South Africa: Immediate Steps Following 1 May 2011 Commencement Of New Companies Act

Last Updated: 11 July 2011
Article by Robyn Holwill
  • Continuation of pre-existing companies and notification of deemed name changes
  • Memorandum and articles of association – memorandum of incorporation
  • Shareholder agreements
  • CIPRO filings
  • Deregistrations
  • Close corporations
  • Conversion of shares with a par value to shares with no par value
  • Status of companies with limited capacity, usually known as SPVs
  • Distributions
  • Intra-group loans
  • Pre-incorporation contracts

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:

  • the duties, conduct and liabilities of directors to every director of a pre-existing company;
  • rights of shareholders to receive any notice or have access to any information of every pre-existing company;
  • meetings of shareholders or directors, and adoption of resolutions to every pre-existing company; and
  • 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.

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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