The Companies Act 2008 - IsoLeso Companies Act, 1973 (“the 1973 Act”) as contained in the...

The Companies Act 2008 A Synopsis for Directors 12 June 2009

2 Confidential – All Rights Reserved Companies Act 2008 – Ernst & Young 2009

1. Introduction

This synopsis provides a brief summary of the key changes to the current Companies Act, 1973 (“the 1973 Act”) as contained in the Companies Act , 2008 (“the 2008 Act”).

The purpose of this synopsis is to provide a high level overview of the key matters that a director of a company should know and is not intended to be exhaustive.

The 2008 Act was signed into law by the President on 9 April 2009.

It is effective on a date yet to be gazetted which may not be less than one year after the 2008 Act was assented to. Commentators are speculating that the 2008 Act will be made effective on 1 July 2010.

At the time of releasing this synopsis the Minister’s Regulations to be issued in terms of section 223 of the 2008 Act had not been published.

This synopsis is not a substitute for reading the detailed provisions of the 2008 Act. We recommend that any decisions or actions being considered on a review of these amendments be done only after consultation with appropriately qualified legal advisors.

2. Background

The 2008 Act is the final stage of the Department of Trade and Industry’s (“the dti”) reform of corporate law in South Africa. The Corporate Laws Amendment Act, 2006 (“the CLAA”) which preceded the 2008 Act was the first phase. Whereas the CLAA amended the 1973 Act, the 2008 Act will replace the 1973 Act in its entirety.

3. Close Corporations

From the effective date, no new close corporations may be formed. Many of the characteristics of the close corporation are now incorporated into a private company, including many of the benefits, such as no audit being required under certain conditions.

4. Categories of Companies

The CLAA introduced two new categories of companies, being Widely Held Companies and Limited Interest Companies. These categories were not retained in the 2008 Act. The following categories (which are more aligned to the categories of companies in the 1973 Act prior to the amendments made by the CLAA) of companies are included in the 2008 Act:

1. Non-profit companies, which is the successor to section 21 companies in the 1973 Act. These companies are subject to a varied application of the 2008 Act. The 2008 Act outlines sections that are not applicable to these companies. The name of a non-profit company must be followed by the expression “NPC”

Close Corporations will continue to exist, although no new Close Corporations may be formed

A company can be a non-profit company or a profit company

The 2008 Act is a complete rewrite of the Companies Act of 1973


2. Profit companies which can be one of the following:

a. State-Owned Companies (“SOC”). This is a new category. The 2008 Act provides for separate legislative treatment regarding certain matters affecting a SOC to avoid conflict or overlap with other legislation specifically applicable to SOC’s. The name of a SOC must be followed by the expression “SOC Ltd.”

b. Private companies, which are comparable with “private companies” in the 1973 Act. One of the requirements for being a private company in terms of the 1973 Act, namely having no more than 50 members, has been removed. This will potentially allow for a wider application of this type of company.

A private company in the 2008 Act is not an SOC and, in its Memorandum of Incorporation (“the Memorandum”) prohibits the offering of its securities to the public, and restricts the transferability of its securities.

The name of a private company must be followed by the expression “Proprietary Limited” or its abbreviation “(Pty) Ltd.”

c. Personal Liability companies, which are private companies comparable with Unlimited Liability companies covered in Section 53(b) of the 1973 Act. The name of a personal liability company must be followed by the expression “Incorporated” or its abbreviation “Inc.”; and

d. Public companies, are defined as all other companies and are comparable with companies of the same name under the 1973 Act. The name of a public company must be followed by the expression “Limited” or its abbreviation “Ltd.”

With the introduction of widely held companies under the Corporate Laws Amendment Act, many of the requirements contained in the 1973 Act which used to apply only to public companies were changed to apply to the newly defined widely held company. Due to the broad definition of a widely held company (which could include, inter alia, a private company which is a subsidiary of listed company), it broadened the application of many sections of the 1973 Act to apply to companies it did not apply to previously. The 2008 Act removes this wider and onerous application of the law which was designed for companies with a public nature rather than private.

A profit company can be a private company, a public company, a personal liability company or a state-owned company


5. Memorandum of Incorporation

The 2008 Act provides for minimal requirements on incorporation and maximum flexibility in the design and structure of the constitution of a company.

The current Memorandum of Association and Articles of Association in terms of the 1973 Act are replaced with a single document, the Memorandum of Incorporation (“the Memorandum”). In accordance with the transitional provisions contained in Schedule 5 of the 2008 Act, every pre-existing company would be deemed to have amended its Memorandum in order to comply with section 11(3)(b) of the 2008 Act regarding company names as well as to comply with the specific requirements of a non-profit company, or a limited liability company as discussed in section on “Categories of Companies” above. Within the first two years following the effective date of the 2008 Act, a company will be allowed to file, without charge, an amendment to its Memorandum to bring it in line with the 2008 Act.

