Pre-incorporation contracts and the liability of the promoters

Abstract

Company law legislation has recently undergone changes with the enactment of the Companies Act 71 of 2008. The purpose of this new piece of legislation is, inter alia, to encourage entrepreneurship and enterprise efficiency, to create flexibility and simplicity in the formation and maintenance of companies, and to provide for the creation, role and use of companies in a manner that enhances the economic welfare of South Africa. This Act was signed into law on 8 April 2009 and is said to come into operation during April 2011. The Act furthermore introduces an extensive and renewed approach to the regulation of pre-incorporation contracts in an attempt to address the shortcomings of previous and current legislation on this topic. This study explores the impact and effect that the new Act will have on the conclusion of pre-incorporation contracts, and also identifies the possible shortcomings of the Act. In order to determine what impact the new Act will have on pre-incorporation contracts, these contracts must first be placed in their historical context. This entails tracing the historical development of the common law rules relating to agency and ratification, and their impact on pre-incorporation contracts. Secondly this study attempts to determine whether the old and the current legislation regulating pre-incorporation contracts have been effective, and if so, to what extent. To establish this, the statutory arrangements that currently regulate pre-incorporation contracts require a grounded, solid and formulated basis, which is determined by an evaluation of the history of the different statutory sections on pre-incorporation contracts in these enactments. A significant part of this study will be devoted to the success, shortcomings and complications presented by the specific statutory arrangements. Fair consideration will be given to case law on these aspects. The South African courts have offered insight into the difficulties relating to the various statutory arrangements and explored alternative methods to supplement these statutory provisions. The advantages, disadvantages and legal consequences of these alternative methods are also discussed and analysed in this study. Concepts that are dealt with in this regard includes shelf companies, an agreement for the benefit of a third party (the stipulatio alteri), and where promoters act as principals. This study also reveals that these alternative methods present their own complications. The central theme of this study remains whether the new Companies Act provides adequate solutions to the problems that frequently arise from the conclusion of pre-incorporation contracts, and whether the shortcomings that exist in current and previous legislation have successfully been addressed by the new Act. To this end, the research reveals that section 21 of the new Act will succeed in equitably balancing the interests of third parties, companies and promoters, by providing clearly stipulated protection measures for all parties involved in the conclusion of pre-incorporation contracts. It has offered valuable improvements to previous statutes. The proposed reforms as introduced by section 21 are therefore welcomed. The mere fact that the South African legislature has now made a conscious attempt to create reform on this subject shows that it acknowledges that pre-incorporation contracts will continue to play an important role in commercial dealings. However, questions still arise on the future role of the statutory arrangements in light of the various alternative methods available to promoters. Academic opinions have also been divided with regards to the future role of pre-incorporation contracts within changing commercial environments. It is clear from the research presented in this study that pre-incorporation contracts have the potential to present a range of complex and challenging questions in practice. Therefore, this study seeks to provide sufficient guidelines to third parties and promoters who seek to acquire rights, duties, assets and benefits for a company prior to its incorporation, while protecting themselves against personal liability and associated litigation.