SECTION 21 COMPANIES VS NONPROFIT COMPANIES AYANDA NGUBO

SECTION 21 COMPANIES VS NON-PROFIT COMPANIES AYANDA NGUBO SEPTEMBER 2014 © Webber Wentzel 2013 5982337

INTRODUCTION • New Companies Act: Came into effect in May 2010; • Grace period to comply with New Act – May 2010 – May 2012 2

TERMINOLOGY • SECTION 21 COMPANY • NON – PROFIT COMPANY; • MEMORANDUM AND ARTICLES OF ASSOCIATION • MEMORANUM OF INCORPORATION; • CIPRO • CIPC • RULES • CONSTITUTION 3

TRADITIONAL GOVERNANCE STRUCTURE Members Section 21 company Directors The members of a section 21 company and NPC may be compared to the shareholders of a company having a share capital. A member who is a natural person is not precluded from also fulfilling the role of director. 4

NEW GOVERNANCE STRUCTURE 5

MEMBERS o The MOI of an NPC under the New Companies Act may allow for membership to be held by juristic persons, including profit companies. However, note that the New Companies Act provides for no more than two classes of members, that is voting and non-voting members, respectively. The MOI must set out the following: • the qualifications for membership; • the process for applying for membership; • initial or periodic cost of membership in any class; and • the grounds on which membership may, or will, be suspended or lost 6

MEMBERS CONT… • Register o A section 21 company under the Companies Act and an NPC under the New Companies Act must keep a register of members at its registered office, in the prescribed form. • General meetings o Under the New Companies Act, only public companies are required to hold AGMs, however, an NPC may provide for the holding of AGMs in its MOI if it wishes to do so. 7

DISADVANTAGES OF HAVING MEMBERS • Loss of Interest; • Challenges with quorum; • Lack of Efficiency; • Lack of accountability and transparency 8

DIRECTORS • General o A section 21 company (in terms of the Companies Act) must have at least 2 directors. o An NPC in terms of the New Companies Act must have at least 3 directors in addition to the minimum number of audit committee or social and ethics committee members. 9

DIRECTORS CONT… o If an NPC has no members, the MOI must set out the basis on which the directors are appointed by the board or any other person. o A director of a section 21 company may be removed by ordinary resolution, before the expiration of his period of office. However, the provisions of section 220 must be complied with. o In terms of the New Companies Act, there is provision made for the removal of a director by the shareholders/Members responsible for appointing such director. There is also provision made for the removal of a director by the board itself (in circumstances where there are no members but subject to certain conditions), which decision can be reviewed by the affected director in court. 10

DIRECTORS CONT… • Disqualification o Certain persons are disqualified from being appointed as directors: • a body corporate or other juristic person; • a minor; • a person of unsound mind; • an unrehabilitated insolvent; • any person who has ever been convicted of an offence involving dishonesty; and • any person who has, due to any act involving dishonesty, been removed from office for not being a fit and proper person to serve as a director in the management or in any position of trust of the body in question. 11

DIRECTORS CONT… • Powers and duties o In the New Companies Act, the level of care and skill required of directors has been increased. A director is required to act with the care, skill and diligence that would reasonably be expected of someone fulfilling the same functions performed by that director in the same company. Should the director possess any additional knowledge, skill or experience then the level of care and skill required is increased even further. o In terms of the New Companies Act, the board has all powers and authorities to run the company save to the extent the Act or the MOI provides otherwise. Thus any limitation on the directors’ exercise of such powers and functions of the company must be included in the MOI as a specific limitation (unless it covers an unalterable authority) or a limitation on an alterable statutory power or authority. 12

CONCLUSION o The purpose of the New Companies Act is, amongst others, to "provide for the formation, operation and accountability of NPCs in a manner designed to promote, support and enhance the capacity of such companies to perform their function". o One of the distinctive features of the New Companies Act is that it provides for greater clarity on the structuring of an NPC. The fact that the Companies Act treated section 21 companies as public companies meant that they were obliged to follow the organisational framework designed for public companies. This means that the manner in which they were to be structured was subject to quite heavy regulation, which may be inappropriate to the nature of the non-profit sector. o As demonstrated above, the main areas that have been given clarity by the New Companies Act is that of membership of NPCs and the structure of their board of directors. 13

• Ayanda Ngubo 0115305461 0834418501 ayanda. ngubo@webberwentzel. com 14

THANK YOU www. webberwentzel. com JOHANNESBURG CAPE TOWN 10, 16 & 18 Fricker Road, 15 th Floor, Convention Tower Illovo Boulevard, Heerengracht, Foreshore Johannesburg, 2196, South Africa Cape Town, 8001, South Africa T +27 11 530 5000 T +27 21 431 7000 Legal Notice: these materials are for training purposes only and do not constitute legal or other professional advice