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

Welcome to
InBrief
Im always amazed by the extent
to which life and law intermingle.
On the one hand we are debating
Oscar, the concept of dolus
eventualis and the reasonable man
test and on the other hand we are
researching the complex set of
laws surrounding the
transferability of shares in private
companies and whether or not
our clients POPI policies are
sufciently far reaching to
encompass the transfer of data in
cross border transactions. Makes
for interesting times and ironically,
we are often more caught up in
the legal matters which affect us
the least.
Wynne Kossuth
Partner
Editor in Chief
Wynne Kossuth
Editor
Rowan Stafford
Publishing and Design
Leanne Cherry
Distribution
Leanne Cherry
Contributors
Monique Gresse
Tomiwa Toriola
Chris Richardson
Private companies and the
restriction on transferability of
shares
When drafting a Memorandum of Incorporation
(MOI) the question often arises as to which
provisions should be dealt with in the MOI and
which should be agreed upon in the
shareholders agreement. Section 8(2)(b)(ii)(bb)
of the Companies Act 71 of 2008 (the Act)
states the following:
A prot company is
(a) ...
(b) a private company if
(i)...
(ii) its Memorandum of Incorporation
(aa) ...
(bb) restricts the transferability of its
securities;
This means that in order for a prot company to
qualify as a private company, its MOI must
restrict the transferability of its securities
(shares are included in the denition of
securities in the Act). To achieve this, it is
clearly insufcient for an MOI merely to record
that the transferability of its securities is
restricted. The manner in which these
restrictions apply must be set out in the MOI.
A requirement of the previous Companies Act of
1973 was that a private companys Articles of
Association had to restrict the right to transfer
its shares. Henochsberg points out that the
concept of restricting the right to transfer
shares is a more limited concept than a
restriction on the transferability of shares
(Henochsberg on the Companies Act 71 of 2008
at p 50).
There are a number of ways in which the
transferability of securities can be restricted.
Examples are the recordal of pre-emptive rights
in favour of existing security holders or requiring
the directors of a company to approve the
transfer of securities. Henochsberg is critical of
using the approval of directors as a requirement
for the transfer of securities. He argues that this
creates uncertainty in that the decision of the
directors must be subject to their duciary duties
(Henochsberg 51).
In many instances, pre-emptive rights provide
the only restrictions on the transferability of
shares agreed to by the shareholders, in which
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
this discussion is section 15(7) of the Act. In
terms of this section, a shareholders agreement
must be consistent with the Act and the
companys MOI, and any inconsistency is void
to the extent of the inconsistency.
InBrief 1
It could be argued that where the Act stipulates
that the MOI of a company is to deal with a
certain subject matter, then to deal with that
subject matter in the MOI and then to
supplement it in a shareholders agreement
potentially renders the shareholders agreement
inconsistent with the MOI. An example of this
would be where an MOI restricts the
transferability of shares by requiring director
approval, and a shareholders agreement
restricts transferability by recording pre-emptive
rights in favour of existing shareholders.
The intention of the legislature could be
interpreted to be that a third party should be
entitled to rely on a companys MOI as the sole
record of all provisions which the Act stipulates
should be dealt with in the MOI. If this
argument is sound, then in the aforesaid
example the pre-emptive rights in the
shareholders agreement would be invalid as
being inconsistent with the MOI.
There are accordingly two reasons for recording
pre-emptive provisions in an MOI and not in a
shareholders agreement:
1. To ensure compliance with the
provisions of section 8(2)(b)(ii)(bb);
2. To remove any possible argument
that dealing with pre-emptive rights
in a shareholders agreement leads to
an inconsistency between the MOI
and the shareholders agreement, and
the resultant invalidity of the pre-
emptive rights.
It is arguable that forced sale and come along
clauses do not restrict the transferability of
shares, but rather that they oblige a shareholder
to dispose of its shares under certain
circumstances. These types of clauses, however,
are usually so intertwined with pre-emptive
provisions and tag along clauses that they too
should be included in the MOI of a company,
and not in a shareholders agreement.
Monique Gresse
Candidate Attorney
 InBrief 2

Digitise the paper trail?

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

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

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

Prescription Act No. 68 of 1969, Y submitted
that the notice of intention to amend constitutes
a process within the meaning of that word in
that Act. The case of Mias De Klerk Boerdery
(Edms) Bpk v Cole 1986 (2) SA 284 (N) was
used in support of this submission, wherein it
was held that a notice of intention to amend in
terms of Rule 28 of the Uniform Rules of Court
was a process in terms of section 15(1) of the
Prescription Act, which interrupted the running
of prescription.
Y submitted that accordingly, if Z were to obtain
nal judgment in its favour in this case, the
process under which it would obtain such
judgment would be the notice of intention to
amend read together with the notice of
amendment. Since the notice was affected after
the three year prescription period, so Y
concluded, Zs claim had become prescribed.
Reliance was placed by Y on the decisions of the
Supreme Court of Appeal in the matter of
Silhouette Investments Limited v Virgin Hotels
Group Ltd 2009 (4) SA 617 (SCA) and the decision
of the Supreme Court of Appeal in Tecmed (Pty)
Ltd and Others vs Nissho Iwai Corporation and Chris Richardson
Another 2011 (1) SA 35 (SCA) 20. Senior Associate
In opposing the special plea, Z placed strong
emphasis on the case of Van Rensburg v
Condoprops 42 (Pty) Ltd 2009 (6) SA 539 E in
which the importance of distinguishing between a
cause of action on one hand and a debt as
envisaged by the Prescription Act on the other was
highlighted. According to the judgment in that
case:
The Prescription Act prescribes periods
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
EVERSHEDS 2014. An Eversheds afliate, owned and
operated under licence by Eversheds (SA) Inc. Registration
No. 2012/097841/21