The Minister of Trade and Industry published the Companies Amendment Bill 2018 – a draft amendment Bill to the Companies Act, No 71 of 2008 (Companies Act) – for public comment on 21 September 2018.
A copy of the Bill can be downloaded here.
We also referred to the Amendment bill in a recent post called “Executive Remuneration is lacking in symmetry.”
The Companies Act has not been substantively amended since coming into effect in 2011. The Department of Trade and Industry has now published the Companies Amendment Bill 2018, is a broad list of proposed amendments, to align the Companies Act with global trends, and to do away with problematic areas and practical issues encountered during seven years of implementation. There is no proposed timeline for the implementation of changes.
Some of the most notable amendments from a corporate and commercial law perspective are listed below (the sections of the current Act are shown in brackets).
1. Memorandum of Incorporation (section 16):
Going forward, the CIPC has 10 days after receipt of the notice of amendment, to reject it. Notice of rejection is not enough – it needs to be supplemented with reasons. So, if the CIPC is inactive and has not responded within 10 business days, it appears to be estopped from forever doing so notwithstanding that it may have good cause to do so.
This amendment will provide much-needed certainty as to the status and effectiveness of amendments and will do away with the concern of lengthy delays.
2. Irregular share issues (new section 38A):
One of the proposed new amendments is to include the power of the court, upon application by an interested person or by the company, to order that shares that were created, allotted or issued invalidly or in an unauthorised manner, to be validly created, allotted or issued if it is “just and equitable” to do so.
The courts will be given the power to validate irregular share creations, issues and/or allotments. This was a significant omission in the Companies Act when it came into force given that a similar and useful provision was contained in s97 of the previous Companies Act (1973).
3. Share buy-backs (section 48):
Share buy-backs are to be more stringently regulated as a special resolution of the shareholders of a company will now be required for any share buy-back unless per a pro rata buy-back offer or on a recognised stock exchange. However this appears to be a case where the drafting does not accurately reflect the intended change – the intention rather appears to be that share buy-backs from directors and prescribed officers, which currently require a special resolution, are to be exempt from the special resolution requirement if the same are pursuant to pro rata offers or on an exchange.
4. Intra-group financial assistance (section 45):
Probably the most significant and useful proposed change is that a special resolution of the shareholders of a company will no longer be required when companies give financial assistance to, or for the benefit of, a subsidiary. This is certainly a helpful and important change and demonstrates the reduction of regulatory burden. However, a special resolution will still be required in instances where subsidiaries provide financial assistance to each other or to a holding company.
The Bill proposes to limit the net of financial assistance transactions that fall within section 45 by excluding “the giving by a company of financial assistance to, or for the benefit of, its own subsidiary.” The intention behind this exclusion is laudable, but its implementation is questionable.
5. Remuneration report (new section 30A):
The directors of a public company will be required to prepare a directors’ remuneration report for submission to the shareholders at the annual general meeting of the company. Albeit that no significant detail as to the content of the remuneration report is to be contained in s30A (apart from requiring (i) a background statement, (ii) an overview of the remuneration policy of the company, and (iii) an implementation report), the required report will presumably mirror the relevant recommended practices contained in King IV (2016) as to content.
6. Definition of “regulated company” (section 118):
The Companies Act mainly regards private companies as regulated companies if more than 10% of its issued securities had been transferred, other than between related or inter-related persons, within a 24-month period prior to the date of the affected transaction.
The circumstances in which a private company will be deemed to be a “regulated company” for purposes of the takeover regulations are to be significantly overhauled. It is now proposed that any private company that is subject to the “extended accountability and transparency” requirements in chapter 3 of the Companies Act shall be a regulated company. This includes any private company that is required to have its financial statements audited, which in turn depends on its “public interest score” as calculated in terms of regulations 26 and 28, or whether it holds assets in a fiduciary capacity.
7. Employee share schemes (section 95):
The definition of an employee share scheme will include a scheme that involves the purchase of shares and not just an issue of shares. This expands then the ambit of the exemptions contained in s41, 44 and 45 of the Companies Act regarding special resolution requirements for share issues and financial assistance to directors and prescribed officers, as well as financial assistance in connection with the acquisition of the securities of a company or its related companies. This proposed amendment may be seen as a welcome clarification, as there was some uncertainty regarding this definition.
8. Auditors (section 90):
The period following which a person who was closely involved in the affairs of a company (being directors, prescribed officers, employees, consultants etc.) may be appointed as an auditor of a company after ceasing to be so involved, is proposed to be reduced from five years to two years. This change perhaps allows a person who is still familiar with the relevant industry and affairs of a company to serve as the auditor, whilst still recognising the importance for such person to be independent of the company for a period.
