Companies Amendment Bills: Department response to public submissions (with Minister)

Meeting report

The Chairperson greeted members on the virtual platform and indicated that the meeting may commence.

Minister Ebrahim Patel was present on the platform.

Briefing by the Minister on Departmental responses to stakeholder issues raised during public hearings on the Companies Amendment Bills

Minister Patel appreciated the opportunity that the Committee had given to the Department and the flexibility that the Committee was willing to accommodate the Department’s schedule as the Chairperson himself had just returned from Abu Dhabi.

He introduced Prof Michael Katz who was the Chairperson of the Specialist Committee on Company Law. It is a statutory committee that has been set out in the Companies Act and has a duty to provide the ministry with advice on matters relating to legislation.

Minister Patel reminded Members of the detailed development of those two bills last year, and the three pillars of the Department’s philosophical and policy objectives. In that presentation, the Department Identified each clause which was to be changed and set out the problem which the Department identified, the proposed solutions and the effects of the change.

He highlighted that the public comments that the Select Committee received constitute the fourth set of public comments on the bill. it is a testimony of the process that was undertaken. Firstly, the first very original bill was published in 2018. Then in 2021, the redraft of the bill was published. In 2023, the Portfolio Committee published the bill and the Department was able to respond. In 2024, the Select Committee published the bill.

He assured the Committee that the engagement on the Companies Amendment Bills took place among the business community which was represented by BUSA and with organised labour. So the engagement was a thorough process in which stakeholders had managed to find common positions in most areas, including the most significant policy areas. The bills before Members had been crafted very carefully with many compromises made whilst still respecting the underlying principle that they sought to advance.

Minister Patel commented on the public comments which the Department had received. A large number of them supported the remuneration in the proposed amendments. However, in a number of cases, some submissions had set out arguments that were in favour of retention and keeping the status quo in the existing legislation. The problem is that remuneration is an issue that many South Africans are not happy with. In other cases, there were also disagreements in how extensive the reforms should be and how far they should go.

The first issue is around disclosure and confidentiality in relation to ss26(2) and 30(a). Some had raised the concern that the proposed amendment such as access to annual financial statements would be in breach of privacy, particularly those related to private companies. The Department’s view was that it should be viewed in the context of the broader architecture and philosophy of the current Companies Act. The Act itself does not make a distinction between publicly listed private companies, state-owned companies, and private companies whose public interest scores exceed the statutory threshold. The principles of transparency and accountability apply to all companies.

Minister Patel highlighted and quoted a number of celebrated judgements from the country’s top courts. In S v Coetzee and Others, the judgement highlighted that “those who choose to carry on their activities through the medium of an artificial legal persona must accept the burdens as well as the privileges which go with their choice”. In Bernstein and Others v Bester NO and Others, Minister Patel highlighted that “the establishment of a company as a vehicle for conducting business based on limited liability is not a private matter. It draws on a legal framework endorsed by the community and operates through the mobilization of funds belonging to members of that community. Any person engaging in these activities should expect that the benefits - inherent in this creature of statute - will have concomitant responsibilities. These include, amongst others, the statutory obligations of proper disclosure and accountability to shareholders. Furthermore, he read that “it is clear that any information pertaining to participation in such a public sphere, cannot rightly be held to be inhering in the person, and it cannot consequently be said that in relation to such information, a reasonable expectation of privacy exists. Nor would such an expectation be recognised by society as objectively reasonable”. In Nova Property Group Holdings v Cobbett, the judgement read that “Section 26 of the Companies Act is enacted with precisely these objectives in mind. It recognizes that the establishment of a company is not purely a private matter and may impact the public in several ways. It therefore seeks to impose strong rights of access in respect of very specific but ultimately limited types of information held by companies. Section 26 must, therefore, be interpreted in accordance with this purpose”. Those judgements provided a broader rationale and justification for requiring private companies to make certain kinds of information available.

He explained why the Department believed that the disclosure of names in the context of remuneration was necessary. For instance, shareholders should be entitled to that disclosure for the purpose of objecting and for enquiring compelling reasons to justify that remuneration should a director receive a remuneration that is manifestly inappropriate. Schedule 8 of 2008 regulation to the UK’s Companies Act requires the same information.

Then, the Minister commented on the proposed amendment made to s30(A) which related to remuneration. There were several options that had been presented to the department. The first was the prescriptive way of prescribing, the second was to provide a binding guideline, the third option was that the bill sets requirements in which remuneration policies have to be approved by shareholders and the last option was to keep quiet on the matter.

The bill used the third option in that shareholders could hold the executives accountable for the remunerative package. At NEDLAC, a serious concern had been registered which was the inequality of wage gap. The Department decided to leave it to the company boards to determine. If boards do not rise to the occasion, Parliament could consider implementing additional measures to address that.

