Governance of Small Companies Made Easy

The old Companies Act (Act 61 of 1973) was designed primarily to cater for the requirements of large companies and it generally ignored the economic and administrative difficulties faced by small businesses. As a result the Close Corporations Act, 69 of 1984, was enacted to cater for the small business. However, as part of the effort to modernise South Africa’s corporate law the ‘in-principle’ decision was taken by government to abolish close corporations and instead provide in the new Companies Act, 71 of 2008 (the Act), for a company structure that reflects the characteristics of a close corporation. Registered close corporations will continue to exist unless wound-up or deregistered but no new close corporations may be formed nor may companies be converted into close corporations.

The approach of the Act is to provide for core company rules that are mandatory or “unalterable”, and for certain default or “alterable” rules that would apply unless varied or altered in a company’s Memorandum of Incorporation (MOI). These “alterable” and “unalterable” provisions of the Act are designed to promote flexibility in order to enable a company to regulate the conduct of its affairs more effectively by adopting appropriate provisions in its MOI to deal with the powers and functions of the board of directors (Board) and the shareholders.

The Board is authorised in terms of section 66(1) of the Act to manage the business and affairs of a company, except to the extent that the Act or the company’s MOI provides otherwise. Certain decisions regarding the management of the company are, however, reserved for shareholders. Some of these powers include the power to amend the MOI, the power to vote on and approve a rule made by the Board relating to the governance of the company, the power to remove directors and the power to approve the disposal of all or the greater part of the company’s assets or undertaking.

Section 57 is a new alterable provision designed to accommodate small companies by simplifying their internal processes. This section governs the exercise of authority within a company, other than a state-owned company, relating to any matter arising in terms of the Act or a company’s MOI and irrespective of whether any such particular matter is expressly addressed in the provisions of the Act (sections 57 to 78) dealing with governance of companies.

Single shareholder companies are exempted from the governance formalities provided for in the Act. In terms of section 57(2) if a profit company has only one shareholder, that shareholder may exercise any or all of the voting rights pertaining to that company on any matter, at any time, without notice or compliance with any other internal formalities. Sections 59 to 65 (being sections dealing with shareholders’ meetings, notices of meetings and shareholder resolutions) would not apply to the governance of that company. Section 57(4) enables shareholders of owner-managed companies to adopt shareholders’ resolutions immediately after the Board resolves to refer a matter to the shareholders. It provides that if every shareholder of a company is also a director of that company then any matter that is required to be referred by the Board to the shareholders for decision may be decided by the shareholders at any time after being referred by the Board, without notice or compliance with any other internal formalities, provided that:

  • every [shareholder] was present at the Board meeting when the matter was referred to them in their capacity as shareholders;
  • sufficient persons are present in their capacity as shareholders to satisfy the quorum requirements of the Act (set out in section 64); and
  • a resolution adopted by those persons in their capacity as shareholders has at least the support that would have been required for it to be adopted as an ordinary or special resolution, as the case may be, at a properly constituted shareholder’s meeting.

When acting under section 57(4) in their capacity as shareholders those persons are not subject to the provisions of sections 73 to 78, being the sections relating to the duties, obligations, liabilities and indemnification of directors. The entire section 75 (director’s personal financial interests) would not apply to a single person company, i.e. where the company has only one shareholder who is also the director. If a profit company, other than a state owned company, has only one director, that director may exercise any power or perform any function of the Board at any time, without notice or compliance with any other internal formalities, and sections 71 (3) to (7), 73 and 74 (the corporate governance provisions of the Act relating to director’s meetings and resolutions, as well as the removal of directors) do not apply to the governance of that company.

Examples of the alterable provisions include the formalities for convening Board and shareholder’s meetings, the period of notice required for meetings, the quorum required, the manner in which meetings may be held, and the threshold majority required for company resolutions.

By not altering any of the alterable clauses, the MOI of a small company can thus be a much shorter and simpler document. A standard form MOI contained in the regulations to the Act may be used resulting in the company adopting all the alterable sections of the Act in the MOI. This is intended to simplify the process and reduce the costs of incorporation of small companies as, normally, the majority of the costs expended in creating a company are incurred in the drafting of its MOI.

Other examples of alterable clauses, which were not included under the old Companies Act of 1973, include the directors’ power to increase or reduce the number of authorised shares, as well as the power to issue shares up to a maximum of 30% of the voting power of all shares of that class. Both of these powers may now be exercised by directors without shareholder approval, unless the MOI provides otherwise. The position is now that should the shareholders not revoke, restrict or modify any of the alterable clauses of the Act the directors would, by default, be afforded the greatest powers allowed by the Act.

Critics of the ‘alterable provisions’ approach to accommodating small companies argue (correctly in my opinion) that it could severely prejudice the rights of minority shareholders in medium and large (unlisted) companies as they could be afforded less protection against majority shareholders or the Board, or both, than they were under the 1973 Companies Act. According to the argument one of the unintended consequences of the Act is that it enables the rights of minority shareholders to be watered-down as it now requires shareholders to have an unrealistic knowledge of company law in order to safe-guard certain of their powers which they previously took for granted. In other words, what may be good for a small company may be problematic for medium and large (unlisted) companies. It is therefore very important to ensure that the provisions of an MOI are carefully crafted to meet the particular requirements of the company and its shareholders.

The MOI is now a crucial document which stakeholders must carefully review as a matter of course to ascertain whether the ‘usual’ rights and powers of shareholders or members remain intact. In the circumstances the services of an attorney able to offer competent and cost-effective advice on the appropriate clauses to be considered for inclusion in an MOI remain an essential part of the process of forming a company. 

Date published: 2013/04/10