20 July 2022 by and Corporate & Commercial Alert

Distributions: More than meets the (i)

Section 46 of the Companies Act 71 of 2008 (Act) is clear on the requirements that must be met before a company may make a distribution – a company must not make any proposed distribution unless the distribution is pursuant to an existing legal obligation of the company, or a court order, or where the board of the company has authorised the distribution.

In all cases the board must have acknowledged that it has applied the solvency and liquidity test and concluded that the company will satisfy the test immediately after completing the distribution.

Ordinarily, when considering whether a distribution might occur, we tend to only consider an upward flow of cash, assets or benefits to the direct shareholders of the company concerned – the classic dividend. However, companies should be aware that a “distribution” as defined in section 1 of the Act is far wider than the generally assumed concept of a payment by a company of a cash or in specie dividend to its shareholders (as contemplated in subsection (a)(i) of the definition). Boards need to ensure that other qualifying transactions are not overlooked for purposes of section 46.

What should be clear from the outset is that a distribution is not just a transfer of money or assets and that subsections (b) and (c) of the definition go further to include an incurrence of a debt or other obligation or a forgiveness or waiver of debt or other obligation (respectively) by a company. What should also be kept in mind is that a distribution is not just a transfer, incurrence, forgiveness or waiver by a company for the benefit of a direct shareholder. Furthermore, each of the subsections of the definition include a reference to being for the benefit of holders of shares of the company or “of another company within the same group of companies”. This effectively means that a distribution can also be made by virtue of a “lateral” or even “downward” transfer, incurrence, forgiveness or waiver which is for the benefit of any shareholder of any company within the same group of companies.

The second aspect of the definition to which we draw attention is the inclusion in subsection (a) of the words “to the holder of a beneficial interest in any such shares”. In this regard, it is important to note the definition of “beneficial interest” (also found in section 1 of the Act) includes a person or entity who holds the right or entitlement to (i) receive or participate in any distribution in respect of the company’s securities, (ii) exercise or cause to be exercised, in the ordinary course, any or all of the rights attaching to the company’s securities, or (iii) dispose or direct the disposition of the company’s securities, or any part of a distribution in respect of the securities) other than through ownership of those shares, but also through “agreement, relationship or otherwise”. This means that a distribution includes a transfer by a company to a non-shareholder, who only holds a beneficial interest in any shares of the company or a person or entity who holds a beneficial interest in any shares in another group company.

As a starting point, it seems that the broad wording is probably best read as an attempt to ensure that the requirements for a distribution cannot be bypassed by a benefit being passed to shareholders which are not direct shareholders or are shareholders elsewhere in a group. As tends to happen in trying to cover all eventualities, the net has been cast very widely and it is worth noting that the scope of the provision has not yet been settled.

It should be noted that although completion of a distribution without complying with the requirements of section 46 does not render the distribution void (unlike sections 44 and 45 of the Act which specifically state that non-compliant transactions are void), the directors themselves can be held liable to the extent set out in section 77(3) of the Act if they fail to vote against the making of a distribution despite knowing such distribution was contrary to section 46 of the Act.

What is highlighted above should trigger directors to consider carefully whether any unusual transfers or arrangements intra-group require compliance with section 46. If in doubt, compliance through passing the necessary resolutions and conducting the appropriate solvency and liquidity test should safeguard the process from future difficulties.

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