ARTICLE 3: INCORPORATION OF COMPANIES UNDER THE NEW COMPANIES ACT

Thursday, December 13, 2007
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INCORPORATION OF COMPANIES UNDER THE NEW COMPANIES ACT
 
NEW COMPANY LAW WILL MAKE IT EASIER RUNNING A COMPANY, BUT WILL IT BE EASIER STARTING UP A COMPANY?
 
A lot has been said about the new Companies Bill.  It will replace the current Companies Act which is more than 34 years old.  It will promote transparency, corporate governance and bring South Africa in line with international best practice.  All of this is good and should be welcomed: company law in South Africa has to be modernised urgently.  The question is, though, will the Companies Bill also make it simpler to incorporate companies and will it be easier to understand what a company’s powers are and where to find a statement of these powers?
 
As the draft of the Companies Bill currently stands it will indeed make it easier to incorporate companies.  The Bill reduces the number of statutory forms required to incorporate a company.  If you incorporate a company under the current Companies Act you will have to file a certificate of incorporation, certificate to commence business, memorandum of association and articles of association with the Registrar of Companies, to name but a few.  The new Bill makes provision for the completion of a Memorandum of Incorporation and the filing of a Notice of Incorporation.  Upon incorporation of the company by the Commissioner (as the person who will have the responsibility of the current Registrar of Companies will be known under the Companies Bill) the Commissioner issues a Registration Certificate.
 
The Bill provides that not all companies have to file their Memorandum of Incorporation with the Commissioner.  Certain categories of companies will now bear the responsibility of keeping their constitutional documents themselves.  This will obviously reduce the burden on the office of the Commissioner, but it will also make it easier for someone to request and review the constitutional documents of the company because you can simply ask the company.  The board is also given the right to amend the Memorandum of Incorporation to correct a patent error in spelling, grammar, punctuation, reference, without going through formal amendments to the Memorandum of Incorporation.
 
The Bill provides that an act of a company is not void solely because the company did not have the capacity to do the act or the directors did not have the authority to perform the act on behalf of the company, solely because the company itself did not have the capacity or power to do the act.  No person may rely on this lack of capacity, power or authority in legal proceedings, except in proceedings between the company and its directors or shareholders or between the shareholders and directors.  Another new provision is that, if the Memorandum of Incorporation limits or restricts the company’s powers or activities, the shareholders may by special resolution ratify any action inconsistent with such limits or restriction.
 
In addition to the Memorandum of Incorporation companies can now make certain governance rules themselves.  In other words the board can simply formulate and send these rules to the shareholders and, subject to ratification at the next general meeting of shareholders, the rules will become permanent rules regulating governance of the company which are not covered by the Companies Bill or the Memorandum of Incorporation.  This allows companies flexibility to formulate their own rules on certain governance issues without going through formal procedures of amending the existing rules and filing them with the regulator.
 
As mentioned, under certain instances, different rules apply to a company depending on how the company is categorised.  This is one of the most important innovations contained in the Bill.  Different types of companies must comply with different rules which recognise, for the first time, that smaller private companies do not, and should not, have the same responsibilities as major public companies in regard to corporate governance and financial reporting.  A number of compliance rules have been adapted to suit the nature and size of the company.  This will assist companies and make it easier for companies to comply with the provisions of the Companies Bill.  One example is in the preparation of the financial statements – the Bill makes provision for the development of financial reporting standards tailored for the size and nature of the company.
 
The new classification system itself seems to be a bit unclear and it seems that some thinking still has to be done on exactly how the classification will work.  The Bill in its current form also introduces new terminology.  The introduction of some of the new terms seems unnecessary and the current terminology should continue to avoid confusion.  Basically, the Bill categorises companies as non profit and profit companies.  Profit companies are then categorised as companies that do not contain restrictions on the transferability of their shares and that do not prohibit offers to the public (larger public companies) and companies that do contain restrictions on the transferability of their shares and that prohibit offers to the public (smaller private companies).
 
To a large extent the rules on how a company must state and use its name and what must be included as part of the name remain the same.  As an example, a non profit company must have “NPC” as part of its name.  Companies will still have to describe themselves with reference to the category they fall into.  The Bill will, however, allow companies to use their registration numbers as a name or to include symbols in their name.
 
The rules relating to pre-incorporation contracts are also simplified.  Currently, a number of onerous, and in my view unnecessary, formalities have to be complied with before a company will be bound to a contract entered into before the company was incorporated.  Any person may enter into a pre-incorporation contract under the Companies Bill.  Any person who knows that the company does not exist and purports to act in its name is jointly and severally liable with any other such person for all liabilities created while so acting.
 
To achieve further transparency shareholders have extensive rights to obtain information from the company, including access to the securities register and minutes of directors meetings.  It should be questioned whether shareholders’ rights should go as far as giving them access to the directors minutes.  The Bill furthermore provides that, if at any time the company’s accounting records reveal that the company does not meet the solvency and liquidity test, the board must deliver a notice to the shareholders and deliver a status report at intervals of no more than 60 business days to the shareholders on the solvency and liquidity test.
 
 
Rudolph du Plessis