Corporate Law Reform

Select Committee on Economic & Foreign Affairs

20 June 2007

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Scope

• To present high-level overview of the Corporate Law Reform and the Companies Bill to the Portfolio Committee on Trade & Industry.

• To inform the Committee about the reform timetable.

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Policy Document

Corporate Law Reform Policy & Objectives:

Corporate Law Reform Policy was published in June 2004 and updated in June 2005

The Policy made the following unequivocal observations:• No substantial review of company law in 30+years (only

introduction of CC Act in 1984)• International jurisdictions undergone substantial revisions• Global and domestic environment changed significantly since

1970s– Corporate structure and financial instruments– Electronic communication, social awareness, changing

markets– Globalising markets, standards and expectations

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Policy Document

• Observations (Continued):

– Corporate failures and scandals in SA and elsewhere highlighted governance issues

– Socio-political and economic change in SA– Other laws: Securities Services Act, Auditing Professions

Act, BBBEE, PFMA, 2nd King Committee Report and the Nel Commission.

– 1973 Companies Act outdated, highly formalistic, has unnecessarily burdensome information requirements, creditor-oriented and is overly criminal.

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Óbjectives for CLR

The following objectives were identified in the Policy Framework:1. Simplification of the procedures for forming companies; and reduction of costs associated with the formalities of forming a company and maintaining its existence.2. Promoting innovation and investment in South African markets and companies by providing for – (a) flexibility in the design and organisation of companies; and(b) a predictable and effective regulatory environment.3. Promoting the efficiency of companies and their management.4. Encouraging transparency and high standards of corporate governance.5. Making company law compatible and harmonious with best practice jurisdictions internationally.

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Specific Goals

• The Policy Document was considered at Nedlac and the following specific goal statements were developed:– 1. Simplification– (a) A company structure that reflects the characteristics of

close corporations, as one of the available options.– (b) A simple and easily maintained regime for not for profit

companies.– (c) Co-operatives and Partnerships should not be

addressed in the reformed company law but Partnership Law should be reviewed.

– 2. Flexibility– (a) An appropriate diversity of corporate structures”.

(b) Retention of listed and unlisted companies.

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Specific Goals

– 3. Corporate efficiency– (a) A shift from a capital maintenance regime based on par

value, to one based on solvency and liquidity.– (b) A Clarification of board structures and director

responsibilities, duties and liabilities.– (c) A remedy to avoid locking in minority shareholders in

inefficient companies.– (d) The mergers and takeovers regime to facilitates the

creation of business combinations.– (e)The judicial management system for dealing with failing

companies to be replaced by a more effective business rescue system.

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Specific Goals

– 4. Transparency– (a) Proper recognition of director accountability, and

appropriate participation of other stakeholders.– (b) Public announcements, information and prospectuses to

be subject to similar standards for truth and accuracy.– (c) Protection of shareholder rights, advancement of

shareholder activism, and provision of enhanced protections for minority shareholders.

– (d) Minimum accounting standards for annual reports.

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Specific Goals

5. Predictable Regulation

(a) Sanctions to be de-criminalized where possible.– (b) Enforcement through appropriate bodies and

mechanisms, either existing or newly introduced.– (c) Striking a careful balance between adequate disclosure,

in the interests of transparency, and over-regulation.

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Policy context

Registered Entities Number Percentage

(% registered)

Close Corporations 1,276,157 40.51% (75%)

Private Companies 412,233 13.09% (24%)

Public Companies 3,757 0.12% (0.2%)

Incorporated Companies (Professional)

7,976 0.25% (0.5%)

External Companies 1,056 0.03% (0.06%)

Total Registered Entities 1,701,179 54%

Unregistered Entities Number Percentage

Informal economy 749,500 23.8%

Sole proprietorships 699 166 22.2%

Total Enterprises in Economy 3,149,845 100%

99% of registered businesses are privately owned, but not all are small or medium-sized

