Private companies may be deemed to be public
AS THE two-year “grace period” is coming to an end this month, the new Companies Act No 71 of 2008 will be in full force and its effects are far-reaching. While the focus has been on the duties of directors, private companies who have over the years issued debt instruments, listed or unlisted, are fast approaching their cut-off line to now register as a public company and meet the requirements of a public company.
The main distinguishing factor between a public and private company is that a public company is far more regulated and subject to greater public scrutiny. Private companies are more restricted in issuing debt instruments and transferring shares to the public.
In terms of the previous Companies Act No 61 of 1973, several large private companies were able to issue securities which were traded, and even listed on the stock exchange, due to the narrow definition of “shares”. However, the new broader definition of “securities” in the new Companies Act means that in terms of the definition of a private company in section 8 (2) (b) of the new Companies Act, any private company that has issued notes, bonds, debentures, instruments based on an index and other debt instruments (which are more fully set out in the definition of “securities” in the Securities Services Act No 36 of 2004) will now be deemed to be a public company, and the directors must make the necessary change with the Companies and Intellectual Property Commission (CIPC) and ensure corporate governance as a public company.
As set out in the advisory opinion provided by CIPC on April 2 2012, they may do this in one of two ways: either by filing a new Memorandum of Incorporation, or by amending their current Memorandum of Incorporation by removing articles relating to private companies and inserting those relating to public companies.
The cost implications of this wider definition are extensive and the consequences all-embracing. As stated above, a new appropriate memorandum will be required; an auditor will have to be appointed each year at the
The cost implications of this wider definition are extensive and the consequences all-embracing
public company’s annual general meeting in accordance with section 90 of the new Companies Act; the company must appoint a person knowledgeable or experienced in relevant laws as a company secretary, as set out in section 86 of the new Companies Act; the now public company is required to hold annual general meetings with its shareholders; and the board composition will have to be reviewed in line with the requirements of a public company.
A private company that may suddenly be deemed to be a public company may find the costs and procedures of being a public company quite onerous and would be advised to seek the advice of their attorneys on the necessary steps to be taken for complying with the new legislation.