A new Companies Act – What does it mean for you?

This is part 1 of a series of posts about the new Companies Act. You can read the first two parts and other posts about South African corporate law right here.

This post was written by Shirley Fodor during her time as a partner at Jacobson Attorneys

9 April 2009 marked another landmark date in the South African legislative arena. On that date the President assented to the Companies Act No 71 of 2008 (“the New Companies Act”).

There were and are many arguments both for and against the change: notably that the 1973 Companies Act (“the 1973 Act”) has through its numerous amendments kept pace with the ever emerging trends and circumstances within the national and international setting. However, the equally strong counter-argument being, given the fundamental political changes in the country there was also a strong motivation that the majority, if not all legislation in South Africa should be subject to some form of review and/or overhaul to the extent necessary to bring it in line with the principles and spirit espoused by the Constitution.

We at Jacobson Attorneys believe that it is important that the New Companies Act be demystified, as far as may be possible, so that our clients will be in a position to make the transition to the new regime seamlessly. We will therefore be bringing you a series of posts on the New Companies Act and the fundamental changes it is ringing on the South African commercial landscape.

In the legislative history of South Africa there have in fact been three fully-fledged Company Acts, all of which have attempted to codify company law. In 1910, at the formation of the Union of South Africa, each of the four provinces had its own Companies Act. The Transvaal Act, which was mostly based on the English Companies (Consolidation) Act 1908, formed the backbone of the first South African Companies Act that was passed in 1926 (“the 1926 Act”).

The Van Wyk de Vries Commission of 1963 was appointed to examine the 1926 Act in order to consolidate and restructure it as well as to evaluate developments in corporate law. It was from the report drafted by the Van Wyk de Vries Commission that the 1973 Act (and the Companies Act which we continue to use today) emerged.

The 1973 Act, although introducing certain fundamental changes, such as the criminalisation of insider trading (now housed in a separate Act), the extension of the provisions of section 424 in respect of “fraudulent” trading to include “reckless” trading as well as the abolition of concepts like partly paid shares and “unlimited” companies, the 1973 Act remained largely in form and content the same law as that of England from which it had been sourced almost 100 years previously.

The question asked when the corporate law reform process that led to the New Companies Act began was “For whose benefit does a company exist?” Is it just for the shareholders (a view commonly held in the United Kingdom and hence in SA) or is there a greater need that must be addressed? Are there interested parties that go beyond the shareholders whose interests deserve protection, while retaining the concept of maximising shareholder wealth? What about corporate governance? Should the directors answer more fully to the shareholders they purport to represent?

It was with this in mind that the drafters of the New Companies Act set out their legislative objectives in section 7: purposes which both echo the spirit and intentions of the Constitution, but also promote entrepreneurship and transparent corporate governance.

This is where the question of the continued existence and incorporation of close corporations arises, as well as the existing company structures under the 1973 Act.

An important innovation was the advent of the Close Corporations Act 69 of 1984 (“the Close Corporations Act”). The Close Corporations Act functions alongside the 1973 Act in many ways and is a means for allowing smaller, more simplified businesses to be incorporated. There are at present just under 2 million close corporations registered on the CIPRO data-base. The New Companies Act repeals and amends large portions of the Close Corporations Act.

The rationale behind this is that the New Companies Act recognises as one of its aims that any person has the right to form a company, and that there are accordingly minimal requirements imposed on the act of incorporation. Given this streamlined and simplified process the legislature has deemed it unnecessary to retain the Close Corporations Act. The Transitional Provisions contained in Schedule 5 of the New Companies Act sets out in broad terms what the future of close corporations will be.

The New Companies Act at present allows for the indefinite continued existence of close corporations until such time as the members may determine that it is in their interests to convert the close corporation to a company under the New Companies Act. New close corporations and the conversions from companies into close corporations will cease from the coming into force of the New Companies Act, which is anticipated to be around July this year. It would appear however therefore that the intention is ultimately to phase out the close corporation, in favour of one of the private company under the New Companies Act, and it would be advisable for those persons who are members of a close corporation to revisit their founding documents and determine whether, given the flexibility in the New Companies Act, it may not be in their interests to convert into a private company.

All “existing companies” under the New Companies Act, will likewise continue to exist under the new dispensation. It must however be borne in mind that under the 1973 Act, the constitutive documents of a company were its articles of association and its memorandum of incorporation. Under the New Companies Act only a memorandum of incorporation is required. The Memorandum of Incorporation, allows for a high degree of flexibility between the company and all its stake holders and can (provided certain elements as set out in section 15 are complied with) be as complex or as simple as the parties thereto require. Given the flexibility imbibed into the New Companies Act it would likewise be advisable for all companies to revisit their founding documents to ensure that they comply with the provisions of the New Companies Act and/or to amend their founding documents so as to facilitate the operations of their particular business within the confines of section 15.


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