Published 30 October 2018
The current Companies Act, 71 of 2008 (“the Act“) succeeded in lessening multiple regulatory burdens under the old Companies Act, 61 of 1973 (“the Old Act“). On 21 September 2018 the Department of Trade and Industry (“the Dti“) released the draft Companies Amendment Bill, 2018 (“the Bill“) to initiate a formal process of changes to the Act. If the Bill is adopted, it will be the third time that the Act is amended, with the first two sets of amendments being implemented by way of the Companies Amendment Act, 3 of 2011 and the Financial Markets Act, 19 of 2012. According to the Dti, the Bill proposes changes that will bring the Act in line with the current international corporate trends and close identified gaps in the Act. In addition, the Bill jettisons certain cumbersome resolution requirements. We have selected a few key changes proposed by the Bill to discuss in a little more detail. The Bill is currently available for public comment until 20 November 2018. We encourage business and stakeholders to tender their comments to the Dti on or before the due date.
Key proposed changes
On what day does the amendment to a memorandum of incorporation (“MOI“) become effective?
The Bill makes it clear that all amendments to MOIs (excluding MOI amendments that change the name of the company) will take effect 10 business days after lodging your notice of MOI amendment with the Companies and Intellectual Property Commission (“the CIPC“). If the CIPC, after the 10 business days have lapsed, has not endorsed the notice of MOI amendment or failed to reject it with reasons, it will be deemed to be effective. Presently, under section 16 of the Act and as contained in the options provided on the CoR 15.2 Notice of Amendment of MOI form, the MOI amendment takes effect on the date that the CoR 15.2 form (together with supporting documents) is filed with the CIPC, the date on which the amended registration certificate is issued by the CIPC, when the MOI amendment includes a name change, (with an estimated turnaround time of 25 days in terms of the CIPC’s website) or such later date as is indicated on the CoR 15.2 form. The applicant may elect one of these options.
This change is welcomed as it shortens the CIPC’s turnaround time and places a duty on the CIPC to act expediently. However, care must be taken with the “deemed effect” when the CIPC does not provide feedback within 10 business days. The silence of the Bill seems to suggest that such “deemed effect” shall be incapable of being rescinded even if the CIPC, in hindsight, has valid reasons to reject the MOI amendment application. This can have long term negative effects on the company in that it will be governed by a defective MOI without knowledge, as no obligation is created on the CIPC to endorse or reject the MOI amendment after the 10 business days have lapsed.
Transparency regarding directors’ and prescribed officers’ remuneration
Stakeholders will be happy to know that the Bill proposes the amendment of section 30(4) of the Act. This section currently provides for the remuneration and benefits disclosure of “each director, or individual holding any prescribed office in the company”. The amended wording provides that each individual director or prescribed officer must be identified by name when reporting about their remuneration and benefits in the annual financial statements of the company. In addition, the Bill introduces a new section 30A in to the Act which outlines a format for a public company’s directors’ remuneration report, which must be compiled for each financial year and presented to shareholders at the annual general meeting.
These proposed changes should be welcomed as they strengthen transparency in South African companies.
Court’s power to validate the irregular creation, allotment or issuing of shares
Shareholders will not be happy to know that the Bill proposes empowering the courts, upon application by an interested person, to validate the irregular creation, allotment or issue of shares when it is just and equitable to do so. A similar provision existed in section 97 of the Old Act. Presently, shareholders or in other cases the board, if they have the power to authorise shares, may pass a resolution to retroactively authorise invalidly issued shares. Under section 38(3) of the Act, shares that are issued in excess of the authorised shares set out in the MOI (and not retroactively authorised) are a nullity.
This proposed change undermines the powers of the shareholders to govern the company by passing resolutions and decide internally whether to authorise invalidly issued shares or not. The discretion of the court is also far reaching in that no clear meaning can be ascribed to the terms “just and equitable”. The proposed change is therefore not welcomed as it limits the powers of the shareholders at the peril of the court’s wide discretion.
Regulation of share buy-backs
The Bill proposes tightening the regulation of share buybacks by requiring a shareholders’ special resolution to be adopted if shares are repurchased from a director or prescribed officer of the company, or a person related to such director or prescribed officer. In addition, the same special resolution will be required if the share buyback entails an acquisition of shares in a company generally, except for in identified circumstances. Such circumstances are where a pro rata (equal) offer is made to all shareholders (or to all shareholders of a particular class), or if the buyback is in the form of a transaction effected in the ordinary course on a recognised stock exchange on which shares of the company are traded. The present position under section 48(8) of the Act is that a shareholders’ special resolution for repurchasing shares is only required where the shares are held by a director or a prescribed officer of the company, or a person related to such director or a prescribed officer and where the buyback involves the acquisition by the company of more than 5% of the issued shares of any particular class of the company’s shares.
Fortunately, the Bill extends the circumstances where a special resolution is required. The implication of this is that any shares in the company that are repurchased must be approved by a special resolution (provided that the repurchase doesn’t fall into one of the exceptions), i.e. irrespective of whether they are held by a director or a prescribed officer of the company, or a person related to such director or a prescribed officer.
These proposed changes should be welcomed as they provide further protection for shareholders to vote on share buybacks. They also reduce regulations where it might be unnecessary to pass a special resolution for efficient operational reasons.
Financial assistance within a group
Lastly, the Bill proposes that shareholders’ special resolutions are no longer required where a company gives financial assistance to its own subsidiary. Under section 45 of the Act, such financial assistance must be authorised by the board and shareholders by passing a special resolution.
The shareholders will not be happy about this amendment since part of their voting power will be limited. In addition, “subsidiary company” is widely defined in the Act and it is unclear if “own subsidiary” will carry a narrower meaning. A decision to tender financial assistance to a subsidiary is material and shareholders should be given the opportunity to vote on it. Although, this proposed amendment lessens regulations it should not be welcomed since it takes away the right of shareholders to vote on this decision.
The identified proposed changes in the Bill which are meant to make the Act more compatible with international corporate trends are in relation to increasing corporate transparency. However, some proposed changes limit shareholders’ rights which will discourage investors and are arguably not aligned to international standards. The Bill provides much needed clarity about when an MOI amendment take effect. Lastly, the Bill lessens regulatory burdens for effective operational means in that resolution approvals are reduced. However, some of the Bill’s dropped resolution requirements, particularly in requesting special resolutions for actions of the company, and empowering the court to validate invalidly issued shares, may come at a cost to shareholders’ rights.