the
consequences of non-approval of the remuneration report cater for a
two-strike rule and a
committee service ineligibility period. In this regard:
- if the report is not approved by ordinary resolution at the AGM: (i) the committee must at the next AGM explain how shareholders' concerns have been taken into account; and (ii) non-executive directors who have served on the committee for 12 months or more in the year under review must stand for re-election as members of the committee at that next AGM;
- if, at that next AGM, the previous financial year's report is also not approved by ordinary resolution, the non-executive directors on the committee may continue to serve as directors, provided they successfully stand for re-election at that AGM but they will not be eligible to serve on the committee for two years thereafter; and
- the requirements to stand for re-election and the two-year ineligibility period do not apply to committee members who have served for less than 12 months in the year under review.
It is worth noting that reference is made in the CAB 2023 to the approval of the "remuneration report" as opposed to the "implementation report". Public submissions recommended that the reference to the remuneration report be changed to the implementation report given that the remuneration policy is included as part of the remuneration report but has already been voted on. However, the DTIC's view was that in the instance of voting on the remuneration report, the remuneration policy is not required to be voted on again, but rather the overall report. The reference to the remuneration report has remained in the final bill.
The amendments to: (i) cater for a two-strike rule rather than requiring the non-executive directors to step down from the remuneration committee at the first instance of non-approval; (ii) reduce the committee service ineligibility period from three years to two years; and (iii) exempt newly serving committee members from re-election and ineligibility, follow from concerns raised in the public submissions that, among other things, non-executive directors might be hesitant to serve on remuneration committees if a proverbial "red card" is issued immediately rather than first issuing a "yellow" card allowing time for remedial action.
The introduction of the additional provisions requiring in-scope non-executive directors to stand for re-election as remuneration committee members and placing on them ineligibility restrictions could create practical timing difficulties regarding when non-executive directors become ineligible to serve on the remuneration committee. In addition, a company would not know before the relevant shareholders' meeting whether the previous financial year's report will be rejected by shareholders or not and therefore whether directors serving on the remuneration committee should be nominated for re-election at the relevant shareholders' meeting.
Further, given the far-reaching consequence of ineligibility, an aggressive shareholder, who has an ulterior motive, eg to ensure a change of the board to facilitate a takeover, may use this mechanism to potentially achieve such a change.
Companies will need to address the new remuneration requirements proactively by aligning their remuneration policies and reporting with the new obligations, preparing for pay gap disclosure, preparing for binding votes on remuneration and being mindful of the potential implications for non-executive directors sitting on remuneration committees.
Social and ethics committee - appointment, composition, and reporting
The Companies Act and Companies Regulations currently include provisions dealing with the appointment and composition of a social and ethics committee (SEC). The Companies Regulations set out the types of companies required to appoint the 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 CAB 2023 introduces amendments and additional provisions concerning the SEC to address gaps identified in the current provisions. Particularly, the CAB 2023 includes a provision to deal with the composition of the SEC, which provides that the SEC of a company must comprise at least three members. For public and state-owned companies, the majority of the members must be non-executive directors who have not been involved in the day-to-day management within the previous three financial years and for other companies, the members must consist of not less than three directors or prescribed officers, at least one of whom must be an aforementioned non-executive director.
The CAB 2023 includes provisions that a company must elect the SEC every year at the AGM in the case of public and state-owned companies and appoint the SEC annually by the board in the case of other companies. The appointment of the SEC must form part of the minimum business to be transacted at the AGM of a public company.
Also included are provisions that the SEC must prepare and present a social and ethics committee report to shareholders at the AGM (or at a general meeting annually or with a written resolution if no AGM is required) and that the presentation of the social and ethics committee report forms part of the minimum business to be transacted at the AGM of a public company. Interestingly, the CAB 2023, does not require the approval by shareholders of the social and ethics committee report as was envisaged in the draft 2021 Bill.
Since the Companies Regulations include certain similar provisions relating to the SEC, these should be updated or removed to align with the new provisions in the Companies Act and avoid any potential conflicts. The Companies Act will, however, prevail in the case of a conflict.
Intra-group financial assistance
The financial assistance requirements in section 45 of the Companies Act will no longer apply to financial assistance by a company to its subsidiaries. This is a welcome exemption. It is worth noting, however, that on the present definition of "subsidiary" in the Companies Act, this exemption would exclude foreign entities and therefore, financial assistance to a foreign subsidiary (even if wholly owned) will continue to require compliance with the section.
Amendments to the requirements for share repurchases
The CAB 2023 reworks the provisions regulating when a shareholders resolution is required for share repurchases. Under the amendments, all repurchases of shares will require the passing of a special resolution by shareholders, unless the repurchased shares are acquired as a result of: (i) a pro-rata offer made to all shareholders or a particular class of shareholders; or (ii) transactions effected on a recognised stock exchange (being a licensed exchange in terms of the Financial Markets Act, 2012) on which the shares are traded. Accordingly, the present provision that (other than as regards repurchase 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.
