1. Much of this memorandum will be devoted to exploring the various forms mentioned in the definition. Two issues arise:

1. Ownership Control

Ownership control is part of the meaning of "municipal entity". If a municipality loses ownership control of an entity or forms an entity without ownership control, the entity is not a "municipal entity". The Systems Act does not prohibit municipalities from forming non-municipal entities, and indeed, says nothing about such entities. It may be the intention of the MFMB to either regulate or preclude the formation of non-municipal entities by municipalities.

In this memorandum we focus on the notion of ownership control because it is central to the definition in the Systems Act and because different regulations may apply to municipal entities and non-municipal entities. The forms can be compared on the extent to which they facilitate ownership control (see, for example, Table 1 under the heading "Control") and this is considered a virtue in this memorandum.

2. Applicable National or Provincial Legislation

The definition requires that municipal entities must be established in terms of "applicable national or provincial legislation". This, in our view, excludes common-law corporate entities. This reading is supported by the fact that service utilities, which are established in terms of by-law, are treated separately in the definition. By inference, the reference to "other corporate entity" can be read to include close corporations which are not specifically mentioned in the definition and any other corporate entity established in terms of legislation.

For what purpose should a Municipal Entity be formed?

2. A further preliminary issue is why municipal entities are formed. A municipality is an organ of state, and as such is subject to a legislative and regulatory framework in the conduct of its administrative affairs. This framework is more demanding in its administration than the administrative framework of private companies and other non-organs of state. A municipal entity is a separate juristic personality from the municipality. Although it is trite that a municipality cannot act ultra vires in establishing a municipal entity, and cannot imbue the municipal entity with more powers than the municipality itself has, the municipality is able to create an administrative structure within the municipal entity that is different, and perhaps less rigorous, than that of the municipality as we elaborate below.
3. There are three important differences between the management of a municipality and that of a private company:

1. A municipal council – a rather unwieldy executive structure- is responsible for decision-making in the municipality, and may delegate these powers to an committee, office or individual. In contrast, a board of directors is responsible for decision-making in the private company and may delegate some of these powers to executive managers. The private company may have the advantage of efficiency in decision-making, although in effect the directors have been delegated decision-making powers by the municipal council;
2. A municipal council is required to engage in collective bargaining with the South African Municipal Workers Union. By contrast, a private company engages in collective bargaining with a union established for the workers of that company, or industry. These unions may have less power than the South African Municipal Workers Union; and
3. A municipal council establishes a procurement policy for the council, while a private company which is also an organ state must establish its own procurement procedures. The private company may then structure the policy around its own unique needs.

4. Although these differences may be viewed as benefits that justify the formation of a municipal entity, in our view they justify company formation only in the context of "for profit" activities and where the municipality cannot adequately improve its internal structures. Given that company formation and monitoring is expensive, risky and demanding, the same effort could yield significant internal improvements that may ultimately be more beneficial for the municipality.

Joint ventures with the private sector

5. A final preliminary issue to be canvassed is the issue of joint ventures with the private sector. We are interested in particular in joint ventures which involve minority shareholding by the municipality. A municipality is required to carry out its powers and functions in order to meet its constitutionally imposed objects. As government, must always act in the public interest. In certain circumstances the interests of the municipality require it to contract with the private sector for services. The question is whether there are ever circumstances where the interests of the private sector cohere with the public interest objectives of the public sector such that the two can become co-investors in an entity. The second question that arises is which investor should take up control of the entity. We raise these as questions that should be debated but do not attempt to answer them in this memorandum.
6. The following are instances in which municipalities could desire to become a co-investor with the private sector –

1. Local economic development initiatives where the municipality provides financial assistance in respect of private initiatives that meet LED objectives. The municipality may not need "control" but may want a position on the governing body and access to information. The municipality may also wish to access some of the surpluses created by the initiative in the long term in order to utilise the money for other LED projects;
2. Trading entities operating on a "for profit" basis. The municipality may not need "control" but may want a position on the governing body and access to information as well as a return on its investment. In this instance the imperatives are the same as any private sector investor; and
3. Subsidized joint ventures with other donors. The municipality could want to participate in sponsoring projects or activities that would be co-sponsored by the private sector. As with any other donor, the municipality may not need "control" but may want a position on the governing body and access to information.

7. The above cases are possible instances where a municipality may have a legitimate interest in maintaining a minority share in a private company.

PART II: CRITICAL DISTINCTIONS

Different Kinds of Companies

8. The diagram in Annexure A sets out the basic distinctions between different forms that can be established under the Companies Act. Section 19 of the Companies Act clarifies that only two kinds of company can be formed under the Act – a company having share capital (that is, shares in a company owned by shareholders) and a company limited by guarantee.

1. Company Having Share Capital

A company having share capital is either a public or a private company (see section 19(2)). The core distinction between public and private companies having share capital is that public companies are larger than private companies in terms of shareholders (see section 20(1), and only public companies may be listed and have shares tradable on the Johannesburg Stock Exchange by the public. Accordingly there is publicity in respect of the financial information of public companies (see section 302(4)).

2. Company Limited by Guarantee

Companies limited by guarantee are deemed to be "public companies" (see section 19(3)) and include so-called section 21 companies (incorporated associations not for gain). In this memorandum, we will use the term "public company" to mean a public company having share capital.

Companies versus Trusts

9. A further basic distinction is between the companies formed under the Companies Act and trusts regulated by the Trust Property Control Act 57 of 1988 ("the Trust Property Control Act").

1. Financial Controls

There are standardized financial and governance controls regulating companies as contrasted with trusts (see Table 1 and Table 4 under the heading "Audit and Reporting" for an elaboration).

2. Corporate Structure

The Companies Act provides a complex corporate structure for companies, including shareholders or members with rights and duties, a board of directors with powers and functions, and external relationships with the public, all subject to the provisions of the Companies Act. In contrast, the rights and duties of a founder and the powers and functions of a trustee are less subject to regulation than those in a company, although there is an extensive common law relating to the powers and behavioural standards of trustees (see Table 4 under the heading "Governance").

3. Ownership

The shares in a company (whether private or public) with share capital are capable of ownership, although the company itself is not technically owned by the shareholders. The rights of the shareholders vis à vis the company are regulated by the Companies Act. These shareholders participate in the surpluses achieved by the company. By contrast a company without share capital (including a section 21 company) and a trust are not owned in this manner. Both a trust and a section 21 company are formed and managed for the benefit of beneficiaries. The beneficiaries may be specified individuals or identified as a group or class of persons. The assets of a section 21 company are owned by the company, while the assets of a trust vest in the trustees. The assets of both are utilised to achieve the main object or purpose of the entity and not as a reward to the members or founders for investment.

Close Corporations

10. A special note is required in respect of close corporations incorporated in terms of the Close Corporation Act 69 of 1984 ("CC Act"). Members cannot be juristic persons in terms of section 29(1) of the CC Act. A municipality is a juristic person (see section 2(d) of the Systems Act) and in our view can therefore not be a member. Accordingly, we do not further consider this form.

