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Companies act 71 of 2008 Final


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The Companies Act 71 of 2008, as amended by the
Companies Amendment Act 3 of 2011, and the
Companies Regulations 2011 came into effect on
1 May 2011.
The Act replaces the 1973 Companies Act . Some of the
provisions relating to the winding-up of insolvent companies in
the 1973 Companies Act will continue to apply until alternative
legislation has been brought into force to deal with the
winding-up of insolvent companies. Also any investigation by
the Minister or the Registrar of Companies under the 1973
Companies Act may be continued.
For the most part, however, the Act contains new
provisions to which companies are required to adhere to
from 1 May 2011. There are certain exceptions set out in
Schedule 5 which deal with transitional arrangements to
facilitate the transition from the 1973 Companies Act to
the Act.
This booklet has been prepared taking into account
the Act and Regulations as at 1 May 2011.

Compiled by KPMG.

Published in: Business
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Companies act 71 of 2008 Final

  1. 1. The Companies Act 71 of 2008
  2. 2. c | Companies Act 71 of 2008 Companies Act 71 of 2008 | 1Contents GlossaryGlossary 1 1973 Companies Act - Companies Act 61 of 1973Introduction 2Overview 3 Act - Companies Act 71 of 2008 1 Categories of companies 4 Commission - Companies and Intellectual Property Commission, which 2 The future of close corporations 5 replaced CIPRO and is known as CIPC 3 Alterable and unalterable provisions 5 FRSC - Financial Reporting Standards Council 4 Company formation 5 Minister - Minister of Trade and Industry 5 Memorandum of incorporation, rules and shareholder agreements 5 MOI - Memorandum of Incorporation being the founding constitutional document 6 Accountability and transparency 6 of a company referred to in 5 below 7 Capitalisation of profit companies 7 Regulation - A regulation set out in the Companies Regulations, 2011 8 Shareholder meetings 10 9 Directors 11 TRP - Takeover Regulation Panel, which replaced the Securities Regulation Panel 10 Additional accountability requirements 14 11 Fundamental transactions 18 12 Appraisal rights 19 13 Takeovers, mandatory offers and squeeze-outs 19 14 Business rescue 19 15 Stakeholders 20 16 Criminal sanction 20 17 Civil actions 20 18 Alternative dispute resolution 21 19 Relevance of the financial position of the company 21 20 Regulatory agencies 21Annexures Annexure 1 : Comparative Analysis of Categories of Companies 24 Annexure 2 : Audit and Independent Review requirements 26 Annexure 3 : Social and Ethics Committee 28
  3. 3. 2 | Companies Act 71 of 2008 Companies Act 71 of 2008 | 3IntroductionThe Companies Act 71 of 2008, as amended by theCompanies Amendment Act 3 of 2011, and theCompanies Regulations 2011 came into effect on1 May 2011.The Act replaces the 1973 Companies Act . Some of theprovisions relating to the winding-up of insolvent companies inthe 1973 Companies Act will continue to apply until alternativelegislation has been brought into force to deal with thewinding-up of insolvent companies. Also any investigation bythe Minister or the Registrar of Companies under the 1973Companies Act may be continued.For the most part, however, the Act contains newprovisions to which companies are required to adhere tofrom 1 May 2011. There are certain exceptions set out inSchedule 5 which deal with transitional arrangements tofacilitate the transition from the 1973 Companies Act tothe Act.This booklet has been prepared taking into accountthe Act and Regulations as at 1 May 2011.
