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South Africa: The new subsection 45 (2A) of the Companies Act – Striking the right balance

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 Amendment framework. Alternatively, shareholders may opt to revert to the pre-Section 45 Amendment stance by designating financial assistance as a reserved matter through an amendment to the memorandum of incorporation.

To avoid doubt, Section 45 Amendment does not apply to the provision of financial assistance granted by:

  1. One subsidiary to another subsidiary within the same group of companies
  2. A subsidiary to its holding company

The reasoning is simple, the provision of loans between sister subsidiaries and subsidiaries to their holding companies is not considered “ordinary course of business” in contrast to the Section 45 Amendment applicable to holding companies giving financial assistance to their subsidiaries, which is intended to create flexibility and ease in the normal and ordinary course of doing business.

The Section 45 Amendment represents a significant shift in the regulatory landscape for the relationship between holding companies and their subsidiaries. Whilst we understand that the amendments aim to reduce the compliance burden and provide greater flexibility in financial assistance arrangements, it remains unclear whether this will be the case. Some companies and shareholders may elect to enjoy the flexibility afforded by the Section 45 Amendment and have reasonable confidence in doing business through their board. Others may:

  1. Elect to revert to the position pre-Section 45 Amendment by amending the company’s memorandum of incorporation to incorporate restrictions relating to the provision of financial assistance to ensure that shareholders are provided with the same rights, privileges, and approvals
  2. Voluntarily elect to still comply with all or some of the previous requirements in place before the Section 45 Amendment. 

Accordingly, it would seem that the answers to the questions above will need to be assessed by each company on a case-by-case basis. It will then be at the discretion of each company to ensure that the necessary measures are in place to strike the right balance between efficiency and the protection of stakeholders whilst doing business in South Africa within the new framework of Section 45.

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Kamogelo Mashigo, Associate Designate, contributed to this legal update.

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Lydia Shadrach-Razzino is a partner in Baker McKenzie's Corporate M&A Practice Group in Johannesburg. Lydia is continuously recognised for her legal proficiency and was most recently included in the Legal 500 Private Practice Powerlist 2024: M&A | Africa - a meticulously researched guide that showcases Africa’s very best. She was a shortlisted finalist for Dealmaker of the Year in 2020 and again in 2021 and received the award in 2021, making her the first woman in the history of the award to have won. In 2022, Lydia was also awarded the Client Choice M&A Lawyer of the Year Award. In 2014, she was awarded the ABSIP Corporate Finance Lawyer of the Year award. She is also recognised by Chambers (for M&A and Private Equity), Legal 500 and Best Lawyers, and is featured in Who's Who Legal. Lydia has advised on several award-winning transactions including Vodacom on its acquisition of an interest in Vodafone Egypt, which was awarded Deal of the Year at the DealMakers Gala Awards in 2021. She advised Ascendis on its disposal of its Animal Health business to Acorn Private Equity, which was awarded Catalyst Private Equity Deal of the Year at the DealMakers Gala Awards in 2021.

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Carine Pick is a director designate in Baker McKenzie's Corporate M&A Practice Group in Johannesburg.
Carine advises private and listed companies (local and international) across a diverse range of industries including retail, pharmaceutical, and telecommunications. She has a particular focus on bidder processes, acquisitions and divestments, joint ventures, restructuring, fund formation, the formation and structure of corporate entities, strategic mergers and empowerment transactions.
Carine's experience includes drafting and negotiating complex and bespoke commercial transaction agreements including ancillary documents (such as MOIs, shareholders’ agreements, transitional services agreements, term sheets, binding offers, repurchase agreements, subscription agreements, asset for share agreements, conducting and coordinating due diligence investigations together with the preparation of due diligence reports, and assisting with the implementation and execution of deals across various jurisdictions.
She also advises on aspects of the South African Companies Act, 2008 and corporate governance.

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Sihle Sibanyoni is an associate in Baker McKenzie's Corporate M&A Practice Group in Johannesburg.
She has experience advising clients on general corporate and commercial law, corporate governance, due diligence investigations, corporate reorganizations, and mergers and acquisitions across multiple industry sectors.
As an energy and infrastructure practitioner, Sihle advised and assisted on high-profile solar, wind, biomass, floating power and hydropower projects. She provides corporate advisory and other commercial legal services to local and international project sponsors, developers, contractors and lenders in complex greenfield and brownfield developments, advising on citing, permitting and regulatory concerns.
In the infrastructure sector, she has experience in social infrastructure transactions. Sihle has assisted on matters concerning PPP and concession agreements, project strategy and structuring EPC contracts, including standard and bespoke forms of contracts, operation and maintenance contracts, fuel purchase and sale agreements and related matters.

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