The Companies Act, No. 71 of 2008, which came into operation on 1 May 2011, replaced the 1973 Companies Act. In July 2024, more than a decade later, the Companies Amendment Act, No. 16 of 2024 (“First Amendment Act”) and the Companies Second Amendment Act, No. 17 of 2024 (“Second Amendment Act”) were enacted and published in the Government Gazette. But it wasn’t until 27 December 2024 that the President caused some of the provisions of First Amendment Act and the entire Second Amendment Act to come into operation.
While this article will focus on the most important amendments, the other amendments that have come into operation will be briefly discussed.
FIRST AMENDMENT ACT
The most noteworthy amendments contained in the First Amendment Act are:
Section 1: Definition of ‘securities’
Reference to “other instruments” in the definition of “securities” has been deleted, and now “securities”, for the purposes of the Companies Act, includes only shares and debentures.
Section 16(9): Amendments to the Memorandum of Incorporation (MOI)
An amendment to a company’s MOI (other than a change of name) will now be effective on the later of:
- 10 days from receipt of the Notice of Amendment by the Companies and Intellectual Property Commission (CIPC), unless endorsed or rejected by the CIPC before the expiry of the 10-day period; or
- such later date, if any, as set out in the Notice of Amendment.
Prior to this section being amended, the Companies Act provided that an amendment to the MOI (other than a change of name) would become effective on the later of:
- the date on and time at which the Notice of Amendment is filed; or
- the date, if any, set out in the Notice of Amendment.
This amendment eliminates uncertainties regarding when “filing” occurs. It also avoids a situation where an amendment to a company’s MOI comes into effect on the date it is filed, the company acts in terms of the amended MOI, and the CIPC rejects the MOI after such action has been taken.
Section 40: Shares issued for future consideration
This section addresses where shares were issued for future consideration – where shares were issued but the consideration for the shares was:
- in the form of an instrument such that value of the consideration for shares that could not be realised by the company until a date after the shares were issued; or
- in the form of an agreement for future services, benefits, or payments by the subscribing party.
Before the amendment to this section came into operation, where shares were issued for future consideration, a company had to ensure that the shares were transferred to a third party to be held in trust and later transferred to the subscribing party in accordance with a trust agreement.
Following the amendments, a company is now required to transfer those shares to a “stakeholder”, to be held in terms of a stakeholder agreement.
The First Amendment Act defines a “stakeholder” as “[…] an independent third party, who has no interest in the company or the subscribing party, who may be in the form of an attorney, notary public or escrow agent” and a “stakeholder agreement” as “[…] a written agreement between the stakeholder and the company”.
This amendment confirms that the party holding the shares in trust need not be a trust registered in terms of the Trust Property Control Act and clarifies that the shares are to be held by an independent third party.
Section 45: Financial assistance
Prior to the amendment to this section coming into operation, a company providing loans or financial assistance in terms of section 45 (that is, for purposes other than the subscription of securities) that were to or for the benefit of the company’s subsidiaries were required to obtain approval by a special resolution of shareholders adopted within the previous two years, and the board had to be satisfied that:
- immediately after providing the financial assistance, the company would satisfy the solvency and liquidity test; and
- the terms under which the financial assistance was proposed to be given were fair and reasonable to the company.
The amendment to this section has relaxed the provisions relating to intra-group financial assistance. Now, where financial assistance in terms of section 45 is given to or for the benefit of a subsidiary, the requirements of section 45 will no longer apply. It is important to note that this exemption does not apply in instances where financial assistance is provided to a foreign subsidiary.
It is important to note, however, that the provisions of section 44 have not changed, and as such, if the financial assistance falls within the ambit of section 44 (that is, financial assistance for the purpose of, or in connection with, the subscription of any option, or any securities, issued or to be issued by the company or a related or inter-related company, or for the purchase of any securities of the company or a related or inter-related company), the requirements of section 44 must still be met.
This amendment enables a company to assist its subsidiaries and focus on the growth of its corporate structure without having to meet strict requirements.
Section 48(8): Share buy-backs
A share buy-back arises when a company repurchases its shares, resulting in a reduction of the number of shares in issue.