9. A new type of post-commencement financing (“PCF”)
Section 135(1A) proposes to deem, as PCF, an amount equal to all disbursements, outgoings, including rates, taxes, electricity and water, paid by a property owner to a third party. These claims will rank equally to claims for outstanding remuneration during business rescue proceedings to employees in terms of section 135(1) of the Companies Act, but higher than PCF.
10. Private company shareholder communications will become publically available
All persons, not only beneficial shareholders, will be granted the right to review and copy shareholder communications in respect of any company within five business days of a request made to the company (including all notices to shareholders, shareholder meeting minutes, shareholder resolutions, any document made available in relation to a shareholder resolution and any written communication to holders of a class of shares). Previously, third parties only had this right through a Promotion of Access to Information Act (PAIA) application.
11. All annual financial statements and securities registers will become publically available
All companies will, in terms of the Companies Amendment Bill 2018, be required to file their annual financial statements and securities registers with the Commission together with their annual returns. Previously only companies required to be audited were required to file their annual financial statements. Once filed, that information will become publically available unless determined confidential by the Commission under Section 212 of the Act.
12. Enhanced reporting obligations
Remuneration (section 30)
- Public companies will be required to prepare directors remuneration reports detailing director remuneration, benefits and policies. The remuneration report must be presented to shareholders at the annual general meeting of the company.
- Clarification has also been provided that all companies required to be audited, when including remuneration in their annual financial statements, must name each director and prescribed officer next to the relevant remuneration value.
Annual financial statements
- Refusing a person access to the annual financial statements of a company where that person has a right of access will, in addition to being a company offence, also amount to a director and officer offence.
- All companies, no longer regulated companies only, will be required to keep a register of beneficial shareholder disclosures.
13. Social and Ethics Committee – no automatic exemption, membership, timing and an externally assured report (section 61/72)
All entities that currently require a social and ethics committee (state-owned entities, listed entities and other companies with a public interest score above 500 points) are therefore still obliged to comply with these requirements.
The proposed amendments by the Companies Amendment Bill 2018 list public companies and state-owned companies as requiring social and ethics committees. Therefore, public companies that do not have a public interest score above 500 points, and resultantly previously fell outside of the criteria for a committee, will also be included by the provisions.
The first members of the committee will need to be appointed within 40 business days instead of 12 months from the trigger event to have a committee.
The automatic exemption (that a company which is a subsidiary of another company that performs the functions of a social and ethics committee for the subsidiary) no longer applies to the obligation to have a committee. Only the requirements around membership of the committee will be relaxed.
In addition to the existing requirement that social and ethics committees have at least three members who are directors or officers of the company, at least one of whom must be a director who is not involved in the day-to-day management of the company’s business and must not have been so involved in the previous three financial years, there is an additional requirement for public and state-owned companies that all members must not be involved in the day-to-day management of the company’s business or have been so involved during the previous financial year or be related to any director who is or has been so involved in the company.
The social and ethics report, which was always reported to the shareholders at the annual general meeting of the company, will need to satisfy a prescribed form and will need to be externally assured.
14. Issues with delayed consideration – held by ‘stakeholders’ (section 40)
An issue of shares subject to delayed payment of the subscription consideration will no longer be held in trust but instead by a stakeholder in terms of a stakeholder agreement, not acting as agent for the company or the subscribing party.
15. Securities definition narrowed
The definition of ‘securities’ will be amended by removing reference to any ‘other instruments’ and introducing a reference to options, such that the definition of securities will mean ‘any shares, debentures or any options in respect thereof, irrespective of their form or title, issued or authorised to be issued by a profit company’.
16. Employee share scheme definition to include transfers
The definition of employee share scheme will be corrected to include transfers of shares (not issues only). This is relevant to enquiries regarding whether or not the offer of shares to employees pursuant to an employee share scheme trigger the Companies Act requirements associated with offers to the public.
17. Auditor appointments (section 90)
The amendment provides for the appointment of an auditor at the shareholder meeting at which the requirement for an appointment first applies. This will replace the existing requirement that the appointment is made at an annual general meeting. The amendment will also relax the restriction that an auditor may not have been a director or consultant of the company for five years (as currently provided) to two years.
18. Name change disputes – registration number
If a company fails to change a corporate name in terms of an administrative order of the Tribunal, it will be possible to apply to the Commission to change the name of that entity to the registration number of the company.
19. Administrative fines – on revenue, not turnover
Though not in the Bill, the parliamentary procedures stipulate an intention to change administrative fines being based on turnover to basing them on revenue.