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.

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