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Company Law: Disposal of a company’s assets and financial assistance to third parties or the directors of the company

Disposal refers to an act of giving away or selling assets to another person or company. Should the company intend to dispose assets or undertaking, special resolution which gives effect to the aforesaid disposal needs to be adopted. It is however vital that such disposal be effected in accordance with the requirements set out in the Companies Act as non-compliance of the Act may render such disposal null and void. A special resolution, which also adheres with the requirements set out in the Companies Act, needs to be adopted in case of financial assistance by the company. Such requirements as well as implications of compliance and non-compliance with the Act in relation to those transactions are more discussed below.

SECTION 112: PROPOSAL TO DISPOSE OF ALL OR GREATER PART OF ASSETS OR UNDERTAKING

Disposal of company’s assets goes along with requirements set out in the Companies Act. Requirements for such proposal to be effective are set out in Section 115 of the Companies Act, if however, the transaction in question is pursuant to a business rescue plan, between wholly owned subsidiary and its holding company, among subsidiaries of the same company, requirements set out in Section 115 does not have to be complied with as per Section 112(1) of the Companies Act.[1]

Should the disposal of company’s assets and undertaking be proposed, a special resolution which gives effect to such disposal need to be adopted in accordance with the Act. Special resolution in this context means a resolution adopted with the support of at least 75% of the voting rights exercised on the resolution, the company’s Memorandum of Incorporation may however permit different percentage of voting rights on any special resolution.

The purpose of the resolution is to give effect to the lawful disposal of company’s assets or undertaking. It is therefore a necessity that such resolution is adopted in accordance with the Act to avoid the aforesaid resolution be declared null and void.

Where the shareholders of the company intends to adopt the aforesaid resolution, the notice which is accompanied by the precise terms of the transaction, needs to be delivered within the prescribed time and in the prescribed manner as required by the Act.[2] Prescribed time in this context means delivery of the notice at least 15 business days before the meeting in case of public company or non-profit company, or at least 10 business days if the company does not fall under the above-mentioned categories. Thus, the content of the notice together with the manner as well as time of delivery must adhere with the provisions of the Act.

Assets or undertaking to be disposed of must be fairly valued as calculated in the prescribed manner. The calculation done by the valuer must therefore reflects the actual value of the assets. In addition to the above, the resolution adopted cannot be implemented to different transaction apart from the specific transaction at hand. The Act states that the resolution is only effective to the extent that it authorizes a specific transaction.[3] In other words, a new resolution needs to be adopted should there be any further similar transactions to be concluded.

SECTION 115: REQUIRED APPROVAL FOR TRANSACTION CONTEMPLATED IN PART

Discussion under this provision specifically pertains to requirements which must be complied with for the above discussed special resolution to be effective and enforceable. A company may therefore not dispose its assets or undertaking if the requirements under this Act has not been complied with.

A proposed transaction needs to be approved by a special resolution adopted by persons entitled to exercise voting rights on such matter, at a meeting called for that purpose and at which sufficient persons are present to exercise, in aggregate, at least 25% of all the voting rights that are entitled to be exercised on that matter or any higher percentage.[4] Special resolution in this context carries the same meaning with the above discussion. It should be borne in mind that any voting rights controlled by an acquiring party or person related to an acquiring party must not be included in calculating the number of voting rights. This also applies to a situation where shareholders of a holding company intend to adopt such resolution where the assets or undertaking of the subsidiary are to be disposed.

Court approval may under certain circumstances be required in addition to the above requirements. If court approval is required but the resolution is not approved by the court, resolution may not be implemented despite meeting other requirements.

The resolution needs court approval where it was opposed by at least 15% of the voting rights that were exercised on that resolution and any person who voted against the resolution must additionally within five business days require the company to seek court approval. Court approval may also be required on application within 10 business days by any person who voted against the resolution. The company may therefore not proceed to implement the resolution if Court approval is required but not obtained.

There are factors the courts consider to determine whether leave can be granted. The court may grant leave to such person only if it is satisfied that the person is acting in good faith and appears prepares to sustain the proceedings. The court may therefore not grant leave where it appears that the person is acting mala fide and has no prospects of success.

Section 115 (6) provides that if a resolution requires court approval, a company must within 15 days after the vote, apply to a court for approval and bear costs of application. If a company fail to make an application within the prescribed time or at all, the resolution will be treated as null and void.[5]

Assets under discussion may be disposed where the above requirements have been satisfied and the necessary measures may be implemented to effect transfer of the assets to the recipient. If, however one of the requirements have not been complied with, or where court approval is required but not obtained, assets may not be transferred as the underlying transaction is not valid and enforceable.

SECTION 44: FINANCIAL ASSISTANCE FOR SUBSCRIPTION OF SECURITIES

Discussion under this section pertains to a financial assistance by a company for subscription of securities. In terms of Section 44 of the Act financial assistance is defined as including a loan, guarantee, the provision of security or otherwise, but does not include lending money in the ordinary course of business by a company whose primary business is the lending of money. This specifically refers to anyone who needs such assistance for subscription of securities, which means any shares, debentures or other instruments issued or to be issued by a profit company.  The board may authorize a company to provide such financial assistance provided that requirements set under section 44 of the Companies Act has been satisfied.

