What is the current status of the new companies Act of 2008? And when and how will it start to affect you?
Current status
The new Companies Act will come into force on a date to be notified by government, probably during the third quarter of 2010. The new Act will replace the old Companies Act of 1973. The Act has already been promulgated, but a significant number of errors have been identified and acknowledged by the Department. It is unclear how these errors are being addressed and when we will see the final, corrected legislation. A set of regulations has also been published, but only for public comment at this stage. The regulations will be finalised in the months to come. The answer, then, is that the Act will probably come into effect somewhere between July and September 2010, unless the correction of errors occasions further delay.
Implications for close corporations
Existing close corporations will be entitled to continue operating. You will be able to convert a corporation to a company under the new Companies Act, but will not be obliged to do so. However,as from the date of effect of the new Companies Act, it will not be possible to register new close corporations – so if you are thinking of establishing one in the future, you should acquire a shelf corporation as soon as possible.
Implications for companies
Imagine that the IRB announces that it has replaced the rules of rugby. The new rules, says the Board, are based on the old rules, but are intended to modernise the game and therefore introduce some fundamental new principles. The new Companies Act will have exactly the same effect on business. The Sharks are lectured by professional referees at the start of each season on the implications of any rule changes made during the off-season. Business people are going to need to do much the same in order to come to terms with the new rules of business.
Other than understanding the new rules, every company will need to take at least two legal steps.
Firstly, you will have two years from the implementation date to replace your existing Memorandum and Article of Association with a new Memorandum of Incorporation. During this grace period your existing Memorandum and Articles of Association will prevail in the event of a conflict with the new Act. Thereafter, the new Act prevails and your company may be left in a state of great uncertainty if there are conflicts.
Secondly, you will need to review your shareholders agreement. These agreements will have dealt with matters that are not or could not be included in the Memorandum and Articles of Association under the old Act, and they are critical to the smooth operation of many companies, as well as the protection of shareholder interests. Under the old Act, shareholders agreements were valid even if they were inconsistent with the Companies Act. This is set to change and shareholders' agreements will be invalid to the extent that they are inconsistent with the new Act. Unlike your existing Memorandum and Articles of Association, shareholders' agreements do not enjoy a grace period. As soon as the new Act becomes effective, shareholders' agreements will immediately be invalid to the extent that they conflict with the new Act.
We believe that the sensible approach is to review your shareholders' agreements and Articles of Association at the same time – they cannot be looked at separately – and to do this as soon as possible. This will ensure that the new Act does not pose any unexpected problems for you and your company.
Tim is the Commercial Director at Venn, Nemeth & Hart Attorneys. He can be contacted at tim@vnh.co.za
Recent Comments