  4. 4. 4 | Companies Act 71 of 2008 Companies Act 71 of 2008 | 5OverviewThe Act introduces fundamental changes to 1.2 Private companies 1.7 Differences between the categories of companies 5 Memorandum of incorporation, rules andSouth African company law and corporate These are similar to private companies under the 1973 The Act has a number of requirements that differ depending shareholder agreements Companies Act in that they prohibit an offer of securities to on the relevant category of company For a detailedactions. the public and restrict the transferability of their securities. comparison between the categories of companies, see 5.1 MOI However, they are no longer limited to 50 members as was Annexure 1. The founding document of a company under the Act is theThe purpose of this booklet is to serve as an previously the case. MOI. The previous memorandum and articles of associationoverview of some of the key issues contained in of existing companies automatically became the MOI on 1.3 Personal liability companies 2 The future of close corporations - 1 May 2011 (s1 definition of MOI). The MOI can deal with anythe Act and the Regulations as opposed to being The directors and past directors of such companies are jointly (Schedule 2 and Schedule 3) matter that the Act does not address and may alter the effecta critical analysis of the Act. and severally liable together with the company, for any debts Close corporations in existence on 1 May 2011 will of any provision in the Act which is an “alterable provision”. and liabilities that were contracted during their periods of continue to exist. Close corporations may be converted into office. These are similar to the “Inc” used for incorporated companies. No new close corporations can be registered and 5.2 Rules1 Categories of companies – s8; s11 professional practices under the 1973 Companies Act. companies cannot be converted into close corporations after In addition to the MOI, unless the MOI provides otherwise,There are the following categories of companies: 1 May 2011. The Act does not currently anticipate any date by the board may make rules that are necessary or incidental 1.4 Public companies when close corporations will cease to exist. to the governance of the company. Any rules made by theNon-Profit Companies to be reflected as NPC These are similar to public companies under the 1973 board will be effective on an interim basis until voted on by Companies Act, although only 1 member is required There are some significant changes to be made to the the shareholders at the next general shareholder meeting. IfProfit Companies (compared to the 7 members requirement previously). Close Corporations Act 69 of 1984, by the Act and a close such rules are ratified at such general shareholder meeting, corporation may be required to be audited if it falls within the the rules will remain binding and have the same effect as if –– Private Companies: to be reflected as Proprietary 1.5 State-owned companies category of regulations passed by the Minister stipulating the incorporated in the MOI. The rules must not be inconsistent Limited or (Pty) Ltd A state-owned company is a company which is listed as entities requiring an audit. In addition, the business rescue with the Act and the MOI. –– Personal Liability to be reflected as Incorporated provisions (see 14 below) will apply to close corporations. a public entity in Schedule 2 or 3 of the Public Finance Companies: or Inc. 5.3 Shareholder agreements Management Act, 1999 (PFMA), or is owned by a municipality –– Public Companies: to be reflected as Limited or Ltd and is similar to a public entity listed in Schedule 2 or 3 of the The Act expressly provides that the shareholders of a 3 Alterable and Unalterable Provisions –– State Owned to be reflected as SOC Ltd PFMA. company may conclude shareholder agreements but provides The Act distinguishes between “alterable provisions”, which Companies: that any such agreement must be consistent with the Act and The majority of the provisions of the Act which apply to a can be effectively amended by the MOI and “unalterable the MOI. This may require a number of existing shareholderIf a company’s MOI includes special conditions, the name public company will apply to a state-owned company unless provisions” which may not be overridden by the MOI. The agreements to be reviewed and if necessary amended.of the company must include the expression “RF”. This specifically exempted by the Minister. MOI may impose a more onerous requirement than wouldwould typically apply to a special purpose company where otherwise apply in terms of an unalterable provision. There are transitional provisions which provide that, for anthe capacity of the company to carry out certain activities 1.6 Foreign company and external company interim period of two years (ie from 1 May 2011 to 30 April A “foreign company” is a company incorporated outside of The rationale for including these concepts is to allow flexibilityhas been limited in its MOI and where such provisions in the 2013) existing shareholder agreements will prevail in the South Africa irrespective of whether it carries on business so that, within certain limits, each individual companyMOI may not be amended or may only be amended under event of a conflict between that shareholder agreement and here. A foreign company is prohibited from offering its could adapt its MOI to create the appropriate balance ofparticular circumstances. the Act or the MOI (Schedule 5 Item 4). If the shareholder securities to the public unless it follows the specific power between the shareholders and the board as may agreement is amended at any time during the two yearThe Act does away with the concepts of “widely-held” and provisions relating to “offers to the public” in the Act. be considered appropriate. The board essentially has the interim period its provisions will no longer prevail over the Act“limited interest” companies that were previously provided inherent power to carry out most actions, unless that power is A foreign company is required to register as an “external or the MOI in the event of a conflict.for in the 1973 Companies Act. expressly restricted by the Act or the MOI. company” if it conducts business in South Africa. Section Alterable provisions cover matters that typically would 5.4 Existing memorandum and articles of association1.1 Non-profit companies 23 provides that a foreign company will not be regarded as be matters of a private nature and that can be altered as There are transitional provisions in the Act which provide thatThese are similar to s21 companies under the 1973 conducting business in South Africa merely by virtue of its determined by the shareholders and as set out in the MOI. the memorandum and articles of association of an existingCompanies Act. They must have a “public benefit” object or carrying out any of certain specified activities. The test for Unalterable provisions cover matters that typically would have company will continue to be effective for two years (iean object relating to cultural or social activities or communal or whether or not a foreign company needs to register as an greater public interest. from 1 May 2011 to 30 April 2013) even if there is a conflictgroup interests. Not all the provisions of the Act apply to non- external company will be to ascertain whether the foreign between the articles and the Act, and beyond two years ifprofit companies and there are specific provisions contained company has engaged or is engaging in a course of