Friday, March 23, 2007

It is fair to say that the South African Companies Act that has been in existence since 1973 is outdated. The current Act contains very little on corporate governance, transparency, accountability, modern merger methods and minority shareholder protection. All these issues are addressed in the new Companies Bill that is intended to replace the Companies Act, and as such the reform should be welcomed.

The Companies Bill will simplify the incorporation of companies. Instead of the memorandum and articles of association, a company’s constitutional documents have been consolidated into one document, the Memorandum of Incorporation, which sets out the rights, duties and responsibilities of shareholders, directors and others in relation to the company. Certain provisions of the Bill may be altered or limited in the Memorandum of Incorporation but there are specific unalterable provisions that apply notwithstanding the provisions of the Memorandum of Incorporation. This ensures that certain protections built into the Bill will apply universally.

In future, there will be distinction between two categories for-profit companies. In the case of widely held companies an offer of its shares to the public is permitted and the transferability of its shares is unrestricted. All companies that are not widely held companies are closely held companies. Widely held companies, not for profit companies and certain closely held companies (for example, those who contribute to public health), may be categorised as public interest companies. Public interest companies are subject to more stringent accounting, disclosure and transparency requirements.

The description of the new forms of companies will be different to what we are used to. A not for profit company will include "NPC" in its name, a widely held company will have "Limited" or "Ltd" as part of its name and a closely held company will have "CHC Limited" or "CHC Ltd" as part of its name.

The Bill promotes and encourages transparency and high standards of corporate governance. Transparency will be ensured through greater director accountability and the appropriate participation of all stakeholders. Shareholder participation at general meetings of the company is modernised and clearly set out in the Bill. The Bill also allows participation of shareholders other than at a meeting, which is one of the areas where the current Companies Act has always been inflexible.

Insofar as take-overs and mergers are concerned, the Bill retains the current methods of achieving take-overs and mergers, although the processes are simplified. The Bill also introduces new rules relating mergers and amalgamations, effectively allowing two companies to merge into one entity, subject to the satisfaction of the solvency and liquidity test and certain approvals.

Although the Bill seeks to decriminalise offences under the Bill, minority shareholders will in future be afforded better protection, in line with modern company law trends. In addition to relief from oppressive or prejudicial conduct, a shareholder who does not wish to support a proposed merger or amalgamation may send an objection notice to the company. If the objection is not withdrawn, the shareholder may demand that the company pays to such shareholder the fair value for the shares if, amongst other things, the resolution for such action was supported by less than 75% of the shares entitled to be voted.

Shares will no longer have a nominal or par value. The board may issue authorised shares only for consideration or other benefit to the company. The archaic and ineffective capital maintenance rules have been replaced by a regime based on solvency and liquidity.

Overall the proposed Bill introduces welcome amendments to South African company law and would certainly modernise a number of aspects of company law that are in need of reform. Although the Bill is generally drafted in clear and simple terms, a number of the provisions of the Bill need to be considered carefully and could require amendment and clarification.