The draft Companies Amendment Bill ('Bill') has been
released by the Department of Trade and Industry on its website,
but as at the date hereof, the final version of the Bill has not
been published in the Government Gazette.
The Bill proposes to effect various amendments to the new Companies
Act 71 of 2008 ('new Act'). Many of these amendments are
aimed at correcting drafting anomalies and errors. There are
however some substantive amendments being proposed and some of the
key changes in the Bill which will affect companies in practice are
summarised below.
SHAREHOLDER AGREEMENTS
The new Act provides (i) that the Memorandum of Incorporation (MOI)
of a company must be consistent with the new Act and (ii) that
shareholder agreements must be consistent with the new Act and the
MOI. Any provisions which are inconsistent are void to the extent
of the inconsistency.
The new Act does provide for a transitional period of two years
after the new Act comes into effect for companies to bring their
MOI (in effect their existing articles of association and
memorandum of association) in line with the new Act, but a similar
provision in relation to shareholder agreements does not appear in
the new Act.
The Bill now provides for a similar two year transitional period to
bring shareholder agreements in line with the provisions of the new
Act and the MOI. This is a useful amendment from a practical
perspective as it is current practice in South Africa to regulate
the relationship of shareholders in companies in shareholder
agreements, and companies will have to make use of this
dispensation during the two year transitional period.
SPECIAL RESOLUTIONS
The new Act provides that:
- more than 50% of voting rights are required for the adoption of an ordinary resolution (this percentage can be adjusted upwards in the MOI); and
- at least 75% of voting rights are required for the adoption of a special resolution (this percentage can be adjusted downwards in the MOI).
A margin of at least 10% must be kept between the percentage
requirements for approval of ordinary and special
resolutions.
The proposed amendment contained in the Bill will allow a
company's MOI to adjust the percentage for special resolutions
to a higher or lower percentage. This means that the MOI may
determine the percentage requirement for special resolutions to be
up to 100%. Due to the required 10% difference, this means that the
percentage requirement for ordinary resolutions cannot be higher
than 90%. It is important to note that these adjustments can be
made in relation to specified matters, and therefore it creates an
important new way in which the rights of minority shareholders can
be protected.
FOREIGN COMPANIES
The new Act requires foreign companies to register with CIPRO as
branch companies if they "conduct business or non-profit
activities" in South Africa, but the factors provided to
determine whether they do so are extremely wide in ambit and could
lead to many foreign companies which do not conduct continuous
business in South Africa having to register as branch companies in
South Africa.
The Bill proposes a much narrower test to determine which foreign
companies should register, namely (i) where the company is a party
to one or more employment contracts within South Africa or (ii) has
engaged in activities which would lead to the conclusion that the
company intends to conduct continual business or non-profit
activities in South Africa for a minimum period of 6 months.
DISSENTING SHAREHOLDERS
The new Act provides relief for shareholders where specified
takeover activity is being proposed in relation to a company.
Dissenting shareholders may (i) require a company to seek court
approval for implementation of the proposed transaction if it was
opposed by at least 15% of the votes excercised on the proposing
resolution and (ii) (regardless of shareholding or votes against
the resolution) apply to court for a review of the transaction if
certain requirements are met.
The problem in this regard is that the new Act does not provide any
limitation on the time within which a shareholder may challenge the
proposed transaction, and this could clearly affect the
implementation of transactions and lead to great uncertainty.
The Bill now provides such time limitations, namely that
respectively five and 10 business days after the resolution was
approved, shareholders must take the relevant steps to initiate
court proceedings in the two instances set out above.
BUSINESS RESCUE
The new Act contains "debtor friendly" Business Rescue
provisions, in terms of which a "practitioner" can be
appointed to attempt to revive a financially ailing company. The
new Act gives wide powers to the practitioner which include the
power to cancel or suspend (in whole or in part) agreements to
which the company is a party. This provision caused widespread
concern that the business rescue practitioner could pick out
agreements or parts of agreements that were favorable to the
company, to the extreme prejudice of creditors.
The Bill makes the practitioner's power to cancel agreements
subject to court overview and he/she will have to demonstrate that
the cancellation is on terms that are just and reasonable in the
circumstances. In addition, the business rescue practitioner's
powers to suspend the company's obligations are limited (i) to
the duration of the business rescue proceedings and (ii) in
relation to agreements whereby security has been granted by the
company.
CONCLUSION
Parliamentary hearings on the Bill are still to take place and will
likely have the effect of delaying the targeted date of
implementing the new Act by October 2010, although it is still
possible that it will come into effect later this year.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.