Importantly, the amendments in the CAB 2023 remove the provision that a repurchase of more than 5% of the shares is subject to the requirements of sections 114 and 115 of the Companies Act. This is welcomed, as the present provision places a burden on companies to obtain independent expert reports for every repurchase of shares over the 5% threshold. The amendment also closes the door on debates around the interpretation of the provision, including whether such repurchases of shares must be undertaken by way of a scheme of arrangement or are subject to section 164 appraisal rights. The removal of this section now clarifies that compliance with the requirements of sections 114 and 115 is not required and that section 164 appraisal rights will not apply, in respect of share repurchases contemplated in section 48 over the 5% threshold.
Alteration of the scope of application of the takeover provisions to private companies
Currently, the takeover provisions in the Companies Act and Companies Regulations only apply to affected transactions undertaken by private companies if more than 10% of the shares in the private company were transferred in the preceding 24 months. In this regard, such a private company is regarded as a regulated company. The CAB 2023 has now amended the criteria in respect of private companies. Under the amendments, a private company that: (i) has ten or more shareholders with a direct or indirect shareholding in the company; and (ii) meets or exceeds the financial threshold of annual turnover or asset value to be determined by the Minister of Trade, Industry & Competition, will be considered a regulated company and be subject to the takeover provisions when it undertakes affected transactions. This is a material proposed amendment as it alters the scope of application of the takeover provisions insofar as private companies are concerned.
While public comments raised the need for more clarity or a definition of the term "indirect shareholding" for purposes of the section, the DTIC was of the view (and Parliament ultimately agreed) that the term "indirect shareholding" was quite often used in legislation for "beneficial ownership", was a well-known term and did not require a definition. Notwithstanding this, potential challenges remain around determining which indirect shareholders should be included and how far up the chain of beneficial ownership is envisaged. For example, if "indirect shareholdings" include all direct and indirect beneficial owners, a subsidiary of: (i) a listed entity; (ii) a trust with multiple beneficiaries in excess of ten; or (iii) a company with one shareholder but more than ten shareholders up to the ultimate individual shareholders, would be considered a regulated company if the prescribed annual turnover or asset value threshold is met. It will therefore be subject to the relevant takeover provisions when it undertakes affected transactions (unless the Takeover Regulation Panel provides an exemption).
Another potential challenge is around the status of a pending affected transaction (that has not closed or been implemented by the time the CAB 2023 is signed into law) involving a private company which, under the current definition, is not a regulated company, but which nevertheless becomes a regulated company under the new criteria. To address this concern, the DTIC has said that it may request the President to determine a different implementation date for this provision.
Effective date of amendments to the MOI
Under the current provisions of the Companies Act, amendments are effective immediately upon filing (although the CIPC has held a different view, namely that CIPC had to first accept the filing). The amended provision now provides that amendments to the MOI (other than in relation to a name change) will take effect only 10 business days after receipt of the Notice of Amendment by the CIPC (unless endorsed sooner or rejected with reasons by the CIPC) or such later date specified in the Notice of Amendment.
As changes can no longer be made with immediate effect, this amendment will impact the timing of transactions requiring amendments to MOIs, including amendments to the authorised shares.
Power of the court to rectify invalid creation, allotment, or issue of shares
The CAB 2023 introduces a new section into the Companies Act which enables a court, on application by the company or an interested party, to validate an invalid creation, allotment, or issue of shares, or confirm the terms thereof, should the court find it is just and equitable to do so. Currently, the Companies 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
The amendments in the CAB 2023 clarify that a private company required to be audited in terms of the Companies Act or its MOI must appoint an auditor at
a shareholders' meeting at which the requirement first applies and thereafter annually at a
shareholders' meeting, not necessarily at the AGM as is currently the case.
Regarding eligibility for appointment as auditor, the current section requires that a person appointed as auditor must not have served as a director, prescribed officer, employee, company secretary or bookkeeper of the company in the five financial years preceding the date of appointment. The CAB 2023 introduces an amendment to reduce this disqualification period to two financial years.
Access to information
The CAB 2023 introduces an amendment to enable holders of beneficial interests access to a company's register of disclosure of beneficial interests (in addition to the other records listed in the section to which the beneficial interest holder already has access). Under the recent GLA Act amendments, affected companies (being regulated companies and private companies that are controlled by, or subsidiaries of, a regulated company), as opposed to just regulated companies, are required to establish and maintain a register of disclosure of beneficial interests.
Under the current section in the Companies Act, third parties have access to a company's securities register and register of directors. Due to the amendments implemented by the GLA Act and the recent amendments to the Companies Regulations, the securities register will now include details of beneficial owners if the company is not an affected company, and as such, third parties will have access to that information.