The board may, authorize financial assistance where it is pursuant to an employee share scheme which satisfies the requirements set out in section 97, employee share scheme satisfies requirements set out under section 97 if the company has appointed a compliance officer who is responsible for administration of the scheme and also will be accountable to directors of the company.

If financial assistance is not pursuant to the employee share scheme stated above, such financial assistance may be authorized by special resolution adopted within the previous two years which approved such assistance either for a specific recipient or a category of potential recipients. [6] Special resolution, in this context also means a resolution adopted with the support of at least 75% of the voting rights exercised on the resolution, the company’s Memorandum of Incorporation may however permit different percentage of voting rights on any special resolution.

The terms under which financial assistance is proposed must be must be fair and reasonable to the company, terms must therefore not have prejudicial effects towards the company. The board must additionally be satisfied that immediately after providing financial assistance, the company will satisfy the solvency and liquidity test. This means that assets of the company must be equal or exceed company’s liabilities and it appears that the company will be able to pay its debts for the period of 12 months after the test is considered.

In Swissinc AG (Pty) Limited and others v Jupiter 8 Commercial Trust and others, the court dealt with the issue of financial assistance advanced to the applicant. Applicant contended that the transaction did not comply with S44 of the Companies Act as there was no special resolution adopted. The court held that although the respondents were not conscious of the provisions of Section 44(3)(a)(ii) of the Companies Act, that required special resolution, factually they did agree and approved the transaction.

Furthermore, when the transaction was agreed upon respondents were the only three directors and the only three shareholders. In other words, despite the fact that they did not record their transaction as a “special resolution” they in fact complied with what is contemplated with the requirement that a special resolution be taken.

The court concluded that strict formalities may be dispensed with where there was unanimous assent in the sense that all the shareholders have acted in concert to attain the same substantial results. [7] It is therefore evident that the transaction contemplated under the Act may be concluded is it substantially complies with the requirements of the Act even though it does not strictly comply with the formalities.

If financial assistance is granted by the company in a manner which does not comply with the provisions of section 44. A director is liable for any loss, damages or costs sustained by the company as a consequence of such actions. The director liable only if he was present at the meeting and failed to vote against the provision of financial assistance despite knowing that the resolution is inconsistent with this Act.

SECTION 45: LOANS OR OTHER FINANCIAL ASSISTANCE TO DIRECTORS

Discussion under this provision refers to financial assistance provided to directors. Under this section financial assistance includes lending money, guaranteeing a loan or other obligation. As per Section 45(1), financial assistance in this section does not include lending money by the company whose primary business is the lending of money i.e banks, it also excludes expenses incurred by the person on behalf of the company.[8]

Requirements discussed under section 44 need to be satisfied under this provision as well. The board must additionally, as section 45(4) provides, ensure that the conditions and restrictions pertaining to a financial assistance in the Memorandum of Incorporation have been satisfied. [9]

Written notice must also be provided by the company to all the shareholders unless every shareholder is a director. Such notice must be provided within 10 business days after the board adopts the resolution, if the total value of all loans, debts, obligations or assistance contemplated in that resolution together with any previous such resolution during the financial year, exceeds the one-tenth of 1% of the company’s net worth at the time of the resolution or within 30 business days after the end of the financial year, in any other case. Section 45(6) further provides that the resolution is void if it is inconsistent with this section.[10]

The consequence of a resolution or agreement which is void is that a director of a company is liable for any loss, damages or costs sustained by the company as a consequence of such actions.

COMMENT

When a director concludes a contract on behalf of the company, he acts in a representative capacity and his actions must reflect the wishes of each shareholder. The above discussed provision seeks to protect the shareholder from the hands of directors as evidenced by the decision in Yvette Joan Farren v Sun Service SA Photo Trip Management (Pty) Ltd. In this case the director of the company concluded an agreement of sale of immovable property on behalf of the company without the approval of the shareholders. The court held that the transfer of the immovable property cannot take place as the underlying transaction did not comply with the provisions of the Companies Act.  The Appellate Division held that even estoppel will not be permitted if by doing so a result would be achieved which is contrary to the intention of the legislature.[11]  The above case illustrates practical consequences of not complying with Section 112 and 115 of the Companies Act where greater part of company’s assets has been disposed.

CONCLUSION

In conclusion, it is evident as per the above discussion that assets and undertakings of the company are well protected under the Companies Act, such protection is however both reasonable and justifiable as the company is being kept viable by its assets and undertakings. Unreasonable disposal of the assets may therefore be prejudicial to the company and to the shareholders.

 

FOOTNOTES

[1] Section 112(1), Companies Act 71 of 2008.

[2] Section 112(3), Companies Act 71 of 2008.

[3] Section 112(5), Companies Act 71 of 2008.

[4] Section 115(2), Companies Act 71 of 2008.

[5] Section 115(6), Companies Act 71 of 2008.

[6] Section 44(3), Companies Act 71 of 2008

[7] Swissinc AG (Pty) Limited and others v Jupiter 8 Commercial Trust and others, para 39.

[8] Section 45(1), companies Act 71 of 2008.

[9] Section 45(4), Companies Act 71 of 2008.

[10] Section 45(6), Companies Act 71 of 2008

[11] Yvette Joan Farren v Sun Service SA Photo Trip Management (PTY) LTD, para 18.

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