Before the amendment of this section came into effect, the decision by the board for the company to buy back its own shares from a director, or a prescribed officer, or a person related to a director or prescribed officer, required (in terms of section 48(8)(a)) approval by a special resolution of shareholders.
In addition, section 48(8)(b) stipulated that where a share buy-back constituted an acquisition by the company of more than 5% of the issued shares of any particular class of shares, the requirements of sections 114 (proposals for schemes of arrangement) and 115 (required approval for transaction contemplated in Part A Chapter 5 – approval for certain fundamental transactions) were applicable.
Section 48(8)(b) created uncertainty as to whether a section 48 share buy-back of more than 5% of a company’s shares constituted a scheme of arrangement or not. If it did, the buy-back would be subject to the Takeover Regulations, where applicable, and dissenting shareholder rights contained in section 164 would be triggered, regardless of whether the company was a regulated company or not. On the other hand, if it did not, the question was whether such a buy-back was only subject to the procedural requirements of a scheme of arrangement when undertaken by a regulated company.
The First Amendment Act replaced section 48(8) in its entirety. Now, although no compliance with section 114 and 115 is required, all share buy-backs require a special resolution of shareholders unless the buy-back is:
- a result of a pro rata offer being made to all the shareholders of the company or a particular class of shareholders; or
- a result of transactions effected on a stock exchange (as contemplated by the Financial Markets Act), on which the company’s shares are traded.
This amendment is welcomed because it removes the burden on companies in instances where the Takeover Regulations, would not otherwise have applied, to comply with the onerous Takeover Regulations in the event of a share buy-back. It is, however, important to note that share buy-backs are still subject to section 46, which means the solvency and liquidity test must still be met.
Section 61 and 72: Social and ethics committee
Prior to the amendments to sections 61 and 72 coming into operation, only state-owned companies, listed public companies, and all other companies with a public interest score above 500 points were required to have a social and ethics committee.
The First Amendment Act now requires all public and state-owned companies to have a social and ethics committee, underscoring the important role these committees play. The key amendments to these sections are as follows:
Section 61: Shareholder meetings
Section 61(8)(a) now requires public companies at their annual general meetings of shareholders to:
- present a social and ethics committee report and a remuneration report in addition to presenting the director’s report, audited financial statements and audit committee report; and
- appoint a social and ethics committee in addition to being required to appoint the auditor for the ensuing year and appoint an audit committee.
Section 72: Board committees
Section 72(5):
A company that in terms of section 72 and the regulations is required to appoint a social and ethics committee and that wishes to apply for an exemption therefor is now required, in terms of section 72(5)(a), to publish its intention to lodge the exemption application with the Companies Tribunal.
The amendment to section 72(5) further provides that where a company is required to appoint a social and ethics committee, the Tribunal may grant an exemption therefor in one of the following circumstances:
- if the company has a formal mechanism within its structures, which substantially performs the functions of the social and ethics committee; or
- having regard to the nature and extent of the structures and activities of the company and the public interest, it is not reasonably necessary to require the company to have a social and ethics committee.
The requirement for another piece of legislation to mandate the appointment of a social and ethics committee before an exemption can be granted has been removed, which means that if the Companies Act requires a company to appoint a social and ethics committee, the exemption can be granted if the company has these mechanisms in place, regardless of whether it is required by another piece of legislation or not.
Furthermore, public interest and the nature and extent of the activities of the company are now equally important. Prior to the amendment, the focus was on the public interest, with the nature and extent of the activities being used to determine whether the requirement for a social and ethics committee was in the public interest or not.
Section 72(6A):
Section 72(6A), which materially replicates regulation 43(2) provides further instances where a social and ethics committee is not required, namely:
- where a company is a subsidiary of a company that has a social and ethics committee, and such committee will perform the required functions on behalf the subsidiary company; or
- where the Tribunal has granted an exemption in terms of sub-sections (5) and (6).
Section 72(7A):
Section 72(7A) sets out that all social and ethics committees need to comprise of at least three members. However, the composition of the committee differs depending on the type of company.
