Working for the greater good
From 1 May 2011 all non-profit companies (NPCs) are required to precede their names with the letters “NPC”. This rule also applies to those companies formed in terms of Section 21 of the old Companies Act of 1973.
NPCs are considered to be incorporated for public benefit, a cultural or social activity, or a communal or group interest. An NPC is required to apply all of its assets and income, however derived, to advance the stated objectives set out in its Memorandum of Incorporation (MOI). An NPC may acquire and hold securities issued by a profit company; directly or indirectly, alone or with any other person, carry on any business, trade or undertaking consistent with or ancillary to its stated objectives.
Strict governance of NPCs is called for to ensure that members and directors do not benefit from NPC income or surpluses, and that they remain focused on achieving stated objectives. A member or director of an NPC may only be paid or receive transfer of any of the NPCs assets under specific circumstances, which includes remuneration in respect of goods or services rendered, actual expenses incurred in the advancement of the NPC, or a legal obligation.
When any of these circumstances actually occur, the processes and policies leading up to these should be clearly documented. For example, the conditions under which a director or member delivers services to the NPC, and the manner in which payments are affected, should be clearly stated and prior approval of the NPC’s board obtained. Clearly defined rules and transparency will go a long way to protect involved directors or members, as well as the NPC. Unlike profit companies, NPCs are dependent on their sound fiscal reputations to attract funding.
Upon dissolution the entire net value of an NPC must be distributed to another NPC, voluntary association or non-profit trust with objectives similar to its own. Directors or members of the NPC are not entitled to any part of the net value of the NPC after its obligations and liabilities have been settled.
NPCs may not amalgamate or merge with profit companies. The disposal of any part of an NPC’s assets or business to a profit company is limited to the extent that it must be for fair value and within the NPC’s regular course of business. Where an NPC has voting members, their approval must be sought for an amalgamation or merger with another NPC, or the disposal of all or a greater part of the assets or undertakings of the NPC.
Members and Directors
The traditional section 21 Company founded under the previous Companies Act comprised members and a board of directors. The current Act allows an NPC not to have members, provided that this decision is documented in its Memorandum of Incorporation (MOI). This is one example of how the new legislation introduced simplicity and efficiency.
If an NPC does opt to have members, they may not be restricted or regulated in any manner that may be construed as unfair discrimination in terms of Section 9 of the South African Constitution. An NPC may have two classes of members – voting and non-voting. Membership may be held by juristic persons, including profit companies. The Act calls for each NPC’s MOI to clearly set out the qualifications for membership, the process for applying for membership, any initial or periodic cost of membership in any class, the rights and obligations, if any, of membership in any class, and the grounds upon which membership may, or will, be suspended or lost.
The MOI must also set out the basis upon which the members choose the directors of the company. Should any of the directors be elected by the voting members, the MOI must provide for the election each year of at least one-third of those elected directors.
If an NPC has no members, the MOI must set out the basis on which directors are to be appointed by its board, or other persons. Unless otherwise stated in the MOI, a minimum of three directors is required on the board of an NPC.
Financial Assistance to Directors
The Act prohibits direct or indirect financial assistance to directors of NPCs or related companies in the form of, for example, loans or debt securities or obligations. Exceptions to this rule are:
Assistance in the ordinary course of the company’s business and for fair value;
Assistance that constitutes an accountable advance to meet legal expenses, in relation to a matter concerning the company; or anticipated expenses to be incurred by the person on behalf of the company;
To defray the person’s expenses for removal at the company’s request; or
In terms of an employee benefit scheme generally available to all employees or a specific class of employees.
NPCs are advised to thoroughly consider their financial assistance policies, if any, and clearly document how they manage such instances.
Audit vs Independent Review
In a further bid to achieve its objectives of simplicity and efficiency, the Act introduces a cost-effective independent review that compliant NPCs may opt for instead of an audit.
A formal audit is, however, required if an NPC’s public interest score (“PIS”) is 350 points or more; or if its PIS score is 100 points or higher, and the NPC’s annual financial statements were internally compiled.
Qualifying NPCs need to evaluate the implications of opting for independent reviews, as at this time banking institutions have not yet issued directives on whether they will accept independent reviews in the place of audited financial statements when considering loan applications or other financial transactions.
Potential fund donors may also be wary of applications from NPCs that use independent reviews rather than audited financials.
Enhanced Accountability and Transparency
NPCs do not need to comply with Chapter 3 of the Act, unless they have their annual financial statements audited. In that case they need to comply with Chapter 3’s Parts B (Company Secretary) and D (Audit Committee).
The manner in which NPCs comply with the provisions of the Act should be clearly documented in their MOIs. Governing bodies of NPCs should therefore exercise their minds regarding the choices presented by the Act and make practical decisions that will best suit their NPCs. They should only draw up their MOIs when they are satisfied they are taking best advantage of the simplicity and efficiency aspects of the new Companies Act.
Melanie Naidoo, BProc, LLB, Dip (Corporate Law), Dip (Corporate Governance), is Senior Executive: Legal and Governance, SAICA.
This article was originally published in the June 2012 issue of ASA.