In the context of financial assistance under section 45 of the Companies Act 71 of 2008 (Companies Act), this scenario arises remarkably often. Although both board and shareholder resolutions are required, the Companies Act is, to a certain degree, silent on the order in which those resolutions must be signed. Despite this silence, a market convention has emerged that treats the signing sequence as if it were determinative of validity, regardless of how the resolutions themselves are drafted.

Against this backdrop, we briefly set out why that convention may be overly prescriptive when applied blanketly in all circumstances. The real issue is not when resolutions are signed, but how they are drafted.

What is financial assistance?

As defined in section 45(1)(a), “financial assistance” includes the lending of money, the guaranteeing of a loan or other obligation and the provision of security for any debt or obligation, subject to certain exclusions. The section applies where the recipient or beneficiary of the financial assistance is, among other things, a director or a related party (for example, a group company) of the company providing the financial assistance. Financial assistance by a holding company to its subsidiary has, however, recently been carved out of the scope of section 45.

What authorisations are required?

Section 45(2) provides that the board may only authorise the company to provide financial assistance to the persons and entities contemplated in that section, subject to subsections 3 and 4.

In order to avoid a contravention of section 45, the following requirements must be satisfied:

• the financial assistance must be provided pursuant to either (i) an employee share scheme, or (ii) a special resolution, adopted within the previous two years, that approved such financial assistance, either in respect of a specific recipient or generally for a defined category of recipients into which the relevant recipient falls (section 45(3)(a));
• the board must be satisfied that (i) immediately after providing the financial assistance, the company will satisfy the solvency and liquidity test, and (ii) the terms under which the financial assistance is proposed to be given are fair and reasonable to the company (as per section 45(3)(b));
• any conditions or restrictions contained in the company’s memorandum of incorporation relating to financial assistance must be complied with (section 45(4)); and
• the board must give written notice of its resolution to provide financial assistance, to shareholders and any registered trade union representing the company’s employees (section 45(5)).

What is clear from section 45?

What is clear is that the board may not authorise any financial assistance unless the particular provision of financial assistance has been approved pursuant to a special resolution of the shareholders, adopted within the previous two years. Further, the special resolution of the shareholders must be passed before the financial assistance is actually provided.

This wording in section 45(3)(a)(ii) also seems to carry through the reasoning in the majority judgment in Neugarten and Others v Standard Bank of South Africa Limited [1989] (1) SA 797 (AD), which held that shareholder approval for the giving of security under section 226 of the old Companies Act 61 of 1973 (the predecessor of the current section 45) had to come before the security was furnished.

What is unclear from section 45?

The assumption that the signing of the shareholder approval must precede board approval rests on a particular reading of three phrases in section 45:

1. The proviso in section 45(2) that the board’s authority is “subject” to subsections 3 and 4.
2. The proviso that the board may not authorise any financial assistance “unless” the particular financial assistance is pursuant to a special resolution of the shareholders.
3. The proviso in section 45(3)(a)(ii) that the board’s authority to authorise any financial assistance be “pursuant to” a special resolution of the shareholders.

Read together, these phrases are often treated as imposing a strict sequencing requirement – any board resolution adopted before the shareholders have spoken is regarded as, at best, premature, and at worst, invalid.

What does section 45 actually say?

The phrases “subject to” and “unless” are not terms of art and must be interpreted in their particular context and setting. The phrases do not carry a timing implication with respect to signature, and simply mean that the board’s authority to authorise any financial assistance is conditional upon the requirements for the particular provision of financial assistance being satisfied (although in some contexts the phrase “pursuant to” can call for a certain sequence of events, it is equally capable of meaning “in accordance with”).

Effectively, sections 45(2) and 45(3) prevent a board resolution from coming into effect unless the required special resolution by the shareholders has been passed.

Where the focus should be

The decisive question is whether the board’s approval was subsequent to or conditional upon the shareholder approval being in place.

Accordingly, if the board resolution is drafted so that its effectiveness is expressly made subject to the adoption of the required special resolution of the shareholders, the requirements of section 45 would be met. Where this is done, neither resolution is rendered invalid merely by virtue of having been signed in a particular order.

Treating signing order as determinative risks elevating form over substance and introducing uncertainty into transactions that are otherwise properly authorised. Our approach reflects the conditional nature of the board’s authority under section 45 and, effectively, renders the timing of signatures largely irrelevant, because, by design, the board’s authority only becomes operative once shareholder approval is in place.

As a result, parties are spared the all-too-familiar exercise of circulating the same board resolution for re-signature simply because the shareholders’ resolution happened to be executed later in the day.