Companies Bill 2008

1. Initial Briefing to the Portfolio Committee on Trade & Industry 25 June 2008 Ms. Zodwa Ntuli, Deputy Director-general: CCRD Mr. Tshepo Mongalo, Project Manager, Company Law Reform: CCRD Mr. H.P. Dwinger, Legal & Regulatory Services: CIPRO Mr. Desmond Ramabulana, Deputy Director, Company Law: CCRD Companies Bill 2008

2. Scope • To present a high-level overview of the Companies Bill as will be introduced into Parliament. • To elucidate the main recommendations from the Bill

3. Background • On 31 January 2007, Cabinet approved publication for public comment of a draft “Companies Bill 2007”. • Following publication of the Bill, the dti conducted meetings, workshops, discussions and conferences across the country to receive comments • The published draft elicited 134 written submissions from stakeholders, interest groups, government departments & agencies and individuals, amounting to more than 2 000 pages. • the dti also held workshops with the Portfolio Committee on Trade and Industry and the Select Committee on Economic & Foreign Affairs on the Bill in 2007. • In general, the public comments supported the objectives, principles and policies of the reform project, although there were challenges which led to structural and substantive changes to the Bill as it currently appears.

4. Scheme of the Bill • Doctrine of substantial compliance (Chapter 1) • Types of Companies (Chapter 1) • Incorporation and Registration (Chapter 2) • Company Names (Chapter 2) • Corporate Finance (Chapter 2) • Corporate Governance Chapter 2) • Transparency and Accountability Chapter 2 & 3) • Public Security Offering (Chapter 4) • Fundamental Transactions (Chapter 5) • Business Rescue (Chapter 6) • Enforcement (Chapter 7 & 9) • Institutions and Agencies (Chapter 8) • Commission Functions (Chapter 8 & 9) • Transitional arrangements: Relationship between the Act and the Close Corporations Act.

5. CHAPTER 1 Interpretation & application • The Bill aims to: • Reduce formality and improve flexibility e.g. section 6 now provides for – • Companies to be granted exemptions from specific provisions if the requirements are inappropriate to the company, given its nature and structure; • electronic documents to be used in place of originals; and • electronic publication of documents, or electronic delivery of notices. • Enhance compliance and prevent avoidance, section 6 also now provides – • a general anti-avoidance remedy, which allows a scheme to be declared void if it seeks to evade a requirement or prohibition in the Bill; and • a plain language requirement for documents, prospectuses and other notices required by the Bill.

6. Types of Companies • Companies incorporated in the Republic • Non Profit Companies: • Subject to special requirements set out in Schedule 2 • Must have at least one public benefit or social/cultural object • Must apply all assets to its stated objects • Residual value must be distributed to like organisations • May not merge with, or convert to a profit company • Profit Companies: • Public Companies • State Owned Enterprises • Personal Liability Companies • Private Companies • Companies incorporated outside the Republic • Foreign Companies • External Companies

7. CHAPTER 2 Company Registration • Incorporation is a right • Policy is to maximize freedom of association and contract - see s.13 • One or more person may incorporate a profit company, 3 or more may incorporate a non profit company • Incorporation is by signing a Memorandum of Incorporation, and filing a Notice of Incorporation with fee • Memorandum may be pro forma or bespoke, but form does not suggest or impose any provisions • Memorandum of a profit company must set out number of authorised shares, and rights, terms, etc of shares. • Memorandum may be in Schedule 1 form, which provides simple check box approach.

8. REGISTRATION Company Registration & Legal status • Bill contemplates future internet based completion and filing of Notice and Memorandum of Incorporation - See s. 6 (13) • All companies must file Memorandum of Incorporation • Notice of Incorporation may be rejected only if incomplete, or if it names too few directors, or initial directors are disqualified. • Commission has no authority to judge the merits of the company’s structure. • Commission must register company, even if chosen name is unavailable, by assigning registration number as interim name of the company. • All companies have all compatible legal powers, unless restricted by its Memorandum of Incorporation • Company exists continuously as a juristic person until de-registered • Pre-incorporation contracts by company are binding unless rejected, and are deemed to have been ratified 3 months after incorporation, unless rejected before that • Reckless trading, or trading while insolvent is an offence.

