The reform of the law of uncertificated securities in South African company law

• Jurisdiction: South Africa
• Date: 15 August 2019
• Published date: 15 August 2019
• Citation: 2010 Acta Juridica 87
• Pages: 87-116
• Author: Maria Vermaas

The reform of the law of uncertif‌icated

securities in South African company law

MARIAVERMAAS*

The writer points out that the new Act no longer creates artif‌icial preferences

for a specif‌ic transfer and holding model of uncertif‌icated securities, such as the

subregister model of the old Act. It enables the Central Securities Depository

(CSD) rules to spell out the specif‌ic settlement model to be used. The newAct

therefore balances the competing interests of the users in a practical way.

However, the actual reform in the market place remains in the hands of the

players. The writer submits that this is the correct approach, since only

detailed and technical consultation can ensure that South Africa will have

up-to-date, competitive and reliable electronic systems. The market is pre-

sented with an important opportunity to carry out ground-breaking changes

in our commercial environment that can benef‌it shareholders and the

economy as a whole. The reform is facilitated in the Act and will, indeed, be

central to South Africa’seconomy and prosperity.

The Act has furthermore extended the protection of a good faith transferee

of uncertif‌icated securities to insolvency. This protection rule forms the

cornerstone of the integrity of the market and makes the electronic register

sacrosanct. This is ref‌lected in the wording that the change of ownership is

effective notwithstanding illegality, fraud or insolvency, provided that the

transferee acts without notice. For this reason, it is important that a provision

relating to f‌inality of settlement of transactions refers to insolvency in com-

pany law as a legal exception.

I INTRODUCTION

The fundamental transition to uncertif‌icated securities through the 1998

amendment to the Companies Act 61 of 1973

1

happened so smoothly that

many readers of the Act may have missed the huge impact it made.

Concepts such as ‘dematerialisation’ – where share certif‌icates are

replaced with uncertif‌icated securities – are no longer new and facilitate

electronic settlement.

2

The value of the uncertif‌icated securities as a

* BLC LLB (Pret) LLM LLD (UNISA); Attorney and Conveyancer of the High Court of

SouthAfrica; Head of Legal, Strate Ltd.

1

Hereinafter ‘the old Act’. The Companies SecondAmendment Act 60 of 1998 inserted a

new s 91A into the oldAct to make provision for uncertif‌icated securities and provided for

matters connected therewith. The formalities of transfer (which is different from the agreement

to transfer) were previously regulated by ss 133ff and the company’sArticles of Association. The

1998 amendment of the old Act also specif‌ically addressed matters with regard to membership

and the register of members, ss 103–5, 109–10 and 113–14.

2

See in general on the ‘paper crunch’of the twentieth century RB Smith ‘A Piece of Paper’

(1970) 25 Business Law 925. Settlement is the completion of a transaction. See on the meaning

of trading, clearing and settlement, JG van der Merwe South African Corporate Business

87

2010 Acta Juridica 87

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percentage of the market capital is currently around 95 per cent. This

demonstrates the overwhelming support for and trust in the security

offered by electronic holding and transfer. The further reform process

proposed in the Companies Act 71 of 2008

3

recognises the requirements

of the fast-changing f‌inancial markets.

Research to review and modernise company law and global best

practices indicate alternative holding patterns and transfer models

4

of

uncertif‌icated securities.

5

The need to bring South African law in line

with international trends that would streamline the transfer process of

uncertif‌icated securities even further, make the market more eff‌icient and

disclose benef‌icial ownership to its fullest, materialised in the framework

provided in the new Act.To enable the f‌inancial market to implement an

alternative model, certain legislative changes were required to s 91A of

the old Act. The purpose of this article is to investigate, as a f‌irst major

reform, the new legal provisions in the new Act that have introduced

more f‌lexibility as regards the choice of a specif‌ic holding and transfer

model.

6

The second essential reform with regards to uncertif‌icated securities in

the new Act strengthens f‌inal irrevocable settlement of transactions.

7

The

holding and transfer system itself must guarantee good title in securities.

The practical diff‌iculties in restoring ownership to the dispossessed owner

are enormous. For these reasons, s 91A of the old Act introduced

protection to the good faith transferee.

8

However, the old Act does not

provide a protection mechanism to the transferee in the event of insol-

vency of a participant

9

or other intermediary

10

in the holding and transfer

Administration by MK Havenga, IM Esser, WD Geach, N Locke, MR Vermaas, DP Mahony

(1995), hereafter ‘SACBA’para 18.5.1.

3

Hereinafter ‘the newAct’.

4

Also referred to as ‘settlement systems’in f‌inancial markets.

5

UNIDROIT is the International Institute for the Unif‌ication of Private Law founded in

1926 as an intergovernmental organisation. It currently comprises 61 member States, including

South Africa. Except where otherwise stated, all references to the UNIDROIT Convention

refer to the Draft Convention on Substantive Rules Regarding Intermediated Securities as adopted by

the Committee of Governmental Experts at its f‌ifth session held in September 2008,

UNIDROIT 2008 Conf.11 – Doc. 48 Rev (Oct 2008), hereafter ‘UNIDROITConvention’,

available at http://www.unidroit.org. See also ‘Explanatory notes to the preliminary draft

Convention on harmonised substantive rules regarding securities held with an intermediary’

(UNIDROIT Study LXVIII – Doc 19 (2004)) published in the (2005) 10 Uniform Law Review

(2005) 36, hereafter ‘Explanatory notes UNIDROIT’; P Paech ‘Harmonising substantive rules

for the use of securities held with intermediaries as collateral: the UNIDROIT project’(2002) 7

Uniform Law Review 1140; P Paech and K Lober ‘Interconnecting Law of Securities Holding

and Transfer – A Chance for Seamless International Improvements’ (2007) 22 Butterworths

Journal of International Banking and Financial Law 9.

6

Para III below.

7

Para IV below.

8

Section 91A(4)(c) of the oldAct.

9

The term ‘participant’refers to the participant in the CSD and is def‌ined in the new Act in

s 1 with reference to s 1 of the Securities Services Act 36 of 2004, hereinafter ‘SSA’.

88 MODERN COMPANY LAW FOR A COMPETITIVE SOUTH AFRICAN ECONOMY

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