but raised a special plea of
prescription upon perfection of the substitution. prosecute its claim to completion and including the right acquired by the proper and
to obtain judgment against Y; timeous service of the original summons
At the hearing of the special plea it was argued due to Xs failure to prosecute its claim interrupting prescription.
by Y that the claim, had prescribed: (i) upon the to completion, the interruption of the
cession of the claim to Z at the date of such running of prescription by the service The special plea was accordingly dismissed.
cession; (ii) upon the issue of the relevant notice of the combined summons fell away,
of intention to amend or (iii) by the amendment and the debt had accordingly
substituting Z in the place of X. prescribed.

Relying on the provisions of Section 15(6) of the

Reliance was placed by Y on the decisions of the
Prescription Act No. 68 of 1969, Y submitted
Supreme Court of Appeal in the matter of
that the notice of intention to amend constitutes
a process within the meaning of that word in Silhouette Investments Limited v Virgin Hotels
that Act. The case of Mias De Klerk Boerdery Group Ltd 2009 (4) SA 617 (SCA) and the decision
(Edms) Bpk v Cole 1986 (2) SA 284 (N) was of the Supreme Court of Appeal in Tecmed (Pty)
used in support of this submission, wherein it Ltd and Others vs Nissho Iwai Corporation and Chris Richardson
was held that a notice of intention to amend in Another 2011 (1) SA 35 (SCA) 20. Senior Associate
terms of Rule 28 of the Uniform Rules of Court
was a process in terms of section 15(1) of the In opposing the special plea, Z placed strong
Prescription Act, which interrupted the running emphasis on the case of Van Rensburg v
of prescription.
Condoprops 42 (Pty) Ltd 2009 (6) SA 539 E in
which the importance of distinguishing between a
Y submitted that accordingly, if Z were to obtain
cause of action on one hand and a debt as
nal judgment in its favour in this case, the
process under which it would obtain such envisaged by the Prescription Act on the other was
judgment would be the notice of intention to highlighted. According to the judgment in that
amend read together with the notice of case:
amendment. Since the notice was affected after
the three year prescription period, so Y The Prescription Act prescribes periods
concluded, Zs claim had become prescribed. of prescription in respect of debts and
not periods of prescription relating to
causes of action, the debt remains the
same.

Z argued further that the effect of a cession of a

claim which is the subject of litigation, which takes
place after the close of pleadings, is that the
cessionary cedes its interest not in the claim, but
in the result of the litigation. www.eversheds.com
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