Companies Amendment Bill: Beware of the new section 38A
This article serves as the second of five instalments dedicated to addressing the five most significant amendments proposed by the Companies Amendment Bill, 2018 (the “Bill”) and the writer’s comments thereon.
One of the proposed amendments is the insertion of section 38A to the Companies Act, 2008 (the “Companies Act”). Section 38A will give the Court the power to, if it is just and equitable to do so, validate the creation, allotment or issue of a company’s shares which are otherwise invalid, upon application by a company or an interested party. Section 38(2) of the Companies Act states that any issue of shares which is not authorised or exceeds the authorised share capital of any particular class is a nullity unless retrospectively authorised by the company’s shareholders within 60 business days. It is interesting to note that a similar provision to that of section 38A was contained in the old Companies Act, 1973 but omitted in the Companies Act.
Upon consideration of the wording used in section 38A, the most notable is the use of the words ‘just and equitable’. What will constitute ‘just and equitable’ will clearly depend on the facts of each matter but it will be interesting to see how this wording will be interpreted in application if the amendment is adopted.
While the provision is laudable, there are some technical points which raise caution over the application over section 38A. What is the status of the purported shareholder during the time period in which application is made to a Court to invoke section 38A? No provision is made in section 38A for the period between the application to Court and any resultant court order thereafter. During this time, does the purported shareholder have a right to be present and vote on shareholder resolutions? This issue does not pose a problem in respect to section 38(2) as there is a limited duration for a retrospective resolution (60 business days) but as any practitioner knows, the period may be longer with a Court application.
It would be suggested that as section 38A currently stands, provision should be made in a company’s memorandum of incorporation for a governance regime to operate in circumstances in which section 38A is invoked and another shareholder is admitted. The rationale is to bind the incoming shareholder to the company’s governing provisions as opposed to a shareholders agreement which will not bind such a shareholder (due to the fact that the shareholder is not contractually bound by not being a party to the shareholders agreement).