Implications for Companies – The new Companies Act in SA.

Wednesday, February 3rd, 2010

In the first quarterly magazine from the Institute of Directors of South Africa, there was an article on some of the implications of the new Companies Act, which I felt was very relevant for many of our Company clients.

I’ve taken the liberty of copying some of them for your information, since I believe you should consider consulting your attorney or registered auditor about any changes you may need to make.

  • It appears that the new act will take effect on 1 July this year.
  • Your existing Memorandum and Articles of Association will, on the date the Act comes into effect, be automatically converted into a single document known as the Memorandum of Incorporation. (MIC)
  • You will be allowed to update this new MIC over the ensuing two years, but many provisions in conflict with the new act will be void with immediate effect, and others after the two year period.
  • The new act contains a number of default provisions that will apply to matters not specifically addressed by the old Memorandum of Articles, and which will be effective from the commencement of the new act.
  • Existing shareholders agreements require urgent attention, as they will immediately be invalid to the extent that they conflict with either the Act or the MIC
  • Certain categories of company have been done away with, whilst others have been introduced. Each category has slightly different requirements in terms of the Act. There are also implications for some Close Corporations as a result of the new act.
  • Individual directors can take comfort from the fact that a number of procedural matters in the current act are decriminalized under the new act. However, where criminal sanctions are provided for, these are onerous.
  • The Act makes provision for civil claims against directors who breach their duty of care and skill and the fiduciary duty they owe the company.
  • Directors who have done their jobs properly, however, and who have no conflicts of interest, will find it easier to defend themselves.

The standard of directors conduct defined in the Act includes the following duties:

  • To act in good faith, for a proper purpose and in the best interests of the company.
  • Directors must not use their position as director, or any information obtained while acting in the capacity of a director, to gain an advantage for any person other than the company, or to knowingly cause harm to the company.
  • To communicate to the company any information (or opportunity) which could be of benefit to the company unless under an obligation of confidentiality not to disclose it.

Shareholders and fellow board members will expect a heightened level of care, skill and diligence to be displayed by all directors. Areas requiring specific attention include:

  • The solvency and liquidity test in relation to, amongst other transactions, distributions to shareholders, share buy-backs or buy-ins, mergers or amalgamations, and the provision of financial assistance;
  • The duty to be reasonably informed before taking a decision, which is also one of the key factors affecting the directors potential personal liability.
  • ‘Reckless trading" and trading insolvent circumstances, where the existing statute and common law are largely retained.
  • Matters requiring a special resolution, including director’s remuneration and certain related party transactions.
  • Schemes of arrangement
  • Business rescue, particularly as many of the contracts we are entering into today will extend beyond July and may be exposed to being altered or cancelled of the contracting party undergoes business rescue.
  • Duties owed by a director to the subsidiaries of a company of which he is a director
  • Management buy-outs.