conduct or there is no conflict between the articles and the Act. Therein Schedule 1 to the Act that govern these companies. a pattern of activities in South Africa over a period of 6 months 4 Company formation – s13 are a number of exceptions to this relating to directors duties which would lead a person to reasonably conclude that such One or more persons or an organ of state may incorporate aOverall the provisions applicable to non-profit companies are and conduct (see 9.7 below), the rights of shareholders to foreign company intended to continually engage in business profit company. An organ of state, a juristic person or three orless formalistic and restrictive than used to be the case under receive information and the provisions relating to fundamental in South Africa. A foreign company will also need to register if more persons acting in concert may incorporate a non-profitthe 1973 Companies Act. For example, non-profit companies transactions (see 11 below). it is a party to employment contracts in South Africa. company.are no longer required to have seven members. In terms ofSchedule 1 a non-profit company may in its constitution set Once registered, the external company must maintain A company is incorporated by completing and filing a MOI andout whether it will have any members and, if it has members, an office in South Africa, register its address with the a Notice of Incorporation.whether the members will be entitled vote. Commission and submit annual returns. It is not subject to the audit or review requirements of the Act.
  5. 5. 6 | Companies Act 71 of 2008 Companies Act 71 of 2008 | 76 Accountability and transparency • may be audited voluntarily at the option of the company 7 Capitalisation of profit companies – 7.2 Application of the solvency and liquidity testAll companies are required to: • must be independently reviewed, if it is not audited. Chapter 2 Part D The Act has a solvency and liquidity test (s4). Solvency relates to the assets of the company, fairly valued, being equal to• Have a registered office (s23) Companies which are not required to be audited may be 7.1 Class and issue of shares or exceeding the liabilities of the company, fairly valued.• Maintain certain records for 7 years (s24) exempt from an independent review if every person who is a Shares will no longer have a par or nominal value. Existing Liquidity relates to the company being able to pay its debts holder of or has a beneficial interest in any securities issued par value shares will remain and the regulations provide for a as they become due in the ordinary course of business for a• Have a fixed financial year (s27) by the company is also a director of the company. voluntary transition of existing par value shares to no par value period of 12 months.• Maintain accurate and complete accounting records (s28) This exemption does not apply however if such company shares. (Regulation 31) meets the public interest score thresholds requiring an audit. In the 1973 Companies Act, solvency and liquidity applied to• Prepare annual financial statements (s30) The MOI will set out the number of authorised shares, the share buy-backs, share buy-ins (a subsidiary acquiring shares (See Annexure 2). As only natural persons can be appointed class of such shares and the rights and terms associated in its holding company) and distributions to shareholders• File an annual return (s33). as directors, wholly owned subsidiaries of companies do not with the authorised shares. It is now also possible to have a (commonly referred to as section 90 payments). It also qualify for this exemption.All companies must prepare annual financial statements category of shares referred to as “unclassified” shares and applied to one of the exemptions in terms of which thewhich satisfy the financial reporting standards. In addition to the Regulations relating to the categories of the directors may determine the rights and terms which will company was permitted to give financial assistance in relation private companies that require an audit, the Regulations also attach to such “unclassified” shares on issue. to its own shares (or the shares of its holding company).The annual financial statements of public companies and prescribe the manner, form and procedures for the conductstate-owned companies will continue to require an audit. Generally, directors may issue shares without shareholder In the Act, the solvency and liquidity test has much wider of an independent review other than an audit, as well as the approval. Shareholder approval (by way of a special resolution) application than in the 1973 Companies Act and applies to-Any other company - professional qualifications of persons who may conduct such will only be required for the issue of shares, convertible reviews. • financial assistance (s44)• must be audited if it falls into a category prescribed by the securities or share options to directors or prescribed officers Minister, taking into account whether it is desirable in the For a more detailed analysis of the audit and independent (and other persons that are related to the company or to any • loans or other financial assistance to directors and related public interest, having regard to the economic or social review requirements, see Annexure 2. director or prescribed officers) or if there is an issue of shares and inter-related companies (s45) significance of the company, as indicated by- or convertible securities with voting power exceeding 30%. • distributions to shareholders (which are very widely –– its annual turnover The directors may only issue shares for adequate defined) (s46) consideration. The term “adequate consideration” is not –– the size of its workforce • the offering of a cash alternative in place of capitalisation defined. There may be particular facts or circumstances shares (s47) –– the nature and extent of its activities which justify the shares being issued at a discount to fair value which in the circumstances could be regarded as • share buy-backs or buy-ins (s48) “adequate consideration”. If it subsequently transpires that • amalgamations or mergers (s113). shares were issued for not “adequate consideration”, this will not invalidate the issue of the shares but may result in the The Act specifies that the financial information to be company having a claim against the directors for a breach of considered for purposes of the solvency and liquidity their duties as set out in the Act (see 9.8 below). test must be based on accounting records and financial statements that meet that prescribed financial reporting The Act now allows for shares to be issued for a consideration standards. It further stipulates that, in addition, the board of future services, future benefits or future payment. Shares must consider any reasonably foreseeable contingent assets are no longer required to be fully paid before they are issued and liabilities and may consider any “other” valuation of the but the Act includes a detailed and complex process for the company’s assets and liabilities that is reasonable in the shares to be held in “trust” pending receipt of payment of the circumstances. consideration. Unless the MOI provides otherwise, directors may- • increase or decrease the number of authorised shares of any class • reclassify any authorised but unissued classified shares • classify shares that are authorised but are unclassified and unissued • determine the preferences, rights, limitations and other terms of “unclassified” shares which have been authorised but not issued.
