Why would an investor, shareholder or mining right holder insist on using a ‘ring fenced’ company? In this alert we unpack what a ring-fenced company is under the Companies Act 71 of 2008 (Companies Act) and why the use of a ring-fenced company can be an additional mechanism to protect funding and investments.

Ensuring that a company and its shareholders comply with the Broad-Based Black Economic Empowerment Act 53 of 2003 (B-BBEE Act) in a B-BBEE transaction is always a concern.

Additionally, a mining right holder may question whether the contractor appointed in terms of the Mineral and Petroleum Resources Development Act 28 of 2002 will fail to meet its obligations and adversely affect its production targets.

In addition to using other forms of security (such as guarantees, cession and pledges and/or special or general notarial bonds), an added layer of protection to consider as a condition to a transaction, is for the counter party to amend its memorandum of incorporation (MOI) to include restrictive conditions (examples of which are below).

B-BBEE transactions

In B-BBEE transactions, a shareholder or investor may want to ensure that the counter party:

• remains 100% Black (as contemplated in terms of the B-BBEE Act) for so long as it is a shareholder within the group of companies;
• does not pass any resolutions to dispose of any of its shares without written consent; and/or
• only disposes of its shares to another B-BBEE company.

Contract mining arrangements

In contract mining arrangements, a mining right holder may want to ensure that the contract mining company it appoints does not:

• change its main business (of contract mining) without consent;
• sell any key or critical equipment or machinery required to perform its obligations; or
• distribute all or a portion of its capital, by means of dividends and/or loans (which could prevent it from performing its obligations, being solvent and/or paying its employees etc.).

By adding a condition to a transaction that the counter party’s MOI must be amended to restrict any of the above example activities (in that the shareholder/investor’s or right holder’s written consent would be required to do so), it can add another means to protect the relevant investment and ensure that any third party who deals with the relevant company is aware of these restrictions.

What is a ‘ring fenced’ company?

Should any of the above restrictions be incorporated into the MOI of any company, the company’s name would need to include the elements “RF” in terms of the Companies Act.

If a company’s name includes the elements “RF”, it would mean that the company’s MOI either (i) contains a restrictive condition(s) applicable to the company (which cannot be amended without adhering to certain additional conditions) or (ii) prohibits the amendment of the MOI as contemplated in terms of sections 15(2)(b) and/or 15(2)(c) of the Companies Act.

The abovementioned restrictive conditions or prohibitions (restrictive conditions) in a company’s MOI are referred to as “ring fencing” provisions in explanatory notes published by the Companies and Intellectual Property Commission.

Practically, instead of the company being referred to as “ABC Proprietary Limited”, the company’s name would be referred to with the additional elements “RF”, so “ABC (RF) Proprietary Limited”.

Why use a ‘ring fenced’ company?

In terms of section 19(5)(a) of the Companies Act, if a company’s name includes the element “RF”, any person (including, a juristic person, foreign company and/or trust) must be regarded as having notice and knowledge of the restrictive conditions in the company’s MOI.

Accordingly, by insisting that these restrictive conditions are incorporated in a counter-party’s MOI, it will, inter alia:

• alert any third party to the restrictive conditions, should the company attempt to enter into a transaction in contravention of these conditions (for example, should the company attempt to dispose of its shares in the B-BBEE transaction example above, or sell its equipment or machinery in the contract mining example above, without the required consent); and
• allow directors, shareholders or prescribed officers to apply to the High Court to restrain the company or directors from doing anything inconsistent with the restrictive conditions.

As stated earlier, the use of a ring-fenced company is an added layer of protection to consider as a condition to your next transaction.