Every company will, in due course, need to review the content of its current Memorandum of Association and Articles of Association and amend it, if needed, to ensure that it is in compliance with the new requirements of the 2008 Act.

The 2008 Act does not contain a standard format for the Memorandum. It is anticipated that such a standard memorandum may be issued by way of a Regulation at a later date.

6. Accountability and Transparency

Every company must:

1. Have a registered office and maintain their documents at that office (or at another location if a company files a notice setting out the locations at which these records are accessible);

2. Retain certain documents for a minimum of seven years (section 24 of the 2008 Act);

3. Make certain specified records available to shareholders; and

4. Annually file an Annual Return with the Commission in the prescribed format. The Annual Return of all public companies must include a copy of the Annual Financial Statements (section 33 of the 2008 Act).

Every company will have to reconsider their documentation retention policy. To the extent that the documents listed in section 24 of the 2008 Act are not currently retained for the indicated period, the company would need to do so from the effective date of the 2008 Act. The transitional provisions indicate that this requirement will be enforced prospectively. It would therefore not be a contravention of section 24(1) of the 2008 Act if the listed documents have not been retained as indicated prior to the effective date of the 2008 Act. We would, however, recommend that a company implements a policy for the retention of the indicated records as soon as possible.

The Memorandum of Incorporation is the sole governing document.

All companies must: ► Retain certain documents

for 7 years ► Make certain records

available to the shareholders

► Submit an Accountability and Transparency Report


7. Reckless Trading and Trading under Insolvent Circumstances

In terms of section 22 of the 2008 Act, a company may not carry on business recklessly, with gross negligence, with the intent to defraud or for any other fraudulent purposes.

Also a company may not trade under insolvent circumstances.

This section of the 2008 Act significantly widens the scope and applicability of the current section 424 of the 1973 Act. Under section 424 of the 1973 Act, a director can be held personally liable, without any limitation of liability for all or any of the debts or other liabilities of the company if a court found that any business of the company was carried on recklessly or with the intent to defraud creditors.

Section 22 of the 2008 Act now also includes trading under insolvent circumstances. As indicated later on, there are significant liabilities and penalties, including, inter alia, a potential 10 year jail sentence and personal liability for any loss, damage or cost suffered by the company, as a result of a contravention of section 22.

Although “insolvent circumstances” is not defined in the 2008 Act, solvency and liquidity is defined in section 4 of the 2008 Act as meaning

► The assets of the company (or the group of companies in the case of a group), fairly valued, equal or exceed the liabilities(including contingent liabilities) of the company (or the group of companies in the case of a group), fairly valued

► The company can pay its debts as they fall due for a period of 12 months.

Section 22 in its current form does not make provision for taking into consideration other actions taken by a company to address the insolvency, such as obtaining a subordination agreement or developing a plan to trade out of the insolvent position.

If one considers the requirements of section 22, regarding reckless trading, and Chapter 6, regarding business rescue (discussed below), of the 2008 Act together, it becomes more apparent that the law expects a company to take the necessary action, such as business rescue proceedings, before the company becomes insolvent.

Considering the impact which trading “recklessly” could have on the company and in particular the consequences for directors, company directors will have to, more than ever before, constantly monitor the company’s financial position and ensure that appropriate action is taken to prevent insolvency. Where a company is currently insolvent, the directors would have to take steps in order to ensure that the insolvent position is rectified before the 2008 Act becomes effective.

8. Annual Financial Statements

All companies will continue to maintain accounting records and to prepare annual financial statements in accordance with the requirements of sections 28 to 30 of the 2008 Act.

A company may not trade recklessly or for fraudulent purposes; or under insolvent circumstances

All companies must maintain accounting records & prepare Annual Financial Statements


Unlike the requirements of the current 1973 Act which requires an AGM to be held within 9 months and the annual financial statements to be presented at that AGM, the 2008 Act specifically requires a company to prepare annual financial statements within 6 months of its year-end. The board has to approve the annual financial statements. It further requires these annual financial statements to be presented to the first shareholders meeting after the financial statements have been approved by the board.

The 2008 Act only requires a public company to call an annual general meeting within 15 months of the date of the previous annual general meeting to present the audited annual financial statements to the shareholders.

The 2008 Act does not require a private company to have an annual general meeting, nor does it prescribe a timeframe for a private company to call a shareholders’ meeting to present the annual financial statements to the shareholders. The only requirement for a private company in this regard is that the financial statements must be prepared within 6 months of its year-end and for the annual financial statements to be presented at the first shareholders’ meeting that is held after the approval date of the annual financial statements.

Many companies may need to revise their current financial reporting processes and plan to ensure that the annual financial statements are prepared within the new 6 month timeframe.

Although the 2008 Act imposes a much reduced timeframe for the board to prepare financial statements, it does not impose any restrictions on the time that private companies have to present these annual financial statements before the shareholders.

Refer to Appendix A for a table summarising the use of accounting frameworks.

