Financial assistance for share acquisitions: legal considerations in financing the financial assistance loans through dividends
Date
2023
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
University of the Witwatersrand, Johannesburg
Abstract
In order for a company to successfully exist and carry out its functions, it requires money (capital investment) from investors. A company gets the money that it needs to carry on a business, either from shareholders or lenders of money or, usually, from a combination of the shareholders and money lenders. Accordingly, a company's capital/finances need to be protected from misuse, while allowing the board of directors to make strategic decisions on behalf of the company. The Companies Act 61 of 1973 (the “1973 Act”) demonstrated many deficiencies that were not able to meet all the requirements of modern corporate practices. For example, companies were prohibited from providing financial assistance to acquire their shares. Furthermore, companies were not allowed to declare and pay dividends unless they could demonstrate the availability of distributable profits, which exist only if the company’s assets exceed all of the company's liabilities and its entire issued capital. The failure to meet modern corporate practices was also highlighted by the team of American lawyers who were members of the Section of Business Law of the American Bar Association (hereafter referred to as "the Review Committee”) which provided that modern corporate practice is not to limit to the power of a company to do various things such as financial assistance.1 The new Companies Act 71 of 2008 (hereafter referred to as “the 2008 Companies Act”) changed most of the rules relating to company law in South Africa. Notably, under the 2008 Companies Act, companies are allowed to provide financial assistance and the Companies Act abolished the doctrine of capital maintenance. This report analyses the requirements of financial assistance in terms of section 44. The analysis is done using the latest unreported case as a foundation to highlight the key aspects of financial assistance. Furthermore, most BEE transactions implemented in South Africa are done through financial assistance (using conventional loans), with the BEE shareholder to whom the loan is granted typically utilizing dividends declared and paid by the company to repay the financial assistance. While this research admits that financial assistance is separate from fair consideration, it will also attempt to illustratethat for certain BEE transactions “fair consideration” and the solvency and liquidity test are critical. This paper also considers the connection, if any, between financial assistance and section 1 Committee on Corporate Laws of the American Bar Association’s Section of Business Law, Report on SouthAfrican Companies Act No. 61 Of 1973 and Related Legislation (2001). 46 of the Companies Act (the declaration of dividends by a company) and the implication of using dividends to repay a loan granted by a company in terms of section 44 of the Companies Act.
Description
A research report Submitted in partial fulfillment of the requirements for the degree of Master of Laws by Coursework and Research Report, School of Law, University of the Witwatersrand, Johannesburg, 2023
Keywords
Financial Assistance, Share Acquisition, Dividends, UCTD
Citation
Motha, Siyabonga Njabuliso. (2023). Financial assistance for share acquisitions: legal considerations in financing the financial assistance loans through dividends [Master’s dissertation, University of the Witwatersrand, Johannesburg]. WireDSpace.https://hdl.handle.net/10539/43520