Conversations and agreements – when are they binding?

Conversations and agreements – when are they binding?

Introduction

A major cause of disputes occurs over the content of agreements. Sometimes these disputes are a result of poorly drafted contracts; content and deliverables not being adequately described; or as a result of variations to the original contract. Another source of dispute is verbal contracts and conversations where the parties dispute the content of what was agreed upon.

Both verbal and written contracts are, in general, legally binding. However, sometimes writing is unavoidable and is a formality for the contract to be valid, for example: the sale of immovable property, antenuptial contracts, wills and executory donations. Along with the preceding list, all documents that have to be submitted to and registered with the Deeds Office must also be set out in writing.

Written contracts have various advantages, among others, they:

  • ensure that both parties are fully aware of the contents of their agreement;
  • create transparency between the parties;
  • create and maintain trust between parties;
  • can stipulate formalities that must be met for validity; and
  • serve to avoid unnecessary disputes.

Electronic communication

The Electronic Communications and Transactions Act 25 of 2002 (“ECTA“) recognises electronic messages (or “data messages“) as the functional equivalent of writing, meaning that data messages have the same legal validity as content written on paper. This results in any formality requiring writing to be met when the information is in the form of a data message. ECTA, however, imposes a requirement of accessibility to accompany data messages by requiring data messages to be easily accessible to the parties thereto.

The validity of electronic messages was confirmed by the Supreme Court of Appeal (“SCA“) in November 2014 in the case of Spring Forest Trading v Wilberry (Pty) Ltd. The court held that variations to an agreement between the parties made via email were binding – the arguments put forth were that the variation to the agreement was required to be made in writing and signed by both parties in order for it to be valid and that this requirement had not been met because the variations were only discussed and agreed to via email. The court stated that the email signatures at the bottom of the emails amount to signatures and that the email messages constituted writing in terms of ECTA.

Conclusion

Written contracts are always recommended. The rationale being that oral agreements offer no objective or clear record of the details of the agreement and the specific terms are often difficult to establish when a dispute arises. Well drafted agreements should include useful information and guidance to the parties to ensure a fair and smooth resolution of disputes or disagreements. The guidance information should address when parties may cancel the agreement, what constitutes breach and how the breach should be remedied.

Written agreements should also set out that any changes to the agreement are not valid if they are not in writing (and signed by both parties) – which prevents disputes over any amended terms of the agreement. This also prevents quarrels of a “he said, she said” nature as everything has been recorded. As set out above, this can be done via email or other electronic messages, including Whatsapp, for example, however, the name of the sender must be signed at the end of the message for it to be valid.

It is important to understand that following the abovementioned judgment, parties to a contract should specifically refer to an “advanced electronic signature” – which is a special signature provided for in ECTA – being required to amend the agreement if the intention is for the usual email type correspondence not to effect an amendment to the agreement.

Remember, you could be bound to a contract where you have willingly signed it even if you have not yet read it.

Important take-aways

  • electronic communication is legally binding and is the equivalent of writing;
  • some agreements can only be altered if the variation is in writing and signed by both parties;
  • some agreements must be in writing and signed (and sometimes commissioned or notarised) in order to be valid and binding; and
  • oral agreements are binding (but not advised!).
The difficulties involved in setting up and managing Section 12J Venture Capital Companies

The difficulties involved in setting up and managing Section 12J Venture Capital Companies

“Section 12J Venture Capital Companies” (Section 12J VCC) seem to be a bit of a buzz phrase doing the rounds in the South African entrepreneurial world at the moment. We have had several requests from new and existing clients to set one up, mainly because of the attractiveness of these structures to investors.

A Section 12J VCC is a company formed in terms of section 12J of the Income Tax Act, 1962 (ITA) – it is essentially a pooling mechanism created by the South African Revenue Service (SARS) to encourage largely high net worth individuals to invest in start ups. The incentive to invest in a Section 12J VCC comes from the fact that investors get a full tax rebate on the funds invested into the Section 12J VCC. So, if a person in the highest tax bracket (presently 45%) invests R 1 million, they will get a tax rebate of R 450,000, meaning that the net investment is R 550,000.

The Section 12J VCC itself is relatively simple to set up, but the real complexity and difficulty comes with the management of it. The legislators have included several anti-avoidance provisions in section 12J of the ITA, which have made it particularly difficult, and in our experience prohibitive, for anyone to manage and run a Section 12J VCC. In fact, at the moment, there are only fifty six Section 12J VCCs approved by SARS and according to the information that we have gathered, and less than half of those are actually trading. It is interesting to note that the legislation allowing these funds was put in place in 2009 – that equates to, on average, seven of these companies formed (not necessarily even operating) every year since inception.

So why is it so difficult to get a Section 12J VCC off the ground? Below we have highlighted some of the major difficulties that some of our clients have had:

  1. No investor into the Section 12J VCC may be a “connected person” in respect of the Section 12J VCC, which essentially means that a natural person cannot own 20% or more of the shares in the Section 12J VCC (directly or indirectly) and a company can own up to 50%, in limited circumstances, of the Section 12J VCC (directly or indirectly), but no more.
  2. No more than 20% of the capital raised through the issue of shares may be invested into any one investee company.
  3. An investee company cannot be a “controlled group company”, meaning that a Section 12J VCC cannot own 70% or more of the equity shares in an investee company.
  4. To be recognised by SARS, the Section 12J VCC must be registered in accordance with section 7 of the Financial Advisory and Intermediary Services Act, 2002 (FAIS), meaning that the company must have a “key individual” in its employment and the Financial Services Board must issue it with a certificate.

There are many more nuances to a Section 12J VCC that we have not highlighted here as they are too lengthy to get into, but they also make for significant barriers to entry.

