To date much of the media coverage of the new Companies Act has focused on the parliamentary process as well as the headline-grabbing fact that the implementation date had to be postponed a few times.
These issues will rightly pale into insignificance in the coming months and years as South Africans come to terms with the most fundamental and widespread change that this country’s business community has experienced in decades.
While some within the business community contend that the rewriting of the entire act was unnecessary and that the country would have been adequately served by continuing to amend the 1973 Companies Act, most of the leading legal commentators argue that the 1973 Act was no longer fit to accommodate the dramatic changes to the corporate landscape that have occurred during the past 40 years. For many, a new act is 10 years late.
The demise of communism – in South Africa the collapse of apartheid – the rapid growth in globalisation, characterised by cross-border trade and investment, and the telecoms revolution are just some of the factors that have dramatically changed the local and international corporate environment.
Carl Stein, a partner with law firm Bowman Gilfillan described how these factors had led to a situation in which the governance of corporations across the globe was coalescing, “the fundamental laws governing companies throughout most of the western world are becoming increasingly aligned with one another”. Stein described the 1973 Act as an outdated “cut-and-paste piece of legislation”.
In the last two decades of the 20th century, this process was accompanied by a dramatic increase in the reach and power of large listed multinational corporations across the globe. As governments withdrew from industries that they previously monopolised or dominated, powerful private sector companies moved in to replace them. Stein noted that by the early years of this century, the danger of having powerful private organisations that were not accountable to the general public to the same extent as governments, became apparent in the increasing numbers of corporate scandals. Enron, Worldcom and Tyco not only created the awareness that the governance of companies would have to be strengthened dramatically but also created the environment in which stricter governance would be accepted.
The widespread damage caused by these scandals reinforced the view that it was not only to shareholders that companies were accountable, but to a larger body of stakeholders such as employees, suppliers and communities. Across the globe corporate law was being changed to require companies to “make far more disclosures of their business activities, introducing more stringent accounting requirements and introducing more laws to ensure that directors discharge their duties honestly, responsibly and diligently,” Stein said.
In 2004 the Department of Trade and Industry (dti) issued a document entitled “South African Company Law for the 21st Century – Guidelines for Corporate Reform”. This policy document, written in the wake of the corporate scandals, inevitably concluded that “company law must acknowledge that companies as economic agents have an impact on society and therefore on a broader range of stakeholders… there is a need to promote and facilitate a greater emphasis on corporate citizenship”.
In addition, the dti document refers to the need to create a simple, comprehensive and legal framework that is accessible to all business people. “It should be possible for small businesses and their advisors to understand the administrative requirements without having to resort to expert advice,” the dti said. It also noted that while company law should be comprehensive, it “should not burden companies with unnecessary rules” and that it must be “facilitative, enabling and flexible”.
This backdrop, and in particular the desire to create a single corporate structure for companies of all sizes, explains much of the architecture and content of the new act.
Thus the Close Corporation will be phased out and all corporate entities will in future have to be incorporated in terms of the new act. As Michael Katz of Edward Nathan Sonnenbergs noted, in future “every company will be regulated by the same legislation”.
In addition, the language of the new act is more user friendly and over 50 alterable provisions provide flexibility. The act also gives greater rights to stakeholders including minority shareholders.
It seems trite to say that the act will change the way we do business, but according to Stein, here are just some of the possible consequences of the implementation of the Companies Act 2008:
l the new and expanded rights and remedies given to stakeholders, plus the scrapping of criminal sanctions, will give rise to greater stakeholder activism and increased litigation;
l the dramatic new business rescue procedures will affect the manner in which banks and other creditors transact, especially with small businesses;
l the new rights and remedies given to minorities, particularly the appraisal remedy, will significantly impact the way in which merger and acquisition activity in relation to large companies is conducted; and
l medium and large companies will have greater social responsibilities. - Ann Crotty