9. Company Names Requirements for Names • Policy is to allow freedom of expression See s. 11 • No limits except to prevent fraud and misrepresentation, and to avoid use of hate speech, and similar offensive names • Company name may be the Registration Number • Company name may include numbers or symbols as well as words • Company Name must end with designating abbreviation Name Reservations • Reservation is optional • Reservation is for 6 months, and may be extended • Reservation is transferable • Provisions included to address cases of name squatting and trading

10. Company Names Use of Names • Policy is to abandon formalities, but prevent misrepresentation and fraud - see s. 32 • Company is free to use its name as and when it sees fit • Name and registration number must be provided accurately on request - offence to fail to do so. • Offence to misrepresent by use of a company’s name • Offence to pass off as a company, when not incorporated in terms of the Act. Office and records • Company must maintain a registered office in the Republic. • Company must keep records at its registered office, or another disclosed location. • Records must be kept for 7 years, in written form, or accessible for printing. • Shareholders have right of access to listed records s. 26

11. Transparency Accounting records and statements • All companies must maintain accurate accounting records. • Offence to falsify or fail to keep proper records. • All companies must have a financial year. • All financial statements given to another person must bear a disclosure statement See s. 29 • Offence to publish false financial statement. • All public, and most private companies must produce annual financial statements. See s. 30 Annual Return • Company must file an annual return See s. 33 • Annual return must include Annual Financial Statements, unless company is exempt. • Commission may deliver notice requiring exempt company to produce AFS in future years. • Public Companies are subject to additional transparency requirements set out in Chapter 3.

12. Corporate Finance Powers of the Board • The board of directors, may increase or decrease the number of authorised shares of any class of shares; re-classify any authorised but not issued classified shares; classify any authorised but not issued unclassified shares; or determine the preferences, rights, limitations or other terms of shares in a class (See S36(3) • As board’s may finance the company through debt, the holders of which will have rights superior to the shareholders, the board is given power to approve equity financing for the company as well. This approach will enable South African companies to compete for capital more effectively in world markets with companies whose boards already have the power to finance their businesses quickly and efficiently • Consideration has been given to the elimination of the concept of par value and the related concept of nominal capital (See S35(2). Banks are, however, exempted.

13. Corporate Finance • The Bill permits, subject to any limitations in the memorandum, both pro rata and non-pro rata share acquisitions if approved by the board, without requirements that could delay a desirable transaction without providing significant benefit to the company or protection for shareholders. • It also permits any company to make any distribution upon approval by the board and without shareholder approval but subject to the existing equity solvency and balance sheet solvency tests (See s46) and subject to express standards of conduct and liability provisions (S76 – 77).

14. Corporate Finance • Directors jointly and severally liable to the company for distributions in excess of that permitted by law • Proof of violation of the director’s standard of conduct is required, especially since that is set forth by statute, as a prerequisite to liability for an unlawful distribution (S46(6). • Consideration has also been given to whether senior liquidation preferences should be treated as “liabilities of the company” for the purposes of share repurchases or any distribution to shareholders, which will be the case only if provided for in the Memorandum of Incorporation (S4(2)(c)).

15. Corporate Finance • Maintaining economically unnecessary limitations on equity investment in South African companies would put these companies at a competitive disadvantage with companies formed under the laws of jurisdictions with more modern and permissive statutes. • Consideration was given to permitting the Board to authorise financial assistance for share acquisitions subject to the solvency liquidity test, shareholder approval requirements and any other requirements of the Memorandum (S44).

16. Governance Corporate Governance This is dealt with under Part F of Chapter 2 and it covers:- • Shareholder right to be represented by proxy (S58) • Shareholders acting other than at a meeting (S60) • Shareholders meetings and conduct of such meetings SS61 & 63) • Revised Meeting quorum and adjournment Requirements (S64) • Modernised rules concerning Shareholder resolutions (S65) • Board, directors and prescribed officers (S66) • Election of directors (S68) • Ineligibility and disqualification of persons to be director or prescribed officer (S69) • Director’s personal financial interests (S75) • Standards of directors conduct (S76) • Liability of directors and prescribed officers (S77), and • Indemnification and directors’ insurance (S78)

17. Chapter 4 Public Security Offering • Chapter addresses, among others, • Actions that are not an offer to the public • Standards for qualifying employee share schemes • General restrictions on offers to the public • Requirements concerning a prospectus (Primary Offers) • Secondary offers to the public • Liability and Responsibility for untrue statements in prospectus

18. CHAPTER 5 Fundamental Transactions, Takeovers and Offers • The Chapter is divided into three parts; i.e. • Part A: Approval For Certain Fundamental Transactions • Part B: Authority of the Takeover Regulation Panel and Takeover Regulations • Part C: Regulation of Affected Transactions and Offers.

19. Chapter 5 Part A: Fundamental Transactions • The Bill recognises the following as Fundamental transactions: • Sale or disposal of all or the greater part of the assets of the company or undertaking • Merger or Amalgamation, and • Schemes of arrangement • The rules regulating fundamental transactions apply to all companies, whether they fall under the jurisdiction of the Takeover Regulation Panel or not • These transactions are now discussed in turn:

20. Chapter 5 (Cont.) Proposals to dispose of all or the greater part of assets or undertaking • EXEMPTIONS • The section does not apply to a transaction – • (a) that is pursuant a business rescue plan adopted in accordance with Chapter 6; or • (b) between a wholly owned subsidiary and its holding company; or • (c) between or among - • (i) two or more wholly owned subsidiaries of the same holding company; • or • (ii) a wholly owned subsidiary of a holding company, on the one hand, and its holding company and 1 or more wholly owned subsidiaries of that holding company, on the other hand.