Regarding point one above – the issue of being a “connected person” – this provision was clearly put in place to avoid situations where a single investor uses this platform to invest in a company where he ordinarily would have done so in any event, but he simply sets up a Section 12J VCC to reap the tax benefit on an investment that he was always going to make.

What we have seen is that there are legitimate arm’s length transactions where investee companies are told that the investor will only invest in them if they are able to use the section 12J of the ITA structure and because of the anti-avoidance restrictions, investee companies are losing out on a potential investment as it is often not possible for this to be done.

Regarding points two and three above, Section 12J VCCs are often restricted in the manner that they can invest when they see a good potential investee company, as they cannot invest more than 20% of their raised capital into the investee company. This means that investee companies can, and do, miss out on obtaining more funding or any funding altogether.

It can also prevent arm’s length investors from investing into one investee company, as they cannot use the Section 12J VCC vehicle to invest into a qualifying investee company because they cannot own more than 70% of the investee company and they cannot use more than 20% of the funds raised in the Section 12J VCC to invest in the investee company. The investor also cannot hold 20% or more of the equity shares in the Section 12J VCC.

The final point is possibly the most difficult, FAIS approval is difficult to obtain as you must have a person who fits the criteria to be a “key individual” in terms of FAIS, which requires experience in the industry and further study. With the fast pace of the business environment, it is often too much of a hurdle to cross to find a party with the correct industry experience to write the exam and become qualified as a key individual.

If you have a legal team that thinks laterally about it, there are ways to manoeuvre within the compliance framework, but even then, there are limitations to the extent that it can be done.

Section 12J VCCs look very attractive from the outside, but when you scratch below the surface, there is a structure that is complex and difficult to manage and balance, which is probably the reason that they have not taken off in South Africa yet. That is not to say that forming a Section 12J VCC cannot be done, as we have assisted in setting up several of them, but it is worth considering it a little bit deeper to see whether this is going to be the best structure for you.

POPI: First meeting for the Information Regulator

POPI: First meeting for the Information Regulator

In our blog post on 7 November 2016 we referred you to the appointment of the members of the Information Regulator – which is an independent juristic person in terms of the Protection of Personal Information Act – commonly referred to as “POPI”. The Information Regulator will be responsible for monitoring and enforcing compliance with both POPI and the Promotion of Access to Information Act 2000 (PAIA).

The 5 members of the Information Regulator (Chairperson, 2 full-time and 2 part-time) have been appointed for a 5 year period that commenced the beginning of the month and according to a media statement issued by Adv. Tlakula (the Chairperson) on 2 December 2016, the Information Regulator held a meeting on 1 December 2016 to commence their function and duties. It has been confirmed that the full time member responsible for PAIA is Adv. Stroom-Nzama and the full time member responsible for POPI is Adv. Weapond.

The POPI commencement date has not been confirmed yet, but the general view in the industry is that 24 May 2017 is the likely day – as this will mean that compliance with POPI will be required as from the 25th of May 2018, which is also the date for compliance with the European Union’s General Data Protection Regulation.

In practice we are starting to see more clients focussing on POPI requirements and starting to create POPI awareness through training sessions and implementation of amended policies and practices. It would probably be unrealistic to think that POPI will mean a “quick fix” for all data concerns, but POPI will certainly play a big role to regulate the way in which companies manage data in future.

Companies Act, 71 of 2008 Series Part 8: Financial assistance under the Companies Act

Companies Act, 71 of 2008 Series Part 8: Financial assistance under the Companies Act

The Companies Act, 71 of 2008, as amended, (“the Act“) regulates the provision of financial assistance by a company, either in respect of the acquisition of securities in that company in terms of section 44 of the Act, or the provision of financial assistance to directors or prescribed officers of that company in terms of section 45 of the Act. Under certain circumstances, and with the appropriate approvals, a company may be authorised to provide financial assistance in one of the two categories mentioned above.

For purposes of this article, we will only deal with Part 8.1: Financial assistance for acquisition of securities, and in a later article, we will deal with Part 8.2: Financial assistance to directors and prescribed officers.

8.1: Financial assistance for acquisition of securities

If a company is considering providing financial assistance for the purposes of the acquisition of securities, the provisions of section 44 of the Act must be adhered to. Securities include any shares, debentures or other instruments issued or authorised to be issued by a company.  This article, however, only discusses on the provision of financial assistance for the acquisition of shares in a company.

What is financial assistance for the purposes of the acquisition of shares?

In terms of section 44 of the Act, financial assistance is widely defined as including a loan, guarantee, the provision of security or otherwise, but does not include lending money in the ordinary course of business by a company whose primary business is the lending of money. In respect of the shares of a company, a company may provide such financial assistance to a person wishing to subscribe for shares in that company, or to a person who wishes to purchase shares in that company from an existing shareholder of that company.

What approvals are required?

The board may authorise such financial assistance to an acquirer of shares unless the company’s memorandum of incorporation (“MOI“) prohibits this. The nature of the board’s authorisation is specified in the Act. The board must be satisfied that (i) immediately after providing the financial assistance, the company would 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. The board’s approval for the granting of financial assistance for the purposes of share acquisitions is limited further – the shareholders are also required to pass a special resolution within the previous two years of the proposed financial assistance, approving, either specifically or in general, recipients for such financial assistance. Unless the financial assistance is in terms of certain employee share schemes, both board and shareholder approval is required, as indicated above, for the granting of financial assistance to a party for the purposes of acquiring shares in the company (or any related or inter-related company).

*Solvency and liquidity test: the assets of the company, fairly valued, equal or exceed the liabilities of the company, fairly valued and it appears that the company will be able to pay its debts as they become due in the ordinary course of business for a period of 12 months after the date on which the test is considered.

What if you didn’t get these approvals?