PART III: PRIVATE COMPANY

11. As set out above, a private company is a company having a share capital incorporated under section 32 of the Companies Act. Ordinarily two or more members may form a private company. It is possible, however, for a single member to form a one-man private company (see section 32). The founders of the company sign the memorandum of association of the company and become initial subscribers of the company. The terms "member" and "shareholder" are synonymous only in the case of companies having share capital. In all companies without share capital, there are only members. Accordingly, in this memorandum, for all sections dealing with companies having share capital, the terms "shareholder" and "member" are used inter-changeably.

Examples in South Africa

12. The City of Johannesburg has formed municipal entities both as private companies as well as section 21 companies For example, City Power, an electricity supply company, Johannesburg Water, a water supply company, and Pikitup, a solid waste collection and disposal company, have been established by the City of Johannesburg as private companies operating on a "for profit" basis in terms of the Companies Act. Each company is governed by a board of directors, which is appointed by the City, and each company is managed by a senior executive management team, headed by a managing director.
13. Typically, services which are provided to individuals have been ring-fenced into the private company structure, while services provided to the public at large have been ring-fenced into the not for profit company structure.

Table 1: Summarizing Essential Features of Private Companies

PRIVATE COMPANY
Control	A maximum of 50 shareholders may own shares in a private company. The shareholders are able to exercise control of the company in the annual general meeting or meeting of members by voting for a change in the directors of the company. Comment: Maintaining "ownership control" as defined in the Systems Act is technically easier for a private company than for a listed public company. A private company may arrange its articles to provide for varying voting rights within each class of shares. It may provide for restricted voting rights or no voting rights at all for some shares. A second way of maintaining control would be by setting out in the articles of the company that if a shareholder wishes to sell shares he would have to offer the shares to the other shareholders first (pre-emptive rights). A third way would be by giving some shareholders the power to appoint directors. There are certainly other ways to maintain control in the private company and the treatment of it here is not exhaustive. In the context of municipal entities, and other companies created by national government, there has been some confusion around the identity of shareholders. A juristic person can be the shareholder of a company, and therefore, a municipality can be the shareholder of a company. However, in practice there have been instances where individuals representing the municipality have become the shareholders in their personal capacity. In our view these instances are attributable to error.
Constitution	The articles of the company regulate the internal affairs of the company; the memorandum of association of the company defines the limitation of the power of the company vis à vis the public at large. These instruments together form the constitution of the company. The articles may restrict the conduct of directors in respect of asset management, regulate the transfer of shares, limit the power of directors to borrow money, issue debentures, buy or sell assets and in any way carry on the business of the company. The Companies Act in schedule 2 provides a generic list of powers of directors that may be omitted by specific mention in the Articles.
Audit and Reporting	A full statutory audit must be performed by the company auditors after each financial year. The financial year of each company is determined by the articles of association of the company and these may prescribe that each municipal entity have one set financial year. Books of account and financial statements must be prepared in accordance with the provisions of the Act. The company is not, however, obliged to lodge a copy of its annual financial statements with the Registrar of companies. The directors are required to present the financial statements to the shareholders at the annual general meeting of the company. Comment: In terms of the Companies Act, companies only consolidate the accounts of a subsidiary, so minority shareholders do not incorporate the accounts of non-subsidiary companies in which they have ownership in to their group accounts.
Governance and Management	The board of director’s function is to manage and control the affairs of the company. A well-structured board could include executive and non-executive directors and should take account of the King Code of Conduct. The board must retain full and effective control over the company, monitor the executive management and ensure that decision-making on material matters is in the hands of the board. In the discharge of their functions, the directors must satisfy four common law and statutory requirements, namely they must act – (a) In good faith, in what they believe to be the best interests of the company as a whole; (b) With the degree of care, diligence and skill that may reasonably be expected from persons of their knowledge and experience; (c) Intra vires, that is, within the scope of their authority as prescribed by the memorandum and articles of association of the company; and (d) as a board. Comment: The issue of conflicts of interests is particularly difficult in the context of municipal entities where councillors or municipal employees may be appointed as directors. Directors are not the representatives of the shareholders who have appointed them, nor do they act for the benefit of these shareholders. Rather, the directors have a fiduciary duty towards the company. A director must recuse him/her self from participating in decision-making and sometimes even in the discussions of the board in the context of a conflict of interest. There is a further difficulty. Councillors and municipal employees who are also directors could misrepresent the policy and strategy of the municipality and mislead the board of directors. They could also undermine the role of the chairperson as go-between for the board and shareholder. The appointment and performance evaluation of directors is a complex issue. From a governance perspective, getting the right mix of persons to create a functional board, which is responsive to the needs of the municipality while able to act in the best interests of the company, is the most difficult task of the municipality.
Adminis-tration	The executive directors in the company run the day-to-day business of the company. The rights and duties of the shareholders in the management of the company are limited. There is a clear distinction between management and ownership of the company. In terms of the Articles, the executive directors are given the responsibility to manage the day to day running of the business without any interference from the owners of the company. The shareholders are given an opportunity to review the work of the directors at the annual general meeting and express their satisfaction or dissatisfaction by voting for the re-appointment or removal of the directors. Comment: In practice, municipal entities tend to rely heavily on support from the municipality and vice versa. Thus, an independent administration that is unresponsive to the municipality is risky, while an under-resourced municipality that cannot adequately respond to the needs of a municipal entity is equally risky.
Asset Management	In terms of section 228 of the Companies Act, the approval of the shareholders in general meeting of the company is required for the disposal of the whole or substantially the whole of the undertaking of the company or the whole or greater part of the assets of the company. As regards the powers of the directors with respect to the assets of the companies, the articles of association can provide for either broad powers or limited powers.
Policy Direction	The founding members of the company determine the main objects of the company. Thereafter, the Board decides on the strategy of the company in order to enable it to meet its objectives. However, the shareholders exercise control of this through the appointment of directors and may further reserve the power to approve the strategy and direction of the company (through approval of the business plan) either through the articles of association or through a corporate governance framework agreed with the Board. Comment: In practice the imposition of policy direction by shareholders proves to be a laborious and bureaucratic process that is costly in the utilisation of both municipal and municipal entity resources. Further, the board is bound to adhere to the service standards established in its business plan and deviations required to respond to changing circumstances and emergencies are time consuming and difficult to agree. Finally, a company established in one political regime with controls reflecting the current policy and direction of that regime may be difficult to adjust to the needs of a different political regime. This reduces the democratic power of institutions to immediately affect the policy and direction imposed by a previous regime.
Intervention	When any shareholder (majority or minority) of a company complains that any particular act or omission of a company is unfairly prejudicial, unjust or inequitable, or that the affairs of the company are being conducted in manner which is unfairly prejudicial, unjust or inequitable to him or other members of the company, he may make an application to the court for an order rectifying this grievance (see section 252 of the Companies Act). Comment: This section protects a shareholder who legitimately complains that the company is being managed in the manner stated above or that an act or omission of a company is unfairly prejudicial, inequitable or unjust to him or the other members of the company. It is important to remember that the shareholders maintain the power to appoint and terminate the appointment of directors (subject to appropriate labour law and contractual agreements). This is the most powerful tool for intervention the shareholders have.
Dissolution	A company may be wound by order of the court or voluntarily (see section 343). A voluntary winding-up may either be a creditors’ or a members’ voluntary winding up. A company may be wound up by the court inter alia if the company has resolved by a special resolution that it be wound up, the members are below seven in a public company or the company is unable to pay its debts. When a company is compulsorily wound up by the order of court, the control of the affairs of the company is taken from the board of directors and given to the liquidator. In a voluntary wind-up by the members, the control is in the hands of the members and in a creditors’ wind-up, control is in the hands of the creditors. Therefore, in a winding up, the board of directors forfeits the power of control over the company. As has been pointed out, a company may be wound up because it cannot pay its debts. In certain circumstances, however, it may be that, given time, the company may be able to rehabilitate itself and avoid being wound up. In terms of section 427, a provisional judicial order for judicial management of the company may be granted. In every winding-up of a company the assets shall be applied in payment of the costs, charges and expenses incurred in the winding-up and, subject to the provisions of section 435(1)(b), the claims of creditors as nearly as possible as they would be applied in payment of the costs of sequestration and the claims of creditors under the law relating to insolvency and, unless the memorandum or articles otherwise provide, shall be distributed among the members according to their rights and interests in the company (see section 342(1)). If however a company is deregistered, the liability of the members continues as if the company had not been deregistered (see section 173).

