It is questionable whether the drafters of the new Companies Act 71 of 2008 (new Act) intended to limit the issuing activities of private companies in the South African capital markets to the extent that section 8(2) of the new Act currently does.
According to Lischa Gerstle, Director at pan-African law firm Bowman Gilfillan, the new Act brought far reaching changes with regard to the transferability of securities by private companies.
“One area of change that is key for private companies which participate in the South African debt capital markets is their ability to transfer their securities after 30 April 2013 when the two-year moratorium period of the new Act comes to an end,” she said.
Ms Gerstle explained that, under the old Companies Act 61 of 1973, the articles of association of a private company prohibited any offer to the public for the subscription of its shares, and restricted the right to transfer its shares on the secondary market. This dealt with the share capital of a company, and essentially referred to equity investments.
Under the new Act, a “private company” is still required to include a restriction on transferability. However, the reference to “shares” has been extended to a restriction of transferability of “securities”, which are defined as “any shares, debentures or other instruments” issued by the company. This means that for a company to qualify as a “private company”, it must restrict the transferability of its securities, including debt securities, on both the primary and secondary markets.
“While this position may not be problematic for the average private company not participating in the capital markets, it has caused much debate in the context of private pre-existing companies with established debt listing programmes in terms of which instruments like preference shares are used to raise funding.
“In short, the new transferability restrictions have the unexpected consequence that a pre-existing private company that issues debt instruments will be restricted in doing so after the expiry of the moratorium period (for the phased-in implementing of the new Act) on 30 April 2013 if its wishes to remain categorised as private company. If it continues to issue listed debt instruments, or has unredeemed listed debt instruments at this date, it will automatically be classified as a public company under the new Act,” explained Ms Gerstle.
Public companies are subject to more onerous obligations than private companies under the new Act, such as the requirement to appoint an auditor and an audit committee, to appoint a company secretary, to have a social and ethics committee and to increase the number of directors to the board of a public company.
In terms of the JSE’s debt listing requirements, listed debt securities must be free of transferability restrictions, which presumably means that pre-existing private companies can only issue unlisted debt instruments as of 1 May 2013. A company that elects to issue a listed debt instrument after expiry of the moratorium period will thus automatically be deemed to be a public company.
A further complexity is that a company that wants to amend its Memorandum of Incorporation during the two-year moratorium period to bring it into harmony with the new transferability restrictions of the new Act will first have to redeem any listed debt instruments.
Said Ms Gerstle, “It remains to be seen how the courts will interpret this position after 1 May 2013 as there is currently no reported case law on the transferability of securities by private pre-existing companies in the context of the new Act.”