Near the end of December 2024, the President issued a Proclamation bringing various sections of the Companies Amendment Act No. 16 of 2024 and the Companies Second Amendment Act No. 17 of 2024 into effect.
These amendments are designed to:
- Enhance ease of doing business by addressing ambiguities in the Companies Act No. 71 of 2008 (“the Act”);
- Ensure fair treatment between directors, senior management, shareholders and workers (some provisions are still to take effect); and
- Implement key recommendations from the Zondo Commission of Inquiry into State Capture, specifically in respect of Section 162 of the Act.
We have had several clients inquire what these amendments mean for them and have summarised below, what we believe to be the most significant changes to the Act.
In our view, the amendments drastically change the potential liability of directors, and it is of the utmost importance that directors of companies are made aware of the possible implications. Furthermore, there are additional obligations placed on directors of mining companies, the details of which will be covered in an article to follow.
Please note that this is by no means intended to be an exhaustive list of the amendments, but rather a summary of those which we anticipate will be applicable to and affect most private companies.
Changes to the Memorandum of Incorporation (MOI) (Section 16(9)(b))
Amendments to a company’s MOI will now take effect:
- 10 business days after the Companies and Intellectual Property Commission (“CIPC”) receives a Notice of Amendment, unless the CIPC rejects it with reasons before this period expires; or
- on a later date specified in the Notice of Amendment itself.
Previously, amendments took effect on the later of:
- the date of “filing” of the Notice of Amendment; or
- the date specified in the notice filed with the CIPC.
The use of the word “filing” often led to confusion as one would have to determine when the CIPC would have considered that “filing” had in deed taken place.
The new amendment not only provides greater certainty as to when an amendment takes effect but also obligates the CIPC to provide reasons for rejecting an amendment to an MOI – this is certainly a welcome change that encourages greater transparency in respect of decisions of CIPC relating to the rejection of MOI’s.
Issuing Shares for Consideration (Section 40(5)(b), 40(6), 40(6A))
Section 40 of the Act regularises the issuing of shares for consideration.
The amendments to the Act contemplate that if a company issues shares where the full value of consideration is deferred, it must:
- issue the shares immediately upon receiving the agreement or instrument; and
- transfer the shares to a “stakeholder”, who will hold them under a stakeholder agreement until all conditions are met.
A “stakeholder” has been defined in terms of the amendments to the Act as an independent third party with no interest in the company or the subscribing party, who may be an attorney, notary public or escrow agent. Whereas a “stakeholder agreement” has now been defined to mean a written contract between the stakeholder and the company.
The provision previously contemplated was that shares would be transferred to a third party and held in trust. This unfortunately didn’t provide any guidance on the type of third party who would hold the shares and the nature of the relationship concerned.
The amendments clearly remove this ambiguity and are intended to ensure greater protection for both the company and the subscribing party.
Financial Assistance to Subsidiaries (Section 45(2A))
Section 45 of the Act establishes the requirements and procedures that a company must follow when providing financial assistance to a director or prescribed officer of the company or to other related persons and entities.
This section places onerous obligations on to the board of a company when granting such financial assistance and prescribes that directors may even be held personally liable in certain instances where the provisions of the section are not complied with.
The amendments to this section contemplate that the giving of financial assistance to, or for the benefit of “subsidiaries” is now excluded from the prescripts of section 45.
The administrative burden of doing business within a group of companies will be materially reduced by the introduction of this amendment, provided of course that the beneficiary of the financial assistance falls strictly under the definition of a “subsidiary” as contemplated in terms of section 3 of the Act. This exemption does not apply to:
- financial assistance to foreign subsidiaries or other related or inter-related entities; or
- financial assistance to directors or prescribed officers of the company or of a related or inter-related company.
Simplified Share Buybacks (Section 48)
Previously, share buyback schemes contemplating a reacquisition of more than 5% of a company’s shares triggered extra regulatory steps, including those prescribed under sections 114 and 115 of the Act. This requirement has now been removed, with section 48(8) being replaced in its entirety.
Decisions by a company’s board to approve share buybacks will only require a special resolution of the shareholders (and no other formalities) if:
- the company intends acquiring shares from a director of the company (or related person to the director); or
- in circumstances where the acquisition is not as a result of:
- pro rata offers made to all shareholders of the company or a particular class of shareholders; or
- a transaction effected on a recognised stock exchange.
The remainder of Section 48 remains unaltered.
Expanded Employee Share Schemes (Section 95)
The definition of “employee share scheme” in terms of section 95 of the Act has been expanded to also include a scheme established by a company, whether by means of a trust or otherwise, for the purpose of offering participation therein solely to employees, officers and other persons closely involved in the business of the company or a subsidiary of the company, either by means of the issue or the purchase of shares in the company. The definition previously only referred to the issuing of shares.
As a result:
- these transactions will not be considered public offers if they comply with Section 97 of the Act regulating employee share schemes; and
- if compliant with section 97, will also receive the benefit of certain financial assistance exemptions under Section 45(3)(a)(i) of the Act.
Landlord Rights in Business Rescue Proceedings (Section 135)
This section regulates the order of priority of post commencement finance during business recue proceedings.
Landlords now have greater protection during business rescue proceedings. If a company fails to pay utility costs (e.g. rates, electricity, water) during the business rescue proceedings, but the landlord continues to cover and pay these costs to the relevant service provider, the landlord’s claim in these circumstances will now be regarded as post-commencement financing, and now ranks:
- below business rescue practitioner fees and secured creditors; and
- above all unsecured creditors as well as creditors arising during the business rescue proceedings who are not post-commencement financiers, whether secured or not.
Directors’ Personal Liability (Section 77)
Section 77 of the Act prescribes the circumstances when a director (which includes an alternate director, prescribed office or person who is a member of a committee of a board or of the audit committee of the company) may be held personally liable.
Section 77(7) of the Act previously contemplated that proceedings to recover any loss, damages or costs for which a person is or may be held liable in terms of this section may not be commenced more than three years after the act or omission that gave rise to that liability. The amendments to the Act substantially vary this position, in that the section now provides that:
- the Prescription Act, No. 68 of 1969 no longer applies to any proceedings to recover any loss, damages or costs for which a person is or may be held liable in terms of section 77 of the Act; and
- claims must be filed within 3 years of the act or omission that gave rise to that liability occurring, but the Court may on good cause shown, extend this period regardless of whether (i) the three-year period has expired or not; or (ii) the circumstances giving rise to the liability occurred prior to the effective date of the amendment.
Extended Period for Director Delinquency Applications (Section 162)
Section 162 of the Act prescribes the circumstances and time periods when an application to declare a director delinquent or under probation may be initiated.
The time limit for applying to declare a director delinquent or place them under probation has been extended from 24 to 60 months in terms of the amendments.
Additionally, our Courts can extend this deadline even further on good cause shown, regardless of whether (i) the three-year period has expired or not; or (ii) the circumstances giving rise to the liability occurred prior to the effective date of the amendments to the Act.
These changes mean that directors can face claims long after leaving office, making it even more critical for directors to exercise care and diligence in their roles and uphold the fiduciary duties that accompany these positions. This will be particularly important for directors of mining companies, where the nature of the business concerned is highly regulated.
These amendments are aimed at not only improving corporate governance but also strengthening director accountability while reducing unnecessary administrative burdens in certain instances.
Although the enactment of some provisions are still pending, the amendments which have come into force will have a significant impact on business.
For further details or clarification on any of these changes, please contact Chantal Murdock at chantal@bv-inc.co.za.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. For tailored guidance, please consult one of our legal professionals.