Keep it simple and set it free: The new ethos of corporate formation

• Jurisdiction: South Africa
• Date: 15 August 2019
• Published date: 15 August 2019
• Pages: 3-42
• Author: Philip Knight

Keep it simple and set it free: The new

ethos of corporate formation

PHILIP KNIGHT*

The 2004 blueprint for corporate law reform promised South Africans a

liberalised regime, in which simplicity and f‌lexibility of corporate formation

would be maximised, formality and administrative burdens would be mini-

mised, and the categorisation and regulation of companies would be rationa-

lised. The Companies Act 71 of 2008 advanced that promise, creating a

framework regime for the simple, yet f‌lexible formation, and the scalable

development, of companies.

But the Act reveals one of the many underlying tensions inherent in the

goals of the reform project. In attempting to maximise f‌lexibility, many of the

procedures and mechanisms established by the Act for the formation of

companies may have compromised the goal of elegance and simplicity.And, as

with any new system, there is a risk that novelty itself may give rise to

misunderstandings, making things appear more complex than they are. The

space created by the Act has yet to be occupied in practice, and will not be fully

understood until it is occupied and used.

Among its explicit purposes, the Act cites both f‌lexibility and simplicity of

corporate formation, and it requires that it be applied in a manner that gives

effect to those and other purposes. The regulations and forms, which have yet

to be promulgated, will be a major instrument by which the Act is applied,

particularly with respect to the formal procedures governing corporate forma-

tion. They will need to be crafted with great care, striking just the right

balance between the competing goals of simplicity and f‌lexibility, if the full

promise of the reform goals and the potential of the Act are to be achieved.

I INTRODUCTION

In May 2004 the Department of Trade and Industry published a blueprint

for reform of South African company law.

1

That document set out a

number of the principles that would ultimately guide the reform of the

law relating to the formation, incorporation, powers, status and naming of

companies, as effected in the Companies Act 71 of 2008 (the newAct).

* Philip Knight served the Department of Trade and Industry from 2003 to 2008 as a

consultant assigned as legislative counsel to the Corporate Law Reform Project, and was the

principal drafter of the CompaniesAct, 2008. He is a lawyer in Vancouver, Canada, where for 7

years he taught as an Adjunct Professor at the University of British Columbia, lecturing on

aspects of legal drafting. Since 2003, he has been a regular annual contributor to professional

development programmes offered by the Faculty of Law at University of Cape Town.

1

The Department of Trade and Industry,South Africa: South African Company Law Reform

for the 21st Century: Guidelines for Corporate Law Reform (May 2004) (referred to in the remainder

of this chapter as the ‘Guidelines for Reform’).

3

2010 Acta Juridica 3

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As a matter of policy, the Guidelines for Reform called for changes that

would have the effect of –

Encouraging entrepreneurship and enterprise diversity by simplifying the

formation of companies and reducing costs associated with the formalities of

forming a company and maintaining its existence, thereby contributing to the

creation of employment opportunities . . .

2

To realise that policy, the Guidelines for Reform proposed several

principles, suggesting that the new company law should –

. . . be simple, comprehensive and accessible to business people and their

advisers. Simplicity should be a guiding principle . . . most importantly [in] the

processes embodied in it, including . . . the requirements for the lodgement of

documents. . . . [I]t should be possible for small businesses and their advisers to

understand the administrative requirements, without having to resort to

expert advice;

3

. . . not burden companies with unnecessary rules [but] be . . . facilitative,

enabling and f‌lexible. . . . [I]ts primary aim should be to make it possible for

companies to structure themselves and carry on their business in the way they

consider most appropriate for the conduct of their business and the administra-

tion of their affairs;

4

. . . contain a minimum of mandatory rules . . . limited to those aspects of

corporate structure . . . which must be complied with by all companies so as to

ensure transparency, disclosure, the protection of legitimate interests and

prevention of fraud and improper and oppressive conduct . . . Apart from

these mandatory rules, the Act should provide the maximum possible f‌lexibil-

ity;

5

. . . encourage the formation of companies of different sizes in the formal

economy....Itisnecessaryto move away from the largely artif‌icial separation

between the different business forms, to recognize only one formal business

vehicle and to provide for a simple, easy company formation process;

6

Generally, abolish the requirement for companies to have specif‌ic named

purposes. Instead, ‘It is proposed that the company should have a broad

purpose, which would be to do business, or to be not-for-prof‌it....share-

holders may wish to limit the purpose of the company, and should be in a

position to impose such limitations;

7

and

Provide that ‘ . . . genuine third parties . . . acting in good faith should be

entitled to assume a company’s capacity and not be bound to inquire into the

company’s capacity.

8

2

Guidelines for Reform at 10.

3

Guidelines for Reform at 28.

4

Ibid 29.

5

Ibid.

6

Ibid 32.

7

Guidelines for Reform at 33.

8

Ibid.

4MODERN COMPANY LAW FOR A COMPETITIVE SOUTH AFRICAN ECONOMY

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All of the changes proposed in the passages recited above have been

realised in the new Act, resulting in a new regulatory environment for

corporate formation. The new environment seeks more to protect the

vulnerable than control the powerful, regulates from reason rather than

imposing arbitrary preferences, provides a f‌irm foundation for certainty

even as it maximises f‌lexibility and frees initiative, and allows suff‌icient

scope for a company’s structure and governing instruments to evolve as

the company itself develops and adapts to the emerging circumstances in

which it f‌inds itself. The central goal of simplicity has been realised, both

in the new Act itself, as well as in the regulatory environment established

by it, precisely because the architects of reform brought a minimalist,

focused ethos to the regulatory task. The result is a document that sets out

the framework for future corporate formation, while simultaneously

serving as an example of the way that the ethos of reason, f‌lexibility and

scalability, when brought together, can ensure simplicity and certainty

both for companies and for company law.

This paper provides a comparative scan of the provisions of the

Companies Act 69 of 1973 (the previousAct), and the new Act relating to

corporate formation and incorporation. Because the new Act has not yet

been implemented, any such comparison has to be approached carefully:

only the words and formulations of the new Act are available for analysis,

while the provisions of the previous Act can be considered in light of the

experience of the past 35 years. The new Act must be read literally, but an

equally literal reading of the previous Act would overlook the important

role that judicial pronouncements and commercial and administrative

practices have played in interpreting and giving meaning to its express

provisions. I am indebted to Prof Philip Sutherland, who reviewed an

early draft of this paper and drew to my attention a number of instances in

which my perhaps too literal reading of the previous Act might have led

me to a false comparison.

In some instances, comparable provisions of the two Acts appear, on a

literal reading of their words, to be far apart, when in fact the non-literal

meaning that has been accorded to the old Act is little or no different from

the literal meaning of the new. Some critics of the new Act may be

inclined to point to such instances and argue that nothing has changed but

the formulations, and changes in formulations breed dangerous uncer-

tainty. That view is contestable: to the extent that a provision of the new

Act, on a literal reading, has captured the old law as its words have had to

be interpreted, the new Act is an improvement. Adopting new formula-

tions that obviate the need for, and inherent uncertainty of, the long,

expensive process of evolving meaning through litigation and judicial

interpretation enhances both certainty and simplicity for all users of a law.

5

KEEP IT SIMPLE AND SET IT FREE

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