THE COMPANIES AMENDMENT BILL, 2018: FIRST DRAFT FOR PUBLIC COMMENT
The Companies Amendment Bill, 2018 (Bill) was published for public comment on 21 September. A copy of the draft is accessible (here).
The amendments seek to update the Companies Act, 2008 (Act) to keep pace with current international corporate trends and close loopholes discovered in the Act during its implementation period. The changes are said not to represent changes to original policy.
The Bill was published for public comment on 21 September, with comments due on or before 14 December 2018. There is no proposed timeline for the implementation of changes.
The last amendments to the Companies Act took five months to come into effect. However that was expedited to coincide with the implementation of the Act in 2011. Implementation of amendments to legislation can vary from one day (e.g. for the Income Tax Act) and 14 months (e.g. for the Competition Act, with a three year trickle for certain provisions).
Most material proposed amendments
Some of the changes most relevant for ‘business as usual’ are set out below
- Section 25/26: 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.
- Section 33: All annual financial statements and securities registers will become publically available
All companies will 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.
- Section 118: Private companies, if audited will be ‘regulated companies’ for Takeover Regulation purposes
In addition to public companies, state-owned companies and companies that elect to be regulated in their MOIs, private companies that are required or have elected to be audited will be deemed ‘regulated companies’ and thus bound by the Takeover Regulations when implementing any affected transaction (i.e. a sale of all or a greater part of the assets or undertakings of a company, a merger, a scheme, a change in beneficial shareholding in increments of 5%, mandatory offers or squeeze outs, etc.). This amendment will replace the current trigger deeming private companies ‘regulated companies’ if they have, in the previous 24 months, had a transfer of 10% or more of their securities other than between related or interrelated parties.
Companies not previously captured will now have enhanced reporting obligations regarding beneficial shareholding and, when implementing affected transactions, will have to comply with or obtain exemptions from compliance with the takeover regulations.
- Section 31 to 33 and 56: Enhanced reporting obligations
- 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.
- Section 72: Social and Ethics Committee – no automatic exemption, membership, timing and an externally assured report
- The regulations pertaining to social and ethics committees have not yet been deleted or amended. Resultantly, the proposed amendments to the Act need to be read together with the existing regulations. 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 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.
- Section 45: Financial assistance – to own subsidiaries excluded from requirements
- The giving of financial assistance to, or for the benefit of, an entity’s own subsidiary will be excluded from the requirements of Section 45. Section 45 otherwise requires that the giving of financial assistance to directors, officers and related and inter-related entities requires the passing of a special resolution, a solvency and liquidity and fair and reasonable board resolution and notice to shareholders and trade unions.
Additional changes most interesting to those active in the transaction space
- Section 16: MOI amendment timing – 10 business days
The amendments propose that other than for name changes, which will remain effective on the date of the certificate of change issued by the Commission, all other amendments to the memorandum of incorporation of a company will be effective within 10 business days after ‘receipt’ by the Commission of the notice of amendment, unless endorsed or rejected in that time. There is no longer provision to select a later date.
- Section 38A: Validation of share issues by a court
A court will be able to validate invalid creations, allotments and issues of securities.
- Section 40(5): Issues with delayed consideration – held by ‘stakeholders’
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.
- Section 48(8): Buy backs – more, not less, ambiguity – linked to pro rata and on market buy back exceptions
Section 48(8) dealing with buy backs remains unchanged, but a new Section 48(9) will be inserted. It seems to provide that a special resolution for a buy-back will also be needed if the buy-back is from directors/ officers/ related persons OR any other buy-back, except if it is pro-rata from all shareholders or on market in the ordinary course.
Changes relevant to post commencement finance and business rescue
- Section 135: Post commencement finance in business rescue
Any amounts due by a company under business rescue to a landlord will be regarded as ‘post commencement financing’ and the landlord will have a voting interest in the business rescue proceedings. Post commencement finance, whether secured or unsecured enjoys preference over unsecured creditors.
Some other changes
- Section 1: Securities definition narrowed
The definition of ‘securities’ will be amended by removing reference to any ‘other instruments’ and introducing 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’.
- Section 95: 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.
- Section 90: Auditor appointments
The amendment provides for the appointment of an auditor at the shareholder meeting at which the requirement for 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.
- Section 160: 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.
- Section 175: 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.
- Section 166/167
Alternative dispute resolution
The proposed amendments remove the ability to send alternative dispute resolution associated with the Act to an ‘accredited entity’ or any other person. It is now only possible to send those disputes to the Tribunal for alternative dispute resolution.
The amendments deal with matters pertaining to the Tribunal constitution, chair and executive appointments and responsibilities and rights to adjudicate on new matters.
Financial Reporting Standards Council
The Financial Reporting Standards Council will be empowered to issue financial reporting pronouncements in respect to international reporting standards which require adoption for local circumstances. Previously, it advised the Minister to make regulations. Its increased powers are however restricted such that pronouncements do not conflict with IFRS.