  6. 6. 8 | Companies Act 71 of 2008 Companies Act 71 of 2008 | 97.3 Financial assistance for the subscription of 7.5 Share buy-backs and buy-ins – s48 securities – s44 A company may repurchase its own shares (a share buy-back)The Act provides restrictions on a company providing provided that the company meets the solvency and liquidityfinancial assistance for the subscription or purchase of test. A share buy-back may generally be authorised by theits own securities or securities in a related or inter-related board without the need for shareholder approval. This iscompany. This restriction is wider than section 38 of the 1973 different to the 1973 Companies Act which required a specialCompanies Act which only applied to financial assistance by resolution for a share buy-back. However, a special resolutiona company for its own shares or shares in its holding will still be required where the company buys back sharescompany. The Act will effectively apply to financial assistance from directors, prescribed officers or persons related to themgiven in relation to securities of the company or any other or where the buy-back of shares amounts to more than 5% ofcompany within the group of companies of which the the particular class of issued shares of the forms part. A subsidiary company can buy shares in its holding companyThe directors may authorise the provision of financial (a share buy-in) provided that the number of shares in theassistance if immediately after the provision of the financial holding company held by all its subsidiaries collectively doesassistance the company will meet the solvency and liquidity not exceed 10% of the number of issued shares of any classtest and the financial assistance has been approved by a of shares in the holding company. A share buy-in may bespecial resolution passed within the previous two years. In authorised by the board without the need for shareholderaddition, the directors must be satisfied that the financial approval. Again, this is different to the 1973 Companies Actassistance is fair and reasonable to the company. A special which required a special resolution for a share buy-in.resolution will not be required if the financial assistance hasbeen given pursuant to an employee share scheme (which 7.6 Distributions to shareholders - s46meets the requirements of the Act). All distributions to shareholders require board approval and need to satisfy the solvency and liquidity test. Distributions7.4 Financial assistance to directors and to related and are extremely widely defined and include dividends and share inter-related companies – s45 buy-backs.Looking at the heading of section 45, it appears that thissection was intended to cover financial assistance to directors 7.7 Offers to the publicwhich was previously dealt with in section 226 of the 1973 The Act continues to regulate the offer of securities to theCompanies Act. However, on a closer reading, section 45 is public. It sets out the circumstances in which offers will notwider and covers not only financial assistance to directors be regarded as offers to the public and the requirements to beand prescribed officers but also covers financial assistance to followed where offers are regarded as offers to the public.related and inter-related companies. Financial assistance is 7.8 Employee share schemes – s95 and 97widely defined and would include loans. All intra-group loanswill therefore need to meet the requirements set out in this A share scheme will qualify as an “employee share scheme”section. for the purposes of the Act if it is a scheme established by the company for the purposes of offering shares or optionsA board may only authorise financial assistance if- in the company solely to employees, officers (which is not• the financial assistance contemplated is not prohibited by defined) and other persons closely involved in the business the MOI of the company or a subsidiary of the company. The Act also prescribes certain obligations relating to the appointment of a• the financial assistance is pursuant to an employee share compliance officer for the employee share scheme which is scheme or in terms of a special resolution adopted within similar to the 1973 Companies Act. Employee share schemes the last two years are exempt from the requirements for the issue of shares• the board is satisfied that after providing the financial to directors or prescribed officers, relating to the granting assistance, the solvency and liquidity test will be satisfied of financial assistance and relating to approvals for loans or financial assistance to directors or prescribed officers.• the terms are fair and reasonable to the company.A notice of any resolution passed by the board relating to suchfinancial assistance must be given to the shareholders and toany trade union representing employees.