Multiple "owners"

14. The structures described above (and our assessment of them) are not affected by "multiple owners". The fact that a company has a legal structure distinct from its shareholders means that the form of the company is unaltered by the fact of "multiple owners". The only distinction in form will be provisions in the articles of association related to control. The generic provisions in the articles of association relating to appointment of directors, and sale and purchase of shares will be tailored to suit the needs of the "multiple owners".

Assessment

15. Private companies are the ideal vehicles for "multiple owners" in the context of profit-making ventures. The "multiple owners" are able to regulate the relationship between themselves through a shareholder’s agreement. The company is legally distinct from its shareholders, and the directors and managers are legally required to operate in the interests of the company. This does not necessarily mean that directors may not operate in the interest of the shareholders. Only in the event that the interests of the shareholders do not cohere with the interests of the company, are the directors required in law to act in the best interests of the company. The directors account to the shareholders on the financial statements, stability and the business operation of the company at the annual general meeting (see further the discussion of control in Table 1 above).
16. General advantages in terms of well-developed financial controls, corporate governance, and regulation by the Companies Act are detailed in Table 1 above. On balance, our view is that a private company is a useful and appropriate form where the municipality intends to generate profit from the provision of services and requires a well-regulated entity.
17. There are several significant problems with the private company structure in the context of the public sector. The first is the relative independence of the board. A board of directors is the governing body of a company, and derives its mandate from the articles of association. The board is responsible for developing a strategy to enable it to carry out its main object. This main object is usually drafted in broad terms, and may not take into account the detailed strategy and direction a municipality may adopt in its IDP (see the discussion of "Governance and Management" in Table 1 above). The municipality, as shareholder, is not granted the power to set the policy and strategy direction of the company. This is the responsibility of the board.
18. The board is also not under close supervision by its shareholder. An assessment of the performance of the company only occurs once in a financial year, when the board provides reports to the shareholders at an annual general meeting. This report consists of the audited financial statements together with the auditors report, and the report of the chairperson. At the annual general meeting, the shareholders approve recommended resolutions, appoint the directors and approve the auditors remuneration. This role is far removed from the kind of control which a municipality has over its internal divisions. The independence of the board is linked with the accountability of the board to the shareholders for the performance of the company. If the independence is taken away, so is the accountability.
19. The dissolution provisions relating to a private company are at odds with the public interest requirements of municipalities. This has been recognised and addressed in the draft Local Government: Municipal Finance Management Bill where an entire chapter is devoted to dissolution provisions for a municipal entity.
20. The primary problem is that there is a so-called "governance gap". Municipal entities operate outside of the administrative framework of a municipality in a way that may be inappropriate for an organ of state providing critical services using state owned assets. The following questions must be addressed in order to make private companies more appropriate for municipal use:

1. Who appoints directors;
2. What are the qualifications and disqualifications of directors;
3. Who does the board report to;
4. What additional issues (outside of the Companies Act requirements) should the board report on;
5. What powers should the board be granted;
6. How is the board, and each individual directors performance assessed;
7. Who assesses the performance of the company;
8. Who assesses the compliance of the company with all relevant laws;
9. Who decides on the policy and strategic direction of the municipal entities;
10. What is the relationship of the chairperson of the board with the municipality and how does the chairperson fulfil his/her role in terms of King II; and
11. What is the role of individual councillors, committees and other offices within the municipality vis a vis the municipal entity?

21. These are just a few of the governance issues that must be addressed and would not ordinarily cause concern in a private sector context. Given the so called "governance gap", it is recommended that each municipality enter into a shareholder compact with the board of directors of a municipal entity. This will permit greater control by the municipality over the strategy of the board, and more rigorous reporting requirements. The shareholder compact can also direct the board to report on issues such as specific compliance with relevant law, as well as detailed reports on its achievement of IDP goals.

PART IV: PUBLIC COMPANY

22. The listing of state-owned entities is an unusual event in South Africa. The listings requirements of the Johannesburg Stock Exchange ("JSE") are stringent and a municipal entity would have to satisfy these before becoming a member of the JSE. For instance, no person may be admitted to JSE membership or continue as a JSE member unless the person holds net assets in South Africa which comply with the minimum capital requirements as set out in the JSE Listings Rules. No municipal entities have been formed as listed public companies. Accordingly, our discussion focuses on unlisted public companies.
23. The only difference between a listed and an unlisted company is that the shares of listed companies can be freely bought and sold on the JSE. All listed companies are members of the Johannesburg Stock Exchange ("JSE"), and subject to the JSE rules. Un-listed companies must have seven members, but may have much more than that. The principle difference between an unlisted public company and a private company is the number of the shareholders that each may have. A private company may have a maximum of 50 shareholders and may have a minimum of one, while an unlisted public company only has a minimum limit of seven shareholders

Table 2: Summarizing Essential Features of Public Companies

PUBLIC COMPANY
Control	The company must have a minimum of seven members. The members are those persons who sign the articles of association of the public company and take up shares in the company. These are one and the same as the shareholders of the company. Comment: The difficulty in the context of public companies and "ownership control" is the requirement of seven members. Often, especially in the context of section 21 companies, public companies established by national government have seven individuals affiliated to the department establishing the public company as the members. This can lead to difficulties if the individuals leave the department. One solution is for the members to be representatives of an office in the department rather than persons in their individual capacity. The articles will determine if the directors have the right to offer shares in this company to the members of the public.
Constitution	See private company.
Audit and Reporting	The company must lodge annual financial statements prepared in accordance with the Act with the registrar of companies. The financial year is set by the articles of association of the company, which could be prescribed by legislation.
Governance/ Management	The board manages and controls the affairs of the company in a manner similar to that in a private company; and is usually assisted by the board committees set up in accordance with the King Report. A public company must have at least two directors.
Administration	The executive directors in the company run the day-to-day business of the company.
Asset Management	See private company.
Policy Direction	See private company.
Intervention	See private company.
Dissolution	See private company.

