THE NEW COMPANIES ACT: MAJOR CHANGES YOU NEED TO KNOW!
After three years of delays, the new Companies Act became effective on May 1. It aims to align our law with global laws, make the law comprehensive, easy to interpret and use.
Note:This is new legislation and there’s a lot to digest here! Speak to us, your CA(SA) if you have any questions.
DOES MY COMPANY STILL REQUIRE AN AUDIT?
If it is a company, then the requirement for an audit is determined by its “Public Interest Score”. The score is determined as follows:
- One point for each employee (you must take the average number of employees you had during the financial year)
- One point for each R1 million or part thereof of turnover
- One point for every R1 million of third party liabilities or part thereof
- One point for every shareholder (and anyone else with a direct or indirect “beneficial interest” in the issued shares and other securities).
If the score is 350 or more then the Act requires an audit be done. If you score 100-349 points and your financials are prepared by your staff an audit is required. If the financials are prepared by an independent party then an independent review needs to be completed (must be done by a CA(SA)). If you score less than 100 points an independent review still needs to be done, but in this case an independent review can be done by a person entitled to sign Close Corporation financial statements.
The exception to the above rules is that, where the company’s shareholders are all directors, no independent review is required.
Note: the Minister has, in Regulations, provided that your company, must – regardless of other factors – be audited in certain cases: for example, where it holds assets in a fiduciary capacity “for persons who are not related to the company” of more than R5 million, as the primary activity in the ordinary course of business.
- Many companies that score less than 350 points may still decide an audit is necessary, for various reasons e.g. outside shareholders or banks.
- It would be prudent for these businesses to elect for a voluntary audit. This is because there is considerable administration workload in a statutory audit, such as setting up an audit committee.
- As the legislation stands, the public interest score must be calculated each year. If you are close to the threshold requiring an audit, it would be cost-effective to continue to have an audit.
- Think carefully if your business only requires a limited review. An audit opinion adds to your organisation’s credibility in the eyes of your important stakeholders, like bankers, creditors and SARS. You will be charged for a limited review, so it is important to weigh up the cost benefit of an audit versus a limited review.
CAN I STILL TRADE USING MY CC?
No new CCs can now be registered but current CCs can trade until they are either wound up, cease trading or convert to a company. The reason for no more CCs being registered is that all the advantages that CCs had can now be found in private companies.
CCs are subject to the “Public Interest Score” (see above). Thus, if CCs qualify they need to have an audit or independent review done.
Note that CCs will still need to have an accounting officer per the Close Corporations Act in addition to an auditor or reviewer as required by the “Public Interest Score”.
The exemption applicable to companies where all shareholders/members are directors also applies to close corporations. The Regulations may still require that an audit or limited review be done (see note above) and, if the CC has more than 350 points, an audit needs to be done anyway.
- If you are a member of a close corporation and are no longer active in the business, it may be a good option to switch the business to a company. In a company you can be a shareholder and not a director and enjoy the benefits of greater limited liability.
- If you are still active in the business, bear in mind that more than 90% of businesses operate as CCs, underlining how simple they are to use. So unless there is a good commercial reason, think carefully if you plan to convert to a company, as once you have changed there is no going back!
WILL MY FINANCIAL STATEMENTS CHANGE?
Your financial statements will still be subject to financial reporting standards as laid down by the Act. In the case of companies with 100 points or less, there will be no change. Ask your accountant for details of standards applicable to companies with over 100 points.
ARE THE MEMORANDUM AND ARTICLES OF ASSOCIATION OF MY EXISTING COMPANY STILL VALID?
The Act makes provision for a two year window to change the memorandum and articles of association to a memorandum of incorporation (MOI).
- One area to take note of is shareholder agreements. These cannot conflict with the new Act or the MOI and thus may need to be amended.
- The MOI is envisaged to be part of the ongoing workings of a company, and shareholders can set rules and regulations (provided they are not in conflict with the Act) to govern the company. For example, they may reduce the vote required to pass a resolution.
WHO RULES THE ROOST – DIRECTORS OR SHAREHOLDERS?
The Act has given directors far more power than the 1973 Act. This is done by the more than 50 alterable provisions in the Act. If the shareholders wish to lessen the power directors have, then they will overturn or water down these alterable provisions in the MOI (see above). Thus, in small companies where the shareholders are actively involved in running the business, it is unlikely they will change the alterable provisions, and hence their MOI will be a short, concise document. As we go up the size chain, and there is more of a separation between shareholders and directors, so one can expect to see the MOI becoming a bulky document as restrictions are placed on the alterable provisions.
In this way, the smaller companies will be as easy to register and operate as close corporations. Their MOI will be the standard one with few or no changes.
Ultimate power, therefore, rests with the shareholders via restricting the alterable provisions in the MOI.
- It is important that both shareholders and directors study and take advice on how the new Act affects them.
HOW AM I AFFECTED AS DIRECTOR/OFFICER?
A criticism of the old Companies Act was that it constrained directors. The new Act gives them greater powers (subject to shareholders – see above) but ensures accountability of directors. It does this by offering redress to a wide variety of stakeholders – creditors, employees, trade unions among others. It also gives power to oversight bodies such as the Takeover Regulatory Panel (TRP), the Companies and Intellectual Property Commission (the old CIPRO) and the Companies Tribunal (a new body which can rule on administrative matters and act to resolve disputes between stakeholders and the company).
The 1973 Companies Act contained numerous criminal offences. This Act greatly reduces criminal offences but the oversight bodies have substantial powers and stakeholders are encouraged to either appeal to these bodies or use the civil courts, including class and derivative actions.
The duties and responsibilities of directors have been codified in the new Act.
The Act doesn’t distinguish between executive and non-executive directors. As it places greater accountability on directors, it is expected that non-executive directors will either refuse to serve on boards or will increase their fees to off-set the increased risk.
NOTE: It isn’t just directors who are at risk here – these duties and responsibilities are extended to “prescribed officers” – i.e. senior managers of the company who exercise control over substantial portions of the business.
- Understand how the new Act affects your position as a director, particularly as a non-executive director.
- Brief your senior managers on their responsibilities and liabilities.
- Re-assess your insurance to ensure it covers both directors and “prescribed officers”.
BE AWARE – NEW POWERS FOR EMPLOYEES AND TRADE UNIONS
Employees are given substantial rights in the Act, for example:
- They are given additional protection in terms of any “whistle-blowing” Act,
- They may apply to have a director declared delinquent or put on probation
- In any business rescue scenario, they are entitled to vote with creditors and attend any relevant meetings
- They may, via their trade union, institute class action against directors or the company itself
- Any statutory documents sent to employees need to be simple and easy to understand
Trade Unions also have increased rights:
- They can institute class action against directors or the company
- They are entitled to the company’s financial statements when business rescue procedures are instituted
- When a decision is made to provide financial assistance to a director, the trade union needs to be given formal notice of this
- Trade unions may act against the company if its actions are contrary to the Companies Act
It’s now a lot easier to institute proceedings against the directors or company. In the old Act, employees and trade unions had to go to court which is expensive and time consuming. Now, they can start proceedings, in certain cases, via a letter which will trigger an independent consultant being appointed to investigate the complaint.
- Ensure your business complies with all relevant labour legislation.
- Monitor management/employee relations to prevent actions being taken which would be time consuming and expensive to defend.