The long-awaited new Companies Act
came into effect at the beginning of May, a month after the
effective date originally planned. Despite the delay, the
legislation is expected to have a positive impact on shareholders
"The new Companies Act is a
complete overhaul of the existing legislation so it's natural
that there will be some teething problems," says Werksmans
Attorneys director, Kevin Trudgeon. "The delay is
unlikely to affect its ability to achieve its goals."
The new Act seeks to endorse the
company as the appropriate vehicle through which business is
conducted; increase the simplicity and efficiency of forming and
maintaining companies; and improve corporate governance and
"The company was traditionally
viewed as the best structure through which to transact business
because it had a separate and independent legal persona, which
protected its shareholders from liability," says
Trudgeon. "But this also meant that there was a shield
behind which parties could engage in improper conduct and
He says the new Act respects the
independence of companies, but in a way that enhances governance
and responsible management.
An example is directors' duties
and responsibilities. "There is a body of common law
which set out directors' responsibilities, but common law is
amorphous and is housed in a variety of places, in different court
cases and texts," explains Trudgeon. "The new Act
does not do away with the common law but to a significant extent
codifies the duties and responsibilities of directors in one place
and sets out clearly what they are."
Minority shareholders too are much
better protected under the new Act. In the past, many
minority rights were procedurally complex and difficult to enforce,
especially when it came to fundamental transactions which involve
the transfer of assets and liabilities. Under the old
statutory regime minorities needed to approach the court if they
wanted to stop a fundamental transaction – and the
plaintiff would have to bear all costs. Under the new Act, if
more than 15% of the company shareholders vote against a resolution
proposing a fundamental transaction, they can require that the
company approach the court to approve the fundamental transaction
before implementation, at the companies' cost.
"In the past companies could
rely on the fact that it was difficult and expensive for
shareholders to access advice and to take the company to court to
get any relief," says Trudgeon. "Now, under the new
Act, because access to court review is made easier, transactions
are likely to be much more closely scrutinised before they are put
If minority shareholders are still
unhappy with the proposed fundamental transaction, the new Act
requires the company to buy them out at a value they agree or at a
fair market value determined by a court.
"Previously the sole remedy for
minority shareholders was to stop a transaction from progressing,
now they can demand to be bought out," he adds.
The new Act also emphasises how
companies should communicate with their shareholders –
stipulating that companies must not only provide information in
plain English, but that they must set out shareholders rights in
various situations. Notices to shareholders must be informative and
outline shareholders' appraisal rights. "In other words,
companies will need to describe the business that they want to
conduct and set out what options shareholders have under the
circumstances," says Trudgeon.
Business rescue provisions have also
been put in place to try and assist failing companies to return to
a state of being economically viable.
The new Act is also flexible enough
to accommodate both big and small companies under its ambit.
With the Close Corporation no longer a legal entity, the Act allows
for different reporting and audit requirements and with regards to
Memorandums of Incorporation, allows companies to alter the
provisions depending on their size. "If the provisions
are too onerous for a small company, they can amend them to better
suit their operations," says Trudgeon.
He says although some aspects of the
new Act are still being ironed out, the legislation is likely to
enhance the business environment and create a solid framework for
both big and small companies to operate in.
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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