However, amendments introduced by the CAB 2023 contemplate that third parties also be given access to a company's MOI, the records in respect of directors, the annual financial statements (AFS) and the register of disclosure of beneficial interests (where this is required).
The amendments exclude the right of third parties to inspect and copy the AFS of private, personal liability and non-profit companies that fall below a specified public interest score (less than 100 in the case of internally prepared AFS and less than 350 in the case of independently prepared AFS). This will impact private companies as only smaller private companies would have the right to prevent third-party access to the AFS.
In a notable departure from the draft 2021 Bill, the CAB 2023 does not include provisions purporting to make it an offence for directors and prescribed officers who fail to accommodate a reasonable request for access or unreasonably refuse access to a person who has the right to inspect or copy records. The status quo that an unreasonable refusal of access is an offence of the company (and not also of directors and prescribed officers) remains intact.
Annual financial statements and filings
Section 30(4) of the Companies Act deals with the particulars to be included in the AFS of companies required in terms of the Companies Act to have their AFS audited, which includes disclosure of the remuneration of directors and prescribed officers in the AFS. An amendment to the section clarifies that each individual director and prescribed officer must be named. This will impact private companies insofar as they are required to have their AFS audited in terms of the Companies Act.
With regard to the filing of the AFS with the annual returns, under the current section 33(1), a company that is required to have financial statements audited in terms of the relevant sections of the Companies Act must include in its annual return a copy of its AFS.
The CAB 2023 amends the section to require public companies, state-owned companies or other profit or non-profit companies whose public interest score exceeds the specified thresholds in the Companies Act and relevant regulations relating to the audit of AFS (for private companies, 350 or more, or at least 100 if the AFS for that year were internally compiled) to include in its annual return a copy of its latest AFS.
Amendments to the definition of employee share scheme
The CAB 2023 amends the definition of "employee share scheme" to reference the purchase of shares in the definition (in addition to the issue of shares and the grant of options for shares in the company), with the effect that an employee share scheme, which involves a purchase of shares and provided it meets the requirements relevant to employee share schemes in the Companies Act, will enjoy the benefit of exemption from certain requirements, such as those pertaining to financial assistance.
Other amendments
Other amendments introduced by the CAB 2023 include an amendment to the definition of "securities" to remove reference to "other instruments"; revisions to the business rescue provisions regarding aspects of post-commencement financing; and various amendments concerning the Companies Tribunal, its composition and its alternative dispute resolution processes.
Companies Second Amendment Bill, 2023
Proceedings to recover loss – time bar in section 77(7)
Section 77 of the Companies Act deals with the liability of directors and prescribed officers for breach of their duties. The current section 77(7) provides that proceedings to recover any loss, damages, or costs for which a person may be held liable in terms of section 77 may not be commenced more than three years from the act or omission that gave rise to the liability. The CSAB 2023 has reworked the section to provide that:
- the Prescription Act, 1969 does not apply in respect of proceedings to recover loss under the section;
- such proceedings may not commence more than three years after the act or omission giving rise to the liability unless a court extends the period; and
- a court may extend the period on good cause shown regardless of whether the period has expired or whether the offending act or omission occurred before the promulgation of the CSAB 2023.
The current time bar of three years is therefore still applicable, however, the provisions clarify that the court may extend such period and the parameters under which this period may be extended.
Delinquency and probation applications - time bar in section 162
Under the current sections 162(2) and 162(3), an application to declare a person delinquent or placed under probation may be brought if the person concerned is a director of the company or, within the 24 months immediately preceding the application, was a director of the company.
The CSAB 2023 extends the period in each of sections 162(2) and 162(3) from 24 months to
60 months. Additionally, under the amendments, the court may on good cause shown extend the period in respect of any of the listed circumstances (to cause the director to be declared delinquent or under probation) regardless of: (i) whether or not such period has expired; or (ii) whether the listed circumstances occurred prior to the promulgation of the CSAB 2023.
Once effective, the provisions will strengthen the tools available to hold directors accountable, and in respect of section 162, give effect to the recommendations of the Zondo Commission of Enquiry into State Capture.
Next steps
The amendments in the Companies Amendment Bills, 2023 are not yet effective. However, we expect that the President will sign the bills into law imminently.
Companies should familiarise themselves with the relevant amendments that may affect their corporate and strategic operations (such as the new remuneration provisions, the SEC requirements, and amendments to the provisions on financial assistance, share repurchases, the scope of application of the takeover provisions to private companies and lodgement of MOI amendments), and prepare accordingly. Where needed, they should seek expert advice to help them navigate the new amendments and their impact on their businesses.
This summary is not intended to, and does not, constitute legal advice, and may not be relied upon. For further information or tailored advice, please contact Madelein van der Walt or your usual Webber Wentzel contact.
