Immediate steps following 1 May 2011 commencement of New Companies Act
The
Presidency has proclaimed 1 May 2011 as the implementation date of the new
Companies Act, 2008.
Continuation
of Pre-existing Companies and Notification of deemed name changes
Every
pre-existing company continues to exist as a company as if it had been
registered in terms of the new Act, with the same name and registration number.
However, when it comes to the concluding expressions in or suffixes to company
names, pre-existing companies are in most cases deemed to have changed
concluding expressions (eg “(Pty) Ltd”) insofar as this may be required, in
order to comply with the new Act.
Pre-existing
companies incorporated under section 21 of the old Act are recognised as
non-profit companies under the new Act and the names of theses companies must
now be followed by the expression “NPC”.
The
names of pre-existing companies that fall within the definition of “state-owned
company” must now be followed by the expression “SOC Ltd.”.
The
names of pre-existing s53(b) companies (that become personal liability companies
under the new Act) remain followed by the expression “Incorporated” or
“Inc.”.
The
position remains unaltered for pre-existing public and private companies, save
that in the case of private companies, the expression “(Proprietary) Limited” no
longer has brackets, ie “Proprietary Limited”, whilst the abbreviation “(Pty)
Ltd” retains the brackets.
All
these changes are deemed to have been made and companies are not required to
file any name change documents with the Commission.
The
expression “(RF)” – for ‘ring-fenced’ - must follow the names of all
pre-existing non-profit companies, state-owned companies, personal liability
companies and companies limited by guarantee where the constitutional documents
of those companies contain restrictive conditions applicable to the company and
provisions restricting or prohibiting the amendment of those conditions, or any
other prohibitions on the amendment of provisions of the constitutional
documents. Oddly, this deeming requirement does not apply to pre-existing
private or public companies with constitutional documents containing like
provisions.
The
company limited by guarantee under the old Act may choose to become a profit
company within 20 business days of the new Act coming into operation, on 1 May
(ie by 30 May 2011). If not it will be deemed to have become a non-profit
company and amended its constitutional documents to that effect.
Memorandum
and Articles of Association – Memorandum of Incorporation
The
memorandum and articles of association of a pre-existing company are deemed to
be that company’s memorandum of incorporation (“MOI”).
For a
period of two years from the commencement of the new Act, any conflict between
the provisions of the MOI of a pre-existing company and the new Act will be
resolved in favour of the MOI. After two years, the new Act will prevail.
However,
from the outset, the Transitional Provisions set out in Schedule 5 of the new
Act prevail and, despite anything to the contrary in the MOI, the provisions in
the new Act apply in respect of:
1. the
duties, conduct and liabilities of directors to every director of a pre-existing
company;
2. rights
of shareholders to receive any notice or have access to any information of every
pre-existing company;
3. meetings
of shareholders or directors, and adoption of resolutions to every pre-existing
company; and
4. fundamental
transactions, takeovers and offers in Chapter 5 unless exempted by that
Chapter.
Companies
are advised to adopt a new MOI that is compliant with the new Act within the two
year time frame – obviously the sooner this can properly be done, the better for
all concerned.
Shareholder
Agreements
The
popular practice of drafting shareholder agreements that conflict with the
company’s constitutional documents and then inserting a provision at the end of
the agreement providing that in the case of a conflict between the provisions of
the shareholder agreement and the memorandum and articles of association, the
provisions of the shareholder agreement will prevail, is now no longer possible.
Such conflicts will be resolved in favour of the MOI (ie, the old memorandum and
articles of association).
However,
for a period of two years from the commencement of the new Act, conflicts
between an existing shareholder agreement and the MOI will still be resolved in
favour of the shareholder agreement. But this “two year reprieve” will cease
upon any change to a shareholder agreement within the initial two years. This
means that changes to shareholder agreements will need to be carefully
considered, to ensure that all amendments to align the agreement with the MOI
are addressed at the same time.
In
order to avoid the potential unwanted consequences of certain provisions of a
shareholder agreement being void upon the expiry of the initial two year period
owing to them being in conflict with the MOI, shareholders are advised to act
sooner, rather than later when it comes to revising their shareholder
agreement.
CIPRO
Filings
All
documentation, applications and lodgements received by CIPRO up to and including
30 April 2011 will be processed in terms of the old Companies Act, 1973. From 1
May 2011 lodgements will have to comply with the new Act and will need to be
processed using new Forms.
Deregistrations
Companies
that have failed to file their annual returns may have been provisionally, if
not finally, deregistered by the Registrar of Companies. We understand that
representatives of CIPRO have verbally indicated that, on 1 May 2011, CIPRO
would immediately deregister all entities on its register that have failed to
file their annual returns. Amongst many other serious consequences, the names of
these entities will then be available for reservation by third parties.
We
therefore strongly recommend that all outstanding annual returns must be filed
immediately and that applications to restore the status of finally deregistered
companies be processed with immediate effect. We also recommend that clients
check their own status as well as confirm that parties with whom they do
business are in fact still registered.
