So many articles have been written on the Companies Act, 2008 starting years before its implementation in May 2011, and still continuing up to this day.  When our clients read these articles or consult with us on the “new” Act we are often asked what the purpose of all of this is and where all of this regulation is going. 

The obvious place to look for an answer to this question is to look at section 7 of the Act itself, where it sets out the purpose. Section 7 includes a dozen or so objectives, for example, the second subsection states that one of the purposes of the Act is to:

“(b) promote the development of the South African economy by—

 encouraging entrepreneurship and enterprise efficiency;

  1. (creating flexibility and simplicity in the formation and maintenance of companies; and

  2. encouraging transparency and high standards of corporate governance as appropriate, given the significant role of enterprises within the social and economic life of the nation;”

Few would disagree that these are noble objectives indeed – who does not want to encourage entrepreneurship, flexibility, transparency and corporate governance?  However, when you start working with the Act you notice some contradictions. For example, I would have thought that entrepreneurship is encouraged by keeping the “red tape” to an absolute minimum?  But how do you ensure transparency at the same time? The obvious solution is to regulate minimum disclosure and accountability. I think you can see where this argument is going – when given a choice, should the legislators favour entrepreneurship or transparency? Or put in another way – more red tape or more happy-go-lucky businesses? And this is only one subsection, look at the other objectives and you will agree that the Act sets itself an almost impossible balancing act to achieve.

The closest the Act could possibly come to achieving this was to, firstly, provide for the most flexible corporate structuring possible, and then by balancing duties with responsibilities.  Whether this was actually achieved remains to be tested.

Concerning the corporate structure, there is now a variety of company types available, ranging from profit to non-profit, and from public to private, and within these categories there can also be subcategories that apply to anything from listed to owner-managed.  And the regulations (read red tape) differ widely between these types of companies.  For example, there’s a whole chapter (chapter 3) that does not apply to private companies unless the company chooses, through its Memorandum of Incorporation, to comply with that chapter.  So, the first step is to make sure you are in the right structure.

The next aspect is the balance between rights and responsibilities.  For example, directors are now able to issue shares without getting permission from the shareholders (flexibility), but there are stricter requirements in sensitive cases, for example directors issuing shares to themselves (accountability).  Or directors can enter into transactions with anyone unless specifically prohibited (flexibility) but transactions with directors have extensive authorisation and reporting requirements (accountability).

There are numerous examples like the two in the preceding paragraph.  Was the perfect balance achieved?  It depends which side you are on, but probably not 100%.  However, the principle seems sound:  Enjoy the privileges and rights afforded by the Act, but be aware of your responsibilities.

Henk Heymans

Partner, Johannesburg

Also read: The takeover regulation panel – Private Companies