If financial assistance is granted by the company in a manner which does not comply with the provisions of section 44 or any conditions or restrictions contained in the company’s MOI in respect of the granting of such financial assistance, then the decision of the board, or an agreement with respect to the provision of such financial assistance, is void to the extent of any such inconsistency. Practically, this means that any shares which were issued or sold on the basis of such unauthorised financial assistances are unauthorised acquisitions. Any director of that company who knowingly provides financial assistance in a manner which is inconsistent with the Act or the company’s MOI, could be held liable for any loss, damages or costs sustained by the company as a direct or indirect consequence of such actions.  If you suspect that your company may have granted unauthorised financial assistance to any person for an acquisition of shares in the company, please feel free to contact our Commercial Team so that we can formulate a plan to try to rectify any such granting of unauthorised financial assistance.

Insights

The rationale behind the Act regulating the provision of financial assistance by a company for share acquisitions is primarily to protect the company’s value. One of a company’s purposes is to raise capital and not to distribute its own capital to the detriment of its shareholders. These specific safeguards on the board’s power and control over the Company are unalterable provisions under the Act and should be carefully considered and understood when considering financial assistance.

These provisions may also be more wide reaching than you may expect. Section 44 applies to the provisions of financial assistance “for the purpose of or in connection with” the acquisitions of shares. It also applies to “securities” which is a wider concept than “shares“. In addition, the financial assistance may be granted in the context of a related or inter-related company*. Such considerations may make a difference in your specific case and should be interrogated accordingly.

Quick tips

  • If you are a shareholder: make sure you understand what it is that you are approving in terms of financial assistance as contemplated in the Act and your company’s MOI and why you are being requested to do so.
  • If you are a director: make sure you understand what is expected of you in terms of the Act and your company’s MOI and your liability if you do not act accordingly.
  • If you are acquiring shares (whether by a subscription for new shares or a purchase of shares from an existing shareholder) using funds loaned from the company: make sure the necessary approvals are obtained otherwise the shares you hold will be unauthorised.

* Companies are related if (i) either of them directly or indirectly controls the other, or the business of the other; (ii) either is a subsidiary of the other; or (iii) a person directly and indirectly controls each of them or thee business of each of them.

Companies Act, 71 of 2008 Series Part 7:  Distributions – a few important points to consider

Companies Act, 71 of 2008 Series Part 7: Distributions – a few important points to consider

When considering distributions by a company, we most often think of cash dividends, being one form of return on investment for investors. This is something most start-up clients consider being a future event in their life cycle and don’t often give much thought to upfront. We’ve set out a few important points to take into account when considering whether or not a company should declare a distribution.

What is a distribution?

Firstly, it is important to bear in mind that the shareholders of a company only have an expectation (and not a right) to share in that company’s profits during its existence. There is therefore no obligation on a company to declare distributions to its shareholders.

The Companies Act, 71 of 2008, as amended, (“the Act”) provides a very wide definition of a “distribution”, which goes much further than just cash dividends. This definition can be broken up into three categories, namely, the direct or indirect: (i) transfer by the company of money or other property (other than its own shares) to or for the benefit of one or more of its shareholders; (ii) incurrence of a debt or other obligation by the company for the benefit of one or more of its shareholders; and (iii) forgiveness or waiver by the company of a debt or other obligation owed to the company by one or more of its shareholders.

The definition is further extended to include any of the above actions taken in relation to another company in the same group of companies, but specifically excludes any of the above actions taken upon the final liquidation of a company.

The first category in the definition of a “distribution” includes cash dividends, payments by a company to its shareholders instead of capitalisation shares, share buy-backs and any other transfer by a company of money or other property to or for the benefit of one or more of its shareholders, which is otherwise in respect of any of the company’s shares. This last sub-category is intended as a “catch all” provision, making the definition that much wider.

Who can make a distribution and in what circumstances?

Section 46 of the Act sets out the requirements that a company must meet before making a distribution. A company must not make any proposed distribution to its shareholders unless the distribution: (i) has been authorised by the board of directors by way of adopting a resolution (unless such distribution is pursuant to an existing obligation of the company or a court order); (ii) it reasonably appears that the company will satisfy the solvency and liquidity test immediately after completing the proposed distribution; and (iii) the board of the company acknowledges, by way of a resolution, that it has applied the solvency and liquidity test and reasonably concluded that the company will satisfy same immediately after completing the proposed distribution.

For purposes of the solvency and liquidity test, two considerations must be taken into account. Firstly, whether the assets of the company, fairly valued, are equal to or exceed the liabilities of the company, fairly valued (this is often referred to as commercial solvency). Secondly, whether the company will be able to pay its debts as they become due in the ordinary course of business for a period of twelve months after the test is considered, or in the case of a distribution contemplated in the first category of the definition, twelve months following that distribution (this is often termed factual solvency). While the Act attempts to specify what financial information must be taken into account when considering the solvency and liquidity test, the provisions are not that clear, apart from requiring the board to consider accounting records and financial statements satisfying the requirements of the Act and that the board must consider a fair valuation of the company’s assets and liabilities. This leaves a lot of room for interpretation as to what can and should be taken into account when considering the solvency and liquidity test.

An important point to note here is that it is the board of directors of the company that must declare a distribution, and not the shareholders. The company’s Memorandum of Incorporation and/or shareholders’ agreement can place further requirements on the company in relation to declaring distributions, for example, a distribution must also be approved by a special resolution of the shareholders. This does not, however, change the fact that the distribution must first be proposed by the board of directors and ultimately be declared by the board of directors.

What happens if a distribution is authorised by the board but not fully implemented?

When the board of the company has adopted a resolution, acknowledging that it has applied the solvency and liquidity test and reasonably concluded that the company will satisfy the solvency and liquidity test immediately after completing the proposed distribution, then that distribution must be fully carried out. If the distribution has not been completed within 120 business days after the board adopts such resolution, the board must reconsider the solvency and liquidity test with respect to the remaining distribution to be made. Furthermore, the Act states that the company may not proceed with such distribution unless the board adopts a further resolution to that effect.

