MOI amendments, validation of share irregularities, and new corporate disclosure requirements

Our first alert discussing the Companies Act 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. In this second alert, we focus on the following key amendments proposed in the Bill, and evaluate them against the Companies Act 71 of 2008 (Companies Act):

• narrower definition of "securities";
• effective date of amendments to a company's memorandum of incorporation (MOI);
• additional information to be filed with the Companies and Intellectual Property Commission (CIPC);
• the courts' power to validate the irregular creation, allotment or issue of shares; and
• obligations regarding information about the "true owners" and beneficial owners of companies.

The amendments discussed in this alert focus on two of the three themes of the Bill that were highlighted by the Department of Trade and Industry, namely (i) improving the ease of doing business by providing certainty and (ii) illuminating the true owners of corporate entities to address money laundering challenges.

Definition of "securities"

The definition of "securities" in the Companies Act includes shares, debentures and "other instruments". The Bill proposes to delete the phrase "or other instruments", thereby narrowing the ambit of the definition and reducing any uncertainty around its scope.

Effective date of MOI amendments

The Bill’s amendment to section 16(9)(b) of the Companies Act seeks to clarify the effective date of an amendment to a company’s MOI.

The amendment (save for name changes which will still be effective on the date set out in the amended registration certificate issued by CIPC) will take effect (i) 10 business days after receipt of the notice of amendment by CIPC, unless the filing has been endorsed or rejected with reasons by CIPC prior to the expiry of such 10-day period or (ii) the date, if any, set out in the notice of amendment, provided that such date may not be prior to the expiry of the aforementioned 10 business day period.

The proposed amendment seeks to address the uncertainty that has been dogging MOI amendments under the Companies Act. Although the Companies Act as it stands states that amendments are effective on filing and does not expressly provide for CIPC to accept or reject such filings, CIPC does from time to time reject such filings for various reasons (some justified, some not). In such a case, the question arises if the original filing was valid and therefore triggered the effectiveness of the amendment, or whether the amendment only becomes effective after CIPC's queries have been resolved (perhaps retrospectively from the original filing date). More conservative players in the corporate arena often take the view that they will only accept the MOI as properly amended once CIPC formally accepts the filing, which delays implementation of transactions. In particular, this approach has been followed in cases where MOIs are amended to authorise new shares (for example where banks intend to subscribe for preference shares in funding structures). If the Bill becomes effective in its current form, the period for which parties have to wait for CIPC's acceptance will be limited to 10 business days. However, some new uncertainties may limit the usefulness of the proposed amendment.The amendment does not specify how one determines the time of receipt of the notice of amendment by CIPC. The section should rather refer to the date of filing or delivery, as these terms are defined in the Companies Act. In terms of the Companies Regulations, 2011 (Regulations) a document delivered by a method listed in Table CR 3 must be regarded as having been delivered to the intended recipient on the date and time reflected in that table. Delivery of documents to CIPC is specifically addressed in Table CR 3. Presumably the timing reflected in the aforementioned table will be considered the "time of receipt".

Unfortunately there are once again drafting anomalies in the proposed amended clause 16(9)(b):

• Presumably an effective date stipulated in a Notice of Amendment will also not occur if the CIPC rejects the notice in question. Subclause (b)(ii) does not however provide for such a scenario.
• The concept of "endorsement" by CIPC is unclear. We assume that it refers to an acceptance of the filed notice. In such a case, the proposed clause does not state if the amendment is then effective on such earlier date of "endorsement".
• The proposed clause does not address the timing consequences if the CIPC does indeed reject a Notice of Amendment. Does that mean that a Notice of Amendment has to be filed anew, with another 10-business day waiting period?

The proposed amendments to section 16 seeks to answer an existing uncertainty regarding MOI amendments but it seems that even more questions may arise pursuant to the amendment.

Company records and filing of information with CIPC

In terms of section 25 of the Companies Act, a company must file a notice setting out the locations(s) at which the company's records are kept or from which they are accessible if they are not kept at the company's registered office, or if the records are moved from one such location to another. The Bill proposes that CIPC publish this notice in a prescribed form. Presumably, more detail regarding this publication requirement will in future be included in the Regulations.

In terms of section 26 of the Companies Act, the holders of a beneficial interest in any securities issued by a profit company and members of a non-profit company have the right to inspect or copy certain company documents such as the company's MOI, directors' records, reports to annual meetings, annual financial statements, minutes of meetings and the securities register or members register. An amendment is proposed to include in this list of information that shareholders/members may access the register of disclosure of beneficial interests in the company. This aligns with the general shift in the Bill towards more transparency regarding the ultimate/true ownership of companies.

