By Madelein Burger, Partner at Webber Wentzel
A new draft of the Companies Amendment Bill has been published. Although the Bill clarifies many important company law issues; several ambiguities related to the current Act remain.
On Friday, 1 October 2021, the Department of Trade, and Industry (DTI) published a new draft of the Companies Amendment Bill, 2021 (2021 Bill) for public comment. The 2021 Bill is to amend the Companies Act, 2008 (Act). Comments on the Bill must be submitted to the DTI by 31 October 2021. This follows the draft Companies Amendment Bill published in 2018 (2018 Bill).
The 2021 Bill notes that the legislator is also considering amendments to the Act as regards worker representation on company boards and the extension of directors’ duties in favour of a multiplicity of stakeholders (as opposed to the present position of directors owing duties to the company), but that these amendments are to be introduced in a further Bill after consultation.
The key proposed amendments to the Act at present, are summarised below:
Directors’ remuneration report for public companies and state-owned companies, pay gap
The 2021 Bill seeks to align the provisions of the Act with the recommendations of the King IV Report on Corporate Governance in South Africa (King IV) in relation to remuneration governance. King IV recommends that companies:
– publish a remuneration report in their annual statement, setting out their remuneration policy and how the policy was implemented by the board; and
– table their remuneration policy and implementation report for shareholder approval, by way of two separate non-binding advisory votes at each AGM.
The provisions of the 2021 Bill mirror those of King IV in that it introduces a new requirement for public companies and state-owned companies to prepare a remuneration report which includes inter alia the remuneration policy and implementation report.
However, the 2021 Bill goes further than King IV as it also requires the report, policy and implementation report to be approved by shareholders at the AGM (and every three years or whenever any material change is made). The policy and implementation report must be approved separately, each by ordinary resolution. The 2018 Bill did not envisage a shareholder vote. It only proposed that a remuneration report be presented to shareholders at the AGM.
If the remuneration policy is not approved at the AGM, it must be presented at the next AGM or general meeting until approval is obtained. Changes may only be implemented once approved by shareholders.
If the implementation report (references to report and policy are interchangeable at times) is not approved at the AGM:
– the remuneration committee must at the next AGM explain how concerns had been addressed; and
– the non-executive directors on the committee must stand down for re-election every year of the rejection of the implementation report.
The present wording does not address the consequences of the entire remuneration report not being approved.
The 2021 Bill sets out what must be included in the remuneration report, namely: (i) a background statement; (ii) the remuneration policy; (iii) the implementation report with details of remuneration received by directors and prescribed officers; (iv) total remuneration and benefits (including bonuses, incentives, fund contributions, share options and awards) of the highest remunerated employee; (v) total remuneration (as aforesaid) of the employee with the lowest remuneration in the company; and (vi) the average remuneration of all employees, median remuneration of all employees and the remuneration gap reflecting the ratio between the total remuneration of the top 5% highest paid employees and the remuneration of the bottom lowest paid employees of the company.
Social & ethics committee – appointment, composition & reporting
Currently, the Regulations set out the types of companies required to appoint a social and ethics committee (SEC). These include state owned companies, listed companies, and any other company that has, in two of the previous five years, scored above 500 points as their public interest score. The 2021 Bill proposes that the SEC must consist of at least three directors (and may in addition include prescribed officers), provided that: (i) for public and state-owned companies the majority of directors must not be involved in the day-to-day management at the time or the previous three years (non-executive); and (ii) for other companies at least one director must be non-executive.
Also new is that the members of the SEC must be elected every year at the AGM in the case of public and state-owned companies (and by the board in the case of other companies), similar to the Act’s requirements for election of the audit committee.
The 2021 Bill further contemplates that the SEC must prepare a formal report to present to shareholders at each AGM (or at a general meeting annually if no AGM is required) and the report must be approved by ordinary resolution. Currently, the Regulations only require a member of the SEC to report to shareholders at the AGM. If the report is not approved the SEC must engage with shareholders who voted against the report and are willing to engage, and within four months publish a statement as to engagement steps. The outcome and action to be taken to address the issues raised by dissenting shareholders and the statement must be presented at the next AGM.
Intra-group financial assistance
The financial assistance requirements in section 45 of the Act will no longer apply to financial assistance by a company to its own subsidiary company. This is a welcome exemption for group companies and in line with the proposal in the 2018 Bill.