9. Financial Statement Audits

Refer to Appendix C for a decision tree to determine whether a company should be audited, independently reviewed, or neither audited nor independently reviewed.

Many private companies and non-profit companies may no longer be required by law to be audited. There may, however, be other circumstances in which the company voluntarily decides to be audited. This would be, for example, where a financial institution requires them to present audited financial statements before granting a loan. A company will therefore need to carefully consider whether an “audit history” may be required at a later time before deciding whether to voluntarily subject itself to an audit or not. Companies should also consider the potential cost impact of additional procedures that may be required to audit opening balances where previous financial years were not audited as well as the potential impact on the audit report in instances where historical information or records may no longer be available many years later.

The regulations that the Minister might issue, may still have a significant impact on whether a category of private companies will be required to be audited or not. As at the date of this synopsis, those regulations have not been published.

The Minister will issue Regulations which will outline what a “review” will entail. These regulations may contain requirements which go beyond the ambit of a normal review conducted in terms

Annual financial statements have to be prepared within 6 months after the year-end The annual financial statements have to be presented to the shareholders at the first shareholders’ meeting following the approval Private Companies are not required to have an AGM

Certain companies are exempt from an audit


of International Standards on Review Engagements. As at the date of this synopsis, those regulations have not been published and it is therefore not possible to indicate what such a review would entail although we expect the Minister’s regulations will require the use of the standards adopted by the IRBA which are those issued by the International Federation of Accountants.

It is important to note that whilst only the individual auditor of a widely held company is required to rotate off the engagement after 5 years according to the 1973 Act, the 2008 Act’s rotation requirements apply equally to all companies being audited. Even a private company that voluntarily chooses to be audited will need to ensure that the auditor is rotated every 5 years.

The 2008 Act does not contain any transitional requirements in this regard. Every company being audited will have to engage with its current auditor before the Act becomes effective to ensure that a succession plan is in place before the 2008 Act becomes effective.

10. Company finance

When the 2008 Act becomes effective, the concept of shares with a nominal value will no longer exist. The transitional provisions indicate that all shares which currently have a nominal value, will continue to have such a nominal value until the Minister issues regulations indicating how such shares should be converted into shares without a nominal value. As at the date of this synopsis, those regulations have not been published.

The solvency and liquidity test in the 2008 Act, is similar to the solvency and liquidity that a company has to consider in terms of various sections in the 1973 Act, such as section 85 regarding circumstances when a company may buy back its own shares or make distributions to its shareholders.

To pass the solvency test, the company’s aggregate assets, fairly valued, must be equal to or exceed the aggregate liabilities (including contingent liabilities ) of the company, fairly valued (section 4(1)(a) of the 2008 Act).

To pass the liquidity test, the company must be able to pay its debts as they become due in the ordinary course of business for a period of 12 months after the date on which the test is considered (or in the case of a distribution, 12 months after the distribution) (section 4(1)(b) of the 2008 Act).

Shareholder approval will still be required for certain transactions including, inter alia, shares and options issued to directors, providing financial assistance to purchase a company’s own shares and financial assistance to directors.

The existing provisions relating to specific forms of debt are revised. It provides for the granting of “special privileges” to certain debt holders regarding, for example, attending and voting at general meetings. Debt can be either secured or unsecured (section 43 of the 2008 Act).

Section 43 of the 2008 Act states that a debt instrument includes any securities other than the shares of the company. “Securities” is defined as having the meaning set out in section 1 of the Securities Services Act, 2004. Refer to Appendix C for the full definition of “securities”. It does not include promissory notes and loans, whether constituting an encumbrance on the assets of the company or not.

Auditor rotation for all audits

A capital maintenance regime replaces par value shares and nominal values


11. Governance of Companies

11.1 Auditors The qualification requirements for a person to be appointed as an auditor are very similar to the requirements currently contained in section 275 of the 1973 Act.

The auditor for a public company or a state owned company must be appointed at the annual general meeting.

In terms of section 270(2) of the 1973 Act, an auditor is deemed to be reappointed at the annual general meeting. Section 90 (6) of the 2008 Act stipulates that “a retiring auditor may be automatically reappointed at an annual general meeting without any resolution being passed”. As in the past, it would therefore be possible for the auditor to be automatically reappointed at the annual general meeting.

As discussed under section 11.3 of this synopsis, only a public company is required to have an annual general meeting. The 2008 Act does not deal with the process that should be followed where a company, other than a public company, decides to voluntarily appoint an auditor or where a regulation issued by the Minister in terms of section 30(7) requires a private company to appoint an auditor. It is recommended that the auditor should be appointed / re-appointed annually at the same shareholders’ meeting where the financial statements are presented to the shareholders.

Under section 93 of the 2008 Act, the auditor of the company:

1. Has the right to access at any time the accounting records and all books and documents of the company and to require from the directors and prescribed officers any information and explanations necessary to perform their duties;

2. Has the right to access any current or former financial statements of any subsidiary of the company and to require from the directors and prescribed officers of the company or the subsidiary any information and explanations necessary to perform their duties; and

3. Is entitled to receive notices of and attend any general shareholders meeting and be heard at that meeting regarding any matter “concerning the auditors’ duties or functions”.

