In Brief
Commercial and corporate legal issues unpacked
ISSUE
1
OCTOBER
2007
CORPORATE LAW REFORM
The Corporate Laws Amendment Act 24 of 2006
The Corporate Laws Amendment Act No. 24 of 2006 ("the Act"), which brings about significant
amendments to the Companies Act No.61 of 1973, was expected to come into force at the beginning of
October. This has not happened yet, but we expect its commencement very soon. It is likely that the Act
will come into force in stages, and that some financial reporting standard provisions may be delayed,
pending the establishment of the Financial Reporting Standards Council and the Financial Reporting
Investigations Panel. This however remains to be seen. For purposes of this briefing, we have assumed
that the whole Act will become effective.
WHAT DOES THE ACT INTRODUCE?
HOW IS SECTION 38 RELAXED?
HOW IS SECTION 228 TIGHTENED?
The Act introduces the following significant
changes:
A company may give financial assistance
for the purchase of or subscription for its
own shares or shares in its holding company if so authorised by special resolution,
and if the board is satisfied that:
A special resolution (instead of an ordinary
resolution) will now be necessary to dispose of the whole or greater part of the
assets or the whole or greater part (instead
of "substantially the whole") of the business
undertaking of the company.
• a further exception to the section 38
prohibition against financial assistance;
• stricter requirements under section 228
for the disposal of an undertaking or the
greater part of the assets of a company;
• the concepts of the widely held company ("WHC") and limited interest company ("LIC"). The Act erroneously also
refers to "public interest companies",
which we assume were intended to be
references to WHCs; and
• the establishment of the Financial Reporting Standards Council (FRSC) and
the Financial Reporting Investigations
Panel (FRIP).
• subsequent to the transaction, the
company's consolidated assets will
exceed its consolidated liabilities; and
• subsequent to providing the assistance
and for the duration of the transaction,
the company will be able to pay its
debts as they fall due in the ordinary
course of business.
This relaxation will, amongst other things,
facilitate black economic empowerment
transactions.
Is your company a WIDELY HELD COMPANY
or a LIMITED INTEREST COMPANY?
Turn the page to find out.
The use of the words "greater part" introduces a more objective test to be applied
with respect to the portion of the business
to be sold - a test which is already applied
in respect of the assets.
A Widely Held Company
is subject to substantially
stricter financial
reporting provisions
under the Act than a
Limited Interest Company.
PAGE 2
WHCs are subject to substantially stricter financial
reporting provisions under the Act than LICs. It is
therefore imperative to determine into which category
your company falls.
WHC
A company is a WHC if:
• its articles provide for an unrestricted transfer of its
shares in that the articles do not contain an
“effective right of pre-emption”. This is defined as a
pre-emptive right which operates in favour of all
shareholders of the company and upon every proposed sale of shares to a person who is not a
shareholder of the company;
• its articles permit the offering of shares to the public;
• it decides by special resolution to be a WHC; or
• it is a subsidiary of a WHC.
LIC
A company is a LIC if it is not a WHC.
CAN A COMPANY CONVERT FROM A WHC
TO A LIC?
A WHC may convert to a LIC:
• prior to the commencement date of the Act, if it
ceases to fall within the definition of a WHC, for
example, by adding an effective right of preemption to its articles; or
• after the commencement date of the Act, if it on or
prior to its next AGM ceases to fall within the definition of WHC and passes a special resolution to
become a LIC, provided that the directors certify
that the company will not in the following financial
year seek to become a WHC (section 1(7) of the
Act).
CONTACT
Alexia Christie
Director
achristie@mallinicks.co.za
(021) 410 9034
Trudie Broekmann
Senior Associate
tbroekmann@mallinicks.co.za
(021) 410 9042
Carmen Abrahams
Associate
cabrahams@mallinicks.co.za
(021) 410 2231
www.mallinicks.co.za
Public companies
• A public company not listed on the JSE may or
may not, in terms of its articles, place a restriction
on the transfer of its shares. In the absence of an
effective right of pre-emption in its articles, it will
be a WHC. Such a company can amend its articles by special resolution to include an effective
right of pre-emption and so become a LIC.
• A public company listed on the JSE may not, under the JSE rules, place any restriction on the
transfer of its shares. It therefore will not be able to
provide for an effective right of pre-emption in its
articles. Such a listed company will automatically
be a WHC and will have to comply with all the
stringent provisions of the Act, which are applicable to WHCs.
Private company
A private company may or may not be a WHC, depending on whether its articles provide for an unrestricted transfer of shares. If a private company's arti-
cles comply with Table B of the current Companies
Act 61 of 1973, it is likely to be a LIC.
WHAT ARE THE TRANSITIONAL PROVISIONS OF THE ACT?
Impact on WHCs
A company that falls within the definition of a WHC
on the commencement date of the Act may delay
compliance with the new section 285A(1) of the Act
(which contains many of the new stringent audit
requirements) until commencement of its next financial year.
In terms of section 285A(1) a WHC:
(a) must comply with new financial reporting standards as defined within the Act;
(b) must comply with the provisions of the Act and
Schedule 4 that are applicable to public interest
companies; and
(c) must prepare financial statements that fairly
present the financial position and the results of
the operations of the company (and its subsidiaries, if applicable) in accordance with paragraph (a).
A WHC that elects to delay compliance with section
285A(1) must:
•
until commencement of its next financial year,
continue to comply with the accounting and
disclosure provisions in sections 286, 288 to
291 and Schedule 4 of the current Companies
Act 61 of 1973, as they applied prior to the commencement date of the Act; and
• thereafter, comply with all the provisions applicable to "public interest companies" and/or
WHCs under the Act.
Impact on LICs
Until such time as accounting standards for LICs
are developed under the Act, each LIC must prepare its financial statements for each financial year
ending on or after 31 December 2005, in accordance with accounting practices adopted by that
LIC, which comply with the framework for the preparation and presentation of financial statements included in the financial reporting standards as defined in the Act. These practices must be attached
to any financial report that is based on such practices. It is not clear whether financial statements
already prepared and presented in respect of these
years will need to be amended.
Please contact us should you require any assistance to determine whether your company will be
a WHC or a LIC under the Act, or the impact of
any provision of the Act.
DISCLAIMER
© 2007 Mallinicks Inc.
The information contained in this briefing is provided for general information purposes only and should not be relied upon in relation to any specific situation.
Please obtain specific professional advice for your particular needs.