In depth

On 26 July 2024, President Cyril Ramaphosa assented to and signed into law the Companies Amendment Bill and the Companies Second Amendment Bill (collectively, "Amendment Act") introducing changes to the Companies Act 71 of 2008, as amended ("Companies Act"), which changes will impact the way business is done in South Africa. On 27 December 2024, certain sections of the Amendment Act became effective.

One such notable section is the introduction by the Amendment Act of a carve-out to section 45 of the Companies Act. Section 45 of the Companies Act deals with loans or other financial assistance to directors and prescribed officers of companies, or of related and inter-related companies, or to related or inter-related companies or corporations, or members of related and inter-related corporations, or persons related to any such companies, corporations, directors, prescribed officers, or members. The new subsection 45(2A) stipulates that "The provisions of this section shall not apply to the giving by a company of financial assistance to, or for the benefit of its subsidiaries" ("Section 45 Amendment"). The Section 45 Amendment results in a company being entitled to provide financial assistance to its subsidiaries without complying with the requirements set out in sections 45(3) and (5) of the Companies Act being:

1. The approval of the shareholders of the company by way of a special resolution, which approval is passed within the previous 2 years of such financial assistance being authorised
2. The board of the company being satisfied that the company would satisfy the solvency and liquidity test as prescribed in section 4 ("Solvency and Liquidity Test") immediately following the financial assistance and that the terms of the financial assistance are fair and reasonable,

(collectively, "Section 45 Approvals")

3. To the extent applicable and following the adoption of the Section 45 Approvals, written notification to all shareholders and any trade union representing employees of the provision of the financial assistance.

The support for introducing the Section 45 Amendment is premised mainly on what is being termed the 'unnecessary compliance burden' with having to comply with the Section 45 Approvals. The Section 45 Amendment is intended to bring flexibility and ease of doing business in South Africa by eliminating excessive administratively burdensome obligations. The ordinary and normal course of business inevitably necessitates holding companies, at regular intervals or on an ad hoc basis, providing loans, security and other forms of financial assistance to their subsidiary companies. However, if the Section 45 Approvals are not duly obtained, then the cost of such failure is that the financial assistance is void, being a pretty steep price to pay. From a Companies Act perspective, the action is deemed non-compliant and there is no valid conduct that can be taken within the legal framework of the Companies Act that allows for such financial assistance to be ratified or rectified. The onerous and severe outcome of failing to obtain the Section 45 Approvals would have ultimately led to the support for the Section 45 Amendment, as the implications can be adverse and detrimental to a business.

While some may welcome the Section 45 Amendment, others, particularly shareholders of holding companies who have long benefitted from its protections, are undoubtedly questioning whether it still serves its purpose by providing the necessary safeguards or instead strips them of rights once granted, and ultimately, whether the Section 45 Amendment will enhance efficiency or introduce additional risks. Pre-the Section 45 Amendment, this uncertainty was already evident in instances of listed companies failing to secure sufficient support for financial assistance at annual general meetings and the classification of financial assistance as a specially protected or reserved matter that requires a specific approval threshold to protect minority shareholders. Accordingly, in answering these questions, we have set out below some considerations.

The removal by the Section 45 Amendment of the passing of the Solvency and Liquidity Test by the board may raise a concern, as this can have the potential for misuse of authority by the board of a holding company regarding the company's finances, which was otherwise mitigated before the introduction of Section 45 Amendment. Our view is that the Section 45 Amendment does not amount to a complete removal of this requirement, as the board of a holding company would already be in possession and have the knowledge of the necessary information to assess its financial position before providing financial assistance and directors would still be required to exercise their fiduciary duties in this regard. Notwithstanding our view, this knowledge and information may not strictly amount to the board satisfying the Solvency and Liquidity Test and confirming the terms of such financial assistance as fair and reasonable.

Nevertheless, a concern may exist as a result of the lifting of the Solvency and Liquidity Test requirement, which concern can be alleviated by companies being proactive in the circumstances and still abiding by passing the Solvency and Liquidity Test (or other agreed financial metric) before a holding company provides financial assistance to a subsidiary through an amendment in its memorandum of incorporation. This requirement would ensure that the board applies itself to the company's financial position before providing financial assistance. We have observed certain companies voluntarily electing to still apply the Solvency and Liquidity test notwithstanding the Section 45 Amendment and the lifting of the requirement.

