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Published: 13 Sep 2010
|Finance Law Update: September 2010|
Company law - Draft legislation - Companies Amendment Bill 2010
The Companies Amendment Bill 2010 (the "Companies Bill") contains proposed amendments to the Companies Act, 2008 (the "new Act"). It has been announced that the new Act will replace the Companies Act, 1973 (the "existing Act") later this year. The Companies Bill includes the following proposed revisions to the new Act:
• Definitions: Various definitions are to be amended and new definitions introduced for terms such as "accounting records", "asset", "creditor", "domesticated company", "liability" and "securities register".
• Interpretation - JSE listing rules: Legislative status is to be given to the JSE listing rules and certain powers to the JSE. For example, section 5 of the new Act is to be revised to provide that the JSE listing rules and the provisions of the new Act apply concurrently to companies except to the extent of inconsistencies, in which event the new Act will prevail. This rule of interpretation does not only apply to listed companies. Another example is that the JSE is to be given the power to declare void any agreement or provision in the constitution of a listed company to the extent that it defeats or reduces the effect of a prohibition or requirement in the new Act.
• Company names: Various changes are to be made to the provisions regarding company names. Perhaps of most significance is a proposal that company names may not be similar to a defensive name, trade name or trade mark registered in favour of a third party.
• Transfer of registration of companies between jurisdictions: Provision is to be made for the transfer of the registration of a company from a foreign jurisdiction to South Africa and for the transfer of registration of a South African company to a foreign jurisdiction.
• Memorandum of Incorporation: Various changes are proposed to the provisions governing the constitutional documents of companies. For example, it is proposed that when an amendment to the memorandum of a company results in the company changing from a personal liability company (i.e. where the shareholders are liable for the debts of the company) to one that is not a personal liability company, certain creditors and third parties must be notified of the change. Changes are also proposed in regard to the doctrine of constructive notice to further limit the operation thereof.
• Piercing of the corporate veil / negation of separate existence of companies: It is proposed that a court may declare that a company is not a separate legal entity from its shareholders - and consequently hold that the shareholders are liable for the company's debts - where it is found that the use of the company or any act of the company comprises an "unconscionable abuse of the juristic personality of the company".
• Registration of foreign companies: The conditions under which a foreign company is required to register in South Africa are to be changed. In terms of the new proposals a foreign company will be required to register in South Africa if it is "conducting business" in South Africa. A foreign company is deemed to be conducting business in South Africa if it is party to one or more employment contracts in South Africa. The provision is not limited to full time employment contracts and may consequently include agency type agreements. The provision is also not limited to circumstances where the employer is the foreign company and it seems that the foreign company will be deemed to be "conducting business" in South Africa where, for example, it is employed by a South African company to provide offshore services.
• Access to information: section 26 of the new Act is to be revised to provide for the type of company records and information that may be accessed by holder of beneficial interests in securities of the company.
• Unpaid shares - release from trust: As part of the provisions relating to "sweat capital" (i.e. issuance of shares paid for by future services) and other unpaid shares, it is provided that where the issue price of shares is paid by way of non-negotiable instrument, the shares must be kept in trust until the instrument is settled. It is now proposed that the references to non-negotiable instruments be replaced with references to instruments where "the value can not be realised". In other words, it is now proposed that shares issued for payment with an instrument "the value can not be realised" must also be kept in trust until the value can be realised. This would be a useful change since non-negotiability does not necessarily imply non-transferability and it is conceivable that non-negotiable instruments made for future payment may have current value that can be realised. However, the proposed change does not address the fact that all or most instruments have at least some value, albeit negligible.
• Record keeping and audits: There are various proposed changes to the provisions relating to record keeping and audits. Provision is also made for a new provision that private companies are not required to have their financial statements audited or reviewed where, generally, the shareholders of the company are also the directors.
• Transfer of securities: A new provision is to be introduced specifying that securities are transferrable by book entry in the securities register. This is effectively a restatement of current law. However, it is also proposed that section 46(6) of the new Act be amended to provide that certified securities held through STRATE (the JSE's central securities depository) may be transferred by book entry in the securities registers kept by STRATE participants. This is a fundamental departure from existing law (which currently allows only for participants to control transfers of uncertificated securities and transfers of beneficial interests in dematerialised securities, and not the dematerialised securities themselves) and may expose companies to risks outside of their control.
• Loans and financial assistance to directors: Section 45(3) is to be amended to provide an additional requirement for the making of loans and granting of other financial assistance to directors. The additional requirement is that the board of the relevant company must be satisfied that that the loan or financial assistance is "fair and reasonable" to the company.
• Buy-back of shares from directors: Section 48 is to be amended to require a special resolution for the buy-back of shares from directors or prescribed officers.
