The Companies Act 2008 and transitional arrangements

1st August 2012

The Companies Act, 2008 (“Act”) which came into effect on 1 May 2011, has irrevocably altered the landscape of company law. However the enforceability of certain provisions contained in the Act was suspended insofar as pre-existing companies are concerned.

Pre-existing companies were granted a two-year grace period (known as a “transitional period”) within which to ensure compliance with the Act. This transitional period is due to expire at midnight on 30 April 2013 and it would seem that a large number of pre-existing companies have not yet taken the necessary steps to ensure compliance with the new Act. The question that arises is what effect the expiration of the transitional period will have on these companies.

“One of the fundamental changes brought about by the Act was the automatic consolidation of the issues which were historically addressed in a company’s Memorandum of Association and Articles of Association into a new document, which is called the “Memorandum of Incorporation” (“MOI”),” says Neil Taylor, partner in the Corporate and Commercial Department at Adams & Adams.

Taylor explains that a pre-existing company’s MOI will, of course, reference the old Companies Act, 1973 which means that in certain instances provisions of the constitutive documents may well conflict with the Act.

“To counter this,” says Taylor, “the Act provides that if a provision of a pre-existing company’s MOI conflicts with the Act during the transitional period, then the provisions contained in that document will prevail.

“Furthermore, during the transitional period and until the MOI has been amended, compliance notices may not be issued against the company for conduct which is contrary to the Act where the MOI permits or condones the conduct in question. However, once the transitional period expires next year, any provision in the MOI which conflicts with the Act will be invalid to the extent of such conflict.”

Taylor points out that similarly, any binding provisions adopted by the company which are comparable to rules of a company (“Rules”) will continue to be of full force and effect, including any which conflict with a provision of the Act, for the duration of the transitional period or until they are amended by the company. “Upon the expiry of the transitional period, however, these Rules will only have effect insofar as they do not conflict with any provisions of the Act.” The Act also makes allowance for the directors of a company to amend or repeal the Rules by publishing a copy of the Rules (or revised Rules) in the manner specified in the MOI and filing a copy of the Rules with the Companies and Intellectual Property Commission (“CIPC”).

Similarly, the enforceability of Shareholder Agreements (“Agreements”) is another aspect of company law which has been considerably altered by the coming into effect of the new Act. In the past, it was common for these Agreements to contain provisions which specified that, in the event of a conflict between any provision contained in the Agreement and the company’s Memorandum of Association and Articles of Association, such Agreement was to prevail over the provisions set out in the constitutive documents. This situation will continue to be the case during the transitional period. However, after the expiry of the transitional period, any provisions contained in these Agreements will only be valid and effective to the extent that they do not conflict with the company’s MOI and, more importantly, the Act.

Taylor confirms that where any specific provisions contained in the Agreement conflict with the MOI or the Act after the expiry of the transitional period, such provisions will be void to the extent of any such conflict. “Should a company fail to amend its Agreement in order to bring it in line with requirements of the MOI and/or the Act, this can lead to catastrophic consequences for the shareholders,” pronounces Taylor. “Given the fact that these Agreements are usually the cornerstone of and typically govern the relationship between the shareholders inter se, it is vitally important that the directors of companies ensure that such Agreements are reviewed and, where necessary, amended so as to comply with the requirements of the MOI and the Act prior to the expiry of the transitional period”. The downside of failing to undertaken this review and required updating is that aspects of this relationship, such as, what to do should a dispute arise between the shareholders or the procedure to be followed in the event that one of the shareholder wishes to sell his shares, may well no longer be valid. It is probably advisable to also insert a clause into the Agreement providing that if an unanticipated conflict should arise, the parties will try to amend the Agreement so as to comply with the Act. This clause would have the effect of ensuring that a conflict would not automatically lead to the invalidity of a portion or, in extreme cases, the entire Agreement thereby leaving the company without protection.”

Other important changes which the Act has made include the abolition of the capital maintenance principle which has changed the way in which dividends are considered and paid. “A company will now only be able to pay dividends if it can satisfy the stringent solvency and liquidity tests as set out in the Act. The Act has also made changes to the various categories of companies and their classifications which can be clearly seen from the endings to their names,” he comments.

Taylor is positive about the new Act and explains that it has helped to reduce the regulatory burden imposed on certain private companies, since not all private companies are automatically required to have their financial statements audited. Instead, private companies may (a) elect to have their financial statements independently reviewed; (b) elect to have their financial statements audited by including a provision to this effect in their MOI’s; or (c) find that their “public interest scores” are such that the Act requires that their financial statements be audited (the public interest score is determined by taking into account the company’s annual turnover, the size of its workforce and the nature and extent of its activities). In addition, while annual general meetings are also no longer compulsory for private companies, it is possible for a private company’s MOI to specify that it will nonetheless hold an annual general meeting.

In conclusion, Taylor articulates that the reasoning behind the imposition of the transitional period is to ensure that companies are afforded a fairly lengthy period of time within which to amend their documents so as to comply with the Act. However, Taylor advises that based on the large number of companies which still have to comply, it is advisable to get your company’s relevant documents updated and, where necessary, MOI amendments done as soon as possible so as to avoid the inevitable rush which will precede the fast-approaching expiry of the transitional period.

“Another good reason to amend the MOI and company name (where necessary) during the transitional period is that these amendments may be done at the CIPC free of charge during the transitional period,” concludes Taylor.

Written by Neil Taylor, partner Corporate and Commercial Department Adams & Adams
Tel: 012 432 6000