Company Law and Practice (CPL512S)
Unit 4 The Formation of a Company
The Formation of a Company
Introduction
A company comes into existence following an application by the founder(s) to the Registrar of Companies for its
incorporation. When all registration requirements have been complied with, the Registrar will issue the company
with a certificate of incorporation.
The result of incorporation is that its members constitute a body corporate having its own name, own assets and
liabilities, perpetual succession and limited liability of its members.
Objectives
Upon completion of this unit you should be able to:
• name the documents which comprise the constitution of a company
• state the purpose of the memorandum of association and the articles of association respectively
• briefly discuss the requirements for the registration of a company name
• describe the memorandum of association and list the information that must be contained therein
• briefly discuss the contents of the articles of association of a company
• formulate the legal rules relating to the alteration of the constitution of a company
• discuss the importance of a company’s constitution
• discuss the binding effect of the company’s constitution as between members and as between the
company and its members
• apply the contents of this unit to solve problems
Additional reading
Cassim, F.H.I, Cassim, M.F., Cassim, R, Jooste, R.D (2011). Contemporary Company Law. Claremont: Juta. (Pages
100-153)
Davies, D., Cassim,F, H.I, Geach, W., Mongalo,T., Butler, D., Loubser, A., Coetzee,L., Burdette, D. (2010).
Companies and Business Structures in South Africa. Cape Town: Oxford University Press. (Pages 28-35)
Delport, P. (2011). The New Companies Act Manual. Durban. LexisNexis. (Pages 19-23)
Mongalo, T. (2014). Corporate Law & Corporate Governance: A Global Picture of Business Undertakings in South
Africa. Cape Town: Oxford University Press. (Pages 77-83)
1 The Company’s Constitution
A company's constitution consists of its memorandum of association and its articles of association. The
memorandum is the founding document: it states the purpose for which the company was formed and, in some
instances, can limit the scope of the company. The articles set out the rights, duties and powers of the members,
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Company Law and Practice (CPL512S)
Unit 4 The Formation of a Company
the general meeting of members and the directors, as well as the manner in which and by whom the affairs of
the company are to be managed and administered.
The memorandum and articles must be read together in the event of an obscurity in either of them, but a
provision in the memorandum of association which is in conflict with the articles has precedence over the
articles.
2 Registration of Companies
A company comes into existence upon registration of its memorandum of association and articles.
In order to obtain registration as a company, you must lodge the following documents with the Registrar of
Companies:
▪ the original and at least two notarially certified copies of a duly executed set of the memorandum of
association and articles
▪ the form CM5 indicating the reserved name and, if required, the shortened form of its name
▪ the notice detailing the company's registered address
3 Company Names
Prior to lodging the prescribed documents for the registration of a company with the Registrar of Companies, you
need to apply for the reservation of the intended name. A shortened form of the name can also be reserved.
You must apply on the prescribed form accompanied by the prescribed fee, which you can pay by affixing
revenue stamps to the form.
If the Registrar approves the application, the reservation will be valid for a period of two months.
In terms of the Companies Act 24 of 2008 the Registrar may refuse the registration if he/she reasonably believes
that the name is “undesirable”.
The name must also comply with the provisions of section 55 of the Companies Act, which prescribes distinctive
last words or subjoined statements to company names, for example "Limited", "(Proprietary) Limited", "Limited
by Guarantee", “Non-Profit Association" etc.
3.1 Use and publication of company names
In terms of the Act every company must, in a conspicuous position and in easily legible letters, display its name on
the outside of its registered office and every office where its business is carried on. Furthermore the name and
registration number of the company must be mentioned in all its notices, official publications, negotiable
instruments, orders for money or goods, letters, delivery notes, invoices, receipts and letters of credit.
Any director or officer of the company or any person acting on behalf of the company who signs or authorises
signature on behalf of the company of any negotiable instrument or order for money or goods on which the
company's name is not correctly stated can be held personally liable on that document if the company fails to
pay.
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Unit 4 The Formation of a Company
4 Further requirements
In terms of section 178 of the Companies Act every company must have a postal address and a registered office
to which all communications and notices may be addressed and where legal process may be served.
Furthermore, a company with a share capital may not commence with business unless and until the Registrar has
issued a certificate entitling it to do so.
