May 8,2012 / News / Legal Brief

The new Companies Act widens the net over corporate finance transactions which require board approval, shareholder approval and in certain cases, notice to be given to shareholders.

“The financial assistance rules in the new Act affect more types of instruments and transactions than before and also applies to related companies, such as subsidiaries, holding companies and companies under common control,” says Werksmans Attorneys’ director Richard Roothman. “There is hardly any form of corporate loan structure that does not fall under the new rules.”

If the relevant board approval or the agreement to provide financial assistance does not comply with the requirements of the Act or the relevant company’s memorandum of incorporation, such approval or financial assistance would be void and a director of the company can be held personally liable for any loss or damage sustained by the company as a direct or indirect consequence of the provision of such financial assistance.

Under the old Companies Act, the board only needed to approve transactions when financial assistance was provided by a company in connection with the acquisition or subscription for shares in that company. But, under the new Act, companies issuing any type of security, including bonds or debentures, are governed by the new provisions. Roothman says other types of transactions now affected by the new provisions include the sale of shares in a subsidiary where the parent company provides a guarantee.

“If a company does provide financial assistance, even for an inter-company loan, the board now needs to approve the transaction,” he adds.

The board must consider whether the company will be solvent and liquid after the assistance is provided and whether the terms of the transaction are fair and reasonable.

“If the directors vote in favour of the financial assistance and it is later determined that the terms were not fair, or that it resulted in the company becoming insolvent, they can be held personally liable for losses or damages sustained by the company as a result of the financial assistance provided,” he says.

Because of the serious consequences of not complying with the Act, most banks and financiers have taken the view that all forms of financial assistance, including inter-company guarantees must be approved by the board and shareholders, as the case may be, and notice must be given to shareholders.

“Companies won’t be able to get a sizeable corporate loan without complying with these provisions in the Act.”

One of the challenges for companies will be getting a special resolution passed each time financial assistance is provided. This means calling a shareholders’ meeting, which can be a time consuming process. Even when obtaining general approval for a loan, the terms need to be wide enough to meet the changing financing requirements of the company for up to two years. This can be difficult to predict.

In addition, the board must notify shareholders and trade unions within ten business days of the passing of a resolution to grant any type of financial assistance if the value of the financial assistance exceeds 0,1% of a company’s net worth.

“The intention of the Act is to improve transparency so that shareholders and unions are better informed of how the company is using its money,” says Roothman. “It’s unlikely that shareholders and trade unions would become too involved in a company’s complex financing arrangements, but depending on when they are told, they may be able to vote on whether a particular transaction should take place or not.”

He says companies which regularly transfer money between inter-company accounts should also pay particular attention to the new rules.

“The legal implications of not complying with the new provisions under the Act are indeed severe,” says Roothman. “It pays to understand which transactions are included under the new Act and what steps must be followed in each case.”