Koos Pretorius, Director, Edward Nathan Sonnenbergs, on South Africa’s new Companies Act

The ever-increasing scramble for investment opportunities on the African continent has been a key driver of foreign direct investment into the country. Regional power, highly developed infrastructure, sophisticated banking and financial services sectors, as well as a stable and developed legal system, are some of the reasons why investors continue to view South Africa as the ideal launch pad into the rest of the continent. As a result, mergers and acquisitions activity in the South African business environment is relatively active. A recent example is US retail giant Walmart’s acquisition of a controlling stake in Massmart, one of the country’s largest retailers with operations in 14 African countries, in a deal valued at $2.5bn.

Investors deciding to establish or acquire a South African incorporated company need to consider the new Companies Act No. 71 of 2008, which came into force on May 1, 2011. The new act has modernised the country’s company law, adopting an eclectic approach, drawing on a variety of jurisdictions and introducing a few novel concepts. Practitioners are now engaged in grappling with the wide-ranging changes heralded by the new act and are assisting clients in guiding them through the transitional period, during which companies must amend their constitutional documents to bring them in line with the legislation.

Although a few teething problems have been encountered amidst the establishment of the Companies and Intellectual Property Commission, the changes to the South African corporate law have generally been regarded as a positive development that has benefitted the country’s ease of doing business rating. Corporate South Africa is looking forward to the newly established Companies Tribunal becoming fully operative. This tribunal promises to be a more specialised forum for the development of corporate law jurisprudence.

Changes to the takeover landscape abound, and we see a mixed bag of the new complementing an overhaul of the more familiar. A scheme of arrangement no longer requires mandatory court sanction, meaning that, board and regulatory consent aside, transactions will essentially only require the approval of 75% of the independent shareholders to succeed, with dissenters protected by appraisal rights. Thus it is ideal for facilitating friendly takeovers and the reorganisation of companies with a wide spread of shareholders.

Evidence of modernisation may be seen in the introduction of amalgamations and mergers, a first in South African law. Local practitioners now have the opportunity to take advantage of the versatility that amalgamations and mergers present. Creative practitioners have the means to craft innovative new frameworks through which to service the demands of the complex world of corporate takeovers and restructuring.

However, some challenges and uncertainties remain. Aspects of the tax treatment of amalgamations and mergers are unclear. We await amendments to the tax laws, as the current Income Tax Act is not clearly aligned with the new legal framework for amalgamations and mergers. In this respect, the key concern is how the rollover relief is to work.

Directors’ duties have been partially codified without dispensing with the valuable common law. Directors will be happy to hear that a US derivative business judgement defence has been introduced. In contrast they may find the provisions regulating conflicts of interests a little too inflexible. If a director of a company has a personal financial interest in respect of a matter to be considered at a meeting of the board, or knows that a related person has a personal financial interest in the matter, the conflicted director must, among other things, disclose the interest and recuse themselves from the meeting and may not vote. While there are exceptions, the requirements cannot be altered in a company’s constitution. The wide definition of related persons in this context gives rise to compliance issues in relation to inter-group transactions.

Despite the challenges, the overarching focus is on modernising and simplifying the country’s company law to make it a friendlier place for doing business.