"Multiple owners"

24. A comment in respect of listed public entities is that they will make the retention of "ownership control" difficult. The listings rules of the JSE require that all shares in any one class must rank equally and all ordinary shares must have voting rights in proportion to their nominal value. Given that the JSE rules may make it difficult to create different classes of shares, an alternative means of maintaining ownership control is for the municipality as the initial majority shareholder to control the number of shares that are issued to the public by the directors of the company. In the case of unlisted public companies, these technical difficulties do not arise, but there may be reason for requiring that all shares in any one class must rank equally and all ordinary shares must have voting rights in proportion to their nominal value in an unlisted.

Assessment

25. Public companies with share capital do not differ significantly from private companies (see paragraph 12.1 above). A key disadvantage is the need to maintain at least seven members.

PART V: SECTION 21 COMPANY

26. This corporate entity is formed in terms of section 21 of the Companies Act. It has to be a company limited by guarantee, which means that it does not have a share capital and is also a public company. There must be seven subscribers to the memorandum of the company and they become the first members of the company. As discussed above, the requirement of seven members can present problems for a municipality.

Examples in South Africa

27. The City of Johannesburg has also established section 21 companies, which structure has been chosen for subsidized entities that the City wished to ring-fence. Among these are the Johannesburg Zoo; City Parks, which provides a management service to the City of Johannesburg in respect of the maintenance and upkeep of the parks and cemeteries in the jurisdiction of the City of Johannesburg; and the Johannesburg Road Agency, which also provides a service to the City of Johannesburg in respect of the maintenance of the City roads.
28. We have been asked to provide a brief overview of how the relationship between a section 21 company and its members would change if it were to be converted into a private company. A section 21 company is prohibited from conversion into a private company. The section 21 company would have to be voluntarily wound-up, and its assets distributed to the municipality. In terms of section 21(2)(b) the assets have to be transferred (after satisfaction of all its liabilities) to,

"some other association or institution or associations or institutions having objects similar to its main object, to be determined by the members of the association at or before the time of the dissolution or, failing such determination, by the Court."

29. Thereafter the municipality could establish a private company and transfer the assets into that private company. The primary difference between the relationship of a section 21 to the municipality and a private company is that the private company may have "multiple owners" who may invest in that company on a "for profit" basis. The dissolution provisions are different in so far as the assets in a private company may revert to the shareholders (after the company has satisfied its liabilities). The accounting standards, governance, relationship of the board to the company and to the municipality remain unchanged.

Table 3: Summarizing Essential Features of section 21 Companies

SECTION 21 COMPANY
Control	There are no shareholders in the company, and the members do not act as "owners" in the sense that they benefit from the rights of ownership. A section 21 company must always have at least seven members as it is a public company. These members have specified rights and duties, and provide a check on the authority and actions of the directors. The members have the right to attend the meetings of the members of the company, to vote at these meetings and to appoint directors. Like shareholders of a private company, the members are not involved in the day to day running of the company. The members can be likened to the founding member of a trust. They will ensure that the directors of the section 21 company carry out the main object of the section 21. The members are also entitled to consider and accept changes to the memorandum and articles of association of the section 21 company. This allows the members to exercise control over the policy direction of the section 21 company. Comment: The best way for the company to maintain "ownership control" would be to ensure that the members are active in their representation of the municipality. It is important to note that each member is entitled to one vote in annual general meetings (see section 193(2)). As a safeguard, the holder of a particular office in the municipality should become the member and not the individual in his personal capacity. The articles of association can also provide for the disqualification of members on specified grounds, including termination of office or employment, and other more typical grounds like insolvency and criminal charges. It is important that the municipality exercise its right, and its responsibility, to appoint members, and to ensure that the members carry out their duties as members.
Constitution	The company constitution is constituted by the articles and memorandum of association. The memorandum must have the main object of promoting religion, arts, sciences, education, charity, recreation, or any other cultural or social activity or communal or group interest. The articles of the company must prohibit the payment of any dividend to its members. The company may or may not be exempt from taxation, depending on whether the service provided by the company falls within the parameters set out in section 10 of the Income Tax Act 58 of 1962 and schedules thereto.
Audit and Reporting	This is a public company and must therefore comply with the auditing and reporting duties applicable to public companies. The financial year of the section 21 company is determined in the articles of association, which date may be regulated by legislation. As with other public companies, a section 21 company is required to keep such accounting records as are necessary fairly to present the state of affairs and business of the company and to explain the transactions and financial position of the trade or business of the company. The financial statements of the company must be presented at the annual general meeting, and must be sent to each member and the Registrar prior to the annual general meeting.
Governance/ Management	Same as a public company, except that the members play the role of the shareholder. The payment of a dividend to members is prohibited (see section 21(1)(d). Comment: The strength of the "shareholder role" depends on the strength of the members. Where the members are appointed only in order to fulfil the requirements of the law, the board of directors plays a strong role, and becomes separated from the government body that has established the entity. On the other hand, a group of interested members will be able to lead the policy, strategy and direction of the board by participating in the annual general meetings, appointing directors, and evaluating the reports of the section 21. As with all companies, it is important for the members to have a governance framework in place with a board charter regulating the conduct of the directors. It is important to remember that directors have a fiduciary relationship to the company, and are required to act in the best interests of the company, and not of a particular members. Thus, differences of opinion may arise between the directors and the members as to the management of the company. In the end, members appoint directors.
Administration	Same as a public company.
Asset Management	The Companies Act does not provide for asset management specifically relating to the section 21 companies. In the absence of specific provisions, it may be assumed that the provisions of the Companies Act on asset management relating to public companies will apply.
Policy Direction	Same as public company.
Intervention	Same as a public company.
Dissolution	Upon winding up, deregistration or dissolution the assets of the company remaining after the satisfaction of all its liabilities must be given or transferred to some other institution or association having the same objects similar to its main object. In our view, this would allow for the assets to return to the municipality (see the discussion in paragraph 32 above).

"Multiple owners"

30. A section 21 company is not an ideal investment structure for single or "multiple owners". However, it does make for an appropriate entity when two or more entities would like to subsidise a joint venture without expectation of a return on that investment. The reasons are simple: both parties exercise only indirect control of the venture through the appointment of management and neither can access the money vested within the section 21. Thus, whether there are two or more municipalities, or a municipality with a donor funder or a department of provincial or national government, the independence of the section 21 company makes for a good structure for subsidised joint venture projects.

