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How The New Companies Act Affects Your Business October 2011

The coming into effect of the new Companies Act has far-reaching implications for any company wishing to do business in South Africa. Corporate managers need to acquaint themselves with the basic requirements of the new Act and take immediate action to ensure compliance. This article is intended to assist companies to identify salient issues.

INTRODUCTION

The Companies Act No 71 of 2008, as amended by the Companies Amendment Act of 2010 together with its accompanying Regulations (“new Act”) came into effect on 1 May 2011 (“effective date”). The new Act replaces the preceding Companies Act, No 61 of 1973 in its entirety. It also repeals several sections of the Close Corporation Act, No 69 of 1984, replacing some of them with the provisions of the new Act.

THE WAY FORWARD

The new Act introduces significant changes to our corporate law system. This article focuses on the incorporation, administration and management of corporate entities and related compliance requirements.

1.  Adopt a New Memorandum of Incorporation

Transitional Period

Under the old Act, incorporation of a company required the submission of two documents, namely the Memorandum and Articles of Association, jointly referred to as the constitution of a company. These two documents are now merged into one single governing document named the Memorandum of Incorporation (“MOI”) which sets out the respective duties, rights and responsibilities of shareholders, directors and other stakeholders in relation to the Company.

Since every company’s existing constitution will undoubtedly contain provisions which are inconsistent with the new Act, it grants pre-existing companies a two-year grace period (“transitional period”) calculated from the effective date. During this period, companies must adopt and file a new MOI that aligns their constitution with the provisions of the new Act. Should a conflict exist between the provisions of the new Act and a company’s existing constitution during the transitional period, then the existing constitution will prevail

Immediately Effective Provisions

However, certain provisions of the new Act became effective from the effective date. The transitional period does not apply to provisions dealing with the following issues:

- The duties, conduct and liabilities of directors;

- The rights of shareholders to receive notices and have access to information;

- Meetings of shareholders and directors and the adoption of resolutions;

- Approvals required for any distributions, financial assistance, insider share issues and options;

- Fundamental transactions, take-overs and offers (except to the extent exempted).

Companies need to consider the impact of these immediately effective provisions on their existing constitution because they cannot indiscriminately rely on their current constitution to prevail over the new Act during the transitional period.

Alterable and Unalterable Provisions

In certain instances, the new Act allows for deviations from certain of its standard provisions (“default provisions”). It permits companies to fine tune or adjust the so-called alterable provisions within certain stipulated parameters. However, if a company chooses not to alter an alterable provision, the standard  default provision will automatically apply. For instance, the new Act permits alterations to the default percentages of support needed for the approval of ordinary and special resolutions, either generally or in respect of any specific matter.

All companies should undertake a thorough assessment of their existing constitution and take immediate steps to make necessary amendments. This will allow them to enjoy the full advantage of the alterable provisions of the new Act.

2.  Align Shareholders Agreement

Companies need to scrutinise their existing shareholders agreements to ensure alignment with the new Act and MOI. The new Act significantly limits the purpose and scope of shareholders agreements as it expressly provides that a company’s MOI will now have precedence over its shareholders agreement. During the transitional period, shareholders agreements will continue to have effect. Should there be an inconsistency between a company’s shareholders agreement and its MOI or the new Act, the shareholders agreement will prevail, safe to the extent provided for in the MOI or the shareholders agreement.

However, following the transitional period, any provision in a shareholders agreement that is inconsistent with the new Act or the MOI will be void to the extent of that inconsistency. In other words, shareholders will no longer be able to agree to provisions intended to override or supersede provisions of a company’s constitution, which arguably may render shareholders agreements superfluous in the future.

3.  Adjust Company Classification

The new Act establishes new classifications for companies as either profit or non-profit companies. In some instances, it introduces new names and name-endings for specific company formats. Companies should familiarise themselves with these new classifications and consider how this affects them. For example, should a company’s MOI contain provisions which restrict or prohibit the amendment of any particular provision of the MOI then the name of the company must be followed with “(RF)”, indicating “ring-fenced”.

4.  Assess Position Of Directors And Prescribed Officers

Consider their Duties

To a certain extent, the new Act codifies the standard of conduct expected from directors. Notwithstanding any provision to the contrary in a company’s MOI, the provisions of the new Act pertaining to the duties, conduct and liability of directors became effective on the effective date.

Identify Prescribed Officers

The provisions in the new Act pertaining to the standard of duties, conduct and liability of directors equally apply to the “prescribed officers” of a company and to members of board committees who are not directors. No distinction is made between executive, non-executive or independent directors. According to the Regulations, a prescribed officer is, “any person who, despite not being a director, exercises general executive control over and management of the whole or a significant portion of the business or regularly participates to a material degree in the exercise thereof, irrespective of his/her title or function performed”.

Companies must ensure that their prescribed officers as well as the directors and members serving on board committees, are fully aware of the required standard of conduct, duty and liability for breaches. Failing to comply with their duties could not only lead to them being placed under probation or declared delinquent but could also expose them to claims by third parties and the company.

Provide for Adequate Indemnities and Insurance

The new Act allows companies, except to the extent that the MOI provides otherwise, to provide financial assistance to directors to defend litigation in proceedings arising from the director’s service to the company. Companies are also permitted to indemnify or insure directors, committee members and prescribed officers against any liability which does not result from wilful misconduct.

5.  Ascertain If Mandatory Audit Of Financial Statements Is Required

In terms of the new Act, not all companies are required to have their financial statements audited but the onus is on the company to ascertain minimum requirements.

All public and state owned companies must have their annual financial statements audited. Other companies are only required to have their financial statements audited if they qualify to do so in terms of the “public interest scorecard” as set out in the Regulations. A company’s “public interest score” is measured against the social or economic impact of a company as manifested by its turnover, the size of its workforce and/or the nature and extent of its activities.

Most companies that do not require audited financial statements will require an “independent review” of their annual financial statements. Exceptions are owner-managed companies (all shareholders are also directors of the company) and single-shareholder companies (one person holds all the securities issued by the company).

6.  Appoint Company Secretary, Audit Committee And Auditor

In terms of the enhanced accountability and transparency provisions of the new Act, companies that are obliged to have audited financial statements must, in addition to appointing an independent auditor, also appoint a company secretary and an audit committee. All other companies would only be required to comply with the enhanced accountability and transparency provisions if their MOI requests it.

7.  Appoint Social And Ethics Committee

Certain companies must appoint a Social and Ethics Committee. This requirement applies mostly to public companies, state-owned companies and significant companies qualifying in terms of their public interest score. The Social and Ethics Committee serves as an advisory panel. It monitors the activities of the company and reports to the company on a wide range of issues such as compliance with legislation, good corporate citizenship, black economic empowerment, consumer and labour relations, health and public safety etc.

8.  Alter Shares

Under the new Act nominal or par value shares can no longer be issued.  All par value shares issued by pre-existing companies before the effective date will continue to be recognised as such but as a transitional measure companies have the option to convert every par value share to a share having no par value within 5 years after the effective date.

 

Conclusion

It would be wise not to procrastinate and wait until the end of the transitional period before implementing the requirements of the new Act. However, the new Act is not a complete codification of the company law and common law principles should always be seen as the wider backdrop.

 

Disclaimer

This article has been compiled for information purposes only and does not constitute legal advice. Legal advice needs to be tailored to the specific needs and circumstances of the case on hand. It follows that neither Pieter Swanepoel nor D’Amico Incorporated can accept liability for any loss or damage caused to any individual or entity that has acted or omitted to act on the basis of this information.