The dawn of a new corporate era
On 8 April 2009, when caretaker President Kgalema Motlanthe gave consent for the promulgation of the new Companies Act 71 of 2008 (the Act), South Africa entered a new corporate era. It took more than three years to draft the Act and will probably take another year to bring into effect the regulations needed for its efficient operation – including the establishment of four new regulatory bodies. The target date set by the Department of Trade and Industry (DTI) for the operation of the Act (and all the regulations under it) is 1 April 2010, a date that most stakeholders agree will have to be shifted out slightly.
The Act which comprises 9 Chapters and 255 Sections replaces the increasingly archaic Companies Act of 1973. “The 1973 Act was anachronous and had not kept up with commercial reality – it had ceased to be in accordance with international norms and standards – and was out of synch with local business practices as well!” said Hugh Bisset of Deneys Reitz’s corporate department. He was presenting at the company’s 2008 Companies Act Seminar, held at Sandton on 18 August 2009.
Getting to grips with the new Act
Attempts to bring the old legislation in line with current business practices resulted in a number of ‘piecemeal’ amendments. “This resulted in many parts of the old Act being dissonant with others,” said Bisset. These amendments were largely directed at the “the principal of capital maintenance – kept in force in South Africa until 1999.” There were three capital maintenance provisions that were progressively done away with in the Companies Amendment Act of 1999 and the Corporate Laws Amendment Act of 2006
A fundamental difference between the old and new Act is its legal foundation. The Companies Act 2008 has its foundation in North American (Anglophone) rather than the familiar English corporate jurisprudence. “There will now be far more recourse to North American jurisprudence, textbooks and academic authorities than to the English authorities,” said Bisset, adding that members of the legal community would have to familiarise themselves with this shift.
These changes are best illustrated by the introduction of a section dealing with Business Rescue. We will see a totally new process take over from the current judicial management arrangement. Bisset said the best proxy for the proposed Business Rescue legislation is the so-called Chapter 11 bankruptcy protection in the US.
The fuss around directors’ duties
Bisset dismissed the media hype that the Act created onerous conditions for company directors. A major departure from the old legislation deals with liability of directors. The Act states that “liability of directors extends to alternate directors, prescribed officers, members of board committees and audit committee members that aren’t directors!” Bisset questioned the absence of a definition of the term ‘prescribed officers’ in the Act and suggested this oversight would have to be addressed at a future date. He also observed that the phrase ‘audit committee members that aren’t directors’ was contradicted elsewhere in the Act.
Directors can be brought to account in terms of common law or section 77(3) of the Act. Bisset noted there was a ‘sting in the tail’ in S282 of the Act. He sketched a scenario where a shareholder could sue the director for perceived contraventions of the Act opening the door to reams of vexatious litigation.
Close Corporation will lose its appeal
Chapter 2 of the Act covers the formation, administration and dissolution of companies in South Africa. One of the major changes incorporated in the Act is the phasing out of the extremely popular close corporation. Existing close corporations will have a choice to continue business in their current form, governed by the Close Corporations Act of 1984, or to convert their close corporation to a company in terms of Schedule 2 of the Act. “Really, the advantage of having a close corporation has fallen away under the Act,” said Bridget King, from Deneys Reitz’s banking and finance department. Most of these advantages have shifted to private companies under the new legislation.
Legislators have been requested to adopt a purposeful approach when applying the Act. “The object and the purpose of the new Act are set out very clearly and include promoting the Bill of Rights, encouraging entrepreneurship, promoting investment and developing the South African economy. These are the stated aims of the new Act and those purposes have to be taken into account when we’re resolving ambiguities and conflicts in the provisions of the Act,” said King.
Editor’s thoughts:
A number of financial services providers have registered their businesses as close corporations. Have you decided whether to continue as a close corporation or, or will you convert to an appropriate business form proposed in the new Companies Act? Add your comments below, or send them to gareth@fanews.co.za
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