Aim of reform is to attract unregistered entities into the formal economy

Of the 3757 public companies, only 440 are listed entities. These companies account for 60% of GDP

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Scheme of the Bill

• The Bill has 9 Chapters and 6 Schedules:– Chapter 1 - Interpretation, Purpose and Application – Chapter 2 - Formation and Registration of Companies– Chapter 3 - Corporate Finance – Chapter 4 - Corporate Governance and Financial Accountability– Chapter 5 –Takeovers, Offers and Fundamental Transactions– Chapter 6 - Business Rescue – Chapter 7 - Remedies and Enforcement– Chapter 8 - Regulatory Agencies and Administration of the Act – Chapter 9 - Offences, Miscellaneous Matters and General Provisions– Schedule 1: Forms of Memorandum of Incorporation – Schedule 2: Members and Directors of Not For Profit Companies– Schedule 3: Public Offerings of Shares and other Securities– Schedule 4: Consequential Amendments – Schedule 5: Legislation to be Enforced by the Commission– Schedule 6: Transitional Arrangements.

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Chapter 1

• CHAPTER 1: INTERPRETATION, PURPOSE & APPLICATION.• Part A:• § 1 of the Bill contains 100 definitions, many reflecting new

substantive provision.• §1 CA (1973) has 43 definitions, many of which are

unnecessary because of substantive changes in new Bill. • Key new definitions include (a) amalgamation, (b) closely held

company, (c) distribution, (d) electronic communication,(e) file, (f) for profit company, (g) incorporator, (h) juristic person, (i) Memorandum of Incorporation, (j) merger, (k) not for profit company, (l) Notice of Incorporation, (m) public interest company, (n) rules of a company, (o) unalterable provision

• New definitions were introduced because many new substantive provisions require new definitions.

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Chapter 1

• Part B• The Chapter, through, § 6 outlines the purposes of the

proposed Act in line with Policy objectives, as being (a) the promotion of economic development, companies, innovation and investment in South Africa; (b) reaffirm role of company; (c) balance rights and obligations of shareholders and directors

• The most important provision in chapter one is the one dealing with categories of companies in § 8. The section deals with what are referred to as ‘for profit companies’.

• In other jurisdictions, like Canada and the U.S.A (under the Model Business Corporations Act), these types of companies are called business corporations. The section provides that every ‘for profit company’ is either a widely held company, or a closely held company.

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Chapter 1

• The section defines what a widely held company as a company which, in its memorandum of incorporation [the company’s governing document], (i) permits it to offer any of its shares to the public; (ii) limits, negates or restricts the pre-emptive right of every shareholder; (iii) provides for the unrestricted transferability of any of its shares. Further, a company is a widely held company if a majority of its shares are held by another widely held company, or collectively by two or more related or inter-related persons, any one of which is a widely held company.

• An equally important provision is that which defines a public interest company. In brief, a public interest company is not a separate category of company, but is, in terms of section 9, either a widely held company, on the one hand, or closely held or not for profit company which meets certain criteria, on the other hand.

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Chapter 1

• The last important provision in chapter one is that which identifies key elements of a not for profit company. This is § 11 and it identifies the following fundamental principles of not for profit companies. These fundamental principles are that a company (i) uses all its assets or income to advance its stated objects; (ii) provides no financial benefit to members or directors; , other than reasonable remuneration for work done, or compensation for expenses incurred to advance the stated objects of the company;and (iii) on winding up, such a company distributes its net value to another not for profit entity, which does not have to be a company but may be a voluntary association or a not for profit trust.