Assessment

31. We do not support the establishment of solely-owned section 21 companies by municipalities. In principle, the company can do no more than the municipality itself and is entirely reliant on the municipality for funding. The establishment of these companies places the entities at a distance from the municipality, and imposes procedural burdens on the municipality to exercise policy control and direction over these entities. Further, a municipality may derive a benefit of efficiency by creating entities that are not subject to collective bargaining agreements and uniform procurement policies. It is a question of philosophy whether a municipality should be permitted to enjoy these efficiencies by creating municipal entities.
32. A further disadvantage is that the founding member of the company cannot receive a dividend if the section 21 company generates profits, and thus cannot re-allocate resources in the event of profit-making by the section 21 company.
33. However, these companies are appropriate where two or more municipalities undertake a jointly-subsidized venture. Section 21 companies have two significant advantages in this context – the founding members can control both the main object and purposes of the company and the management of assets by clear statement of the object of the company. Similarly the founding members can control the powers of the directors in the articles of association. However, there is a risk associated with any founding document. The first issue is to determine how much power and flexibility the directors should have. If the directors are given broad powers and flexibility there is a danger that they may divert from the main object of the company. On the other hand, if the documents are drafted too narrowly, there is a danger that the documents must be amended every time the founding members change the policy direction of the entity. On balance, amending the documents is easier than bringing directors to heel.

PART VII: TRUSTS

34. In general, there are two types of trusts, inter vivos and testamentary trusts. One species of an inter vivos trust is the business or trading trust, where the trust structure is utilised as a vehicle for the conduct of a business enterprise, for profit. Testamentary trusts are used for the protection of assests.
35. A trust is defined in the Trust property Control Act as

"[the] arrangement through which the ownership in property of one person is by virtue of a trust instrument made over or bequeathed—

(a) to another person, the trustee, in whole or in part, to be administered or disposed of according to the provisions of the trust instrument for the benefit of the person or class of persons designated in the trust instrument or for the achievement of the object stated in the trust instrument; or

(b) to the beneficiaries designated in the trust instrument, which property is placed under the control of another person, the trustee, to be administered or disposed of according to the provisions of the trust instrument for the benefit of the person or class of persons designated in the trust instrument or for the achievement of the object stated in the trust instrument,

but does not include the case where the property of another is to be administered by any person as executor, tutor or curator in terms of the provisions of the Administration of Estates Act, 1965".

36. A trust is accordingly formed when a person (the "founding donor") registers the trust deed and appoints trustees as the first trustees of the trust. The founding donor stands in the position of the shareholders of a company. The trust is regulated in terms of the Trust Property Control Act No. 57 of 1988, which provides inter alia for:

1. The registration of trust deeds
2. The authorisation of trustees by the Master;
3. The requirement of care, diligence and skill imposed on trustees;
4. Provisions relating to the registration and identification of trust property and with the accounting of trust property by trustees;
5. Removal and termination of the office of a trustee; and
6. Provides for regulations on any matter related to the Act.

37. Trusts have been used extensively in the private sector in South Africa for many purposes including:

1. as an instrument for "estate freezing";
2. for share incentive schemes in terms of section 38(2) of the Companies Act;
3. for the establishment of charitable and educational vehicles;
4. for the ownership of property;
5. for the purpose of creating debentures in terms of the Companies Act;
6. for the purpose of creating unit trust schemes governed by the Unit Trust Control Act;
7. to defer payment of benefits to capital beneficiaries in testamentary trusts;
8. to realise assets;
9. for the exercise and control of companies in voting trusts;
10. for protective purposes where it is desired that the beneficiaries should enjoy the benefit and use of the trust assets but not own or control them.

38. A trust is founded for the benefit of a person or persons called the beneficiary or beneficiaries and the trust deed establishes the main object of the trust. The founder of the trust may decide to be a trustee or not to be involved at all in the administration of the trust. Further, the trust deed establishes procedures for amendment of the trust deed. Beneficiaries do not become entitled to trust property until the trustee makes a determination that they are so entitled. Accordingly the only legitimate action the beneficiaries could take against a trustee is that the trustee has not acted in accordance with the requirements of the trust deed, or the fiduciary duties required by law.

Examples in South Africa

39. We have been advised of the existence of the Franeschhoek Empowerment and Conservation Trust, a trust established in the Western Cape (see Annexure "C" for a short description of the trust extracted from http//www.fedi.co.za). We are aware of a case where a trust has been suggested in a municipal service transaction involving the private sector, where the nature of the transaction requires private-sector investment over a long term period, but where the project is anticipated to last beyond the private sector involvement.

Table 4: Summarizing Essential Features of Trusts

TRUST
Control	The trust property vests in the trustees for purposes of administration of the trust but the trustees have no beneficial interest therein. Comment: "Ownership control" as defined in the Systems Act may be read as applying to trusts. The notion of "directors" can be substituted by "trustees" and the concept of "votes" can be substituted with the right of the municipality qua founder to change the trust deed. The founder in a trust may include provisions that limit the powers and duties of the trustees (excluding fiduciary duties) and may also provide for procedures for the amendment of the trust deed. The trust deed may provide for the different voting rights for trustees.
Constitution	The constitution of the trust is the trust deed, which sets out the powers and duties of the trustees and the objects of the trust. Comment: The beneficiaries in whose interest trustees must act would depend on the need of the municipality. These could range from the municipality itself, a specified list of persons, a specified class of persons, or an unspecified group – the public at large. The more specified the main object and the beneficiaries, the easier to monitor the performance of the trust and the trustees. Legislation could require that the main object of any municipal entity cohere with the IDP of the municipality establishing it.
Audit and Reporting	The trust is not required by law to make financial statements, although this may be required by the trust deed. The Master may also require financial statements. As with private companies, the financial statements of a trust do not have to be reported to the Registrar of Companies. Comment: The trust deed may require that the books of the trust be audited and that there be a report by the auditor to the beneficiaries. Legislation such as the MFMB could require all municipal entities to have a minimum standard of financial accounting and reporting. This would solve the difficulties which the flexibility around trust deeds currently presents. If the trust is a subsidiary of a municipality, the financial statements of the trust will have to be included in the consolidated accounts of the municipality.
Governance	A trust is managed by the trustees of the trust who hold a position and exercise function analogous to the position and functions exercised by the directors of the company. The appointment, and continuation of the position of trustees depends on the trust deed and the approval of the Master. The founder may retain the right to appoint trustees, or may choose to divest this power and give the trustees the right of assumption (that is, the right to bring new trustees on board). The trustees can be made as accountable to the founder as the founder wishes according to the terms of the trust deed.
Administration	The powers and functions of the trustees (and therefore of the trust itself) must be determined with reference to the trust deed. Comment: The trustees usually have the power to appoint individuals to carry out specific tasks. If the trust is a small one set up for a very specific purpose, the trustee can also be the person who carries out the executive tasks required of a trust. For larger trusts, the trust structure can be analogous to the company structure with the trustees playing the role which directors play (the analogy is supported in the discussion in the previous section). The nature of the object of the trust will determine the structure which the trust should take. The key advantage is that the trust is not burdened with a complex structure if it doesn’t need one (see further Table 7 below).
Asset Management	Determined by the trust deed and by law – both the Trust Property Control Act and the common-law.
Policy Direction	Determined by the trust deed and by law – both the Trust Property Control Act and the common-law.
Intervention	Determined by the trust deed.
Dissolution	Determined by the trust deed.

