a new companies act

A new Companies Act

What does it mean for you?! 2

Choosing and structuring your business entity! 5

Its all in the direction! 10

Standards of Conduct (the Scary Stuff)! 17

Sharing is caring! 25

Shareholders rights and duties! 32

The Big Deal! 36

We all fall down! 40

Get in touch! 44

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What does it mean for you?9 April 2009 marked another landmark date in the South African legislative arena. On that date the President assented to the Companies Act No 71 of 2008 (“the New Companies Act”).

There were and are many arguments both for and against the change: notably that the 1973 Companies Act (“the 1973 Act”) has through its numerous amendments kept pace with the ever emerging trends and circumstances within the national and international setting. However, the equally strong counter-argument being, given the fundamental political changes in the country there was also a strong motivation that the majority, if not all legislation in South Africa should be subject to some form of review and/or overhaul to the extent necessary to bring it in line with the principles and spirit espoused by the Constitution.

We at Jacobson Attorneys believe that it is important that the New Companies Act be demystified, as far as may be possible, so that our clients will be in a position to make the transition to the new regime seamlessly. We will therefore be bringing you a series of posts on the New Companies Act and the fundamental changes it is ringing on the South African commercial landscape.

In the legislative history of South Africa there have in fact been three fully-fledged Company Acts, all of which have attempted to codify company law. In 1910, at the formation of the Union of South Africa, each of the four provinces had its own Companies Act. The Transvaal Act, which was mostly based on the English Companies (Consolidation) Act 1908, formed the backbone of the first South African Companies Act that was passed in 1926 (“the 1926 Act”).

The Van Wyk de Vries Commission of 1963 was appointed to examine the 1926 Act in order to consolidate and restructure it as well as to evaluate developments in corporate law. It was from the report drafted by the Van Wyk de Vries Commission that the 1973 Act (and the Companies Act which we continue to use today) emerged.

The 1973 Act, although introducing certain fundamental changes, such as the criminalisation of insider trading (now housed in a separate Act), the extension of the provisions of section 424 in respect of “fraudulent” trading to include “reckless” trading as well as the abolition




of concepts like partly paid shares and “unlimited” companies, the 1973 Act remained largely in form and content the same law as that of England from which it had been sourced almost 100 years previously.

The question asked when the corporate law reform process that led to the New Companies Act began was “For whose benefit does a company exist?” Is it just for the shareholders (a view commonly held in the United Kingdom and hence in SA) or is there a greater need that must be addressed? Are there interested parties that go beyond the shareholders whose interests deserve protection, while retaining the concept of maximising shareholder wealth? What about corporate governance? Should the directors answer more fully to the shareholders they purport to represent?

It was with this in mind that the drafters of the New Companies Act set out their legislative objectives in section 7: purposes which both echo the spirit and intentions of the Constitution, but also promote entrepreneurship and transparent corporate governance.

This is where the question of the continued existence and incorporation of close corporations arises, as well as the existing company structures under the 1973 Act.

An important innovation was the advent of the Close Corporations Act 69 of 1984 (“the Close Corporations Act”). The Close Corporations Act functions alongside the 1973 Act in many ways and is a means for allowing smaller, more simplified businesses to be incorporated. There are at present just under 2 million close corporations registered on the CIPRO data-base. The New Companies Act repeals and amends large portions of the Close Corporations Act.

The rationale behind this is that the New Companies Act recognises as one of its aims that any person has the right to form a company, and that there are accordingly minimal requirements imposed on the act of incorporation. Given this streamlined and simplified process the legislature has deemed it unnecessary to retain the Close Corporations Act. The Transitional Provisions contained in Schedule 5 of the New Companies Act sets out in broad terms what the future of close corporations will be.

The New Companies Act at present allows for the indefinite continued existence of close corporations until such time as the members may determine that it is in their interests to convert the close corporation to a company under the New Companies Act. New close




corporations and the conversions from companies into close corporations will cease from the coming into force of the New Companies Act, which is anticipated to be around July this year. It would appear however therefore that the intention is ultimately to phase out the close corporation, in favour of one of the private company under the New Companies Act, and it would be advisable for those persons who are members of a close corporation to revisit their founding documents and determine whether, given the flexibility in the New Companies Act, it may not be in their interests to convert into a private company.

All “existing companies” under the New Companies Act, will likewise continue to exist under the new dispensation. It must however be borne in mind that under the 1973 Act, the constitutive documents of a company were its articles of association and its memorandum of incorporation. Under the New Companies Act only a memorandum of incorporation is required. The Memorandum of Incorporation, allows for a high degree of flexibility between the company and all its stake holders and can (provided certain elements as set out in section 15 are complied with) be as complex or as simple as the parties thereto require. Given the flexibility imbibed into the New Companies Act it would likewise be advisable for all companies to revisit their founding documents to ensure that they comply with the provisions of the New Companies Act and/or to amend their founding documents so as to facilitate the operations of their particular business within the confines of section 15.




Choosing and structuring your business entityIt is fairly common knowledge that the manner in which we do business is largely a question of personal choice and practicality. There is no absolute requirement that an entrepreneur select an incorporated entity as the vehicle through which to run his business: a sole proprietorship may well meet a personʼs particular needs or in the case of a family business, a partnership may be well suited. What is important however, is that careful consideration is given to the structure of the business entity chosen, and in particular the potential consequences (including the tax implications) of having selected any particular entity, whether it is incorporated or otherwise.

Companies (and close corporations) are in law considered to be juristic persons. This means that from the date on which it receives its Registration Certificate (under the 1973 Act the Certificate of Incorporation and the Certificate to Commence Business) the company is considered to be a separate legal entity, with rights and obligations which is capable of pursuing those rights and enforcing those obligations by means of its officers. Simply put, the Registration Certificate is the companyʼs birth certificate, from the moment the Registration Certificate is issued the company stands in law as though it were a person in its own right. Section 19(1)(b) of the New Companies Act sets out that a company has legal capacity and the powers of an individual except to the extent that a juristic person is incapable of exercising such power. In essence this means that:

• subject to what is set out below, the members of the company and the company itself are separated, with the members in general not being personally liable for the companyʼs debts;

• the assets and liabilities belong to the company and not the members;

• the company itself must enforce any right it may have against a third party for any wrong it may have sustained;

• management (subject to what is set out in the Memorandum of Incorporation) vests in the directors and not in the shareholders;

• a share is a personal right, entitling the holder to an interest in dividends, attend and vote at meetings of the shareholders and a return of capital on the winding up of the company.




