Attention: Mr. A Hermans
Committee Secretary
Portfolio Committee on Trade and Industry
Email:
21 January 2010
Dear Mr. Hermans
Companies Amendment Bill

We welcome the opportunity to comment on the Companies Amendment Bill. Please find attached our list of the main issues that need to be addressed before the Companies Act, 2008 becomes effective in order to facilitate the transition from the old Companies Act to the new Companies Act.

Should you wish to discuss our comments or require any clarity on any matters raised please do not hesitate to contact me.

Yours sincerely
Thinglemony Pather
Director: Department of Professional Practice

Office: 011647 5037
Mobile: 083704 0064

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KPMG Comments on the Companies Amendment Bill, 2010

The following should still be amended:

Section / Problem wording / Issue / Rectification
4(1) / “in the case of a holding company the consolidated assets” and “in the case of a holding company the consolidated liabilities” / From a legal point of view the wording of this section is a major concern. Legally, each company is a separate entity with no automatic rights to the assets of its subsidiaries and no legal obligation to honour the liabilities of its subsidiaries. The fact that an “insolvent” holding company has solvent subsidiaries should be irrelevant (as any party who has a legal relationship with the insolvent holding company will not benefit from the assets of the solvent subsidiaries).
A creditor or shareholder of the holding company will only have a claim against the holding company and therefore allowing a company to take account of solvency/liquidity on a group basis severely erodes the protection to creditors and shareholders. A company will in any event include, in its own assets, the value of its investments in its subsidiaries, being the asset over which that company has legal title.
Similarly, to require a company to include liabilities that it has no obligation to settle would lead to unfair results for the company. / Remove the wording which requires a holding company to consolidate the assets and liabilities of its subsidiaries.
11(3)(c)(ii) / “Pty” / In the interest of consistency with current practice we propose that the brackets around both “(Proprietary)” and “(Pty)” be retained. Removing the brackets will not make a legal difference but may cause confusion on implementation of the new Act. / Add brackets to both “(Proprietary)” and “(Pty)”
15(2)(b) / “contain any restrictive or procedural requirements… impeding the amendment of any particular provision of the Memorandum of Incorporation” / We understood that the intention of the “RF” company is that the doctrine of constructive notice should apply to these companies. In other words any person intending to do business with the company would be warned that the company has some kind of “special” condition which could affects its ability to enter into third party transactions. The letters “RF” would therefore essentially be a safeguard protecting the company, typically in the case of so-called special purpose vehicles.
The proposed amendments remove this useful commercial tool. The proposed amendments only require the use of the letters “RF” in the event that a company has procedural constraints for the amendments of its memorandum of incorporation. In many instances these procedural requirements may be minor and not of interest to third parties. / Retain the original version of this section as contained in the Companies Act No 71 of 2008.
16(9)(b)(ii) / “the date, if any, set out in the Notice of Amendment” / We propose that, for purposes of consistency with the proposed section 16(9)(b)(i), that section 16(9)(b)(ii) also provides that the Notice of Amendment may provide for a “time” to take effect in addition to the date. / Include the phrase “and time” after “the date” in section 16(9)(b)(ii)
22(1)(b) / “(A company must not) trade under insolvent circumstances” / This section on a whole is very problematic.
Although the criminal sanction has been removed in section 214, directors acquiescing to trading under insolvent circumstances still face personal liability against which they cannot be indemnified.
Also, as the “solvency and liquidity test” is applied throughout the Act to safeguard third parties and the business rescue provisions also require that the directors must consider whether the company is “financially distressed” the additional emphasis in section 22 on trading in insolvent circumstances is unnecessary and restrictive.
We believe that the current prohibition on carrying on business recklessly, with gross negligence, etc as contained in section 22(1)(a) provides the courts with sufficient opportunity to consider all relevant facts (including the financial position of the company).It is not desirable to constrain the discretion of the courts as currently envisaged in section 22(1)(b).
For example, the “insolvent circumstances” may be temporary in nature as would be the case in the event of the fluctuation of international commodity prices for a mining company. Section 22(1)(b) would encourage the directors to close down the company to avoid personal liability, even though it is anticipated that commodity prices will increase in future. / Remove subsection (b) from s22(1).
65(11) / Add a “catch-all” provision to the list of special resolutions to provide for any matter required to be decided by special resolution in terms of the company’s memorandum of incorporation. / Add an additional item to provide for matters to be decided by special resolution as required by the company’s memorandum of association.
66(2) / “in addition to the minimum number of directors that the company must have to satisfy any requirement, whether in terms of this Act or its Memorandum of Incorporation, to appoint an audit committee, or a social and ethics committee as contemplated in section 72(4)” / The proposed amendment can have an onerous result.
For example it may be practical for a company to appoint 2 executive directors, eg the MD and FD and then 3 independent non-executive directors for the purposes of the audit committee and the social and ethics committee. Instead, the proposed amendment will require all public companies to have 9 directors of which 6 are non-executive. / Do not amend section or clarify whether a public company will effectively be obliged to have 3, 6 or 9 directors.
94(2) / The proposed amendments to section 30(2)(b)(ii)(aa) contemplates that the board of a company can also decide (in addition to the MOI) that the company should have any audit. From a governance point of view we believe that it would also be good to grant the board the ability to decide that the company should appoint an audit committee in terms of section 94. / Add to section 84 and section 94(2) a reference to the ability of the board to elect to appoint and audit committee in terms of section 94.
95(1)(c)(i) and (ii) / “issue of shares” and “grant of options” / We note that the definition of “employee share scheme” refers only to the “issue” of shares and the “grant” of options. Although this is not a problem in the context of Chapter 4, it creates a problem where this definition of used for other exemptions, such as sections 44 and 45. The result of the use of the current definition will be that employee incentive schemes which either purchases shares on the secondary market or creates a secondary market for shares (for example by way of a trust) would arguably not be subject to the exceptions. / Reconsider the definition of “employee share scheme” which is currently very restrictive as it only contemplates the “issue” of share of the “grant” of options and does not deal with share schemes involving the secondary trading in shares.
99(1)(b) / “memorandum of incorporation” / A foreign company may not necessarily have a memorandum of incorporation. / Change the words “memorandum of incorporation” to “founding documents”
136 / We are of the view that suppliers who are obliged by the business rescue practitioner to continue to supply goods or services during business rescue proceedings should at least be entitled to remuneration of the goods and services supplied during that time. / Despite the provision of section 135 we believe that section 136 should specifically provide that supplies during business rescue proceeding would be paid for on a “cash on delivery” basis.
218(1) / “unless a court has made a declaration” / The entire section 218(1) is problematic from a legal point of view. We believe that in the interest of certainty, a contravention of the Act should have the result that the transaction is void (as is currently the position in terms of our common law), unless the specific section contemplates a different outcome or remedy.
Apart from the fact that section 218(1) leads to uncertainty, it also requires the involvement of a court, even if all parties to the action acknowledge that a specific action contravened the Act. The requirement to apply to court will potentially be costly and time consuming. / Section 218(1) should be deleted.

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