Question

a) In terms of the company's Act, set out the definition of distribution as well as three types of distribution.

b) A company’s directors may not authorize any proposed distribution unless it has complied with
which two tests?

c) Briefly discuss the meaning of ‘’financial assistance’’ in terms of company law.

d) With reference to case law, discuss the term securities in terms of company law.

Answer 1

a.)

A distribution is a company’s payment of cash, stock, or physical product to its shareholders. Distributions are allocations of capital and income throughout the calendar year.When a corporation earns profits, it can choose to reinvest funds in the business and pay portions of profits to its shareholders.Shareholders can receive distributions on a regular basis, such as monthly, quarterly, or annually.

Owner’s distributions

Owner’s distributions are earnings an owner withdraws from their business. The amount of the distribution depends on the business’s profits.Business owners may utilize distributions for personal use or place distributions in business accounts for future use.Protocols for owner distributions may vary depending on the type of business structure (e.g., partnership).

IRA distributions

IRA distributions can include plans such as 403(b) accounts or 457 plans. Retirement account distributions fall into two categories:

Distributions individuals take prior to age 59-and-a-half

Distributions individuals take on or after turning 59-and-a-half

If an individual takes the distribution before turning 59-and-a-half, the distribution is subject to IRS penalties and ordinary income tax.

Mutual fund distributions

A mutual fund company typically gives earnings and other types of payouts to investors or shareholders as distributions.Mutual fund distributions are earnings from a fund’s operation. Unlike regular shareholder dividends, a mutual fund is required by law to pass profits back to investors or shareholders.

c.)In terms of section 44 of the Companies Act, financial assistance by a company would include extending a loan, guarantee or the providing of security to enable a person to obtain funding for purposes of acquiring shares in that company. Section 44 seeks to regularise such instances of financial assistance however, and this would extend beyond the mere granting of a loan to a would-be shareholder. The wide definition of “financial assistance” makes it clear that the section covers various scenarios and also specifically where financial assistance by a company is provided to anyone not only for the purpose of enabling him or her to subscribe for shares in that company, but also if the assistance is to enable shares to be acquired in a related company.

d.)A security is a financial instrument, typically any financial asset that can be traded. The nature of what can and can’t be called a security generally depends on the jurisdiction in which the assets are being traded.It includes equity, debentures etc.