This is where the common law concept of the corporate veil comes in. The corporate veil refers to the notional line that is drawn between the company and those persons behind it. In most circumstances, one cannot “pierce” the corporate veil in order to attack the persons behind it. This is not however absolute. Where the corporate veil principal is being abused, the courts are entitled to look at the “substance” of the actions taken rather than the legal form utilised, and in so doing personal liability can once again be attracted.

Sections 75 and 76 of the New Companies Act specifically states that a director or officer of a company may be held personally liable for a breach of certain statutorily created duties. These duties include many of those duties which were commonly considered as fiduciary duties of directors, and include the failure to disclose a financial interest, using his position as a director to obtain some form of personal gain or cause harm to the company, or fails to act in the best interests of the company. In such instances, the corporate veil of the company will not protect the directors and officers from personal liability even though the common law position as regards the corporate veil has not been specifically altered or incorporated into the New Companies Act.

Whereas the 1973 Act catered for a public company, a private company and an external company, (with non-profit organisations being dealt with essentially separately) the New Companies Act has two broad categories of company: a profit company and a non- profit company.

Profit companies may be incorporated by one or more persons and fall into four classes:

• a state-owned enterprise;

• a public company;

• a personal liability company; and

• a private company

For purposes of this discussion only private companies and public companies will be considered in detail as personal liability companies are those private companies utilised by professional associations such as attorneys and accountants who were previously limited to a




partnership structure and in terms of section 53 of the 1973 Act were able to incorporate such entities predominantly for the purposes of succession planning. The state-owned enterprise likewise falls outside of the scope of this discussion, we are however happy to answer any direct enquiry on the subject.

As with the 1973 Act, a private company is one in terms of which the Memorandum of Incorporation contains an express prohibition against the offering of shares to the public and restricts the transferability of its shares. The restriction on the transferability of the shares in a private company is one of the defining elements of a private company. The shareholders themselves wish to retain a degree of control over who the other shareholders will be, and if such shareholders want to dispose of their shares, then the remaining shareholders want to have a say in who ultimately holds them.

In the matter of Smuts v Booyens; Markplaas (Edms) Bpk and Another v Booysens [2001] ZASCA 57 (also 2001 (4) SA 15 (A)) the court held that the word “transfer” consisted of a number of steps within a private company setting: (a) an agreement to transfer, (b) the execution of the transfer document, and (c) registration of transfer. In terms of the 1973 Act the restriction on the transferability of the shares in a private company as contained in the articles of association had to be complied with, failing which no valid transfer could take place, even if the purchaser was unaware of the restriction. Private companies under the New Companies Act have retained these features while additional flexibility and simplicity of management has been built into the New Companies Act to cater for smaller businesses.

The primary differences between a private company and a public company are that the transmissibility of the shares are no longer limited, shares may be offered to the public (subject to certain conditions which will be discussed later in this series) and membership in the company is unlimited.

As set out in Part 1 of this series, one of the main objectives of the New Companies Act is to foster a spirit of entrepreneurialism in South Africa by rendering it simple and inexpensive to incorporate a company. In fact the incorporation of a company is now worded in terms of being a right rather than a privilege bestowed by the State.


http://www.saflii.org.za/za/cases/ZASCA/2001/57.html




The incorporation process begins with a “Notice of Incorporation” (in accordance with the provisions of section 13(1) and signed by all members) being filed with the Commission. The Notice of Incorporation must be accompanies by the Memorandum of Incorporation and the prescribed fee. The contents of the Memorandum of Incorporation are those matters set out in section 15 and include the rights, duties and responsibilities of the shareholders and directors within and in relation to the company. It should be noted that the Memorandum of Incorporation may be unique to the company in question (but must still comply with section 15) or the company may elect to utilise the pre-prepared form in the New Companies Act and amend it at will.

At the very least the following matters should be comprehensively dealt with in the Memorandum of Incorporation:

• the objects and powers of the company (together with any restrictions on that power);

• composition and functioning of the board of directors (including alternate directors and frequency of meetings);

• board committees;

• powers of the board and powers of the shareholders;

• shareholder meetings and shareholder rights;

• personal liability and indemnification of directors;

• amendment of the Memorandum of Incorporation;

• company secretaries and other officers;

• disposals of shares by shareholders;

• conversions of shares into different classes;




• the ability of the board of directors to create rules.

The ability of the board of directors to create rules is a specific right of the New Companies Act. In terms of section 15(3) of the New Companies Act, unless the companyʼs Memorandum of Incorporation dictates otherwise, the directors are entitled to make, amend, or repeal any rules relating to the company in respect of any matter not dealt with the in the New Companies Act or in the Memorandum of Incorporation, provided that a copy of such rules are published in accordance with the provisions of the Memorandum of Incorporation and filed with the Commission. Any rules so published will take effect within 20 days after publication or on the date specified in the rule, whichever is the later.

The companyʼs Memorandum of Incorporation and rules are binding among the shareholders, between the company and the shareholders, between the company and each director, and the company and all prescribed officers and audit committee member.

Companies may still enter into shareholder agreements. However whereas in the past the parties were able to agree that in the event of any inconsistency between the articles of association and the shareholdersʼ agreement, the shareholdersʼ agreement would take precedence, under the New Companies Act, all shareholdersʼ agreements must comply with the New Companies Act and the Memorandum of Incorporation and to the extent that the shareholdersʼ agreement is inconsistent with either document, the shareholdersʼ agreement will be void to the extent of the inconsistency.