"Multiple owners"

40. The key to control of a trust is the drafting of the trust deed, and appointment of the trustees. Most trusts grant the trustees broad powers to achieve a stated purpose. A clearly stated purpose can limit the ability of the trustees to engage in undesirable activities. On the other hand, control over the appointment and removal of trustees can achieve the same purpose. A trust can be used in the context of "multiple owners", provided appropriate controls are drafted into the trust deed.
41. The second key factor in a trust is that it is established for the benefit of beneficiaries. These can be either a group or class of persons, or named individuals. In the context of "multiple owners" there may even be different types of beneficiaries who receive different benefits. This flexibility can be advantageous to a municipality, but is disadvantageous from a control and monitoring perspective. The trustees of a trust would be appointed by the municipality in much the same fashion as the directors of a company would be appointed. The termination of these appointments would be a matter of labour law and contract. The terms of appointment should clearly reflect the intentions of the founding donors in this respect.

Assessment

42. The trust structure provides an alternative to the company structure. The trust vehicle has the following advantages:

1. it has "limited liability";
2. it is simple to form and structurally flexible in that it can be altered or dissolved with limited constraints; and
3. it provides a form of perpetual existence.

43. These advantages are useful to municipalities in so far as a municipality can fine-tune the structure of the trust and act innovatively within a broad statutory and common law framework (see the headings "Governance" and "Administration" above). Secondly, a particular person without direct interest in the trust can be given the power to control certain decision-making that could affect the return on the investment made, provided that this does not undermine "ownership control" if that person is not the municipality. Thirdly, these rights can be terminated without a purchase or sale of shares, and finally the trust structure remains intact after the departure of a trustee or beneficiary or any person holding the rights described above.
44. In general terms, the key advantage in the formation of a trust is the flexibility in the control and management of the trust. In the public sector context, and from the perspective of the National Treasury, this flexibility is the primary disadvantage to trusts. The flexibility inherent in the structure also provides scope for deviation from desired standards of management, administration and governance.
45. The key disadvantage of a trust as a municipal entity is the lack of standardized financial controls. As opposed to a company, whether private or public or section 21, where accounting standards, and financial reporting is regulated by the Companies Act, a trust is flexible in its financial reporting requirements. As Honore points out "a trust need not make an annual financial statement and its accounts need not be audited unless in a particular case the Master so requires". This can be addressed in the MFMB by requiring that all trust deeds provide for audited annual financial statements, in accordance with the standards imposed by the Companies Act, or in accordance with the standards adopted by the municipality. This takes care of financial controls, financial years and financial reporting
46. A further question that arises is who monitors the governance of the trust, and what powers do they have to intervene if necessary? The founding donor is the person who would be most interested in the financial statements. The trust deed could require an annual meeting, much like an annual general meeting of a private company, where the founding donor would be presented with the financial reports. In a private company, the financial statements are approved and signed off by the board of directors. In a trust, it would be the trustees who would take responsibility for the accuracy of the financial statements. The founding donor would then be able to assess the performance of the trustees based on the financial reports and a report of the trustees. Any of these requirements can be imposed by the MFMB immediately or at a later date to be proclaimed (see paragraph 72 below).
47. The flexibility of trusts is an ambiguous virtue. While trusts are a useful vehicle for a wide range of municipal objectives if they can be adequately controlled, in the absence of effective controls, the trust structure can be manipulated to avoid good governance.

PART VIII: FUNDS

48. There are different kinds of funds each regulated by statute. For example provident funds (regulated inter alia by the Income Tax Act 58 of 1962), medical benefit fund (regulated by the Medical Scheme Act 131 of 1998), pension funds (regulated by the Pension Funds Act 24 of 1956), and retirement annuity funds (regulated inter alia by the Tax on Retirement Funds 38 of 1996 and the Financial Services Board Act 97 of 1990) to name a few. A pension fund is the most common type of fund established by a municipality. It should be mentioned that none of these funds are trading entities and they will not be appropriate to serve many conventional purposes for municipal entities. Hence, it is difficult to apply the horizontal and vertical dimensions to them. Given this conclusion, and the fact that each fund is regulated by its own statute, we do not summarise the features of funds in tabular form.
49. It is appropriate for funds to remain within the list of municipal entities in order to achieve very specific objectives, for example, establishing a pension fund for municipal employees.

PART X: CO-OPERATIVES

50. Co-operatives are formed in terms of the Co-Operative Act 91 of 1981 ("Co-Operative Act"). The co-operative has been described as an organisation sui generis acting for the benefit of its shareholders and producing members.
51. Provision is made in the Co-Operative Act for the formation and incorporation of agricultural co-operatives, special farmers’ co-operatives, and trading co-operatives. Agricultural co-operatives may in instances provided for in that Act join together to form a special farmers’ co-operative, and a trading co-operative may be either a primary co-operative or a central co-operative or a federal co-operative.
52. In terms of the Co-Operative Act, co-operatives (other than a trading co-operative) must pursue one of the activities listed by the Minister as a co-operative practice. Without distinguishing between the different types of non-trading co-operative, and in general, terms, there are three types of transactions that these co-operatives may carry out: agricultural transactions, insurance transactions, and medical or pension schemes. There is no limit to the activities of a trading co-operative. The Co-Operative Act also imposes limits on the transactions which a co-operative may carry out with non-members.

Table 5: Summarizing Essential Features of Trading Co-Operatives

TRADING CO-OPERATIVE
Control	A person becomes a member of a co-operative when a share in the co-operative is issued or transferred to him, or in the manner or on compliance with the requirements determined in the statute of the co-operative (see section 71). The statute of the co-operative may be used to maintain "ownership control".
Constitution	The statute of the co-operative comprises the constitution of the co-operative.
Audit and Reporting	The co-operative has to prepare annual financial statements and consolidated annual financial statements and lodge these with the registrar of co-operatives.
Governance	The affairs of a co-operative must be managed and controlled by a board of directors who exercise the powers and perform the duties of the co-operative subject to the provisions of the Co-Operative Act (see section 107(1)). The board is appointed at the annual general meeting of the members, by a vote of the members. As with a company, subject to any limitations set out in the statute of the co-operative, the board of directors may delegate any of its powers, including its powers of management and control, to a director or a committee of directors, or it may authorise a director or committee to perform any of the board’s duties or to act as the co-operative’s representative or agent. The board is required to report back to the members at the annual general meeting. This report must deal with every matter which is material for the appreciation by members of the state of affairs, the business and the surplus or deficit of the co-operative
Asset Management	A co-operative is not allowed to advance money to an undertaking or to a co-operative of which it is a member, indemnify its members or any such undertaking or co-operative against damage or loss or become surety for or give security on behalf of its members or any such undertaking or co-operative, except under authority of a special resolution. Provided that the objectives of the institution so established or taken over, or in which interests or shares have been acquired, shall relate to the objectives of the co-operative concerned (see section 52).
Policy Direction	The statute must contain a set of rules regulating the internal affairs of the co-operative (see section 30(1)(g)).
Dissolution	The dissolution of the co-operative will not affect the liability of a director, officer or member of the co-operative. Such liability, if any, subject to the law relating to prescription, will continue to exist and may be enforced as if the co-operative had not been dissolved (see section 47).

