Section 38 of the Companies Act, 1973 prohibits a company from providing financial assistance for the purchase or subscription of its own shares. To be more specific:
38. No financial assistance to purchase shares of company or holding company.—
(1) No company shall give, whether directly or indirectly, and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any shares of the company, or where the company is a subsidiary company, of its holding company.
(2) The provisions of subsection (1) shall not be construed as prohibiting—
(a) the lending of money in the ordinary course of its business by a company whose main business is the lending of money; or
(b) the provision by a company, in accordance with any scheme for the time being in force, of money for the subscription for or purchase of shares of the company or its holding company by trustees to be held by or for the benefit of employees of the company, including any director holding a salaried employment or office in the company; or
(c) the making by a company of loans to persons, other than directors, bona fide in the employment of the company with a view to enabling those persons to purchase or subscribe for shares of the company or its holding company to be held by themselves as owners.
This act was promulgated a long time ago therefore it is rather difficult to understand (this is in direct contrast to modern acts, the new ones are really easy to read and understand).
There has been a fair amount of talk about the relaxation of section 38. Today's Business Times carried an interesting article on section 38. It is likely that section 38 will be relaxed because it has hampered BEE deals thus far, although the article does suggest that it is an antiquated restriction inherited from English law.
What I did find interesting was that there are already exemptions to section 38. Holding companies can provide financial assistance for the purchase of shares in their subsidiaries. Financial assistance may be provided by a company for the purchase of its business, instead of its shares. Companies may also lend funds to a share incentive trust as part of an employee share incentive scheme.
If section 38 is going to be relaxed then it won't be as simple as just financing the purchase of shares. A report in Business Day on the 23rd of May, 2006 suggested that a few conditions would apply
- company's assets must exceed its liabilities
- board must pass a special resolution to sanction the sale of shares
Caird is off to Durban
We are off to Durban for a few days, back in JHB on Friday. I will try and post something whilst I am down there but my experience of Durban hospitality probably means that I won't get a chance. We are also stopping off in Harrismith on Thursday to see an agricultural enterprise development project run by Nestlé.
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