There were different views on remuneration and there are different policy choices. The Department has calibrated views from different sides of the spectrum. Minister Patel informed the Committee that it was the Department’s view that the amendment should be used to tackle the injustice of excessive pay. The pay gap is a historical challenge in SA that has contributed to the inequality in SA. If the bill is approved by both houses, the amendments would empower shareholders in stronger governance on excessive director pay. Minister Patel assured the Committee that the Department had taken into consideration the view of the JSE and addressed those concerns during the Portfolio Committee process. The Department was of the view that further amendments are not strictly necessary for the legislation to be effective at this stage.

There were calls for adding additional categories to remunerative disclosure requirements. From a policy perspective, the Department recognised the importance of disclosing gender, and racial lines to address discrimination in the labour market. However, that would again initiate a whole chain of public consultation process which the Department felt was too significant a step and should be incorporated in future amendment processes.

Minister Patel highlighted the social and ethics committee in relation to s72. It is an innovation in the law that seeks to address environmental and social concerns. The provision is to require compliance from companies.

On composition, Minister Patel indicated that there had been questions about whether shareholders should elect SCC members. The Department did not see merit in the concern as the committee was very specific and how shareholders appointed SCC could have a negative impact on that.

Further proposals had been made to ss5, 66, 69, 75, 129 and 145 of the Companies Act which the Department believed would need further consultation and research. So those proposals may be included in future rounds of amendments.

Minister Patel indicated that the Department had received fewer comments on the Companies Second Amendment Bill. There were two submissions that had disagreed with the proposed change to s77(7). The Department viewed it as a different policy choice and not the one which the Department believed was warranted.

Furthermore, he highlighted that the Companies Second Amendment Bill arose from the recommendations of the Zondo Commission.

(See Presentation)

Discussion

The Chairperson suggested to the Committee that it should combine the clause-to-clause Q&A and deliberation given that they only had a short time to apply their minds to the document.

Mr M Mmoiemang (ANC, Northern Cape) sought clarity on the typo “contemplated” in s26 (5)(g).

On remuneration, he appreciated the context and overview which the Minister had provided and described it as a terrain to traverse for the country. He also appreciated the comparison between different jurisdictions on the issue of the pay gap. It reminded him of one of the local miners whose partner is listed on the Australian stock exchange. In October 2021, the shareholders rebelled against the executives’ pay and asked to remove the CEO. Hence, it is a necessary intervention that underlines the importance of remunerative transparency to shareholders.

He supported the Department’s view on metrics on policy matters.

Finally, he appreciated and noted that the Department did not support recommendations that were sought to amend s1, 16, 25, 33, 45, 118, 135, 160, 194, 195, and 204 of the bill.

Mr M Dangor (ANC, Gauteng) agreed with the Chairperson’s suggestion that the inputs should be given to the Committee; then Members would deliberate and apply their minds to the document.

Mr J Londt (DA, Western Cape) posted in the Chatbox and asked if Members could get a deadline on the feedback on clause-by-clause deliberation.

The Chairperson responded that next week Tuesday Members could do that and requested for the clause-by-clause document to be sent to the Committee.

The Chairperson sought clarity whether the typo “comtemplated” would constitute another round of amendment or it would just be treated as a typo.

The Chairperson enquired about holding companies financially assisting their subsidiaries. The Consumer Goods Council wanted that clause to be amended as it should not be confined to holding companies but companies themselves should be allowed to assist one another financially. If the purpose is to assist business growth, he asked if companies could assist each other in the current legislation.

On the definition of security, the Chairperson wanted to know why “or other instruments” were removed from the amendment bill.

Minister Patel indicated that the Department was happy to expand on the metrics. He further encouraged the Committee to inform the Department with more information if Committee Members had more input.

Prof Michael Katz, Chairperson of the Specialist Committee on Company Law, thanked the Committee for this opportunity to address it.

He commented on the suggestion to reinsert “other instruments” and explained that the definition of security arises from a number of sections in the text and its definition thus became important. The Department’s view is that including “other instruments” would be inappropriate and confusing and would be better if the wording was dropped.

Prof Katz explained s45 which deals with the prohibition against giving financial assistance to companies within the same group. He highlighted that the prohibition is not a complete ban because if a company wants to offer financial assistance to another company within the same category, it would require a special resolution that would have to be passed by its shareholders not later than the last two years, and then the company has to conduct a liquidity test. The argument behind that is that shareholders of a subsidiary company are minority shareholders, so if a subsidiary company gives financial assistance to its holding company or its subsidiary, it could be detrimental to the company’s shareholders. So the prohibition is put in place to protect the interest of the minority shareholders. In the case where a holding company gives its own subsidiary financial assistance, given that there is alignment in the interests between its shareholders and the company, the prohibition would not be necessary.

There was also a recommendation that the Department should allow giving financial assistance to foreign subsidiaries. Prof Katz explained that the Companies Act only regulates South African companies. A foreign subsidiary is regulated by the laws of the foreign jurisdiction that may have a totally different approach to the exercise of control which the Department could not bring into its dispensations the activities.