Directors liability for unlawful distributions

If a director does not follow the requirements for making a distribution and resolves to make such distribution (either at a meeting or by round robin resolution) despite knowing that the requirements have not been met, then that director can be held personally liable for any loss, damages or costs sustained by the company as a direct or indirect consequence of the director failing to vote against the making of that distribution.

There are, however, limitations placed on a director’s potential liability, in that such liability only arises if: (i) immediately after making all of the distribution (no liability can arise for partial implementation), the company does not satisfy the solvency and liquidity test; and (ii) it was unreasonable at the time of the resolution to come to the conclusion that the company would satisfy the solvency and liquidity test after making the relevant distribution.

A director who has reason to think that a claim may be brought against him (other than for wilful misconduct or wilful breach of trust), may apply to court for relief. The court may grant relief to the director if he has acted honestly and reasonably or, having regard to the circumstances, it would be fair to excuse the director.

There is a limit on the amount that a director can be held liable for in relation to not meeting the requirements of a distribution – section 77(4)(b) provides that such amount will not exceed, in aggregate, the difference between the amount by which the value of the distribution exceeded the amount that could have been distributed without causing the company to fail to satisfy the solvency and liquidity test and the amount (if any) recovered by the company from persons to whom the distribution was made.

Conclusion

Distributions by a company of its assets to its shareholders, whether in the form of cash or otherwise, are carefully regulated by the Act. This is clearly to protect the interests of creditors and minority shareholders of the company. You will also have noticed that the Act does not deal separately with the different types of distributions and includes a wide variety of transactions which will be regarded as a distribution under the Act. We trust that the issues highlighted above will give you some insight and guidance on this topic. If you would like to discuss any of these topics in more detail, please feel free to contact our commercial department and we will gladly assist.

If you would like to discuss any of these topics in more detail, please feel free to contact our commercial department and we will gladly assist.

Share Capital: What to Consider?

Share Capital: What to Consider?

COMPANIES ACT, 71 OF 2008 SERIES PART 6: SHARE CAPITAL – WHAT TO CONSIDER?

The monies raised by a company through the issue of shares is commonly referred to as the share capital of that company. The Companies Act, 71 of 2008 (as amended) (“Companies Act“) regulates certain aspects regarding share capital, which every director, shareholder and potential investor should be aware of. Set out below are 8 of the most important things you should know in order to manage your company’s share capital and to help you make informed decisions about potential equity investments.

  1. Where is the share capital recorded?

A company’s memorandum of incorporation (“MOI“) must set out the classes of shares, the number of shares of each class that the company is authorised to issue and any specific preferences, rights, limitations and other terms associated with the shares. The share capital is therefore located in the MOI, which is theoretically a public document available for inspection from the Companies and Intellectual Property Commission (“CIPC“).

  1. The distinction between the authorised and issued shares of a company

The authorised shares are the shares which the company is entitled to issue in terms of its MOI. Authorised shares have no rights associated with them until they have been issued. The issued shares are shares that are authorised and issued to shareholders, and to which certain rights are then attached.

  1. Basic rights attaching to every share

Save as provided otherwise in the MOI of the company, a share affords every holder of such share the right to certain dividends when declared, the return of capital on the winding up of the company and the right to attend and vote at meetings of shareholders. These rights can, however, be limited, for example, dividend preferences or liquidation preferences may attach to one class of shares but not the others. Non-voting rights may also attach to a class of share. However, every share issued gives that shareholder an irrevocable right to vote on any proposal to amend the preferences, rights, limitations and other terms associated with that share. This is an unalterable right under the Companies Act.

  1. How many authorised shares is appropriate?

This of course depends on the circumstances, but there is no limit to the number of authorised shares a company can have in its share capital. When starting a business an entrepreneur will often acquire a “shelf company”, which typically has an authorised share capital of 1 000 shares. This is suitable if there are only one or two shareholders. If more shareholders are anticipated, the authorised share capital will need to be increased. It is advisable to have enough authorised shares to avoid having to create further shares (and go through the process set out in point 5 below) every time the company needs to issue further shares.

  1. Amendment of the share capital – how is the CIPC involved?

The authorisation, classification, number of authorised shares, and preferences, rights, limitations and other terms associated with the shares, as set out in the company’s MOI, may only be changed by way of an amendment of the MOI. Such amendment can be approved by resolution of the board of the company, or by special resolution of the shareholders of the company, depending on which method is provided for in the MOI. It is common practice to restrict the board’s powers in this regard and reserve such matters for approval by the shareholders (in the MOI).

Any amendment of the MOI must be submitted to the CIPC for acceptance and registration. This process could take anywhere between 1 – 3 months, depending on the CIPC’s capacity and any backlogs.

  1. What happens if shares are issued in excess of the authorised share capital?

In the event that more shares are issued than are authorised (or shares are issued that have not yet been authorised), the board may retroactively authorise such an issue within 60 business days of “issue” – otherwise the share issue is void to the extent that it exceeds the authorised share capital. In such circumstances, the company must return to the relevant person the fair value of the consideration received in terms of such share “issue” (plus interest) and the directors could be held liable for any loss, damage or costs sustained by the company as a consequence of knowingly issuing unauthorised shares.

While these consequences can be severe, the potential costs and damages to the company (and its board) can be limited in the event that all the shareholders are willing to participate in rectification steps that would need to be taken and simultaneously waive their rights to claim any return of consideration and damages, where such actions were not taken knowingly and not timeously retroactively authorised.

