South Africa: The Draft Companies Amendment Bill

Last Updated: 24 October 2010
Article by Jan Bouwman

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.

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