The long-awaited regulations to the new Companies Act of 2008 were released by the Department of Trade and Industry at the end of December 2009 for public comment. The regulations add content to the new Act and deal with provisions relating to prescribed officers, business rescue, administrative fines, par value shares and the like. The format of the various types of Memoranda of Incorporation for different companies has also been published.
The new Act partially codifies the existing common law duties of directors and provides that a director could be held liable for damages or costs sustained by the company in accordance with the principles of common law or the law of delict relating to breach of fiduciary duties as well as certain statutory obligations. Although this in itself may not be cause for concern, the Act states that a "director" includes a "prescribed officer". The draft regulations provide that a prescribed officer includes a host of individuals even if not an appointed director. For all purposes of the Act a person is a prescribed officer if that individual has general executive authority over the company, is responsible for financial management or the legal affairs of the company, has managerial authority over the company's operations or otherwise exercises control over the management and administration of the business of the company. The result is that chief executive officers, chief financial officers, chief operating officers and head in-house legal counsel will be grouped with directors for the purposes of the Act, with the consequences that follow from holding that office. Steps will need to be taken by companies to manage this new risk and current insurance policies will need to be amended to indemnify all prescribed officers.
As far as business rescue proceedings are concerned, there has been some debate as to who will be qualified to take up an appointment as a business rescue practitioner to turn financially stressed businesses around. The draft regulations provide that an attorney, liquidator or person with a recognised degree in law, commerce or business management, will qualify for appointment, provided that person has been practising in their field for at least 10 years. In limited instances, the appointee need only have five years experience. A practitioner can charge up to R2000 per hour and will be entitled to recoup out-of-pocket expenses incurred in that role. The Business Rescue Practice Regulatory Board, which is yet to be established, will be the watchdog responsible for accrediting persons who meet the prescribed qualifications for admission as business rescue practitioners. It will be interesting to see how this new profession develops in view of the anticipated income that may be earned compared to other professions.
The regulations have now clarified that the administrative fines for failure to comply with the Act will be based on the annual turnover of the guilty company, provided that the fine does not exceed the greater of 10% of the company's turnover during which the failure occurred or a maximum of R1 million. The regulations specify that the method for determining the turnover of a company for the purpose of fines will be the same as that used in our Competition Act. Although these fines may appear to be harsh, the decision whether to impose a fine ultimately rests with the courts and the Companies Commission will not be entitled to impose fines randomly.
A fundamental change is the abandonment of the concept of par value shares. The new Act provides that a share does not have a nominal or par value and that a pre-existing company may not authorise any new par value shares after coming into force. The regulations state that every share of a pre-existing company must be converted to a share having no par value within five years of the effective date. Such a conversion must be proposed by the board, distributed to the shareholders and be approved by special resolution. Shareholders may take some comfort in the fact that it is prescribed that rights associated with such shares must be preserved or, alternatively, the company will be required to compensate its shareholders for the loss of any such rights.
The regulations contain the format of the Memoranda of Incorporation of the different types of companies envisaged in the Act, being profit and non-profit entities. Profit companies include state-owned, private, public and personal liability companies. But companies will not be compelled to make use of these prescribed forms and are free to compile their own document provided that the document is consistent with the Act. No other statutory forms that will be used for the ongoing administration of companies have yet been published for comment.
It is mooted that the new law will come into effect in July 2010, but whether this will materialise is yet to be seen. Public comment on the regulations may be submitted to the department before the beginning of March this year.
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