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JOHAN ROODT
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JOHN COHEN
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The new Companies Act of 2008 streamlines the administration of companies by dispensing with formalities where these would serve no purpose.

The new Companies Act creates fast-track processes and dispenses with unnecessary internal formalities.

One of the weaknesses of the "old" Companies Act of 1973 was its rigidity and insistence on adherence to formalities even where these served no purpose, and the lack of a simple statutory mechanism to cure an irregularity where the requisite formalities had, in error, not been observed.

Hitherto, the courts in South Africa and England have, to a limited extent, permitted formalities to be dispensed with where all the shareholders are in agreement on the matter in question. This is the so-called "doctrine of unanimous consent", as laid down in Re Duomatic Ltd [1969] 2 Ch 365. But it was doubtful whether the unanimous consent of the shareholders could validly dispense with the statutory formalities required for the passing of a special resolution, that is to say, a resolution required to be passed by a three-quarter majority of shareholders' votes. (See in this regard Gholke and Schneider v Westies Minerale (Edms) Bpk 1970 (2) SA 685 (A) at 692 - 3 and Quadrange Investments (Pty) Ltd v Witind Holdings Ltd 1975 (1) SA 572 (A) at 581.)

There were also other limits to what could be done informally with the unanimous consent of the shareholders. Thus, for example, a dividend declared by a company in contravention of a condition in its memorandum of association could not be validated by the unanimous consent of the shareholders (see Quadrangle Investments, above).

Amendments to the "old" Companies Act of 1973 went some way toward dispensing with the usual formalities for the passing of a special resolution by permitting a resolution to be proposed and passed as a special resolution at a meeting of shareholders that had been called without the requisite 21 days notice if all the shareholders of the company consented in writing. This was provided for in section 199(2A) of the Companies Act of 1973 which was added to the Act in 1988.

The new Companies Act of 2008 has taken this approach further in providing more extensive and detailed statutory authorization for dispensing with formalities in circumstances where they would serve no purpose and to provide for inadvertent irregularities to be easily rectified after the event.

For example, section 57(1) - (2) of the new Act applies where a profit company has a single shareholder and permits that shareholder to exercise any or all of the voting rights without notice or compliance with internal formalities. This frees a "one-man company" from having to comply with internal formalities for the calling of a shareholders' meeting and for voting on a resolution - which is clearly sensible since the outcome is a foregone conclusion. However, the Act provides that this relaxation applies only to "internal formalities"; the meaning of this phrase is not clear, and it probably does not cover formalities prescribed by the Companies Act, as distinct from formalities required by the company's memorandum of incorporation ("MOI").

However, section 60(1) - (2) of the new Act, read together with the definition in section 1 of "special resolution", permits a resolution to be voted on in writing (in essence, by way of a round robin circulated amongst the shareholders) without the necessity of summoning a meeting (see s 57(2)(a)). This provision is explicit that this method can be used to pass a special resolution (see section 60(2)(a) and the definition in section 1 of "special resolution").

However, such dispensing with formalities does not apply if the company's memorandum of incorporation does not permit such a process; (see section 60(5)). Consequently, the promoters of a company and the subsequent shareholders can retain the need for formalities if they so wish, by including an appropriate provision in the company's MOI.

A compliance requirement in this regard is imposed by section 60(4), which states that, within ten business days after adopting a resolution or after electing directors in terms of these provisions, the company must deliver a statement, outlining what has occurred, to every shareholder who was entitled to vote on or consent to the resolution or to vote in the election of the director. This again is a sensible safety net; it ensures that all shareholders are kept informed of what has occurred so that they can, if they so wish, assert that there has been some irregularity in the process or some infringement of their rights.

When it comes to increasing the company's share capital, the primary method of doing so is (as was the case under the Companies Act of 1973) by way of a special resolution. This is now provided for in terms of section 36(2)(a) of the new Act.

However, section 36(3) of the new Act also offers an alternative method which is available unless the company's memorandum of incorporation does not allow it, namely that an increase in the company's authorized share capital can be effected by a resolution of the board of directors.

This offers a useful and expeditious way of effecting an increase in share capital (which may, in some circumstances, need to be done quickly to secure a business deal) without going through the lengthier process of calling a shareholders' meeting or arranging for a shareholders' round robin - because even the latter method can be time-consuming if the shareholders are geographically scattered or are difficult to contact.

Moreover, section 38(2) of the new Act provides that if a company issues shares that have not been authorized in terms of section 36, the issuing of those shares "may be retroactively authorized in accordance with section 36", that is to say, either by way of a special resolution or by way of a resolution of the board of directors. This mechanism for a retroactive regularizing of an irregularity is particularly welcome.

The question arises whether a retrospective authorization in terms of section 38(2) is available where the irregular issue of shares in question occurred prior to the coming into force of the Companies Act of 2008. The better view seems to be in the affirmative.

Although the new Act does not say that this is required, it is probably advisable that the resolution of the board should also state that it retroactively authorizes the increase in the company's authorized share capital.

It is implicit in section 38(3)(c) that such a retroactive authorization also validates any certificate issued in respect of such shares and any entry in the share register.

The company must then file a notice of amendment of its Memorandum of Incorporation, as required by section 36(4).

The new Act also provides in section 74 for directors to act otherwise than at a formally constituted board meeting. Unless the company's MOI provides otherwise, any decision that could be voted on at a board meeting can instead be adopted by written consent of a majority of the directors, given either in person or by electronic communication (eg by fax or e-mail) provided that every director has received notice of the matter to be so decided. A decision made by the directors in this way is as effective as if it had been approved by voting at a board meeting.

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