21. Chapter 5 (Cont.) • REQUIREMENTS (S112 Disposals) • A company may not dispose of all or the greater part of its assets or undertaking unless - • (a) the disposal has been approved by a special resolution of the shareholders, in • accordance with section 115 (dealing with approval requirements).

22. Chapter 5 (Cont.) Proposals for merger or amalgamation • Upon implementation of the amalgamation or merger, each amalgamated or merged company to satisfy the solvency and liquidity test. • Amalgamating or merging companies must enter into a written agreement setting out, in particular: • the proposed Memorandum of Incorporation of any new company to be formed by the amalgamation or merger; • the name and identity number of each proposed director of any proposed amalgamated or merged company; • the manner in which the securities of each amalgamating or merging company are to be converted into securities of any proposed amalgamated or merged company, or exchanged for other property (S113)

23. Chapter 5 (Cont.) • if any securities of any of the amalgamating or merging companies are not to be converted into securities of any proposed amalgamated or merged company, the consideration that the holders of those securities are to receive in addition to or instead of securities of any proposed amalgamated or merged company; • the manner of payment of any consideration instead of the issue of fractional securities of an amalgamated or merged company or of any other juristic person the securities of which are to be received in the amalgamation or merger;

24. Chapter 5 (Cont.) • details of the proposed allocation of the assets and liabilities of the merging or amalgamating companies among the companies that will be formed or continue to exist when the agreement has been implemented; • details of any arrangement or strategy necessary to complete the amalgamation or merger, and to provide for the subsequent management and operation of the proposed amalgamated or merged company or companies; and • the estimated cost of the proposed amalgamation or merger.

25. Chapter 5 (Cont.) Proposals for scheme of arrangement (S114) • EXEMPTIONS • Liquidation • Business Rescue • DEFINITION: • It is any arrangement between the company and holders of any class of its securities, including a reorganisation of the share capital of the company by way of, among other things - • (a) a consolidation of securities of different classes; • (b) a division of securities into different classes; • (c) an expropriation of securities from the holders; • (d) exchanging any of its securities for other securities; • (e) a re-acquisition by the company of its securities; or • (f) a combination of the methods contemplated in this subsection.

26. Chapter 5 (Cont.) • REQUIREMENTS: • The company must retain an independent expert, who meets the following requirements: • The person to be retained must be - • qualified, and have the competence and experience necessary to – • understand the type of arrangement proposed; • evaluate the consequences of the arrangement; and • assess the effect of the arrangement on the value of securities and on the rights and interests of a holder of any securities, or a creditor of the company; and • able to express opinions, exercise judgment and make decisions impartially.

27. Chapter 5 (Cont.) • REQUIREMENTS (Cont.): • The person to be retained must not • have any other relationship with the company or with a proponent of the arrangement, such as would lead a reasonable and informed third party to conclude that the integrity, impartiality or objectivity of that person is compromised by that relationship; • have had any relationship contemplated in sub-paragraph (i) within the immediately preceding 2 years; or • be related to a person who has or has had a relationship contemplated in sub-paragraph (i) or (ii).

28. Chapter 5 (Cont.) REQUIREMENTS Cont: • The expert must prepare a report to the board concerning the proposed arrangement, which must, at a minimum – • state all prescribed information relevant to the value of the securities affected by the proposed arrangement; • identify every type and class of holders of the company’s securities affected by the proposed arrangement; • describe the material effects that the proposed arrangement will have on the rights and interests of the persons mentioned in paragraph (b), and

29. Chapter 5 (Cont.) • evaluate any material adverse effects of the proposed arrangement against – • the compensation that any of those persons will receive in terms of the arrangement; and • any reasonably probable beneficial and significant effect of the arrangement on the business and prospects of the company; • state any material interest of any director of the company, or trustee for security holders, and state the effect of the arrangement on those interests and persons; and • include a copy of sections 115 ( dealing with the required approvals for transactions) and 164 (dealing with appraisal rights)

30. Chapter 5 (Cont.) Implementation of amalgamation or merger (S116) • Each of the merging or amalgamating companies must give notice to every known creditor of that company; • A creditor may seek leave to apply to a court for a review of the merger or amalgamation only on the grounds that the creditor will be materially prejudiced by the amalgamation or merger; and • A court may grant leave only if it is satisfied that • the applicant for leave is acting in good faith; • if implemented, the merger or amalgamation would materially prejudice the creditor; and • there are no other remedies available to the creditor. • This creditor remedy does not apply to a company engaged in business rescue proceedings pursuant to the company’s business rescue plan adopted in accordance with Chapter 6.