Alternatively, we would recommend that companies follow the 'best practice' position, being that the directors acknowledge that the financial position of the company was considered, whether or not with reference to the Solvency and Liquidity Test (or other agreed financial metric), before the provision of the financial assistance, to give the necessary comfort to shareholders that the financial position of the company was considered. This acknowledgment may be recorded through a board resolution, meeting minutes, or other written correspondence between the board. Whilst the suggested approach would not amount to the oversight previously enjoyed by some of the shareholders, the shareholders would have the necessary reassurance that the financial position was considered before the provision of the financial assistance, thus upholding the spirit of the Section 45 Amendment by not requiring shareholder approval.

The next point for consideration is whether when a holding company provides financial assistance to a subsidiary, there is a need to protect the shareholders and whether rights have been stripped from shareholders as a result of the Section 45 Amendment. The board of a holding company sits in a unique position, it may be the only board within a group that can objectively make a decision that is in the best interest of both itself and its subsidiaries, subject to ensuring at all times that the board acts within their duties and responsibilities as a board of a holding company, whilst considering the broader implications of the group. Shareholders are generally not operationally involved with the day-to-day running of a business and in their capacity as shareholders, they are not entitled to all financial information of the business. Accordingly, it could be argued that shareholders should not be given the ultimate say when making these types of decisions. Whilst this argument holds value, section 45 primarily exists to protect the shareholders from board mismanagement of company finances.

This protection is generally afforded through specific provisions of the Companies Act (such as the position before the Section 45 Amendment) and proactive measures taken by shareholders, such as the right to nominate a board representative and access additional financial information. However, it is important to note that this is not the rule, some rights need to be negotiated between the shareholders, and in some instances, shareholders may not have the leverage to negotiate these rights, meaning that such protection is not guaranteed for all shareholders.

In light of the above, it can be argued that the Section 45 Amendment has curtained a level of authority and protection once held by some of the shareholders, unless these shareholders have negotiated certain other rights. Some shareholders of a holding company who:

1. Are also directors of a holding company
2. Hold additional rights entitling representation on a board and access to additional information, and/or
3. Believe the protection is unnecessary when financial assistance is provided in the ordinary course by holding company to subsidiaries,

may welcome the Section 45 Amendment acknowledging it amounts to an unnecessary administrative step. Other shareholders may not take this view.

Whether a certain level of authority and protection is necessary for shareholders regarding financial assistance provided in the ordinary course by a holding company and its subsidiary remains subjective. We generally advise our clients that shareholders should secure the right to nominate a director and negotiate additional rights, including access to comprehensive financial information, to ensure transparency and accountability, thereby obtaining protection independent of the pre-Section 45 Amendment framework. Alternatively, shareholders may opt to revert to the pre-Section 45 Amendment stance by designating financial assistance as a reserved matter through an amendment to the memorandum of incorporation.

To avoid doubt, Section 45 Amendment does not apply to the provision of financial assistance granted by:

1. One subsidiary to another subsidiary within the same group of companies
2. A subsidiary to its holding company

The reasoning is simple, the provision of loans between sister subsidiaries and subsidiaries to their holding companies is not considered "ordinary course of business" in contrast to the Section 45 Amendment applicable to holding companies giving financial assistance to their subsidiaries, which is intended to create flexibility and ease in the normal and ordinary course of doing business.

The Section 45 Amendment represents a significant shift in the regulatory landscape for the relationship between holding companies and their subsidiaries. Whilst we understand that the amendments aim to reduce the compliance burden and provide greater flexibility in financial assistance arrangements, it remains unclear whether this will be the case. Some companies and shareholders may elect to enjoy the flexibility afforded by the Section 45 Amendment and have reasonable confidence in doing business through their board. Others may:

1. Elect to revert to the position pre-Section 45 Amendment by amending the company's memorandum of incorporation to incorporate restrictions relating to the provision of financial assistance to ensure that shareholders are provided with the same rights, privileges, and approvals
2. Voluntarily elect to still comply with all or some of the previous requirements in place before the Section 45 Amendment. 

Accordingly, it would seem that the answers to the questions above will need to be assessed by each company on a case-by-case basis. It will then be at the discretion of each company to ensure that the necessary measures are in place to strike the right balance between efficiency and the protection of stakeholders whilst doing business in South Africa within the new framework of Section 45.

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Kamogelo Mashigo, Associate Designate, contributed to this legal update.