Interesting points were made in the July 25th Business Day edition on the interaction between a business rescue application brought under the new Companies Act by a Group and the pending liquidation of one of its subsidiary companies. To read the full article click on the following link. www.businessday.co.za/articles/Content.aspx?id=149072

In need of legal advice regarding family related issues or divorce? Contact Carme Haupt-Fick on 072-377-0533 or (011) 675-2881. Know your rights.

PRESENTED BY:

Marthus du Toit

Otto Krause Incorporated Attorneys
Unit C9, Clearview Office Park
77 Wilhelmina Avenue
Allensnek, Roodepoort, RSA


Tel: 011 675 2881 Fax: 011 675 2899


INTRODUCTION

• New Companies Act – expected to come into force on 1 May 2011.
• Has been in the making since 2004 – due to certain administrative flaws was delayed.
• Together with the coming into effect of the Act, will also come into effect the Companies Amendment Bill – to correct errors, legal technical and grammatical issues – and Regulations to the Companies Act.
• The introduction to the Act – list the purpose of the act as, inter alia: 
• To define the relationship between companies, respective shareholders or members and directors;
• To provide for equitable and efficient amalgamations, mergers and takeovers of companies;
• To provide for efficient rescue of financially distressed companies;
• To provide appropriate legal redress for investors and third parties with respect to companies; etc.
• In the words of Mr. Rob Davies, Minister of Trade and Industry –
• “ We need to move beyond where we are and allow economic actors to get on with business and job creation”
• Existing companies will need to take various important steps to comply with the new Act.

SOME KEY CHANGES

• Areas of importance:

1. Categories of Companies
2. Memorandum of Incorporation (MOI)
3. Shares
4. Shareholders Agreements
5. Directors” Duties
6. Business Rescue
7. Close Corporations
8. New Bodies

1.   CATEGORIES OF COMPANIES

• 1973 Act – distinguishes between Companies with Share Capital (Private Companies & Public Companies) and Companies without Share Capital (company limited by guarantee, for example Section 21 Company).
• New Act – similar distinction – Profit Companies and Non-Profit Companies.
• Profit Companies – Incorporated by one or more persons for financial gain for the shareholders.
• Non Profit Companies – Incorporated by at least three persons for public benefit or an object relating to one or more cultural or social activities, or communal or group Interest.
• Profit Companies can be one of the following:
• State-owned enterprise – Registered as a company in terms of the new Act and falls within meaning of “state-owned enterprise” in the Public Finance Management Act, or is owned by Municipality. (Name must end on SOE Ltd);
• Private Company – one that is not state owned – and MOI prohibits it from offering its securities to the public and restricts transfers of securities. Unlike present Private Company (only 50 shareholders) – no limit on number of members. (Name must end with Proprietary Limited or (Pty) Limited;
• Personal Liability Company – must meet the criteria of a Private Company. MOI must state that it is personal liability company. Directors and past Directors – jointly and severally liable with company for debts of company. (Name must end in Incorporated of Inc.)
• Public Company – all other profit Companies. Current requirement of at least seven members (shareholders) – not repeated in new act. (Name must end in Limited or Ltd)

2.   MEMORANDUM OF INCORPORATION

• Memorandum of Incorporation (MOI) – to replace the Memorandum and Articles of Association – Incorporation Documents under 1973 Act.
• MOI will be new founding document of Company.
• Document sets out the relationship between:
• Company and Shareholders
• Company and Directors
• Company and third parties within Company
• Company and other third parties
• Provisions in MOI may be amended from time to time.
• MOI may contain additional requirements in respect of amendment to Memorandum or may prohibit amendment of provisions in Memorandum. Name of Company must then be followed by letters “RF”.
• Directors may make rules for governance of Company – issues not addressed by Act or Memorandum.
• Time period allowed for existing Companies to adopt new MOI – 2 years from effective date.

3.   SHARES

• 1973 Act – requires Memorandum to state the types of shares into which share capital is divided, i.e.-
• Whether shares are of a fixed amount – par value shares
• Whether they are fixed in number – no par value shares
• New Act – states that shares do not have a nominal or par value.
• Companies will in future use no par value shares only – authorised capital of a company will be expressed as a number of shares – no reference to amount of money.
• Under New Act – existing par value shares must be converted into no par value shares.
• Provision made for protection of rights of shareholders under current Act.
• Time period for conversion – 5 years.

4.   SHAREHOLDERS AGREEMENTS

• New Act – MOI and Rules of Company – binding between the Company and each shareholder, as well as between shareholders themselves.
• MOI – does not create any contractual relationship – all shareholders are bound by statute to act in accordance with MOI and Rules.
• Shareholders are specifically authorised to enter into shareholders’ agreements – on condition that such agreement is consistent with new Act and Memorandum of Incorporation.
• Provisions in Shareholders agreements not aligned with MOI or Act – will cease to have any force or effect – detrimental to relationship between shareholders insofar it relates to rights and obligations.

