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Impact of the New Companies act on BEE


Companies Act 71 of 2008

• Published on 9 April 2009
• Takes effect on date proclaimed by President
• Maybe sometime in first half of 2011
• Government Department responsible - DTI (Same as BEE)


Types of Companies under New Act

• Private Companies (PTY Ltd)
- Prohibited from offering shares to the public
- Transferability of shares restricted
- May now have more than 50 shareholders?
Implications of utilising a (pty) ltd to benefit a Broad Base of BEE shareholders.

• Personal Liability companies - inc - professional associations
- Directors jointly and severally liable for contractual debts of the company

• State owned companies - soc ltd - owned by government as per PFMA or MSA

• Public Companies - ltd - profit, not private, nor state owned, nor personal liability.

• Non-profit companies - NPC - incorporated for public benefit.
- Income and profit not distributable
- Would also be a vehicle utilised as a Broad Based ownership scheme under the BEE codes.

Founding Documentation/Constitution

• Memorandum of Incorporation
- Single Document
• Unalterable provision
• Alterable provisions
• Default Provisions


• Between MOI and New Companies Act - New Companies Act prevails - inconsistent provision - void
• Between MOI and Shareholders' Agreement - MOI prevails - Inconsistent provisions void
- Implications for BEE transactions already concluded!
- Where BEE shareholder rights/ privileges/ restriction/ prohibitions/ in the shareholders agreement - may have to be negotiated into MOI
- Two year grace period to amend.

Purpose of Shareholders' Agreement

• Diminishing role of Shareholders' agreement
• Deal with issues not dealt with in MOI
• Deals with issues of confidentiality
• More emphasis on MOI

Ring Fenced Companies

• Under old act - Doctrine of constructive notice
- The classical BEE SPV used by funders of BEE deals to ring-fence activities of BEE shareholders and to bind 3rd parties
• Under New Act - Doctrine abolished
• Therefore 3rd parties not deemed to know of restrictions on company's powers
• But, if wanted to bind 3rd parties to restriction -
- In notice of incorporation draw attention to restriction
- Name of company must have RF at the end

Capital Structure

• Impacts the concept of "economic rights" and "voting rights" under BEE ownership scorecard
• No more nominal or par value shares
- (1000 share with a value of R1 each)
- Maybe something like 1 share valued at R 2m
• Company can determine voting and economic rights of shares - classified according to class - eg.
- Total Shares = 3
- 1 share of R 50m (Stated Capital) with 50% total voting rights on all matters and distribution rights of 30% issued to shareholder A
- 1 share of R1 with 25% voting rights on some matters and 20% distribution rights issued to shareholder B (EE shareholder)
- 1 share of R10m with 25% voting rights on non-BEE shareholder matter and 50% distribution rights issued to shareholder C
• Classes, rights, preferences must be set out in MOI - if MOI silent then presumption of equality on rights and preferences.

Pre-emptive right to existing shareholders for issue of shares

• alterable provision
• amend if you not happy

Issue of shares

• Under existing Act - must be paid-up: created some issues and challenges for the financing of BEE transactions
• New Act - board determines consideration payable
• Also allows for future payment for the issue of shares -> but
- shares are issued to a 3rd party - who holds in trust
- Voting rights, pre-emptive rights and distribution rights of shares may not be exercised except as set out in trust agreement: implication for voting rights/ economic rights under BEE ownership scorecard?