5 The Memorandum of a Company
The memorandum of association is the founding document of a company. The memorandum of association
typically includes the name of the company, the object of the company and its ancillary objects, details of its
share capital and guarantee; special conditions; pre-incorporation contracts and an association clause. Only the
association clause deserves a brief discussion.
5.1. Association clause
The memorandum of association of a company with a share capital concludes with the following statement:
"We, the several persons whose names, addresses and occupations are subscribed, are desirous
of being formed into a company in pursuance of this memorandum of association and we
respectively agree to take the number of shares in the capital of the company set opposite our
respective names."
The memorandum must be signed by at least seven persons in the case of a public company and by at least one
person in the case of a private company. The full names and particulars (occupation, residential, postal and
business address) of the subscribers as well as the number of shares taken by each must be included in the
association clause.
The signature of each subscriber must be witnessed and the full names and particulars of each witness must be
stated.
6 The Articles
The articles of association determine the manner in which the company is to function. The articles must be
registered together with the memorandum of association.
The articles can either consist of the articles contained in Table A of Schedule 1 of the Act (if the company is a
public company) or Table B of Schedule 1 (if the company is a private company). These tables can be modified, or
even completely custom-made, to suit the purpose of the particular company. The articles must be completed
and set out in the prescribed form and must be signed by each subscriber to the memorandum and a witness,
stating each of their full names and occupation as well as their residential, business and postal addresses.
7 Alteration of the Constitution
The provisions of both the memorandum of association and the articles may be altered or supplemented, either
by special resolution or, in the case of special conditions, in the manner provided by the particular condition.
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Company Law and Practice (CPL512S)
Unit 4 The Formation of a Company
A copy of every special resolution in force for the time being must be embodied in or annexed to every copy of
the articles issued. A provision in the articles prohibiting its alteration is invalid. An alteration effected bona fide
and for the benefit of the company as a whole, cannot be impeached.
8 Legal Relationships Arising from the Company Constitution
As previously discussed a company must have a constitution, which consists of a memorandum of association
and the articles. We shall now look at the different relationships created by the company’s constitution; namely
between the company and its members, between members and between the company and directors
The provisions of the company’s constitution create a binding contractual relationship contract relationship
between the company and its members. In terms of section 71(2) of the Companies Act the memorandum of
association and articles are deemed to have been signed by each member to observe all the provisions thereof.
Accordingly, each member is deemed in law to be acquainted with the contents of these two documents and is
bound thereby.
8.1 The relationship between company and member
The constitution of a company constitutes a binding contract as between the company and each of its members.
For example, if the articles were to provide that a certain issue between the company and a member must be
resolved by arbitration, a party raising the issue in court can be ordered to follow the arbitration process.
The contract arising from the constitution binds the member only in his capacity as member. For example, if the
articles were to provide that a certain member of the company is to be appointed as the accountant of the
company, such a provision cannot be enforced by him/her as the appointment as accountant is unrelated to
his/her rights as member.
8.2 The relationship between members
The memorandum and articles, in so far as they concern the rights and duties of members, bind the members
contractually as against each other to comply with its provisions. If the articles, for example, provide that a
member may sell his/her shares only after having first offered them to the other members, the company or any
other member can restrain the member from acting in conflict with this provision.
8.3 The relationship between company and director
The memorandum and articles do not constitute a contract between the company and a director in his/her
capacity as director. A director can therefore not rely on the terms of the articles in order to retain his/her office,
or to determine the amount of the remuneration due to him/her, unless, in the circumstances, an implied or tacit
agreement can otherwise be construed. The relationship between a director and the company is discussed in
detail in units 9 and 10 of the study guide.
Summary
In this unit you learnt which documents we must be lodge with the Registrar of Companies when we want to
register a company, and what information must be contained in these documents. The most important
documents are the articles of association and the memorandum of association, which together form the
constitution of the company. A company’s constitution is binding on all present and future members of the
company, and constitutes a contract between the company and its members, and the members inter se.
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Unit 4 The Formation of a Company
References
Cassim, F.H.I, Cassim, M.F., Cassim, R, Jooste, R.D (2011). Contemporary Company Law. Claremont: Juta.
Davies, D., Cassim,F, H.I, Geach, W., Mongalo,T., Butler, D., Loubser, A., Coetzee,L., Burdette, D (2010).
Companies and Business Structures in South Africa. Cape Town: Oxford University Press.
Delport, P. (2011). The New Companies Act Manual. Durban. LexisNexis.
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