Corporate Law Reform
Select Committee on Economic &
Foreign Affairs
20 June 2007
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.
2
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
3
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– 1973 Companies Act outdated, highly formalistic, has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.
4
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.
5
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.
6
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.
7
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.
8
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.
9
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%
Of the 3757 public
companies, only 440
are listed entities.
These companies
account for 60% of
GDP
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
10
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.
11
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.
12
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.
13
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 preemptive 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.
14
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.
15
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.
16
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
17
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.
18
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.
19
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.
20
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 nonprohibited 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.
21
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 preincorporation agreements(§ 18).
22
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.
23
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.
24
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.
25
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.
26
Chapter 2
Part 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).
27
Chapter 2
Table C: Comparison of current and proposed provisions:
Current Company Law
Proposed Company Law
Name reservation compulsory
Memo and articles of association
must be lodged with registration
Pre-incorporation contracts are
complex
Name approval process is complex
Name reservation optional
Memo of incorporation only governing
doc & does not have be lodged
Pre-incorporation contracts simplified
Registration No is not acceptable as
name
Negation of defence of ultra vires
Requires up to 7 persons to register
a company
Name approval process simplified and
clarified
Registration 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
28
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 Shares
In order to facilitate equity financing of company in timesensitive 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).
29
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.
30
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.
31
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.
32
Chapter 4
Chapter 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.
33
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
34
Chapter 6: Business Rescue
Chapter 6
• 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.
35
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..
36
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
37
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.
38
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.
39
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.
40
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
41
Details
• Tshepo Mongalo
Project Manager: Corporate Law Reform
P/Bag X 84
Pretoria
0001
012 394 1503
0824109427
E-Mail: Tshepo@thedti.gov.za
42
THANK YOU