Corporate Laws Amendment Bill [B6-2006]: briefing

ECONOMIC AFFAIRS SELECT COMMITTEE
20 June 2006
CORPORATE LAWS AMENDMENT BILL [B6-2006]: BRIEFING

Chairperson: Ms N Ntwanambi (ANC)

Documents handed out:
Department of Trade and Industry presentation
Proposed amendments document
Corporate Laws Amendment Bill [B6-2006]

SUMMARY
The Department of Trade and Industry briefed the Committee on key aspects of the Corporate Laws Amendment Bill that intended to amend sections of the Companies Act. Proposed legislation focused on financial assistance by companies to purchase their own shares, the establishment of audit committees within public interest companies, the entrenchment of accounting standards and the recognition of electronic signatures in financial transactions and other related activities. Legislation would facilitate the creation of a Council and a Panel to guide implementation of the legislation and monitor progress.

Members asked various questions including the positioning of agencies to implement the legislation, the implications of companies providing financial assistance to purchase their own shares, the prohibition of auditors to render non-audit services, the communication of proposed amendments to interested parties and business entities, the indemnification of Inspectors, reasons for the 75% shareholder approval threshold, measuring tools to monitor implementation, the list of interest groups consulted and the role of provincial governments in implementation plans.

MINUTES
Department of Trade and Industry presentation
Mr M Netshitenzhe (Director-Commercial Law and Policy) outlined the important issues contained in the Corporate Laws Amendment Bill. Issues discussed included financial assistance by companies to purchase their own shares, the introduction of an audit committee to public listed companies, the rotation of auditors on a five-year basis, to provide a legal framework for accounting standards and the acceptance of electronic signatures. The Bill sought to provide confidence to both foreign and domestic investors. Certain entities would be created to enforce provisions of the Bill. The rationale of the Bill was explained.

Discussion
Ms M Temba (ANC-Mpumalanga) noted that the Department’s presentation referred to the Portfolio Committee and commented that the Select Committee should receive greater recognition from the Department. She asked where the entities established to enforce provisions and monitor implementation would be based.

Mr N Hendricks (UIF) sought further clarity on the concept of companies providing financial assistance to prospective investors to purchase their own shares. The prohibition of auditors to render non-audit functions could have an adverse impact on small business in terms of additional costs.

The Chairperson asked for a comprehensive list of agencies linked to the Department to be forwarded to the Committee.

Mr Netshitenzhe stated that previously accountants had operated in accordance with an ethical framework designed by the relevant professional body. The present mindset was that more accountability from auditors was needed in the light of widespread fraud and misrepresentation. The Bill advocated the establishment of a Council and a Panel to oversee implementation. The entities would be based at the national level but would have a presence in all provinces. Section 38 of the Companies Act did not permit companies to provide financial assistance from their own assets to facilitate purchase of their shares. The intention of the present Bill was to allow companies to render financial assistance in accordance with three criteria namely, that the company remained solvent, assets were of a higher value than liabilities and that 75% of shareholders agreed to the assistance at the Annual General Meeting. Systems were in place to monitor implementation. The provisions of the Bill pertaining to the services to be provided by auditors should be read in conjunction with the guidelines expressed in the Auditors Professions Act. Auditors should not provide non-audit services such as tax advice to companies that they audited.

The Chairperson asked if additional amendments other than those provided would follow.

Ms Temba asked how relevant information on proposed amendments could be communicated to the local level.

Mr Hendricks asked whether companies would be informed beforehand of intended visits by Inspectors. Inspectors could cause considerable damage to a company’s financial status by leaking certain confidential information to competitors or adverse information to the wider public. He asked how the actions of Inspectors could be controlled and to what extent indemnification would be allowed.

Mr D Gamede (ANC-KwaZulu-Natal) noted that the 75% threshold to approve financial assistance transactions appeared unrealistic and asked why two-thirds or a simple majority would not be acceptable. Clarity was sought on the measuring tools to be used by entities created to implement the legislation. He asked whether only registered auditors would be used in the short term.

Mr Netshitenzhe stated that no new issues would be introduced to the Committee at this stage until the Chairperson of the Portfolio Committee had been consulted.

The Chairperson asked that any new proposed amendments would be forwarded to the Committee prior to the next meeting. She asked what steps could be taken against Inspectors that contravened regulations.

Mr Netshitenzhe responded that wrongful acts by Inspectors would be investigated and prosecutions would follow if necessary. Negligent acts committed by the Inspectors in good faith would be treated leniently by the courts. The Minister would appoint Inspectors to investigate alleged irregularities or non-compliance of regulations. The Inspector would hold an initial meeting with the company management to acquire a response to the allegations. A preliminary report would then be formulated. Auditors were obligated by the Companies Act to report violations to the relevant authorities. For example, tax avoidance had to be reported to the Revenue Service. The 75% threshold for shareholder approval was unusual but the intention was to dissuade irresponsible decision-making and protect the interests of minority shareholders. The threshold had been approved at recent public hearings.

Mr M Lepaku (Director-Policy and Legislation) explained that the threshold had initially been introduced in the United Kingdom in the 1920s to prevent asset-stripping takeovers where investors borrowed money to purchase a company’s shares and then sold the shares to repay the loan. The Bill intended to protect minority shareholders’ rights.

Mr Mutwa (Legal Advisor) added that the 75% threshold encompassed a special resolution as opposed to an ordinary resolution. Overwhelming support was necessary to protect the interests of minority shareholders.

Mr Lepaku stated that the prohibition of non-audit services by an external auditor applied to public interest companies.

Mr Netshitenzhe declared that awareness campaigns on the implications of the Bill would be conducted at the provincial level.

Ms Temba asked whether the awareness campaigns would occur prior to or after the promulgation of the legislation.

A member asked whether Nafcoc had been included in the consultation process. She stated that electronic registration had to operate in tandem with traditional forms of registration.

The Chairperson requested the list of stakeholders consulted by the Department. She asked whether consultation had occurred with provincial MECs on aspects of the Bill.

Mr Netshitenzhe explained that the Department had obtained a mandate from the Cabinet to publish the Bill in August 2005. Fifty key professional stakeholders and business bodies had initially commented on the Bill. No consultation occurred with closed corporations. The electronic and traditional registration processes would be applied simultaneously.

Mr Mutwa stated that the Department would consider an alternative communication strategy to ensure that the implications of the Bill were available to all stakeholders and business groups.

The Chairperson requested copies of all submissions to be forwarded to the Committee. The legal advisors had to be present at the next meeting. The Committee discussed the Third Term Committee Programme. An oversight visit would be undertaken to Richards Bay to focus on various industries. Particular attention would be placed on local economic development. The Department of Minerals and Energy’s Director-General would brief the Committee on current legislation in the third term.

The meeting was adjourned.