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The new Companies Act of 2008 – what about close corporations?

25th November 2009


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One of the effects of the new Companies Act of 2008 is the phasing out of close corporations. No new close corporations may be formed once that Act comes into operation during 2010. Existing close corporations can elect to continue to exist until deregistered, dissolved or converted into a private company governed under the new Companies Act. It will be possible for businesses to continue to run their operations out of an existing close corporation if they so wish.

The close corporation is intended to serve smaller businesses, creating a flexible form of corporate entity with the advantages of simplified and inexpensive incorporation, separate legal existence, limited liability and less onerous financial reporting requirements.

So what are the options available to those seeking the advantages of the close corporation once the new Companies Act is in operation? The new Act provides for the formation of two types of companies, being profit companies and non-profit companies. Profit companies are further subdivided into state-owned companies, private companies, personal liability companies and public companies. Of these different forms of business, a private company will suit a small enterprise because it may be formed by one person and need only have one director. A private company will still be prohibited from offering its shares to the public and the transferability of its shares will be restricted but, interestingly, it will no longer be subject to a limitation of 50 shareholders.

Unlike public companies and state-owned companies, a private company will generally not need to appoint a company secretary or an auditor or to establish an audit committee unless its Memorandum of Incorporation requires it to do so. However, the new law does provide that the Minister of Trade and Industry can prescribe that certain private company's annual financial statements must be audited having regard to factors such as the economic or social significance of the company on business South Africa, its annual turnover, the size of its workforce and the nature and extent of its activities. It is highly unlikely that these requirements will be prescribed for small private companies. Naturally, the financial statements of a private company may be audited voluntarily if the company so chooses. It is possible that third party financiers of the company or the company's bankers may require the company to do so as a matter of business practice. Any financial statements that are given to any third party must fairly present the financial position of the company.

Annual statements which are not audited will have to be "independently reviewed". It is not yet certain what an independent review will entail as the exact details are still to be published in terms of regulations to the new Act. But if one person holds all of the shares in the company, or if every person who is a shareholder is also a director, the company's financial statements need not be independently reviewed.

Once the new Act comes into effect, there will be sufficient flexibility so that those entrepreneurs seeking to incorporate a small entity and enjoy the benefits previously available through the use of a close corporation, can incorporate a small private company with director shareholders. The new law caters for smaller businesses as it provides that those entities will not automatically be subject to strict financial reporting and auditing requirements. There will therefore be no need for close corporations.

Written by : Siboniso Mncwango and Trisha Ramnarain, Candidate Attorneys at Deneys Reitz







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