Groups / Groepe : caput 6

• DOI: 10.10520/EJC74114
• Date: 01 January 2010
• Pages: 147-172
• Published date: 01 January 2010

147

CAPUT 6

GROUPS / GROEPE

6.1 Intra group transactions*

6.1.1 Introduction

Simplif‌ication was a primary aim in the design and drafting of the Close

Corporations Act, 1984. It avoids any real separtation between own-

ership and control by restricting the maximum number of members to

ten and by requiring them, in principle to be natural persons. Exclusion

of corporate membership prevents a situation where public companies

can by converting their subsidiaries into close corporations do business

in a form never intended for them. More particularly it is said to avoid

the necessity of “intricate and cumbersome clauses” to “provide for

disclosure and abuse of control arising from group formation.”1

A group may be def‌ined as a holding company, which is not itself a

wholly-owned subsidiary, together with all the companies which are its

subsidiaries.2 The essence of the holding/subsidiary relationship lies in

the direct or indirect control of the subsidiary by the holding company.3

It has been stressed that, because incorporated companies are ex-

cluded from direct or indirect membership of close corporations, pro-

vision does not have to be made for groupings and attendant com-

plications and problems.4 However, a close corporation may be a

* Based on Henning “The South African Close Corporation, group for-

mations and intra group transactions” 2006 International and Com-

parative Corporate Law Journal 1-25.

1 Naudé “The South African Close Corporation” 1984 Journal for Juridi-

cal Science 125; Henning (ed) “Close Corporations” in Joubert The

Law of South Africa (First Reissue) Vol 4.3 (1996) par 501.

2 Companies Act 61 of 1973 schedule 4 par 4(1), Cilliers and Benadé

et al Company Law (1982) 546; Cilliers and Benadé et al Corporate

Law (2000) 387; Cilliers and Benadé et al Entrepreneurial Law (2003)

237; Henning “Maatskappygroepe” in Lubbe Ouditkunde (1984) 168;

Botha Groups in South African Company Law (1981) 26.

3 Sage Holdings Ltd v The Unisec Group Ltd 1982 1 SA 337 (W) 350;

The Unisec Group Ltd v Sage Holdings Ltd 1986 3 SA 259 (T) 269;

Botha Groups 22; Meskin (ed) Henochsberg on the Companies Act

(2004) 11; Brooks “Share capital-related determinants of the holding/

subsidiary relationship” 1984 Modern Business Law 101.

4 Eg. Naudé “The South African Close Corporation” 1984 Journal for

Juridical Science 127-128; Venter “Die ontstaan en eienskappe van

die Wet op Beslote Korporasies, 1984” 1984 Journal for Juridical Sci-

ence; Cilliers and Benadé Corporate Law 548; Symington A Guide to

Close Cor porations (1984) 59; Malan Beslote korporasiereg (1986)

98; Oosthuizen Beslote korporasies (1986) 65; Geach and Schoeman

Guide to the Close Corporations Act and Regulations (1990) 567;

148

member of and shareholder in, and even control, a company. It is

therefore indeed necessary to make provision for such a grouping

and its attendant problems. If this is not done, the relevant provisions

of the South African Companies Act 61 of 1973 (the “Companies Act”)

could be circumvented by simply placing a close corporation in control

of one or more companies in a pyramid.5

Section 55 of the Close Cor porations Act is designed specif‌ically to

prevent the circumvention of certain provisions aimed at combating

the abuse of control. It provides for the application of section 37 and

certain provisions of section 226 of the Companies Act in cases where

the relationship between a close corporation and a company is such

that if the close corporation were a company, the corporation would

be a holding company of the f‌irst-mentioned company. For the sake

of brevity, such close corporations will be referred to as “controlling

corporations” and such companies as “controlled companies”.6

This very limited application of a few provisions of the Companies Act

by section 55 of the Close Corporations Act does not justify a conclu-

sion that the legal position of a controlling corporation and its con-

trolled company or companies can generally, and simply, be labelled

with the same tag as that of a holding company and its subsidiary

or subsidiaries. Unqualif‌ied comments that a close corporation is, for

example, regulated as “a holding company in a group” and that a “cor-

poration does in fact become the holding company of a limited com-

pany”, as well as references to a “close corporation which is a holding

company” can quite conceivably contribute very little to averting incor-

rect conclusions in this regard.7 The same applies to too broad state-

ments, for example that “the Close Corporations Act treats a close

corporation controlling a company as if it were the holding company

of a subsidiary in the context of the Companies Act”.8

In this contribution, attention is therefore focused specif‌ically on ca-

veats which should be taken into account if the legal position of con-

trolling close corporations and their controlled companies is to be

considered with the necessary circumspection.

Beuthin Basic company law (2000) 303; Williams Concise company

and partnership law (1997) 320. See also Blumberg The Law of Cor-

porate Groups (1987) 39; Olbrisch Die südafrikanische close corporation

und ihre strukturellen Unterschiede zur deutschen Gmbh (1997) 44.

5 Naudé 1984 Journal for Juridical Science 127-128; Venter 1984 Jour-

nal for Juridical Science 113.

6 See Henning “Beslote Korporasies in groepsverband” 1992 THRHR 286.

7 See Cilliers et al Close Corporations Law (1998) 5-8.

8 Supplement to Wille and Millin’s Mercantile Law of South Africa (un-

dated) 19.