  1. Share capital may comprise of different classes of shares

Not all shares in a company need have equal rights and preferences. Some shares may have preferential rights as to capital and/or dividends, privileges in the matter of voting or in other respects. A company may, for example, create one class of shares for the founders of the company, another class of shares for its investors and a third class of shares for its employees, with each class having its terms tailored for specific purposes. Note that the preferences, rights, limitations and other terms of shares distinguish the different classes, but are always identical to those of other shares of the same class.

  1. Shares in a company incorporated under the “old” Companies Act, 61 of 1973 (as amended) (“1973 Companies Act”)

Any issued shares held in a company that was incorporated under the 1973 Companies Act and were issued before 1 May 2011, being the effective date of the Companies Act (“Effective Date“), continue to have all the rights associated with it immediately before the Effective Date. Those rights may only be changed by means of an amendment to the MOI of the company.

All shares of companies incorporated under the Companies Act are no par-value shares. Under the 1973 Companies Act, however, a company could have a par-value share capital. If par-value shares had been issued as at the Effective Date, such company may still issue further authorised but unissued par-value shares, but the authorised par-value share capital itself may not be increased. In the event that such a company wishes to increase its authorised share capital, it can either convert its existing par-value shares to no par-value shares and then increase such number of authorised shares, or alternatively, create a further class of no par-value shares thereby also increased the total number of authorised shares.

Concluding remarks

Although at first glance the exact composition and structure of a company’s authorised and issued share capital may not be considered a top priority for busy entrepreneurs to worry about, we trust that the issues highlighted above will give you some insight and guidance into how and why your company’s share capital should be of great importance to your shareholders and any potential investors. If you would like to discuss any of these topics in more detail, please feel free to contact our commercial department and we will gladly assist you.

Shareholders Meetings – How, when and why?

Shareholders Meetings – How, when and why?

COMPANIES ACT, 71 OF 2008 SERIES PART 3

Introduction

In order for a company to achieve its objectives, it must make decisions about its day-to-day operations, as well as its long-term goals and business aspirations. So, you may ask, how does one practically give effect to this? And between the shareholders and the board of directors (“the Board”), who is responsible for what? As a broad construct, one can use “the tree and the fruits” metaphor, in that any decision pertaining to the tree (or the income earning structure of the company), typically falls within the realm of the shareholders, and any decision pertaining to the fruits (or the income earning operations) of the company, typically falls within the realm of the Board. In this article, for the sake of simplicity, we will explain the purpose and importance of shareholders’ meetings by deconstructing them under three basic questions: “Why, When and How?”. The topic of Board meetings will be covered in a future article.

Why?

The purpose of shareholders’ meetings is to provide the shareholders of a company with an opportunity to debate and vote on matters affecting that company. The Companies Act, 71 of 2008 (“Act”) gives shareholders certain substantive powers which include, among others, the power to amend the Memorandum of Incorporation of the company (“MOI”), the power to elect and remove directors, and the power to approve the disposal of all or the greater part of the company’s assets.

The Act draws a distinction between a general shareholders’ meeting and an annual general meeting (“AGM”). An AGM is a shareholders’ meeting which is held once in every calendar year (but no more than 15 months after the date of the previous AGM), and at which very specific business must be transacted. Under the old Companies Act, 61 of 1973 (“Old Act”) both public and private companies were required to convene an AGM. However, under the new Act, it is no longer mandatory for a private company to convene an AGM, unless its MOI provides otherwise.

When?

The Board may call a shareholders’ meeting at any time – it must, however, hold a shareholders’ meeting:

  • when the Board is required by the Act or the company’s MOI to refer a matter to the shareholders for decision;
  • whenever required in terms of section 70(3) of the Act to fill a vacancy on the Board;
  • when one or more written and signed demands for a shareholders’ meeting are delivered to the company by the shareholders;
  • when an AGM of the shareholders is required to be convened; and
  • whenever otherwise required by the company’s MOI.

How?

Notice: Typically, a shareholders’ meeting may only be convened once the notice requirements have been complied with. A company must deliver a notice of each shareholders’ meeting in the manner and form prescribed by the Act to all shareholders of the Company. In the case of a private company the notice period is at least 10 business days before the meeting is to begin. The notice requirements contained in the Act serve only as a guideline and a company’s MOI may provide for different minimum notice periods. A shareholders’ meeting may also be called on shorter notice than the period prescribed, provided that every shareholder who is entitled to vote is present at the meeting and votes to waive the minimum notice period.

Proxies: A shareholder entitled to attend and vote at a shareholders’ meeting is entitled to appoint a proxy (who need not also be a shareholder) to attend, participate in and vote at the meeting in the place of such shareholder.

Quorum: A quorum is the minimum number of persons whose presence at a meeting is required before any business may validly be transacted. A shareholders’ meeting may not commence until sufficient persons are present to exercise, in aggregate, at least 25% of the voting rights in respect of at least one matter to be decided. Furthermore, a matter to be decided on may not begin to be considered unless sufficient persons are present at the meeting to exercise, in aggregate, at least 25% of all the voting rights entitled to be exercised on that particular matter. The Act allows the MOI to specify a different quorum threshold. It is worth noting that once the quorum requirements for a meeting to commence or for a matter to be considered have been satisfied, the meeting may continue as long as at least one shareholder with voting rights is still present at the meeting, unless the company’s MOI provides otherwise.

Voting: Matters that are set for determination at a shareholders’ meeting are framed as resolutions and are put to a vote by the shareholders. A shareholders’ resolution is either an ordinary resolution (needs to be supported by more than 50% of the voting rights exercised on the resolution) or a special resolution (needs to be supported by at least 75% of the voting rights exercised on the resolution). The MOI of the company may permit a higher percentage of voting rights to approve an ordinary resolution and/or a different percentage of voting rights to approve a special resolution, provided that there must at all times be a margin of at least 10% between the two types of resolutions’ voting thresholds.

