ARE YOU LEGALLY COMPLIANT AT RUNNING YOUR COMPANY?

  • A lot of unsuspecting business owners have landed up in court because of legal compliance issues – not because they were irresponsible but because they were not aware of their legal duties in the first place.

  • We have listed a number of the important Acts below which any business owner in South Africa today will need to comply with in order to be termed “legally compliant”.

The Companies Act

The Companies Act is a set of laws that governs the running of every business in South Africa. The Act was re-written in 2008 and has been in effect since 2011, providing business owners and company directors with legal guidelines on how to run their companies according to the letter of the law. Here are some important highlights from the Companies Act:

  • Every company must be registered and operate in accordance with all South African laws, including the Companies Act and others.

  • Company owners and directors are responsible for running their businesses responsibly and ethically – this means that the business must not be run in a way that puts its owners, staff, or customers at a disadvantage on purpose.

  • Company directors are more liable than they used to be for losses and mismanagement – if a director makes a decision that causes losses or damage to the business, the person could be held legally responsible for these.

  • Closed Corporations (CCs) are being phased out by the new Companies Act – it is advisable to register all new businesses as (Pty) Ltd entities and convert any older CC businesses to this type as well.

  • The rules on auditing of financial results and tax returns have changed in the new Companies Act of 2008 – make sure that you have consulted an attorney and accountant before you submit your first tax return.

  • The constitution of every type of Company is now comprised in only one document, called the company’s “Memorandum of Incorporation”. The MOI replaces both the memorandum of association and articles of association of pre-existing companies.

  • Pre-existing Companies had until the 31 April 2013 to bring their memorandum of association and articles of association into harmony with the act.

Changing the memorandum of incorporation (MOI)

Companies incorporated before 1 May 2011 have until 1 May 2013 to lodge an amended memorandum of incorporation (MOI) with the Companies and Intellectual Property Commission (CIPC), free of charge.

Why should companies change their MOI?

  • Although not mandatory, the Companies Act of 2008 is creating opportunities for companies to reconsider the stipulations of their MOI. For example, if a company’s existing MOI requires an annual audit of its financial statements, it may be advisable to consider updating the MOI.

  • An audit may no longer be required in terms of the 2008 Act for the particular company, yet unless the MOI is amended, this requirement will prevail.

  • In addition, the existing MOI may require that the company hold an annual general meeting after the end of its financial year. The Act no longer contains such a requirement for private or non-profit companies, but unless the MOI is amended, this requirement will also remain.

How to lodge an amended memorandum of incorporation (MOI)

Given these considerations, should a company elect to amend its MOI, it can choose to prepare and lodge three different types of amendments:

  • A default MOI which incorporates the default provisions of the Act

  • An altered MOI which incorporates the alterable provisions of the Act

  • A unique MOI which is specifically tailored towards the company’s unique needs and requirements.

  • Standard templates to amend MOIs have been issued in terms of the Act and Regulations, for non-profit companies (with or without members), a short standard form for private companies which incorporates the default provisions of the Act (CoR15.1A), and a long standard form for profit companies (CoR15.1B). These forms, although standardised and convenient, are not recommended to amend the MOI, due to errors and inconsistency in their content.

  • Example, the 2008 Act defines a private company’ as a company that is not a State-Owned Company and its MOI prohibits it offering securities to public and restricts the transferability of its securities. The CoR15.1A form however, does not include a clause which restricts the transferability of the securities.

  • This may mean that even although the company is intended to be a private company, it may be treated as a public company, and have to comply with the requirements for public companies as set out in the Act (that it requires an audit and must hold an AGM and have at least three directors). This is clearly an error in drafting by the Legislature.

Directors

  • The Companies Act stipulates several rules for the appointment, resignation, removal, obligations, and duties of directors. Duties include both a fiduciary duty, and a duty of reasonable care, which operate in addition to existing common law duties.

  • A director is required to act:

  1. in good faith and for a proper purpose,

  2. in the best interests of the company,

  3. with the degree of care, skill and diligence that may reasonably be expected of a person,

  4. carrying out the same functions in relation to the company as those carried out by the director,

  5. having the general knowledge, same skill, and experience of that director – a reasonable man/women test.

Liability of Directors

  • The term director includes alternate director, prescribed officer (CEO, MD CFO etc), audit committee or board committee members.

  • A director is liable for breach of fiduciary duty, acting without authority, party to supplying false or misleading information about company or making of an untrue statement in a prospectus.

  • A director must disclose any personal financial interests in any matter before the company.

  • A director may not use the position as director or information gained as a director to make a secret profit or gain advantage for themselves or someone else or to cause harm or detriment to the company.

  • Directors or related persons must also disclose to the company any financial interest acquired, after the agreement or other matter has been approved by the company.

  • A sole director who does not hold all the beneficial interest of securities or related persons to the director, who discloses a personal financial interest in a company agreement, may acquire approval to enter into that agreement by the passing of an ordinary resolution of the shareholders.

  • In addition, directors could be held liable to shareholders for fraudulent acts or acts of gross negligence or to a third party who has suffered damages due to the acts of the directors.

  • The Act also includes the “business judgment test” which states that if a director has applied reasonable care, skill, and diligence, has no material financial interest, and has a basis for believing that the decision made was in the best interest of the company, the director will not be held liable for a breach of duty. This is only if a director did not act in bad faith or for improper purpose.

The Consumer Protection Act

  • Just like the Companies Act regulates the nitty-gritty of running your business, the Consumer Protection Act regulates how businesses interact with their customers.

  • It aims to:

  1. Promote a fair, accessible, and sustainable marketplace for consumer products and services;

  2. Establish national norms and standards to ensure consumer protection; Make provision for improved standards of consumer information, to prohibit certain unfair marketing and business practices;

  3. Promote responsible consumer behaviour;

  4. Promote a consistent legislative and enforcement framework, related to consumer transactions and agreements;

  5. Establish the National Consumer Commission; and Replace, in a new and simplified manner, existing provisions from five acts, including the Consumer Affairs (Unfair Business Practices) Act of 1988; Trade Practices Act of 1976; Sales and Service Matters Act of 1964; Price Control Act of 1964; and Merchandise Marks Act of 1941 (specifically Sections 2-13, and 16-17).

  • The CPA has an impact on your business in two ways: