Thorts: What’s happened to the (new) companies amendment bill?

There has been speculation around what has happened to the (new) Companies Amendment Bill. In this article, we consider some of its key features, should it be promulgated in its current form.

Status Quo

On 1 October 2021, the Department of Trade, Industry and Competition (DTIC) published the latest draft of the Companies Amendment Bill (Amendment Bill) in Government Gazette No.45250, which contains some departures from the prior version, published on 21 September 2018. The public was afforded a 30- day period to submit any comments in relation to the Amendment Bill and, since then, there has been media speculation as to the delay in its much-anticipated promulgation. Desmond Ramabulana, the DTIC’s Head of Commercial Law and Policy, provided useful insights regarding the progress of the Amendment Bill by confirming, in a comment to journalist Ann Crotty in June, that the DTIC is analysing the comments received last year and, once complete, the Amendment Bill will be referred to cabinet for parliamentary introduction. When questioned by the Financial Mail as to the expected timing of this process, Ramabulana indicated that “there are no timelines that can be pre-empted, but the department is aiming to make sure this bill [is] referred to Parliament within this financial year.”

The Amendment Bill aims to accomplish three noteworthy policy goals, namely:

(1) improving the ease of doing business with regard to certain provisions of the Companies Act No.71 of 2008, as amended (Companies Act);

(2) enabling greater wage ratio transparency at the firm level; and

(3) addressing true or beneficial ownership of companies, so as to confront money laundering apprehensions.

Some of the key amendments in the amendment bill

I) Enhanced transparency on disclosure of remuneration
An amendment that would likely have attracted significant public comment is the director’s remuneration report for state-owned and public companies. The Amendment Bill, in clause 6, entrenches principle 14 of the King IV Code (Principle 14) by introducing a requirement for public and state-owned companies to prepare a remuneration policy for directors and prescribed officers. Notably, the Amendment Bill, in section 30A(2), extends Principle 14 by requiring that the remuneration policy be approved by shareholders, by way of ordinary resolution at the annual general meeting (AGM), and every three years or whenever any material change is made.

S30A(3) of the Amendment Bill states that the company’s remuneration policy must be detailed in a remuneration report, which must include:

(a) a background statement;
(b) the aforesaid remuneration policy;
(c) the implementation report, detailing the remuneration received by directors and prescribed officers;
(d) total remuneration and benefits of the highest remunerated employee;
(e) total remuneration of the employee with the lowest remuneration; and
(f) 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 five percent of highest paid employees and the remuneration of the lowest paid employees of the company.

As per s30A(6) of the Amendment Bill, the remuneration policy and implementation report, whilst both forming part of the remuneration report, must be approved independently by ordinary resolution of shareholders.

S30A(7) of the Amendment Bill states that if the remuneration policy is not approved at the AGM, changes cannot be made thereto, and it must be presented at the next AGM or general meeting until approval is obtained. S30A(9) of the Amendment Bill states that if the implementation report is not approved, the remuneration committee (or the responsible directors’ committee) must, at the next AGM, present to shareholders the details of how their concerns were considered, and the non-executive directors who serve on the aforesaid committee shall be required to step down for re-election every year that the implementation report is rejected.

In our view, it is likely that public comment focused on the approval processes for the remuneration policy report and implementation report, as contemplated in terms of sections 30A(2), (4), (6) and (7) and (9) of the Amendment Bill, as well as the insertion of section 30A(3) (e) and (f) above, dealing with, inter alia, the total remuneration of the employee with the lowest remuneration in the company and the average remuneration of employees, median remuneration of employees, and the remuneration gap between the highest and lowest paid employees, respectively.

II) Financial Assistance
A long-awaited change in the Amendment Bill is clause 11 thereof, which amends s45 of the Companies Act by inserting a new section, 2A. S2A specifies that the provisions of s45 of the Companies Act will not apply to a company that gives financial assistance to, or for the benefit of, its subsidiaries. This amendment arises from the notion that the protections currently provided for in s45 of the Companies Act need not regulate the provision of financial assistance between a holding company and its subsidiary. This amendment will ameliorate the unnecessary inter- group compliance burden that s45 of the Companies Act currently gives rise to.

