The parliamentary process, necessary endorsements and the president’s approval of the Companies Amendment Bill were finalised on 24 March 2011, following eight years of meticulous consultative processes, incorporating recommendations from various stakeholders.

The new Act’s main aim is to reduce the cost and red tape when doing business in South Africa and to bring a progressive corporate environment conducive to economic growth, development and transformation of business conduct.

The Department of Trade and Industry (the dti) is confident that all systems and processes were followed correctly to ensure the Companies and Intellectual Property Commission (CIPC) will be sufficiently equipped to face all practical and operational challenges. The new CIPC is a merger of the Companies and Intellectual Property Registration Office and Office of Companies and Intellectual Property Enforcement, which will educate on the Act, advise on structures most relevant for each individual business, and provide necessary conversions.

The Act covers a wide spectrum and, since it had not been changed since 1973, needed many amendments.

Zodwa Ntuli, deputy director-general of the dti, said: “We wanted the Act to be on global standards and more advanced than counterparts in other countries in terms of corporate law, therefore we consulted with many industry stakeholders.”

Issues that were raised by stakeholders during the process and rectified by the dti included the conversion of companies, the business rescue model, the registration of external companies in South Africa and the clarification of independent reviews.

Registrations of external companies are accomplished the same way as domestic companies and subject to the same regulations.

Although a torrent of concerns from practitioners who deal with company law is expected, Davies said the new direction was very much to the benefit of all companies operating in South Africa. The legislation ensures enhanced protection for minority shareholders, early turnaround of companies in distress, and improved enforcement powers to detect any attempts at hijacking or cloning companies.

The new Act would promote start-up of more businesses and encourage increased participation in the economy, in particular small and medium enterprises (SMEs).

SMEs are the backbone of the private sector and contribute to 80% of the total employment and 42% of the economy, with close to two million informal businesses in operation.

Gerald Meyerman, former manager at the World Bank and policy adviser with the United States Agency for International Development Financial Sector Program since 2009, said the new Act was a necessary step to promote growth.

Registering a new company is now far easier, with only a single document required – known as a memorandum of incorporation – defining the rights, duties and responsibilities of shareholders, directors and officers.

Even though a two-year period is allowed to update the memorandum of incorporation in line with the Act, many existing provisions will be cancelled with immediate effect.

Companies will be able to trade with merely a company number and no name, while SMEs will not be required to produce audited financial statements.

The Act has new approaches to the incorporation of businesses based on the public interest scale and scalability, corporate governance and accountability consisting of protection of shareholders, investors and the public, and regulation thresholds determined by annual turnover, size of workforce and the nature of company’s activities.

The Act provides for civil and criminal liability of directors, with draconian consequences for those who failed to comply with the law.

Eric Levenstein, a director in the commercial department at Werksmans Attorneys, said shareholders and stakeholders would be protected from the unscrupulous conduct of directors, with their being declared delinquent under the new legislation and possible jail time or fines.

The business rescue scheme is built into the legislation: Instead of a company in financial distress going under judicial management, a rescue process can be initiated by the workers and management, with the creditors held at bay while the company is put back on its feet. This model ensures longevity of companies, which would make investing even more appealing to foreign countries.

Shareholder activism is promoted through minority shareholders being able to call a general meeting, marshalling only 10% of total shares. An audit committee can be appointed by shareholders to establish its role and the level of independence to be maintained between audit committees and boards of companies.

However, no transitional arrangements had been made for audits for those firms that would no longer require an audit in terms of the new law – only companies with a year-end after the date of implementation of the new Act must apply it.

The controversial clause 43, which allows a person convicted of fraud or dishonesty to become a director of a company if he or she is the sole shareholder, was reconsidered.

No new close corporations (CCs) can be incorporated, and existing CCs, which account for 78% of the total registered entities, will need to comply with the new reporting and filing requirements.

The enforcement of the new Act does not stipulate an immediate effect of upgrading from a CC to a company, or a disintegration of existing CCs.

The dti confirmed that the new Act will allow the use of symbols in company names; however, banks objected that it would be costly to upgrade and prepare information technology systems to be able to read symbols and foreign language.

As a result, the dti recommended that implementation of the relevant provision be delayed for two or three years, but not removed from the Act entirely.

Many are concerned about the readiness of the CIPC to accommodate and enforce the new Act. However, Ntuli is confident all necessary systems and processes are in place for the CIPC to function sufficiently with organised and informed employees.

Although the dti went through an extensive process to compile the Act to complete satisfaction, it cannot guarantee there will not be any teething problems, thus industry professionals can continue to raise queries as the dti recognises the need for guidance and will improve the Act continuously.

Rizel Delano