Companies need to be aware of the implications that the abandonment of nominal (or par) value shares in the new Companies Act - due to come into force next year - will have for bank funding arrangements, says Deneys Reitz director Kevin Cron.
Though the Companies Act of 1973 provided for the share capital of a company to be divided into shares having a par value or no par value, the new act provides that a share may not have a par value. "The concept of par value used to reflect the underlying value of the share, but this is no longer the case and the concept is now artificial."
There is no difficulty with the abolition of the par value concept, says Cron, but it is uncertain how the provisions in the new act will be applied.
Though banks' own shares will not be required to become no par value until the minister brings the act into force for banks, preference shares owned by banks in other companies will be affected by the provisions. "There is much work to be done to convert the preference shares to comply with the provisions of the new act and many companies will be unsure how to do this. However, if this issue is not properly addressed, it will likely cause disruption in the financial sector."
The problem for companies, he says, will be firstly the expense entailed in making the required changes, and secondly, the transitional period between the current and the new system.
Many institutions, including the Law Society of the Northern Provinces, of which Cron is a member, have consulted with the department of trade & industry (DTI) regarding the act and the new regulations to be published, says Cron. It is hoped the DTI took account of their recommendations.
"One of the issues discussed is whether there can be an automatic conversion of par value to no par value or whether the DTI will allow for a period wherein companies can take steps to make the amendments. The Law Society has recommended that companies be given a two-year period to do this, as there are complex instruments involved with a huge variance of rights attached. A sweeping rule would, in many cases, not be appropriate."
There is also concern that because the new regulations have been somewhat delayed, they are now being rushed through to meet the DTI's target of June or July 2010 for the act to come into force. "This is a cornerstone piece of legislation which should not be rushed through. One scenario is that the uncertainty around implementation of the terms of the new act could cause disputes and uncertainty over rights. It is essential that companies act as soon as the new regulations are published, and within the time period allocated."
CEOs and chief financial officers of both issuers and investors need to be analysing the potential effect of the change on their own companies, he says, "looking at the rights attached to the classes of shares they have issued, and preparing the necessary resolutions and documents in good time so they can amend the rights attached to those shares to accord with the provisions of the new act while still retaining the commercial essence of the share structure".
Another source of potential difficulty is the tax implications of the new act, says Cron. "Though many new provisions in the Companies Act - including those on no par value shares - have tax implications, the Income Tax Act has not yet been amended to take account of the new structure regarding companies. Many of the current provisions in the Income Tax Act, for example, are based on the existence of par value shares."
