The Department of Trade, Industry, and Competition has embarked on a review of the Companies Act, No. 71 of 2008 (“the Act”) in an effort to align the provisions of the Act with global trends and harness any deficiencies identified since its inception. This process culminated in amendments to certain provisions of the Act which President Cyril Ramaphosa signed into law on 26 July 2024. The amendments will only come into operation on a date fixed by the President by notice in the Government Gazette, which has not been determined.
This article provides a high-level overview on those amendments which are specifically calculated at facilitating ease of doing business, from a corporate finance perspective.
Section 38 of the Act– Issuing shares
Section 38 of the Act empowers a company’s board to issues shares provided that such shares have been validly authorised. If a company issues shares that have not been authorised, or which are more than the number of the authorised shares, then the issuance of those shares is a nullity. However, such issue can be authorised retrospectively by a special resolution filed with the Companies and Intellectual Property Commission within sixty business days after the date of the invalid issue.
Therefore, if a resolution to retroactively authorise an otherwise invalid share issue is not adopted within sixty business days, the issuance of such shares remains a nullity and the company will be required to return the consideration received by it for the invalidly issued shares, with interest thereon. This can create difficulties where the subscription consideration has already been spent by the company. It can also create issues for the board of the issuing company since the section imposes personal liability on directors.
The amended section 38 of the Act provides that, on application by the company or any party who holds an interest in the company, a court may validate the creation, allotment or issue of shares if it is satisfied that it is just and equitable to do so. This amendment gives the company and affected persons an additional remedy where retroactive authorisation has not occurred.
Section 40 of the Act – Consideration for shares
Section 40 of the Act states, inter alia, that a company can only issue shares for “adequate consideration” as defined in section 1 of the Act. Thus the board must thus ensure that, before it issues shares, the consideration for such shares is fair and reasonable. In terms of section 40(5) of the Act, if the consideration for the shares is in the form of an instrument where payment is deferred or in the form of an agreement for future services, then the shares can be issued but must be transferred to a third party and held in a trust and later transferred to the intended subscriber once payment is made or the services have been rendered, as the case may be. In this regard, section 40(6) of the Act requires the conclusion of a trust agreement regulating how those shares are to be dealt with in the interim.
The amendment to section 40 of the Act replaces the words ‘third party’ with ‘stakeholder’, and the words ‘trust agreement’ with a ‘stakeholder agreement’. A ‘stakeholder’ is defined as “an independent third party with no interest in the company or the subscribing party and may be an attorney, notary public or escrow agent”.
Therefore, when a company issues shares where payment is deferred, or the payment is in the form of an agreement for future services those shares will now be issued to a “stakeholder” and regulated in the terms of a “stakeholder agreement”. This amendment has removed the uncertainty that was associated with the trust arrangement as some had gone as far as interpreting this section to mean that an actual trust must be registered to house these shares.
Section 45 of the Act –Financial assistance
Section 45 of the Act renders void any financial assistance given by a company to a director or prescribed officer or related or inter-related person in circumstances where the company does not meet the solvency and liquidity test set out in section 4 of the Act, or the terms on which the financial assistance is being given are not fair and reasonable vis a vis the company.
The amended section 45 of the Act has inserted a new provision which provides that these requirements are no longer required when a holding company is providing financial assistance to its subsidiary. We note that the exemption does not apply when a subsidiary company is providing financial assistance to its holding company.
Section 48 of the Act – Share repurchases In respect of share repurchases, section 48 of the Act empowers the board of a company to resolve for the company to repurchase its issued shares. The board must ensure that, before implementing a share repurchase, the company passes the solvency and liquidity test outlined in section 4 of the Act. A shareholders’ special resolution is also required if the share repurchase is in respect of shares held by a director, prescribed officer, or related person.
Section 48(8)(b) of the Act states that, if the share repurchase is in respect of shares which are more than five percent of the issued shares, then such transaction must also comply with the requirement of section 114 of the Act, dealing with schemes of arrangement, and in addition, the requirements of section 115 of the Act would also need to be complied with.
Section 114 of the Act requires, inter alia, the board to retain an independent expert who must prepare a fair and reasonable opinion and deliver the report to the shareholders of the company. Section 115 of the Act entitles a dissenting shareholder to exercise appraisal rights in terms of section 164 of the Act.
There has been debate on whether the appraisal rights set out in section 164 of the Act apply in the context of a share repurchase in terms of section 48 to the extent that which section 114 applies to that repurchase. This debate was settled by the Supreme Court of Appeals (“SCA”) in Capital Appreciation Ltd v First National Nominees.[1] In this matter Capital Appreciation notified its shareholders of its intention to repurchase several of its shares from specific shareholders. First National Nominees, being a shareholder in Capital Appreciation, objected to the proposed repurchase and demanded that its shares be purchased at fair value in terms of section 164 of the Act. Capital Appreciation opposed the application on the basis that section 164 of the Act did not apply to a section 48(8)(b) share repurchases. The SCA held that section 164 of the Act did apply in respect of those share repurchases to which section 114 of the Act applies.
The amendment has effectively replaced section 48(8) of the Act with a new section which eliminates the requirement that share repurchases of more than five percent must comply with the requirement of section 114 and 115 of the Act. Consequently, if section 115 of the Act is no longer applicable to share repurchases, then the appraisal rights in section 164 of the Act will also not find application in the context of a section 48(8)(b) share buy-back.
It is also fundamental to note that, in terms of the new section 48(8) of the Act, all share repurchases will require a shareholders’ special resolution except in cases where a company conducts a pro rata repurchase from all its shareholders or the share repurchase is conducted on a recognised exchange.
It is expected that these reforms will make it less cumbersome to capitalise companies and to effect commercial arrangements between companies and their shareholders.
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[1] Capital Appreciation Ltd v First National Nominees (Pty) Ltd and Others (280/2021) [2022] ZASCA 85
Mduduzi is an associate in our Corporate / Commercial and Project Finance Practice. He joined RAMS Attorneys as an associate in 2024.
Matodzi is a director in our Corporate and Commercial Practice.