South African common law provides that a company yet to be incorporated cannot perform juristic acts, and it is not possible to represent an unincorporated company. Contracts concluded by unincorporated companies were accordingly considered to be void ab initio and not capable of being ratified following its incorporation. This common law principle created an obstacle for entrepreneurs as they were not able to enter into valid contracts to set up the operations of their businesses before a company was incorporated, such as a lease agreement for business premises. This obstacle was later partially removed by our courts, which construed these types of contracts as a stipulatio alteri. However, such contracts do not automatically regulate the potential consequences arising from the company not eventually being incorporated.

To deal with this, South African law provides entrepreneurs with a useful tool, namely the pre-incorporation contract. Section 1 of the Companies Act 71 of 2008 (Companies Act) defines a pre-incorporation contract as:

“[A] written agreement entered into before the incorporation of a company by a person who purports to act in the name of, or on behalf of, the proposed company, with the intention or understanding that the proposed company will be incorporated, and will thereafter be bound by the agreement.”

Section 21 of the Companies Act creates the statutory exception to the common law principle discussed above and allows a contract to ‘time-travel’ and bind the company upon incorporation, provided certain requirements are met.

It is stated in section 21 of the Companies Act that a person (the promoter) may enter into a contract in the name of, or purport to act in the name of, or on behalf of, an unincorporated entity. The requirements for a valid pre-incorporation contract are:

• it must be in writing;
• the company must subsequently be incorporated; and
• the board of the company must either ratify (completely, partially or conditionally) or reject the pre-incorporation contract within three months from the company’s incorporation date, failing which, the pre-incorporation contract will be deemed to have been ratified.

If all the requirements above are met, the pre-incorporation contract is as enforceable against the company as if it had been a party to the contract when it was made.

Liability

It must be noted that the promoter is jointly and severally liable with any other persons for liabilities created, as provided for in the pre-incorporation contract, while so acting if (i) the company is not incorporated, or (ii) after being incorporated, the company rejects any part of such agreement. If any part of the pre-incorporation contract is rejected, the liability of the promoter is only in respect of those rejected portions. However, the liability is discharged if the –

• company entered into an agreement on the same terms as, or in substitution for, the pre-incorporation contract; or
• pre-incorporation contract is ratified or deemed to have been ratified, as discussed above.

Further, if the board rejects the pre-incorporation contract, any person who bears liability (such as the promoter) may assert a claim against the company for any benefit the company received, or is entitled to receive, in terms of the pre-incorporation contract.

It is noteworthy that section 21 of the Companies Act does not prescribe a time within which the company must be incorporated following the conclusion of the pre-incorporation contract. As such, a promoter should take all reasonable steps to ensure that the company is incorporated as soon as reasonably practicable, or only conclude a pre-incorporation contract when there is reasonable certainty that a company will be incorporated as any person who bears liability (such as the promoter) will remain liable under the pre-incorporation contract until the earlier of the (i) company’s incorporation and subsequent ratification (completely, partially or conditionally) by the board of directors, or (ii) cancellation or termination of the pre-incorporation contract.

Regulation 35 of the Companies Regulations, 2011 provides that a promoter may give notice to a company of the pre-incorporation contract by filing with the Companies and Intellectual Property Commission (CIPC), and delivering to the company, a notice in Form CoR35.1. Although this notice is voluntary, it is highly recommended to mitigate the risk of ambiguity as to the pre-incorporation contract’s existence and any liability attached to it. The regulation further provides that, if the board decides to completely or partially reject or ratify the pre-incorporation contract, the company must, within five business days, file an official notice of its decision with the CIPC in Form CoR35.2. A copy of this notice must also be delivered to each party to the pre-incorporation contract or each person “materially affected” by the action. As such, even if the promoter does not file their notice, the company is required to file its notice of its board decision with the CIPC.

Conclusion

Section 21 of the Companies Act takes a balanced approach. On the one hand, it protects third parties contracting with an unincorporated company by minimising their risk as the promoter is liable until the pre-incorporation contract is ratified or another agreement is entered into. On the other hand, it safeguards (i) the promoter, as the board of the company has three months to ratify or reject the pre-incorporation contract, and (ii) the company has the freedom to accept or reject all or part of the pre-incorporation contract and thus, agree to be bound and assume the liabilities of the promoter. Therefore, entrepreneurs and companies can safely teleport their contracts through the space-time continuum.