The New Companies Act

The New Companies Act

SHARE

The new Companies Act, which came into being earlier this year, has meant that South Africans are starting businesses in a more legislated environment. The Act brought with it many changes that affect not only existing businesses but start-ups as well.

The Companies Act, 2008 has been modernised and brought into line with international best practices. It was drafted in plain language with many of the sections and rules being simplified.

Some of the main features of the Act include:

  • Fewer statutory forms are required to incorporate a company. Instead of a memorandum of articles of association, a company’s constitutional documents consist of one document only, the Memorandum of Incorporation (MoI). The MoI sets out the rights, duties and responsibilities of shareholders, directors and others in relation to the company.
  • Companies are allowed to change certain requirements according to their own circumstances.
  • Different types of companies must comply with different rules. This means smaller companies have less arduous responsibilities than large public companies when it comes to corporate governance and financial reporting. For example, smaller companies will be subject to less taxing financial reporting standards than larger companies.
  • The regulatory burden on companies has been reduced but there are stricter accountability and transparency requirements for state-owned and public companies.
  • High standards of corporate governance are encouraged, with minimum accounting standards having been set for annual reports. There are also stricter provisions governing directors’ conduct and liability, and their common law duties and liabilities have now been codified. A company is prohibited from reckless, negligent or fraudulent trading, and persons who were knowingly party to such conduct are guilty of an offence.
  • The Act contains new structural arrangements, with the introduction of new regulatory institutions and the transformation of others. Companies are now classified as either profit or non-profit companies.
  • The concept of business rescue is broadened and formalised, and provision is made for a modern business rescue regime.
  • There is a move towards the decriminalisation of company law and the establishment of bodies for the effective enforcement of the legislation. Minority shareholders and other stakeholders, including employees, will have better protection, powers and remedies under the Act, including the ability to bring class actions.

1. A new institution

The Companies Act saw the migration of the Companies and Intellectual Property Registration Office (CIPRO) into the Companies and Intellectual Property Commission (CIPC). The Commission not only replaces CIPRO but it has additional functions and powers.

The main functions of the Commission include:

  • Registering companies, co-operatives and intellectual property rights and maintaining such register;
  • Disclosing information on its register;
  • Promoting education about, and awareness of, company and intellectual property law;
  • Promoting compliance with the relevant legislation;
  • Ensuring the efficient and effective enforcement of relevant legislation;
  • Monitoring compliance with and contraventions of financial reporting standards, and make recommendations in this regard; and
  • Reporting to, conducting research for, and advising the Minister of Trade and Industry on matters of national policy relating to company and intellectual property law.

2. The Act and company formation

Applying the principle that the incorporation of a company is a right, rather than a privilege, the Act places minimal requirements on the act of incorporation.

A company is incorporated by the adoption of a MoI, which is the sole governing document of the company. It imposes certain specific requirements on the content of a MoI which are necessary to protect the interests of shareholders in the company.

3. Meetings and notices

The new Companies act regulates meetings. In terms of attendance of meetings, it requires that shareholders can be represented by way of a written proxy, which is valid for one year. Physical attendance is not mandatory, and meetings may be conducted entirely by electronic communication. The Act requires that shareholders must be able to communicate simultaneously.

The notice periods for meetings are as follows:

  • 15 business days for public companies
  • 10 business days for private companies

4. Duties of directors

It is essential that directors know their rights and are aware of what is expected of them. They are subject to the common law as found in court rulings and judgements. The Act has introduced a partial codification of directors’ duties, including both a fiduciary duty and duty of reasonable care, which operate in addition to the existing common law duties.

A director is required to act in good faith and for a proper purpose in the best interests of the company. They should act with the degree of care, skill and diligence that may reasonably be expected of a person carrying out such functions and having the same skill and experience of that director (the reasonable man/woman test).

Furthermore, directors are required to disclose any personal financial interests. They may not use their position as director or information gained as a director to make a secret profit or gain advantage for themselves or someone else or to cause harm or detriment to the company.