Amendments to the requirements for share repurchases
All repurchases of shares will require the passing of a special resolution by shareholders, unless it entails a pro rata repurchase from all shareholders or a repurchase in the ordinary course on a recognised stock exchange on which the shares are traded. Accordingly, the present provision that (other than as regards repurchases from directors and officers) a repurchase of shares constituting 5% or less of the shares does not require the passing of a special resolution will no longer apply.
The requirement that a repurchase of more than 5% of the shares requires compliance with sections 114 and 115 of the Act no longer applies. This is to be welcomed, as the present provision puts a burden on companies to obtain independent expert reports for every repurchase of shares of more than 5% of shares. It also closes the door on the debates as to whether the provision means that such repurchases of shares must be undertaken by way of a scheme of arrangement.
Limitation of scope of application of the takeover provisions to private companies
Currently, the provisions in relation to affected transactions and the takeover regulations only apply to private companies if more than 10% of the shares in the company were transferred in the preceding 24 months. The 2021 Bill proposes to limit the scope of application of the takeover provisions only to private companies that have ten or more shareholders with a direct or indirect shareholding in the company and meets or exceeds the financial threshold or annual turnover or asset value to be determined by the Minister. This is a material proposed amendment as it limits the scope of application of the takeover provisions substantially insofar as private companies are concerned. This is also different from the 2018 Bill which limited the application to companies required to be audited under the Act. Uncertainty may, however, be created with the reference to “shareholders with a direct or indirect shareholding.”
Power of the court to rectify invalid creation, allotment or issue of shares
On application by the company or an interested party to the relevant court, an invalid creation, allotment or issue of shares, may be validated or the terms thereof confirmed should the court find it to be just and equitable to do so. Currently, the Act does not allow a court to do so and parties caught in such a situation are left without a remedy.
Requirements for appointment of auditors
A private company required to be audited in terms of the Act or its MOI must appoint an auditor annually at a shareholders’ meeting (not necessarily at the AGM, as is currently the case). The 2021 Bill (as did the 2018 Bill) proposes to reduce the disqualification period for a person contemplating to serve as auditor but who served as a director, prescribed officer, employee, company secretary or bookkeeper of the company for the two financial years preceding the date of appointment of the auditor. Currently, the disqualification period is longer, being five financial years.
Effective date of amendments to MOIs
As in the 2018 Bill, the 2021 Bill provides some much-needed clarity on the effective date of amendments to MOIs. The current provisions of the Act are unclear, and many adopted the view that the amendments were effective immediately upon filing. The 2021 Bill proposes that amendments to MOIs (other than in relation to a name change) will take effect only after 10 business days of being filed if not rejected by the Companies and Intellectual Property Commission (CIPC) (or endorsed sooner). As changes can no longer be made with immediate effect, this proposal will impact on the timing of transactions requiring amendments to MOIs, including amendments to the authorised shares.
Public access to securities register of companies
The 2021 Bill (similar to the 2018 Bill) provides that Companies must file a copy of their securities register and register of disclosure of beneficial interest, annually with the CIPC, with their annual returns. This is a material proposed amendment as third parties presently do not have public access to the securities register unless they request the information at the relevant company’s registered office. The information will now be accessible at the CIPC on an anonymous basis (i.e., without disclosing the identity of the person to the company). We caution that these publicly available registers may be outdated, as changes in shareholding (and beneficial shareholding) from the last date filed, will only be reflected once the next annual return is filed, with no obligation to file interim changes.
Introduction of a definition of “true owner“
The 2021 Bill introduced a new definition, that of “true owner” who would in essence be the natural person who is the ultimate and true owner and last person in the chain of holders of a specific security in a company, who can direct the registered holder or for whose benefit the securities exist. The definition is relevant for purposes of the term “beneficial interest” in the Act which will now include the true owner. The 2021 Bill also requires companies to know who their beneficial shareholders are and if not known, to enquire from registered shareholders, beneficial shareholders and the true owner for confirmation.
Access to information & new offences
Access to information to parties who are not registered, or beneficial shareholders were restricted to the securities register. The 2021 Bill proposes that, as regards larger companies, third parties also be given access to the MOI of the company, the list of directors, the annual financial statements, and the register of beneficial shareholders. Shareholders also have the right to request, financial statements in addition to the rights already in the Act.
Two new offences are proposed in the 2021 Bill, for directors and prescribed officers who do not act reasonably when a party requests information it is entitled to and the same is not provided.
The 2021 Bill is open for comment until 31 October 2021. Webber Wentzel will be submitting comments on this 2021 Bill. Comments will include addressing certain ambiguous provisions of the current Act that the 2021 Bill does not, in its present form, address.