Sanchia Temkin

Professional Services Editor

SA’s close corporation structure is set to survive, following pressure from business organisations and others who feared that scrapping the structure could have harmful unintended consequences.

Sources close to the process said the long-awaited review of SA’s company laws has progressed rapidly, and that a revised internal policy document is expected to be handed to government this week.

Its recommendations include retaining the close corporation — which allows for relatively cheap and easy company registration — on the grounds that removing it would burden small businesses with onerous disclosure and reporting requirements.

The document also contains more clarity on proposed changes to the way small and medium-sized enterprises are audited, and suggests that the law governing companies’ ability to give financial assistance be relaxed to facilitate black empowerment deals.

Last year the trade and industry department embarked on a comprehensive review of SA’s company laws, envisaging a single, uniform corporate entity for both big and small businesses.

This would have spelled the end for the close corporation, a structure credited with boosting the number of small businesses and thereby creating employment. There are currently about 1,1-million registered tax-paying businesses in SA and more than 1000 primary companies, excluding their subsidiaries.

A corporate law review round table meeting was held in Johannesburg last week, at which major role players including the JSE Securities Exchange SA, academics, lawyers, accountants and members of government put forward proposals. These included distinguishing further between private and public companies, codifying directors’ duties and making provision for business rescues.

Bill Lacey, a consultant to the South African Chamber of Business, said at the weekend that the recommendation on close corporations was a "pragmatic and sensible step to endorse the value of this type of structure".

Company law in other countries provided for similar company structures aimed at easing and simplifying small business.

Kevin Cron, a senior director at commercial law firm Deneys Reitz, said close corporations were not able to access either capital or debt finance to the same extent companies could, and it made sense to keep the distinction between the two. "It would be a desirable move to retain the present structure as it has proved to be a popular structure for small businesses," Cron said.

But Emil Brincker, a director at corporate law advisers, Edward Nathan, said while he welcomed the decision the Close Corporation Act needed to be simplified.

He said companies could expect section 38 of the Companies Act, which prohibits the giving of financial assistance, to be relaxed. "This may enable businesses to enter into empowerment deals on a more flexible basis," he said.

There are also proposals to do away with the current requirement of filing memorandums and articles of association. Instead, a single document known as a "constitution" will be required.

Companies can also expect an end to the requirement to file pre-incorporated contracts.

Consideration was also set to be given to business rescue exercises in the event of insolvency.