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Article by: Joanne Taylor
Published: 04 Nov 2011
|Maximising benefits of the new Companies Act|
THE recently promulgated new Com-panies Act, which came into effect on May 1, is a combination of both the old Act and the new Act, states corporate law firm Brink Cohen Le Roux (BCLR) director Johan Brink.
He explains that the new Act allows pre-existing companies to continue under the same name and registration number as before the implementation of the Act. Existing directors, officers and auditors continue to hold office, while existing court proceedings will continue and the rights and obligations of these company directors remain in full force and effect.
“Companies will have two years from May 1 to get their house in order, during which period they are required to adopt a new Memorandum of Incorporation (MoI) which complies with the new Act,” says Brink.
Brink notes that a significant change in the new Act includes the simpler registration process of a new company, where only one registration document – the MoI – is needed.
“Companies will now be able to trade with a company number only and do not require a full name, while small and medium-sized companies will no longer be required to produce audited financial statements, although such companies would still be required to have their financial statements reviewed,” says Brink.
The concept of a close corporation (CC) is being phased out. Existing CCs will continue to exist, but no new ones will be registered. Owing to simplified legislation, reduction of regulatory burden and simplicity of formation, CCs are encouraged to convert to private companies. The private company will replace the CC as the preferred vehicle for small and medium-sized businesses under the new Act.
“Another innovation in the new Act is the business rescue proceedings, where the management of a company in financial distress can initiate business rescue proceedings. This, in effect, replaces judicial management under the old Act. Creditors are then held at bay in terms of a debt moratorium while the company is being put back on its feet,” explains Brink.
A business rescue practitioner will be appointed for the distressed company and he or she will draw up a business rescue plan, which must then be adopted by the company to save it from possible liquidation.
Another change includes the extension of the ambit of ‘control’ for company law purposes. Besides the traditional shareholding voting rights’ control, or control by a majority of the directors of a company, the ability to significantly influence the decision-making process in relation to material issues also constitutes control. By way of example, a 25% minority shareholder with entrenched veto rights in relation to material issues will be treated as a controlling shareholder.
An audit committee must be appointed by the board of directors. Since the executive directors, such as the financial director and MD, may not serve on audit committees, the level of independence should be maintained between audit committees and boards of companies.
“During the two-year window period for the adoption of a new MoI, existing shareholder agreements will continue to be in force. After the two-year period, only those provisions of shareholder agreements which are not inconsistent with the new Act or the MoI will remain enforceable. Companies are, therefore, required to review existing shareholder agreements and, where necessary, amend and incorporate them into the MoI before May 1, 2013,” says Brink.
Another change in the new Act is the fact that all shares have no par value. In the old Act, shares were considered having either a par value or no par value.
“This is also a transitional issue in that no new par value shares may be created. During the two-year period, existing authorised but unissued par value shares may still be issued. When a new MoI is adopted, a special resolution will be required to convert existing par value shares into no par value shares,” says Brink.
It would be advisable to plan the conversion of no par value shares and the adoption of a new MoI in time to avoid the bottleneck that will occur at the end of the two-year period.
Companies are still allowed to give financial assistance in connection with the subscription for or purchase of its own shares, provided the solvency and liquidity tests are met.
Further, if a minority shareholder chooses to vote against a particular transaction within the company, such a shareholder may demand that the company buy the shares back by enforcing the shareholder’s newly created appraisal rights, provided the shareholder gave notice to the company of his or her intention to oppose the resolution and provided further that the shareholder voted against the resolution.
New Role of Directors
“The acceptance of an appointment as a director should be accepted with careful consideration,” notes Brink, owing to the fact that directors may incur personal liability for any loss or damages the company may suffer as a result of poor decision-making by the directors, resulting in a breach of fiduciary duties or a director’s duty to act with care and skill.
Directors, including officers of a company, members of boards committees and alternate directors will now be held legally responsible for any loss suffered by the company as a result of that director having participated in the taking of a decision, or failed to act against certain unauthorised or unlawful actions and situations.
“Punishment for such activities include being declared delinquent and being blacklisted, thus preventing future appointments as a director,” states Brink, concluding that directors should always perform their duties honestly, with the necessary degree of care and skill, in order to avoid such punishment.