Two Companies Amendment Bills have been introduced in Parliament. The Companies Amendment Bill is a revision of the draft 2021 Bill and retains many of the amendments proposed in that version, although with a few tweaks. The Companies Second Amendment Bill proposes to extend the time bars applicable to applications for director delinquency and proceedings to recover loss due to director liability. While several of the proposed amendments are welcome, ambiguities remain. This snapshot explores some of the key proposed amendments.
On 28 August 2023, the Minister of Trade, Industry and Competition introduced the Companies Amendment Bill, 2023 (CAB 2023) and the Companies Second Amendment Bill, 2023 (CSAB 2023) in Parliament. The Bills propose several amendments to the Companies Act, 2008 (Companies Act).
The introduction of the Bills in Parliament follows on from a notice the Department of Trade, Industry and Competition (DTIC) published in the Government Gazette on 14 August 2023, which indicated the Minister's intention to introduce the Bills and provided some background on the proposed amendments. Additional information on the notice is provided in an article we published on 16 August 2023 about The DTIC publishes intention to introduce two Companies Amendment Bills in Parliament.
Companies Amendment Bill, 2023
Background
The CAB 2023 is a revised version of the draft Companies Amendment Bill, 2021 (draft 2021 Bill) published for public comment in October 2021. A snapshot of the key amendments proposed by the draft 2021 Bill is provided in an article we published on 4 October 2021 about the New Draft Companies Amendment Bill.
A review of the CAB 2023 against the draft 2021 Bill is somewhat a case of
déjà vu. The majority of the amendments are the same or substantially similar to those proposed in the draft 2021 Bill. A few limited substantive changes relating to, among other things, the provisions dealing with the remuneration report and the social ethics committee have been proposed.
Additionally, amendments in the draft 2021 Bill which focused on the filing of copies of the securities register and disclosure of beneficial interests register and introduced a new definition of "true owner" have not been included in the CAB 2023. This is due to similar amendments effected to the Companies Act in December 2022 and April 2023 as a result of the General Laws (Anti-money Laundering and Combating Terrorism Financing) Amendment Act, 2022 (GLA Act). Among other things, the GLA Act amendments introduce new definitions of "beneficial owner" and "affected company" and provide for the disclosure of beneficial ownership and beneficial interests and the filing of copies of the securities register and register of disclosure of beneficial interests at or above a 5% threshold with the Companies and Intellectual Property Commission (CIPC). The amendments are explained in an article we published on 25 January 2023 about the
Commencement of the General Laws Amendment Act.
Amendments to the Companies Regulations, 2011 (Companies Regulations) dealing with, among other things, the requirements relating to the disclosure and filing of beneficial ownership and beneficial interest information also took effect from 24 May 2023.
Key proposed amendments
Directors' remuneration report for public companies and state-owned companies and disclosure of pay gap
In line with the draft 2021 Bill, the CAB 2023 seeks to align the provisions of the Companies Act with the recommendations of the King IV Report on Corporate Governance for South Africa, 2016 (King IV) in relation to remuneration governance.
The provisions of the CAB 2023, like the draft 2021 Bill, mirror those of King IV in that they introduce a new requirement for public companies and state-owned companies to prepare and present a remuneration report.
The CAB 2023 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 short-term incentives or bonuses, long term incentives such as share options and other incentive awards and fund contributions) of the highest remunerated employee; (v) total remuneration (as aforesaid) of the lowest remunerated employee; 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 bottom 5% lowest paid employees.
The CAB 2023, however, goes further than King IV as it also requires the remuneration report, remuneration policy and implementation report to be approved by shareholders at the AGM (and in the case of the remuneration policy, every three years pursuant to the AGM or whenever any material change is made). The policy and implementation report must be approved separately, each by ordinary resolution. Changes may only be implemented once approved by shareholders.
If the implementation report is not approved at the AGM:
- the remuneration committee must at the next AGM explain how shareholder concerns have been addressed; and
- the non-executive directors on the committee will not be eligible to serve on the remuneration committee for three years after non-approval of the implementation report, however, may still continue to serve as directors.
