LAW REFORM IN RSA

CORPORATE REGISTERS FORUM: CAPE TOWN 2009

MacDonald Netshitenzhe, Director: Commercial Law and Policy: CCRD

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Purpose

• The purpose of the presentation is to give a high level overview of the Corporate Law Reform in South Africa that led to the enactment of the Companies Bill/Act, 2008 as approved by Parliament

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Policy Principles

• Encourage entrepreneurship and enterprise development

• Promoting innovation and investment in the domestic market

• Promoting the efficiency of companies and their management

• Encouraging transparency and high standards of corporate governance

• Making company law compatible and harmonious with best practices jurisdictions internationally

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Goal Statements

• Simplification: Simple and easily maintained regime for non profit companies

• Flexibility: Appropriate diversity of company structure

• Corporate efficiency: Emphasize solvency and liquidity. Boards must have clear roles and directors must assume clear responsibilities and duties, creation of a Business Rescue system and replace judicial management system

• Transparency: Corporate governance must exist at board abd directors` level, minimum accounting standards should be required for annual financial statements

• Predictable regulation: Decriminalize where possible and effectively enforce company law through well resourced bodies

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Background• In South Africa in theory there is no legal backing of corporate/financial

governance. It is only in 2006 that the dti started to introduce the legal backing in the Corporate Laws Amendment Act and the Companies Bill was introduced to specifically address this issue in detail. Voluntary organisations did their best to create the culture of corporate governance but that was not enough. Legislative intervention was necessary.

• On 31 January 2007, Cabinet approved publication for public comment of a draft “Companies Bill 2007”.– Following publication of the Bill, the dti conducted meetings,

workshops, discussions and conferences across the country to receive comments. NEDLAC process was also followed.

– The published draft elicited 134 written submissions from stakeholders, interest groups, government departments & agencies and individuals, amounting to more than 2 000 pages.

– Public Hearings by the portfolio Committee were also held in Parliament before the Bill was approved for assent by the President.

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Background

• The Bill is envisaged to come into legal force in 2009/2010.

• As for now Business Case is being made for the formation of a Commission of Companies and Intellectual Property (Commission).

• Regulations will be drafted and other institutions will be formed soon so that the Bill can be implemented with ease.

• Corporate governance will only succeed through legislative interventions. In this regard, there is another school of thought that says that we should leave corporate governance to “voluntarism”, this is a wishful thinking. In passing, the global crises in the area of financial services is there due to non recognition of corporate governance principles.

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Rationale

• The need for a review of the company law regime was necessitated by, amongst others:

- outdated legislation that is highly formalistic

-overly criminalizing even issues that are pure administrative omissions and commission

-legislation that is creditor-oriented instead of shareholders and other stakeholders ( Good examples of stakeholders are to be found in the Chapter dealing with Business Rescue)

-Globalization and the advent of democracy

-scourge of corporate failures and scandals that undermine corporate governance. Corporate governance may be in place but lack of enforcement of those priciples

-Simplification of company registration and maintenance

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• Statistics on company registrations• Doctrine of substantial compliance (Chapter 1)• Types of Companies (Chapter 1)• Incorporation and Registration (Chapter 2)• Company Names (Chapter 2)• Corporate Finance (Chapter 2)• Corporate Governance (Chapter 2)• Transparency and Accountability Chapter (2 & 3)• Public Security Offering (Chapter 4)• Fundamental Transactions (Chapter 5) • Business Rescue (Chapter 6)• Enforcement (Chapter 7 & 9)• Institutions and Agencies (Chapter 8)• Commission Functions (Chapter 8 & 9)• Transitional arrangements: Relationship between the Act and the

CC Act.

Scheme of the Bill

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Statistics on registrationsRegistered Entities Number Percentage

(% registered)

Close Corporations 1,276,157 40.51% (75%)

Private Companies 412,233 13.09% (24%)

Public Companies 3,757 0.12% (0.2%)

Incorporated Companies (Professional) 7,976 0.25% (0.5%)

External Companies 1,056 0.03% (0.06%)

Total Registered Entities 1,701,179 54%

Unregistered Entities Number Percentage

Informal economy 749,500 23.8%

Sole proprietorships 699 166 22.2%

Total Enterprises in Economy 3,149,845 100%

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CHAPTER 1

Interpretation & application• The Bill aims to:• Reduce formality and improve flexibility e.g. section 6 now provides

for – • (i)  Companies to be granted exemptions from specific provisions if the

requirements are inappropriate to the company, given its nature and structure;

• (ii) electronic documents to be used in place of originals; and• (iii) electronic publication of documents, or electronic delivery of notices.• (b) Enhance compliance and prevent avoidance, section 6 also now

provides – • a general anti-avoidance remedy, which allows a scheme to be declared

void if it seeks to evade a requirement or prohibition in the Bill; and• a plain language requirement for documents, prospectuses and other

notices required

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Types of CompaniesCompanies incorporated in the Republic