In terms of item 4(2)(a) of the Fifth Schedule to the New Companies Act, all pre-existing companies may at any time within 2 years following the general effective date, file without charge any amendment to its Memorandum of Incorporation to bring it in harmony with the new Companies Act.




Its all in the directionIt is a long established principal that the business and affairs of a company must be managed by, or in terms of, the instructions given by the board of directors. The question is – who is a director and what is a director entitled to do?

Confusion is frequently caused by business nomenclature. Is everyone with the title “director” or “manager” necessarily a director in terms of any of the New Act? The simple answer is, no. A director, in terms of section 66 of the New Act is someone who has given their written consent to act in that capacity once appointed in accordance with the provisions of section 66 and is, subject to what is set out below in respect of ex officio and alternate directors, generally appointed by the shareholders of the company.

A private company (or personal liability company) is required to have at least one director, and a public company is required to have at least 3 directors. The companyʼs Memorandum of Incorporation may specify:

• a higher minimum number of directors to be appointed;

• the direct appointment and removal of one or more directors by any person who is specifically named in the Memorandum of Incorporation for that purpose;

• a person to be an ex officio director as a consequence of that person holding some other title, designation or similar status, and will be considered as having all the powers and functions of any other director of the company, except to the extent that such powers are specifically restricted by the Memorandum of Incorporation;

• the appointment of alternate directors; and

• in respect of public and/or state-owned companies musdt provide for the election of half of the board of directors by the shareholders.

This means there are now essentially five species of director:




• an executive director: who is directly involved into the day-to-day management of the company, and is an employee of the company or one of its subsidiaries (such directors will frequently be Memorandum of Incorporation appointments made by the shareholders);

• a non-executive director: who is not involved in the day-to-day management of the company and is not a full time salaried employee of the company or any of its subsidiaries;

• an independent director: who is a non-executive director, does not represent the interests of any shareholder, is not employed in the company or its subsidiaries in any way and has no contractual interests in the company or group;

• an ex officio director: who holds office as a result of another office, title or status. Ex officio directors have those powers and obligations assigned to them in the Memorandum of Incorporation and are not appointed by the shareholders.

• an alternate director: who is appointed by an appointed director (whether executive or non-executive) to serve in their stead, as and when required. The Memorandum of Incorporation may set out the manner of election of independent directors.




In order to qualify for an appointment as a director, the following qualifications must be met in order to be eligible for the appointment:

• the party to be appointed may only be a natural person (in the Netherlands Antilles, for example, juristic persons may be appointed as managing directors of a company as there is a split board concept); or

• an unemancipated minor, or a person suffering under a similar legal disability; or

• any person who does not meet any specific criteria laid down in the Memorandum of Incorporation.

In addition, certain persons are disqualified from being appointed as a director. Save in respect of a disqualification imposed by a court of law, the remaining categories of disqualification are not absolute. These disqualifications are set out in section 69(8)(a) of the New Act and include:

• a person who has been prohibited by a court of law from becoming a director;

• a delinquent;

• an unrehabilitated insolvent;

• a person removed from a position of trust as a result of dishonestly;




• a person who has been convicted, without option of a fine for offences involving dishonesty.

Notwithstanding what is set out above the New Act contains certain exemptions in respect of persons who would otherwise be disqualified to act as a director. These exemptions are set out in section 69(11) of the New Act and permit:

• an unrehabilitated insolvent;

• a person who was removed from office for dishonest conduct;

• a person who was committed of a crime that involved dishonesty; or

• a person declared to be a delinquent.

to apply to court, it would seem on an ex parte basis, for permission to act as a director despite the disqualification. In so doing, the applicant will have to prove on a balance of probabilities that they have been rehabilitated and can be put in a position of trust once more.




As set out above a companyʼs Memorandum of Incorporation, may in certain respects alter the baseline position set out in the New Act. The most important of these are the following:

• a greater number of directors than that set out in the New Act (note that in respect of a public company, the number of directors may not be less than three);




• half the number of directors must appointed by shareholders in a profit company and the Memorandum of incorporation may specify a particular person who will be capable of appointing and removing directors, provided the minimum number of directors is at all times appointed;

• the designation and appointment of ex officio directors;

• While payments may be made to directors for their services as such, there is no right to such payment contained in the New Act. Any payment made to directors may only be made, if the specific payment is not prohibited by the Memorandum of Incorporation and was approved by special resolution taken within the previous two years.

Directors may be removed (notwithstanding anything to the contrary contained in any agreement) by the shareholders, by ordinary resolution, or in some instances by the board of directors.

In the event that the shareholders wish to remove a director, that director must be given notice (not less than the period a shareholder is entitled to for notice of a meeting) of the intended removal and given an opportunity to make representations to the shareholders either in writing prior to the meeting, or orally at the meeting.

The board of directors, where the board consists of more than 3 members may remove one of its members in the event that:

• a director has become ineligible or is disqualified;

• a director is incapacitated and unable to perform his duties, and is likely to remain incapacitated for some time. (The amount of time that will be considered as reasonable will depend on the individual circumstances of the director and the severity of his ailment);

• a director leaves the Republic and there are no other directors resident in the Republic;

• a director has not properly performed his duties as a director.




Where the board of directors has initiated and sanctioned a removal, the director in question may apply to court to have such decision reviewed.

Unless the companyʼs Memorandum of incorporation provides otherwise, the board of directors may (and in the case of a public, listed company, must) appoint board committees.

The King Code on Corporate Governance (“the King Code”) requires the formation of a remuneration committee and an audit committee and it is recommended that a nominations committee be formed, with such additional committees as may be desirable in terms of the nature and industry in which the company operates.

Private companies are not obliged to establish committees of the board, but it is recommended in order to provide greater accountability and transparency within the company.

In the next installment of this series, we will be examining the duties of directors and the newly introduced standards of conduct to which directors are required to adhere and which make substantial inroads to the traditional concept of the corporate veil.