The proposed amendments relating to the ineligibility of non-executive directors to serve as members of the remuneration committee are a change from the proposals in the draft 2021 Bill which required the non-executive directors to stand down for re-election every year of rejection of the implementation report. It is, however, not clear how the new proposed provisions will operate in practice: do the members of the remuneration committee cease to be eligible immediately after non-approval at the AGM?; if a new committee is constituted the new committee must explain how concerns were addressed at the next AGM; what will the position be if the new committee is of the view that, acting in the best interest of the company, certain concerns raised should or could not be addressed; if the implementation report is again not approved, the new committee will also have to stand down.
The changes practically could make some non-executives hesitant to sit on the remuneration committee of a company and if members continuously become ineligible due to consistent rejection of the report, there may be no board members left to serve on the committee. 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.
As with the draft 2021 Bill, the CAB 2023 does not address the consequences of the entire remuneration report not being approved.
Social & ethics committee - appointment, composition, and reporting
The Companies 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 CAB 2023 proposes that the SEC of a company must comprise at least three members. For public and state-owned companies, all the members must be directors who are not involved in the day-to-day management at the time or in the previous three years (non-executive) and for other companies, the members must consist of no less than three directors or prescribed officers, at least one of whom must be a director who is non-executive.
The proposed amendments are a change from those envisaged in the draft 2021 Bill which provided that for public and state-owned companies, the majority (as opposed to all) of the directors must be non-executive.
Similar to the draft 2021 Bill, the CAB 2023 proposes that the members of the SEC must be elected every year at the AGM in the case of public and state-owned companies (and appointed annually by the board in the case of other companies).
The CAB 2023 contemplates that the SEC must prepare and present a social and ethics committee report to shareholders at each AGM (or at a general meeting annually or with a written resolution if no AGM is required). Interestingly, the CAB 2023 does not include the proposed provisions in the draft 2021 Bill requiring: (i) approval of the report by ordinary resolution; (ii) if the report is not approved, SEC engagement with shareholders who voted against the report; (iii) publication of a statement as to engagement steps, the outcome of the engagement and the actions to be taken to address dissenting shareholder concerns; and (iv) presentation of the statement at the next AGM. It therefore appears that the approval of the report (and the consequent steps if there is no approval) is no longer envisaged, and it is just presentation of the report that will be required as per the proposed amendments.
Since the Companies Regulations include certain similar provisions relating to the SEC, these should be updated or removed to align with the new proposed 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 for group companies and in line with the proposal in the draft 2021 Bill. It is worth noting, however, that on the present definition of "subsidiary" in the Companies Act, this exemption would appear to exclude foreign entities and therefore, financial assistance to a foreign entity (even if wholly-owned) will continue to require compliance with the section.
Amendments to the requirements for share repurchases
The proposed amendments relating to share repurchases are substantially the same as those proposed in the draft 2021 Bill.
Under the proposed 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 in the ordinary course 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 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.
Importantly, in line with the draft 2021 Bill's proposals, the CAB 2023 seeks to 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. It 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. While a recent SCA judgment appeared to regard a repurchase of shares of more than 5% as effectively a fundamental transaction to which sections 114, 115 and 164 appraisal rights apply, the removal of this section should now clarify 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.
Limitation of scope of application of the takeover provisions to private companies
Currently, the provisions relating to affected transactions and the takeover regulations in the Companies Regulations only apply to private companies if more than 10% of the shares in the company were transferred in the preceding 24 months. The CAB 2023 proposes to limit the scope of application of the takeover provisions only to private companies that: (i) have ten or more shareholders with a direct or indirect shareholding in the company; and (ii) meet or exceed the financial threshold or annual turnover or asset value to be determined by the Minister. This provision was contemplated in the draft 2021 Bill and despite previous comments raised regarding the potential for uncertainty given the reference to "indirect shareholding", this wording has remained.
This is a material proposed amendment as it limits the scope of application of the takeover provisions insofar as private companies are concerned. The difficulty will, however, be to determine which indirect shareholders should be included and whether this envisages all beneficial owners of securities (direct and indirect). If all indirect shareholders are included, any subsidiary of, for example (i) a listed entity; (ii) a trust with multiple beneficiaries in excess of ten; (iii) a company with one direct shareholder but more than ten shareholders up to the ultimate individual shareholders, even if a 100% held subsidiary, will remain subject to the relevant takeover provisions.