Voting may take place either by a show of hands or by a poll. On a show of hands, a shareholder entitled to exercise voting rights present at the meeting (or his / her proxy) only has one vote, regardless of the number of voting rights linked to the securities the relevant shareholder holds and would otherwise be entitled to exercise. Voting in this manner is well suited to taking uncontroversial decisions quickly. Voting by a poll, on the other hand, is determined in accordance with the voting rights associated with the number of securities held by that shareholder, for example, if the shareholder holds 50 out of 200 shares in issue, the shareholder would be entitled to exercise 25% of the total voting rights.

Electronic communication and written resolutions (round robin resolutions)

A company may make provision for its shareholders’ meetings to be conducted by way of electronic communication, subject to the condition that the electronic communication allows all meeting participants to participate reasonably effectively in the meeting and to communicate concurrently with each other without an intermediary.

Instead of calling and holding a formal shareholders’ meeting, the Act also provides that shareholders may consent in writing to certain decisions that would otherwise be voted on at a meeting. Such resolutions must be submitted to the shareholders entitled to vote in relation thereto, and be voted on by such shareholders, in writing, within 20 business days after the resolutions were submitted to them. A written resolution will have been adopted if its supported by persons entitled to exercise sufficient voting rights for it to have been adopted as an ordinary or special resolution, as a the case may be. Such decisions have the same effect as if they had been approved by voting at a formal shareholders’ meeting.

This flexibility is very welcome since it encourages shareholders to play a more active role in the company’s affairs and provides the company with a quick and efficient means of holding meetings and passing resolutions.

Companies Act, 71 of 2008 Series Part 6: Share capital – what to consider?

The monies raised by a company through the issue of shares is commonly referred to as the share capital of that company. The Companies Act, 71 of 2008 (as amended) (“Companies Act“) regulates certain aspects regarding share capital, which every director, shareholder and potential investor should be aware of. Set out below are 8 of the most important things you should know in order to manage your company’s share capital and to help you make informed decisions about potential equity investments.

  1. Where is the share capital recorded?

A company’s memorandum of incorporation (“MOI“) must set out the classes of shares, the number of shares of each class that the company is authorised to issue and any specific preferences, rights, limitations and other terms associated with the shares. The share capital is therefore located in the MOI, which is theoretically a public document available for inspection from the Companies and Intellectual Property Commission (“CIPC“).

  1. The distinction between the authorised and issued shares of a company

The authorised shares are the shares which the company is entitled to issue in terms of its MOI. Authorised shares have no rights associated with them until they have been issued. The issued shares are shares that are authorised and issued to shareholders, and to which certain rights are then attached.

  1. Basic rights attaching to every share

Save as provided otherwise in the MOI of the company, a share affords every holder of such share the right to certain dividends when declared, the return of capital on the winding up of the company and the right to attend and vote at meetings of shareholders. These rights can, however, be limited, for example, dividend preferences or liquidation preferences may attach to one class of shares but not the others. Non-voting rights may also attach to a class of share. However, every share issued gives that shareholder an irrevocable right to vote on any proposal to amend the preferences, rights, limitations and other terms associated with that share. This is an unalterable right under the Companies Act.

  1. How many authorised shares is appropriate?

This of course depends on the circumstances, but there is no limit to the number of authorised shares a company can have in its share capital. When starting a business an entrepreneur will often acquire a “shelf company”, which typically has an authorised share capital of 1 000 shares. This is suitable if there are only one or two shareholders. If more shareholders are anticipated, the authorised share capital will need to be increased. It is advisable to have enough authorised shares to avoid having to create further shares (and go through the process set out in point 5 below) every time the company needs to issue further shares.

  1. Amendment of the share capital – how is the CIPC involved?

The authorisation, classification, number of authorised shares, and preferences, rights, limitations and other terms associated with the shares, as set out in the company’s MOI, may only be changed by way of an amendment of the MOI. Such amendment can be approved by resolution of the board of the company, or by special resolution of the shareholders of the company, depending on which method is provided for in the MOI. It is common practice to restrict the board’s powers in this regard and reserve such matters for approval by the shareholders (in the MOI).

Any amendment of the MOI must be submitted to the CIPC for acceptance and registration. This process could take anywhere between 1 – 3 months, depending on the CIPC’s capacity and any backlogs.

  1. What happens if shares are issued in excess of the authorised share capital?

In the event that more shares are issued than are authorised (or shares are issued that have not yet been authorised), the board may retroactively authorise such an issue within 60 business days of “issue” – otherwise the share issue is void to the extent that it exceeds the authorised share capital. In such circumstances, the company must return to the relevant person the fair value of the consideration received in terms of such share “issue” (plus interest) and the directors could be held liable for any loss, damage or costs sustained by the company as a consequence of knowingly issuing unauthorised shares.

While these consequences can be severe, the potential costs and damages to the company (and its board) can be limited in the event that all the shareholders are willing to participate in rectification steps that would need to be taken and simultaneously waive their rights to claim any return of consideration and damages, where such actions were not taken knowingly and not timeously retroactively authorised.

  1. Share capital may comprise of different classes of shares

Not all shares in a company need have equal rights and preferences. Some shares may have preferential rights as to capital and/or dividends, privileges in the matter of voting or in other respects. A company may, for example, create one class of shares for the founders of the company, another class of shares for its investors and a third class of shares for its employees, with each class having its terms tailored for specific purposes. Note that the preferences, rights, limitations and other terms of shares distinguish the different classes, but are always identical to those of other shares of the same class.

  1. Shares in a company incorporated under the “old” Companies Act, 61 of 1973 (as amended) (“1973 Companies Act”)

Any issued shares held in a company that was incorporated under the 1973 Companies Act and were issued before 1 May 2011, being the effective date of the Companies Act (“Effective Date“), continue to have all the rights associated with it immediately before the Effective Date. Those rights may only be changed by means of an amendment to the MOI of the company.

