Friday, June 20, 2008

 When it becomes law, the Companies Bill will replace the Companies Act of 1973. South African company law will undergo a quantum leap, headed by a more modern regulatory regime.  The current public version of the draft Companies Bill (on which this article is based) was published in 2007, but a later version has since been passed by cabinet for tabling in parliament. This article will be updated to the extent necessary once the later version is released. 
Consistent with the direction taken by the Companies Act, the Companies Bill adopts a capital regime underpinned by considerations of solvency and liquidity.   
The Companies Bill applies the solvency and liquidity test in a number of instances such as when a company declares a dividend, buys back its own shares, provides financial assistance for the purpose of or in connection with the acquisition of its own shares or undergoes an amalgamation or a merger. 
This article focuses on part C of chapter 3 of the Companies Bill regulating shareholder distributions.  
What is a distribution? 
The "distribution" definition in section 1 of the Companies Bill is sufficiently wide to cover both dividends and capital distributions.  Payments pursuant to share buy-backs are also included (which is not the case with the definition of “payments to shareholders” in section 90 of the Companies Act).  
In general, the provisions of part C of chapter 3 are similar to those currently contained in section 85 (share buy-backs) and section 90 (payments to shareholders) of the Companies Act.   
The Companies Bill permits a board of directors to approve shareholder distributions, subject to the company complying with the solvency and liquidity test “immediately after giving effect to” the board’s approval.  
So, a board contemplating a distribution must first consider solvency and liquidity.  A company will satisfy the solvency and liquidity test at a particular time if, “considering all reasonably foreseeable financial circumstances” at that time: 
·         the company’s total assets equal or exceed its total liabilities; and 
·         “it appears that” the company will be able to pay its debts as they became due in the course of business for twelve months following the distribution. 
The twelve month test is new.  This will resolve the uncertainty which the Companies Act has created as to the length of time after the distribution over which a company’s liquidity must be considered.  Further, it is the company’s solvency immediately after the distribution that matters. 
Share repurchases (and purchases by subsidiaries of their holding company’s shares) continue to be permissible under the Companies Bill subject to compliance with the solvency and liquidity test stated above. 
Next, a board must consider what approvals are required to effect a distribution.  The Companies Bill explicitly provides that a distribution requires board authorisation.  Although sections 85 and 90 of the Companies Act do not explicitly refer to board approval, this does go without saying.   
Is shareholder approval required? If a company’s shares are listed, the listings rules of the stock exchange concerned may require shareholder approval. Currently, the JSE Listings Requirements require an ordinary resolution of shareholders for a payment to shareholders (other than a dividend or a payment for a buy-back). Section 85 of the Companies Act currently requires the authority of a special resolution for share buy-backs. Repurchases under the Companies Bill will need the approval of only an ordinary resolution if made from all shareholders of the class concerned.  A repurchase from specific shareholders will still need to be approved by a special resolution. Currently, the JSE Listings Requirements require a special resolution in line with the Companies Act.   
As with the Companies Act, subsidiaries will not be permitted to hold more than 10% of the shares of any class in the capital of their holding company.  There has been some uncertainty as to whether the purchase by a subsidiary of its holding company’s shares under section 89 of the Companies Act requires the consent of the shareholders of the holding company.  The Companies Bill provides that a resolution of the shareholders of the subsidiary is sufficient. 
The purchase of a company’s shares by someone “related” to the company will now also require the “buy-back approvals”.  “A” is related to “B”, inter alia, if A directly or indirectly controls B, if A directly or indirectly controls “the whole or part of the business” of B or if C controls the whole or part of the business of both A and B. 
A constant theme in the Companies Bill is personal liability of directors for losses suffered by the company, shareholders and others arising from statutory breaches.  The Companies Bill holds directors jointly and severally liable if a distribution is made contrary to the provisions of the Companies Bill and, in so doing, the directors also breach the provisions of the Companies Bill dealing with directors’ fiduciary and other duties. The directors could be liable for the amount by which the distribution exceeds the amount that could have been distributed without such a contravention.  With a share buy-back, the amount for which the directors could be liable is the purchase price of the acquisition less any amount recovered from the shareholders concerned.  Section 86 of the Companies Act does already provide for personal liability of directors who allow buy-backs in contravention of the solvency and liquidity requirements.  Section 90 is silent in this regard, but there are, of course, general common law fiduciary duties to which directors are subject and the provisions of section 424 of the Companies Act relating to reckless and fraudulent trading.   
Listed companies will need to consider the requirements of the Companies Bill in conjunction with the relevant securities exchange rules, which in certain instances will impose additional or more onerous requirements. 
Lance Fleiser is a director in the Corporate Department at Bowman Gilfillan.