 

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Chapter 1

• In summary, this chapter introduces two categories of companies, i.e. (a) For Profit Companies (or business corporations) and (b) Not For Profit Companies (former § 21 companies). For profit companies or business corporations may either be (i) widely held or (ii) closely held. All widely held companies are public interest companies. In addition, closely held companies and not for profit companies which meet certain criteria may be classified as public interest companies. In the case of a closely held company, categorisation as a public interest company takes place when two of the following criteria are met; i.e. (a) an annual turnover of R50 million; (ii) a monetary asset value of R25 million; and (iii) an employment threshold of not less than 200 employees. Two of the following three criteria qualify a ‘not for profit company’ as a public interest company, namely; (i) R20 million annual turnover; (ii) a monetary asset value of R10 million; (iii) an employment threshold of not less than 50 employees.

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Chapter 1

Table B:Categories of Companies

For Profit Companies Not For Profit Companies

(a) Widely held Companies;

(b) Closely held Companies Successor to § 21 companies and are subject to -

(i) a varied application of the Act, as set out in § 11; and

(ii) a special set of fundamental rules, set out in § 12.

Public Interest Companies:

•All widely held companies

•Closely held companies that meet at least two of the three thresholds and companies which are designated by Minister: take deposits from public or exercise public trust; have substantial impact on environment; contribute to public health; supply essential goods, services or infrastructure

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Chapter 1• Consequences of characterisation as a PI company

§. 15 – A PI must file its Memorandum of Incorporation

§. 79 – A PI must hold an annual meeting (in the case of a NFP, even if it has no members)

§. 79(5) – A PI shareholder/members meeting must be accessible within the Republic for electronic participation. On the other hand, it may be held anywhere, unlike non PI companies, which by default must hold their meetings within the Republic.

§. 84 – A PI company has a higher minimum number of directors.

§. 94 – A PI company must keep a directors’ register.

§. 96 and 97 contemplate more stringent Financial Reporting Standards to be prescribed for PIs.

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Chapter 1

• Consequences of characterisation as a PI company

§. 97 The requirement to have financial statements is not PI dependent.

§. 100 – PIs must have audit committees, must appoint auditors, and are subject to stricter audit practices than are non PI companies

§. 104 – The requirement to have a company secretary applies only to WHCs, and thus is not PI dependent.

§. 161 – PI companies must implement a regime to accept whistleblower concerns.

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Chapter 2

CHAPTER 2: FORMATION & REGISTRATION OF COMPANIES:Part A – Incorporation & Legal Status This chapter advances the objective of Simplification of

company registration procedures and reduction of costs associated therewith, as reflected in the Policy Document.

In addition to confirming a company is a corporate juristic person with full powers (§ 12), the chapter affirms the incorporation of a company as a right and permits a mimimun of one person to form a business corporation or for profit company (§ 13). In this regard, the statute is in line with modern corporate law statutes such as § 2.01 of the Model Business Corporations Act; § 101 of the Delaware General Corporation Law; § 2-102 of the Maryland Corporation Law and § 7 of the UK’s Companies Act.

The Bill facilitates company formation through the adoption of a short-form Memorandum of Incorporation and Notice of Incorporation.

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Chapter 2

The Bill permits incorporation by adoption of (a) a prescribed form of Memorandum of Incorporation (set forth in Schedule 1) or (b) any other form complying with certain minimum requirements (set forth in Schedule 1) and with the unalterable provisions of the Act but including, if desired, other non-prohibited provisions, including the power to adopt internal rules concerning governance of the company (§ 14). This facilitates formation of companies and governance.

The chapter also provides for simplified filing requirements of a Memorandum of Incorporation and abolishes the need for certification by notary, and the requirements for a seal.

In brief, the Bill only mandates a public interest company to file its Memorandum of Incorporation. A closely held company does not have to lodge its Memorandum of Incorporation, but has to keep it at its registered office.

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Chapter 2

At any rate incorporators of a closely held companies do not have to draft their Memoranda but may adopt a Model Memorandum in Schedule 1 to the Bill (§ 15&16). The Bill abolishes the doctrine of constructive notice in the sense that a person is not deemed to have notice or knowledge of the contents of any document relating to a company merely because the document (a) has been filed with the Commissioner; or (b) is accessible for inspection at an office of the company (§ 15(4)).

