Updates: Details

Section 228 of the Companies Act used to provide that the Directors of a company could not, without the authority of the general meeting, enter into a binding agreement to dispose of: • the whole or substantially the whole of the undertaking of the company; or • the whole or the greater part of the assets of the company. The amendment to Section 228 came into effect on 14 December 2007. Section 228 now provides that the Directors now require a special resolution to dispose of: • the whole or the greater part of the undertaking of the company; or • the whole or the greater part of the assets of the company. If the directors purported to do so prior to the amendment, the agreement could at a general meeting be ratified. Now the agreement has to be ratified by a special resolution of the shareholders. If the shareholders do not ratify the agreement then it would be invalid and unenforceable. In order for a special resolution to be effective it requires • 75% of the shareholders to vote in favour of the resolution at a meeting for which • not less than 28 days notice has been given, and • within a month after the passing of the resolution, the resolution is lodged with the Registrar of Companies for registration. Only after that resolution has been registered by the Registrar is it effective. The purpose of Section 228 is to protect the shareholders. The court has always held the view that effect must be given to that intention. Accordingly, the court has not afforded any protection in the past to an innocent third party who enters into an agreement where the company has not properly carried out its internal formalities or acts of management in respect of section 228. Section 228 has always provided that the resolution approving the disposal shall have no effect unless it authorises or ratifies the specific transaction. So the resolution has to refer to the particular sale. A possible sale to an unknown third party, at an unknown price on unknown terms could never be a specific transaction. It is therefore not possible to obtain the resolution prior to the conclusion of the sale of the agreement (You could in theory, get an offer which is left open for say acceptance within 45-60 days and get the special resolution passed and registered before the Seller accepts the offer- but this is unlikely and impractical). As such, any resolution pursuant to the sale of the property, where the property is the whole or greater part of the undertaking, or the whole or greater part of the assets of the company will be after the signature of the sale agreement and will be for that particular sale to be approved (ratified) by the shareholders at a meeting. In the circumstances, and in order to make it clear, to the company selling a property what its obligations are, and to the Purchaser that the agreement is not conclusive if section 228 is of application, it would be advisable to include in your sale agreements a clause to the following effect: "1A. If the Seller is a company, the duly authorised signatory hereto hereby warrants that the disposal of the property in terms of this agreement does not constitute a disposal of:- 1.1 the whole or substantially the whole of the undertaking of the company, or 1.2 the whole or the greater part of the assets of the company. 1B If the Seller is a company and the sale of the property constitutes the disposal of either: 1.1 the whole or substantially the whole of the undertaking of the company, or 1.2 the whole or the greater part of the assets of the company, then this agreement is subject to it being ratified in terms of Section 228(2) of the Companies Act and the registration in terms of Section 200(1) of the Special Resolution approving the sale, prior to registration of transfer of the property." (Delete whichever is not applicable) Or, a shorter, but less informative version: "1A. If the Seller is a company, the duly authorised signatory hereto hereby warrants that Section 228 of the Companies Act does not apply to the sale of the property. 1B If the Seller is a company, and Section 228 of the Companies Act is of application to the sale of the property by the Seller, then this agreement is subject to it being ratified by the shareholders and the registration of the Special Resolution approving the sale, prior to registration of transfer of the property." (Delete whichever is not applicable)

Written by: Maria Davey