"Multiple owners"

53. Ownership of a co-operative vests in its members. Each member is issued shares. Shares can be bought and sold, but only to qualifying persons. The list of qualifying persons depends on the type of co-operative and is specified in the Co-Operative Act. The structure is designed for multiple owners (see further paragraph 58 below) and none of the assessments above are affected by "multiple owners".

Assessment

54. There are a number of reasons why a co-operative is unsuitable as a municipal entity. Firstly, a co-operative is formed for the benefit of its members and shareholders. Accordingly, the transactions are carried out by its members for their own personal benefit. In the case of an agricultural co-operative, the activities of the co-operative are even confined to an area in which the Co-Operative Act is applicable. As the name suggests, a group of persons bandy together to do something that is better done by a group than alone. Personal effort and reward are the key features of a co-operative. A municipality may wish to enter into joint ventures, but the principal function of a municipality is to act in the public interest. Accordingly, the very structure of a co-operative is unsuitable for ownership by a public body and our view is that co-operatives should not be included among the list of municipal entities.

PART IX: SERVICE UTILITIES

55. Service utilities are established in terms of section 82(2)(a) of the Systems Act by enacting a by-law establishing and regulating the functioning and control of the service utility. This form of municipal entity is the closest thing to an entity that can be designed purely for the needs of the public sector, save for the fact that at the moment a service utility is utterly unregulated and unstructured.

Table 6: Summarizing Essential Features of Service Utilities

SERVICE UTILITY
Control	In terms of section 82(2)(c) the municipality which established the service utility must exercise "ownership control", as defined in the Systems Act, over it in terms of the by-laws. The by-laws may set out exactly how this would be done.
Constitution	The by-laws.
Audit and Reporting	The by-laws will establish a financial system as well as controls. The entity will also be subject to national legislation which establishes minimum standards and controls.
Governance	If service utilities are established in the manner of statutory bodies, the utility could be governed either by a management committee, or an individual. Statutory bodies can be closely regulated, controlled and monitored by the department which establishes the body. This would probably be the same for service utilities.
Administration	Statutory bodies range from large complex administrations to very simple structures depending on the need. The creator of the service utility would be able to design an administrative system relevant to the needs of the service utility. Comment: The question of whether the executive management should be split from the strategic management would depend on the size and nature of the service utility. The King report is obviously designed for companies and deals with the issues that are related to companies. In a non-company context, many of the issues are different and the recommendations in the King report are not necessarily transferable. Governance checks, controls and balances are necessary, and minimum standards for these can be established in legislation.
Asset Management	Risk and assessment management controls tie up with financial controls. Obviously a complex administration would require far more controls than a simple administration. Further the by-law should set out how much power the management body (or person) would have over the assets, how to deal with the assets, and what to do with the assets on dissolution.
Policy Direction	The by-law would set out the main object of the service utility and provide guidance on who is to set the policy and direction of the service utility.
Intervention	This would be determined by the by-law itself.
Dissolution	This would be determined by the by-law itself.

"Multiple owners"

56. The framework for "multiple owners" requires careful consideration in the context of service utilities. The concept of "ownership" of a statutory body is difficult. Obviously a statutory body established by different arms of government where government in its various forms acts as the "multiple owners" is easier than a scenario where the private sector is to be one of the "multiple owners". Rights akin to rights of shareholders can be created by the by-law for the private sector, and a regime for the transfer of those rights can also be created by the by-law. It is not possible to give more than a brief initial response to this issue, and at present it is our view that the private company structure is probably more appropriate in the context of private-sector involvement.

Assessment

57. In essence a service utility is a statutory entity and is akin to the national statutory entities in so far as its entire administration, management and functioning is determined by the by-law that establishes it.
58. At present, there is no legal framework for service utilities. However, legislation could prescribe a structure as regulated as a private company, but with the kind of "controlling" relationship between a municipality and the governing board of a service utility that is appropriate in the public sector. The legislation could also inter alia, design financial reporting and accounting standards for service utilities that cohere with those appropriate for municipalities, and minimum governance standards for the relationship between the service utility and the municipality. The legislation could specify the following:

1. the circumstances under which a municipality could establish a service utility;
2. the qualifications and disqualifications of members of the governing body;
3. an appropriate reporting relationship between the municipality and the governing body of the service utility;
4. the issues that the governing body should provide reports on;
5. the powers that the governing body may or may not be granted;
6. a requirement that the performance of the governing body and the individual members of that body be assessed;
7. requirements around the assessment of the performance of the service utility;
8. the implementation of the municipalities policy and strategic direction by the service utility; and
9. the role of individual councillors, committees and other offices within the municipality vis a vis the service utility.

59. The other advantage would be to regulate the "ownership" structure in a way that entirely suits the municipality. A further benefit, if possible, would be to reduce the tax exposure of municipal entities through the development of the legal regime for service utilities, although this may involve negotiations with the South Africa Revenue Service.
60. In summary, the current disadvantage of service utilities is the fact that they are not regulated in the Systems Act – either through existing substantive or procedural controls of general application. Our experience has been that municipalities and lenders have been reluctant to create an entity about which so little is known. In our view, with adequate regulation, service utilities could provide a great advantage for municipalities with the experience to design and operate them.

PART X: CONCLUSION

Comparative Assessment

61. The different structures that are currently available to a municipality in terms of the Systems Act for the establishment of a municipal entity are different from each other in many ways. Some are more regulated than others, some are better suited to multiple owners (and some have a requirement of more than one "owner"), some are better suited to profit-generating activities, while others cannot be used for profit-related motives. The difficulty for national government is to understand how these entities differ from each other, and how to ensure a minimum standard of regulation for all of them.
62. The table below sets out a range of issues which we believe to be of particular importance, and the standards of control imposed by the Companies Act for private companies are contrasted with the regulation in the Companies Act or elsewhere relating to trusts, section 21 companies and service utilities.