Auditors are not obligated to attend annual general meetings nor required to answer questions about the audit but are “entitled” to attend and “entitled” to answer questions about the auditor’s “duties or functions”.

11.2 Audit Committees Refer to Appendix B for a summary of when an audit committee has to be appointed as well as a detailed discussion of the duties of the audit committee and the criteria for being a member of the audit committee.

The minimum number of members of the audit committee has been increased from 2 to 3. A company required to appoint an audit committee will therefore need to ensure that at least one

An auditor may be automatically re-appointed at the AGM An auditor has the right of access to records and information of the company and its subsidiaries and to attend any general shareholders meeting

An auditor is not required to attend AGM nor obliged to answer questions about the audit


additional member is appointed if it currently only consists of 2 members.

The CLAA amended the 1973 Act by adding section 169A which states that a member of the audit committee has to be a non-executive director of the company that must act independently.

The requirements of the 2008 Act (as discussed in the Appendix) are in many respects similar to the requirements of the 1973 Act, although there are some differences.

Whilst the 1973 Act requires all widely held companies to appoint an audit committee (including certain private companies which are subsidiaries of a widely held company) the 2008 Act only requires public companies and state owned companies to appoint an audit committee. Many companies, which are currently required to appoint an audit committee, may therefore not need to appoint one once the 2008 Act becomes effective.

Sections 15(6)(c) , 77(1) and 72(2) of the 2008 Act read together imply that a person, who is not a director of the company, may be a member of the audit committee. However section 94(4) states that:

“(4) Each member of an audit committee of a company must---

(a) be a director of the company, who satisfies any applicable requirements prescribed in terms of subsection (5)…”

Accordingly, to be a member of an audit committee, you must also be a duly appointed director of the company.

The duties and functions of the audit committee remains largely the same, although there are some changes.

The regulations that the Minister may issue regarding the qualifications of a member of the audit committee may have a significant impact on the composition of the audit committee. The regulations may require one member to be “financially literate”.

Audit committee required for public companies and state-owned companies Every member of the audit committee must also be a director of the company


11.3 Shareholders Meetings The 2008 Act introduces flexibility in the manner and form of shareholder meetings. These include, inter alia, the following:

1. Any resolution that could be voted on at a shareholders’ meeting, may also be submitted to the shareholders for consideration and the shareholders may then vote on that matter in writing within 20 business days after the resolution was submitted to them (section 60 of the 2008 Act).

2. Annual General Meeting (“AGM”) (Section 61 of the 2008 Act):

a. A public company must convene an AGM once every calendar year, but no more than 15 months after the date of the previous AGM.

b. A private company is not required to convene an AGM.

c. When an AGM is held, the following matters must be dealt with:

i. Presentation of the directors’ report, audit committee report and the audited financial statements for the immediately preceding financial year;

ii. Election of directors;

iii. Appointment of the auditor and audit committee for the ensuing year; and

iv. Any other matter raised by the shareholder, with or without advance notice to the company.

3. A shareholder may be represented by proxy and such a proxy need not be a shareholder of the company (Section 58 of the 2008 Act).

4. Unless prohibited by the Memorandum, a shareholders meeting may be conducted entirely by electronic communication; or one or more shareholders may participate by electronic communication in all or part of the shareholders’ meeting as long as it enables all persons participating in the meeting to communicate concurrently with each other without an intermediary.

5. Resolutions:

a. General: The 2008 Act provides for two types of resolutions, being an ordinary resolution and a special resolution;

b. Ordinary resolution:

i. For an ordinary resolution to be approved, it must be supported by more than 50% of the voting rights exercised. Except for an ordinary resolution to remove a director in terms of section 71 of the 2008 Act, the Memorandum may require a higher percentage of voting rights to approve an

Resolutions to be voted on by shareholders can also be submitted to the shareholders and voted on in writing

A shareholders meeting may be conducted by electronic communication

A resolution can be either an ordinary resolution or a special resolution


ordinary resolution; or one or more higher percentages of voting rights to approve ordinary resolutions concerning one or more particular matters.

c. Special resolution:

i. For a special resolution to be approved, it must be supported by at least 75% of the voting rights exercised on the resolution. The Memorandum may permit a lower percentage of voting rights to approve a special resolution; or one or more lower percentages of voting rights to approve a special resolution concerning one or more particular matters.

ii. There must at all times be a margin of at least 10 percentage points between the requirements for an ordinary resolution and the requirements for a special resolution to be passed.

The flexibility introduced by the 2008 Act regarding the conduct at shareholders meetings, including participation by electronic means and the alternative to an actual meeting as discussed above, provides companies with alternative and potentially more efficient means for conducting its business.

The 2008 Act allows for greater flexibility in setting a quorum for a meeting. The default quorum for shareholders meetings is 25%, however, the company’s Memorandum may specify a higher or lower percentage.

