15 August 2010 by

Establishing a Company in terms of the new Act

Principal themes of the company law reform include the simplification of incorporation, aimed at reducing costs in order to encourage enterprise development, and the creation of a predictable regulatory environment which will encourage foreign investment. All are hopeful that the new company law regime, which is in keeping with international best practice, will create an enabling environment for economic growth in South Africa.

In the new Act, familiar terms and concepts such as private and public companies have been retained. The new Act does not include the concept of "widely held companies", which in terms of the Corporate Laws Amendment Act 2006, extends across the existing categorisation of companies, and serves as a foundation for imposing higher standards of transparency and accountability. The concepts of "public interest companies" and "limited interest companies" based on thresholds that appeared in the first draft of the Bill released in 2007, have also been dropped.

The new Act divides all companies into two broad categories, namely "profit companies" and "non-profit companies". The non-profit companies are the successor to Section 21 companies. There are four types of profit companies, namely private companies, public companies, personal liability companies (which used to be the old Section 53b companies available to incorporated partnerships), and a new category of companies called "state owned companies".

The new Act makes incorporation of a company a right. One or more person may incorporate a profit company, and three or more persons may incorporate a non profit company. It will no longer be necessary for every company to have the memorandum and articles of association, but one founding document, the Memorandum of Incorporation, will be required. The incorporation process in its simplest form will entail signing a Memorandum of Incorporation, filing a Notice of Incorporation and paying an incorporation fee. The Memorandum may be pro forma or tailored to suit the specific company, but the form does not suggest or impose any provisions. The Commission must register a company, even if its chosen name is unavailable, by assigning a registration number as well as an interim name of the company. All companies will have all compatible legal powers, unless specifically restricted by a Memorandum of Incorporation. A company will continue to exist as a juristic person until it is de-registered.

The new Act defines a foreign company as an entity incorporated outside South Africa, irrespective of whether it is a profit or non-profit company, or carries on business in South Africa. All foreign companies carrying on business or non-profit activities in South Africa will be required to register as external companies in terms of the new Act.

In terms of the Corporate Laws Amendment Act of 2006, greater accountability and transparency provisions were introduced for widely held companies, which had to amongst other requirements, appoint an audit committee. The new Act provides for certain minimum levels of accountability and transparency for all companies and enhanced transparency and accountability requirements for public companies and state owned enterprises. The enhanced transparency and accountability requirements can also apply to private companies, personal liability companies and non-profit companies that choose to make them applicable and state as much in the Memorandum of Incorporation. Companies that must comply with the enhanced transparency and accountability provisions have to appoint an audit committee who will be responsible for nominating the auditors and determining their remuneration.

Under the new Act, shares will no longer have a nominal or a par value. All shares will therefore effectively be treated like no par value shares. Section 36(3) of the Act represents a major shift, since except to the extent that the Memorandum provides otherwise, a company's board may increase or decrease the number of shares, or reclassify any shares that have been authorised but not issued, or determine the rights that attach to shares in a specific class. This is in stark contrast to Section 75 of the 1973 Companies Act, which provides that a company may, if authorised by its articles, alter its share capital and shares by way of special resolution. The apparent motivation for this provision is to enable South African companies to compete for capital more effectively in world markets with companies whose boards already have the power to finance their businesses quickly and efficiently.

The new Act will create a variety of new regulatory agencies that will be responsible for administering the Act. A Companies and Intellectual Property Commission (the Commission) will be established to attend to registration of companies and intellectual property rights and maintain proper records, and the enforcement of the Act. The Commission will essentially take over the role currently fulfilled by CIPRO.

There will also be a Companies Tribunal which will adjudicate any applications made in terms of the Act and also assist in the resolution of disputes. The Takeover Regulation Panel will regulate affected transactions and offers in terms of chapter 5 of the new Act. A Financial Reporting Standards Council will advise and consult with the Minister of Trade and Industry about developing financial reporting standards.

Tessa Brewis
Senior Associate, Corporate and Commercial

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