The Bill provides for the expanded negation of ultra vires defense in an attempt to provide further assurance and protection for persons dealing with the company in good faith (§ 17). In an another instance of improving assurance and protection for persons dealing with the company before incorporation, the Bill provides for expanded validation of pre-incorporation agreements(§ 18).

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Chapter 2

Part B – Company Names.

  In this regard, formal requirements for company name are

shortened and simplified (§ 19). The main aim of the reform in this area was to eliminate time-consuming and otherwise burdensome requirements. In particular, name reservation will be available to protect one or more names, but it will not be required.

In addition, the draft proposes reforming the criteria for acceptable names in a manner that seeks to give maximum effect to the constitutional right to freedom of expression.

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Chapter 2

Specifically, the draft will restrict a company name only as far as necessary to -

(a) protect the public from misleading names which falsely imply an association that does not in fact exist;

(b) protect the interests of the owners of names and other forms of intellectual property from other persons passing themselves off, or coat-tailing, on the first person’s reputation and standing; and

(c) protect the society as a whole from names that would fall within the ambit of expression that does not enjoy constitutional protection because of its hateful or other negative nature.Beyond those purposes, there will be no further administrative discretion to reject names, as is found in the existing Act.

 

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Chapter 2

Importantly, Name Reservation is no longer required as a self standing process in the process of registration. Name approval take place simultaneously with the registration process. A company does not need to have a name and it may use its unique registration number as a name. A Company name must end with:(a)   The expression “NPC”, in the case of a not for profit company. Or(b)  The word “Limited” or its abbreviation, “Ltd.”, in the case of a widely held company. Or(c)  The expression “CHC Limited” or its abbreviation, “CHC Ltd.”, in the case of a closely held company.

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Chapter 2

One very important provision relating to names and registration numbers is that found in § 24. In essence, the section requires a company to ensure that its registered name and registration number are clearly stated on or in every document issued or signed by, or on behalf of, the company, if the document evidences or creates a legal obligation of the company. This provision, in effect, replaces § 50 of the 1973 Companies Act which has extensive requirements on displaying of company name and registration number. Failure to comply with this section may lead to personal liability.

 

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Chapter 2Part C – Registered Office and Records. According to § 25, a company must have registered office in

South Africa and register its address. Ordinarily, change of address takes place 5 days filing of Revised Notice of Registered Address. For clarification and for the purposes of encouraging good corporate practice, a company’s records must be written or convertible to written form and must include securities register, Memorandum of Incorporation, annual reports, accounting records, shareholders meeting minutes, written communications to shareholders generally, register of directors and directors meeting minutes and resolutions.

In an effort to enhance shareholder rights, the Bill gives the shareholders a right, on request made in good faith, to inspect and copy securities register, Memorandum of Incorporation, annual reports, financial statements, shareholders meeting minutes, written communications to shareholders generally, register of directors and directors meeting minutes and resolutions (§ 27).

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Chapter 2

Table C: Comparison of current and proposed provisions:

Current Company Law Proposed Company Law

Name reservation compulsoryMemo and articles of association must be lodged with registrationPre-incorporation contracts are complexName approval process is complex

Registration No is not acceptable as nameNegation of defence of ultra vires

Requires up to 7 persons to register a company

Name reservation optionalMemo of incorporation only governing doc & does not have be lodgedPre-incorporation contracts simplified

Name approval process simplified and clarifiedRegistration No may be used as name

Expanded negation of ultra vires defence Only 1 person required for For Profit and 3 persons for Not for Profit

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Chapter 3

• Chapter 3 – Corporate Finance • This chapter of the Bill is dedicated to dealing with the

following issues, namely, (a) Company Shares, (b) Debentures and Similar Instruments, (c) Distributions by the Company, (d) Registration and Transfer of securities, (e) and Public Offering of Securities. The Chapter advances the objective of Promoting innovation and investment in South African markets and companies by providing for flexibility in the design and organisation of companies 

•  Part A – Company SharesIn order to facilitate equity financing of company in time-sensitive global capital markets, the Bill provides that the Memorandum of Incorporation must set out authorized classes and numbers of shares and may authorize board to increase or decrease number of shares or classify or reclassify shares; ratification of defective issuances (§ 34).  

