14 October 2010 by

The Companies Amendment Bill - more than mere grammar and spelling to be corrected

On 22 December 2009, the Department of Trade and Industry announced that it intended to address certain "grammatical errors, incorrect reference and cross referencing, missing of words, inconsistency of provisions and incorrect spelling" in the new Companies Act (new Act). Whilst this was seen as a welcome acknowledgement of shortcomings in the new Act, many legal practitioners and academics wondered openly whether the fundamental flaws contained in the new Act in its present form were capable of repair at all. These doubts were reinforced with the publication of the draft regulations under the new Act on the same day. It seemed that in some cases the regulations were being used as the means to address shortcomings in the new Act and, as such, ran the risk of being challenged as ultra vires.

After much speculation, the Department published a draft Companies Amendment Bill on its website on 28 July 2010. It is now quite clear that there is recognition that the new Act in its present form is significantly deficient and the proposed changes certainly go a lot further than dealing with mere grammatical and other formal issues.

The Bill, which runs to some 102 pages, seeks to amend no less than 110 of the 225 sections of the new Act with many of the sections being amended in several different respects. No less than 21 of the definitions in section 1 are to be changed and 9 entirely new definitions are to be added, some to add clarity and others, such as the definition of a "domesticated company", to introduce concepts not currently contemplated in the new Act.

Public hearings of the Parliamentary Committee on Trade and Industry to discuss the Bill are currently scheduled to commence on 7 September 2010, with the Bill to be formally considered by the Committee on 22 September 2010. No indication has been given as to when the amended draft regulations might be expected. All of this makes it clear that the (amended) new Act will not come into operation on 1 October 2010 as was most recently anticipated by the Department.

Pending the finalisation of the Bill, the following are amongst the important changes that are now proposed:

  • The Bill seeks to deal with the uncertainty regarding the provisions of shareholders agreements of existing companies. The wording of the new Act seemed to suggest that not only the articles of association of "existing companies" but also their shareholders agreements would continue to prevail over the new Act (save in respect of certain specific matters) for the two-year transitional period after the new Act comes into force. The draft regulations, although not clear, suggested that this might not be the case. It was therefore thought that there would be a need to migrate shareholder agreement provisions into articles of association prior to the new Act coming into operation if it was intended to keep these alive for the two-year period. The Bill makes it clear that this will not be necessary and that both the articles of association and existing shareholders agreements will live on for the transitional period (by the end of which the latter will need to be incorporated in the company's Memorandum of Incorporation or else be rendered void to the extent that they conflict with the new Act or the Memorandum of Incorporation).
  • The Bill provides for a foreign company to "transfer" its registration to South Africa (SA) subject to certain specific requirements, including the fact that the whole or greater part of its assets are situated in SA, the majority of its shareholders are resident in SA and the majority of its directors are or will be South African citizens. Such a "domesticated company" will cease to be registered in the foreign jurisdiction where it was originally registered and will continue life as a South African company without affecting the rights of any person or the rights and obligations of the company itself.
  • The new Act currently has a curious provision in section 218(1) which in effect says that even if the new Act provides for any resolution, provision of an agreement or the like to be void, it will not be void until a court declares it void - which is a legal nonsense. The Bill has addressed this and now makes it clear that the section has in mind only matters which are voidable or prohibited. Such matters will, logically, only become void when a court declares them such.
  • The new Act allows the board to make loans or grant other financial assistance to directors in section 45 subject to certain conditions. These include a special resolution of shareholders and the fact that the company must, after the granting of the loan or financial assistance, satisfy the solvency and liquidity test in the new Act. The Bill has introduced a further requirement, namely that the terms under which the financial assistance is to be given are "fair and reasonable to the company". No basis for assessing this is suggested.
  • In terms of the new Act, a company can acquire its own shares subject to compliance with certain requirements, which do not include a special resolution of the shareholders. The Bill, however, now introduces the requirement of a special resolution where the shares are to be acquired from a director or prescribed officer of the company (or anyone related to them as defined in the new Act).
  • The Bill now effectively provides for an increase in the minimum number of directors (currently one for private companies and three for public companies) by providing that the stated minimums exclude "the minimum number of directors that a company must have to satisfy any requirement ... to appoint an audit committee or a social and ethics committee". The new Act requires an audit committee of at least three non-executive directors and the draft regulations contemplate a social and ethics committee comprising a further three non-executive directors. Not all companies are obliged to have either of these committees but, where they do, companies will need to increase the size of their boards to comply with this requirement.
  • The provisions currently contained in the draft regulations in terms of which companies may apply to the Companies Tribunal for exemption from the requirement of having to appoint a social and ethics committee have been moved to the Bill (and will no doubt be removed from the next draft of the regulations). This should deal with the ultra vires issue that might have arisen in this case.
  • The controversially wide powers given to a business rescue practitioner in section 136(2) of the Act to "cancel or suspend entirely, partially or conditionally any provision of an agreement to which the company is a party" other than an employment agreement have been tempered in the Bill. The Bill proposes that a practitioner may suspend (but not cancel) obligations of the company "for the duration of the business rescue proceedings". If a practitioner wishes to cancel an agreement, he will need to apply to court to do so "on terms that are just and reasonable in the circumstances". The Bill provides further that where a practitioner suspends a provision of an agreement relating to security granted by the company, that provision will continue to apply where the practitioner causes the company to dispose of any property over which that security exists. This means that the company will have to obtain the consent of the security holder, unless the proceeds will cover the whole of the debt, and the company will be obliged to pay over the proceeds of the sale to such person, up to the amount of the debt.

The final shape of the new Act will be determined during the course of the Parliamentary process but it is probably unlikely that further significant changes will be made before the new Act comes into force. Whether or not the Bill addresses all of the shortcomings in the new Act remains to be seen in the months and years ahead.

Francis Newham, Director
Corporate and Commercial

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