Companies won’t be able to
get a sizeable corporate loan
without complying with these
provisions in the Act.
Under the old Companies Act, the board only needed to approve
transactions when financial assistance was provided by a company
in connection with the acquisition or subscription for shares in that
company. But, under the new Act, companies issuing any type of
security, including bonds or debentures, are governed by the new
provisions. Roothman says other types of transactions now affected by the new provisions include the sale of shares in a subsidiary
where the parent company provides a guarantee. ‘If a company does
provide financial assistance, even for an intercompany loan, the
board now needs to approve the transaction,’ he adds.
The board must consider whether the company will be solvent
and liquid after the assistance is provided and whether the terms
of the transaction are fair and reasonable. ‘If the directors vote in
favour of the financial assistance and it is later determined that
the terms were not fair, or that it resulted in the company becoming
insolvent, they can be held personally liable for losses or damages
sustained by the company as a result of the financial assistance
provided,’ he says.
Because of the serious consequences of not complying with the
Act, most banks and financiers have taken the view that all forms
of financial assistance, including inter-company guarantees, must
be approved by the board and shareholders, as the case may be,
and notice must be given to shareholders. ‘Companies won’t be
able to get a sizeable corporate loan without complying with these
provisions in the Act.’
One of the challenges for companies will be getting a special
resolution passed each time financial assistance is provided. This
means calling a shareholders’ meeting, which can be a timeconsuming process. Even when obtaining general approval for
a loan, the terms need to be wide enough to meet the changing
financing requirements of the company for up to two years. This
can be difficult to predict.
In addition, the board must notify shareholders and trade unions
within 10 business days of the passing of a resolution to grant any
type of financial assistance if the value of the financial assistance
exceeds 0.1% of a company’s net worth.
‘The intention of the Act is to improve transparency so that
shareholders and unions are better informed of how the company
is using its money,’ says Roothman. ‘It’s unlikely that shareholders
and trade unions would become too involved in a company’s
complex financing arrangements, but depending on when they are
told, they may be able to vote on whether a particular transaction
should take place or not.’
He warns that companies that regularly transfer money between
inter-company accounts should also pay particular attention to the
new rules.
‘The legal implications of not complying with the new provisions under the Act are indeed severe,’ says Roothman. ‘It pays to
understand which transactions are included under the new Act,
and what steps must be followed in each case.’ ■
Edition 1
SA BANKER
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