The impact of South African company law reform on close corporations: Selected issues and perspectives

• Jurisdiction: South Africa
• Author: Johan J Henning
• Published date: 30 August 2019
• Pages: 456-479
• Date: 30 August 2019
• Citation: 2010 Acta Juridica 456

The impact of South African company law

reform on close corporations: Selected

issues and perspectives

JOHAN J HENNING*

The main impact of the new South African Companies Act 71 of 2008 on

close corporations may be summarised as follows. First, new close corpora-

tions are proscribed, which not only translates into the phasing out of close

corporations, however gradual, but leaves small entrepreneurs with only one

avenue for new incorporations and that is under the new Companies Act.

Second, there is the clearly discernible tendency to subject the close corpora-

tion to more and more onerous administrative duties and arrangements. This

is amply illustrated by the approach to supplant numerous arrangements of the

Close Corporations Act by that of the new Companies Act, by repealing the

f‌irst and incorporating large tracts of the latter by reference. It is unfair to

expect the close corporation to perform optimally in a legal milieu for which it

was not designed and to encumber it with duties and obligations contrary to its

very nature and fundamental design philosophy. However, it seems as if

off‌icially the last thing that is hoped for of the current close corporation in the

new dispensation is that it performs optimally.

I INTRODUCTION

The raison d’être of the Close Corporations Act 69 of 1984 was the

provision of a simple, deregulated, decriminalised, inexpensive and f‌lex-

ible, free-standing limited-liability vehicle for the single entrepreneur or a

small number of participants, to meet his/her or their reasonable needs

and expectations without burdening him/her or them with legal require-

ments that would not be meaningful in the circumstances.

1

* B Iur LLB LLD (UOFS) Hon FSALS (UK). Distinguished Professor and Dean of the

Faculty of Law, University of the Free State; Senior Research Fellow, Centre for Corporate

Law,Institute of Advanced Legal Studies, University of London; Attorney of the High Court.

1

See in general S J Naudé ‘The South African Close Corporation’ (1984) 9 Journal for

Juridical Science 117 at 119; M Larkin ‘Company Law (Including Close Corporations)’ 1984

Annual Survey of South African Law 317; J J Henning ‘Close Corporations’LAWSA vol 7 (1996)

paras 497–500; Cilliers et al Corporate Law (2000) 568; H S Cilliers et al Close Corporations Law

(1998) 12; H S Cilliers et al Close Corporations Service (1991 et seq) 1–4; M L Benade et al

EntrepreneurialLaw (2009) 288; J L van Dorsten South African Business Entities (1993) 21; M Katz

and M Barker ‘Companies’ 3 Butterworths Forms and Precedents(1991) 18; D S Ribbens In Quest

for the Appropriate Code for the Ideal Legal Form for the ProprietaryBusiness Enterprise (1986) 228; S J

Naudé ‘Die Toekoms van die Beslote Korporasie en die Private Maatskappy’ (1986) 3

Transactions of the Centre for Business Law 1;MFRBleimschein and J J Henning ‘The

Registrability of a Close Corporation Not for Gain’ (1989) 52 Journal for Contemporary

Roman-Dutch Law 251, ‘Structuring a Close Corporation Not for Gain’ (1990) 53 Journal for

Contemporary Roman-Dutch Law 567; J J Henning andMFRBleimschein ‘Die neue

456

2010 Acta Juridica 456

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The close corporation has met with wide approval. From 1 January

1985 until the end of 2008 more than two million close corporations were

registered compared to fewer than half a million companies of all forms

and types.

2

On 12 June 2006 1 276 157 close corporations were still

active in South Africa.

3

In this chapter attention will be given to the impact of the company law

reform process and especially the far-reaching if not drastic changes to be

wrought by the provisions of the Companies Act 71 of 2008 (hereinafter

the new Act) on existing close corporations when it becomes operative.

II THE CLOSE CORPORATIONIN BRIEF

Under the Close Corporations Act a close corporation is a fully f‌ledged

and closely held juristic person which confers on its members all the usual

advantages associated with legal personality and in which all or most

members are more or less actively involved. In principle there is no

separation between ownership and control. Every member is entitled to

participate in the management of the business and act as an agent for the

corporation and owes a f‌iduciary duty and a duty of care to the corpora-

tion. The consent of all the members is required for the admission of a

new member.

4

It is ideally suited to small businesses. The managerial and

Unternehmensform der Close Corporation in Südafrika’ (1990) 22 Recht der Internationalen

Wirtschaft 627; J J Henning ‘Judicial Management and Corporate Rescues in South Africa’

(1992) 17 Journal for Juridical Science 90–105; J J Henning and M Wandrag ‘’n Oorsig van die

Herkoms van die Private Maatskappy en die Huidige Posisie in Enkele Regstelsels’ (1993) 26

De Jure 14; R C Beuthin Basic Company Law (1992) 325; S Ping-fat ‘Not too close for Comfort’

(1992) 6 International Corporate Law 17; J J Henning ‘The South African Close Corporation –A

Statistical Survey’ (1998) 4 Amicus Curiae 29;A A Venter‘Die Onstaan en Eienskappe van die

Wet op Beslote Korporasies’(1984) 9 Journal of Juridical Science 110; A W Vestal ‘Business Law

Reform in South Africa: The Right Path, the Right Reasons’ (2002–2003) 91 Kentucky Law

Journal 829–840; C Jaehne Legal Comparison between the South African Close Corporation and the

German ‘Gesellschaft mit beschränkter Haftung’ (unpublished LLD Thesis, University of the Free

State 2006) 220–236; D C du Toit ‘Applying the Moral Imperative: The Close Corporation’

(1984) 9 Journal for Juridical Science 108; N Olbrisch Die südafrikanische Close Corporation und ihre

strukturellen Unterschiede zur deutschen GmbH (1997) 5–25; J J Henning ‘Reforming Business

Entity Law to stimulate Economic Growth among the Marginalized: The Modern South

African Experience’ (2003) 91 Kentucky Law Journal 773–827; J J Henning ‘Southern African

Small Business Corporations in Comparative Perspective’ (2005) 2 Journal of TransnationalLaw

and Contemporary Problems 287–341; J J Henning ‘Close Corporation Reform in Southern

Africa’(2001) 26 Journal of Corporation Law 918–950.

2

The total registration, that is incorporations of new close corporations and conversions

from companies to corporations, during the period 1985 to 2006 amounted to 1 494 488 close

corporations compared to 387 757 companies of all kinds and types. See also http://www.

cipro.co.za/about_us/registration_stats.asp. During 2007 and 2008 a further 519 634 close

corporations and 65 504 companies were incorporated, see http://www.cipro.co.za/about_

us/CIPROWebStatistics.pdf.This puts the total for the period 1985 to 2008 at 2 014 122 close

corporations and 453 361 companies.

3

See http://www.cipro.co.za/about_us/registration_stats.asp.

4

For the distinctive features of the close corporation, see eg Olbrisch (n 1) 33; Jaehne (n 1)

4–12.

457IMPACT OF SA COMPANY LAW REFORM ON CLOSE CORPORATIONS

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