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http://www.iodsa.co.za/products_boardservices.asp?CatID=105



Standards of Conduct (the Scary Stuff)One of the most fundamental changes introduced by the New Act relates to the standard of conduct expected from directors, prescribed officers and any member of a board committee (including the audit committee) even if certain committee members are not board members, and the liability that they may attract if they fail to adhere to these standards. The word “hectic” has frequently been associated with sections 75 to 77 (inclusive) by clients and fellow practitioners.

The need for the new, more stringent liability provisions are necessitated by the fact that in the past directors (in particular) have frequently treated companies as their personal fiefdoms while paying little heed to the potential consequences. After all, that is what the corporate veil was created for- to protect inter alia the directors from prying eyes.

The corporate veil was briefly referred to in part 1 of this series. The fiction of juristic personality means that the juristic person is viewed separately from the persons who comprise it. Even though a company cannot act or enter into agreements or sue and be sued, without the aid of individuals, the people who perform these actions are effectively acting as agents of the juristic person, and all rights and liabilities adhere to the juristic person and not the individual concerned. The courts, as a result of cases like


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Salamon v Salamon & Co Ltd 1897 AC 22 and Dadoo Ltd v Krugersdorp Municipal Council 1920 AD 530 have historically been loathe to look behind the corporate veil, unless some form of abuse of the juristic personality has been perpetrated. Unfortunately, the law in this area developed along very haphazard lines. However, ultimately in the matter of Cape Pacific Ltd v Lubner Controlling Investments (Pty) Ltd [1995] ZASCA 53 (also 1995 4 SA 790 (A)) the Appellate Division laid down that each inquiry as to whether or not the corporate veil should be lifted necessitates an enquiry into the facts, with emphasis being placed on the substance rather than the form of any corporate action taken. The court was additionally of the view that there is no general discretion to pierce the corporate veil, however where fraud, dishonesty or any other form of improper conduct is alleged, or by virtue of any policy consideration there are good grounds for piercing the corporate veil. This includes:

• giving effect to the legislature: we are all permitted to arrange our affairs in the most effective way – however we cannot create a structure purely for avoiding a particular provision of the legislature – for example no matter how one attempts to paint it, tax evasion will be just that regardless of the clothes in which it is dressed. Tax avoidance on the other hand is a legitimate, for example, if a tax neutral amalgamation transaction is available to you, why would you select a structure that triggers capital gains tax?

• to prevent fraud;

• to prevent breaches of fiduciary duty;

• to prevent improper evasion of any obligation, for example in the matter of Cattle Breeders Farm (Pvt) Ltd v Veldman 1974 1 SA 169 (RA), a matrimonial spat was brought before the court under the guise of a commercial ejectment. The immovable property in question happened to be the matrimonial home which the applicant had left after he had committed adultery, and the “squatter” was the applicantʼs estranged wife. In the circumstances the applicant was the sole shareholder and director of the company from whom the immovable property was leased. The court held that the company was nothing other than the applicantʼs alter ego and refused to allow him to use the corporate structure to avoid his obligations in terms of family law; and








• when the court sees piercing the corporate veil as being in the public interest. For example in times of war, payments to enemy states are frequently forgiven as it would be seen as sleeping with the enemy. This was the case in Daimler Co Ltd v Continental Tyre and Rubber Co (Great Britain) Ltd 1916 2 AC 307.

This is where the New Act steps in, as it is also legislatively possible to pierce the corporate veil, and to a greater and lesser extent, this is precisely what the New Act is aiming at: making it easier to prevent and prosecute abuses of the corporate structure.

The three sections that we are predominantly concerned with are section 75 (directorʼs personal financial interests), section 76 (standards of conduct) and section 77 (liability of directors and prescribed officers). It must be borne in mind however, that:

• these sections apply equally to directors, prescribed officers and board committee members (including the audit committee) and whether or not the committee members are themselves directors (for ease of reference, these will be collectively referred to as “directors”); and

• breaches of many of the clauses in the New Act will constitute breaches of these sections.

So what do these sections actually say in plain English?

Section 75 is concerned with personal financial interests. This section links quite closely with the common law concept of fiduciary duties. One of the fiduciary duties of a director is to prevent his personal interests from clashing with those of the company. The companyʼs interests must in all circumstances come first, and where there is a direct or indirect collision between the company and the directorʼs interests, the director is obliged to disclose this fact to the company (i.e. the remaining directors and the shareholders). This is what is commonly known as a conflict of interests.

Section 75 of the New Act goes further, the director who has a personal financial interest (read = conflict of interests) must disclose same in writing (at any time) setting out the details and importantly the extent of the conflict. Where a director realises he has a conflict of




interests (or knows that a related party has a conflict of interests) in any matter to be raised at a board meeting then in terms of section 75(3) he/she is obliged to:

• disclose the interest and its general nature before the matter is considered by the meeting;

• disclose any material information relating to the matter and may disclose any relevant insights or observations;

• leave the meeting immediately after making his disclosure and not take part in any consideration of the matter by the rest of the board;

• not sign any document in relation to the matter unless specifically authorised to do so by the remainder of the board.

The director in question will still be considered as being present for purposes of a quorum, but will not be considered as being present for purposes of any decision or vote that must be taken in relation to the matter.

Where a conflict arises (either for the director or a related person) after an agreement has been entered into by the company, the director in question must likewise disclose such conflict of interests to the company detailing the nature and material circumstances of how that conflict arose.

Even if a director has a conflict of interest at the time any decision is taken or agreement is entered into, this conflict of interest will not invalidate the decision if it was approved as set out above, or if the shareholders have ratified it and the court may declare the decision or agreement valid on application of any interested party despite the failure of the conflicted director to comply with the provisions of section 75. Of course, in the latter instance good grounds shall have to be shown, and if the interested party and the conflicted director were acting collusively, it is unlikely that the order sought will be granted.

Section 76 sets out those standards of conduct to which all directors must adhere.

The things a director must do when exercising the powers and functions of a director are:




• to act in good faith and for proper purpose;

• to act in the best interests of the company;

• to act with the degree of care, skill and diligence that may be expected of a person carrying out the same functions as those carried out by the particular director, having a comparable general knowledge and experience of that director;

• to communicate to the board at the first possible opportunity of any information that comes to his/her attention that is material to the company or generally not available to the company, unless the director is bound not to disclose the information by virtue of legal or ethical obligations of confidentiality.