Close
Corporations
It is
no longer possible to incorporate any new CCs, nor is it possible to convert
existing companies into CCs.
All
existing CCs will continue to exist under the new Act, and it will be possible
to convert existing CCs into private companies.
The
annual financial statements of CCs will only need to be audited if so required
by the Regulations to the new Act, regard being had to annual turnover, size of
workforce and the nature and extent of the CC’s activities. If an audit is not
required, then the annual financial statements will need to be independently
reviewed, as prescribed in the Regulations.
Conversion
of shares with a par value to shares with no par value
Conversion
of shares with a par value to shares with no par value is optional. Par value
shares issued under the new Act are also permissible, provided there is adequate
authorised par value share capital and at least one share in the same class was
issued before 1 May 2011. It is, however, not possible to create any more par
value authorised share capital, nor is it possible to issue previously
authorised shares if none of the same class of shares is already in
issue.
Status
of companies with limited capacity, usually known as SPVs
The
new Act abolishes the doctrine of constructive notice. Limitations on a
company’s capacity, traditionally set out in the memorandum of association
(although they may also be found in the articles of association), relied on the
doctrine of constructive notice for their enforceability in that third parties
dealing with a company were deemed to have knowledge of that company’s limited
capacity. The memoranda and articles of association of special purpose vehicles
commonly used in many financing structures were regularly so adapted in order to
limit the capacity of these companies to the special purposes for which they
were established.
Under
the new Act, it is possible for the doctrine of constructive notice to apply to
those restrictive conditions, provided they are highlighted to the world at
large by filing a notice with the Commission and the adding of the suffix “(RF)”
to the company’s name. Third parties dealing with such companies are then deemed
to have constructive knowledge of the restrictive conditions.
Consequently,
in order for the doctrine of constructive notice to continue to apply to these
restrictive conditions, pre-existing companies must, as soon as possible after
the implementation of the new Act, file a notice of those provisions with the
Commission. The doctrine of constructive notice will only apply under the new
Act from date on which the notice is so filed.
Distributions
From
1 May 2011, all dividends and other distributions by a company need to comply
with section 46 of the new Act. The most typical distributions are dividends
declared by a company to its shareholder, although the definition of
distributions extends to other forms of payments or transactions by a company in
favour of its shareholders for example share repurchases, a payment in lieu of a
capitalisation share, the incurrence of a debt or other obligation by a company
for the benefit of its shareholders and the forgiveness or waiver by a company
of a debt owed by a shareholder.
Section
46 will in our view apply even if the dividend was declared before the date on
which the new Act came into operation, but is not yet paid. An unpaid dividend
will need to be re-approved under the new Act at a board meeting in compliance
with section 46.
A
distribution may only be made pursuant to an existing legal obligation or a
resolution of the board of directors of the company. In both cases the board of
the company will need to confirm by resolution that the board of directors has
applied the solvency and liquidity test, namely a financial assessment that the
company will be solvent immediately after the proposed distribution as well as a
forward looking assessment that the company will be able to service its debts in
the coming year.
If
any distribution does not comply with these provisions the directors of the
company may be exposed to personal liability.
Intra-group
loans
Section
45 of the new Act, although headed “Loans or other financial assistance to
directors”, also covers loans between companies in the same group. More
specifically, the section regulates “financial assistance”, which includes
lending money and the provision of security, by a company to a “related or
inter-related company”. Companies are related through ownership or control. Thus
a holding company is related to its subsidiary, and vice versa, as are
co-subsidiaries to one another, to name but a few examples of how companies may
be “related” or “inter-related”.
Any
form of related company financial assistance (save for certain specific
exceptions) requires the approval of the company by way of a special resolution
and the company providing the financial assistance must be both solvent and
liquid after the transaction. Further, the terms of the financial assistance
must be both fair and reasonable to the company providing the financial
assistance.
In
addition, notification of the financial assistance must be given to shareholders
and to trade unions representing employees of the company concerned.
Section
45 will also apply to financial assistance that was approved under the old Act,
but had not yet been implemented when the new Act commenced. In other words,
such financial assistance will need to be re-approved under the new Act, in
accordance with all the requirements of section 45.
Pre-incorporation
contracts
The
new Act provides for pre-incorporation contracts in section 21. This section
maintains the position that written pre-incorporation contracts are valid
contracts that may be entered into and subsequently ratified by the company
concerned. The contract is then enforceable against the company as if the
company had been a party to it when it was concluded.
An
advantage of the new section 21 is that the pre-incorporation contract no longer
needs to be filed with the Commission (previously CIPRO) on incorporation for
the contract to be binding and enforceable on the company. This benefits
companies that wish to keep the terms of their pre-incorporation contracts
confidential.
The
company must ratify the contract within three months of the company’s
incorporation. The company’s board may, within this period, completely,
partially, or conditionally ratify or reject any pre-incorporation contract. If
no such action is taken, the company will be deemed to have ratified the
agreement.
Robyn
Holwill
Director
- Corporate, Mergers & Acquisitions
Deneys Reitz
Inc