11.4 Directors 11.4.1 General The board of a private company must comprise at least one director. The board for a public company or a non-profit company must comprise of at least three directors. The Memorandum may also provide for the appointment of alternate directors of the company (section 66(2) of the 2008 Act).

11.4.2 Appointment and dismissal of directors Unless the Memorandum provides otherwise, shareholders will no longer be allowed to vote for more than one director simultaneously. The company must vote for each director separately.

Unless the Memorandum provides otherwise, the board may appoint a person who satisfies the requirements for election as a director to fill a vacancy and serve as a director of the company on a temporary basis until the vacancy has been filled as described above.

Despite anything to the contrary in the Memorandum or an agreement between the company and the director, a director may be removed from office by the adoption of an ordinary resolution at a shareholders meeting (section 71 of the 2008 Act).

Directors’ remuneration must be paid only in accordance with a special resolution approved by the shareholders within the previous two years (section 66(9) of the 2008 Act).

Public companies and non-profit companies must have at least 3 directors

Appointment of each director to be voted on separately by shareholders

Directors’ remuneration to be approved prospectively by special resolution passed within 2 prior years


As stated above, the remuneration paid to a director must be paid in accordance with a special resolution which may not be older than two years. Every company will therefore have to ensure that it passes a special resolution before remuneration is paid to the director. If a company has not yet passed such a resolution, they will have to do so before the first remuneration is paid to directors after the 2008 Act becomes effective. Companies will also have to ensure that this special resolution is updated regularly, but at least every two years, to ensure that every remuneration payment made to a director is in accordance with a special resolution which is not older than two years.

11.4.3 Ineligibility and disqualification The Memorandum may prescribe additional grounds for ineligibility or disqualification as a director and may also impose minimum qualifications to be met by directors of that company.

The 1973 Act lists instances, similar to those listed below, where a person becomes disqualified to be a director of a company. The 2008 Act divides these between matters that cause a person to be ineligible to be a director and matters that disqualify a person from being a director. A person who is ineligible to be a director, may not become a director for as long as the ineligibility persists. A disqualification, however, is temporary in certain instances as discussed below. This means that a person, who may have been permanently disqualified under the 1973 Act, may now become qualified again under certain circumstances under the 2008 Act.

Section 69(7) of the 2008 Act renders the following persons as ineligible to be a director of a company:

1. A juristic person;

2. An unemancipated minor; or

3. A person who does not satisfy any qualification set out in the Memorandum.

In terms of section 69(8) of the 2008 Act, the following persons are disqualified from being a director:

1. A court has prohibited that person from being a director or declared such a person to be delinquent;

2. An unrehabilitated insolvent;

3. A person prohibited from being a director in terms of any public regulation;

4. A person that has been removed from an office of trust on the ground of misconduct involving dishonesty; or

5. A person who has been convicted and imprisoned, without the option of a fine, for theft, fraud, forgery, perjury, or an offence involving fraud, misrepresentation or dishonesty.

A disqualification relating to points 4 and 5 above ends at the later of:

► 5 years after the date of removal from office, or the completion of any sentence imposed for the relevant offence, as the case may be; or

Certain persons are ineligible or disqualified from being a director


► At the end of one or more extensions as determined by a court (section 69(9) of the 2008 Act.

11.4.4 Directors’ conduct The 2008 Act incorporates many of the duties which were previously considered to be common law fiduciary duties. Although these duties have now been specifically included into the legislation, it should not result in any additional duties which the director did not previously have under common law.

Section 76(3) of the 2008 Act requires that a director of a company must exercise the powers and perform the functions of a director:

“(a) in good faith and for proper purpose;

(b) in the best interest of the company; and

(c) with the degree of care, skill and diligence that may be reasonably be expected of a person –

(i) carrying out the same functions in relation to the company as those carried out by the director; and

(ii) having the general knowledge, skills and experience of that director”.

Furthermore, a director must not use his/her position as a director, or any information obtained as a director, to gain personal advantage or to cause harm to the company or a subsidiary of the company (section 76(2)(a) of the 2008 Act).

A director must communicate to the Board any information that comes to the director’s attention in terms of section 76(2)(b), other than information which the director reasonably believes is immaterial to the company or is generally available to the public or known to the other directors; or information which the director is bound not to disclose by a legal or ethical obligation of confidentiality.

Directors must act in good faith and in the best interest of the company


A director of a company can demonstrate that he/she acted in the best interest of the company and with the requisite care, skill and diligence if:

1. The director has taken “reasonably diligent steps to become informed about the matter”;

2. The director either did not have an interest in the matter being considered or declared such an interest as required by section 75 of the 2008 Act; and

3. The director made, or supported a decision made by a committee of the board, with “a rational basis for believing, and did believe, that the decision was in the best interest of the company” (section 76(4)(a) of the 2008 Act).

