The Department of Trade and Industry has proposed various changes to the Act to align with modern international corporate trends and to address the problematic areas by closing some loopholes in the Act. Many of these changes are technical in nature, however, the following proposed amendments are some of the more substantial amendments that the Bill proposes.
The Bill proposes that companies that are required to include particulars showing the remuneration and benefits received by each director will now also have to include details pertaining to remuneration and benefits of a prescribed officer. The Companies Act currently reads as “individual holding any prescribed office”. The Bill therefore seeks to streamline the wording hereof. The main amendment to this section however, is that the Bill states that each individual must be named. This promotes transparency and accountability and ensures full disclosure on a controversial issue.
Deals with validation of irregular creation, allotment or issuing of shares. This section proposes that a company or any interested person is permitted to approach a court for an order validating the creation, allotment or issuing of shares, if it is just and equitable to do so. The proposed amendment fails to address the issue of whether existing shareholders would have any say in the process but it is safe to say that each matter dealt with by a court will depend on the particulars of each case. Furthermore, the Bill fails to make provision for the time during the ongoing court process. Until such time that a court order is granted, does the potential shareholder have a right to vote? The Bill states that the shares must be deemed to have been validly created, allotted or issued upon the terms of the creation, subject to conditions imposed by the court. This can be problematic due to one of the terms of creation being the date of creation. Should the court make a ruling in favour of the applicant, will the shares be retroactively authorised? The Act currently reads that shares may be retroactively authorised by way of a shareholder resolution. This brings us back to the aforementioned issue regarding voting rights. The Bill gives the court the power to impose certain conditions so it is possible that courts may provide clarity on this issue.
The Act presently empowers the board to provide financial assistance subject to sections 45(3) and 45(4), one of which is pursuant to a special resolution of the shareholders. The Bill aims to reduce the regulatory burden by proposing that this requirement be done away with in instances where a company provides financial assistance to, or for the benefit of, its own subsidiary. The question arises as to whether or not this falls within the ambit of the board’s authority regardless of whether it can comply with the aforementioned provisions. The proposed amendment is problematic as the adoption of a special resolution is only one of the many requirements for financial assistance.
- Section 16 – Amending Memorandum of Incorporation
- The Companies Act currently states that the amendment to a company’s MOI will take effect on the date that the Notice of Amendment is filed. This, however, has created confusion as to the definition of “filed”. The market interpreted this to mean the date the Notice was filed with CIPC whereas the CIPC’s interpretation is that it is only filed once they have reviewed and approved same. The Bill seeks to bring clarity to this provision and do away with unnecessary delays by proposing that the amendment to a company’s MOI will take effect 10 days after receipt of a Notice of Amendment by the CIPC if the Commission have failed to endorse the said Notice of Amendment or failed to deliver a notice of rejection in that time. It seems that if the CIPC has not responded within the 10 days, they would be prohibited from delivering a Notice of Rejection.
- Section 30 – Annual Financial Statements
- Insertion of Section 38A
- Section 45 – Loans or other Financial Assistance to Directors
- Section 48 – Company of Subsidiary acquiring company’s shares
The Bills seeks to stringently regulate share buy-backs by proposing that a share buyback must be approved by a special resolution of shareholders if shares are to be bought back from a director, a prescribed officer or a person related to a director or a prescribed officer. A special resolution adopted by shareholders will also be required if the buyback entails an acquisition other than a pro rata offer made to all shareholders or transactions effected in the ordinary course on a recognised stock exchange. Share buy-backs are advantageous from a tax perspective as this type of transaction falls within the income tax definition of a “dividend” which are exempt from normal tax. In the 2016 Budget Review, the Minister of Finance stated that the wide-spread use of share buy-back arrangements merits a review to determine if additional countermeasures are required. Furthermore, the 2017 Budget proposes that specific legislative countermeasures be introduced.
- 6. Section 72 – Board Committees
The Bill proposes that public companies and state-owned entities would now be required to set up a social and ethics committee. Companies may apply for an exemption in certain circumstances. It has been said that companies should be obliged to develop a social conscience and act responsibility having regard to the impact companies have on the wider public interest.
- 7. Section 118 – Takeover Regulations
Takeover regulations currently apply to many transactions undertaken by a private company which is cumbersome and to some extent unnecessary, especially for small to medium-sized private companies. It is proposed that Part C of the Act and the takeover regulations only apply with respect to an affected transaction or an offer involving a private company if the said private company at the time of the affected transaction is required to have its annual financial statements audited every year.
- 8. Section 135 – Post Commencement Finance
The Companies Act makes no reference to property owners, landlords, tenants or lease agreements in the event of business rescue proceedings. Property owners or landlords often need to approach the business rescue practitioner and come to an agreement that rental be treated as a business rescue expense or post commencement finance in terms of the landlord’s hypothec in terms of Common Law. What happens when the parties cannot reach an agreement? The Bill addresses this issue by inserting that any amounts due by a company under business rescue to a property owner, in terms of a contract which the owner has paid to any third party during the business rescue proceedings, will be regarded as post commencement finance. Post commencement finance enjoys preference over unsecured creditors.
The amendments seek to simply, clarify and bring certainty to the Act. The Companies Amendment Bill 2018 is open for input and comments by members of the public and other interested parties until the 14 December 2018.