31. Chapter 5 (Cont.) • A notice of amalgamation or merger must include confirmation that the amalgamation or merger • has satisfied the requirements of sections 113 and 115; • has been approved in terms of the Competition Act, 1998 (Act No. 89 of 1998), if so required by that Act; and • has been granted the consent of the Minister of Finance in terms of section 54 of the Banks Act, 1990 (Act No. 94 of 1990), if so required by that Act; and • is not subject to - • further approval by any regulatory authority; or • any unfulfilled conditions imposed by or in terms of any law administered by a regulatory authority; and • the Memorandum of Incorporation of any company newly incorporated in terms of the agreement.

32. Chapter 5 (Cont.) • After receiving a notice of amalgamation or merger, the Commission must - • issue a Registration Certificate for each company newly incorporated in terms of the agreement; and • de-register each of the amalgamating or merging companies that has not survived the merger. • When a merger or amalgamation agreement has been implemented – • the property of each amalgamating or merging company becomes the property of the newly amalgamated, or surviving merged, company or companies; and • each newly amalgamated, or surviving merged, company is liable for all of the obligations of every amalgamating or merging company

33. Chapter 5 (Cont.) • Part B – Authority of the Takeover Regulation Panel (TRP) • It has the authority to regulate “affected transactions”, which are defined to mean – (i) a transaction or series of transactions amounting to the disposal of all or the greater part of the assets or undertaking of a regulated company (ii) a merger or amalgamation if it involves at least one regulated company (iii) a scheme of arrangement between a regulated company and its shareholders (iv) the acquisition of, or announced intention to acquire, a beneficial interest in any voting securities of a regulated company amounting to 5%, 10%, 15%, or any further whole multiple of 5% (v) the announced intention to acquire a beneficial interest in the remaining voting securities of a regulated company not already held by a person or persons acting in concert; (vi) a mandatory offer; or (vii) a compulsory acquisition;

34. Chapter 5 (Cont.) PART C: Panel regulation of affected transactions • (1) The Takeover Regulation Panel must regulate any affected transaction or offer without regard to the commercial advantages or disadvantages of any transaction or proposed transaction, in order to - • (a) ensure the integrity of the marketplace and fairness to the holders of the securities of regulated companies; • (b) ensure the provision of - • (i) necessary information to holders of securities of regulated companies, to the extent required to facilitate the making of fair and informed decisions; • (ii) adequate time for regulated companies and holders of their securities to obtain and provide advice with respect to offers; and • (c) prevent actions by a regulated company designed to impede, frustrate, or defeat an offer, or the making of fair and informed decisions by the holders of that company’s securities. (Sec 119)

35. Chapter 5 • Compulsory acquisitions and squeeze out: (S124) • If, within 4 months after the date of an offer for the acquisition of any class of securities of a regulated company, that offer has been accepted by the holders of at least 90% of that class of securities, the offeror may notify the holders of the remaining securities of the class – (i) that the offer has been accepted to that extent; and (ii) that the offeror desires to acquire all remaining securities of that class; • After giving notice, the offeror is entitled, and bound, to acquire the securities concerned on the same terms that applied to securities whose holders accepted the original offer. Within 30 business days after receiving a notice, a person may apply to a court for an order - (a) that the offeror is not entitled to acquire the applicant’s securities of that class; or • (b) imposing conditions of acquisition different from those of the original offer.

36. Chapter 8 Companies and Intellectual Properties Commission Maintains and operates Registry Monitors and promotes compliance with Act Enforces Act by receiving and investigating complaints, issuing compliance orders and referring offences for prosecution Conducts research, promotes education, co-ordinates with other agencies, and reports to Minister Takeover Regulations Panel Replaces current Securities Regulation Panel Regulates affected transactions and offers Advises Minister on Takeover Regulations

37. Chapter 8 Ombuds Adjudicates disputes over Commission decisions and compliance notices May serve as an Alternative Dispute Resolution agent between private parties in dispute under the Act Financial Reporting Council Standards Receives reports from Commission concerning compliance with Financial Reporting Standard Advises Minister on FRS

38. COMPANIES BILL, 2008 RELATIONSHIP WITH CLOSE CORPORATIONS ACT • The Bill provides for - • the co-existence of the new Companies Act and the Close Corporations Act; • amendments to the Close Corporations Act to harmonize the two laws with respect to regulation; • existing close corporations are free to retain their current status until determine that it is their interest to convert to a company; and • the Close Corporations Act to be closed as an avenue for the incorporation of new entities, or for the conversion of companies into close corporations, as of the effective date of the Bill. 38

39. THANK YOU