Certain Companies Act Amendments Are Now in Force – What You Need to Know

Below, we set out a brief summary of some of the key provisions which have come into force, and also touch on those which are not yet effective (the most important and contentious of the latter being the provisions on the public's access to annual financial statements, as well as remuneration approval by shareholders and the concomitant remuneration committee "two strike" rule). For further details regarding the amendments, see our January 2024 seminar here.

This note is not an exhaustive list. There are a number of other amendments which are largely administrative in nature.

Please look out for communications from us in due course regarding webinars which will cover this topic.

 

Effective Provisions – the following ARE in force:

MOI Amendments

Following many years of uncertainty as to when exactly an amendment to a memorandum of incorporation (MOI) takes effect (there were constant debates around when "filing" takes place), the position now is that the amendment takes effect 10 business days from receipt of the amendments by the Companies and Intellectual Property Commission (CIPC), unless endorsed or rejected by CIPC earlier (section 16).  

Shares issued for future consideration

Where shares are issued for future consideration, those shares must now be transferred to a so-called "stakeholder" (being an independent third party such as an attorney, notary public or escrow agent) and dealt with in terms of a "stakeholder agreement" between the stakeholder and the company (section 40). As such, the concept of a "trust arrangement" in these circumstances has been done away with.  This probably puts paid to any debate around whether this is a registrable trust as contemplated in the Trust Property Control Act, but apart from this it is largely business as usual for future consideration subscriptions.  

Financial Assistance

The requirements that need to be met before a company may give financial assistance to related or inter-related companies or corporations (shareholder special resolution; solvency and liquidity; fairness and reasonableness) no longer apply where the financial assistance is given by a holding company to a subsidiary (section 45). However, it is important to note that financial assistance given by a company for the acquisition of shares in that company (or a related company) in terms of section 44 does not have the same carve-out, so just make sure whether your transaction traverses section 44 as well.  Also, "subsidiary" by definition, covers only South African subsidiaries.  

Share Buy Backs

All share buy-backs now require a special resolution of the shareholders, unless they occur in terms of a pro rata offer to all shareholders, or are undertaken on a stock exchange by a listed company. This is one of the most material amendments.

Previously, a repurchase by a company of more than 5% of a class of its shares, in a single transaction or integrated series of transactions, was subject to the requirements of sections 114 and 115, which respectively deal with schemes of arrangement and the general approval requirements for fundamental transactions.  This tortuous provision (contained in the previous section 48(8)) resulted in confusion around whether such a repurchase is in fact a scheme of arrangement, or is merely subject to the procedural requirements of a scheme of arrangement (namely the procuring of an independent expert's report and the approval of shareholders by special resolution). The significance of buy backs being regarded as schemes of arrangement is that they were, as a result, subject to takeover law if undertaken by a regulated company (a scheme of arrangement automatically qualifies as an affected transaction), which then introduced a significant layer of regulation in respect of the transaction. Nevertheless such buy backs also triggered appraisal rights in terms of section 164.

By now doing away with the reference to sections 114 and 115, the amendments finally end the debate as to whether one-on-one contractual buybacks are "schemes of arrangement". They are not, and will not trigger appraisal rights.  They will also not require an expert's report anymore.

Social and Ethics Committee

The key amendment here is that the members of the social and ethics committee (SEC) of a public company or state-owned company must now be elected by shareholders at the AGM, as opposed to being appointed by the board (section 72 and 61).

Furthermore, in the case of public and state-owned companies, the majority of the members of the SEC must be non-executive directors and must have been non-executive directors for at least the past three financial years.

Employee Share Schemes

An employee share scheme (ESOP) which involves a purchase of shares, and not only subscriptions or issues of shares, now falls within the statutory ESOP definition (section 95). The significance of this is that such an ESOP will qualify for the carve outs in relation to: financial assistance under sections 44 and 45; share issuances to directors or prescribed officers under section 41; and the public offer (prospectus) rules. That is, provided the ESOP complies with section 97 with regard to the appointment of a compliance officer. 

Time Bar for Pursuing Directors for Breach

The hard prescription period of three years which previously applied in section 77 (which deals with the company's action for damages against directors who have caused loss to the company as a result of breach of their fiduciary duties), will now be capable of extension by a court on good cause shown. 

The hard prescription period of two years which previously applied in section 162 (which relates to the bringing of a delinquency application against rogue directors) will now be extended to five years, which may further be extended by a court on good cause shown.

These amendments will be retrospective, and thus will also cover director misconduct which occurred prior to amendments taking effect.

Landlord's Position in Business Rescue

The position of landlords will be ameliorated and strengthened in that their claims for the charges (utilities, rates, taxes and the like) will be regarded as "post-commencement finance".  These claims will rank behind employees' claims, but above all pre-commencement claims whether secured or unsecured. There is no transitional period, so this will impact business rescue processes that are well underway as it stands.

Provisions NOT YET in Force

Companies can rest assured that two of the most contentious amendments are not yet in force. These are –

• the provisions allowing the public access to annual financial statements, including those of certain categories of private companies (section 26); and
• the requirement for public companies to publish remuneration policies and reports for shareholder approval (sections 30A and 30B), coupled with the proposed "two strike" rule in respect of remuneration committee membership where the implementation report is voted down.

Further amendments that are not yet in force include –

• the change to the definition of a "regulated company" (section 118), insofar as it relates to private companies. This has implications for whether the Takeover Regulations apply when certain transactions are concluded. The current definition therefore continues to apply, namely that a private company is a regulated company if more than 10% of its shares have been transferred within the previous 24 months (other than between related persons) or if that private company's memorandum of incorporation opts that company into the Takeover Regulations; and
• the new provision for an application to court, by any interested party, to retroactively regularise irregular share creations, issues or allotments, on good cause shown (section 38A). Presently, if there is an inadvertent error or irregularity in the creation and/or issuance of fresh shares (e.g. issuances in excess of authorised share capital; non-filing of MOI amendments increasing share capital; issuances without the required shareholder approval; etc) there is very little in the way of remedies available to a company to retroactively regularise the invalidity. The only provision dealing with this is section 38(2) which allows ratification of share issues in excess of share capital, by shareholders within 60 business days of the issuance.  However in many cases the 60 business day period has long expired before the invalidity is discovered, rendering section 38(2) unavailable.

It remains to be seen when these amendments will come into effect.

Companies to Take Action

It is imperative that companies take note of the above amendments and adapt accordingly.  AGM notices will be the first to go under the knife, but given that the new sections 30A and 30B are on hold, the changes should actually not be too drastic.  Nevertheless it is always a good idea to have some degree of readiness in respect of amendments not yet in force. We are able to assist companies with all their needs in this regard.