Approval of shareholders for issue of shares

Only in certain cases that approval of shareholders (which must be by special resolution) is required for a issue of shares
• directors or officers or future directors or officers
• related or interrelated persons in relation to the company / directors / officers or issues any of those persons' nominees
• issues which result in the new shares holding 30% or more of the voting rights of that class

Generally capital maintenance but

• for financial assistance for purchase' of own shares
• buy-back by company of own shares
• loans to directors
• distributions (incl. dividends) to shareholders
- satisfy solvency and liquidity test

So what else is new

Public companies
• No pre-emptive rights re new issues
• Financials have to be audited
• Obligatory to have secretary [could be a juristic person or partnership]
• Obligatory to have audit committee
• Minimum no of directors = 3 unless MOl requires higher no
• Disqualified directors can't act
• Necessary to have AGMs
• Notice of meetings 15 business days
• The takeover regulations apply

Private companies
• Existing shareholders have pre-emptive rights re new issues of shares except in certain circumstances
• Financial don't have to be audited except if fall above thresholds published by Minister - but have to be independently reviewed except basically where shareholders and directors the same
• Not obligatory to have co secretary or audit committee
• Minimum no of directors = 1 unless MOl requires higher no
• Disqualified directors can act if sole shareholder or rest of shareholders his consenting relations
• AGMs not necessary
• Notice of meetings 10 business days
• The takeover regulations only apply to private companies if the MOl so provides or alternatively in the last 24 months at least the prescribed percentage of shares (which the Minister cannot make less than 10%) have been transferred except among related or interrelated parties.

Resolutions and voting rights
• Ordinary resolutions = more than 50% of the votes exercised - but
- The MOl can prescribe higher thresholds for different types, except for resolution for removal of any director which is fixed at more than 50%,
- Always has to be 10% differential between ordinary and special resolutions
• Special resolutions = 75% of the votes exercised - but
- The MOl can prescribe different thresholds for different types of matters subject to the 10% differential rule
• Remember rationale of BEE Codes voting target - 25%+1 vote - New Act provisions could be utilised to defeat that rationale?

New rights for employees / unions

• One of purposes - "reaffirm concept of the company as means of achieving economic and social benefits" - Labour Relations Act prevails
• Trade unions have locus standi to apply for interdict re conduct inconsistent with the Act
• The company has to notify trade unions re financial assistance to directors
• Via the Commission have access to financials to initiate business rescue
• Is an affected person for business rescue - both trade unions and unrepresented employees entitled to notices/be consulted and vote on business plans
• Derivative action open to trade unions
• Locus standi to apply to courts to place a director on probation or declare a director delinquent

Unconscionable abuse of juristic personality

• The new action to court to declare the use of the company an unconscionable abuse of the juristic personality - s163(4) - this is a key provision - the application can be brought by any interested party or the court can act meru motu - it deems the company not to be a juristic person this seems as if it will be a better action than piercing the corporate veil
• Potential action in the case of BEE FRONTING!

Impact of corporate governance in terms of new Act and King III

Composition of board

• Majority should be non-executive directors ( 1bonus point under BEE Codes for black Independent non-exec directors)
• BEE Codes define independence with ref to King's definition
• In King III independence = no interest exceeding 5% of group's total issued shares or material to personal wealth
• At least 2 executives (CEO and finance) must be on the board (for max points under BEE Codes, 1 must be black and half a black woman)
• Chairperson should be independent, non-executive
• Chairperson should not be CEO - retired CEO should not be chairperson until after 3 years

Report on performance
• Financial information on its own not sufficient
• Report on positive or negative impact of company on community's economic life through its operations
• How company to enhance positive and mitigate negative
= integrated reporting = economic + social + environment (which must all incl. BEE)

Who are the relevant authorities

• The Commission
- Companies and Intellectual Property Commission
- This replaces CIPRO
- It can adjudicate complaints re all sections of the act other than those which are in the jurisdiction of the Takeover Regulation Panel
• The companies tribunal
- Appointed by the Minster
- Comprises a chairperson + 10 other members Has authority administratively to grant exemptions from any provision of the act that is not within the jurisdiction of the takeover regulation panel
- It also adjudicates applications to it into the act
- Resolves disputes voluntarily referred to it as a form of ADR instead of going to court or filing complaints with the commission
Safiyya Patel l Director
150 West Street Sandton 2196
Tel: +27 (11) 269 7600 Fax: +27 (11) 269 7899

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Impact of the New Companies act on BEE

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