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Chapter 3

To further facilitate equity financing of company in time sensitive global capital markets, the chapter provides for equitable voting powers; intra-class equality except as provided in Memorandum of Incorporation; class preferences and other rights, which may be made dependent upon objectively ascertainable facts (§ 35). 

• In order to afford protection of shareholders, the chapter provides for pre-emptive rights, which way be negated or limited in Memorandum of Incorporation (§ 36).

• Importantly, and in order to facilitate equity financing, the Bill allows for the shares to be paid for in exchange of any consideration determined by the board in line with proper standards of conduct. Particularly, the consideration may include a contract for future services or benefits, or a promissory note.

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Chapter 3

• Notably and given the economic insignificance of par values and nominal capital, the Bill provides for shares to have no par value (§ 37). Pre existing shares with par values are preserved in line with transitional arrangements.

• In order to further enhance shareholder rights, the Bill also provides for shareholder approval for issuing shares in certain cases, including issuance at less than fair market value to a director, for non-cash consideration, or with more than 30% of voting power (§ 38).

• In line with § 6.24 of the Model Business Corporations Act, the Bill clarifies that the company may issue option for purchase of shares or other securities (§ 39).

• Most importantly, in line with best practice jurisdictions and in order to enhance company’s ability to raise equity, direct or indirect financial assistance for share purchases is permitted subject to limitations, including solvency and liquidity and shareholders approval.

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Chapter 3

The Chapter further outlines a new general scheme for debentures designed to protect the interests of debentures holders without making unnecessary distinctions based on artificial categorization of the debt instrument they hold.

• Treats all distributions (e.g. share buy backs, dividends, redemptions, etc) in the same way by subjecting them to “the solvency and liquidity test.

• Existing scheme for registration and transfer of uncertificated securities modified considering Securities Services Act.

• Simplified and modernised scheme for primary and secondary offering of securities to the public, based on the principles of the current Act.

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Chapter 4Chapter 4: Corporate Governance & Financial Accountability:Chapter retains most of the provisions found in the current law

regarding corporate governance with important changes: – Quorum thresholds for passing an ordinary resolution 25% of

all shares entitled to vote – Allows shareholders to participate in meetings by electronic

communication. – Allows shareholders and directors to take binding decisions

other than at a meeting.– Sets out a codified regime of directors’ duties, which includes

both a fiduciary duty, and a duty of reasonable care, which operate in tandem with existing common law duties.

– Supplemented by provisions addressing conflict of interest, and directors’ liability, indemnities and insurance

• Retains existing law with respect to financial records and statements, auditors, audit committees and company secretaries, but relieves closely held companies from the requirements of appointing auditors, unless they are also public interest companies as defined.

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Chapter 5

Chapter 5: Takeovers, Offers and Fundamental Transactions

• Retains existing scheme largely (schemes of arrangement,mandatory offers, squeeze-out transactions, Takeover Code and Takeover Regulation Panel)

• Main changes:– Notification of share purchases– Approval of fundamental transactions ( the disposal of

substantially all of its assets or undertaking, a scheme of arrangement, or a merger or amalgamation) by a court only required if a significant minority opposed (at least 15%) or if procedural irregularity or a manifestly unfair result found.

– Supported by a remedy of appraisal rights for dissenting minority shareholders.

– Introduces concepts of merger and amalgamation of companies

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Chapter 6Chapter 6: Business Rescue

• Replaces the current judicial management with a modern business rescue regime, largely self-administered by the company, under independent supervision within constraints set out in the chapter, and subject to court intervention at any time on application by any of the stakeholders.

