The Companies Act, 2008
By Rachel Kelly
Mark Twain observed that “a banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain”. As the world finds its way through the global credit crisis, many businesses in South Africa are faced with challenges in securing finance – some businesses are struggling to get finance at all whereas others are finding that existing credit facilities are being reviewed or renewed on less favourable terms. But what relief does the new Companies Act offer to those businesses struggling to hold onto their umbrellas?
The new Companies Act, 2008 was signed into law on 9 April 2009 (although its commencement date is still to be proclaimed) and it replaces the previous Companies Act in full (subject to transitional arrangements remaining in force). In some respects, the new Act retains much of which worked in the previous Companies Act but it also contains provisions and concepts that many have welcomed as positive advances in modern company law.
In the area of financing, the new Act allows a company to issue shares for (amongst other things) an agreement for future services to be provided to the company (although private company shareholders generally have to be offered these shares first). While this was the position under the previous Companies Act and the common law, few companies took advantage of this preferring the more traditional approach of issuing shares for cash and using the cash to procure the services required by the company. These provisions also allow for the issue of shares for a consideration of future benefits or future payment to the company, although these are not discussed here.
The provisions of the new Act do, however, differ from the previous Companies Act and the common law in one significant way. Whereas previously, the company had to receive payment for the shares (albeit in the form of services rendered) before it could issue the shares, the new Act provides that on entering into the agreement for the future services, the company must immediately issue the shares and cause these to be held in trust, pending the fulfilment by the subscribing party of its obligations in terms of the agreement to provide the future services.
While held in trust, and unless otherwise agreed, the subscribing party will not have voting rights or pre-emptive rights in respect of the shares and any distributions made by the company may be credited against the remaining value of the services still to be performed at the time the distribution is made. The subscribing party may also not transfer the shares while held in trust, unless the company expressly agrees to this.
If the subscribing party does not provide the services to the company, the shares are to be returned to the company and cancelled (although the company may not do this for at least 40 business days after the date on which the services were due to be provided by the subscribing party).
These provisions provide considerable flexibility to companies in structuring financing arrangements which suit the company’s needs and, as these provisions are now contained in the new Act, we may see more companies taking advantage of this. Take, for example, a company seeking to expand office space – instead of being required to pay cash for building services, a company could agree to issue shares to the builder who may then, with the company’s consent (if the building services have not yet been provided), transfer these shares to an investor for cash. From the company’s perspective, the company is not required to raise upfront capital outlays and the company is protected in the event that the work is not provided. What is not dealt with in the new Act is what happens if the services are provided unsatisfactorily but, again, the company and the subscribing party have the flexibility to determine these arrangements. The company is also able to agree, pending the rendering of the services, whether the shares held in trust will carry voting or pre-emptive rights.
In addition to these provisions, the new Act retains many of the financing provisions contained in the previous Companies Act, for example, subject to certain conditions, a company may issue options for the allotment or subscription of shares, issue secured or unsecured debt instruments, provide financial assistance for the subscription of its securities (or the securities of a related company) and issue capitalisation shares.
The economic downturn we are facing is likely to affect every business operating in South Africa. Whether this be changing the way companies do business or being forced to restructure and reassess business models, the consensus of many is that companies will need to adapt to the changing environment in order to survive. For many companies, part of this adapting will mean changing the way things have traditionally been done. Companies who are declined finance, or who are offered finance on onerous terms, may be required to find new and innovative ways to raise the finance they need. It can only be seen as a good thing that the new Companies Act contains tools to allow this to happen.