Many businesses in South Africa will have to publicise what individual directors earn, while others will fall subject to the country’s takeover rules for the first time, under a raft of changes made to company law.
The amendments will update the Companies Act 2008 when they take effect – a date still to be prescribed by South Africa’s president, Cyril Ramaphosa, in the Government Gazette. They will impact businesses across sectors.
Access to company records and annual financial statements
Currently, the Companies Act entitles shareholders or members of a company to inspect and copy a range of documents or company records, whilst non-members may only access the securities register, on application to the company and payment of a fee.
Under the changes, any person will now have the right to inspect and copy a wider range of documents or company records – including the beneficial interest register and annual financial statements of a company, subject to limited exceptions.
In South Africa, businesses are required to calculate their ‘public interest score’ by reference to criteria set out in the Companies Act, which includes turnover, number of employees, third-party liabilities, and number of stakeholders. Their score has a bearing on the degree of company law obligations they are subject to.
The right to inspect the annual financial statements does not extend to a private company, non-profit company or personal liability company where the annual financial statements are prepared internally in a company with a public interest score of less than 100 or prepared independently in a company with a public interest score of less than 350.
According to Lisa Botha of Pinsent Masons, a controversial amendment concerns rules relating to the disclosure of the remuneration and benefits of directors and prescribed officers. Under the new rules, the individuals receiving the remuneration and benefits must be named by companies in their annual financial statement.
“For state-owned companies, public companies and profit or non-profit companies whose public interest score and accounting treatment meets certain thresholds, the annual financial statements will now have to be filed at the Companies and Intellectual Property Commission (CIPC),” Botha said. “The annual financial statements will also be available to non-members of the company on application to the company and payment of a fee, save where the company is a private company, non-profit company or personal liability company where the public interest score and accounting treatment fall below certain thresholds.”
“The amendments are intended to enhance transparency, but the inclusion of larger profit companies in the disclosure regime has caused discomfort – both because of access to the company’s financial information and to the remuneration and benefits of the directors personally,” she said.
Remuneration disclosures
The new legislation also introduces remuneration disclosures which are not contemplated in the current Companies Act, which will allow shareholders to have better oversight over the remuneration practices and policies of a company.
As well as having to disclose remuneration details on an individualised named basis, all public and state-owned companies will be required to prepare and present a remuneration policy for approval by ordinary resolution of the shareholders at either the company’s annual general meeting or a shareholders meeting called for that purpose. Once approved, the remuneration policy remains in force for three years and must be approved every three years thereafter or whenever there is a material amendment.
All public and state-owned companies will also be required to prepare a remuneration report annually in respect of the previous financial year for presentation and approval at the annual general meeting. The remuneration report must contain: a background statement; a copy of the company’s remuneration policy; and an implementation report, containing remuneration details relating to directors, prescribed officers, the highest paid employee, the lowest paid employee, the average total remuneration of all employees, the median remuneration of all employees and the remuneration gap between the highest paid employees and the lowest paid employees.
Marlene Murphy of Pinsent Masons said: “The vote at the AGM is not on the implementation report, but rather on the remuneration report, which includes the remuneration policy. However, at the time the remuneration report is considered by shareholders, the remuneration policy has already been separately approved by ordinary resolution of shareholders.”
Loans or other financial assistance to directors
Currently, where a company provides financial assistance, such as guaranteeing a loan or other obligation and securing any debt or obligation, to a related or inter-related person, including a company or corporation, the board of a company is required to pass a solvency and liquidity test and to resolve that the terms of the financial assistance are fair and reasonable to the company and the shareholders are required to pass a special resolution, before providing the financial assistance in question.
Under the changes made, financial assistance by a company to its subsidiary will no longer fall subject to these requirements. The financial assistance provisions will still apply where a subsidiary receiving financial assistance is an offshore company.
Approval requirements for a share buy-back
A share buy-back under the current Companies Act is subject to the passing of a special resolution if the buy-back is in respect of more than 5% of any class of shares; and the preparation of an independent expert report; or the exercise of any section 164 appraisal. These requirements will be removed when the amendments take effect, simplifying the process to be followed when effecting share buy-backs by a company.
A company will only be required to pass a special resolution if any shares are to be acquired from a director, prescribed officer of a company or a person related to a director or prescribed officer of a company, and it entails the acquisition of shares in the company, subject to some exceptions.
Anthony Crane of Pinsent Masons said: “The requirements relating to share buy-backs and appraisal rights have often resulted in divergent views. The deletion will now simplify and provide legal certainty to the process.”
Director liability
The new legislation has a material impact on the liability of directors in that the periods during which directors may be held liable have been extended. The period within which directors may be declared delinquent has been increased from 24 months to 60 months and proceedings against a director to recover any loss, damages or costs will be capable of being instituted against the director even if a period of three years has passed, if a court deems it appropriate.
Private company takeover regulations
Currently, a private company is considered a regulated company in South Africa if there has been a transfer of more than 10% of the issued shares in the company over the previous 24 months, other than where the transfer was between or among related or inter-related persons. Under the updated framework, a private company will be a regulated company if the company has 10 or more shareholders with a direct or indirect shareholding in the company and meets or exceeds the financial threshold of annual turnover or asset value, which are determined by government.
Jannie de Villiers of Pinsent Masons said: “The result is that certain private companies may now qualify as regulated companies, which have to comply with the takeover provisions or obtain exemptions.”
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