The new legal capital regime in South Africa

• Jurisdiction: South Africa
• Date: 15 August 2019
• Citation: 2010 Acta Juridica 131
• Author: James J Hanks, Jr
• Pages: 131-150
• Published date: 15 August 2019

The new legal capital regime in

South Africa

JAMES J HANKS, JR*

REMEMBRANCE

Mike Larkin was a sweet and gentle man. I knew him primarily as a teacher

and considered him a friend. On my trips to South Africa during the period of

Company Law Reform, he often asked me to teach a class or two in his

courses at Wits or UCT, generally followed by dinner with others and hearty

conversation. Unfailingly courteous and constitutionally respectful of others’

views, he seemed more interested in what he could learn than what he could

say. In the din of many voices, this grace sometimes obscured, although only

brief‌ly, a keen mind operating at a f‌ine pitch. As the horror of his violent and

far too early death recedes, we are left with the warm memories of a wonderful

human being, whom all of his friends were honored to know. This essay is for

Mike Larkin.

For nearly two centuries, many countries have addressed, through statutes and

case law, the issues of minimum capital for companies and limiting companies’

power to distribute cash and other assets to shareholders. Often company

statutes have addressed these issues conjunctively, although they are not

necessarily economically related. Following the lead of the Model Business

Corporation Act in the United States, the new Companies Act 2008 wisely

eschews minimum capital requirements, eliminates the artif‌icial concept of

par value and nominal capital and further ref‌ines the equity and balance sheet

solvency tests for distributions to shareholders and applies it to all forms of

distribution. In some cases, the 2008 Act improves on the Model Act.While

these advances should be applauded, further consideration should be given to

whether the balance sheet solvency test has any utility and whether the true

concern of company law in limiting distributions should be conf‌ined to the

equity solvency test.

I INTRODUCTION

Since the early days of corporations, ‘legal capital’ – the rules governing

contributions to capital by shareholders and distributions from capital to

shareholders – has played a central and often vexed role in the allocation

of power and economics among the corporation, shareholders, board of

directors, creditors and others. Most troublesome of all is whether (and, if

* AB (Princeton University) LLB (University of Maryland) LLM (Harvard University).

Partner, Venable LLP, Baltimore, Maryland, andWashington, DC. Adjunct Professor of Law,

Cornell and Northwestern Law Schools; Visiting Senior Lecturer, Cornell Business School.

Author, Maryland Corporation Law (Aspen Publishers Supp 2009); and co-author (with Bayless

Manning), Legal Capital (Foundation Press 1990).

131

2010 Acta Juridica 131

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so, how) corporation or company law

1

should try to balance the legiti-

mate main concern of shareholders – that they will be able to realise a

current return on their investment – with the chief concern of creditors –

that the board of directors, elected by the shareholders, will, especially if

the directors see the company is in trouble, drain it of funds and other

assets, through dividends, share repurchases or otherwise, leaving insuff‌i-

cient assets to pay the creditors.

In the eighteenth and early nineteenth centuries, when companies

were formed episodically – in England by a separate Act of Parliament and

in America by separate Acts of the colonial or early state legislatures – it

appears that almost all f‌inancing for companies was provided by equity

investors through initial subscriptions and subsequent capital calls on

them.

2

Leveraging capital through borrowing from banks or other

sources appears to have been relatively insignif‌icant. In those times there

was a lot of litigation over the shareholders’ subscriptions and other pay-in

obligations, including minimum investments, forms of consideration

(including promissory notes and future services) and valuation.

3

Most of

these issues have evaporated by now. No state in the United States is

known to this author to require any minimum capital to form a corpora-

tion, although minimum capital requirements are still prevalent in the

European Union.

4

The Model Business Corporation Act (the Model

Act),

5

Delaware

6

and Maryland

7

all recognise any tangible or intangible

property (including promissory notes and contracts for future services) as

valid consideration for the issuance of shares.

In the f‌irst half of the nineteenth century, however, with the Industrial

Revolution, particularly in England, and with the opening and explora-

tion of the trans-Appalachian West in the United States, the need for

f‌inancing in addition to equity capital became signif‌icantly greater and so

did the need for companies as the legal structure for the pooling of capital

1

As is well known, what in US practice is referred to as a corporation and as corporation (or

corporate) law is known in South Africa (and England, among other places) as a company and

company law,respectively – conventions that I am happy to follow in this article as appropriate.

2

Butler ‘Nineteenth Century Jurisdictional Competition in the Granting of Corporate

Privileges’(1985) 14 J Legal Studies 129 at 139 n 30.

3

B Manning with JJ Hanks Jr Legal Capital 3 ed (1990) 44–61 (hereinafter ‘Manning/

Hanks’).

4

See European Union, Second Council Directive, Art 6.Article 6(1) requires a ‘minimum

capital’of at least 25 000 ‘European units of account’(def‌ined to mean euros). This requirement

applies only to joint-stock companies, which, in general, are larger corporations, and the

requirement may be increased by the national law of EU member states. In France, for example,

the minimum capital for a joint-stock company (société anonyme, a form of corporation with at

least seven stockholders) is h37 000 and if the company is listed, h225 000. Indeed, the concept

of a minimum capital is so ingrained in France that the traditional, well-accepted expression is

‘Le capital social est le gage des créanciers’(‘the minimum capital is the pledge for the creditors’).

5

Model Corporation BusinessAct s 6.21(b).

6

Delaware General Corporation Law s 152.

7

Maryland General Corporation Law s 2–206(a),(b).

132 MODERN COMPANY LAW FOR A COMPETITIVE SOUTH AFRICAN ECONOMY

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