May 23,2011 / News / Legal Brief

The long-awaited new Companies Act came into effect at the beginning of May, a month after the effective date originally planned. Despite the delay, the legislation is expected to have a positive impact on shareholders and business.

“The new Companies Act is a complete overhaul of the existing legislation so it’s natural that there will be some teething problems,” says Werksmans director, Kevin Trudgeon.  “The delay is unlikely to affect its ability to achieve its goals.”

The new Act seeks to endorse the company as the appropriate vehicle through which business is conducted; increase the simplicity and efficiency of forming and maintaining companies; and improve corporate governance and transparency.

“The company was traditionally viewed as the best structure through which to transact business because it had a separate and independent legal persona, which protected its shareholders from liability,” says Trudgeon.  “But this also meant that there was a shield behind which parties could engage in improper conduct and governance.”

He says the new Act respects the independence of companies, but in a way that enhances governance and responsible management.

An example is directors’ duties and responsibilities.  “There is a body of common law which set out directors’ responsibilities, but common law is amorphous and is housed in a variety of places, in different court cases and texts,” explains Trudgeon.  “The new Act does not do away with the common law but to a significant extent codifies the duties and responsibilities of directors in one place and sets out clearly what they are.”

Minority shareholders too are much better protected under the new Act.  In the past, many minority rights were procedurally complex and difficult to enforce, especially when it came to fundamental transactions which involve the transfer of assets and liabilities.  Under the old statutory regime minorities needed to approach the court if they wanted to stop a fundamental transaction – and the plaintiff would have to bear all costs.  Under the new Act, if more than 15% of the company shareholders vote against a resolution proposing a fundamental transaction, they can require that the company approach the court to approve the fundamental transaction before implementation, at the companies’ cost.

“In the past companies could rely on the fact that it was difficult and expensive for shareholders to access advice and to take the company to court to get any relief,” says Trudgeon.  “Now, under the new Act, because access to court review is made easier, transactions are likely to be much more closely scrutinised before they are put to shareholders.”

If minority shareholders are still unhappy with the proposed fundamental transaction, the new Act requires the company to buy them out at a value they agree or at a fair market value determined by a court.

“Previously the sole remedy for minority shareholders was to stop a transaction from progressing, now they can demand to be bought out,” he adds.

The new Act also emphasises how companies should communicate with their shareholders – stipulating that companies must not only provide information in plain English, but that they must set out shareholders rights in various situations. Notices to shareholders must be informative and outline shareholders’ appraisal rights. “In other words, companies will need to describe the business that they want to conduct and set out what options shareholders have under the circumstances,” says Trudgeon.

Business rescue provisions have also been put in place to try and assist failing companies to return to a state of being economically viable.

The new Act is also flexible enough to accommodate both big and small companies under its ambit.  With the Close Corporation no longer a legal entity, the Act allows for different reporting and audit requirements and with regards to Memorandums of Incorporation, allows companies to alter the provisions depending on their size.  “If the provisions are too onerous for a small company, they can amend them to better suit their operations,” says Trudgeon.

He says although some aspects of the new Act are still being ironed out, the legislation is likely to enhance the business environment and create a solid framework for both big and small companies to operate in.