Adraft of the long-awaited Companies Amendment Bill was unveiled at the end of last month, and both the draft law and the Companies Act of 2008, which it seeks to amend, will come into effect during the final quarter of this year, replacing the Companies Act of 1973.

The 102-page draft proposes significant changes to the 2008 Act, including the correction of material errors and ambiguities that may have resulted in the misapplication of the new Act. It also includes corrections of typographical and other patent errors. Further, it contains provisions that will better enable the administration of the Act, including providing authority for certain implementing regulations.

The draft Bill proposes that a business rescue practitioner may only entirely, partially or conditionally suspend, for the duration of business rescue proceedings, an obligation of the company, and that a cancellation thereof may only take place on application to a court and if the court is satisfied that the cancellation will be just and reasonable.

Regarding the registration of foreign companies, the draft Bill proposes to amend the 2008 Act to provide that only a company which is a party to one or more employment contracts within South Africa and which is engaging in a course of conduct, or has engaged in a course or pattern of local acti- vities over a period of at least six months, is required to register as an external company in South Africa.

Law firm Webber Wentzel Attorneys explains that, although this proposed provision is rather vague, the mere holding of meetings, opening a bank account or holding security will no longer trigger the need for a foreign company to register as an external company in South Africa and to maintain a physical office here.

The time limit to apply for the review of a fundamental transaction may also be amended, as the Act does not set a time limit. The draft Bill proposes to remedy this omission by providing that, if 15% of shareholders oppose the resolution, a shareholder has five business days after the special resolution has been passed to require the company to apply to a court for a review of the special resolution and ten business days to approach the court directly in the case of fewer than 15% of shareholders opposing the resolution.

As the Act is currently drafted, shareholders’ agreements are possibly voidable and capable of being declared of no effect if they are not consistent with the Act or the articles of association of the company. This affects shareholders involved in corporate joint ventures, as the majority of their rights and protections are typically built into share- holders’ agreements. The new draft Bill proposes to extend the two-year grace period to shareholders’ agreements as well.

The Act provides that no special resolution is required for the repurchase of shares by a company. The draft Bill proposes that a special resolution will be required in the case of a repurchase of shares by a company from a director, a prescribed officer or a person related to any such person, or if the repurchased shares constitute 5% of the shares in the relevant class.

One of the surprising provisions in the Act is that the shareholders of a company may, by special resolution, approve actions by the directors of the company whereby they fraudu- lently or negligently act outside the scope of their authority and that no party will have a claim for damages against the directors for acting in such a manner.

Minority shareholders should be alert to the fact that the draft Bill exacerbates the position by providing that fraudulent and negligent action can be ratified and directors’ actions, which are also undertaken knowingly, wilfully or intentionally, may also be ratified.

The Act provides that matters that require special resolutions may only require 75% of the shareholders to vote in favour of such resolution and that this percentage may be decreased but not be increased. The draft Bill changes this position by proposing that a higher percentage may be stipulated, providing extra protection for minority shareholders.

The Act provides that companies may be required to cease trading if they are trading under insolvent circumstances. Webber Wentzel reports that, currently, it is a commercial reality that the majority of local companies trade under technically insolvent circumstances, but are commercially solvent. If the Act remains unchanged, such companies will contravene the Act and may have to cease trading. However, the draft Bill contains no amendment to deal with this commercial reality.

The Act also limits the application of the doctrine of constructive notice to apply only to special conditions to which attention has been drawn in the notice of incorporation of the company or an amendment thereof. The draft Bill limits the application of the doctrine to conditions regarding the amendment of the memorandum of incorporation.

It is expected that the draft Bill will soon be introduced into Parliament and published for comment in the Government Gazette.