The new Companies Act, No 71 of 2008, will change the landscape of companies, as they are presently constituted, says Law firm Adams & Adams commercial department head André Visser.
The new Act no longer limits the number of shareholders in a private company, which means that more companies will opt to take on the status of a private company and, as such, will not be subject to auditing, he says. The new Act only requires public companies, State-owned companies and certain others to audit their yearly financial statements.
Further, it is expected that, since the Act does away with the incorporation of new close corporations, presently constituted close corporations will be converted into private companies at some stage in the future. Although the Act does relax certain of the more stringent formalities that currently exist in respect of private companies, the position will still be that private companies under the Act will have to comply with the requirements that will be more stringent and require more compliance than would generally apply to close corporations, he says.
Accordingly, although certain smaller private companies may be exempted from general requirements in the Act, the position will still be stricter on small, medium-sized and microenterprises compared with the current restrictions for close corporations, he explains.
He says that the most important aspects that companies need to start dealing with are those relating to the conversion of their par value shares to no par value shares, the reviewing of their shareholders agreements and aligning their memo- randum and articles of association with the Act.
The removal of the requirement for nonpublic companies to be audited is considered to be a rather damaging provision, Visser says. He explains that an unsuspecting director who makes the choice to opt out of having the company’s financial statements audited, places the company at risk of being refused funding in the future, should financial institutions require audited financial statements to be submitted before granting a loan.
It might also have the negative effect of curtailing foreign investment. What would initially seem like a money-saving decision would have the exact opposite effect in the future, he says.
Another issue is that the Act allows shareholders of a company to pass a special resolution under certain circumstances, which has the effect of approving any actions carried out by directors, even when they fraudulently or grossly negligently acted outside the scope of their authority and power under the memorandum of incorporation (MoI) of the company. The shareholders can prescribe, in terms of the special resolution, that no party will have a claim for damages against the directors for acting in such a manner.
Meanwhile, directors of a company subject to business rescue proceedings are required to continue to exercise their roles and functions as a director, subject to the business rescue practitioner’s authority. The director’s scope of legal liability during the course of business rescue proceedings is greatly reduced.
He explains that, under those circumstances, the Act relieves a director of certain fiduciary duties, as these duties are placed with the business rescue practitioner.
The Act indicates that a share will no longer have a nominal or par value. Any shares of a pre-existing company that have been issued with a nominal or par value, and are held by a shareholder immediately before the effective date, continue to have the nominal or par value assigned to them when issued, subject to any regulations made in the Act.
In terms of the draft regulations, every share of a company in existence prior to the promulgation of the Act must be converted to a share having no par value within a period of five years of the effective date of the Act.
The process for this conversion is provided for in the draft regulations, which state that a company must effect an amendment to its MoI, which has been approved by a special resolution of shareholders of the company, adopted at a meeting called for that purpose. The resolution must be proposed by the board of directors of the company and a copy thereof must be distributed to the shareholders at least ten business days prior to the meeting.
The resolution must be accompanied by a report, which is to be prepared by the board of directors. In the event of the proposed amendment of the company’s MoI being approved by the shareholders, the company would be entitled to effect the amendment by filing the amendment with the Companies Intellectual Properties Commission.
He advises that a company with par value shares needs to start considering when it would be appropriate to start the conversion process of its par value shares and would need to determine the appropriate timeframe to implement the necessary changes to its MoI.
On the effective date, it will be assumed that all memorandums and articles of associations of existing companies would have been amended to comply with the provisions of the Act, Visser concludes.