All shares of companies incorporated under the Companies Act are no par-value shares. Under the 1973 Companies Act, however, a company could have a par-value share capital. If par-value shares had been issued as at the Effective Date, such company may still issue further authorised but unissued par-value shares, but the authorised par-value share capital itself may not be increased. In the event that such a company wishes to increase its authorised share capital, it can either convert its existing par-value shares to no par-value shares and then increase such number of authorised shares, or alternatively, create a further class of no par-value shares thereby also increased the total number of authorised shares.

Concluding remarks

Although at first glance the exact composition and structure of a company’s authorised and issued share capital may not be considered a top priority for busy entrepreneurs to worry about, we trust that the issues highlighted above will give you some insight and guidance into how and why your company’s share capital should be of great importance to your shareholders and any potential investors. If you would like to discuss any of these topics in more detail, please feel free to contact our commercial department and we will gladly assist you.

Companies Act, 71 of 2008 Series Part 5: Voluntary winding-up of solvent companies in terms of the Companies Act

Introduction

Although any mention of the “winding-up” or liquidation of a business enterprise has the tendency to attract negative sentiments in the commercial world, the voluntary winding-up of a solvent company remains a useful and practical tool for businesses to achieve certain defined outcomes.  Section 80 of the Companies Act, 71 of 2008 (“the Companies Act“) deals with the voluntary winding-up of a solvent company either by its shareholders or by its creditors; this article will however focus exclusively on a winding-up instituted by the shareholders of that company.  By simply asking: “Why, How and What?” we will address some of the reasons for considering the voluntary winding-up of a solvent company and provide some practical insight into the procedures that need to be followed by the shareholders of a company who wish to utilise the provisions of section 80 of the Companies Act.

Background

The Companies Act prescribes the procedure for the winding-up of solvent companies, whereas the previous Companies Act, 61 of 1973 (“the Old Act“) still largely regulates the winding-up procedure of insolvent companies.  As mentioned, this article will focus exclusively on the voluntary winding-up of a solvent company by its shareholders.  It is however important to note that even after a voluntary winding-up procedure has begun in terms of section 80 of the Companies Act, if a court determines that a company is insolvent, it may be ordered to be wound up as an insolvent company in accordance with the relevant provisions of the Old Act.  The factual and commercial solvency position of a company therefore remains an important consideration in determining which winding-up procedure should be followed.

Why the voluntary winding-up procedure should be considered for solvent companies?

The voluntary winding-up of solvent companies exists as a means to achieve various purposes, including: the restructuring of businesses forming part of a group in order to streamline current or future operations; companies becoming redundant due to mergers or takeovers; and the winding-up of companies used as special purpose vehicles to complete certain projects (once such projects have been finalised).

Therefore, the catalyst for the use of the voluntary winding-up procedure is a decision that the company serves no further purpose, and that available assets should rather be realised and distributed to its shareholders.

How does the procedure start?

The winding-up process involves both the office of the Master of the High Court (“the Master“) as well as the Companies and Intellectual Property Commission (“the CIPC“).  As mentioned, the procedure is regulated by section 80 of the Companies Act and essentially consists of three main steps.

Step One

Before the actual procedure can commence with the CIPC, the Master should be approached.  If the company to be wound-up has any debts, security must be furnished to the Master for the payment of these debts within twelve months after the start of winding-up procedures.  In the event that the company to be wound-up has no debts, consent must be obtained from the Master in order to dispense with the need to furnish security.  For the Master to consider dispensing with the security requirement, the following documents should be submitted to the Master, after which a determination will be made:

  • a sworn statement by a director of the company authorised by the board, stating that the company has no debt; and
  • an auditor’s certificate stating that, to the best of its knowledge and belief, the company appears to have no debt.

Step two

Only once satisfactory security has been furnished to the Master, or the Master has consented to the dispensing of the security requirement, can the process be initiated with the CIPC, where the following documents must be submitted:

  • form CoR 40.1: this is the required Notice of a Special Resolution to Wind-up a Solvent Company;
  • written resolutions of the shareholders of the company authorising the winding-up of the company and the appointment of the liquidator;
  • confirmation of security provided, alternatively the Master’s consent to dispense with security; and
  • an originally certified identity document of the authorising director.

If all the above documents are correctly submitted, the service turn-around time for the CIPC to process the voluntary winding-up can take anything between two to four weeks, following which the CIPC will then issue a certificate of confirmation to this effect.

Step three

The next step would be to approach the Master for purposes of appointing a liquidator.  The Master will require the CIPC certificate of confirmation, together with the following documents, in order to appoint the liquidator:

  • proof of publication in the Government Gazette, of the notice to wind-up the company voluntarily and to appoint the liquidator; and
  • an affidavit of non-interest deposed to by the liquidator.

What are the implications for the company?

When the winding-up procedure starts, the company is still regarded as a juristic person and retains all such power whilst it is being wound up (unless the memorandum of incorporation of the company provides otherwise), but is prohibited by the Companies Act from carrying on its business, except insofar as it benefits the company during the winding-up process.  In practice, this usually means that a liquidator would continue trading the business for a short period of time to finalise current transactions.

Furthermore, it also needs to be noted that once the liquidator is appointed, the directors’ powers will cease, unless specifically authorised by the liquidator or shareholders in general meeting.  For all practical purposes, the liquidator is now in control of all winding-up operations and proceedings of the company up until dissolution by the CIPC occurs, and it is removed from the register of companies, as envisaged by section 82 of the Companies Act.

Concluding remarks

We hope that this article has shed some light on the purposes of, and processes concerned with, a voluntary winding-up of a solvent company.  Please feel free to contact our offices if you think this process might be applicable to your business’s needs, or if you have any other queries or questions regarding this or any other topic, and we will gladly assist you in your undertakings.

