The new Companies Bill aims to make company law in South Africa more accessible. Gareth Driver reports

In June 2008 the long-awaited new Companies Bill was tabled in the South African Parliament, with the intention that it be adopted in 2008 and become effective in 2010.

The Bill seeks to re-write South African company law completely. It will have far-reaching effects, with changes to the rights of shareholders and directors' duties, and innovations in the area of 'fundamental transactions'.

It is apparent that there has been an American influence on the Bill, although South African company law will retain its English roots.

Corporate governance

For the first time in South African company law, the Bill attempts to codify the general duties of directors. However, the Bill does not entirely exclude the application of the common law.

The codified duties of directors in the Bill provide that:

• A director must disclose any conflict of interest he has in relation to a matter before the board. The concept of a conflict of interest is extended to include a personal financial interest of a person related to the director – the conflicted director may not take part in the board's consideration of that matter.
• A director must not use his position to: (a) gain any advantage for himself or any person or body other than the company or one of its wholly-owned subsidiaries; or (b) knowingly cause harm to the company or any of its subsidiaries.
• A director must communicate to the company any information that comes to his attention at the earliest practicable opportunity, unless: (a) he is bound not to make that disclosure by a legal or ethical obligation; or (b) he reasonably believes that the information is immaterial to the company or generally available to the public.
• A director must exercise his powers and perform his functions (a) in good faith and for a proper purpose; (b) in the best interests of the company; and (c) with the degree of care, skill and diligence that may reasonably be expected of a person carrying out those functions.

The extent of a director's liability has also been set out in the Bill (and has become the source of much consternation among directors). In addition to explaining the liability for any breach of the aforementioned duties, the Bill states that a director will be liable for losses suffered by the company as a result of that director having taken, or having failed to act against, certain unauthorised or unlawful actions and situations.

The Bill includes a modified version of the business judgment rule. This will protect a director from allegations of breach of the duties of care and skill where that director has (i) taken reasonably diligent steps to become informed about the matter; (ii) either had no conflict of interest in relation to the matter or complied with the rules on conflicts of interest; and (iii) had a rational basis for believing, and indeed did believe, that his decision was in the best interests of the company. In addition, a director is specifically entitled by the business judgment rule to rely on information presented by persons such as employees and advisers who that director reasonably believes to be reliable and competent.

While it is debateable whether the Bill actually increases the duties of directors, it most certainly enhances the rights of shareholders – with perhaps the single most significant enhancement being the introduction of appraisal rights for dissenting shareholders. The appraisal rights will be available wherever the company proposes to enter into certain fundamental transactions or to alter its Memorandum of Incorporation in a manner adverse to the rights of any class of shares. Shareholders who unsuccessfully oppose such actions in the prescribed manner will thereafter be able to compel the company to repurchase all of their shares for their fair value, unless a court orders otherwise.

Fundamental transactions

The Bill will regulate fundamental transactions to a greater extent than was previously the case. Apart from takeover offers made to the shareholders of a company, the Bill contemplates three kinds of fundamental transaction, namely: (i) disposals of the majority
of a company's assets or undertaking; (ii) mergers; and (iii) schemes of arrangement.

While disposals of assets have always been common in South Africa, South African law had not previously adopted the concept of a merger per se, where a company may, provided that solvency and liquidity are preserved, transfer its liabilities (as well as it assets) to another company without the consent of its creditors. The risk this concept poses to creditors is mitigated by a procedure which states that those creditors must be informed of the merger. They may challenge it in court if they are acting in good faith, will be materially prejudiced by the merger and have no other remedies.

Nonetheless, the availability of the merger as a transaction is likely to open a new issue of contention between creditors and their debtors, where creditors are likely to seek to protect themselves by contract without having to launch that kind of court challenge.

All three of these types of fundamental transaction will require approval by a 75% majority of shareholders. In addition, where the transaction involves the disposal of a majority of the assets or undertaking of the holding company of the organization contemplating the disposal, the same approval of the shareholders of that holding company will be required.

The manner of giving notice to convene a meeting to approve one of these fundamental transactions will be regulated, and that notice will have to be accompanied by explanations of the rights of shareholders to (a) sell their shares to the company under the appraisal rights mentioned above, or (b) have a court review of the transaction.

A court review will now be essential wherever 15% or more of the votes cast were against the transaction, or a court grants any shareholder leave to have the transaction reviewed. On a review, the court will be able to set aside the resolution approving the transaction, if the transaction is manifestly unfair to any class of the company's shareholders or the vote on the transaction was materially tainted by conflict of interest, inadequate disclosure or other irregularity.

The regulation of takeover offers will also change, with a new, more powerful Takeover Panel set to replace the old Securities Regulation Panel.

Other noteworthy changes

Other noteworthy changes that will be introduced by the Bill are (i) a new definition of control and the introduction of the concept of related persons, (ii) amendments to the rules on corporate finance and offers of shares to the public and (iii) a new approach to business rescues, which has caused much controversy.

Conclusion

The extent of the change provided for in the Bill leads one to conclude that all South African corporate documents – from the Memorandum and Articles of Association to the mandates of committees and executives – will need to be reviewed once the Bill has been adopted. Despite the short-term upheaval entailed, it is likely that the Bill will succeed to some extent in its aim of making South African company law simpler and more accessible.