Financial assistance to subsidiaries no longer subject to section 45

In this third weekly alert, (alert one available here and alert two here) we will focus on the proposed amendments to the following sections of the Act:

1. Section 40(5)(b) of the Act - partly paid shares

Clause 10 of the Bill proposes an amendment to section 40(5)(b) of the Act requiring shares that are not fully paid up to be transferred to a stakeholder (previously a third party) and held in terms of a stakeholder agreement (previously held in trust in terms of a trust agreement), until fully paid up.

A stakeholder is defined as a trusted 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.

The primary effect of the proposed amendment is that partly paid shares are required to be held in trust by an independent party (ie an attorney, notary public or escrow agent), whereas under the current wording of the Act the shares could be held by another shareholder or other interested party. The contents of the proposed stakeholder agreement will largely mirror the trust agreement currently contemplated in the Act.

2. Section 45 of the Act – financial assistance

Clause 11 of the Bill proposes two amendments to section 45:

• firstly by amending the heading of section 45 of the Act from "Loans or other financial assistance to directors" to "Financial Assistance"; and
• secondly by excluding the provision of financial assistance by a company to its subsidiary from the ambit of section 45.

Under the current Act a company that grants financial assistance to its subsidiary must, as a pre-requisite to such financial assistance, first obtain prescribed approvals from its shareholders and board of directors, failing which such financial assistance would be void. This will no longer be the case if the Bill in its proposed form is enacted.

The proposed amendment recognises that the protections contained in section 45 are not required for the provision of financial assistance by a company to its subsidiary and give rise to an unnecessary compliance burden.

3. Section 48(8) of the Act – special resolution requirement in respect of repurchases of shares

Clause 12 of the Bill extends the shareholder approval (by special resolution) required for a company to implement a share buy-back to include all share buy-backs, whereas the current Act applies only to buy-backs in excess of 5% of the issued shares.

However, the proposed amendment also provides for two new exceptions where shareholder approval will not be required for a repurchase, namely:

• when a company is implementing a share-buyback by means of an offer made pro-rata to all shareholders; and
• in respect of transactions effected on a recognised stock exchange. The stock exchange exception will not apply to share buy-backs from directors, prescribed officers or persons related to them.

In addition, the proposed amendment removes the requirement that the aforementioned special resolutions must be subject to sections 114 and 115 of the Act. This means that a company implementing a share buy-back will no longer be required to obtain an independent expert report in terms of section 114 in respect of the proposed share buy-back unless the buy-back for other reasons constitutes a scheme of arrangement.

4. Section 95(1)(c) of the Act – definition of employee share scheme

Clause 17 of the Bill proposes an amendment to section 95 of the Act by extending the definition of an "employee share scheme" to include share purchases.

The effect of this is to correctly reflect the nature of employee share schemes and to allow the relevant schemes to qualify for exemption from certain provisions of the Act (such as the requirement to obtain shareholder approval for financial assistance in terms of sections 44 and 45 of the Act or any offer under a qualifying employee share scheme being deemed as not an offer to the public in terms of section 96).

5. Section 118(1)(c)(i) of the Act – circumstances in which a private company becomes a regulated company

Clause 18 of the Bill proposes the amendment of section 118(1)(c)(i) of the Act by prescribing new requirements for a private company to fall within the jurisdiction of the Securities Regulation Panel (Panel) 6 when it implements affected transactions.

If the Bill is enacted, a private company with 10 or more shareholders with "direct or indirect shareholding" in the company will be subject to the takeover regulations and oversight from the Panel if it meets or exceeds the financial threshold of annual turnover or asset value which shall be determined by the Minister in consultation with the Panel. It is not clear what the italicised phrased means or how it will be interpreted in practice. It seems to imply that one may have to look beyond the list of direct shareholders in the company when the application of section 118(1)(c)(i) is considered but it is not clear how many levels beyond the company's shareholders the indirect shareholding of investors will have to be investigated.

The new requirement will replace the existing test which simply looks at the extent to which shares in the company have been transferred during the most recent 24 months amongst unrelated parties.

The proposed amendment further grants the Panel the discretion to exempt any particular transaction affecting a private company in terms of section 119(6) of the Act.

Our first alert (available here) discusses the Companies Amendment Bill, 2021 (Bill) provided an overview of the Bill and an in-depth discussion on the proposed amendments relating to disclosure of executive remuneration.

The second alert (available here) focusses on the key amendments proposed in respect of the filing of MOI amendments, validation of share irregularities, and new corporate disclosure requirements.