The new Companies Act, No 71 of 2008, which was promulgated into law on May 1, states that Articles and Memoranda of Association of companies and Founding Statements of close corporations that existed prior to the introduction of the new Act are construed as constituting deemed Memoranda of Incorporation (MoI). In these circumstances, such founding documentation remains in effect,” says business law firm Burt Meaden Incorporated MD Richard Meaden.
However, he explains that members and directors of existing companies and close corpor-ations do need to take heed of the content of the new Act and reconcile it with their deemed MoI. Portions of a deemed MoI that do not reconcile with the contents of the new Act may be construed as being void.
The new Companies Act has changed the way companies will be incorporated in future, he says.
“To register a new company, the required number of people must complete a notice of incorporation and register an MoI with the Companies and Intellectual Properties Com-mission,” he explains.
The MoI is defined as a docu-ment that sets out the rights, duties and responsibilities of shareholders, directors and others within and in relation to a company. All companies will be required to have an MoI that complies with the new Act and corporate entities that were in existence prior to the new Act have been given a two-year grace period in which to achieve compliance.
He notes that the new Act supersedes the 1973 Act, but some aspects of this Act, including that relating to debt provisions, have been incorporated into the new law.
“In addition, the Act has intro- duced content requirements associated with good corporate governance, including that contained in the King Codes. The types of companies available have been simplified and classified as profit and nonprofit entities and close corporations cease to be,” he explains.
According to the Act, its main purpose is to provide for the incorporation, registration, organisation and management of companies. Also, the Act allows for the capitalisation of profit and the registration of offices for foreign companies conducting business in South Africa.
Further, the Act defines the relationships between companies and their respective shareholders or members and directors. It provides for equitable and efficient amalgamations, mergers and takeovers of companies, the efficient rescue of financially distressed companies and appropriate legal redress for investors and third parties engaging with companies.
Meaden says the new Act allows for the creation of the Companies and Intellectual Property Commission, as well as a takeover regulation panel being established to administer the requirements of the Act. A Companies Tribunal has also been established to facilitate alternative dispute resolution and to review the decisions of the commission and a Financial Reporting Standards Council has been established to advise on the requirements for financial record keeping and reporting by companies.
He explains that the Act offers more transparency and insight into the corporate affairs of a company and will encourage good corporate governance through a new set of standards.
Meanwhile, Meaden says there are certain transitional provisions in Schedule 5 of the Act that deal with deemed MoI provisions.
These include that an existing Section 21 company needs to amend its MoI to state that it is a nonprofit company, as well as alter its name to include the letters NPC. Also, a company incorporated in terms of the 1973 Act needs to amend its deemed MoI to reflect that it is a personal liability company and change its name to include the letters ‘Inc’. Lastly, a State-owned company needs to amend its deemed MoI to be identified as such and include the letters ‘SOC’ in its name.
Further, Meaden states that a company limited by guarantee, other than a previous Section 21 company, must file a notice electing to become a profit company and may change its name to comply with the naming regu-lations. However, if it fails to file a notice, it will have to amend its MoI to state that it is an NPC.
Meaden explains that, within the two-year grace period, companies and close corporations may submit amendments to deemed MoI, at no charge, to bring them in line with new requirements for an MoI. Notices of name changes and copies of special resolutions altering company names also need to meet the requirements of the Act.
A person holding office as a director, company secretary or auditor before the effective date will continue in that office, subject to any changes in the MoI. Any person who is not eligible to be director, company secretary or auditor in terms of the new Act will be regarded as having resigned from the position.
The Act does not distinguish between executive and non- executive directors that share equal accountability regarding the affairs of the company. Such accountability also extends to senior management reporting to directors and independent professional service providers of the company, including accountants, auditors and financial and legal representatives on whose advice directors place reliance.
Shareholders, directors and senior management of companies must familiarise themselves with the scope and content of the new Act. Careful consideration should be given with regard to ensuring that founding documentation, relevant agreements, objects and operations of the company are compliant with the new Act. Where there are discrepancies, these should then be attended to within the two-year grace period.
Regarding share classes, the presumption remains that all shares enjoy equal rights. However, a company’s shareholders and board may designate shares with different rights, preferences, limitations and terms. The company’s board may increase or decrease the number of shares of any class of shares, reclassify authorised shares that were not issued, classify unclassified shares, or determine preferences, rights, limitations or other terms of shares.
The approval of ordinary resolutions requires the support of shareholders possessing more than 50% of the voting right and, for special resolutions, this increases to 75%. However, for the first time in South Africa’s corporate history, the MoI may permit a lower percentage of voting rights to approve a special resolution.
“One cannot contract out of the terms of the new Act and, given the sophistication of it, it is advisable to seek professional advice regarding the scope, application and impact of this Act on corporate operations. This advice can be obtained from the commission, or from legal and accounting firms,” concludes Meaden.