ARTICLE 2: OVERVIEW OF THE 2006 CORPORATE LAWS AMENDMENT AND THE COMPANIES BILL, 2007
OVERVIEW OF THE 2006 CORPORATE LAWS AMENDMENT AND THE COMPANIES BILL, 2007
Set out below, in broad terms, are the most important changes to South Africa’s corporate law which were effected by the 2006 Corporate Laws Amendment Act (the "2006 Act"), as well as those which are proposed by the Companies Bill, 2007 (the "Bill").
THE 2006 ACT
These amendments are “deemed necessary in the short term prior to the completion of South Africa’s corporate law reform process” (Minister of Trade and Industry). They are long overdue and have been warmly welcomed by most businessmen and professionals, although there has been criticism of the actual wording of certain of them.
Diverse interests are affected by these amendments, particularly the new requirements relating to financial standards, financial reporting and auditors. These include lawyers, accountants, shareholders, directors, members of close corporations, financial advisers, bankers, company secretaries and the JSE.
The most significant amendments made to the Companies Act, 1973 (the "Act") by the 2006 Act are the following –
– legal backing is given to accounting standards, the upshot of which is that companies will no longer be able to select the mode of accounting that presents their financial positions in the most favourable light. These amendments are the most voluminous of the 2006 Act. They impose a uniform set of accounting standards on all companies which are comparable with international standards. Two sets of accounting and reporting standards are introduced. For this purpose, companies are classified as either "widely held" or "limited interest" companies. Widely held companies include public companies. The accounting and reporting standards imposed on widely held companies are more onerous than those imposed on limited interest companies;
– auditor independence is promoted by, inter alia, the introduction of compulsory audit committees for widely held companies, strict requirements for their composition and detailed provisions relating to the appointment and duties of auditors;
– shareholder diversification, which is particularly relevant in relation to Black Economic Empowerment, is facilitated by a long awaited, watershed amendment to the Act which enables any company to finance the acquisition of its own shares if certain criteria are met, thus opening up a source of finance for this purpose which was hitherto prohibited;
– any sale of a business or the greater part of a company’s assets must now be approved by 75%, not 50%, of shareholders, thus increasing the protection for minority shareholders in the face of take-overs; and
– enabling electronic communications and filings with the Companies and Intellectual Property Registration Office ("CIPRO") including the CIPRO website, and the abolition of a number of administrative formalities such as the requirement for certain notices to be published in the Government Gazette.
We stress that, although the 2006 Act has been enacted (ie, it is now law), it has not yet come into operation. This will only happen when the State President fixes this date by proclamation in the Government Gazette.
When the Bill becomes law in 2010, it will replace both the Act (including the 2006 Act) and the Close Corporations Act 1984 in their entirety, although the latter Act will be phased out over a ten year period.
The most significant changes made and new principles introduced by the Bill are as follows:
- the Bill modernises our company law by, inter alia, introducing a number of new key terms and words which are commonly used and understood by businessmen and professionals, such as “beneficial interest”, “control”, “distribution” and “related persons”, to name a few. Most of these already appear in the rules of the JSE Limited, called the JSE’s "Listing Requirements";
- the "solvency and liquidity test" (which is already used in relation to share buy-backs under the Act) becomes a cornerstone test which must be applied in about ten different instances, including the making of any distribution (including dividends) by a company, mergers and amalgamation and loans to directors;
- the provisions and procedures relating to certain "fundamental transactions", namely schemes of arrangement and disposals of businesses or the greater part of a company’s assets, are radically changed. A new procedure and remedies which are common to both these fundamental transactions is introduced. The Bill also introduces a new category of fundamental transactions called "mergers and amalgamations" to which such procedures and remedies also apply;
- it brings our company law into line with best practices internationally, especially in relation to listed companies and offers of securities to the public;
- the Bill extensively changes the provisions of the Act relating to meetings of shareholders and directors (including voting) and communications in order to give more flexibility and to modernise the Act. Many of these provisions are similar to clauses commonly used in modern shareholders’ agreements;
- it introduces a new business rescue regime which will replace the current judicial management system of failing companies. The Bill does not, however, amend the insolvency provisions of Chapter 14 of the Act. These will be retained in their current form until new "uniform insolvency legislation" is enacted;
- protections for minority shareholders are greatly increased by introducing several new remedies and procedures while retaining almost all such protections which are presently contained in the Act;
- it introduces a host of new provisions which promote transparency, high standards of corporate governances and accountability;
- the duties and responsibilities of directors and, therefore, personal liability of directors are greatly increased. In particular, the Bill codifies the common law duties of directors;
- it makes company law simpler to administer, enforce and understand by, for example, scrapping par value shares and share premium. Only no par value shares will exist once the Bill becomes law. There are about 270 sections in the Bill, while the Act contains over 450;
- it retains all the new principles introduced by the 2006 Act;
- it also creates new statutory bodies which will administer and enforce the new Act and, in some instances, provide alternative methods to resolve disputes; and
- finally, the Bill de-criminalises our company law. The Act presently contains over 120 sections which impose criminal sanctions for their breach. The Bill abolishes all criminal sanctions except a handful of the more serious offences and replaces them with a system of administrative enforcement and fines. For this purpose, the Registrar of Companies (who will be called the Commissioner of the Companies and Intellectual Property Commission) and the Securities Regulation Panel (which will be called the Takeover Regulation Panel) are given far greater and wider powers.
Most people will be relieved to know, however, that the Bill retains most of the fundamental principles upon which the Act is based, with some notable exceptions. The common law also remains largely intact, again with some notable exceptions.
Rudolph du Plessis