In making a decision as contemplated in the preceding paragraph, the director may rely on certain parties, such as an employee of the company, legal counsel, accountants and other professional persons, or a committee of the board (refer to section 76 of the 2008 Act for a detailed list).

11.4.5 Board committees and board meetings Unless the Memorandum provides otherwise, the 2008 Act allows the board to appoint any number of committees to deal with matters on the board’s behalf and with the full authority of the board. Such a committee may also include members who are not directors of the company as long as those members are not disqualified or ineligible to be a director. Any non-director member of the committee will not be allowed to vote on any matter considered by the committee.

Unless the Memorandum provides otherwise, a meeting of the board may be conducted by electronic communication; or one or more directors may participate in a meeting by electronic communication. All participants in the meeting must be able to communicate concurrently without an intermediary.

Unless the Memorandum provides otherwise, a decision that could be voted on at a meeting of the board may instead be adopted by written consent of the majority of the directors, given in person or by electronic communication

The flexibility provided by the 2008 Act regarding the manner in which a board meeting may be conducted as discussed above, provides a company with alternative and potentially more efficient means for conducting its business.

12 Liability of directors

As mentioned previously, many of the previous common law fiduciary duties have been written into the 2008 Act. The 2008 Act now clearly sets out the duties and functions of the directors as well as the liabilities which the director could incur regarding any breaches of those duties and functions.

The liabilities that are incurred are joint and several with any other person who may be held liable for the same act. Any person with a claim can therefore bring such a claim against all the directors or any one particular director. A court may provide relief.

The liabilities can be briefly summarised as liabilities for breaches relating to:

A board may appoint committees and delegate any authority of the board to such a committee A committee of the board may include persons who are not directors A board meeting may be conducted by electronic communication A board decision can be voted on in writing

Directors could be held jointly and severally liable with any other person who may be held liable for the same act A court may grant relief


1. Fiduciary duties relating to non-disclosure of personal financial interests; misusing the position as director to gain personal advantage; or not acting in good faith and for proper purpose or in the best interest of the company;

2. Not acting with the requisite “care, skill and diligence”;

3. Acting in the name of the company despite knowing he/she does not have the authority to do so;

4. Reckless trading (including trading under insolvent conditions);

5. An act “calculated to defraud a creditor, employee or shareholder of the company, or had another fraudulent purpose”;

6. Signing, consenting to or authorising the publication of financial statements that are false and misleading in a material respect;

7. Issuing unauthorised shares or securities

8. Providing financial assistance contrary to the provisions of the 2008 Act;

9. Approving a distribution or acquiring the company’s own shares contrary to the provisions of the 2008 Act.

As discussed above, the director can incur significant liabilities for the contravention of certain sections of the 2008 Act. The 2008 Act, however, provides some relief by allowing a company to indemnify a director against certain liabilities and by allowing a company to purchase insurance covering the company and/or the directors against any such losses.

To the extent that it is permitted by the 2008 Act, companies should consider purchasing insurance to cover the company and the directors against such liabilities.

Directors may be liable for: ► Breach of fiduciary duty

or delict ► Breaching the provisions

of the 2008 Act or the Memorandum

► Agreeing to reckless trading

► Misleading financial statements

► Failing to vote against certain decisions

► Certain costs pertaining to legal proceedings


13. Enforcement and Penalties

Although the 2008 Act contains fewer offences than the 1973 Act, the remaining offences could result in significant penalties for the parties involved.

One of the most significant penalties is for a contravention of section 22 of the 2008 Act relating to reckless trading, trading with the intent to defraud creditors and trading under insolvent conditions. Such an offence could lead to the directors incurring unlimited liability as well as a potential 10 year jail sentence. Companies will need to monitor their financial position with great care to prevent an insolvency. Where a company is currently insolvent, it would need to take immediate action to rectify that insolvent position. It is unclear whether a loan subordination or shareholder guarantee would be regarded as being steps which would satisfy the provisions of the act dealing with trading in insolvent circumstances.

The same penalty applies to a person who has been responsible for financial statements being prepared, approved, disseminated or published which are materially non-compliant with standards or are misleading or false.

Companies, and particularly the directors, would need to ensure that sufficient focus is place on the matters listed in this section to prevent the potential liabilities highlighted herein.

Refer to section 216 of the 2008 Act for more details regarding penalties.

14. Takeovers and Fundamental Transactions

Chapter 5 of the 2008 Act reforms the Panel (currently the Securities Regulation Panel) and the requirements regarding fundamental transactions, including, inter alia, takeovers, amalgamations and mergers.

The 2008 Act introduces a compulsory acquisition of minority shareholding in a takeover scenario when a person (including a juristic person) acquires voting rights in a company after which the total voting rights held by that person exceeds the set threshold. Such a threshold has to be prescribed by the Minister and may not be less than 35%.

The 2008 Act changes the requirement for court approval by only requiring such approval if there is a significant minority (defined as being at least 15%) opposed to the transaction or where the court grants a person leave to apply to a court to review the transaction.

