This blog was co-authored with Thokola Zungu, Trainee Associate.

On 26 July 2024, the Companies Amendment Act and the Companies Second Amendment Act, which amend the Companies Act, 2008 were signed by the President and will come into operation on a date to be fixed by the President by proclamation.

The amendments to the financial assistance requirements of the Companies Act include a new subsection 45(2A): “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”. The amendment will result in less onerous compliance requirements for holding companies providing financial assistance to subsidiaries.

The provisions of section 45 requiring a special shareholder resolution and requisite board resolution, will no longer apply to a holding company giving financial assistance to, or for the benefit of, its subsidiaries. The financial assistance resolutions required for the granting of financial assistance by a subsidiary to its holding company or other subsidiaries of its holding company, remain unchanged.

In terms of the Companies Act, a holding company “in relation to a subsidiary, means a person that controls that subsidiary as a result of any of the circumstances contemplated in section 2(2)(a) or 3 (1)(a)”. The definitions of subsidiary and holding company are premised on the control that the holding company exercises over the subsidiary. A subsidiary can by definition only be a company incorporated in South Africa. Foreign companies which are controlled by South African companies are not “subsidiaries” for purposes of the Companies Act.

However, that does not mean that financial assistance to such foreign companies is not regulated by section 45. In Trevo Capital Ltd v Steinhoff International Holdings (Pty) Ltd the Cape Town High Court confirmed that the Companies Act contemplates that foreign companies that are controlled by South African companies fall within the ambit of the concept of a “related or inter-related corporation” as set out in section 45(2). Financial assistance can only be given to such a foreign company by a South African company, if the South African company complies with section 45 of the Companies Act. Consequently, the new section 45(2A) does not affect the applicability of the provisions to foreign companies that are controlled by South African companies.

The rationale behind section 45 is the protection of shareholders and creditors. When a company provides financial assistance to a subsidiary, the need for the protection of shareholders does not arise. Accordingly, from the perspective of shareholders, the provision in the current Companies Act created a compliance burden, the removal of which results in less onerous compliance requirements. From the perspective of creditors, the amendment dispenses with the protection they currently enjoy.

Companies should consider whether it is in their interests to amend their constitutional documents to either make the provision of financial assistance to subsidiaries a matter which requires the approval of shareholders or remove such matter where it has been previously included.  Holding companies should continue to consider the implications of providing financial assistance to their local and foreign subsidiaries.

A company’s memorandum of incorporation may contain restrictions and/or requirements relating to the provision of financial assistance by the company in question. These restrictions and/or requirements must be adhered to.