South Africa: What Is Meant By An Offer To The Public In The Companies Act 71 0f 2008

Last Updated: 29 January 2013
Article by Ian Cox

A private company is famously distinguished from a public company on account of the fact that its memorandum of incorporation must prohibit it from offering its securities to members of the public. This is in terms of section 8(2)(b)(ii)(aa) of the 2008 Companies Act. There is nothing new in this. This restriction has existed in one way or another since the Transvaal Companies Act 31 of 1909 which introduced the private company into our law.

This distinction should not be confused with the much older preoccupation in company law of drawing the line on share dealing between honest albeit foolish endeavour and skulduggery. The latest version of those efforts is to be found in Chapter 4 of the 2008 Companies Act (sections 95 to 111).

There was an anomaly in our law prior to the 2008 Companies Act between what was meant when the term "offer to the public" was used to regulate public share dealing by a company in terms of chapter 6 of the 1973 Companies Act and what was meant when the phrase was used elsewhere in that act to define a private company and when regulating public share dealing by shareholders offered.

This anomaly created unnecessary complications as the test applied in deciding what was an offer of securities to the public by a shareholder in terms of section 142 was different to the one that had to be applied when the company made an offer to the public of its own securities in terms of Chapter 6. The Supreme Court of Appeal when faced with this in Gold Fields Ltd and another v Harmony Gold Mining Company Ltd and others [2005] 3 All SA 114 (SCA) tried to manage the anomaly away. Thus the court ignored the special meaning of an offer to the public defined in chapter 6 of the 1973 Companies Act, relying instead on cases dealing with the general meaning of the term when used in section 141. I refer to the page 117 of the judgement where the Honourable Mr Justice Nugent held.

I can add nothing useful to what has been said in earlier cases as to the meaning of "public" (there is no suggestion that the word is used in section 145 in any special sense). In S v V 1977 (2) SA 134 (T) at 137 Franklin J (citing S v Rossouw1 and Tatem Co v Inland Revenue Commissioners2 to similar effect) said that:

"[t]he ordinary meaning of the word 'public' is the community as a whole rather than the community as an organised body".

I think it is unhelpful, and potentially misleading, to attempt to determine by inference what is included in an "offer to the public" by referring to the inclusions and exclusions in section 142 (the definition of an "offer to the public") and section 144 respectively, for those inclusions and exclusions might just as well have been inserted to avoid uncertainty. The better approach, in my view, is to ask whether the present offer can properly be said to have been made to the public as that term is ordinarily understood.

This anomaly no longer exists in the 2008 Companies Act. Section 141 of the 1973 Companies Act which dealt with what are now called secondary offers fell outside Chapter 6 and its definition of an offer to the public. Its equivalent under the 2008 Companies Act is section 101 is now part of Chapter 4 and thus subject to the definition of an offer to the public contained in section 95(1)(h). Whatever might be left of the anomaly due to the definition of a private company in section 8(2)(b)(ii)(aa) is disposed of if you treat that requirement mechanically. Thus it's requirement is met merely by the company's memorandum of incorporation containing a provision that states that it must not offer it securities to the public as this is prohibited.

That leaves the much more difficult question of what is meant by an offer to the public in Chapter 4. It is clear that the term still embraces its ordinary meaning. Section 95(1)(h) defines a an offer to the public in these terms:

h) offer to the public"

i) includes an offer of securities to be issued by a company to any section of the public, whether selected—

(aa) as holders of that company's securities;

(bb) as clients of the person issuing the prospectus;

(cc) as the holders of any particular class of property; or

(dd) in any other manner; but

ii) does not include—

(ee) an offer made in any of the circumstances contemplated in section 96; or

(ff) a secondary offer effected through an exchange.

I think the intention is clear. The definition of an offer to the public must be applied literally as defined. The term no longer has an ordinary meaning separate and distinct from the definition quoted above. That definition of course includes the ordinary meaning of the term but this cannot be separated from the defined meaning as the Supreme Court of Appeal did in the Goldfields case. This is because the anomaly the court relied on in that case no longer exists. The definition of an offer to the public must be strictly applied to Chapter 4.

The harsh consequences that would result from this literal application of the section is ameliorated by the change to the definition of the word "offer" in section 95(1) (g). The scope of what is generally referred to as an offer to the public no longer includes an invitation to make an offer for securities in a company. The definition now reads:

"offer", in relation to securities, means an offer made in any way by any person with respect to the acquisition, for consideration, of any securities in a company.

Thus companies both public and private or their shareholders who invite members of the public to make offers for their securities will not be affected Chapter 4. However I must sound a note of caution here. This should not be seen as an open invitation for companies or shareholders evade Chapter 4 by hawking their shares to the public under the smokescreen of an invitation to make an offer. Apart from the anti avoidance measures contained in section 6 , section 5(1) requires the 2008 Companies Act to be interpreted having regard to the purposes set out in section 8. Schemes designed to defeat or evade Chapter 4 are likely to fall foul of these sections. The ordinary meaning of an offer to the public will continue to apply. Such schemes will in my opinion be treated as offers to the public as defined in section 95(1)(h).

I think the approach adopted by the Honourable Mr Justice Wallis in Financial Services Board v Dynamic Wealth Ltd and others [2012] 1 All SA 135 (SCA) may be indicative of the approach that will be adopted in this regard. In that matter Dynamic Wealth Limited argued that its investment scheme was not a collective investment scheme as defined in Collective Investment Schemes Control Act of 2002 because its members were a restricted circle of individuals engaged in a domestic or private business venture and thus fell outside the definition of members of the public. That argument was summarily dismissed in these terms:

This claim was shown to be false when lists of the participants were provided to the inspectors. By way of example, a tennis association; a primary school and a school for the blind; a church; an optometrist and other businesses; several trusts, both family and charitable; some deceased estates and a number of individuals from various parts of the country and having little other than their investment in that portfolio in common. The answering affidavit said that membership was restricted to persons invited to join through Dynamic Wealth's network of independent financial advisers. However, this network was 470 strong and it recruited literally thousands of investors who invested hundreds of millions of Rand through these associations. There can be no doubt that investments were being solicited from members of the public.

It may be an oversimplification but for practical intents and purposes I think one could do a lot worse that apply the so called duck test in these cases. So:

if it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.

After all, as the Honourable Mr Justice Nicholas observed in S v. Rossouw [1971] 3 All SA 135 T, the question what constitutes an offer to the public is one that can only be answered with reference to the circumstances of the particular case. A similar approach has been adopted in other countries.

This may not be ideal given that it is a criminal offence to make an offer of securities to the public in contravention of Chapter 4. However I suggest this is a lot better than trying to lay down hard and fast rules for a problem made uniquely fluid by the infinite possibilities that arise when human ingenuity and optimism grapple with the prospect of making a profit.

So in summary, I suggest:

  1. A private company is such inter alia because its memorandum of incorporation must prohibit it from offering its securities to members of the public. As such it cannot raise funds by offering its shares to the public in the manner contemplated in Chapter 4
  2. This prohibition does not extend to shareholders of private companies who like their counterparts in public companies, may offer those shares to the public provided they comply with section 101.
  3. Courts may not longer ignore the definition of an offer to the public contained in section 95(1)(h) of the 2008 Companies Act as they did under the 1973 Companies Act. An offer to the public as defined in that section must be strictly applied to Chapter 4 of the 2008 Companies Act.
  4. An offer to the public does not include an invitation to the public to make an offer for shares unless that invitation is in substance, albeit not in form, an offer to the public.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions