In accordance with the JSE Listings Requirements (Requirements), there are various shareholder decisions which may only be voted on at an “in person” general meeting of shareholders. Notably, a decision to issue shares for cash must be voted on at an actual meeting, and may not be voted on in writing. Owing to the lockdown in South Africa and the need for social distancing, physical shareholder meetings are off the table for the time being.
The Financial Sector Conduct Authority has issued FM Notice 3 of 2002 (FM Notice) in consultation with the JSE relaxing this rule until the end of this year in relation to the approval of specific and general authorities for the issue of shares for cash. (The FM Notice was issued under section 6(3)(m) of the Financial Markets Act 19 of 2012 read with section 281(4) of the Financial Sector Regulation Act 9 of 2017.)
The JSE has engaged with the market regarding the impact of the COVID-19 pandemic on the business and operations of issuers, and has been approached by a number of issuers, sponsors and advisers exploring possibilities on how capital can be raised more quickly and efficiently. The JSE previously issued a letter in April 2020 setting out the various methods available for raising capital. The prohibition on gatherings, the logistical difficulties caused by the lockdown with regard to the delivery of notices via the South African post office, and the economic fallout of the pandemic have made compliance with the current rules for physical shareholder meetings virtually impossible. The relaxation of the rules relating to issues of shares for cash is in the public interest in order to allow for listed companies to implement capital raises which are vital to keep these businesses afloat in times of financial hardship on an urgent basis.
Section 60 of the Companies Act 71 of 2008 (Companies Act) allows companies to propose a resolution which could have been voted on at a general meeting of shareholders to be voted on instead by means of a written resolution. However, the ability of listed companies to propose written resolutions is limited by paragraph 10.11(c) of Schedule 10 read with paragraph 10.11(h) of the Requirements which state that shareholder meetings must be convened in person. There are currently only four instances where Main Board issuers may propose written resolutions in terms of section 60 of the Companies Act: a change of name, odd lot offers, an increase in authorised share capital, and the approval of amendments to the company’s memorandum of incorporation (MOI).
An issue of new shares for cash results in the dilution of the rights and investments of existing shareholders. For this reason, a general or specific authority for the issue of shares for cash requires the approval of shareholders at an “in person” general meeting in accordance with paragraphs 5.50 to 5.52 of the Requirements. This authority must be approved by a 75% majority of the votes cast on the resolution. In accordance with the FM Notice, listed companies are now exempted from paragraph 10.11(c) and 10.11(h) of Schedule 10 to the Requirements: a general or specific authority for the issue of shares for cash may now be proposed by Main Board issuers by way of a written resolution in accordance with section 60 of the Companies Act, and shareholders may vote by means of submitting a written proxy notice. This exemption will remain in place until 31 December 2020.
The JSE cautions issuers that the exemption in the FM Notice is subject to the MOI of each issuer. In accordance with section 16 of the Companies Act read with the Requirements, MOI amendments require shareholder approval by means of special resolution. An amendment to the MOI is permitted to be undertaken by written resolution pursuant to paragraph 10.11(h)(4) of Schedule 10 to the Requirements. We recommend that issuers seeking to implement a capital raise by means of written resolution should seek the necessary legal advice to establish whether their MOIs require amendment to allow for the application of the FM Notice. This would usually be the case because in accordance with Schedule 10 to the Requirements, the issuer’s MOI must limit voting by means of written resolution (save for in the four instances mentioned above). In terms of the Companies Act, it would be possible to include the MOI amendment resolution in same notice as the written resolution to approve an issue of shares for cash, provided that the resolution to amend the MOI is passed by the requisite majority. The JSE reminds Main Board issuers that it is incumbent on listed companies to ensure that they comply, in all aspects, with the provisions of the Requirements and the Companies Act in respect of the mechanisms that such companies may employ to raise additional capital.