Non Profit Companies:• Subject to special requirements set out in Schedule 2• Must have at least one public benefit or social/cultural

object.• Must apply all assets to its stated objects• Residual value must be distributed to like organisations• May not merge with, or convert to a profit company

Profit Companies:• Public Companies• State Owned Companies• Personal Liability Companies• Private Companies

Companies incorporated outside the Republic Foreign Companies External Companies

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CHAPTER 2 Company Registration

• Incorporation is a right• Policy is to maximize freedom of association and

contract - see s.13• One or more person may incorporate a profit company,

3 or more may incorporate a non profit company.• Incorporation is by signing a Memorandum of

Incorporation, and filing a Notice of Incorporation with fee.

• Memorandum may be pro forma or bespoke, but form does not suggest or impose any provisions

• Memorandum of a profit company must set out number of authorised shares, and rights, terms, etc of shares.

• Memorandum may be in Schedule 1 form, which provides simple check box approach.

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Company Registration Bill contemplates future internet based completion and filing of

Notice and Memorandum of Incorporation - See s. 6 (13) All companies must file Memorandum of Incorporation Notice of Incorporation may be rejected only if incomplete, or if

it names too few directors, or initial directors are disqualified. Commission has no authority to judge the merits of the

company’s structure. Commission must register company, even if chosen name is

unavailable, by assigning registration number as interim name of the company.

All companies have all compatible legal powers, unless restricted by its Memorandum of Incorporation

Company exists continuously as a juristic person until de-registered

Pre-incorporation contracts by company are binding unless rejected, and are deemed to have been ratified 3 months after incorporation, unless rejected before that.

Reckless trading, or trading while insolvent is an offence.

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Company Names

Requirements for Names Policy is to allow freedom of expression See s. 11 No limits except to prevent fraud and misrepresentation, and to

avoid use of hate speech, and similar offensive names Company name may be the Registration Number Company name may include numbers or symbols as well as

words Company Name must end with designating abbreviation

Name Reservations Reservation is optional Reservation is for 6 months, and may be extended Reservation is transferable Provisions included to address cases of name squatting and

trading

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Company Names Use of Names Policy is to abandon formalities, but prevent misrepresentation

and fraud - see s. 32 Company is free to use its name as and when it sees fit• Name and registration number must be provided accurately on

request - offence to fail to do so.• Offence to misrepresent by use of a company’s name• Offence to pass off as a company, when not incorporated in

terms of the Act. Defensive names are catered for

Office and records Company must maintain a registered office in the Republic. Company must keep records at its registered office, or another

disclosed location. Shareholders and members of the public have right of access

to company records s. 26 Trade unions given limited access to financial statements for

purposes of initiating Business rescue process

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TransparencyAccounting records and statements• All companies must maintain accurate accounting records.• All companies must have a financial year.• Offence to falsify or fail to keep proper records or to publish false financial

statements• All financial statements given to another person must bear a disclosure

statement See s. 29• All companies, large and small must prepare annual financial statements-sec

30.– Need for all companies to prepare AFS:

• To encourage sound financial management• To ensure sustainability of companies of all sizes• To comply with other regulatory requirements

– However reduce regulatory burden by • Exempting these companies from having AFS audited or reviewed• Differential reporting standards: small companies will comply with

less onerous standards; s29(5)• The Commission will direct private companies to prepare an audited

AFS if certain threshold is attained – Decriminalise non-compliance with form and content of FS; s29(6)

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Transparency– Appointment of audit committee

• Shareholders must appoint the Audit Committee as a sub-committee of the Board; s94

• Audit Committee report must be included in the Directors report to the AGM

• Filling of audit committee vacancy to be done by shareholders instead of board; s94(6)

• Regarding the appointment of auditors, rotation period is five years with the cooling-off period of two years.

– Section 159 - protection of whistle-blowers - Information must be given to persons, e.g. board and company secretary that have power to act on the information

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Reporting

• Role of the Financial Reporting Standards Council (FRSC)

– FRSC will consider International Financial Reporting Standards (IFRS), consult, research and adapt IFRS to local needs and advise Minister on their suitability - s203

– Minister will issue standards as regulations upon considering advice from FRSC – s29(4) and s223

– Issuance of standards will be done with speed

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Corporate Finance

• The Bill allows the board of directors, subject to the Memorandum, to increase or decrease the number of authorised shares of any class of shares; re-classify any classified shares that have been authorised but not issued; classify any unclassified shares that have been authorised but are not issued; or determine the preferences, rights, limitations or other terms of shares in a class (See S36(3).

• In view of the board’s broad power to finance the company through debt, the holders of which will have rights superior to the shareholders, the board is given power to approve equity financing for the company as well. This approach will 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.