III) Share Repurchase Requirements
Another change in the Amendment Bill (which is eagerly anticipated by many), is the proposal to revise s48(8) of the Companies Act by requiring that all share repurchases be approved by special resolution of the shareholders, unless it entails a pro rata repurchase from all shareholders or a repurchase on a recognised stock exchange on which the shares are traded. Accordingly, the present provision of s48(8), which requires compliance with the requirements of s114 and s115 of the Companies Act if the transaction involves an acquisition of the company of more than five percent of the issued shares, will no longer apply. In our view, this amendment is well-supported, as the present provision places a burden on companies to comply with s114 and s115 of the Companies Act (which are not well-suited to share repurchases) which includes, inter alia, the obligation to obtain an independent expert report for repurchases of shares in excess of five percent of any class of shares of the company. If promulgated, it will end the debate as to whether the provision means that such repurchases of shares must be undertaken by way of a scheme of arrangement.

In a judgment that has entrenched the compliance burden, on 8 June 2022, in the matter of First National Nominees (Pty) Ltd and others v Capital Appreciation Limited and Others, the Supreme Court of Appeal confirmed that s48(8)(b) of the Companies Act contemplates that share repurchases in excess of five percent are subject to all of the procedural requirements and rights delineated in s114 and s115 of the Companies Act. Thus, if the proposed amendment to s48(8) is promulgated, it would be a welcomed simplification of what has become a burdensome section which arguably provides little practical benefit to stakeholders.

IV) Beneficial Owners of Companies
The Amendment Bill revises s56 of the Companies Act by introducing a definition of “true owner”, and measures what companies will need to adhere to, to establish and report their true ownership. Essentially, “true owner” is defined as the natural person who would, in all circumstances, be considered the ultimate and true owner of the relevant securities, whether due to (directly or indirectly) being entitled to the benefit from the securities, due to (directly or indirectly) being able to direct the registered holder with regards to the securities, or for any other reason.

These amendments identify the true owner of shares of a company by identifying both the beneficial holders and ultimate beneficial owners of its shares. These amendments

(i) oblige all companies to require from their registered shareholders, details of the identity of persons who hold beneficial interests in the companies’ shares;
(ii) strengthen the existing provisions relating to companies’ establishing and maintaining a register of the owners of beneficial interests in its shares, and disclosure by shareholders relating to the persons who hold beneficial interests in its shares; and
(iii) (iii) require all companies to publish in their audited financial statements, details of all persons who, alone or in aggregate, hold beneficial interests amounting to five percent or more of a particular class of shares.

The proposed definition of “true owner” aligns with the definition of “beneficial owner” in the Financial Intelligence Centre Act No. 38 of 2001. The rationale for the revision is to eliminate company ownership arrangements that are used for illicit and criminal purposes. This is significant in allaying concerns about the potential Grey-listing of South Africa by the Financial Action Task Force.

V) Other
Amongst what are regarded as a number of more “technical” changes, other useful changes in the Amendment Bill include:

• Section1: The definition of “securities” has been amended to delete the phrase ‘other instruments’, which removes any ambiguity regarding the scope of securities;

• Section 16(9)(b): This revision clarifies that the period in which the Companies and Intellectual Property Commission (CIPC) should accept a Memorandum of Incorporation (MOI) amendment will be limited to 10 days, subject to a few exceptions;

• Section 38A: This revision provides for judicial intervention, to enable parties to obtain certainty regarding the validity of share issues where the requirements of the Companies Act or a company’s MOI were not strictly adhered to; and

• Section 135: This proposed change clarifies that any utility- related payments made by a landlord to third parties during business rescue proceedings will be regarded as post- commencement financing and will rank before concurrent creditors, but after employees.

Conclusion

After the DTIC has reviewed the public comments, the Amendment Bill’s promulgation will provide significant and, in our view, mostly positive improvements to the Companies Act. In summary, the revision of inter- group financial assistance and share repurchase provisions will improve the ease of doing business.

Significantly, the introduction of the definition of a ‘true owner’ will aid in identifying the beneficial holders and ultimate beneficial owners of a company’s shares. It remains to be seen how industry will react to the more contentious aspects of the Amendment Bill, being
the enhanced transparency and approval procedures in relation to remuneration, particularly sections 30A(2)(e) and (f), as well as s30(9). As with any legislative development, the market will no doubt appreciate certainty either way, both as regards the substance of the changes, and the timing.

Anthea Eleftheriadis and Tevin Ramalu are Candidate Legal Practitioners. Supervised by Matthew Morrison, a Director in Corporate and Commercial | ENSafrica.

This article first appeared in DealMakers, SA’s quarterly M&A publication
DealMakers is SA’s M&A publication
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