  7. 7. 10 | Companies Act 71 of 2008 Companies Act 71 of 2008 | 118 Shareholder meetings 8.3 Resolutions – s65 Ordinary resolutions must be approved by more than 50%8.1 Annual general meetings – s 61 of the voting rights exercised in respect of the resolution.Annual general meetings must be held no later than fifteen Special resolutions must be approved by 75% of the voting(15) months after the previous annual general meeting. Only rights exercised in respect of the special resolution. The MOIpublic companies and state-owned companies are obliged to may provide for a higher percentage for ordinary resolutionshave an annual general meeting. and for a higher or lower percentage for special resolutionsThe annual general meeting convened by public and state- provided that there is at least a 10% difference betweenowned companies shall consider - the percentage approval required for ordinary and special resolutions. Different percentages may be prescribed in the• the directors’ report MOI for resolutions pertaining to different matters.• the audited financial statements 8.4 The need for special resolutions – s65(11)• the audit committee report Special resolutions are required :• election of directors • To amend the MOI or ratify a consolidated revision of the• appointment of the auditor MOI• appointment of the audit committee. • To ratify actions by the company or directors in excess of their authorityIn terms of the 1973 Companies Act, the audit committeewas appointed by the board, whereas in terms of the Act, the • To approve an issue of shares or grant of rights to directorsaudit committee is now to be appointed by the shareholders. and related companiesAs an auditor can only be appointed at an annual general • To approve an issue of shares or securities in excess ofmeeting, all companies which are required to be audited, 30% of the voting power of the shares or securities in thatwhether in terms of their MOI’s or the Regulations, will be classrequired to hold annual general meetings (s90). However, • To authorise the board to grant financial assistance to 9 Directors1such company will not necessarily have to deal with matters directors or prescribed officers or related or inter-related 9.1 Directors and prescribed officers – s 66 to s70other than the appointment of the auditor, as is required for companies (see 7.4 above) A private company or personal liability company requires A profit company must allow for shareholders to elect apublic and state-owned companies. at least one director and a public company and a non-profit minimum of 50% of the directors and the alternate directors. • To authorise the board to provide financial assistance for transactions in connection with the securities of the company requires at least three directors in addition to the The remaining directors may be appointed by any other8.2 Shareholders meetings – s61 to s64 company or related or inter-related companies (see 7.3 minimum number of directors that may be required for the person stipulated in the MOI.A quorum of 25% of the votes represented at a General above) audit committee or social and ethics committee where theMeeting of shareholders is required, provided that if the Directors’ remuneration is required to be approved by a company is required to have such committees. For example,company has more than two shareholders, there must be at • To approve the acquisition by the company of its own special resolution of shareholders approved within the last a public company may require a minimum of nine directorsleast three shareholders present to constitute a quorum (s64). shares in certain circumstances (see 7.5 above) two years. There is some debate as to whether this applies (three for the audit committee and three for the social andThe MOI can raise or lower the percentage required for a to all directors remuneration. The more widely held view • To authorise the basis for compensation of directors of a ethics committee in addition to the minimum of three). If aquorum (but not the requirement of three shareholders where appears to be that this requirement only applies to non- profit company (see 9.1 below) single director is able to serve on more than one committee,applicable). The Act makes provision for the postponement of executive directors fees as supported by King III. this reduces the actual minimum number required.a meeting if a quorum is not present. • To approve a voluntary winding-up If the number of directors is below the minimum required by Only a natural person with full legal capacity is eligible to be aThe minimum notice period of meetings of shareholders of • To approve the winding-up of a solvent company by the the Act or the MOI, this does not limit or negate the authority director. The MOI may also set out minimum qualifications fora public company is fifteen business days and of a private court of the board, or invalidate anything done by the board or the is ten business days. These notice periods apply company. • To approve the transfer of the company’s registration to airrespective of whether the meeting is held to consider A person is disqualified to be a director of a company for foreign jurisdiction The board is obliged, within 40 business days, to convene aordinary or special resolutions. The Act also allows for waiver various reasons including if a court has prohibited that person shareholders meeting to elect directors (S67), if the numberof notice of meetings. • For “fundamental transactions” (see 11 below) from being a director, or declared the person to be delinquent, of directors falls below the minimum. or the person has been removed from an office of trust orThe Act allows for shareholders’ decisions to be taken by • To revoke a previous special resolution that gave rise to convicted of certain specified crimes or is an unrehabilitated The definition of “director” includes alternate directors andway of “round robin” (s60), thereby alleviating the need to appraisal rights insolvent or is prohibited by public regulation. de facto directors. Generally, where