Legal framework of the close corporation : chapter 3
| Date | 01 January 2008 |
| DOI | 10.10520/EJC74092 |
| Author | Christoph Jaehne |
| Pages | 43-78 |
| Published date | 01 January 2008 |
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CHAPTER 3
LEGAL FRAMEWORK OF THE CLOSE CORPORATION
3.1 Introduction
Like the GmbH, also the close corporation is the subject of its own
specific Act. This being the Close Corporations Act 69 of 1984, which
came into effect on 1 January 1985.1
The following chapter deals with the legal framework surrounding
the close cor poration. As in case of the GmbH, in the early stages
of its introduction some in the business and legal community were
raising doubts in connection with this new legal form. However, with
the apparent success of the close corporation criticism quickly sub-
sided. The most relevant other forms to conduct business in South
Africa are partnerships and the public and private company.
Concerning the close corporation, being seen as the backbone of
free enterprise, developments resulting out of a DTI policy paper ti-
tled “South African company law for the 21st century — Guidelines
for cor porate law reform” also will have implications on this business
form. Additional aspects influencing the ongoing reform process in
company law are intra-South African factors, in par ticular the discus-
sion regarding the constitution, its values and its practical relevance.
However, to put the reform process in perspective, it is also relevant to
sketch some developments elsewhere which might be of impor tance
for the South African discussion. Important to mention at this stage
is therefore the reform process in England because of the special
relationship between South African and English company law. So the
British aim to create a simple and modern framework for their com-
pany and partnership law can be of relevance for the South African
situation. Accordingly the various reports of, i.a., Law Commissions
regarding company and partnership law will be discussed as well as
the Limited Liability Partnership as a new form of business entity. Of
great importance, however, is also the role of the close corporation as
a legal form commented upon internationally. Especially interesting is
a recent discussion on this legal form in the United States of America
within the context of reforms in this country. Given this background
also discussed will be whether an one-Act approach covering com-
pany and close corporation is a wise solution for South Africa.
1 With subsequent amendments; for a detailed overview regarding amend-
ments, see Close Corporations Service, Part 6. Subsequent abbrevia-
tion of the Act will be CCA. For a short summary of the history of the
Act, see Naudé, 1984, TRW 117; Venter, 1984, TRW 109.
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3.2 Close Corporation: From ‘off limits’ to ‘no limits’
As mentioned above, during the beginning stages of the close corpo-
ration also doubts were cast on the new legal entity and some urged
“legitimate new business ventures” to keep “entirely clear of the close
corporation”.2
As in case of the GmbH, also the close corporation has proved its
critics to be wrong.
Since its introduction on 1 January 1985, the close corporation’s short
history has been a remarkable success. Looking at this legal form
from abroad, one was led to expect that the close corporation could
serve to function as an example for similar countries looking for a legal
form to enhance the development of small business ventures.3
However, given the mentioned wind of change in the South African
company law through the proposed SA DTI reform proposals, for an
overseas spectator it comes as a surprise that in the South African
company law reform process the close corporation is not being set
as an actor on stage but that its future position is challenged.
3.3 South African business forms
The South African law also provides for a variety of legal forms for
business entrepreneurs. The most commonly used forms of conduct-
ing business are a sole proprietorship, a partnership, a company, a
business trust and a close corporation.4 Besides the close corpora-
tion, in this context it is sufficient to shortly introduce partnerships
and companies.
3.3.1 Distinction between partnerships and corporations
The South African legal system differentiates between partnerships
and corporations.
3.3.1.1 Partnerships
The South African law of par tnership is not codified, but based on
the South African Common Law, which has its roots in both the Ro-
man Law and the Roman Dutch Law.5
2 Divaris, “Close corporations of the third kind”, 1984, Businessman’s Law
83, 84, “whether they are to be big or small, black or white”, Divaris ibid.
3 In this context also referring to the critics Henning, “Observationes
Mercatoriae I”, 1986, TRW 97, 98. See also below chapter 3.3.1.4,
‘Recent developments’.
4 For information on interesting indigenous business forms busy with mic-
rolending in the informal sector, the stokvel and mashonisa, see Lukhele,
Stokvels in South Africa (1990); Henning, “Stokvels: enkele inleidende op-
merkings oor terminologie en omsrkrywings”, 1996, THRHR 100 et seqq.
5 For further reading, see Henning/Delport, Partnership in: The law of
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Different forms of partnerships are available to South African entre-
preneurs. It suffices to say that the main classification is made (1)
according to the liability of the partners, which may be shared by
all the partners (ordinary partnerships) or be limited to certain part-
ners (extraordinary partnerships),6 and (2) to the extent that profit is
shared between partners, which may relate to all the income of the
partners (universal partnerships)7 or be limited to the income de-
rived from a specific venture (particular or ad hoc partnerships).
It is, however, noteworthy to mention that the possibility of forming
a partnership with limited liability for its members proved to be un-
popular. Until 1976, a limited liability partnership, as an enterprise
form, was available in South Africa by means of two statutes, namely
the Cape Special Partnerships Limited Liability Act 24 of 1861 and the
Natal Special Partnerships Limited Liability Law 1 of 1865. Conse-
quently these two statutes were repealed.8 Hence, a limited liability
partnership can no longer be formed.
South Africa, Volume 19, (1984). See, e.g., Warmelo, An introduction to
the principles of Roman civil law (1976), p. 188 et seqq. For the interest-
ed reader publications of Zimmermann (referred to as the “eerste ‘ere’
ambassadeur vir die Suid-Afrikaanse reg”, by Sonnekus, “R Feenstra
en R Zimmermann”, 1997, TSAR 394) should be mentioned, in addition
to footnote 1, Das römisch-holländische Recht in Südafrika (1983), see
also The law of obligations (1993); “Roman law in a mixed legal system
— The South Afr ican perspective”, in Evans-Jones (ed.), The civil law
tradition in Scotland (1995), 41 et seqq.; “Roman-Dutch law in South
Africa: Aspects of the reception — process”, 1985, Lesotho Law Journal
97 et seqq.; “Das südafrikanische Privatrecht im Schnittpunkt zwischen
common law and civil law”, 1985, ZfRV 111 et seqq.; “Synthesis in
South African private law: Civil law, common law and usus hodiernus
pandectarum”, 1986, SALJ 259 et seqq.; “Das römisch-holländische
Recht und seine Bedeutung für Europa”, 1990, JZ 825 et seqq. “Das
römisch-holländische Recht in Zimbabwe”, 1991, RabelsZ 505 et seqq.
Regarding developments in the USA, cf. Henning, “Revision of the law
of partnership in the United States of America: A commendable prec-
edent?”, 1997, SALJ 684 et seqq.
6 Extraordinary partnerships being: limited partnerships, en comman-
dite partnerships and anonymous partnerships, cf. for a detailed back-
ground into the legal histor y Henning/Delport (1984). For the specific
application of a partnership en commandite in connection with a close
corporation, see Klopper, Die aanwending van die vennootskap en
commandite as kapitaal-voorsieningskema vir beslote korporasies, 19
Med SOR (1993).
7 A partnership universorum bonorum and a partnership universorum
quae ex quaestu veniunt, cf. Henning/Delport (1984).
8 They were repealed by the Pre-Union Statute Law Revision Act 36 of
1976. See with regard to their insignificance Henning, 1986, TRW 97,
98 referring to Henning/Delport (1984), 257 fn. 9, only ca. 300 were
founded in more than one century.
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