Table 7: Showing a Direct Comparison of Different Forms

ISSUE	PRIVATE COMPANY	TRUST	SECTION 21	SERVICE UTILITY
Control	Shareholders establish the company by registering it with its articles and memorandum.	The Founding Donor establishes the trust by registering the trust deed.	Seven members establish the company by registering it with its articles and memorandum.	The municipality establishes the service utility by passing a by-law.
Governing Body	The board of directors is appointed by the shareholders or as otherwise stipulated in the articles.	The trustees are appointed by the founding donor or as otherwise stipulated in the trust deed.	The board of directors is appointed by the members or as otherwise stipulated in the articles.	The governing body is established by the by-law and appointed as per the terms of the by-law.
Constitution	The memorandum and articles of association.	The trust deed.	The memorandum and articles of association.	The by-law.
Financial Statements	Annual financial statements in accordance with the Companies Act are required to be audited annually.	The trust deed may require financial statements and sets the standards to which these must adhere. In addition the Master may call a trustee to account under section 16 of the Trust Property Control Act.	Annual financial statements in accordance with the Companies Act are required to be audited annually.	The by-law may require financial statements and sets the standards to which these must adhere.
Financial Year	The articles establish a date for the financial year end.	The trust deed may establish a date for a financial year end if the deed requires financial statements.	The articles establish a date for the financial year end.	The by-law will establish a date for the financial year end.
Return of Assets	On dissolution of the company, the assets are first utilised to meet the debts of the company, and then the assets are sold or otherwise distributed and the proceeds are distributed to the shareholders in the form of a dividend.	The assets are to be utilised for the benefit of the beneficiaries. The trust deed may require that on dissolution the assets be distributed to the beneficiaries, or that the assets be transferred to an institution or entity that has the same or similar object as the trust.	The assets are to be utilised in carrying out the main object of the section 21. The articles may (and most do) require that on dissolution the assets be transferred to an institution or entity that has the same or similar object as the trust.	The by-law will establish a dissolution regime, and may make provision for the return of assets.
Annual General Meeting	Annual AGMs are required by the Companies Act. That Act requires that all shareholders be given notice of the AGM together with the Financial Statements, Auditors Report and the report of the chairman. The purpose of the AGM is to present the Financial Statements to the shareholders, appoint the directors and approve the auditors fees, and to put all resolutions recommended by the directors to vote.	Not required by law, but may be required by the Trust Deed.	Annual AGMs are required by the Companies Act. That Act requires that all members be given notice of the AGM together with the Financial Statements, Auditors Report and the report of the chairman. The purpose of the AGM is to present the Financial Statements to the members, appoint the directors and approve the auditors fees, and to put all resolutions recommended by the directors to vote.	May be required by the by-law.

Analysis of the Comparative Assessment

63. The table above shows two interesting things. The first is that the key to control lies in the constitution or founding documents of an entity, and that even with a generic constitution (as provided for in the Companies Act), the founder of the entity has scope for shaping the entity into a vehicle suitable to its needs.
64. The second interesting thing is that the only vehicle that can be crafted to be perfectly suitable for all municipal needs is the service utility. The existing corporate forms have not been designed for the public sector and although they may be suitable for use as municipal entities, they are not ideally suitable. Our view is that the service utility has the greatest potential for meeting the requirements of both the National Treasury and municipalities in the long term. With sufficient regulation, the service utility can be designed to establish the correct relationship between a municipality and a governing body. In our view, a governing body of a municipal entity should be subject to greater control by the municipality than the board of directors of a private company. Obviously this has implications for the personal liability of the directors. The more external controls placed on a board of directors, the less the personal liability of the directors. This may not be a bad thing in the context of public sector entities where the board’s essential function is strategy and direction in implementing a municipal plan and not in devising strategies and direction to enhance shareholder value.
65. The greatest case for focusing on service utilities is that private companies are not entirely suitable for public sector ownership. A very thorough assessment of the Companies Act has to be undertaken if municipalities are to create private companies as municipal entities. In acknowledgment of this, the MFMB has already tailored the provisions relating to dissolution. Further, the conventional fiduciary duties of directors of private companies do not make scope for the importance of the public interest in dealing with state assets, unless the founding documents of the company are carefully crafted. In this context, municipalities need greater controls over the policy and direction of the company, and may even require the power of direct intervention. This is unheard of in the context of a private company where a strict line is drawn between the roles and the powers of shareholders and directors.
66. Obviously drawing up the correct regulatory framework needs time. Our view is that service utilities should be preserved in legislation, although suspended from operation until such time as the regulatory framework has been developed. The next section briefly examines how this might be done.

Coming into Operation of Selected Provisions

67. We understand that at a recent meeting of the joint National Treasury and DPLG team, the provisional consensus was that the MFMB should restrict municipal entities to private companies or as few forms as possible. This consensus was driven by an acknowledgment that given the differences between the various corporate forms, it would be necessary to create separate rules for each form. Restricting municipal entities to private companies allows for the careful elaboration of rules in a relatively familiar legal context.
68. Our view is that the MFMB should not restrict municipal entities to private companies alone, but should provide for but only bring into operation those provisions relating to other forms – including trusts and service utilities - at a later date when suitable rules have been devised. The provision headed "Short Title and Commencement" can state expressly that the sections relation to service utilities and trust do not take effect until a date determine by the Minister by notice in the Gazette. We are not concerned that the implication of this advice is that the rules relating to private companies would appear in the Act itself, whereas the rules relating to trusts and service utilities would appear (if at all) in regulations.

CLASSES OF SHARES
Types of shares	Description	Voting rights
Ordinary shares	Has unrestricted rights to participate in a distribution of dividends or capital after the rights of preferred shareholders have been satisfied.	The shares may be divided into different classes, with each enjoying different voting rights (only in respect of unlisted companies).
Preference shares	Preferences shares usually enjoy a preferential right to dividends and the repayment of capital on liquidation, but depending on the articles of the company may or may not have a right to participate beyond a specified amount as regards dividends or return of capital. Preference shares may also be issued as redeemable on a specific date or at the option of the company, subject to certain restrictions.	Voting rights may or may not be conferred on these classes of shares and these rights must be defined by the articles of the company.
Convertible preference shares	Preference shares that are convertible into the ordinary shares at a future date.	Voting rights may or may not be conferred on these classes of shares and these rights must be defined by the articles of the company.
Deferred shares	Have the same attributes as ordinary shares, but only rank for a dividend after a prescribed minimum dividend has been paid to common stockholders or a certain period of time has elapsed.	The shares may be divided into different classes, with each class enjoying different voting rights (only in respect of unlisted companies).

The Franschhoek Empowerment and Conservation Trust ("FREMCO TRUST) is registered with the Master of the High Court in Cape Town under reference IT3341/2001, set up pursuant to a Franschhoek Municipal Council decision.

The two main purposes of the FREMCO Trust as a business trust, is to serve as vehicle through which the previously disadvantaged of Franschhoek can participate in the mainstream of the local economy, and to disburse levy funds on behalf of the Stellenbosch Municipality.  The Trust is the joint venture partner of FRANDEVCO (Pty) Ltd. in the development of the former Franschhoek municipal Commonage land.  In this capacity it will participate in the establishment and ownership of a large agricultural estate, a resort/spa hotel, and exhibition and convention hall, a craft centre and a food and wine museum and training centre.  The Trust is also contractually charged with administering a development levy payable to it (consisting of 1% on the price realised of all property sold and transferred out of the Commonage land). The proceeds of this levy must be spent outside of the Commonage property, on improving the well-being of the previously disadvantaged of Franschhoek. Of the levy income 90% is destined for the empowerment of the previously disadvantaged, and 10% for the Mont Rochelle Nature Reserve (which adjoins the Commonage).

The beneficiaries of the Trust are all those who were legally resident in the municipal area of Franschhoek on 30 November 2000, who are breadwinners of a family and who either are members of FRALCRA (that is, a land claimant), and/or who belong to the previously disadvantaged communities of Franschhoek.