NEW COMPANIES ACT OFFERS RELIEF TO STRUGGLING BUSINESSES

Wednesday, August 12, 2009
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 “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.” Mark Twain Buffeted by the global credit crisis, many businesses face challenges in securing finance; indeed, some are struggling to get finance at all, while others are finding that existing credit facilities are being reviewed or renewed on less favourable terms.

The good news is that the new Companies Act offers some assistance to businesses struggling to hold onto their umbrellas. The Act was signed into law on 9 April 2009, though its commencement date is still to be proclaimed. It replaces the previous Companies Act in full, subject to certain transitional arrangements remaining in force.

In some respects, the new Act retains much of that which worked in the previous Companies Act but also contains new provisions and concepts that many have welcomed as positive advances in modern South African company law. In the area of financing, the new Act allows a company to agree to issue shares for, amongst other things, future services to be provided to the company, although private company shareholders generally have to be offered these shares first.

While this was the position under the previous Companies Act and at common law, most companies preferred the more traditional approach of issuing shares for cash and using this cash to procure the services required by the company. These provisions also allow for the issue of shares for a consideration of future benefits or future payment to the company. The provisions of the new Act do, however, differ from the previous Companies Act and the common law in one significant way. Currently, companies have to receive consideration for their shares (albeit in the form of services rendered) before these can be issued. The new Act, in contrast, provides that on entering into an agreement for future services, a company must immediately issue shares and cause these to be held in trust, pending the fulfilment by the subscribing party of its obligations in terms of such an agreement.

While held in trust, and unless otherwise agreed, the subscribing party will not have voting rights or pre-emptive rights. Any distributions made by the company may be credited against the remaining value of the services still to be performed at the time that any such distribution is made. Nor may the subscribing party transfer the shares while held in trust, unless the company expressly agrees to this.

If the subscribing party does not provide the services to the company, the shares are to be returned to the company and cancelled, although the company may not do this for at least 40 business days after the date on which the services were due to be provided by the subscribing party. These provisions offer considerable flexibility to companies in structuring financing arrangements which suit the company’s needs and, as these provisions are now contained in the new Act, we may see more companies taking advantage of them.

A company seeking to expand office space, for example, could, instead of being required to pay cash for building services, agree to issue shares to the builder who may then, with the company’s consent (if the building services have not yet been provided) transfer these shares to an investor for cash. From the company’s perspective, the company is not required to raise upfront capital outlays and is protected in the event that the work is not provided. Not dealt with in the new Act is what happens if the services are provided unsatisfactorily. Yet, again, the company and the subscribing party have the flexibility to determine these arrangements. The company is also able to agree, pending its rendering of the services, whether the shares held in trust will carry any voting rights or pre-emptive rights.

In addition to these provisions, the new Act retains many of the financing provisions contained in its predecessor. For example, subject to certain conditions, a company may:

• issue options for the allotment or subscription of shares;
• issue secured or unsecured debt instruments;
• provide financial assistance for the subscription of its securities, or the securities of a related company; and
• issue capitalisation shares.

The economic downturn we are facing is likely to affect every business operating in South Africa. Whether this be changing the way companies do business or being forced to restructure and reassess business models, companies will need to adapt to the changing environment in order to survive. For many companies, part of such an adaptation will mean changing the way things have traditionally been done. Companies that are declined finance, or that are offered finance on onerous terms, may be required to find new and innovative ways to raise the finance they need. Thankfully, the new Companies Act contains the tools for this to happen.