These notes have been passed down and sold through 3 generations of Stellenbosch law students. This is my addition to the body of company law notes. I know it can really be a killer but these notes really helped me and I ended up doing really well in my exam. Please do send me an in-mail I have ext...
Part 10: Corporate Finance II
What does the company do with the money it receives for its issued shares?
Closely related to corporate governance we deal with ways benefits/funds of the
company can be given to its shareholders.
o Because the company is a separate JP, the creditors rely on the funds within
the company
o This part of corporate finance looks at those rules which prevent a
shareholder from abusing control of the company and using the funds for
their own benefit and to the detriment of creditors
o Secondly, that the directors who are appointed by certain shareholders do
not harm the general body of shareholders
Previously, the main protection given for creditors and shareholders in this context
was ‘capital maintenance’
10.1 Capital maintenance
The idea is to achieve protection of creditors against abuses by the company of its
capital; also protection of shareholders to a degree
o What is it? idea was that when shareholders provide funding to the
company, that funding (through purchasing shares) should serve as a
guarantee fund for the creditors
o Funds serve as a buffer for the creditors to ensure their debts will be paid
Traditionally, we had the capital maintenance rule, which said that the shareholders
could not touch the capital of a company (had to stay in the company as a guarantee
fund)
o Most obvious way of abusing company funds as the board is e.g. issuing
dividends to shareholders, buy-backs, issuing shares at a discount, loans to
directors, bursaries to directors’ children, etc
o Basic rules/principles
1. If the company wanted to pay dividends, had to come out of profits
only
2. Buy-backs were not possible when the company buys back its own
shares, the shares go back to the company (they are redeemed), and
funds of the company are given to the shareholders, idea that this
would undermine the guarantee fund
3. Shares could not be issued below par value
o You want to prevent the company’s funding being abused by shareholders or
people related to or in control of the company
o You could only use the company’s funding for business activities
o Certain jurisdictions still use the capital maintenance rule
Legislature (1973 Act and its predecessor) refined these rules somewhat – (own
notes)
1. Prohibited certain kinds of financial assistance given to purchasers of shares in
the company
o If you can’t give back the funds that were paid to the company in exchange
for shares, then the company also shouldn’t give financial assistance to allow
them to buy shares
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