• Recognises the interests of shareholders, creditors and employees, and provides for their respective participation in the development and approval of a business rescue plan.

• Notably, the chapter protects the interests of workers by -– recognising them as creditors of the company with a voting

interest to the extent of any unpaid remuneration, – requiring consultation with them in the development of the

business rescue plan,– permitting them an opportunity to address creditors before a

vote on the plan, and– according them, as a group, the right to buy out any

dissenting creditor who has voted against approving a rescue plan.

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Chapter 7

Chapter 7: Remedies and Enforcement

• High Court remains the principal forum for remedies• Retains existing remedies, but introduces new remedies,

including:– right to seek a declaratory order as to a shareholder’s rights– right to apply to have a director declared delinquent or

under probation– Appraisal rights for dissenting shareholders to certain

actions– Right to commence or pursue legal action in the name of

the company (common law derivative action)• Establishes an extended right of standing to commence an

action on behalf of an aggrieved person, and a regime to protect “whistle blowers” who disclose irregularities or contraventions of the Act..

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Chapter 8

Chapter 8: Regulatory Agencies and Administration of Act

• Companies and Intellectual Property Commission (currently CIPRO & dti)– Registration, enforcement of law, education

• Takeover Regulation Panel (currently SRP)– Approval of certain offers

• Financial Standards Reporting Council (same)– Advice on reporting standards

• Companies Ombud (new)– Resolution of shareholder disputes– Appeal of administrative decisions

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Chapter 9

Decriminalization of Company Law:

In accordance with the objectives and goals, the proposed Act de-criminalizes company law. There are very few remaining offences, those arising out of refusal to respond to a summons, give evidence, perjury, and similar matters relating to the administration of justice in terms of the Act. Any such offences must be referred by the Commission to the National Public Prosecutor for trial in the Magistrate’s Court.

Generally, the Act uses a system of administrative enforcement in place of criminal sanctions to ensure compliance with the Act. The Commission, or the Takeover Panel, may receive complaints from any stakeholder, or may initiate a complaint itself.

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Chapter 9 Following an investigation into a complaint, the Commission or

Panel may - (a) end the matter;(b) urge the parties to attempt voluntary alternative resolution of their dispute(c) advise the complainant of any right they may have to seek a remedy in court;(d) commence proceeding in a court on behalf of a complainant, if the complainant so requests;(e) refer the matter to another regulator, if there is a possibility that the matter falls with their jurisdiction; or(f) issue a compliance notice – but only in respect of a matter for which the Act does not provide a remedy in court.

A compliance order may be issued against a company, or against an individual if the contravention of the Act was by that individual, or if the Act holds them equally liable with a company for the contravention.

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Chapter 9

A person who has been issued a compliance notice may of course challenge it in court, but failing that, is obliged to satisfy the conditions of the notice. If they fail to do so, the Commission may either apply to the court for an administrative fine, or refer the failure to the National Prosecuting Authority as an offence. In the case of a recidivist company that has failed to comply, been fined, and continues to contravene the Act, the Commission may apply to the Court for an order dissolving the company.

Finally, to improve corporate accountability, the draft proposes that it will be an offence, punishable by a fine or up to 10 years imprisonment, for a director to sign or agree to a false or misleading financial statement or prospectus, or to be reckless in the conduct of a company’s business.

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Proposed Timetable

• Proposed Timetable

Updated Bill following comments

31 May 2007

Submission of updated Bill for further comments

1 – 30 June 2007

Further review of the Bill 1 – 31 July 2007

Submission of Bill to Cabinet

15 August 2007

Submission of Bill to State Law Advisors

31 August 2007

Introduction of Bill into Parliament

February 2008

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Details

• Tshepo MongaloProject Manager: Corporate Law ReformP/Bag X 84Pretoria0001012 394 15030824109427E-Mail: Tshepo@thedti.gov.za

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