The Bill further proposes to broaden the rights of non-shareholders to access company records. Currently non-shareholders are only entitled to access the securities register or members register. The Bill proposes to extend their rights to include a company's MOI, directors' records, annual financial statements and register of disclosure of beneficial interests. The broadened information right does not extend to reports to annual meetings or minutes of annual meetings.

The proposed new section 26(2A) purports to limit the rights of non-shareholders to access certain company records of private, personal liability and non-profit companies that fall below a certain public interest score (i.e. companies who are not by reason of their public interest score obliged to have their annual financial statements audited). The records so excluded are reports to annual meetings, notices and minutes of annual meetings, and written communications with shareholders; however, this is non-sensical as non-shareholders do not have the right in terms of section 26(2) to access such records. Given the public interest score thresholds that are reflected in the proposed section 26(2A), the intention may have been to exclude the right to access annual financial statements as the companies in question are not obliged (at least based on public interest scores) to have their annual financial statements audited. However, as the proposed provision stands, it is ineffective.

Additionally, the Bill proposes to broaden the offence of failing to accommodate any reasonable request for access to information, or otherwise refusing, impeding or frustrating the reasonable exercise of the information rights, in section 26 to include (in addition to the company itself) the directors and prescribed officers of the company. However, it also introduces a defense to this in that such director or prescribed officer will not be guilty of an offence if he shows that he took all reasonable steps to secure the company's compliance. It is a legal defense to show that he acted reasonably and that in the circumstance the default was excusable. A similar extension of the offence provisions is proposed for section 31, which deals with right of persons holding beneficial interests in any securities of a company being entitled to receive notice of publication, and a copy, of the company's annual financial statements. No equivalent defense provisions are, however, proposed in respect of contraventions of such information rights.

The following amendments are proposed to section 33 of the Companies Act which relates to the filing of annual returns:

• As the Companies Act currently stands, all companies that are required to have their annual financial statements audited are required to file a copy of such annual financial statements with their annual returns. The Bill proposes a slight amendment, requiring only public companies, state-owned companies and private companies obliged to have their annual financial statements audited by reason of their public interest scores to file the their latest annual financial statements. A company that, for example, is required only in terms of its MOI to have its annual financial statements audited will no longer be obliged to file annual financial statements with its annual return.
• It is proposed that all companies file copies of their securities registers and registers of beneficial interest together with their annual returns.
• The CIPC will be obliged to make the annual returns of companies (which include the additional information discussed above) available in electronic form to any person.

These amendments are aimed at enhancing corporate transparency and access to information to both CIPC and members of the public.

Court validation of company shares

In terms of the proposed new section 38A, our courts will, on application by the company or any party who holds an interest in the company, be empowered to validate the irregular creation, allotment or issuance of shares if the court is satisfied that it is just and equitable to do so and subject to conditions that the court may impose. This judicial intervention will enable parties to obtain certainty as regards the validity of share issues where the requirements of the Companies Act or a company's MOI were not strictly followed. It will, for instance, prevent share issues from being declared a nullity to the extent that a resolution to retroactively authorise such shares is not adopted when put to a vote, as contemplated in section 38(3) of the Companies Act.

Beneficial owners of companies

The Bill seeks to introduce a definition of "true owner;" and several measures that companies will need to comply with to establish and report their true ownership. In essence, "true owner;" is defined as the natural person who would in all circumstances be considered the ultimate and true owner of the relevant securities, whether due to (directly or indirectly) being entitled to the benefit from the securities, due to (directly or indirectly) being able to direct the registered holder with regards to the securities, or for any other reason.

The amendments proposed to section 56 of the Companies Act are intended to identify the true owner of shares of a company, on not only the first tier of beneficial holders but also to require companies to identity the ultimate beneficial owners of its shares. These amendments (i) place an obligation on all companies (and not only public companies as is currently the case) to require from their registered shareholders details of the identity of persons who hold beneficial interests in the companies' shares, (ii) strengthen the existing provisions relating to companies establishing and maintaining a register of the owners of beneficial interests in its shares and disclosure by shareholders relating to the persons who hold beneficial interests in its shares, and (iii) require all companies to publish in its audited financial statements details of all persons who, alone or in aggregate, hold beneficial interests amounting to 5% or more of a particular class of shares.

Section 56(5) of the Companies Act will require any company that is unsure of the identity of all persons who have a beneficial interest in the company (being the natural or juristic person who is entitled to company distributions, voting rights and disposal rights in relation to the company's securities), to confirm with the registered holders of its shares whether they are the beneficial holders or whether they hold the shares on behalf of third party.

It is interesting to note that the proposed definition of "true owner" is in line with the definition of "beneficial owner;" in the Financial Intelligence Centre Act 38 of 2001. This demonstrates another purpose of the amendment, being to eliminate company ownership arrangements that are used for illicit and criminal purposes.