Effective date of amendments to the MOI
The CAB 2023 provides some needed clarity on the effective date of amendments to a company's memorandum of incorporation (MOI). Under the current provisions of the Companies Act amendments are effective immediately upon filing (although CIPC has held a different view, namely that CIPC had to first accept the filing).
The CAB 2023 proposes 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 CIPC unless endorsed sooner or rejected with reasons by CIPC (and if a date is specified in the Notice of Amendment, such date may not be a date earlier than 10 business days from receipt by CIPC). As changes can no longer be made with immediate effect, this proposal will impact the timing of transactions requiring amendments to MOIs, including amendments to the authorised shares.
Despite the updates recognising potential problems with the current section, the proposed new amendments are unclear as they refer to "receipt" by CIPC. Previous comments on the proposed section in the draft 2021 Bill suggested that reference be made rather to the date of "filing" as this term is defined in the Companies Act and addressed in the Companies Regulations. The wording has, however, remained unchanged in this regard. The proposed amendments also do not clarify what "endorsed" means (but presumably this means "acceptance" of the filed notice) nor does the section deal with the consequences of a rejection by CIPC of the Notice of Amendment.
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 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. These proposals were included in the draft 2021 Bill.
Requirements for appointment of auditors
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 (as did the draft 2021 Bill) proposes to reduce this disqualification period to two financial years.
Access to information
The CAB 2023 proposes an amendment to enable holders of beneficial interests access to a company's register of disclosure of beneficial interests. 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, third parties have access to a company's securities register. 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 have access to information they previously would not have had.
However, the CAB 2023 also proposes that, in addition to the securities register, 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 CAB 2023 proposes to 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 proposed amendment impacts 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 proposed 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. A proposed 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 proposes an amendment to the section to require public companies, state-owned companies or other profit or non-profit companies whose public interest score exceeds the specified threshold 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.
Other amendments
Other proposed amendments in the CAB 2023 include: (i) a tweak to the definition of employee share scheme to reference the purchase of shares (in addition to the issue of shares), revisions to the business rescue provisions regarding aspects of post-commencement financing (interestingly, the proposal to amend the section dealing with creditor participation in business rescue to specifically reference the voting interest of operating expenses deemed post-commencement financing has not been retained in the CAB 2023); and (iii) various amendments concerning the Companies Tribunal, its composition and its alternative dispute resolution processes. Several of these amendments are the same or substantially similar to those proposed in the draft 2021 Bill.
Companies Second Amendment Bill, 2023
Background
The amendments proposed by the CSAB 2023 follows from a recommendation made by the Zondo Commission of Enquiry into State Capture. The recommendation was to extend the time bar in sections 162(2) and 162(3) of the Companies Act relating to applications to declare a director delinquent or under probation. While the recommendation by the Zondo Commission was in respect of two specific companies, the DTIC has expressed that it is in the public interest that any amendments to extend the time bar in section 162 apply generally. Although not a recommendation of the Zondo Commission, the DTIC has also indicated that the time period within which to commence proceedings to recover loss due to director liability under section 77(7) should be amended.
Key proposed amendments
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 proposes to extend the period in each of section 162(2) and 162(3) from 24 months to
60 months. A retrospective element has been included in new proposed provisions which provide that the extended period of 60 months may apply whether or not any of the listed circumstances (to cause the director to be declared delinquent or under probation) was committed before the extended period.
Additionally, in both sections, new amendments have been proposed to empower the court, on good cause shown, to extend the 60-month period, whether or not the listed circumstances occurred before the extended period.
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 3 years from the act or omission that gave rise to the liability. The CSAB 2023 proposes to amend the section to empower the courts on good cause, to extend the time period of three years, whether or not any act or omission referred to the section occurred before the extended period.
Next steps
The introduction of the Companies Amendment Bills in Parliament has kicked off the legislative process. Public comments, invited on 4 September 2023, must be submitted by 12h00 on Monday, 2 October 2023. Public hearings on the Bills will take place in mid-October 2023.
September and the last quarter of 2023 are likely to be a flurry of activity as the amendments are considered, debated, and make their way through the legislative process.
We will continue to monitor these developments.
Access a copy of the Companies Amendment Bill, 2023
here. Access a copy of the Companies Second Amendment Bill, 2023
here.
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.
