New Act enhances companies’ flexibility to regulate own affairs

6th November 2009 By: Jacqueline Holman

A significant feature of the new Companies Act (No 71 of 2008) is the concept of flexibility and the allowance for companies to regulate their own affairs in accordance with their own constitutions and circumstances, says law firm Edward Nathan Sonnenbergs chairperson Michael Katz.

He explains that the Act includes alterable and unalterable provisions to provide for flexi- bility to a certain extent. An alter- able provision is one where, not withstanding what the Act says, the company can regulate itself, and its relationships between shareholders and between shareholders and directors. There are other provisions included in the Act that are unalterable and will prevail, despite what is stated in a company’s constitution.

Another feature is its business rescue regime, which includes a number of principles protecting employees and enabling them to be involved in the governance of companies.

Katz points out that, in South African company law currently, a company is either operating or is in liquidation and that, if a company fails, it has serious implications for three groups of stakeholders, namely the shareholders, employees and creditors.

“In a country intent on creating and preserving jobs, a mechanism is needed for taking sick companies into intensive care, nursing them back to health and establishing them back into the economy,” he says.

Katz adds that the Act’s business rescue regime is well structured and adds immeasurably to South African company legislation, as it can preserve jobs and benefit all stakeholders.

Although there have been concerns that the business rescue regime will undermine creditors, he believes that an important balance has been struck in the Act to enable the business rescue practitioner to take certain necessary steps that will make a business rescue effective and achievable. This will affect people that have contracts with a company to some extent, but, in many respects, if a business rescue does not take place, creditors would still have had to contend with an insolvent company.

The fundamental transactions of the Act include the disposal of significant assets, a merger or amalgamation and a scheme of arrangement, and the processes relating to these. The only way of currently gaining control of a company is by gaining control of its shares by private agreement, a scheme of arrangement or a takeover offer. There are no provisions in South African company law for one company to acquire the business of other companies.

Katz says that he believes that the new concept of amalgamations and mergers, which will allow for a company to acquire the business of other companies, including their assets and liabilities, is an important addition to the business environment.

Further, there are many procedural and administrative provisions that allow simplifications that enable smaller companies to receive the benefits of limited liabilities and perpetual succession, but in a cost-effective way.

Implications for Directors Katz comments that there have been some exaggerated statements that the Act will have hugely adverse implications for directors. This is owing to the fact that, for the first time in South African company law, the duties and responsibilities of directors have been codified and described in the Act.

He says that these conclusions and statements are inaccurate, as they are simply based on the fact that directors’ duties have been codified, which is a worldwide trend designed to make the knowledge of directors’ duties and responsibilities more accessible.

The Act describes the duties of directors as a summary of the existing common law, including their fiduciary duties and duties of care, skill and diligence. It is not explicitly stated that the Act replaces existing common law, but rather, in determining the liability for breach of duties, common law principles will be applied in relation to fiduciary common law duties and the duties of care, skill and diligence.

“In my view, the Act does not change the duties and responsibilities of directors. It preserves the current position almost in its entirety,” says Katz.

The Act also includes a business judgement test, which states that, if three criteria are complied with, then the directors will be regarded as having fulfilled their duty of good faith and skill, care and diligence. The criteria of the test include that, if there is conflict, it is disclosed, that the directors are reasonably informed about the matter and that they act rationally. Katz comments that directors who can successfully rely on the new business judgement test would probably, in any event, be able to defend themselves in accordance with the applicable common law principles.

Further, a large amount of preparation will need to be carried out for companies to comply with the Act. He points out that preparation for and amendments to shareholder agreements and the constitutional documents of companies may have to be made. Further, contracts with third parties will have to be re-evaluated in the light of the business rescue regime.

“In recognition of the fact that companies will have a large amount of preparation to carry out to comply with the Act, there is a provision in the Act that states that it cannot come into operation sooner than one year from the date that it was signed, which was April 8, 2009,” he says.

Katz concludes that the Act is more cost effective compared with the current Act and it is easier for small companies to comply with the Act.