The new Act deals comprehensively with the election, disqualification, vacancies, removal, meetings, resolutions and liabilities of directors:

  • Appointment: In a private company, there has to be a minimum of one director, while for a public or non-profit company, the minimum is three. Each incorporators of a company becomes its first directors. Directors are thereafter appointed by the majority of shareholders entitled to vote on their election, for an indefinite term or as the MoI stipulates. Any vacancies on the board may be filled temporarily by election of other board members or as the Memorandum of Incorporation provides.
  • Disqualification: A person is disqualified from acting as a director when they are declared delinquent by a court, a juristic person, an un-emancipated minor, an un-rehabilitated insolvent, prohibited by public regulation, removed from office of Trust due to dishonesty, convicted of a crime of dishonesty without option of a fine or if they do not meet the qualifications set out in the MoI of the company.
  • Removal: A director may be removed by an ordinary resolution of shareholders entitled to vote, or by board meeting (when alleged that director is disqualified, incapacitated or negligent in duties). The director must be given the opportunity to be heard at a meeting before the board can vote on removal. The removed director has the right to apply to court for damages for loss of office.
  • Board meetings: The board authorised director may call a meeting at any time. They must call a meeting when 25% of directors (when the board has at least 12 members) or two directors in any other case, request a meeting. The company must keep minutes of all board meetings and every resolution taken at a meeting. Each director has one vote and majority vote approves a resolution.
  • Liability: A director could be held liable to shareholders for fraudulent acts of gross negligence or to a third party who has suffered damages due to the acts of the directors. Amongst previously mentioned liabilities, they are also liable for breach of fiduciary duty, or delictual act, acting without authority, party to supplying false or misleading information about the company or making an untrue statement in a prospectus.
  • Indemnification and Insurance: A company may not indemnify a director for wilful misconduct or breach of trust, or for a director acting without proper authority from the company or undertaking a prohibited act, or for perpetuating a fraudulent act. A company may take indemnity insurance on behalf of its directors in order to aid in any lawsuit against the director as related to the company. A company may purchase insurance to protect a director against permitted liability.

While the Act has removed many of the criminal offences which were found in the previous Companies Act, the potential for civil claims against directors in terms of the New Companies Act is far greater. Members of the board, and audit committees, have the same liability as directors, even if the members of the board committees are not directors and even though they have no voting rights on matters considered by the board committees.

5. Accountability and transparency

The Companies Act, 2008 has set certain common requirements for all companies. However, differentiated requirements depend on the company’s wider responsibility to the public and the social and economic impact that the company’s operations have.

The requirements include:

  • All companies must prepare annual financial statements (AFSs), unless a company can satisfy the Commission that it meets certain criteria.
  • All companies have to file annual returns with the Commission.
  • Certain private companies with a greater responsibility to the wider public as a consequence of their significant social or economic impact may be required to have their AFSs audited. All other companies must be either voluntarily audited or independently reviewed.
  • All financial statements must satisfy the prescribed financial reporting standards. These standards may vary for different categories of companies but must be consistent with International Financial Reporting Standards as set by the International Accounting Standards Board.
  • All public and certain private companies must appoint an auditor.

6. Business Rescue

The Act has replaced the previous regime of judicial administration of failing companies with a modern business rescue (BR) regime. The regime is largely self-administered by the company, under independent supervision within constraints set out by the Act, and subject to court intervention at any time on application by any of the stakeholders.

The Act protects the interest of employees and workers by:

  • Recognising them as creditors of the company with a voting interest to the extent of any unpaid remuneration before the commencement of the rescue process;
  • Requiring consultation with them in the development of a BR plan;
  • Permitting them an opportunity to address creditors before a vote on the plan; and
  • Giving them, as a group, the right to buy out any uncooperative creditor or shareholder who has voted against approving a rescue plan.

BR proceedings begin when the board passes a resolution that the company voluntarily begins BR proceedings, or when an affected person, such as a shareholder, creditor, employee or organised labour, applies to court for BR proceedings.

The BR process includes the following steps:

  1. Within five days after passing the necessary resolution, the company must appoint a BR practitioner and publish the notice as prescribed.
  2. The company must then file the appointment of the BR practitioner with the Commission and inform all affected parties of the appointment.
  3. During BR proceedings, no legal proceedings may commence or proceed against the company in any form.
  4. BR proceedings end when a court sets aside a resolution or order that began BR proceedings or converts BR proceedings to liquidation proceedings; the BR practitioner files a termination notice of BR proceedings; the BR plan has been rejected; or the BR practitioner has filed a substantial implementation of the plan.
  5. During BR proceedings, all directors of the company can only act by authority of the BR practitioner.

Useful resources

Entrepreneur
Entrepreneur Magazine is South Africa's top read business publication with the highest readership per month according to AMPS. The title has won seven major publishing excellence awards since it's launch in 2006. Entrepreneur Magazine is the "how-to" handbook for growing companies. Find us on Google+ here.