Davidson v Cough N.O. and Others (41962/2021) [2022] ZAGPJHC and Livanos and Others v Qates and Others are two recent cases that provide guidance on the acquisition and disposal of a member's interest in a Close Corporation.
In Davidson v Cough N.O., the court considered whether the transfer of a member's interest in a Close Corporation had taken place. The court held that for a transfer to occur, the parties must have reached a consensus ad idem, which means an agreement on the essential terms of the contract. The court found that no consensus had been reached between the parties, and therefore, the transfer had not taken place.
In Livanos and Others v Qates and Others, the court considered the fairness of a transaction in which the majority of the members had acquired a minority member's interest in the Close Corporation. The court held that the transaction was not fair because the minority member had received much less than the fair value of their interest, and the transaction had not been conducted in good faith. The court ordered that the transaction be set aside.
These cases highlight the importance of ensuring that there is a clear agreement between the parties when transferring a member's interest in a Close Corporation. It is also important to ensure that any transactions are conducted fairly and in good faith, taking into account the fair value of the member's interest.
3. Briefly, discuss the acquisition and disposal of a member’s interest in a Close Corporation in light of the two cases, Davidson v Cough N.O. and Others (41962/2021) [2022] ZAGPJHC and Livanos and Others v Qates and Others.
3 answers
4. Marcus and Shona are fourth year LLB students with a entrepreneurship mindset at the University of Glico, in Bloemfontein, Free State Province. They have attended a lecture for the Law of Business Entities and gained some crude knowledge on the idea of Stokvels. Marcus and Shona are excited and fascinated with the idea of starting a stokvel. They are contemplating on establishing an online scheme whereby they invite members of the public including their friends to invest 2000 rands each into their new scheme which they call XMXM with 100% guaranteed return on investment within a week. The members who are enrolled into the scheme also received 30% of the money they have invested if they enrol new members in the scheme. As the membership pool expands exponentially, XMXM would even uses the profits from downstream membership to pay bonuses to those who are excelling in recruiting new members into the scheme. Based on statutory provisions, case law and other authorities, explain to Marcus and Shona whether their proposed scheme qualifies to be a stokvel
Marcus and Shona's proposed scheme does not qualify as a stokvel as it does not meet the requirements set out in the Stokvel Act, 2013 ("the Act").
According to Section 1 of the Act, a stokvel is defined as a group of people who have entered into an agreement with a view to contribute money or resources to a common fund or to engage in any other lawful activity for their mutual benefit.
The XMXM scheme proposed by Marcus and Shona does not conform to this definition for several reasons:
Firstly, the promise of a 100% guaranteed return on investment within a week is a clear indication that the scheme is aimed at providing financial gains to the members. This is not in line with the concept of a "common fund" for the mutual benefit of the members, as prescribed by the Act.
Secondly, the fact that members can receive a 30% return on investment by enrolling new members into the scheme also reinforces the notion that the scheme is focused on individual financial gain rather than the collective well-being of the members.
Lastly, the idea of using profits from downstream membership to pay bonuses to members who are excelling in recruiting new members into the scheme also contradicts the purpose of a stokvel which is to provide mutual benefit to all members, irrespective of their individual contributions or achievements.
In summary, the XMXM scheme proposed by Marcus and Shona does not qualify as a stokvel because it is not aimed at mutual benefit, but rather at individual financial gain. It may also be viewed as a form of pyramid scheme, which is illegal in South Africa, and participation in such a scheme can lead to severe financial losses for the unsuspecting members. Therefore, it is important for Marcus and Shona to seek proper legal advice before proceeding with their proposed scheme to avoid any legal implications.
According to Section 1 of the Act, a stokvel is defined as a group of people who have entered into an agreement with a view to contribute money or resources to a common fund or to engage in any other lawful activity for their mutual benefit.
The XMXM scheme proposed by Marcus and Shona does not conform to this definition for several reasons:
Firstly, the promise of a 100% guaranteed return on investment within a week is a clear indication that the scheme is aimed at providing financial gains to the members. This is not in line with the concept of a "common fund" for the mutual benefit of the members, as prescribed by the Act.
Secondly, the fact that members can receive a 30% return on investment by enrolling new members into the scheme also reinforces the notion that the scheme is focused on individual financial gain rather than the collective well-being of the members.
Lastly, the idea of using profits from downstream membership to pay bonuses to members who are excelling in recruiting new members into the scheme also contradicts the purpose of a stokvel which is to provide mutual benefit to all members, irrespective of their individual contributions or achievements.
In summary, the XMXM scheme proposed by Marcus and Shona does not qualify as a stokvel because it is not aimed at mutual benefit, but rather at individual financial gain. It may also be viewed as a form of pyramid scheme, which is illegal in South Africa, and participation in such a scheme can lead to severe financial losses for the unsuspecting members. Therefore, it is important for Marcus and Shona to seek proper legal advice before proceeding with their proposed scheme to avoid any legal implications.