The things a director must not do when exercising the powers and functions of a director are:

• to make use of any information while acting as a director;

• to gain some personal advantage;

• or an advantage for any other person than the company itself, or any of the companyʼs subsidiaries.

A director will be considered to have adhered to the above obligations if:

• he/she has been reasonably diligent in becoming informed about any matter;

• he/she has no personal interests in the outcome of the matter;

• he/she has complied with the requirements of section 75;

• the decision was taken and supported by a decision of a board committee and in taking the decision the director believed on a rational basis that the decision was in the best interests of the company and in so doing, the director is entitled to rely on any




function that may have been reasonably delegated and any information, opinions, reports or statements (including financial statements) presented by the companyʼs employees, legal counsel, accountants or other professionals where the information is within that personʼs professional expertise, or any board committee of which the director is not a member, in all circumstances if the information merits confidence. Red Bull may give you wings – but I have never seen a flying cow.

Where a director has not complied with these standards of conduct, which are really a codification of the common law position, and as such are nothing new, the director will attract liability in terms of section 77.

A director will be held personally liable for any loss, damages or costs (including costs of court proceedings) sustained by the company:

• in accordance with the principles of common law relating to a breach of a directorʼs fiduciary duties or any other breach of a directorʼs duty contemplated in section 75 and section 76;

• in accordance with the principles of the common law relating to delict as a result of a breach of section 75 and section 76, any other provision of the New Act or any provision contained in the companyʼs Memorandum of Incorporation;

• if the director has signed any document on behalf of the company, or otherwise acted in its name in circumstances where the director knew he did not have the authority to act;

• agreed to carry on the companyʼs business in a manner that is prohibited by section 22 (section 22 determines what constitutes reckless trading by a company);

• if the director is party to any act or omission, the purpose of which is to defraud a creditor, employee or shareholder of the company, or for any other fraudulent purpose;

• signed or consented to the publication of any financial statements, prospectus or other statement that contains information that is false or misleading in a material respect;




• was present at a meeting, or participated in the taking of any decision in terms of section 74 (this is where a director takes a decision other than at a meeting of directors) and failed to vote against

• the issuing of any unissued shares, which issue had not been authorised in terms of section 36 (in order to issue shares in terms of section 36(1)(d)(ii) require the board of the company to determine any rights, preferences or limitations associated with the shares, prior to their issue);

• the issue of any authorised securities where this was contrary to the provisions of section 41 (this is where shareholder approval for the issuance is necessary);

• the granting of options, where such options have not been authorised in terms of section 36;

• the provision of financial assistance to any person for the purchase of shares in the company despite knowing that the provision of financial assistance in the circumstances is inconsistent with the provisions of section 44 or the companyʼs Memorandum of Association;

• the provision of financial assistance to a director contrary to the provisions of section 45 or the companyʼs Memorandum of association;

• a resolution approving a distribution, where the company has not passed the solvency and liquidity test;

• any allotment by the company where such allotment is contrary to any provision of chapter 4, where the allotment is declared void.

Where the board of a company has taken any decision, which contravenes the New Act then the company or any director who has been held liable in terms thereof may apply to a court for an order setting aside that decision and the court may make any order which is equitable in the circumstances including rectifying the decision or reversing the transaction and requiring the company to indemnify any




director who may have been held liable in terms of section 77, which would otherwise be joint and several with any other person who may be held liable in terms of the Act.

So for all the conduct and liability provisions appear to be daunting in their scope, they really are nothing other than a codification of the common law position on fiduciary duties and a more effective means of prosecuting those who offend against these duties, by creating a statutory mechanism for piercing the corporate veil. Thereby increasing the transparency and accountability of a company in accordance with the suggestions put forward by King Code on Corporate Governance. A responsible corporate citizen should have nothing to worry about.


http://www.iodsa.co.za/products_reports.asp?CatID=149

http://www.iodsa.co.za/products_reports.asp?CatID=149



Sharing is caringIt has come to our attention that a number of our clients do not understand what a share is and what the rights and obligations of a person being the registered and/or beneficial shareholder may be.In addition to this, the means by which a company can obtain capital appears to be equally confusing.Accordingly, in lieu of launching into a discussion on the changes in the New Act relating to shares and shareholders we thought it prudent to dispel some of the myths surrounding the capitalisation of a company.

As such companyʼs can raise money (read, capital) by one of two methods, the issue of shares (“equity shares”) or by debt.Either incurring the debt funding or by issuing debt shares (debentures and bonds) or, as is becoming more prevalent hybrid instruments which combine elements of both equity and debt financing.

The share capital of any company is comprised of two elements: an authorised share capital and an issued share capital.

The authorised share capital is the initial capital investment made in the company by its founders.This amount can then be adjusted (either increasing or decreasing the authorised share capital by a special resolution) according to the needs of the company in question.

The authorised share capital is then divided up into units (or shares) which are capable of being disposed of either to selected individuals or to the public at large (in the case of a public company), when these units are taken up by subscribers, who become shareholders (under the 1973 Act upon payment of the subscription price in full), it is transformed from being authorised share capital into issued share capital.

In Borlandʼs Trustee v Steel Brothers and Company Ltd (1901) 1 Ch 279 the court described a share is “an interest of a shareholder in the company measured by a sum of money, for the purpose of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders inter se.”This is not the most helpful definition.In effect, because shares can be bought, sold and owned, they are really a type of property.A form of property that cannot be seen or felt, but can be moved or traded from one person to another.That is to say, incorporeal movable property carrying the obligation of compliance with the founding documents of the company and granting, amongst others the fundamental rights to:




• vote at any meeting of the shareholders of that particular class of share;

• information (both financial information and access to the share register);




• share in the profits of the company;

• share in the residual assets of a company on its dissolution.

