The Companies Act, No. 71 of 2008 is in operation since the 1st of May 2011. A two year transitional period was allowed to enable pre-existing companies to adopt a Memorandum of Incorporation in compliance with the provisions of the Companies Act, 2008. This window period expires on the 30th of May 2013 and as from the 1st of May 2013, all companies who have not converted their Memorandum of Association (“MOA”), to conform to the provisions of the Companies Act 2008, automatically have accepted all the alterable provisions of the Act and to the extent that the MOA conflicts with any provision of the Act, the provisions of the Act will prevail.
Many shareholders, members and directors of companies have not paid any attention to the provisions of the New Companies Act and are not familiar with their rights, responsibilities, liabilities and duties under the New Companies Act.
We will deal briefly with certain aspects of the Companies Act in this Newsletter and future Newsletters. Please note that these comments are merely aimed to alert all shareholders, directors, members, prescribed officers or those persons who interact with companies and who are not familiar with the New Act, to use these notes as a guideline to gain further knowledge of the Act and Regulations.
• All MOA’s will automatically convert to become the company’s new Memorandum of Incorporation (“MOI”).
• The MOI is the constitutional governance document of the company.
• The purpose of the Act is inter alia to balance the rights and obligations of shareholders and directors within the company, to encourage efficient and responsible management and to provide for efficient rescue and recovery of financially distressed companies (Section 7).
• Directors and shareholders must give careful consideration to the provisions in adopting a customized MOI in terms of the Act and it is also not advisable to adopt the standard CoR MOI formats.
• The MOI is not a “one size fits all” document.
• The MOI determines what level of protection shareholders enjoy, defines the company’s authority levels, the roles and rights of shareholders and directors.
• A company who has not adopted a MOI in terms of the new Act, may have major compliance issues with the provisions of the new Act and directors and shareholders will find it difficult to define their rights, responsibilities, risks, liabilities and relationship.
• Directors and shareholders should always act in the best interest of the company and to attain the objectives of a company and not to act in their own personal interest.
• In order to protect public interest in dealing with companies, the new Act introduces the public interest score test, which determines the accounting and financial reporting standards of a company.
• PI score calculation comprises of four elements:
o The average number of employees during the financial year (one employee = 1 point);
o Outstanding third party liabilities (R1 million liability at the financial year end = 1 point);
o Total turnover, excluding VAT (R1 million or portion thereof in turnover during the financial year =
o 1 point);
o Total known individual shareholders (one shareholder = 1 point);
(In the case of a non-profit company, one member = 1 point).
• The Public Interest Score determines the financial reporting standards and determines whether a company’s annual financial statements are subject to an independent review or an audit or subject to enhanced accountability standards.
• PI score calculation needs to be conducted regularly to establish what the status of the financial reporting standards should be.
• Profit companies and personal liability companies are required to have at least one director.
• Public companies and non-profit companies are required to have at least three directors.
• The Act stipulates that at least 50% of the directors should be elected by its shareholders. If this provision is not amended, the shareholders will have no say in the election/appointment of the other 50% of directors.
• Each incorporator of a new company is a director of that company until replaced.
• Section 19(1)(b): A company has all the legal powers and capacity of an individual, except to the extent that the company’s MOI provides otherwise.
Why should you adopt a customized MOI?
The DTI forms are incomplete and lack provisions that limit or restrict the Board’s authority. It does not take cognizance of the financial reporting standards of a company and does not require an AGM to be held (in case of private profit companies and non-profit companies);
A customized MOI can clarify limits and restricts the powers of directors, such as the right to unilaterally change the authorized share capital of the company, or to unilaterally change the rules of the company;
To reduce legal compliance and risk of shareholders and directors;
To amend alterable provisions of the Act;
To ensure that provisions of a Shareholders’ Agreement does not conflict with the provisions of the MOI.
• A profit company is restricted from offering its shares to the public. The standard DTI form, CoR15.1A, for example does not restrict the transferability of shares and you may therefore be at risk to meet the requirements of a public company.
• Section 4 of the Act deals with the requirement that a company satisfies the solvency and liquidity test. This test implies that if applied, the assets of the company as fairly valued, must equal or exceed the liabilities of the company AND the company must be able to pay its debts as they become due in the ordinary course of business for a period of twelve months after the date on which the test is considered (Section 4). If this test fails, directors are required to:
o consider liquidation;
o consider business rescue.
• The Act contains alterable and unalterable provisions. The alterable provisions give powers to the directors, which can be revoked, restricted or abolished.
• Unalterable provisions limit the powers of directors, but can also be altered in terms of a company’s MOI. These provisions usually commence with the words “Despite anything to the contrary in a Company’s Memorandum of Incorporation”, whereas the alterable provisions usually commence with the words “Except to the extent that a Company’s Memorandum of Incorporation provides otherwise.”
• Section 22 deals with reckless trading and stipulates that a company may not carry on business recklessly, with gross negligence, with intent to defraud any person or for any fraudulent purpose or trade under insolvent circumstances (Section 4 – Solvency and Liquidity Test).
Examples of alterable provisions (default provisions)
• Ordinary resolution of shareholders: More than 50% of the voting rights (50% plus one).
• Special resolution by shareholders: At least 75%.
• There must always be a margin of at least 10% between an ordinary resolution and a special resolution. Therefore if an ordinary resolution is 51%, a special resolution percentage requirement may not be lower than 61%.
• Section 10(2)(f): Members of a NPC cannot approve a business rescue plan for the NPC;
• Every NPC is also subject to the public interest score test, which determines whether a NPC requires an audit or an independent review;
• NPC’s do not automatically qualify for any tax concessions;
THESE NOTES WILL BE AVAILABLE ON OUR WEBSITE ON http://www.eyslaw.co.za.
EY Stuart Attorneys – Pretoria