the Act deals specificallyhold a formal meeting. This is permitted for all matters other • For such other matters that the MOI requires a special with the duties, liabilities etc of directors, these provisionsthan matters for which the Act specifically indicates that the resolution. also apply to board committee members and prescribeddecision must be taken at an annual general meeting. officers, even though these persons are not directors.A public company must allow for reasonable access by A “prescribed officer” is a person who exercises (or regularlyelectronic participation by shareholders at every shareholders’ Note: participates to a material degree in the exercise of) general 1 The definition of ‘director’ in a number of sections includes an alternate director,meeting of the company. prescribed officer and a member of a committee of the board or of the audit executive control over and management of the whole or a committee. This includes the sections which deal with ‘ineligibility and disqualification of persons to be director or prescribed officer’, ‘directors’ personal financial interests’, significant portion of the business or activities of the company ‘standards of directors conduct’, ‘liability of directors and prescribed officers’ and ‘indemnification and directors’ insurance’. (Regulation 38).
  8. 8. 12 | Companies Act 71 of 2008 Companies Act 71 of 2008 | 139.2 Removal of directors – s 71 9.6 Director’s personal financial interests – s75 • communicate to the board any information that comes 9.8 Liability of directors and prescribed officers – s77A director may be removed by an ordinary resolution at a The Act sets out procedures that are required to be followed to the director’s attention, unless the director reasonably A director, prescribed officer and a member of a boardshareholders’ meeting. The director concerned must be given for a director (including prescribed officers and board believes that the information is immaterial to the company committee may be held liable for any loss suffered by thenotice of the meeting and be afforded reasonable opportunity committee members) to disclose a financial interest of that or generally available to the public or known to the other company -to make a presentation on the matter before a vote is taken by director or of a person related to that director in respect of any directors or the director is bound not to disclose that information by reason of confidentiality. • for a breach of fiduciary dutythe shareholders. matter to be considered by the board. A director of the company, when acting in that capacity, must • arising from breaches of the Act or the MOIThe board may remove a director whom it has determined A director may also disclose any personal financial interest inis ineligible, disqualified, incapacitated, negligent or guilty of advance, by delivering to the board, or the shareholders (in exercise the powers and perform the functions of director– • as a consequence of the director -dereliction of duty. certain circumstances), a written notice setting out the nature • in good faith and for a proper purpose –– acting without the necessary authority and extent of that interest.Nothing in the Act precludes a director who has been • in the best interests of the company –– acquiescing to the company carrying on businessremoved from claiming damages for loss of office. If a director of a company has a personal financial interest recklessly in respect of a matter to be considered at a meeting of the • with the degree of care, skill and diligence that may9.3 Board committees – s72 board, or knows that a person related to that director has a reasonably be expected of a person - –– being present or participating in a decision or failingThe board may appoint any number of board committees and personal financial interest in the matter, the director must –– carrying out the same functions in relation to the to vote against certain specified decisions whichdelegate to any committee any authority of the board. Board make certain specified disclosures and must leave the company as those carried out by that director contravene the Actcommittees may include non-directors but non-directors will meeting immediately after making the disclosures and may –– having the general knowledge, skill and experience of –– being party to any act or omission intended to defraudnot have a vote. The delegation to any committee does not not take any part in the consideration of the itself relieve the director of the directors’ duties. In relation that director. –– signing or authorising the publication of any false orto standards of conduct and liability all members of the board A decision made in contravention of the procedures in this misleading financial statements. section can be ratified by an ordinary shareholders resolution These duties effectively re-state a director’s common lawcommittees are deemed to be directors (s75-78). fiduciary duties and the duty of care, skill and diligence. or by the court, failing which such decision will not be valid. The above list is not exhaustive of the provisions of section9.4 Social and ethics committee – s72(4) (Regulation 43) The Act includes the “business judgment test” which 77 which includes a comprehensive list of acts or omissions 9.7 Standards of directors conduct – s76 effectively provides that if the director has taken reasonable which could give rise to liability. In addition, directors couldThe Act has brought in a new statutory committee called asocial and ethics committee. All state-owned companies, The Act includes certain common law duties and certain steps to be informed, has no material financial interest (or also be liable to third parties, for example to shareholders forlisted public companies and any other company with a public additional statutory duties of directors. These duties also disclosed such financial interest) and has a rational basis to fraudulent acts or acts of gross negligence (s20(6)) or to anyinterest score above 500 in any two of the