Many people believe that the fact that they have a share certificate means that they are shareholders in a company with all the rights and obligations attaching thereto.This is not entirely correct.The simple fact is that anyone with a computer and a printer can create share certificates.It is the share register that is important.A share register sets out the classes of shares, who all shareholders are, the amounts paid for the shareholding, and the changes in shareholding over time. Every company is obliged to keep and maintain a share register at its registered offices.A share certificate therefore is merely evidence that a person may be a shareholder, but it is the share register that will ultimately provide conclusive proof.This is why when there is a dispute as to whom may be shareholders in a company: the primary order sought is for rectification of the share register and not the issue of a share certificate.

A company under the 1973 Act was able to choose whether the share capital of the company would consist of par value shares or no par value shares (but not a combination of both) irrespective of the class of share being issued.

A par value share contains an indication of that shareʼs value.This notional value often has no correlation to the market value of the share in question.Frequently one finds in the constitutive documents of a company that the share capital consists of:

“Authorised Share Capital: R1000 divided into 1000 shares of R1,00 each; and




Issued Share Capital: R100 divided into 100 shares of R1,00 each”

The value of R1,00 attaching to the share represents its par value.This does not mean that the shares are necessarily sold for R1, as frequently a premium is applied to the par value of the shares in order to bring them in line with what the market value may be.

Additionally, there is also no reason to issue all of the shares in the authorised share capital on incorporation or in any subsequent share issue, as long as the shares actually issued reflect the correct shareholding percentages.It is in fact prudent not to issue all of the authorised share capital as this will allow for further subscriptions and conversions into preference shares or debentures as needs be, without first having to increase the authorised share capital, which requires the passing and lodging of a special resolution with the Registrar of Companies.

This is an important area of change under the New Act, which specifically prohibits the issue of further par value shares and in fact abolishes par value shares altogether going forward, thereby bringing our law in line with that which is practiced by some of the first world English speaking countries.

For those of you with par value shares in issue, there is no need to panic.The transitional provisions of the New Act specifically allow for the continued existence of all par value shares until such time as the Minister has promulgated regulations for the conversion of such shares into no par value shares.The transitional provisions likewise provide for the rights of the par value shareholders to be preserved and if this proves to be impossible then those shareholders prejudiced by the conversion become entitled to compensation from the company.

No par value shares, by necessary implication, are shares in respect of which no par value, or no notional value, is attached to the individual shares, allowing a degree of greater flexibility to the company as it is not tied to the par value of the shares.This in theory allows for different share issues to be priced at different values, including a lower value that the initial issue of shares.

This brings us to the different classes of share:




• In the absence of any indication to the contrary all shares are considered to be ordinary shares.This means that the shares grant the same fundamental rights listed above to all of the shareholders;

• A preference share as the name indicates confers some form of preference on the holder.The most common preference granted relates to dividends.A preference share holder is commonly entitled to a percentage of any dividend in priority to the ordinary shareholders, with a similar preference applying to the division of the companyʼs assets on winding up.There are various types of preference shares, however the most commonly found preference shares are:

• cumulative/non-cumulative preference shares: a dividend may only be declared if a company has sufficient profits and on occasion a company is not in any position to grant a dividend at all.If a preference share is cumulative it means that in the event that no dividend is declared is declared in a particular year, the entitlement to that dividend, is carried forward to the following year.Where a dividend is non-cumulative, it means that one is only entitled to a dividend in that particular year, and if it is not declared and paid, the entitlement lapses.

• participating preference shares/non participating preference shares: unless otherwise expressly stated, preference shares are considered to be non- participating.If a preference shareholder is entitled to participate, this means that they are entitled to share in the surplus profits after the payment of their preferential dividends irrespective of the profitability of the company.These surplus profits may, depending on how the preference share terms are drafted, beshared with the ordinary shareholders on apro rata basis.

• convertible preference shares: as the name implies these preference shares may, on the fulfillment of certain conditions (which will be specified in the terms attaching to relevant preference share) then the holders thereof, will be entitled to change the preference share into another class of share issued by the company.The conversion is most commonly from a preference share to an ordinary share.

• It should also be borne in mind that there may be a combination of the forms of preference share above, which means that you may for example have a cumulative convertible preference share.All this means is that the dividends accumulate in the event of




non-payment of a dividend in any period and that on the occurrence of a specified event (or after a specified period of time) the preference share may be converted into another class of share.

• The term treasury share refers to fully paid up shares, which a company has re-purchased from its shareholders, which the company may then resell, as opposed to cancel.The right to repurchase shares is not an automatic one, and the Articles of Associate or the Memorandum of Incorporation must specifically authorize the repurchase and warehousing of such shares.The period of time that the repurchased shares are warehoused before being sole is termed as being “held in the companyʼs treasury”.

• Capitalisation shares are those shares created, when a company converts its distributable reserves into shares instead of declaring a dividend and paying such dividend to the shareholders.So instead of paying a cash dividend, the dividend is paid by means of shares in proportion to the shareholding held by each shareholder.

• Deferred shares are fairly uncommon.These are shares issued to the founders and promoters of a company for their assistance in the formation and incorporation of a company.The reason why they are referred to as “deferred” is because payment of any dividend to such shareholders, is deferred until the ordinary shareholders have received their dividend.Effectively this means that the deferred shareholders are last in the dividend queue.

Most companies are reliant on debt funding in one form or another.Debentures are found in many forms, so it is no easy task to define exactly what constitutes a debenture.In effect it is a documentary acknowledgement of debt by a company in favour of a specific person. Cause for frequent confusion is that while every debenture is an acknowledgement of debt, not every acknowledgement of debt is a debenture. The element that identifies a document as a debenture, will be the manner in which it was issued – which is very similar to the manner in which a share is issued.

The New Act does not fundamentally change the nature of a share- other than to abolish no par value shares.This concept together withthe rights and obligations of shareholders will be considered in the next installment of this series of posts.




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Shareholders rights and dutiesAs we established earlier in the series, a company is seen as a person in law, who acts by means of its members (or shareholders), its directors and its employees.