The 2008 Act also now specifically includes provisions regarding amalgamations and mergers.

The above changes should further promote innovation and investment in South African companies in line with the objectives of the 2008 Act.

Penalties for offences include imprisonment of up to 10 years for breaching confidentiality, making false statements, being involved in reckless conduct and materially false financial statements

New remedy for compulsory acquisition of minority shareholding in a takeover scenario Court approval only required if more than 15% oppose the transaction

Companies may amalgamate or merge


15. Business Rescue

The current provisions in the 1973 Act regarding judicial management is considered by many to be a failure in practice. As a result chapter 6 of the 2008 Act replaces the current judicial management system in its entirety with a new business rescue regime.

The main impact would be that business rescue is largely self-administered with a Business Rescue Practitioner (“the Practitioner”) being appointed who will have full management control with the view of developing and implementing (if approved) a plan to effectively rescue the company. The company is also protected from certain legal proceedings.

Chapter 6 received much criticism from various parties, but remains in place. It was suggested by many that business rescue should be dealt with in insolvency legislation. Many are also concerned with the powers awarded to the Practitioner especially since the role of the Practitioner is a new role that is not currently practised / mastered by any particular profession. The role of the Practitioner is a multi-disciplinary role and practitioners will have to evolve over time.

16. Remedies

Remedies available in terms of Chapter 7 of the 2008 Act to enforce any provision of the 2008 Act, the Memorandum or any transaction or agreement as contemplated in the 2008 Act, includes:

1. Alternative Dispute Resolution;

2. Applying to the Companies Tribunal for adjudication on a matter for which such an application is permitted in the 2008 Act;

3. Applying to the High Court for an appropriate order;

4. File a complaint to the Panel regarding fundamental transactions, takeovers and offers; or

5. File a complaint with the Commission regarding any other matter arising in terms of the 2008 Act.

The 2008 Act also proposes providing protection for whistleblowers. The whistleblower has “qualified privilege in respect of the disclosure” and is immune from civil, criminal and administrative liability for that disclosure if the conditions as set out in section 159 of the 2008 Act are met.

A company, shareholder, director, company secretary or prescribed officer of a company, a registered trade union representing employees of the company or another representative of the employees of the company may, in terms of section 162 of the 2008 Act, apply to a court for an order declaring a director of the company delinquent or under probation under certain circumstances.

Judicial administration of failing companies replaced by a new business rescue regime which is largely self-administered by the company Legal proceedings against the company limited while under business rescue proceedings

Remedies include: ► Alternative Dispute

Resolution ► Companies Ombud ► Applying to the High

Court ► Complaints to the Panel

or Commission

Confidential – All Rights Reserved Companies Act 2008 – Ernst & Young 2009

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Appendix A – Use of Accounting Framework

In terms of sections 29 and 30 of the 2008 Act, all companies must prepare annual financial statements. Furthermore, financial statements, including annual financial statements, prepared by the company must satisfy the prescribed financial reporting standards. The Minister, after consulting the Financial Reporting Standards Council, prescribes financial reporting standards.

As at the date of this synopsis, no such regulations have been issued. Due to the fact that the concepts of “widely held companies (WHC) and limited interest companies (LIC) have not been retained in the 2008 Act, it is not possible, at this time, to indicate which companies would be required to use IFRS and which companies may use standards for small and medium enterprises (“SME accounting”). We accordingly provide a summary below indicating the requirements under the current Companies Act, 1973 (as amended by the Corporate Laws Amendment Act).

Type of Entity Financial Reporting Framework under the current 1973 Act Widely Held Company International Financial Reporting Standards (IFRS) or South African

Statements on Generally Accepted Accounting Practice (SA GAAP) as well as Schedule 4* of the 1973 Act.

Limited Interest Company a. The Statement of GAAP for Small and Medium sized Entities (SME’s) and Schedule 4*; or

b. International Financial Reporting Standards (IFRS) or South African Statements on Generally Accepted Accounting Practice (SA GAAP) as well as Schedule 4* of the 1973 Act.

Close Corporations No set framework. Financial statements must be prepared in accordance with section 58 of the Close Corporations Act.

Trusts Depends on the Trust Deed. Could be a financial reporting framework (such as IFRS), a comprehensive basis of accounting, or “entity specific” basis of accounting

In terms of section 29(5) any regulations on financial reporting standards issued by the Minister must be consistent with International Financial Reporting Standards issued by the International Accounting Standards Board. Potentially, the Statement of Generally Accepted Accounting Practice for Small and Medium-sized Entities and ED 257, Proposed Framework for Non-Public Entities, may not be acceptable after the effective date of the Act.

(* == Schedule 4 has not been retained in the 2008 Act)


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Appendix B – Requirement to appoint an audit committee

We summarise the requirements for the appointment of an Audit Committee below by type of company.