previous five years apply to prescribed officers and board committee members. believe the decision was in the best interests of the company, third person who has suffered loss by virtue of the directorsis required to appoint a social and ethics committee. See the director will not be liable for a breach of duty, unless the breaching the Act (s218(2)) – see 17 below). A director must -Annexure 3 for a detailed discussion on the social and ethics director acted in bad faith or for an improper purpose. While the Act, to a large extent, has removed many of • not use the position of director, or any information obtainedcommittee. A director is entitled to rely on the performance of employees, the criminal offences which were prevalent in the 1973 while acting in the capacity of a director - professional advisors, experts and board committees, Companies Act, the potential for civil claims against directors9.5 Board meetings - s73; s74 –– to gain an advantage for himself or any person other in terms of the Act appears far greater (see 16 and 17 provided that the person appears reliable. The Act sets outIn addition to typical directors’ meetings, the Act makes than the company or a wholly-owned subsidiary of the below). It is also important to note that members of board criteria for each class of persons that must be met prior toprovisions for board meetings to be held by electronic company committees and prescribed officers will have the same a director relying on such person. Without detailing each ofcommunication and for decisions of the board to be taken by liability as directors under section 77 even if the members of –– to knowingly cause harm to the company or a subsidiary these, the general approach appears to be that the person“round robin”, provided all the directors have received notice the board committees or prescribed officers are not directors of the company must be qualified in respect of the particular matter and mustof the meeting. The majority required for a “round robin” and even though they have no right to vote on any matters merit confidence.decision does not differ from that of a meeting, unless the considered at board committees.MOI provides differently. 9.9 Indemnification and directors’ insurance – s78 A company may not indemnify a director against liability arising from - • wilful misconduct or breach of trust by the director • the director acting without the necessary authority • reckless trading • fraudulent acts of the director • a fine related to an offence committed by the director unless the fine was based on strict liability. (There are limited exceptions to the prohibition on payment of fines.) Other than the specific instances mentioned above, a company may indemnify a director in respect of any liability, including the liability arising from a directors’ negligence. A company may also purchase insurance to protect a director or the company against any liability in respect of which the company is permitted to indemnify a director.
  9. 9. 14 | Companies Act 71 of 2008 Companies Act 71 of 2008 | 1510 Additional accountability requirements 10.1 Company secretary • certifying in the company’s annual financial statements Rotation of auditor – s92 (s34 and 84) Appointment of company secretary – s86 whether the company has filed required returns and The same individual may not serve as the auditor or notices in terms of this ActAdditional accountability requirements relating to the The Act requires all public companies and state-owned designated auditor of a company for more than fiveappointment of an auditor, company secretary and audit companies to appoint a company secretary who is • ensuring that a copy of the company’s annual financial consecutive financial years. The five consecutive years iscommittee apply to - knowledgeable or experienced in the relevant laws. The statements is sent to every person who is entitled to it calculated from 1 May 2011. company secretary must be a permanent resident of the • ensuring a person is responsible for compliance by If an individual has served as the auditor or designated auditor• every public company Republic, and must remain so while serving in that capacity. the company with the transparency and accountability of a company for two or more consecutive financial years• every state-owned company (unless exempted by the provisions set out in Chapter 2 – Part C and Chapter 3 of Duties of the company secretary – s88 and then ceases to be the auditor or designated auditor, the Minister or a conflict exists between the Act and the Public the Act. individual may not be appointed again until after the expiry of Finance Management Act, 1999) A company secretary’s duties include, but are not restricted at least two further financial years. to - 10.2 Auditor• a private company, personal liability company or non-profit Appointment of auditor – s 90 Rights and restricted functions of auditors – s93 company if its MOI requires it to comply. • providing the directors of the company with guidance as to their duties, responsibilities and powers Each year at its annual general meeting, a public company or The auditor of a company -Companies that require an audit as a result of meetingthe audit thresholds in the Regulations, other than public • making the directors aware of any law relevant to or state-owned company must appoint an auditor. • has the right of access at all times to the accountingcompanies and state-owned companies, are not required affecting the company If a company other than a public company or state-owned records and all books and documents of the company,to appoint a company secretary or audit committee merely company is required to be audited in terms of the Regulations and is entitled to require from the directors or prescribed • reporting to the company’s board any failure on the part ofas a result of the obligation to appoint an auditor. However, or in terms of its MOI, such company should appoint officers of the company any information and explanations the company or a director to comply