• A company is allowed to give financial assistance to third parties to buy its own shares. Provided the company satisfies the solvency and liquidity tests

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Corporate Finance

• The Bill permits, subject to any limitations in the memorandum, both pro rata and non-pro rata share acquisitions if approved by the board, without requirements that could delay a desirable transaction without providing significant benefit to the company or protection for shareholders.

• It also permits any company to make any distribution upon approval by the board and without shareholder approval but subject to the existing equity solvency and balance sheet solvency tests (See s46) and subject to express standards of conduct and liability provisions (S76 – 77).

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Corporate Finance

• Directors should be jointly and severally liable to the company for distributions in excess of that permitted by law.

• It was further considered appropriate to require proof of violation of the director’s standard of conduct, especially since that is set forth by statute, as a prerequisite to liability for an unlawful distribution (S46(6).

• The Board is allowed to take certain actions that would allow the company to be competitive. That must be done within the confines of the Memorandum of Incorporation.

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Corporate Governance

This is dealt with under Part F of Chapter 2 and it covers issues such as – Shareholder right to be represented by proxy (S58)– Shareholders acting other than at a meeting (S60)– 10% of shareholders may demand that a meeting be called– Shareholders meetings and conduct of such meetings S61 & 63).

Shareholders are allowed to abstain in meetings– A meeting which does not form a quorum must be adjourned and the

members at the adjourned meeting shall be deemed to form a quorum at the next meeting (S64)

– Modernised rules concerning shareholder resolutions (S65)– Board, directors and prescribed officers (S66)– Election of directors (S68)– Ineligibility and disqualification of persons to be director or prescribed officer

(S69)– Director’s personal financial interests (S75)– Standards of directors conduct (S76)– Liability of directors and prescribed officers (S77), and– Indemnification and directors’ insurance (S78). Directors are not to be

indemnified where they in breach of their duties

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Chapter 6• Business rescue– Concept of business rescue designed to provide rescue

mechanism to a company that has financial difficulties but has not reached stage of insolvency

• This Bill not intended to deal with insolvency• The expression “Financially distressed” is properly

defined and it does not give an impression that business rescue is associated with “insolvency”

– In business rescue, speed is of essence. Therefore Business Rescue Practitioner is given appropriate powers (s140) to control the process including power to suspend transactions temporarily (s136)

• Consultation process provided for in Bill caters for participation by relevant stakeholders

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Business Rescue• Notably, the chapter protects the interests of workers by -

– Providing access to financial statements

– recognising them as creditors of the company with a voting interest to the extent of any unpaid remuneration,

– requiring consultation with them in the development of the business rescue plan,

– permitting them an opportunity to address creditors before a vote on the plan, and

– according them, as a group, the right to buy out any dissenting creditor who has voted against approving a rescue plan

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Chapter 6

– Claims of the workers are aligned with Insolvency Act, for consistency with regard to equal treatment of those claims This is also in line with the preferred ranking of employee claims in terms of Insolvency Act and ILO Convention

– The Bill as it stands, in s140(1)(d), caters for development of business rescue plan ‘after consultation’ with all “affected” stakeholders, as opposed to ‘in consultation”

– Business rescue practitioners` report will be available to the trade unions and employees, in terms of the Bill

– Definition of pension schemes also include provident schemes

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Chapter 8

Institutional Framework

Commission should amongst others, efficiently and effectively register local and external companies, accurately maintain proper records and information on companies, promote education and awareness on the legislation

Specialist Committees to advise the Minister on company law and policy and the other on the resources of the Commission

Companies Tribunal should amongst others, resolve disputes in a transparent manner

Takeover Regulation Panel should regulate affected transactions and offers in terms of chapter 5

Financial Reporting Standards Council should amongst others develop financial reporting standards and also develop standards for small businesses.

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RELATIONSHIP WITH CLOSE CORPORATIONS ACT• The Bill provides for -

– the co-existence of the new Companies Act and the Close Corporations Act;

– amendments to the Close Corporations Act to harmonize the two laws with respect to regulation, while preserving the existing internal features of close corporations;

– existing close corporations are free to retain their current status until such time as their members may determine that it is their interest to convert to a company; and

– In order to avoid regulatory arbitrage, the Close Corporations Act to be closed as an avenue for the incorporation of new entities, or for the conversion of companies into close corporations, as of the effective date of the Bill.

Transition

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Conclusion

• Simplification of the registration process and maintenance of an updated register will be an order of the day. This will encourage new entrants into the corporate world and investors can rely on the legal environment created

• This law champions corporate governance and it is believed that this will create a good corporate culture of doing business in South Africa. This will result in competitiveness of South African companies

• Establishment of well resourced institutions such as the Commission and the Financial Reporting Standard Council will result in the efficient and effective enforcement of the Bill in South Africa

• Awareness and education campaigns will be some of the cornerstones for successful implementation of the Bill

• Education and awareness alone will not be enough. Monitoring, investigations and prosecutions must compliment compliance in general.

THANK YOU