Type of Company Audit Committee Required

Profit Companies: Public Company Yes State-owned company Yes Private Company No1 Personal Liability Company No1 Non-profit Company No1

All public companies and state-owned companies must elect an audit committee at each annual general meeting. Any other company may voluntarily appoint an audit committee if they wish to do so. The following public companies and state-owned companies do not have to appoint an audit committee:

1. A state-owned company which has been exempted by the Minister under section 9 of the 2008 Act;

2. A bank exempted under section 64(4) of the Banks Act.

Accordingly, the shareholders and not the board appoint the members of the audit committee (Section 94(2) of the 2008 Act).

A company that is required to appoint an audit committee, is exempt from doing so if the company is a subsidiary (as defined in the 2008 Act) of another company that has an audit committee and the audit committee of that other company performs the functions of an audit committee required by the 2008 Act for that subsidiary company (section 94(2) of the 2008 Act).

An audit committee must comprise at least 3 members who must (section 94(4) of the 2008 Act):

1. Be a director of the company

2. Not be :

a. Involved in the day-to-day management of the company (or have been so involved in the previous financial year);

b. A prescribed officer or full-time employee of the company or another “related” or “inter-related”2 company (or have been such an officer or full-time employee during the previous three financial years);

c. A material supplier or customer of the company; or

d. A person “related” 2to a person in (a) to (c) above.

The Minister may prescribe minimum qualification requirements for audit committee members to ensure that the audit committee, taken as a whole, comprises of persons with adequate relevant knowledge and experience to perform its functions (section 94(5) of the 2008 Act).

The duties of the Audit Committee are as follows:

1. Nominate for appointment as auditor a Registered Auditor who, in the Audit Committee’s opinion, is independent;

2. Determine the audit fees and the auditor’s terms of engagement;

3. Ensure that the appointment of the auditor complies with the requirements of the 2008 Act and any other relevant legislation;

1 The company may elect to appoint an audit committee voluntarily 2 Refer to section 2 of the 2008 Act for the definition of related and inter-related


20

4. To determine the nature and extent of any non-audit services that the auditor may provide to the company and to pre-approve any proposed agreement with the auditor for the provision of such non-audit services to the company. This is the same as the requirement currently contained in the Companies Act, 1973 as amended by the Corporate Laws Amendment Act.

5. Prepare a report which is included in the annual financial statements:

a. Describing how the Audit Committee carried out its functions;

b. Stating that the audit committee is satisfied that the auditor is independent;

c. Comment, as appropriate, on the financial statements, accounting practices and the internal financial control of the company;

6. Receive and deal with complaints regarding:

a. Accounting practices and internal audit of the company;

b. The content or auditing of the company’s financial statements;

c. The internal financial controls; and

d. Any other related matter.

7. Make submissions to the board on any matters relating to the accounting policies, financial control, records and reporting of the company; and

8. Perform other functions determined by the board.


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Appendix C – Requirements for companies to be audited, independently reviewed or neither audited nor independently reviewed

The following decision tree has been prepared to assist in determining whether a company has to be audited, independently reviewed or neither audited nor independently reviewed. It should be read together with the requirements of section 30 of the 2008 Act.

No

Is the company a private company which is subject to a Regulation issued by the Minister requiring this category of private company to be audited?

No

Has the company voluntarily chosen to be audited?

No

Is the company a private company where either • one person holds, or has all of the beneficial interest

in, all of the “securities” issued by the company; or • every person who is a holder of, or has a beneficial

interest in, any “securities” issued by the company is also a director of the company?

Yes

The company is exempt from both an audit and an independent review.

The company has to be audited

The company has to be

independently reviewed

Is the company a public company or a state-owned company? Yes

Yes

Yes

No


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The 2008 Act defines “securities” as having the meaning set out in section 1 of the Securities Services Act, 2004. Section 1 of the Securities Services Act defines securities as:

““securities”—

(a) means—

(i) shares, stocks and depository receipts in public companies and other equivalent equities, other than shares in a share block company as defined in the Share Blocks Control Act, 1980 (Act No. 59 of 1980);

(ii) notes;

(iii) derivative instruments;

(iv) bonds;

(v) debentures;

(vi) participatory interests in a collective investment scheme as defined in the Collective Investment Schemes Control Act, 2002 (Act No. 45 of 2002), and units or any other form of participation in a foreign collective investment scheme approved by the Registrar of Collective Investment Schemes in terms of section 65 of that Act;

(vii) units or any other form of participation in a collective investment scheme licensed or registered in a foreign country;

(viii) instruments based on an index;

(ix) the securities contemplated in subparagraphs (i) to (viii) that are listed on an external exchange; and

(x) an instrument similar to one or more of the securities contemplated in subparagraphs (i) to (ix) declared by the registrar by notice in the Gazette to be a security for the purposes of this Act;

(xi) rights in the securities referred to in subparagraphs (i) to (x);

(b) excludes—

(i) money market instruments except for the purposes of Chapter IV; and

(ii) any security contemplated in paragraph (a) specified by the registrar by notice in the Gazette”

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