ARTICLE 4: OVERVIEW OF THE CORPORATE FINANCE CHAPTER IN THE COMPANIES BILL
OVERVIEW OF THE CORPORATE FINANCE CHAPTER IN THE COMPANIES BILL
When it becomes law, the Companies Bill of 2007 will replace the Companies Act of 1973. South African company law will undergo a quantum leap, moving to a more sophisticated and modern regulatory regime. The Companies Bill has not been finalised and so is still subject to change.
The Companies Bill modernises the current statutory provisions regulating offers of securities to the public.
The definition of what constitutes an “offer to the public” and the stipulated instances in which offers will not be regarded as being “to the public” are similar to those currently contained in the Companies Act. Offers under qualifying employee share schemes will continue to be regarded as not to the public so long as employees are advised of the nature and risks of the transactions and furnished with financial statements and information and certain other requirements are met.
A distinction is drawn between primary and secondary offers in the Companies Bill.
Offers made by a company of its own shares (primary offerings) will either require a prospectus complying with the Companies Bill (if involving an unlisted company) or must comply with the relevant securities exchange’s requirements (if involving a listed company). A primary offering made by a company whose shares have not previously been the subject of a public offer (an initial public offering) will however require a prospectus complying with the Companies Bill even if the company’s shares are listed.
Offers made by a person of another company’s shares (secondary offerings) will need to be accompanied by a “shortened prospectus” containing the information required by the Companies Bill (unless a prospectus previously issued as part of a primary offering by the company, updated as necessary, is available).
A prospectus will need to contain both the information required in schedule 3 to the Companies Bill and all other information which an investor reasonably requires to assess the company, its assets, liabilities, financial position, profits and losses, cashflow and prospects.
The Companies Bill changes the shareholder approval requirements for the creation and issue of shares.
Currently, a special resolution of shareholders is required to create new shares. Under the Companies Bill, the board of directors will be able to create shares if permitted to do so in the memorandum of incorporation.
Presently under the Companies Act, an ordinary resolution of shareholders is required to issue shares. Under the Companies Bill, it appears that the board of directors of a company will now in certain circumstances be able to authorise the issues of shares. The Companies Bill will however require a special resolution of shareholders for an issue of shares to a director or to certain individuals or entities “related” to a director.
A special resolution of shareholders will also be required if the shares being issued will carry more than 30% of the voting rights attaching to all shares immediately before the issue and the subscription price of those shares is settled with a non-cash consideration or the shares are issued at a subscription price below fair market value. In certain circumstances, shares issued under separate transactions will need to be aggregated for purposes of the 30% calculation.
Shareholders will now have a statutory right to take up any unissued shares which the company wishes to issue. This right will not apply if excluded in the memorandum of incorporation or if shares are issued for a fair value non-cash consideration, for example, to buy a business.
As with the Companies Act, a special resolution will be required if an option is granted to a director to subscribe for shares (other than if an option is granted to a director employed by the company who is granted the option in that capacity).
The Companies Bill presents a capital regime underpinned by considerations of solvency and liquidity.
The Corporate Laws Amendment Act of 2006 enables a company to provide financial assistance in relation to the acquisition of its own shares if it satisfies tests of solvency and liquidity. The Companies Bill continues on this path. Generally, financial assistance will be permissible if the memorandum of incorporation does not prohibit it, if the company will comply with the solvency and liquidity tests immediately after giving the financial assistance, if the terms of the assistance are fair and reasonable to the company and if shareholders approve the financial assistance by special resolution. Interestingly, this shareholder approval can be in the form of a general authority given to the board as much as five years earlier. As with the Companies Act, an agreement relating to the provision of financial assistance is void if inconsistent with the legislation.
Generally, the Companies Bill permits the board of directors to approve distributions to shareholders (including dividends and capital distributions), subject to compliance with the solvency and liquidity tests.
Share repurchases (and purchases by subsidiaries of their holding company’s shares) continue to be permissible subject to compliance with the solvency and liquidity tests (but now only need an ordinary resolution of shareholders if made from all shareholders). A repurchase from specific shareholders will still need to be approved by a special resolution of shareholders. The purchase of a company’s shares by someone “related” to the company will now also require such approvals. As with the Companies Act, subsidiaries will not be permitted to hold more than 10% of the shares of any class in the capital of their holding company.
Finally, the Companies Bill will abolish the concept of par value shares, which form a core part of South African company law today (though more in form than substance!).
A constant theme in the corporate finance chapter (and the Companies Bill generally) is personal liability of directors for losses suffered by the company, shareholders and others arising from statutory breaches.
Listed companies will of course need to consider the requirements of the Companies Bill in conjunction with the relevant securities exchange rules, which in certain instances impose additional or more onerous requirements.
The corporate finance chapter of the Companies Bill also introduces detailed rules on debentures (it refers to the current regulations thereon as archaic), regulates the obligation to disclose beneficial interests in shares and sets out the rules applying to the registration and transfer of certificated and uncertificated shares. These topics will be included in the next article.