The primary rights of shareholders relate to their entitlement to vote at meetings of the shareholders. While this does not confer a direct role in management of the company (this function falling within the purview of the directors), the directors are required to implement those decisions of the shareholders, which are reserved to them.

A shareholder is entitled to notice of and to attend meetings of the shareholders and to obtain minutes of these meetings. Shareholders are also entitled to a copy of the annual financial statements of the company. Any additional entitlements must be specifically conferred.

In order for a meeting of the shareholders (or any class of shareholders) to be held it must first be properly convened. A meeting of the shareholders is convened by means of a notice, which sets out the date, time, venue and matters to be discussed. The notice periods vary from 15 days to 21 days depending on the type of resolutions to be passed. Included in the notice must be a copy of all resolutions that the company wishes to pass and the voting percentage required to pass the resolution. In addition a notice convening an annual general meeting must contain a summary of the annual financial statements.




The notice of the meeting must contain an entitlement of the shareholder to appoint a proxy to attend, participate in and vote on its behalf. The proxy must be appointed in writing and signed by the shareholder making the appointment and the appointee need not be another shareholder. A proxy remains valid for one year unless the shareholder has appointed the proxy to perform some specific function. A copy of the written proxy must be delivered to the company before the meeting (usually 48 hours). If a proxy is appointed, it does not mean that the shareholder can no longer act. If the shareholder attends the meeting, then the proxy is temporarily suspended. The shareholder may also revoke the proxy at any time.

If a company either does not give notice of a meeting, or if the notice is somehow defective, the resolutions taken may not be valid.

It is also possible to pass resolutions by means of a written document circulated to all of the shareholders, and if the requisite percentage of shareholders votes in favour of the resolution, then it will be passed.

A quorum for a meeting of the shareholders is 25% of the shareholders present in person or by proxy in respect of at least one item on the agenda. If the company has more than 2 shareholders then the meeting may only begin once 3 or more shareholders are present.




When voting at a meeting occurs by a show of hands, each person present is only entitled to one vote, irrespective of the number of shares he may actually hold. When voting at a meeting occurs by poll, all the voting rights may be exercised that attach to the shares.

The general principle that applies to votes is that of majority rule. Each shareholder agrees to be bound by the majorityʼs decisions. This majority may be an ordinary majority (habitually 50% +1) or a special majority (habitually 75%). In terms of the New Companies Act the above thresholds may now be amended either higher or lower, provided that at all times there is at least a 10% voting differential between an ordinary and special resolution.

It terms of the New Companies Act there are really only three types of special resolution which are required to be passed as such – they are:

• altering the companyʼs Memorandum of Incorporation (this would include converting ordinary shares into another type of share, changing the main business and objects of the company and the like);

• the voluntary winding up of the company; and

• disposals – whether in terms of a material asset sale, a merger or amalgamation transaction or the entering into a scheme of arrangement with creditors.

Companies frequently set out additional matters which would have to be effected by means of a special resolution, and these have habitually been contained in a shareholdersʼ agreement . As the principle governing document under the New Companies Act is the Memorandum of Incorporation, those companies with additional special resolution requirements (for example the changing of the auditors or the incurring of certain types of debt) should transfer these into their Memoranda of Incorporation in order for them to retain efficacy.

As can be seen therefore, the only material impact to the shareholderʼs rights and duties under the new regime, relates to the voting thresholds and the manner in which these thresholds are set out in the Memorandum of Incorporation.




The Big DealOne of the more novel introductions to the New Companies Act is the introduction of a chapter (chapter 5) devoted to specific types of transactions – the fundamental ones. The Old Companies Act required companies to play hide and seek with certain provisions relating to the disposal of all or the greater part of the undertaking or assets of a company (the infamous section 228), schemes of arrangement (section 311), court sanctioned amalgamations (section 313) and takeovers (section 440K read in conjunction with the Securities Regulation Panel rules). While the Old Companies Act did contain something that looked vaguely like a merger (by means of the absorption of one company into another by means of a scheme of arrangement, the concept of a merger without court sanction was conspicuously absent.

The term “Fundamental Transaction” is utilised in the New Companies Act to designate any of the following transactions:

• mergers amongst two or more companies;

• disposals of all or the greater part of an undertaking or assets; and

• schemes of arrangement.

In addition to these transactions the New Companies Act (in chapter 5) refers to “affected transactions” which will be dealt with later in this segment.

A merger is a fairly self-explanatory concept (set out in section 113 of the New Companies Act) – two or more companies combine their assets and liabilities, into one of the merging parties (with the remaining parties ceasing to exist) or into a new company with all of the merging parties ceasing to exist.




The requirements for giving effect to a merger transaction (excluding any competition considerations) is that the board of each company party to the transaction must be satisfied that the solvency and liquidity test will still be passed upon implementation of the merger. This means that the assets of the company, fairly valued, equal or exceed the value of its liabilities and the company is able to pay its debts as and when such debts fall due for payment. If so, the merger (together with the details thereof) must be submitted to the shareholders and a special resolution approving the merger passed. Where a shareholder does not vote in favour of the resolution, he will have his appraisal rights, which means that the shareholder may demand that the company pay him the fair value for all shares held by him/it in the company, where such the shares held by a particular class of shareholder (of which the particular shareholder is a member) is materially prejudicial to that class.

The disposal of all or greater part of the assets or undertaking of a company means more than 50% of the assets or undertaking must be disposed in the transaction. In order to give effect to such a transaction the following steps must be taken:




• the specific disposal must be approved by a special resolution of the shareholders prior to the transaction being entered into (or the transaction will not be binding);

• the notice of the meeting must specify the terms of the transaction and the steps involved in bringing the transaction to fuition; and

• the assets to be disposed of must in terms of the financial reporting standards, must be given their fair market value.

Section 114 deals with schemes of arrangement. A scheme of arrangement is in essence an agreement between the company and its shareholders. Such a scheme may come about in a number of ways. The company may re-arrange its share capital by, for example:

• repurchasing its shares; and/or

• exchanging shares in issue for a different class of share; and/or

• dividing its share capital into different classed or consolidating them.