• Beneficial ownership of securities: Section 57 is to be amended to provide that where a person is reflected in a company's security register as the holder of a beneficial interest in securities, that person may vote on the securities if "the beneficial interest includes the right to vote". The difficulty with this provision is that the term beneficial interest is wide enough so that more than one person may be deemed to be the holder of the beneficial interest in the same rights in the same securities and it is possible that the proposed new provision may give rights to conflicting claims.
• Shareholders meeting and voting: Section 63, 64 and 65 relating to the conduct of shareholders meetings and voting are be clarified and elaborated upon.
• Social and ethics committees: Section 72 is to be amended to provide more specifically and extensively for social and ethics committees required to be established by certain categories of companies to be specified by regulation. Greater powers are also given to these committees.
• Liability of directors: Section 77 is to be amended to provide that the liability of directors arising from a failure to actively vote against certain undesirable resolutions of the board is no longer conditional upon the resolutions first being declared void.
• Business rescue proceedings - suspension and cancellation of contracts: Section 136 (which deals with the powers of a business rescue practitioner (i.e. the official appointed to oversee a company that is subject business rescue proceedings) in regard to the cancellation and suspension of contracts entered into by the company under business rescue before commencement of the proceedings) is to be revised. It is now proposed that the practitioner will be entitled to suspend the operation of all contracts other than employment contracts and agreements that are subject to sections 35A and 35B of the Insolvency Act, 1936 (i.e. close-out netting agreements). However, the practitioner may apply to court for an order to "entirely, partially or conditionally cancel, on any terms that are just and reasonable in the circumstances, any agreement to which the company is a party". There is nothing in the proposed amendment indicating what is to be considered "just and equitable".
• Transitional and implementation issues: Various amendments and changes are made to be made to provisions relating to the transition between the existing Act and the new Act. One such proposed change is that certain questions and issues arising within the first two years after the coming into effect of the new Act will may be referred to and determined by the Companies Tribunal (effectively a government body).
Taxation - Draft legislation - Voluntary Disclosure Programme and Taxation Laws Second Amendment Bill 2010
The Voluntary Disclosure Programme and Taxation Laws Second Amendment Bill 2010 (the "Tax Bill") provides for the following:
• Voluntary disclosure relief: Sections 1 to 11 of the Tax Bill provide a new dispensation, called a "voluntary disclosure relief programme", in terms of which any person who has, within 12 months from inception of the programme, breached the Income Tax Act, 1962 or any other tax law administered by the Commissioner for the South African Revenue Service ("Commissioner"), may disclose information about the breach to the South African Revenue Service (SARS) and SARS may then assess the applicant for tax and waive any penalties or interest that may otherwise be payable as a result of the breach.
• Transfer duty - electronic filings and payment: the Transfer Duty Act, 1949 is to be amended to provide that all payments must be made electronically and that all declarations and returns must be authenticated and filed electronically.
• Finality of Commissioner's decisions qualified: Section 3 of the Income Tax Act which provides that the Commissioner's determinations are not subject to appeal, is to be further qualified in regard to certain determinations relating to deduction of expenditure incurred in exchange for venture capital (12J), deduction in respect of environmental expenditure (30B), deductions in respect of ships (14), employee fringe benefits tax, turnover tax and capital gains tax.
• Tax rulings - additional requirements: Part IA of the Income Tax Act dealing with applications for tax rulings is to be amended to provide that applications for rulings must also include a representation by the tax payer that the tax payer is compliant with all tax laws administered by the Commissioner and that the tax payer's tax returns and tax payment obligations are up to date.
• Deduction and withholding on account of fringe benefits: Various changes are proposed to the provisions in schedule four of the Income Tax Act relating to deductions and withholding on account of fringe benefits. The changes relate to arrangements concerning certain company vehicles where at least 80% of the use of the vehicle in any year will be for business purposes; liability deductions for share incentive schemes in associated companies; and granting the Commissioner the right to claim estimated deductions from employers who fail to submit declarations.
• Record keeping and administration - VAT and UIF: Various changes of an administrative and record keeping nature are proposed to the Value-added Tax Act, 1991 and the Unemployment Contributions Insurance Act, 2002.
• Mineral taxes - payment and administration: Various changes are proposed to the Mineral and Petroleum Resources Royalty (Administration) Act, 2008 relating to the determination, collection and payment of royalties under the Mineral and Petroleum Resources Royalty Act, 2008.
Case law - Arrest for debt declared unconstitutional
The Constitutional Court has declared unconstitutional and unenforceable provisions of South African law providing for the arrest of a debtor on the grounds that he is about to flee the country in order to prevent the adjudication of a claim relating to the debt (see Malachi v Cape Dance Academy (CCT 05 / 10)  ZACC 13).
For further information concerning any item in this publication please contact Jurgens Bezuidenhout on JB@JurgensB.co.za or telephone +27 82 922 3671
See http://www.jurgens-bezuidenhout.com/ for more details