Companies Act 2008 - foreign companies - duty to register in South Africa with CIPRO

The South African government proposes substituting the Companies Act, 1973 (the "existing companies act") with the Companies Act, 2008 (the "new companies act") in July 2010.

Under the existing companies act, a foreign company (defined as a "external company") is required to register in South Africa with the South African companies regulatory authority (CIPRO) after the foreign company has established a "place of business" in South Africa (s 322(1)). Under the new companies act, a foreign company is required to register after it has it has started to "conduct business" or "non-profit activities" in South Africa (s 23(1)). The new companies act provides (in s23(2)) that a foreign company "is not to be regarded as conducting business, or non-profit activities within [South Africa], unless that foreign company is engaged in, or has engaged in, one or more of the following activities within the Republic:

(a) Holding a meeting or meetings of the shareholders or board of the foreign company, or otherwise conducting the internal affairs of the company;

(b) establishing or maintaining any bank or other financial accounts;

(c) establishing or maintaining offices or agencies for the transfer, exchange or registration of the foreign company's own securities;

(d) creating or acquiring any debts, mortgages or security interests in any property;

(e) securing or collecting any debt, or enforcing any mortgage or security interest.

(f) acquiring any interest in any property; and

(g) entering into contracts of employment.

The new provisions could mean that large numbers of previously unaffected foreign companies may in future be required to register with CIPRO and establish offices in South Africa., including, for example, offshore subsidiaries of South African companies and foreign companies that have bought South African bonds or offshore companies with non-resident bank accounts.

One of the consequences of registering is that the foreign company must establish and maintain an office in South Africa (s23(3)(a)). The establishment of an office might in turn have South African tax consequences.

Companies Act 2008 - Special resolutions

The descriptions of ordinary shareholders resolutions and special shareholders resolutions in the new companies act are similar to their descriptions in the existing companies act, although the new companies act provides for certain additional actions to be taken by special resolution (requiring a 75% shareholder majority) instead of by ordinary resolution (requiring a 50% majority). Actions requiring a special resolution in terms of the new companies act are -

1. Amendment or substitution of memorandum of incorporations (s16(1), s65(11)(b) and Schedule 5(4)(2)(b));

2. Ratification of actions of directors that are contrary to memorandum of incorporation (s20(2));

3. The issuing of shares of a company or options or rights to the shares to directors or prescribed officers of the company or to related person (as defined) (s41(1));

4. The granting of financial assistance for purposes of buying shares in the company or rights thereto other than in terms of an employee share scheme (s44(3));

5. Approving the voluntary winding-up of a company (s65(11)(b), 80(1) and s81(1)(a)(i));

6. Approval of "fundamental transactions" which are a disposal of all or the greater part of the assets or undertaking of the company (s112(2)(a)), an amalgamation, merger and a scheme of arrangement (s115(2)(a) and s65(11)(c));

7. Determining the remuneration of directors (s66((9));

8. Conversion of a close corporation to a company (Schedule 2(2)(a)).

Companies Act 2008 - Employee rights

The new companies act affords a number of new rights to employees of companies. These are:

1. A trade union representing employees of a company may take legal steps to restrain the company from doing anything contrary to the new act (s20(4));

2. A company must notify any trade union representative of a decision by the board of the company to provide financial assistance to a director of the company (s45(5));

3. Employees of a company are a separately recognised interest group in business rescue proceedings (Chapter 6) with special veto and participation rights (s144), preferential treatment for claims for remuneration (s135 and 144(2)) and continuity of employment (s136(1));

4. Employees are protected against consequences of making disclosures about their employer to regulators and certain company officers (s159);

5. Employees (through their trade union or representative) may apply to have a director declared delinquent or under probation (s162(2));

6. Employees (through their trade union or representative) have the right, with court approval, to bring or continue legal proceedings on behalf of or in the name of the company in order to protect the legal interests of the company if the company fails to do so (s165).