Section 72(7A)(a) sets out that members of the social and ethics committee of a public or state-owned company must be directors who are not involved in the day-to-day management of the business of the company and must not have been so involved at any time in the previous three financial years.
In respect of any other company, however, section 72(7A)(b) only requires one of the members of the social and ethics committee to be a director who is not involved in the day-to-day management of the business of the company and who has not been so involved at any time in the previous three financial years. The other two members can therefore be directors or prescribed officers and whether or not they are involved in the day-to-day management of the business of the company or have been so involved in the previous three financial years is irrelevant.
Prior to section 72(7A) coming into operation, rules regarding the composition of a social and ethics committee were set out in regulation 43(4), which are materially similar to section 72(7A)(b).
This section may seem relatively straightforward. However, the nuances in the language used is important. For instance, reference is not made to executive and non-executive directors, but rather the level of involvement in the management of the business of the company. In other words, companies cannot hide behind the title of “non-executive director” where such person has, in reality, been involved in the day-to-day management of the business of the company.
Another important nuance to note is that a person must not to have been involved in the day-to-day management of the business of the company in the previous three financial years, regardless of the capacity or position that person held. In other words, a person involved in the day-to-day management of the business of the company (irrespective of the capacity or position held) who is then appointed as a director who is not so involved would not satisfy the requirement of not being involved in the day-to-day management of the business of the company the previous three financial years, and would not be eligible for appointment as member if such non-involvement was a requirement.
Section 72(8A):
In terms of section 72(8A)(a), the board of a company which on 27 December 2024 was required to have a social and ethics committee is required to appoint the first members of the committee within 12 months of this date, or if the company has applied for an exemption and the Tribunal has rejected the application, within 12 months of this rejection.
Section 72(8A)(b) requires public companies and stated-owned companies that are incorporated on or after 27 December 2024 to constitute a social and ethics committee within 12 months of their incorporation and requires all other companies incorporated on or after 27 December 2024 to constitute a social and ethics committee within 12 months after the date on which such company first met the criteria set out in section 72(4)(a).
Other than changes made due to the distinction between listed and non-listed public companies being removed, section 72(8A) mirrors regulation 43(3).
Section 72(9A):
In terms of, section 72(9A), once the members of the social and ethics committee of a public company or state-owned company have been appointed by the board, the company is required to elect a social and ethics committee at each AGM thereafter (that is, election by the shareholders). On the other hand, once the members of the social and ethics committee of any other company have been constituted by the board, the board of such company is required to appoint a social and ethics committee annually thereafter.
Therefore, the first social and ethics committee of all companies is constituted by the board, but the shareholders of a public company and state-owned company elect the committee thereafter.
Section 72(11):
Section 72(11) requires the board to appoint a person to fill a vacancy on a social and ethics committee within 40 days of the vacancy arising. It is important to note that no distinction is made between public and state-owned companies, on the one hand, and all other companies, on the other.
Section 95: Employee share schemes
Prior to 27 December 2024, employees, officers, and other persons closely involved in the business of the company or a subsidiary of the company were only entitled to participate in an employee share scheme if shares in the company were issued to them or if they were granted options for shares in the company. The amendment to this section has broadened the definition of an employee share scheme and now allows for employees to participate in an employee share scheme by purchasing shares in the company.
Assuming that “purchase” refers to the purchase of shares by an employee from a shareholder, where a company provides financial assistance to an employee to enable that employee to purchase such shares, the company will be exempt from the financial assistance requirements set out in sections 44 because the financial assistance will be pursuant to an employee share scheme.
What still remains unclear, however, is whether, in instances where the company is providing financial assistance to an employee to purchase shares, the employee is required to purchase shares from other employees or whether the employee is entitled to purchase shares from any shareholder.
Section 135: Post-commencement finance
Section 135 of the Companies Act governs post-commencement financing. Post-commencement financing refers to funding that is received, or that is deemed to have been received, by a company after the commencement of business rescue proceedings, and these claims enjoy preference over pre-commencement financing.