with the Actall the provisions regarding the process for appointment, an auditor at the annual general meeting at which the necessary for the performance of the auditor’s dutiesindependence, rotation etc relating to the appointment of an • ensuring that minutes of all shareholders meetings, requirement to be audited first applies. • in the case of the auditor of a holding company, hasauditor will apply to such companies. board meetings and the meetings of any committees of To be appointed as an auditor of a company, a person or firm- the right of access to all current and former financial the directors, or of the company’s audit committee, are statements of any subsidiary of that holding company properly recorded in accordance with the Act • must be a registered auditor and is entitled to require from the directors or officers of • must not be prohibited from being a director of a company the holding company or subsidiary any information and explanations in connection with any such statements • must not be - and in connection with the accounting records, books –– a director or prescribed officer of the company and documents of the subsidiary as necessary for the performance of the auditor’s duties –– an employee or consultant of the company who was or has been engaged for more than one year in the • is entitled to - maintenance of any of the company’s financial records or –– attend any general shareholders meeting the preparation of any of its financial statements –– receive all notices of and other communication relating to –– a director, officer or employee of a person appointed as any general shareholders meeting company secretary –– be heard at any general shareholders meeting on any –– a person who, alone or with a partner or employees, part of the business of the meeting that concerns the habitually or regularly performs the duties of accountant auditor’s duties or functions. or bookkeeper, or performs related secretarial work, for An auditor appointed by a company may not perform any the company services for that company - –– a person who, at any time during the five financial years • that would place the auditor in a conflict of interest as immediately preceding the date of appointment, was a prescribed or determined by the Independent Regulatory person contemplated above Board for Auditors in terms of section 44(6) of the Auditing –– a person related to a person contemplated above Profession Act 26 of 2005 • must be acceptable to the company’s audit committee as • as may be determined by the company’s audit committee. being independent of the company.
  10. 10. 16 | Companies Act 71 of 2008 Companies Act 71 of 2008 | 1710.3 Audit committees – s94 Duties of the audit committeeAppointment of the audit committee An audit committee of a company has the following duties -At each annual general meeting of a public company, a state • to nominate an independent auditorowned company or any other company required by its MOI toappoint an audit committee, the shareholders must appoint • to determine the auditor’s fees and terms of engagementat least three directors to the audit committee, unless the • to ensure that the appointment of the auditor complies withcompany is a subsidiary of another company which has the provisions of the Act and any other legislation relatingan audit committee and that audit committee will perform to the appointment of auditorsthe functions required under this section on behalf of thatsubsidiary. • to determine the nature and extent of any non-audit services that the auditor may provide to the company or aEach member of an audit committee of a company must- related company• be a director of the company, who satisfies any minimum • to pre-approve any proposed agreement with the auditor qualification requirements as may be prescribed by the for the provision of non-audit services to the company Minister • to prepare a report, to be included in the annual financial• not be - statements for that financial year - –– involved in the day-to-day management of the company’s –– describing how the audit committee carried out its business or have been so involved at any time during the functions previous financial year –– stating whether the audit committee is satisfied that the –– a prescribed officer, or full-time executive employee, of auditor was independent of the company the company or another related or inter-related company, or have been such an officer or employee at any time –– commenting on the financial statements, the accounting during the previous three financial years practices and the internal financial control of the company –– a material supplier or customer of the company, such that a reasonable and informed third party • to receive and deal with any concerns or complaints, or on would conclude in the circumstances that the its own initiative deal with any concerns, relating to - integrity, impartiality and objectivity of that director is –– the accounting practices and internal audit of the compromised by that relationship company• not be related to any person contemplated above. –– the content or auditing of the company’s financialThe Minister may prescribe minimum qualification statementsrequirements for members of an audit committee as –– the internal financial controls of the companynecessary to ensure that any such committee, taken as awhole, comprises persons with adequate financial knowledge –– any related matterand experience to equip the committee to perform its • to make submissions to the board on any matterfunctions. The current provisions of the Regulations allow concerning the company’s accounting policies, financialfor a wide range of qualifications or experience in this control, records and reportingregard. It requires that at least one third of the members of • to perform any other oversight function determined bythe audit committee must have academic qualifications or the board.experience in economics, law, corporate governance, finance,accounting, commerce, industry, public affairs or humanresource management.