The impending new Companies Act, 71 of 2008, anticipated to be amended pursuant to the Amendment Bill, 2010 ("New Companies Act"), will bring into effect fundamental changes to corporate law in South Africa. Companies need to prepare for this transition.
The bulk of the New Companies Act will come into effect on a date referred to as the General Effective Date ("GED") that will be fixed by the President in terms of section 225 of the New Companies Act and this date is anticipated to be early next year. One of the most important aspects of the New Companies Act is the regulation of the Memorandum of Incorporation ("MOI"), which replaces the current Memorandum and Articles of Association of a company. The MOI must be consistent with the New Companies Act.
A key qualification to this is that the terms of any current Articles of Association will prevail in the event of a conflict with the New Companies Act for two years from the GED ("Moratorium") subject to certain exceptions in Schedule 5 ("Schedule 5 Exceptions"). During this period Companies are required to amend their MOIs to bring them into harmony with the New Companies Act. While there are some transitionary protections, this Moratorium is potentially misleading because of the wide Schedule 5 Exceptions and should not lead to complacency. After the GED it will be dangerous to blindly follow any pre-existing Articles of Association. The Schedule 5 Exceptions that will have immediate effect on the GED include:
- the duties, conduct and liabilities of directors;
- meetings of shareholders and directors and the adoption of resolutions;
- shareholder notices and access to information;
- the approvals required for any distributions, financial assistances, insider share issues or options; and
- the provisions regulating fundamental transactions.
These exceptions cover the greater part of the matters regulated in most Articles of Association and therefore substantially reduce the scope of the Moratorium. For example, most of the wide unalterable related party controls will have immediate effect, and generally directors will not be entitled to vote in respect of matters in which they or a related party have a personal financial interest, notwithstanding a contrary provision in the Articles of Association.
Good corporate governance and the duties placed on directors require preparation for the New Companies Act, including assessing and managing the associated risks as required by the King III Report on Corporate Governance.
Central to this planning is a "GAP analysis" which considers the impact of the New Companies Act on the constitutional documentation, that is, existing shareholders’ agreements and the current Articles of Association. In addition to a constitutional review, proper preparation extends to consideration of the impact on material transactions and contracts and the need for education and training. There is a great deal of new ground to cover and it is important that companies do not leave their preparation to the last minute.