Companies Act, 71 of 2008 Series Part 3: Shareholders’ meetings

Introduction

In order for a company to achieve its objectives, it must make decisions about its day-to-day operations, as well as its long-term goals and business aspirations. So, you may ask, how does one practically give effect to this? And between the shareholders and the board of directors (“the Board”), who is responsible for what? As a broad construct, one can use “the tree and the fruits” metaphor, in that any decision pertaining to the tree (or the income earning structure of the company), typically falls within the realm of the shareholders, and any decision pertaining to the fruits (or the income earning operations) of the company, typically falls within the realm of the Board. In this article, for the sake of simplicity, we will explain the purpose and importance of shareholders’ meetings by deconstructing them under three basic questions: “Why, When and How?”. The topic of Board meetings will be covered in a future article.

Why?

The purpose of shareholders’ meetings is to provide the shareholders of a company with an opportunity to debate and vote on matters affecting that company. The Companies Act, 71 of 2008 (“Act”) gives shareholders certain substantive powers which include, among others, the power to amend the Memorandum of Incorporation of the company (“MOI”), the power to elect and remove directors, and the power to approve the disposal of all or the greater part of the company’s assets.

The Act draws a distinction between a general shareholders’ meeting and an annual general meeting (“AGM”). An AGM is a shareholders’ meeting which is held once in every calendar year (but no more than 15 months after the date of the previous AGM), and at which very specific business must be transacted. Under the old Companies Act, 61 of 1973 (“Old Act”) both public and private companies were required to convene an AGM. However, under the new Act, it is no longer mandatory for a private company to convene an AGM, unless its MOI provides otherwise.

When?

The Board may call a shareholders’ meeting at any time – it must, however, hold a shareholders’ meeting:

  • when the Board is required by the Act or the company’s MOI to refer a matter to the shareholders for decision;
  • whenever required in terms of section 70(3) of the Act to fill a vacancy on the Board;
  • when one or more written and signed demands for a shareholders’ meeting are delivered to the company by the shareholders;
  • when an AGM of the shareholders is required to be convened; and
  • whenever otherwise required by the company’s MOI.

How?

Notice: Typically, a shareholders’ meeting may only be convened once the notice requirements have been complied with. A company must deliver a notice of each shareholders’ meeting in the manner and form prescribed by the Act to all shareholders of the Company. In the case of a private company the notice period is at least 10 business days before the meeting is to begin. The notice requirements contained in the Act serve only as a guideline and a company’s MOI may provide for different minimum notice periods. A shareholders’ meeting may also be called on shorter notice than the period prescribed, provided that every shareholder who is entitled to vote is present at the meeting and votes to waive the minimum notice period.

Proxies: A shareholder entitled to attend and vote at a shareholders’ meeting is entitled to appoint a proxy (who need not also be a shareholder) to attend, participate in and vote at the meeting in the place of such shareholder.

Quorum: A quorum is the minimum number of persons whose presence at a meeting is required before any business may validly be transacted. A shareholders’ meeting may not commence until sufficient persons are present to exercise, in aggregate, at least 25% of the voting rights in respect of at least one matter to be decided. Furthermore, a matter to be decided on may not begin to be considered unless sufficient persons are present at the meeting to exercise, in aggregate, at least 25% of all the voting rights entitled to be exercised on that particular matter. The Act allows the MOI to specify a different quorum threshold. It is worth noting that once the quorum requirements for a meeting to commence or for a matter to be considered have been satisfied, the meeting may continue as long as at least one shareholder with voting rights is still present at the meeting, unless the company’s MOI provides otherwise.

Voting: Matters that are set for determination at a shareholders’ meeting are framed as resolutions and are put to a vote by the shareholders. A shareholders’ resolution is either an ordinary resolution (needs to be supported by more than 50% of the voting rights exercised on the resolution) or a special resolution (needs to be supported by at least 75% of the voting rights exercised on the resolution). The MOI of the company may permit a higher percentage of voting rights to approve an ordinary resolution and/or a different percentage of voting rights to approve a special resolution, provided that there must at all times be a margin of at least 10% between the two types of resolutions’ voting thresholds.

Voting may take place either by a show of hands or by a poll. On a show of hands, a shareholder entitled to exercise voting rights present at the meeting (or his / her proxy) only has one vote, regardless of the number of voting rights linked to the securities the relevant shareholder holds and would otherwise be entitled to exercise. Voting in this manner is well suited to taking uncontroversial decisions quickly. Voting by a poll, on the other hand, is determined in accordance with the voting rights associated with the number of securities held by that shareholder, for example, if the shareholder holds 50 out of 200 shares in issue, the shareholder would be entitled to exercise 25% of the total voting rights.

Electronic communication and written resolutions (round robin resolutions)

A company may make provision for its shareholders’ meetings to be conducted by way of electronic communication, subject to the condition that the electronic communication allows all meeting participants to participate reasonably effectively in the meeting and to communicate concurrently with each other without an intermediary.

Instead of calling and holding a formal shareholders’ meeting, the Act also provides that shareholders may consent in writing to certain decisions that would otherwise be voted on at a meeting. Such resolutions must be submitted to the shareholders entitled to vote in relation thereto, and be voted on by such shareholders, in writing, within 20 business days after the resolutions were submitted to them. A written resolution will have been adopted if its supported by persons entitled to exercise sufficient voting rights for it to have been adopted as an ordinary or special resolution, as a the case may be. Such decisions have the same effect as if they had been approved by voting at a formal shareholders’ meeting.

This flexibility is very welcome since it encourages shareholders to play a more active role in the company’s affairs and provides the company with a quick and efficient means of holding meetings and passing resolutions.