After the amendments to section 135 came into effect, a landlord’s claim in respect of public utility services – such as rates and taxes, electricity, water and sanitation and sewer charges – paid by the landlord to third parties during business rescue proceedings are now also regarded as post-commencement finance, strengthening the landlord’s position in respect of these claims. These amounts will rank below employees’ claims but ahead of all secured and unsecured claims against the company.
Other amendments
Section 90 now provides that auditors’ appointments for private companies, personal liability companies, and non-profit companies that are required by the Companies Act or the regulations to have their financial statements audited can take place at a shareholders’ meeting once the requirement applies and annually at the shareholders’ meeting thereafter. The appointment of the auditor at an AGM is no longer required. In addition, the disqualification period in section 90(2)(b)(v) has been reduced from five years to two years.
Where the Companies Tribunal makes an administrative order directing a company to choose a new name following an application in terms of section 160, the administrative order is now required to stipulate a date by which the company is required to comply with such order. In addition, should the company not comply timeously, the applicant may now approach the CIPC to replace the name of the company with its registration number.
The amendment to section 167 has revoked the power of an entity accredited in terms of section 166 from recording the resolution of the dispute in the form of an order or a consent order, as the case may be – only the Tribunal has this power in terms of this section.
The amendment to section 194 elaborates on the role and function of the chairperson and chief operating officer of the Tribunal and requires the Minister, in consultation with the Minister of Finance, to determine remuneration, allowances, benefits and conditions of appointment of the members and the chief operating officer of the Tribunal.
Last, section 204 requires the Financial Reporting Standards Council to receive and consider any relevant information relating to the reliability of, and compliance with, financial reporting standards and adapt international reporting standards for local circumstances through the issue of financial reporting pronouncements and consider information from the Commission as contemplated in section 187 (3) (b). “Financial reporting pronouncements” are standards, guidelines and circulars developed, adopted, issued or prescribed by the Financial Reporting Standards Council.
SECOND AMENDMENT ACT
The Second Amendment Act predominantly amends the timelines for taking action against directors in breach of their duties and supports the Presidency’s intention to ensure that directors are held accountable for their actions.
Section 77: Liability of directors and prescribed officers
Prior to the Second Amendment Act coming into operation, proceedings to recover loss, damages or costs sustained by the company for which a person could be liable in terms of section 77 could not be brought more than three years after the act or omission which gave rise to the liability.
Although this is still the case, the Second Amendment Act specifically states that the Prescription Act does not apply to such proceedings and allows the court to extend this period on good cause shown regardless of whether the three year period has expired or the act or omission that resulted in the loss, damages or costs contemplated in section 77 occurred prior to the promulgation of the Second Amendment Act.
Section 162: Delinquent directors
Prior to the Second Amendment Act coming into operation, a court application to declare a director delinquent or under probation could be brought by persons referred to in section 162(2) and/or 162(3) (1) while the person was a director of the company, or (2) if the person had, within the 24 months immediately preceding the application, been a director of the company.
Not only has the 24-month period in sub-sections (2) and (3) been increased to 60 months, but the court has the further power, on good cause shown, to extend this period even further, regardless of whether the 60-month period has expired or the circumstances set out in section 162(2)(b) or 162(3)(b) occurred prior to the promulgation of the Second Amendment Act.
It is important to note that while the time period for:
- a company, a shareholder, director, company secretary, or prescribed officer of a company, a registered trade union that represents employees of the company, or another representative of the employees of a company (section 162(2)); and
- the Commission or the Panel (section 162(3))
has been extended to 60 months, no such extension has been granted for organ of state responsible for the administration of any legislation to bring such an application.
CONCLUDING REMARKS
Most of the amendments to the Companies Act are welcomed because they tighten the rules and regulations of corporate law and emphasise the importance of ethical and responsible business practices. Companies are encouraged to familiarise themselves with these new provisions and proactively ensure that their operations and practices are compliant.
Nicola Mullineux is a senior associate at Herold Gie Attorneys and Lara Horne is a candidate attorney at the same law firm.
The views expressed in this article are those of the writers and are not necessarily shared by Moonstone Information Refinery or its sister companies. The information in this article does not constitute legal advice that is appropriate to every individual or company’s needs and circumstances.
