The Companies Act of 2008, which came into effect on May 1, has significant implications for non-profit organisations (NGOs), including grantmaking bodies which have chosen a corporate structure. Most of these organisations, previously called Section 21 Companies, will almost certainly need expert assistance to ensure compliance with the new legislation, says BoE Private Clients.

With more than a century of experience in looking after donors and non-profit organisations, BoE Private Clients has sought to ensure, through the specialised services of its Philanthropy office, that sustainable giving is made easier and structured to function effectively within the prevailing regulatory environment.

Realising that non-profit companies may unwittingly find themselves on the wrong side of the new Act, BoE Private Clients recently tasked legal expert Richard Rosenthal to brief the bank’s Philanthropy division and its clients on the Act’s impact and implications for the non-profit sector.

Most analyses of the Companies Act have focused on its impact for profit companies, , but Rosenthal warns that the non-profit corporate sector is also subject to the new Act, which means the implementation of a host of new provisions and procedural requirements over the next two years, including the restructuring of founding documents.

“The Companies Act is a formidable piece of legislation containing numerous innovations and procedural changes, and it will have a significant effect on all non-profit companies,” says Rosenthal.

“While many of the changes may prove to be beneficial in the fullness of time, at the moment they are somewhat daunting and everyone, from lawyers to companies and even the new Office of Registry, are in a state of post-traumatic shock as they try to understand and come to terms with the requirements of the new Act.”

Rosenthal says that while the new legislation holds many benefits, it also contains a number of obscurities and potential problems which will need to be addressed.

He warns that all new companies must be registered in terms of the new Act, and give immediate effect to its provisions. Existing Section 21 Companies are given 2 years to implement the new provisions, although some important sections come into force immediately.

Issues highlighted by Rosenthal include:
A provision “likely to cause dismay among pedantic lawyers”, that the founding document, now called a Memorandum of Incorporation (MOI), must be written in plain language intelligible to the ordinary person without having to strain to understand its terms. After the 2-year transitional period, the prescriptive provisions of the new Act will over-ride contrary provisions in the old Memorandum and Articles of Association.
In future, NPCs will be subject to the calculation of a “public interest score” – a mechanism similar to that applicable to BEE scores - which will determine the degree to which NPCs have to conform to higher reporting standards, and the manner in which financial statements must be audited and presented.
The Act spells out a number of duties, obligations and performance standards, in terms of the conduct and potential liability of directors. “What used to be buried obscurely in common law is now explicitly spelt out in the Act,” says Rosenthal, "and these provisions apply immediately.”
Previously a Section 21 Company was obliged to have a minimum of 7 Members. Now Members are an option, but if there are members they have rights of access to detailed company information. For example, in annual financial statements, the remuneration of directors and senior office bearers must now be specified individually, and may no longer be reflected within total global figures.
There are also new and detailed provisions dealing with meetings of shareholders and directors, including voting procedures; proxies; quorums; and directions on the conduct of meetings and required notices.

“There are both alterable and unalterable provisions. When you draft the MOI one must be aware of provisions about which you have choices, and those which are imposed and which you can’t change,” says Rosenthal, adding that most NPC’s will need professional advice to ensure full compliance with the Act.

Rosenthal says that the Act contains a number of specimen forms, and many organisations – perhaps in a state of exhaustion or despair - may well adopt such standard forms without adapting them to their particular circumstances.

He suggests that the need to review existing documents provides an opportunity and merits attention, even if it will be demanding to work through the present governance arrangements, to align them with new Act, and to cast them, if necessary, in more simple language that is readily comprehensible to persons without special legal training.

Importantly, it needs to be noted that directors may incur personal liability if they approve or allow transactions to take place which conflict with the newly introduced “solvency and liquidity” tests.

“In certain circumstances, Directors can find themselves on the hook for reckless trading, and this can lead to personal liability for claims and losses. Although the clause is primarily designed for profit companies, it is not irrelevant to NPCs,” says Rosenthal.

The Act also includes substantive provisions regarding the need for members to approve the remuneration or other benefits of directors.

“Many NPC directors agree to serve voluntarily, and without remuneration. However, unless the Company’s founding documents prohibit remuneration of Directors, it is completely lawful to pay remuneration, provided it is reasonable. However, the new Act says that any remuneration of directors must be approved by special resolution of the members in general meeting, and such resolution is only valid if passed within the previous 2 years. The Act is also highly prescriptive about the circumstances in which loans or other financial assistance may be given to directors or other officers of the company.”

BoE Private Clients
Contact: Richard Rosenthal
021-423 2975