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The operation of South African companies is regulated by the Companies Act of 2008 (the Companies Act), which replaced the Companies Act of 1973. In turn, the 1973 Companies Act replaced South Africa's first company legislation, the Companies Act of 1926.
One of the primary aims of adopting the Companies Act nearly a decade ago was to bring South Africa's company legislation up to date with modern requirements. However, it has not necessarily helped make it easier to do business in South Africa.
Now, new amendments to the Companies Act have been proposed. Among other things, they are intended to make the legislation more business-friendly. The Minister of Trade and Industry published the proposed amendments for comment in September 2018, and the comments period closed in December 2018. We consider several of the contemplated changes positive and discuss them in detail below.
EFFECTIVE DATE FOR AMENDMENTS TO COMPANIES' CONSTITUTIONAL DOCUMENTS
Proposed Section 38A of the Companies Act is welcome as it gives a court the power to retrospectively validate invalid share creations, allotments or issuances where doing so is just and equitable.
The Companies Act currently provides that an amendment to a memorandum of incorporation (MOI, a South African company's constitutional document) takes effect on the date on which the notice of amendment is "filed" with the Companies and Intellectual Property Commission (CIPC) (or such later date specified in the notice of amendment).
The meaning of the word "filed" has been subject to debate. Does "filed" mean when the notice of amendment to the MOI is delivered to CIPC, or only once CIPC sends its notice confirming that the MOI has been accepted and placed on file? Literally interpreted, "filed" means the point in time when the MOI is physically delivered to (i.e., filed with) CIPC. However, CIPC issued a non-binding opinion to the effect that an MOI only takes effect once CIPC sends its notice confirming that the MOI has been accepted and placed on file.
This has led South African lawyers to take a conservative approach and only close transactions once the MOI has been accepted and placed on file by CIPC. There is good reason for this conservative approach. If CIPC's view is correct, and the parties elect to close a transaction before CIPC sends its notice confirming that the MOI has been accepted and placed on file, then for example, the issuance of newly created shares on closing would be void unless ratified within 60 business days after the shares were purportedly issued. Additionally, minority protections (which, under the Companies Act, must be captured in the MOI to limit a board's powers) will not be effective until the MOI has been accepted and placed on file. The requirement that an amendment to an MOI be accepted and placed on file by CIPC before closing often results in substantial closing delays, as it has often been the last suspensive condition to be fulfilled.
The proposed amendment to the Companies Act provides that an amendment to an MOI becomes effective on the earlier of CIPC endorsing the relevant notice of amendment or ten business days after receipt by CIPC of the notice of amendment, unless CIPC rejects it with reasons. This proposed amendment is helpful, because the parties to a transaction will now know whether the suspensive condition requiring the amendment of an MOI to have become effective has been fulfilled within ten business days after CIPC's receipt of the notice of amendment. This contrasts with being required to delay closing until CIPC sends a notice confirming that the MOI has been accepted and placed on file.
VALIDATING IRREGULAR CREATIONS, ALLOTMENTS OR ISSUANCE OF SHARES
New amendments to the Companies Act are … intended to make the legislation more business-friendly.
Section 38(2) of the Companies Act currently provides that if a company purportedly issues shares that exceed what the company's MOI authorizes, the purported issuance may be retroactively authorized (through a board or shareholder resolution, depending on the circumstances) within 60 business days after the shares were purportedly issued.
Section 38(2) of the Companies Act raises a practical issue: If an error of this nature were to occur, it is unlikely to be identified within the 60-business-day period. And once that time-period elapses, there is no basis on which to rectify the invalid issuance.
Proposed Section 38A of the Companies Act is welcome, as it gives a court (pursuant to an application made by the company concerned or an interested party, such as a shareholder or a third-party subscriber who has subscribed for invalidly issued shares) the power to retrospectively validate invalid share creations, allotments or issuances where doing so is just and equitable.
FINANCIAL ASSISTANCE BY A HOLDING COMPANY TO ITS SUBSIDIARIES
Section 45 of the Companies Act currently requires that, before a holding company provides any financial assistance to any of its subsidiaries, it must satisfy two main requirements:
- The shareholders of the holding company must have passed a special resolution approving the financial assistance
- The holding company's board must have passed a resolution confirming that the holding company's assets exceed its liabilities and that the holding company will be able to pay its debts as they fall due in the ordinary course of business in the 12-month period after providing the financial assistance (the Solvency and Liquidity Test)
Some ambiguity exists as to what the legislature intended as the precise effect of the proposed amendment to Section 45 of the Companies Act. The commentary to its drafting indicates that the intention was to remove the requirement for passing a special resolution where a holding company provides financial assistance to a subsidiary. However, as currently drafted (in addition to removing the requirement to pass a special resolution), the proposed amendment also removes the requirement for a holding company to pass the Solvency and Liquidity Test.
We see no reason to obtain a special resolution when a holding company is providing financial assistance to its subsidiaries, because all shareholders of the holding company are in the same position vis-à-vis one another and therefore minority shareholders should not be oppressed. In addition, from an operational perspective, the proposed amendment will make intra-group loan arrangements much more manageable, because the administrative burden of obtaining special resolutions from shareholders of holding companies for financial assistance to subsidiaries will be removed.
However, there is a counterargument. Under the current regime, the holding company's shareholders will, by virtue of the special resolution requirement, have knowledge (at least generally) of the maximum amount of financial assistance that a holding company intends to provide to its subsidiaries. If the requirement to have a special resolution passed is removed, then shareholders of the holding company are unlikely to have any knowledge of the extent of financial assistance provided by a holding company to its subsidiaries until after the fact, when presented with annual financial statements.
Although the current drafting of the proposed amendment is unclear, the legislature surely could not have intended to remove the requirement for a holding company's board to pass the Solvency and Liquidity Test when providing financial assistance to subsidiaries. We say this because solvency and liquidity is a fundamental principle of the Companies Act. Removing the requirement that a holding company pass the Solvency and Liquidity Test before providing financial assistance to its subsidiaries would cut across a fundamental creditor protection that prevents a holding company from shifting its assets to its subsidiaries in circumstances where it is unable to pass the Solvency and Liquidity Test. We acknowledge that there are already provisions in the Insolvency Act No.24 of 1936 dealing with, among other things, voidable dispositions that creditors could rely on. But creditors enjoy a greater degree of protection if the provision of financial assistance by a company is treated as void ab initio in circumstances where the company has not passed the Solvency and Liquidity Test.
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