Due to the complexity of such schemes, it is necessary that the nature and purpose of the scheme be dealt with by an independent professional (with the independence criterion being largely based on the King Codes) and accordingly do not intend delving further into the matter.

The courtʼs involvement is now restricted to the following instances:

• where at least 15% of the voting rights exercised on that matter were against the resolution and the majority still wish to proceed;

• a review application is launched by any shareholder who voted against the resolution where such resolution was patently unfair to any class of shareholder and/or the vote fell foul of the conflict of interest provisions or some other material procedural irregularity has been committed.




It should further be noted that none of section 112-115 may be utilised in circumstances where a contracting company is in financial distress.

An affected transaction is one over which the Takeover Regulation Panel (previously the Securities Regulation Panel) has jurisdiction. Affected transactions relate primarily to regulated companies (notably publicly companies, state owned enterprises (unless the specific enterprise has received an exemption) and under specific conditions only a private company). The primary difference is that the Takeover Regulation Panel rules now have force of law, but the mandate of the Takeover Regulation Panel remains essentially unchanged.

The most common types of affected transactions are: mandatory offers, compulsory offers and squeeze out. As the nature of these transactions fall outside of the ambit of this discussion, further information may be obtained on request.

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We all fall downPerhaps the most controversial aspect of the New Companies Act relates to the introduction of certain provisions relating to the assistance of financially distressed companies.

Every economy shows business successes and failures. A business may fail for a variety of reasons, and not just because of poor management. This is completely normal. The difficulty faced when a company fails is the ripple effect it has on its employees, suppliers and creditors.

For some time the international community has been leaning away from the liquidation of companies in financial distress to a business rescue type process, whereby the company is essentially given a second chance.

It terms of section 128(1) of the New Companies Act the objective of the business rescue process is to facilitate the rehabilitation of a financially distressed company by providing for the supervision and management of a company (on a temporary basis), placing a moratorium on the rights of claimants against the company or in respect of its property and the development and implementation of business rescue plan, or if that is not possible, to achieve a better return for the companyʼs creditors than if the company had been liquidated at the outset.

A company is considered to be financially distressed when:

• there is reason to believe that the company will not be in a position to pay all of its debts as and when they become due and payable over the next six months; and

• it is likely that the company will be insolvent within the next six months.

Business rescue procedures may be commenced either by a resolution of the directors of the company or by court order. For obvious reasons the directors will only be in a position to take such a resolution and there appears to be a reasonable prospect of rescuing the




company. If there were no such reasonable grounds and no business rescue practitioner has been appointed, the resolution may be set aside by order of court.

So what does that mean?

A business rescue practitioner is appointed to the company and will assume the full management function of the company. He may remove directors if he feels this is necessary and he may delegate certain of his functions to the remaining directorate and management. Once the business rescue practitioner has had an opportunity to investigate the affairs of the company, he must develop a business rescue plan, and if adopted, oversee the implementation thereof.

For as long as the corporate rescue proceedings are ongoing, a moratorium is placed on most civil proceedings and additional proceedings may be started only with the permission of the business rescue practitioner. The court time periods or enforcement periods do not apply against the company during the business rescue;

The property of the company is protected in that it may only dispose thereof in the ordinary course of their business, as part of an approved rescue plan or with the specific consent of the business rescue practitioner.

The assets of the company may be used as security for funding required during the business rescue period. Employees are on the top of the pecking order for payment of their salaries as their contracts are not effected by the business rescue proceedings and any retrenchment process which is undertaken will still be governed by the relevant labour legislation.

What happens to creditors?

The creditors are entitled to be notified of and participate in all elements of the business rescue process and play a crucial roll in the approval (or rejection) of the business rescue plan.




Whenever there is a decision which requires the input of the creditors, each creditor will be entitled to the a vote equal to the value of his claim against the company. In order to facilitate this process, the creditors may form a committee to represent their interests and allow them to prove their claims against the company.

What is a business rescue plan?

As the name implies it is a roadmap on how to potentially save the company from liquidation and set it back on the path of financial success. In order to be effective the business rescue plan must contain all of the information that any person affected by the business rescue would need in order to determine whether the business rescue plan should be accepted.

The plan itself is divided into three sections: an introduction and background, proposals, assumptions and conditions and a certificate which must be provided by the business rescue practitioner.

The plan must contain a list of all of the assets and liabilities of the company together with all security provided by the company. In the event that the company may ultimately be liquidated, versus the potential benefits of approving the business rescue plan must also be disclosed.

The bulk of the business rescue plan will be devoted to proposals on how to assist the company and must detail any moratoria imposed, how the company will be released from certain of its debts. In this regard it should be borne in mind that the business rescue




practitioner may cancel or suspend, whether in whole or in part almost any agreement that the company has entered into. This entitlement depending on how it is utilised may have severely negative consequences on the creditors.

Unless a court dictates otherwise, the business rescue plan mist be completed within 25 business days after the resolution or court order is granted.

If the creditors accept the business rescue plan then they are all bound by it and the business rescue practitioner must then take all the necessary steps to implement the business rescue plan.

It is intended that all business rescue procedures must be undertaken within 3 months. The business rescue practitioner may apply for additional time from the court and the business rescue practitioner must deliver monthly reports on the progress of the proceedings to all affected persons, the court or to the Commission until the business rescue proceedings are terminated.

Compromises

Much like its predecessor, the New Companies Act contains a mechanism to enter into a compromise with its creditors or a scheme of arrangement (as discussed previously). The primary difference is that the court is no longer an active participant in the process, but merely sanctions the compromise once the parties thereto have reached an agreement on the terms thereof.

In terms of section 155(1) of the New Companies Act, the provisions relating to compromises do not apply to a company undergoing business rescue procedures.

The remaining provisions largely fall in line with the Old Companies Act and will not be discussed in any detail, save to state that the proposal which must be approved by all affected parties by means of a special resolution, which once obtained must be submitted to the High Court for sanction, provided that it is just and equitable for the court to do so.




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