5.   DIRECTORS’ DUTIES

• Primary goal of Company – to act in best interest of Shareholders. Shareholders appoint Board of Directors.
• New Act – Board of Directors consists of:
• Private and Personal Liability Company – at least one Director
• Public Company or Non- Profit Company – at least three Directors
• New act – codifies the General duties of Director (Section 76):
• Must not only disclose any conflict of interest in relation to matter before the board, but also a personal financial interest of a person related to the director, Director may not take part in consideration of the matter.
• Director must not use his position or information gained as such to:
• Gain any advantage for himself or any other person other than Company or wholly-owned subsidiaries;
• Knowingly cause harm to the company or subsidiaries.
• Director must communicate at earliest opportunity to Company any information that comes to his attention, unless he is legally bound not to do so, or he reasonably believes the information is immaterial or public knowledge
• Director must perform duties and exercise powers:
• In good faith and for proper purpose;
• In the best interest of the company, and
• With the necessary degree of care, skill and diligence
• Other duties:
• To comply with Act
• To comply with the Company’s Memorandum
• To manage business affairs at the Company
• To carry on business without trading recklessly or under insolvent conditions
• To appoint board members
• To appoint audit committee
• To appoint company secretary
• To call and convene shareholders meetings
• To keep company records
• To keep Accounting records
• To pay directors remuneration in terms of MOI and get it approved by shareholders
• To appoint auditors
• To obtain independent review of Financial Statements
• To prepare Annual Financial Statements
• To prepare a directors report
• To issue a prospectus
• To disclose Directors Remuneration
• To file an annual return
• To facilitate a shareholders meeting; etc.

6.   BUSINESS RESCUE

• Defined as proceedings to facilitate the rehabilitation of company that is financially distressed.
• Done by providing for:
• Temporary Supervision of the Company – management of its affairs, business and property;
• Temporary moratorium of rights of claimants against companies or in respect of property in its possession; and
• Development and implementation, if approved, of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities.
• Goal – to maximise the likelihood of the company continuing in existence, resulting in a better return for creditors or shareholders than liquidation.
• Financially distressed – when it appears to be reasonably unlikely that the company will be able to pay all of its debts as they fall due within the immediate ensuing six months
• Commencement of Business Rescue:
• Board Resolution – resolution filed with commissioner – business rescuer appointed by Company;
• Application to Court by Affected persons – examples: shareholder, creditor, trade union representing employees or employees. Interim practitioner nominated by Applicant and appointed by Court;
• By the Court of its own accord – where liquidation application is pending.
• Any affected person may object to company resolution or appointment of practitioner – Application to Court:
• Allege Company not distressed
• No reasonable prospect of rescuing company
• Procedural irregularities.
• Person can object at any time from commencement to adoption of plan
• Creditors Rights impaired:
• Moratorium on Legal Proceedings – even if already commenced;
• Practitioner have right to suspend or cancel agreements;
• Disposal of Property;
• Ranking of claims;
• No calling of guarantee or surety except with leave of court;
• Actions to mitigate impairment:
• Assess all Transactions and Creditors wisely;
• Look for more recourse;
• Be informed and act fast;
• Participate in process – appointment of practitioner;

7.   CLOSE CORPORATIONS

• Was proposed that Close Corporations be done away with.
• Due to popularity of business form – decided that Close Corporations will co-exist with new companies for ten years. Thereafter final decision will be taken whether to repeal Close Corporations Act or to retain as separate business form.
• After commencement of new Companies Act – no more new Close Corporations to be incorporated.
• No Company can be converted to Close Corporation

8.   NEW BODY

• Cipro to be transformed into the Companies and Intellectual Property Commission.
• Companies Tribunal is established.
• Securities Regulation Panel is now the Takeover Regulation Panel.

Disclaimer. The above document is an extract from a seminar presented at a meeting of the Roodepoort Chamber of Commerce and Industry, and it does not constitute legal advice. Should you require legal advice on any specific issue pertaining to the above, you are advised to approach an attorney at our firm, or obtain independent legal advice.

To all our valued clients and other interested parties, kindly be advised that the e-mail doing the rounds regarding "the De-Merit System" that purports to have been originated by our firm, is a scam. Some idiot had copied our company's logo and pasted it on his/her own ill-considered and cooked-up e-mail scam.

We can further confirm that we are currently conducting investigations into this matter, and once the fraudster has been located and identified, he/she will be prosecuted to the full extent of the law for the fraud committed by him/her against our firm.

We trust that the fraudulent e-mail has not caused too much inconvenience to our loyal clients and to the public at large. In the unfortunate event that you have received or receive the fraudulent e-mail, kindly immediately delete same. Under no circumstances should it be forwarded to any other person. Your assistance to stop the fraudulent e-mail from being viewed any further by unsuspecting members of the public, will be greatly appreciated. Warmest regards, Otto Krause Inc.