South Africa: Business Owners Warned To Avoid Complacency Over The New Companies Act

Last Updated: 12 May 2011
Article by Caryn Leclercq

South African companies need to implement a number of immediate steps to comply fully with the new Companies Act and, accordingly, managers should familiarise themselves with the provisions of the new Companies Act as soon as possible. 

That's according to Werksmans Attorneys director Caryn Leclercq, who says managers should be aware that the Act came into effect on 1 May.  

She explains, "The two-year transitional period provided for in the Act could be misleading. Companies will need to comply with Act immediately, as the transitional period only applies to a few limited matters."  

In line with one of the Act's key provisions, the current constitutional documents of a company, comprising the memorandum and articles of association, will be replaced by a single Memorandum of Incorporation (MOI). Leclercq says that all companies should undertake a detailed analysis of their constitutional documents and recommends that pre-existing companies should formulate and file their new MOIs as soon as possible after the effective date rather than waiting until the end of the transitional period. 

The new Act also curtails the ability of shareholders to regulate conflicts between the MOI and shareholders agreement contractually. During the transitional period, shareholders agreements will continue to have force and effect and the new Act provides that, in the event of a conflict between those provisions and the provisions of the company's MOI or the new Act, the shareholders agreement will prevail, except to the extent provided for in the MOI or the shareholders agreement itself. However, Leclercq advises company managers to review their existing shareholders agreements thoroughly and note any inconsistencies with the company's MOI and the new Act, because, following the transitional period, if any provision of a shareholders agreement is inconsistent with the new Act, it will be void to the extent of the inconsistency.

Shareholders for their part should be cautious about making any amendment to their shareholders agreements during this transitional period as arguably this could result in shareholders losing the protection of the transitional provisions.   

The new Act also introduces a number of changes to company types and name endings. Most changes will occur by default, but managers should establish the new company classification applicable to their companies and whether the onus is on them to submit any documentation to the authorities. 

"In addition, companies limited by guarantee which do not wish to become non-profit companies must by notice elect to become profit companies and make the consequential changes to their MOIs.

The duties and responsibilities of directors, as well as prescribed officers, company secretaries, auditors and board committee members, have been partially codified in the new Act.  

"Affected personnel should be informed of the way the codification affects them and their responsibilities in terms of the new Act, as well as the extent of potential statutory and third party liability they could face for any breach of these provisions," says Leclercq. "In this regard, it is critical to identify the prescribed officers for each company.

"It would also be wise to take out adequate insurance cover or have indemnities in place to cover any possible liabilities that could be faced by both directors and prescribed officers."

Leclercq says, "It's also important to scrutinise the Act's provisions dealing with the eligibility and disqualification of directors and other senior personnel (such as prescribed officers), and ensure that any vacancies arising as a result do not leave the company with less than the minimum number of directors or officers".

On the issue of auditing requirements, Leclercq says that companies need to establish whether they are obliged to have their annual financial statements audited (limited in the new Act to certain types of companies), and whether they are required to appoint an audit committee and a company secretary. 

"Similarly, they should determine whether they are obliged to appoint a social and ethics committee, with the correct membership profile as required in the Act," she adds.    

In line with the Act's stipulations on language use, companies should ensure that all notices to shareholders and other documents are in the prescribed form and in "plain language". 

In respect of share certificates, the new Act requires companies to endorse share certificates where the transfer of shares is restricted, Leclercq says.

Leclercq points out that the new Act re-writes South African company law and will have far-reaching effects. "Companies should pay particular attention to the provisions relating to directors and shareholders' duties, responsibilities and rights, as well as the approvals required for distributions, financial assistance and insider share issues and options.

"The rules for fundamental transactions, take-overs and bids should also be closely analysed," she concludes.

Companies Act Implementation Checklist

1.

Adopt a new Memorandum of Incorporation

ü

2.

Consider the role of existing shareholders' agreements

ü

3.

Change name to reflect new rules on name endings

ü

4.

Identify prescribed officers

ü

5.

Check that all directors, prescribed officers, committee members, company secretaries and auditors are eligible and not disqualified

ü

6.

Educate directors, prescribed officers and other relevant staff as to their responsibilities

ü

7.

Consider whether adequate indemnities and/or insurance has been provided for directors and public officers

ü

8.

Establish audit committee and social and ethics committee with correct membership, if required

ü

9.

Determine the extent of the company's responsibility to have its financial statements audited and appoint an auditor where necessary

ü

10.

Ensure that all notices to shareholders and other documents are in the prescribed form or in plain language

ü

11.

Endorse share certificates where the transfer of shares is restricted

ü

12.

Companies limited by guarantee must elect to become a profit company and make the necessary consequential changes or become a non-profit company

ü

13.

Comply with the provisions of the new Act dealing with:

ü
  • the duties, conduct and liabilities of directors
ü
  • rights of shareholders to receive notices and have access to information
ü
  • meetings of shareholders and directors, and the adoption of resolutions
ü
  • approvals required for any distributions, financial assistance (including intra-group loans), insider share issues and options
ü
  • fundamental transactions, take-overs and offers
ü

(except to the extent that the transitional arrangements delay their effect)

 

14.

Listed companies should comply with the amended JSE Listings Requirements

ü

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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