South Africa Companies Amendment Bill, 2021: Potential relief after more than a decade, or further complexities?

On 1 October 2021, the Minister of Trade, Industry and Competition published the Companies Amendment Bill, 2021 ("the Bill") for public comment. The Bill seeks to amend the Companies Act, 71 of 2008 ("Companies Act") which commenced more than a decade ago (on 1 May 2011). Comments to the Bill are due on 31 October 2021.

It appears as if some of the provisions of the Companies Act (such as sections 45), which place an onerous administrative burden on those holding companies that provide intercompany financial assistance, may finally be amended. 

However, the Bill also seeks to amend a variety of other provisions of the Companies Act (such as section 26), which may potentially give rise to uncertainties and which may be problematic for certain private companies, personal liability companies and non-profit companies that seek to keep their financial statements confidential and out of the hands of competitors. 

In the paragraphs that follow, we provide an overview of the proposed amendments to section 45 and 26 of the Companies Act. This is the first article in a series of articles which sets out our high-level views in relation to the proposed amendments contemplated by the Bill.

Proposed amendment to section 45

Currently, under the Companies Act, a holding company that grants financial assistance to a 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 (as provided for in section 45(6)).  In particular, a holding company may only grant financial assistance to a subsidiary if:

• such financial assistance is pursuant to a special resolution of the shareholders, adopted within the previous two years, which approved such assistance either for the specific recipient, or generally for a category of potential recipients, and the specific recipient falls within that category; and
• the board of directors of the holding company is satisfied that:
  • immediately after providing the financial assistance, the company would satisfy the solvency and liquidity test; and
  • the terms of the proposed financial assistance are fair and reasonable to the company.

The Bill seeks to amend this position by proposing that the requirements of section 45 shall not apply to a holding company providing financial assistance to, or for the benefit of, its subsidiaries.  The Bill recognises (in the explanatory section thereof) that the protections contained in section 45 are not required for the provision of financial assistance by a holding company to its subsidiary and give rise to an unnecessary compliance burden.

Accordingly, the requirements of section 45 of the Companies Act would no longer be triggered if a holding company provides financial assistance to its subsidiary. This proposed amendment to the Companies Act would be of great assistance to holding companies that need to advance money to its subsidiaries from time to time. Take note, however, that the wording of the proposed revision to section 45 indicates that the requirements of section 45 would still apply in instances where a subsidiary grants financial assistance to its holding company. 

Proposed amendment to section 26

Although the proposed amendments to section 45 may create relief for holding companies, the proposed amendments to section 26 may be of concern to certain private companies, non-profit companies or personal liability companies that seek to keep their financial statements confidential and out of the hands of potential competitors or contractual counterparties.

If the proposed amendments to sections 26 are introduced, members of the public may be entitled to request copies of the annual financial statements of private companies, non-profit companies or personal liability companies, except in the following circumstances:

• where an annual financial statement is internally prepared for such company and the company has a Public Interest Score of less than 100; or
• where an annual financial statement is independently prepared for such company and the company has a Public Interest Score of less than 350.

The reason for this is that, in terms of the proposed amendments to section 26(2) of the Companies Act, any person that (i) does not hold, or have, a beneficial interest in, a profit company, or (ii) is not a member of a non-profit company, also has a right to inspect and copy, on the payment of a prescribed fee, financial statements stipulated in section 24(3)(c)(ii) of the Companies Act (i.e. annual financial statements required by the Companies Act).

The proposed section 26(2A) includes a carve-out to this abovementioned inspection right and provides that this inspection right shall not apply in relation to those private companies, non-profit companies or personal liability companies that have an Public Interest Score of less than 100 (where such company’s financial statements are internally prepared) or of less than 350 (where such company’s financial statements are independently prepared).  The explanatory note to the Bill states that the amendment to section 26 of the Companies Act promotes transparency.

Having regard to the fact that various private companies and personal liability companies regard their financial statements as highly confidential, the anticipated amendments to section 26 of the Companies Act are likely to be contentious.

Clyde & Co intends to submit comments to the Bill by the deadline of 31 October 2021. Please contact Ernie van der Vyver or Hielien Venter if you have any questions or would like to participate in the process to consolidate such comments ahead of this deadline.