As of the 1st of May 2011 the New Companies Act of 2008 has come into force. The new Act brings about wide ranging changes to company laws in South Africa and those operating businesses out of corporate entities should make the time to find out how they will be affected by the new Act.
We are aware that in the fishing industry many of the rights holding and vessel owning companies are governed by shareholders agreements which are tailor made to regulate the harvesting of fishing rights and the operation of high value vessels. This raises two issues which should be of immediate concern under the new Act. Firstly, the provisions relating to the Memorandum of Incorporation (the new constitution document of the company) and its inter play with the pre-existing articles/memorandum of the company and any pre-existing shareholders agreements. Secondly certain provisions of the new Act apply immediately and in particular the provisions dealing with fundamental transactions more specifically the disposals by a company of the greater part of its assets or undertaking.
Memorandum and Articles of Association – Memorandum of Incorporation
The memorandum and articles of association of a pre-existing company are deemed to be that company’s memorandum of incorporation (“MOI”).
For a period of two years from the commencement of the new Act, any conflict between the provisions of the MOI of a pre-existing company and the new Act will be resolved in favour of the MOI. After two years, the new Act will prevail.
However, from the outset, the Transitional Provisions set out in Schedule 5 of the new Act prevail and, despite anything to the contrary in the MOI, the provisions in the new Act apply in respect of the following:
- The duties, conduct and liabilities of directors to every director or a pre-existing company;
- Rights of shareholders to receive any notice or have access to any information of every pre-existing company;
- Meetings of shareholders or directors, and adoption or resolutions to every pre-existing company; and
- Fundamental transactions, takeovers and offers in Chapter 5 unless exempted by that Chapter.
Companies are accordingly advised to adopt a new MOI that is in line with the new Act within this two year time period – the sooner this can properly be done, the better for all concerned.
Shareholder Agreements
The established practice of drafting shareholder agreements that conflict with the company’s articles and then providing at the end of the agreement that in the case of a conflict between the provisions of the shareholder agreement and the articles of association, the provisions of the shareholder agreement will prevail, is now no longer possible. Such conflicts will be resolved in favour of the MOI (ie, the pre-existing memorandum and articles of association).
However, for a period of two years from the commencement of the new Act, conflicts between an existing shareholder agreement and the MOI will still be resolved in favour of the shareholder agreement. But this “two year reprieve” will terminate upon any change to a shareholder agreement within the initial two years. This means that any changes to shareholder agreements will need to be carefully considered, so that all amendments to align the agreement with the MOI are carried out at the same time.
In order to avoid the inconvenient consequence of certain provisions of a shareholder agreement being void upon the expiry of the initial two year period owing to them being in conflict with the MOI, shareholders are advised to act sooner, rather than later when it comes to revising their shareholder agreement/adopting a new MOI.
FUNDAMENTAL TRANSACTIONS – DISPOSAL OF GREATER PART OF ASSETS OR UNDERTAKING
Shareholder Approval
A company may not implement a disposal of a greater part of its assets or undertaking without the approval of its shareholders, which must be given by way of a special resolution. In order for that resolution to be validly adopted:
- A meeting of shareholders must be called to consider the resolution and notice of that meeting must be given to shareholders in the prescribed manner. That notice will have to include various items of information, including explanations of the rights of shareholders to sell their shares to the company under the appraisal rights and have a court review the transaction (both of which are explained further below);
- Ordinarily, the resolution must be supported by 75% of the votes cast on the resolution at a quorate meeting, although this percentage may be varied in the company’s Memorandum of Incorporation;
- Votes controlled by an acquiring party (together with its related persons and concert parties) must be ignored when determining whether the meeting was quorate and whether the resolution received the required support.
In addition, where the transaction involves a disposal by a subsidiary company and the assets or undertaking being disposed of also constitute all or the greater part of a majority of the assets or undertaking of the holding company of that subsidiary when one has regard to the consolidated financial statement of the holding company, then
the approval of the shareholders of that holding company by way of special resolution is also required.
Court review of fundamental transactions
The approval of a court will now be essential for the disposals of assets, mergers and schemes of arrangement if:
- The special resolution approving the transaction was opposed by 15% or more of the votes cast on that resolution and any person who voted against the transaction requires the company to obtain such approval; or
- A court grants any shareholder leave to have the transaction reviewed. The court may only grant such a review if that shareholder:
(i) is acting in good faith;
(ii) appears prepared and able to sustain the proceedings; and
(iii) has alleged facts which, if proved, would justify the court setting aside the resolution approving the transaction.
Where the court’s approval is required, the court will only be able to set aside the special resolution approving the transaction if:
(i) the transaction is manifestly unfair to any class of the company’s shareholders; or
(ii) the vote on the transaction was materially tainted by (a) conflict of interest; (b) inadequate disclosure; (c) failure to comply with the Act, the company’s rules or Memorandum of Incorporation; or (d) other significant and material procedural irregularity.
Appraisal rights
One of the most innovative features of the Act is the fact that it grants appraisal rights to dissenting shareholders whenever the company adopts a resolution approving a fundamental transaction. (The appraisal rights are also available when a company amends its Memorandum of Incorporation so as to alter the rights attaching to any class of shares in a manner adverse to the holders of those shares).
Shareholders who unsuccessfully oppose such transactions will thereafter be able to compel the company to repurchase all of their shares for their fair value, unless a court orders otherwise. However, apart from a situation in which the company would be rendered illiquid as a result of that repurchase, the grounds on which the court may order otherwise are unclear.
CONCLUSION
Brushing aside the technical jargon, the bottom line is that all companies with shareholders agreements should be looking now at adopting a custom made memorandum of incorporation suitable to the operations of such company and furthermore where a company is looking to sell a major asset or its undertaking (e.g. a vessel or fishing rights), special attention should be given to the new requirements regarding the obtaining of shareholders approval for such transaction.