Companies Act 2008 - Derivative actions of shareholders - Determination of the exceptions to the rule in Foss v Harbottle

The rule in Foss v Harbottle (1843) 67 ER 189 is that an action for harm done to a company can be pursued only by the company and not by a shareholder of the company. There are a number of exceptions to this rule under common law (see for example McCrae v Absa Bank Limited (7 April 2009)) and certain statutory exceptions (e.g. sections 266 to 268 of the existing companies act). Generally, an exception to the rule would be permitted, for example, to allow a minority shareholder of a company to institute a claim for recovery of the money by the company against a debtor in circumstances where the company itself takes no action only because the majority shareholder of the company is also the debtor. Section 165 provides that a shareholder, director, trade union or employee representative or other person may bring an action in the name of and on behalf of a company to protect the legal interest of the company if (a) that person (i.e. the applicant) has followed certain procedures (designed to insure that the mater is investigated by the company and the company is given the chance to bring the action itself); (b) the company has not itself instituted the action; (c) the court is satisfied that i) the applicant is bona fide; ii) the proposed or continuing proceedings involve the trial of a serious question of material consequence to the company; and iii) it is in the best interests of the company that the applicant be granted leave to commence or continue the proceedings. Section 165(1) provides that any right at common law of a person other than a company to bring or prosecute any legal proceedings on behalf of that company is abolished.

Case law - transfer of ownership in money by merger - enrichment actions

It is a general principle of South African law that the recipient of money becomes the owner of the money when it is no longer separately identifiable from other money held by the recipient. From this it follows that when money is deposited into a bank account, the ownership of the money passes to the bank and that if the deposit is made in error, the depositor may have a claim against the bank (or, depending on circumstances, the account holder) for repayment of an equivalent amount, but will have no right in or to the money itself. An exception to this principle was permitted in the case of Nissan South Africa (Pty) Ltd v Marnitz N.O. and Others 2005(1) SA 441 at 448G to 449 D. In that case, Nissan instructed its bank, FNB, to transfer money to the Standard Bank account of TSW Manufacturing. However, in the instruction to FNB, Nissan gave the wrong account number and the money was incorrectly transferred to the account of Maple Freight, another client of Standard Bank. Maple Freight immediately transferred most of the money to its FNB bank account, and Maple Freight was thereafter placed in liquidation. Nissan applied to court for an order that FNB pays Nissan the amount money to Nissan. The liquidator of Maple Freight opposed the application, claiming that the money formed part of the insolvent estate of Maple Freight on the basis that Nissan has no claim against FNB because the money, having lost its identity upon payment to FNB, was not owned by Nissan and that FNB, having a liability to its customer (Maple Freight), was not enriched. The court rejected this argument and ordered FNB to repay the money to Nissan, suggesting that, because the money had been stolen, FNB had no obligation to account to Maple Freight and that FNB was enriched. In the more recent case of Muller NNO v Community Medical Aid Scheme (30 April 2010), the High Court allowed an exception to the principle on transfer of ownership by merger in circumstances where there was a mistaken payment but no theft. In that case medical aid contributions were paid into the bank account of a bankrupt medical fund called HMS after arrangements had been made for another medical aid fund, Commed, to assume medical cover for the period in respect of which the contributions were paid. Commed applied for an order for payment of the money. The liquidator of HMS opposed and application. The court granted the application stating that "the payments concerned were correctly made by the members of HMS in the belief that they were due to that fund, when in fact unknown to them at that time the fund was unable to render the services for which such payments were being made and [Commed] had undertaken the obligations of HMS. In my view what was paid to HMS could not be classified as its property" because HMS had no intention of receiving the money for its own benefit in settlement of a debt due to it.

For further information concerning any item in this publication please contact Jurgens Bezuidenhout at JB@JurgensB.co.za

For information about Jurgens Bezuidenhout see www.Jurgens-Bezuidenhout.com