Prof Katz commented on Mr Brauteseth’s question in the meeting last week. By bringing in those companies in ss24 and 26, Mr Brauteseth’s concern was that that would be increasing compliance for private companies. Prof Katz agreed with the Minister on that part and highlighted that there is no distinction between public and certain private companies in terms of transparency and accountability. There are certain private companies whose public interests score exceeds a certain level and thus should be held accountable. For those private companies whose public interests do not exceed that threshold, the Department has been cautious in not increasing their compliance.

Prof Katz noted about the input on the transition period that listed companies may be in the middle of just about giving notice to shareholders when the Act becomes operative and they have to start again according to the new disclosures 30a and b. He assured the Committee that there would be a provision in the proclamation that there would be staggered dates taking cognizance of the necessity to make regulations. However, the Department was of the view that any suggested amendments to provide transitionary allowances aren’t appropriate to be included in the bill itself.

Prof Katz responded to the enquiries on whether the disclosure in 30(b) could result in the desired effect of reducing remuneration. He did not think that any jurisdiction has had that effect as yet even in those countries that have been practising this. He quoted Justice Louis Brandeis, who said “electric light is the best disinfectant and sunlight is the best policeman”. Using that metaphor, he pointed out that the disclosure obligation would certainly have a shrinking effect.

People don’t want to have to defend and justify outrageously disproportionate remuneration. The very requirement of putting it in the sunlight shrinks. He clarified that he was not saying that this is always the case but that is the philosophical objective of regulation by disclosure.

Prof Katz noted the Minister’s remark that some of these proposals were based on linguistic style but some are based on misconceptions of some underlying provisions of company law. He provided examples on the two misconceptions in section 45 and tried to give on other instruments where it has its adverse impact. There was one that dealt with mandatory offers where there was a change of control and the question was if someone’s shareholding goes above 35% but it arose because there was a buyback of shares by the company, that shouldn't trigger the consequence. There's a very good reason why it does. The whole philosophy of mandatory offers is based on the doctrine of equal opportunity when there's a change of control. Control could change in one of two circumstances, either a company and its sponsors together acquire more than 35 or the company by buying back some of its shares could then bring about with one of its major shareholders which had 33 or 34 percent before now crosses the line and if that was exempt, that would have been a very big hole that control could change without an offer and that shareholder could thereafter buy as many shares as they like.

Minister Patel thanked Prof Katz for his detailed response.

He recognised the many international practices and the Australian shareholder response had been noted. He emphasised that the Bill empowers shareholders and uses a proactive shareholder approach to regulate the proper responsibilities of the board and shareholders. Traditionally, in many countries, remuneration matters were exclusively the domain of the board and shareholders would not get involved. What has happened is that those practices have resulted in differentials that shareholders have expressed a growing concern about. They are limited now simply to advisory votes. In addition to shareholders, society has also raised concerns about this. That are periodic stories about the salary levels of executives and it leads to a round of public commentary and condemnation. The role of Parliament and the Executive is to take heed of these public concerns and find an appropriate balance from a policy point of view of addressing it. The Department has sought to address this by empowering shareholders and ensuring there are consequences to a remuneration committee’s decision. This is the reason why shareholders are given additional powers.

The Minister indicated that Prof Katz dealt with the question around holding companies and affiliates substantially.

On definitions and exclusion of the word other, this was dealt with substantially by Prof Katz.

The additional document will be made available as requested. The Committee can call upon the officials and Prof Katz, depending on his availability.

The Chairperson thanked the Minister and Prof Katz for addressing the questions.

The Chairperson sought clarity on whether the typo constituted an amendment that needs to go back to the National Assembly.

Adv Fatima Ebrahim, Parliamentary Legal Advisor, replied that the Minister was correct. It will be dealt with as an administrative matter. The Bills Office will make the correction before the Bill serves in the Council for adoption.

Minister’s closing remark

Minister Patel closed his briefing by reiterating that the engagement on the Companies Amendment Bill was an extensive process. Many interesting issues have been raised. Though those issues may not have been addressed in this bill, the Department believed that those proposals were beyond the scope of the bill and would inspire a new programme of work in the seventh Parliament.

The market and business community would be keen for the bills to be finalised. It will bring legal clarity and certainty to the areas where there have been anomalies and challenges with the implementation of the Companies Act.

He commended the helpful Select Committee process and appreciated its excellent spirit in engaging with stakeholders.

If necessary, the Department may amend the document it will circulate to take into account the comments raised at today’s meeting, for example, the point about holding companies and affiliates. It may add a paragraph or two to that document so that the Committee has the benefit of a written reply to the questions raised. An amended version of the document will be sent later today. He looked forward to the outcome of the Committee’s deliberation next week.

The Chairperson thanked the Minister and his team for taking the Committee through the responses.

Consideration and adoption of minutes

The Committee minutes of 5 December 2023, 6 February 2024 (2 on this day), and 20 February 2024 were all duly adopted.

The Chairperson adjourned the meeting.