New Companies Act Alert
 

THE COMPANIES ACT NO 71 OF 2008

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After a somewhat eventful and lengthy journey, the new Companies Act No 71 of 2008 has finally been passed into law, with an effective date of 1 May 2011.

The Act should be read in conjunction with the Companies Amendment Act and the Companies Regulations of 2011.

To quote from the Minister of Trade and Industry, Dr. Rob Davies, the “new Companies Act is a major piece of legislation and reform which has a number of features to it which will certainly improve the environment for business operation in South Africa”.

The new Act replaces the previous Companies Act No 61 of 1973 and has been designed with the primary objective of bringing our general company and corporate law into line with modern trends and international best practice.

Some of the key features of the Act are as follows:

CLOSE CORPORATIONS

The new Act does not permit the registration of Close Corporations (CC’s) and no new CC’s will be incorporated after the effective date.

However, CC’s that have already been incorporated and are in existence will continue to remain in business, until such time as they are deregistered or dissolved in terms of the Close Corporations Act or the members choose to convert to a company under the new corporate regime.

The idea behind this is based upon the fact that the new Act has been designed to introduce a less onerous and more flexible regime within which small to medium-sized companies can operate.

REPLACEMENT OF CIPRO

The Act provides for the replacement of the Companies and Intellectual Property Registration Office (CIPRO) with a new institution, the Companies and Intellectual Property Commission.

The Commission will have significantly expanded powers and functions and will be responsible for inter alia the registration and implementation of companies. A new process for the registration of companies will apply and will include an electronic means by which this can take place.

CATEGORIES OF COMPANIES

The Act introduces two categories of companies, non-profit and profit companies.

Non-profit companies will replace those companies previously limited by guarantee and section 21 companies.

Profit companies can take one of four different forms:

  • Personal liability companies (indicated by the word “Incorporated” or “Inc” after its name)

  • State-owned companies (“SOE Ltd”)

  • Public companies (“Limited” or “Ltd”)

  • Private companies (“Proprietary Limited” or “(Pty) Ltd”)

COMPANY DOCUMENTS

The Memorandum and Articles of Association are replaced with one document entitled the Memorandum of Incorporation (MOI).

The MOI will be extremely important in determining the rights, duties and responsibilities of the shareholders and directors of the company.

The MOI will be enforceable between the company and each shareholder, between the shareholders themselves and between the company and each director. It may only be amended by special resolution adopted at a shareholder’s meeting or in other specific circumstances set out in the new Act.

The Act provides for a two year transitional period, until 1 May 2013, in which companies can convert their existing Memorandum and Articles of Association into an MOI, which must be consistent with the provisions of the Act.

During this transitional period, the provisions of the Memorandum and Articles of Association will prevail in the event of any inconsistency with the new Act.

After 1 May 2013, the MOI will prevail.

This will have a major impact upon shareholder agreements, as from 1 May 2013 the provisions of these agreements will be subject to the MOI.

IMPLICATIONS FOR THE INSURANCE INDUSTRY

Naturally of course, insurance companies and brokers, underwriting managers, administrators and other entities operating as companies within the insurance industry will have to ensure that they are fully compliant with the provisions of the new Act.

Various provisions of the new Act will also have a significant impact upon the potential liabilities that companies will face.

In particular, insurers that provide Directors and Officers cover will have to carefully consider the potential exposure of the company’s board of directors and other senior officer bearers.

Duties and standards of director’s conduct

The duties and standards of director’s conduct have been partially codified and are set out at Section 76 of the Act.

Amongst other things, a director –

  • Must not use his position to gain any advantage for himself or to knowingly cause harm to the company or subsidiaries;


  • Must communicate to the board, at the earliest practicable opportunity, any information that comes to his attention unless such information is immaterial or available to the public or other directors;


  • Must perform his functions in good faith, for a proper purpose, in the best interests of the company and with the degree of care, skill and diligence reasonably expected of a person (a) carrying out the same functions in relation to the company as those carried out by that director and (b) having the general knowledge, skill and experience of that director.

Whilst Section 76 does not materially alter the common law standard of care, it does provide an easily accessible reference list for the standards and duties expected of directors. This in itself may facilitate and encourage more claims against the directors of a company.

Section 76 also provides for a slightly modified version of the so-called business judgment rule, which will be of some comfort to directors.

In this regard, a director will have complied with his duty of care where –

(i) The director has taken reasonably diligent steps to become informed about the matter;

(ii) The director had no material personal financial interest in the subject matter of the decision or complied with the requirements of the Act pertaining to personal financial interests; and

(iii) The director had a rational basis for believing that the decision was in the best interests of the company.

More parties can bring claims

The new Act extends the powers and remedies available to shareholders, stakeholders and third parties in instituting claims against the directors of a company.

This marks a significant departure from the limited remedies available under the old Companies Act, which were generally speaking limited to the shareholders of the company.

Employees, trade unions and creditors for example will now all be able to utilise the remedies (more fully set out below) and hold the board of directors to account for their decisions and actions.

Introduction of the class action

The Act expressly incorporates the right at Section 157 to bring an application or action before a court by a person “...acting as a member of, or in the interest of, a group or class of affected persons, or an association acting in the interests of its members”.

Claimants will now be able to litigate against the board of directors for and on behalf of a number of other persons. This will enable claimants to act in concert with each other in a co-ordinated and potentially devastating manner against directors of the company.

In addition, successful class actions will lead to multiple awards for damages and are likely to result in additional legal costs in dealing with all of the claimants. Significant investigation costs may also arise in respect of dealing with and investigating the merits of a threatened class action.

A far more effective derivative action

The Act also provides at Section 165 for a far more effective derivative action than that previously allowed for under the old Companies Act.

The primary purpose of the derivative action is to allow a person who believes that the company should take legal action, but where the board of directors has for whatever reason failed or refused to do so, to apply for and compel the company to initiate such action.

The mechanism by which such an action can be instituted under the new Act is far simpler than that permitted under the old Companies Act, which typically involved a formal application to a court of law.

Under the new Act, a person may now simply serve a demand upon a company to commence or continue legal proceedings in order to protect the legal interests of the company.

The persons permitted to do so include the shareholders of the company, those persons entitled to be registered as a shareholder of the company or a related company, the directors or prescribed officers, registered trade unions or a party who has been granted leave of the court to do so.

The fact that such action can be launched to protect the “legal interests” of the company is also potentially extensive and will cover a far wider range of matters than simply enforcing a legal right – the notion of legal interests has generally been afforded a far wider interpretation in our law than a legal right and includes mere concerns of a legal, financial or other matter.

The company will also have to consider and deal with the potentially significant investigation and related costs in dealing with such demands, as well as the diversion of senior management’s time, energy and focus away from the core business of the company, in order to deal which such demands.

Link between class actions and derivative action

Of particular interest is the fact that the new Act also provides for a link between a class action and derivative action.

A demand may be served on a company to take legal action (i.e. the derivative action) which demand may be exercised by a person acting on behalf of another party (i.e. the class action).

Company’s right to purchase insurance

There is good news in the fact that the new Act has brought clarity to the previous, somewhat uncertain position, regarding a company’s right to purchase insurance to protect both itself and its directors.

Section 78 of the Act now provides that a company may purchase insurance to protect both itself and its directors, irrespective of whether the insurance is intended to indemnify the director in respect of liabilities owed both to the company and to third parties, provided that the insurance does not cover certain circumstances set out in the Act.
The circumstances in which a company may not purchase insurance and indemnify a director include the following:

  • Absence of authority to act

  • Reckless or negligent trading

  • Fraud


  • Wilful misconduct


  • Fines relating to the conviction of an offence by a director

The Act also provides that the company may purchase insurance against any expenses that the company is permitted to advance a director to defend litigation arising out of the director’s services to the company, if the proceedings are either abandoned or exculpate the director, or arise in respect of those liabilities that the company is permitted to indemnify the director.
Civil liability

Finally, the Act expressly recognises and incorporates the notion of civil liability.

Section 218 of the Act provides inter alia that any person who contravenes any provision of the Act is liable to any other person for loss or damage suffered by that person as a result of that contravention.

Important Notice:
Kindly note that this publication is not and shall not be construed as legal advice and is issued solely for general information purposes. It is not an exhaustive account of all the provisions of the Companies Act No 71 of 2008.