CORPORATE LAW REFORM TO INCLUDE FLEXIBLE INTERNATIONAL MEASURES – BY FRANCOIS TERBLANCHE
The Department of Trade & Industry (“DTI”) has announced that it intends to draft a new Companies Act. The DTI is to review the existing Companies Act, the Close Corporations Act and the common law relating to companies and close corporations. Its proposals include the creation of one standard corporate vehicle and the removal of the distinction between close corporations, private companies and public companies. Instead, it proposes to distinguish between listed and unlisted companies by imposing additional rules on listed companies. It also intends introducing more flexible measures and mechanisms adopted from appropriate jurisdictions.
For example, the DTI proposes to streamline companies’ constitutional documents. A company’s internal and external functionings are currently governed by its memorandum and articles of association. When a company is created, the subscribers can either create their own company specific constitutional documents or adopt or modify a statutory template. The DTI proposes that the new Companies Act should set out mandatory constitutional provisions which apply to all companies and leave it to the shareholders to create additional or voluntary requirements. This proposal broadly follows the positions in England and the USA where default articles of association or its constitutional equivalent apply to private companies or corporations unless the entity’s constitutional documents specify otherwise.
The DTI also proposes to reduce companies’ administrative burden of corporate compliance by giving shareholders the entitlement to opt out of certain otherwise mandatory rules. A company will only be able to opt out if there is agreement amongst a sufficiently high percentage of its shareholders. This proposal follows England’s elective régime whereby small private companies can be de-regulated by lessening inappropriate formal requirements. The elective régime can only be introduced with the unanimous consent of all shareholders and, even then, it can be revoked by an ordinary resolution of shareholders. Under England’s elective régime, the shareholders can agree to remove the need to lay accounts before the general meeting, although accounts will still have to be prepared and sent to members every year. Similarly, the shareholders can agree to remove the requirement to hold an annual general meeting each year, although any shareholder can still demand an annual general meeting.
The elective régime may be very useful for small private companies where the directors and the members of the company are to a large extent the same people. There is typically less of a need for members in these companies to have safeguards and checks against directors. Larger groups of companies may also find the adoption of the elective régime useful in reducing the administrative burden of corporate compliance in respect of appropriate subsidiary companies. It will be interesting to see which formal mandatory requirements may be opted out of under the proposed elective régime.
Perhaps the most flexible new proposed concept is the introduction of mergers in the true sense of the word. At the moment, South African mergers and acquisitions essentially take one of two forms in that the purchaser buys either the shareholding in the target company or buys the target company’s business. The introduction of mergers in the true sense of the word will add a third dimension to the mergers and acquisition environment in that it will then be possible to absorb one company into another, or two companies into a new entity. The assets and liabilities of the merged company will become the assets and liabilities of the surviving company and the merged company will cease to exist. Alternatively, where two or more companies are merged into a new entity, it will almost be as if all the assets and liabilities of the merged companies had been transferred into a new third company and the two merged companies had ceased to exist.
The introduction of true mergers will give rise to some unique South African considerations. For example, will the transfers under the merger be zero-rated for VAT purposes on the same basis as that which is currently available for the sale of a business as going concern? Will the group restructuring rollover tax relief apply to mergers as well? How will the competition authorities analyse market concentration in the hands of the new merged entity? Presumably section 197 of the Labour Relations Act will be extended to deal with the new merger mechanism. As such, the contracts of employment of the employees of the pre-merged companies should automatically be transferred to the new merged entity.
The merger concept will also give rise to a number of insolvency considerations. For example, will the merging entities need to give notice of their intention to merge on the same basis as that on which the seller of a business may now give notice of his intention to sell his business under section 34 of the Insolvency Act? What form of security will creditors of the pre-merged entities require before they are prepared to consent to the merger (if their consent is required)?
The merger concept is bound to dramatically change the way in which merger and acquisitions transactions are done in South Africa. The challenge to the legislature is to retain the flexibility inherent in this new mechanism without imposing unduly onerous and time consuming requirements. At the same time it must also ensure that creditors and shareholders are adequately protected.
Another proposal which one can easily overlook is the intended decriminalisation of the Companies Act. The DTI intends to provide for appropriate civil and administrative sanctions for non-compliance and to decriminalise the Companies Act as much as possible. No doubt, directors will welcome the removal of the ever-lurking threat of criminal exposure for non-compliance. They may, however, face greater financial and administrative exposure under the new régime.
Although there is still a lengthy consultation process to be performed before the new legislation is finalised, it is encouraging that these useful measures are at least on the drawing board.
Francois is a partner in the Corporate Department of Bowman Gilfillan