Corporate Law Reform

1
Corporate Law Reform

• Select Committee on Economic Foreign Affairs
• 20 June 2007

2
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.

3
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 30years
  (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

4
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• 1973 Companies Act outdated, highly formalistic,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.

5
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.

6
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.

7
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.

8
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.

9
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.

10
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
11
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.

12
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.

13
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.

14
Chapter 1

• The section defines what a widely held company as
  a company which, in its memorandum of
  incorporation the companys governing document,
  (i) permits it to offer any of its shares to the
  public (ii) limits, negates or restricts the
  pre-emptive 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.

15
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
  companyand (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.
•  

16
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.

17
Chapter 1

• Table BCategories 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 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
18
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.
19
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.
20
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 UKs Companies
  Act.
• The Bill facilitates company formation through
  the adoption of a short-form Memorandum of
  Incorporation and Notice of Incorporation.

21
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 non-prohibited 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.

22
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 ( 1516). 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 pre-incorporation
  agreements( 18).

23
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.

24
Chapter 2

• Specifically, the draft will restrict a company
  name only as far as necessary to -
• protect the public from misleading names which
  falsely imply an association that does not in
  fact exist
• 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 persons reputation and standing
  and
• 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.
•  

25
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.

26
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.
•  

27
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 companys
  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).

28
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 Registration No is not acceptable as name Negation of defence of ultra vires Requires up to 7 persons to register a company Name reservation optional Memo of incorporation only governing doc does not have be lodged Pre-incorporation contracts simplified 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
29
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 time-sensitive 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).  

30
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.

31
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 companys
  ability to raise equity, direct or indirect
  financial assistance for share purchases is
  permitted subject to limitations, including
  solvency and liquidity and shareholders approval.

32
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.

33
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.

34
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

35
Chapter 6

• Chapter 6 Business Rescue
• 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.

36
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
  shareholders 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..

37
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

38
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 Magistrates 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.

39
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.

40
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
  companys business.

41
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
42
Details

• Tshepo Mongalo
• Project Manager Corporate Law Reform
• P/Bag X 84
• Pretoria
• 0001
• 012 394 1503
• 0824109427
• E-Mail Tshepo_at_thedti.gov.za

43
THANK YOU