FINANCIAL ASSISTANCE BY COMPANIES TO ISSUE SHARES

Section 38 of the Companies Act, 61 of 1973 (now repealed) contained a prohibition against companies issuing shares to prospective shareholders on loan account.  This was identified as one of the hurdles in the way of BEE empowerment deals specifically (which quite often involves BEE participants requiring funding to be able to subscribe for shares in a company).  Consequently, this was addressed in the Companies Act, 71 of 2008, through the introduction of section 44 which now specifically provides for new share issues to be undertaken on loan account, subject thereto that this is not prohibited by the company’s memorandum of incorporation.

The board of directors of a company may now authorise financial assistance to be provided by the company by way of a loan, guarantee or the provision of security to any person for the purpose of subscribing for shares issued in that company.  However, and despite any provision of a company’s memorandum of incorporation, the company’s directors may not authorise any financial assistance unless the financial assistance is for either an employee share scheme, or has been authorised through a special resolution by the shareholders of the company.  (A special resolution involves a resolution adopted with the support of at least 75% of the voting rights exercised on the resolution, or a different percentage which may potentially be allowed for in the company’s memorandum of incorporation.)  In addition, the company’s directors must be satisfied that the terms of the loan (or other form of financial assistance) is fair and reasonable to the company, and that the company would, after providing the financial assistance, still be both solvent and liquid.  If the company’s memorandum of incorporation specifically imposes certain further conditions on the company granting financial assistance for the issuing of its shares, these requirements too need to be adhered to.

Any agreement to provide financial assistance which would be contrary to the requirements set out above in terms of either section 44 of the Companies Act, or the memorandum of incorporation of a company, would be void.  Directors in breach of this may be held personally liable for damages caused.

The new regime in the ‘new’ Companies Act is enabling for business, but directors should caution against applying this without due consideration to the above requirements.  Of specific relevance would be if for example the recoverability of a loan granted to enable the borrower to subscribe for shares is doubtful.  If this is the case, the duty of care of the directors towards the company may be called into question by other shareholders prejudiced as a result, potentially leading to delictual claims against the directors in personal capacity for not displaying the statutory required duty of care towards the company.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

FINANCIAL ASSISTANCE AND THE COMPANIES ACT

A4_bOne of the more significant changes that the “new” Companies Act, 71 of 2008, brought about was that a company may now provide financial assistance to prospective shareholders to subscribe for shares in that company. In other words, it may lend persons money to enable them to subscribe for shares in the lender (although other forms of financial assistance is also contemplated – see below). Previously, in terms of section 38 of the now repealed Companies Act, 61 of 1973, this was not allowed.

In terms of section 44 of the “new” Companies Act, financial assistance by a company would include extending a loan, guarantee or the providing of security to enable a person to obtain funding for purposes of acquiring shares in that company. Section 44 seeks to regularise such instances of financial assistance however, and this would extend beyond the mere granting of a loan to a would-be shareholder. The wide definition of “financial assistance” makes it clear that the section covers various scenarios and also specifically where financial assistance by a company is provided to anyone not only for the purpose of enabling him or her to subscribe for shares in that company, but also if the assistance is to enable shares to be acquired in a related company.

The purpose of the provision is quite clearly to protect existing shareholders. For example: if a company were to lend money to a prospective shareholder who is subsequently unable to repay the assisting company, that company would have effectively diluted the shareholding interests of the existing shareholders (who would have paid cash for their shares), whilst the new shareholder who is unable to repay the company still has an interest left in the company (and indirectly therefore to the cash subscription proceeds of the other shareholders).

Notwithstanding the potential negative effect of allowing shares to be subscribed for in a company on loan account, it is foreseeable that such financial assistance may be required from time to time for genuine commercial purposes and transactions that would otherwise not have been feasible. B-BBEE transactions are an excellent example of this.

For a company to give financial assistance to a would-be shareholder, the directors of the company must be satisfied that the financial assistance is fair and reasonable to the company, and further that the company will be solvent and liquid thereafter. They must also ensure that this is not in contravention of the company’s Memorandum of Incorporation. If in breach of any of these conditions, the directors may potentially be held personally liable. Typically, the shareholders of the company must also approve thereof by way of a special resolution.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. (E&OE)