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GETTING TO GRIPS WITH THE NEW COMPANIES ACT
The new Companies Act,1 (“the new Act”) ushers in a new era of company law and
when it eventually comes into effect, it will, as can be expected, give rise to a fair
amount of confusion about the implications for existing companies. To some degree,
this confusion should be resolved when the draft Companies Amendment Bill, 2010
(“the Bill”) is promulgated but many areas of uncertainty remain. Bearing this in
mind, directors should be aware of certain major changes introduced in the new Act
as they get to grips with its provisions.
The Memorandum of Incorporation (“the MOI”)
Under the new Act, incorporating a new company requires a notice of incorporation
to be filed with the Commission (previously the Registrar of Companies),
accompanied by an MOI signed by the incorporators of that company.2 An existing
company’s memorandum and articles of association will automatically form its MOI.3
During the transitional period
On the effective date, existing companies will be assumed to have amended
their MOI (which will consist of the memorandum and articles of association in
place at that stage) to comply with the new Act’s name requirements (for
example section 21 companies will automatically become non-profit
companies).4 Existing companies will be given a two year period after the
new Act comes into force (”transitional period”) to amend their MOI in order
to bring it in line with the new Act’s requirements.5 During this transitional
1
Act 71 of 2008.
2
Section 13 (1).
3
Under the Companies Act 61 of 1973 (“the current Act”), the Memorandum of Association is the founding document of the
company. The Articles of Association deal with the internal arrangements relating to control and administration and may also
deal with other matters of considerable substance (the Articles must be registered together with the Memorandum in terms of
section 59(1) of the current Act).
The definition of Memorandum of Incorporation in the new Act provides that it is the document that sets out specified matters
(rights, duties and responsibilities of shareholders, directors and others within and in relation to the company and other matters
contemplated in section 15, such as company rules) by which the company was incorporated under the new Act or by which a
pre-existing company was structured and governed before the commencement of the new Act (or if later, the date that a close
corporation was converted under the new Act). (Section 1 of the new Act.)
4
Item 4(1) Schedule 5 read with section 11(3).
5
Item 4(4) Schedule 5.
2
6
period the following will apply if any conflicts arise:
• If there is a conflict between the provisions of a pre-existing
company’s MOI and the new Act, the MOI will prevail.7 However, the
new Act will prevail over the MOI in the event of a conflict between the
new Act and any clause in a pre-existing company’s MOI relating to:
directors duties, conduct and liability;
shareholders’ rights to receive notice or have access to any
information;
directors’ and shareholders’ meetings and adoption of
resolutions;
fundamental transactions, take-overs and offers, except to the
extent that it is exempted in terms of Chapter 5 of the new
8
Act.
The Bill in addition proposes the following arrangements for the transitional
period:
• If there is a conflict between a binding provision adopted by a
company9 and a provision of the new Act, the binding provision will
10
prevail.
• If there is a conflict between a provision in a shareholders’ agreement
and a provision in the new Act or the company’s MOI, the
shareholders’ agreement will prevail (except to the extent that the
shareholders’ agreement or the MOI provides otherwise).11
After the transitional period
After the two year transitional period granted by the new Act has expired, any
6
Item 4(4) Schedule 5 read with section 115(3) of the Bill.
7
Item 4 (a) Schedule 5.
8
Item 7 (5) Schedule 5.
9
Comparable to company rules as contemplated in item4 (3) Schedule 5 of the new Act.
10 Section 115(3) (d) (ii) of the Bill.
11 Section 115(3) (d) (iii) of the Bill.
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provision of the MOI that conflicts with the provisions of the new Act will be
void to the extent of that inconsistency.12 The Bill however, proposes
exceptions to this rule where the provisions of the MOI will not be rendered
void for inconsistency, such as when public regulations or listing requirements
require the MOI to contain provisions that are not in harmony with the
unalterable provisions prescribed by the new Act.13 In any case, the entire
content of the MOI will not be rendered void until a court has declared it to be
so, giving shareholders an opportunity to review and amend the MOI.
Alterable and Unalterable provisions
The new Act distinguishes between alterable and unalterable provisions.
Companies will not be allowed to alter the substance or effect of unalterable
provisions in their MOI or in the company rules.14 On the other hand, an
alterable provision is a provision that may be altered in the company’s MOI.
For example, a special resolution will require the support of seventy-five
percent of the voting rights exercised under that resolution, but a company
may lower the percentage required to approve a special resolution in its MOI,
provided that the margin between the percentage required to approve a
special resolution and an ordinary resolution is always ten percent.15 It
should be noted that the Bill proposes to amend the new Act such that the
percentage for a special resolution may be not only be decreased but also
increased in the MOI within the parameters set out in the new Act.16
Change of Name
In terms of the new Act, the name of a company is required to contain specific
expressions. For example, a non-profit company should include the letters “NPC” in
its name.17 Private and public companies will still use the expressions “(Pty) Ltd” and
12 Section 15(1).).
13 Section 5(d) and section 11(a) of the Bill.
14 S1 “Unalterable provision”
15 Section 65(9) and (10)..
16 Section 41(c) of the Bill.
17 Section 11 (3) (c) (v).
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“Ltd” respectively.18 Existing companies that fall within the definition of non-profit,
personal liability and state-owned companies will be assumed to have amended their
MOI and their name so as to include the required expressions.19 However, for other
companies, such as companies limited by guarantee electing to become profit
companies, it will be necessary to alter the company name to meet the new Act’s
requirements.20
Company Rules
If allowed by its MOI, the board can make rules concerning the governance of a
company with regard to matters that are not addressed in the new Act or the
company’s MOI. The general meeting would have to ratify the rules by an ordinary
resolution in order for them to become permanently binding.21 The rules provide a
greater degree of flexibility for companies as it may be easier to create or amend a
rule than to amend the MOI (an amendment to the MOI usually requires a special
resolution to be passed22). When amending or adding a rule, the company is
required to file a copy of the amended rules with the Commission.23
If an existing company has any binding provisions that fulfil the same purpose as the
rules under the new Act, these provisions will continue to be effective as rules during
the transitional period. These rules will remain binding after the transitional period,
provided that they are consistent with the new Act.24
Shareholders’ Agreements
Unlike the current practice where a shareholders’ agreement signed by all the
shareholders will prevail over the Articles of Association, in terms of the new Act, if
there is any inconsistency between the provisions of the shareholders’ agreement
18 Section 11(3) (c).
19 Item 4(1) (a) to (c) schedule 5.
20 Item 4(1) (d) Schedule 5. Another example is a company required to include the expression (RF) in its name because its MOI
prescribes additional restrictive or procedural requirements for the amendment of the MOI. Section11 (3) read with section 15
(2) (b) and (c) and section 16 of the new Act and section 11 of the Bill.
21 Section 15(4) (c).
22 Section 65(11) read with clause 41 of the Bill.
23 Section 15(3).
24 Item 4(3) Schedule 5.
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