Companies Bill: Initial Briefing

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Trade, Industry and Competition

24 June 2008
Chairperson: Mr D Dlali (ANC)
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Meeting Summary

The Consumer and Corporate Regulation Directorate of the Department of Trade and Industry and its Company Law Reform Unit gave an informal introduction to the Companies Bill with the intention of presenting an overview of the Bill and an explanation of the main recommendations informing the Bill.

Meeting report

Ms Zodwa Ntuli, Deputy Director-General for Consumer and Corporate Regulation, commenced by pointing out that the meeting was not intended as a formal presentation as she was working from the printer’s proof of the Bill. She hoped to provide a more formal introduction once the Bill was introduced. In addition to introducing her team, she emphasised that she was not intending to go into detail but only concentrate on some areas which required to be highlighted. See Powerpoint presentation for full comments.

She reminded the Members that the Bill’s concepts had been extensively work-shopped throughout the country and that 134 submissions had been received. Those submissions had been considered, followed up with the stakeholders and worked into the version before them – for the aim was to achieve public support. She outlined the scheme of the Bill, noting amongst others, that Chapters 2 and 3 were concerned with transparency, Chapter 4 Public Securities, Chapter 5 Shareholder security, Chapter 6 Business Rescue and the Functions of the Companies and Intellectual Property Registration Office (CIPRO) and then there was the question of linkages with other committees so that there was a holistic approach.

Chapter 1:
Interpretation, Purpose And Application
This chapter dealt with the formalities of company registration and what was aimed at was flexibility, to be read against the improved technology with which CIPRO was now provided which meant the reduction of the burden of registration process compliance. Notwithstanding, there was provision for exemption of special companies. The intention was flexibility and the doing away with delays in the registration process.

There was also provision for the use and acceptance of electronic documents. However she cautioned that for legal purposes not all electronic documents were accepted and so she conceded that a hybrid process was contemplated. It was also envisaged that there could and would be electronic delivery of electronic documents; but, again, the requirements of the legal process were somewhat in arrear of the intentions. To achieve compliance with the legal process not only was the hybrid system necessary, but also safeguards had to be built into the system. The aim was that proactive powers would emanate from the legislature. However, an overriding consideration was the use of plain language and the achievement of clarity and certainty.

Types of companies
Companies within the Republic of South Africa were divided into Profit Companies and Non Profit Companies. Non Profit Companies were required to reveal their specific stated intentions, that is, what their intentions or intended beneficiaries might be.

Profit companies might be either pure profit enterprises or state owned enterprises or combinations of the two; and they could even be foreign or external companies operating within South Africa.

Chapter 2:
Formation, Administration and Dissolution of Companies
The intention was to introduce no new terminology, to retain common terms, and avoid confusion, wherever possible. The registration of a company was regarded as a right, not a privilege, and required to be a simple accommodating process - bearing in mind the constitutional imperatives, inter alia, freedom of association and the right to conduct business.

Whereas the minimum number of participants for a Profit Company was one, a Non Profit Company had to have a minimum of three participants.

A Company was still required to have a Memorandum of Association by which certain basic minimum information was divulged: being the number of shares issued, the shareholders and Directors’ names and details. In light of the approach that registration was a right, Companies could elect to utilise Schedule 1, which if chosen led to a tick box completion or submission of basic information. This did not obviate the possibility the Companies might themselves choose to elaborate upon the basic information required, in which case there would or could be elaborate memoranda submitted. In addition the registration procedure envisaged the use of electronic submission of the required facts and information. Regard had to be had of technological advances. Problems might conceivably arise when companies submitted incomplete information or ineligible directors on their lists. However, the intention was to avoid technicalities and if there were inaccuracies, deficiencies or ineligibility, the Registration Office would not reject an application but would revert to the submitter, seeking clarification or a necessary amendment. The intention was flexibility.

Pre incorporation contracts were envisaged, and envisaged to be binding, unless specifically excluded in terms of any law of regulation.

Reckless trading or fraudulent offers would still be regarded as offences, but with administrative sanctions rather than criminal consequences.

Company names
With regard to names, it was intended to ease up on this matter but in the light of constitutional imperatives and certainly no offensive names would be allowed. A mere number for a name would suffice. Name reservations were optional but would endure for six months only. Action was contemplated against name squatting, which had been widened in concept and application. However, misrepresentation or passing off would still be offences.

The intention was to abandon formalities with regard to registration. The Department was well aware of the cost implications to companies of extensive documentation and the intention was simplification of the documents.

An additionally required feature was transparency and to this effect, documentary records had to be maintained for seven years minimum and disclose all relevant information about the company. In this regard, the financial accounting records and annual financial statements were regarded as the minimum. Lack of compliance was an offence with consequences. However, provision was made for exemptions upon application by any company. Public Companies by contrast with Private companies had enhanced requirements to meet.

Corporate Finance
With regard to Corporate Finance, Boards of Directors had enhanced powers and might finance expansion through debt so that the necessary arrangements were made quickly and efficiently although safeguards were built in. This was so South Africa was aligned with other jurisdictions.

There was provision for par value shares and reduction of capital although banks were exempted from following such a route.

To safeguard all interested parties, any Directors electing to reduce capital could become jointly and severally liable with the Company of which they were Directors for any losses sustained by other parties. Financial assistance by the Company for the acquisition of share holdings was still prohibited. The maintenance of equity was brought into line with the provisions of other jurisdictions

Corporate Governance
This was set out in Part F of Chapter 2, which was a codification of all voluntary provisions.

Chapter 5:
Fundamental Transactions, Takeovers and Offers
 Mr Tshepo Mongalo, Project Manager: Company Law Reform, DTI, then addressed Chapter 5 and explained the changes to the Companies Act envisaged by the Bill.

For fundamental transactions, a majority in favour of the special resolution was required and this was an attempt to apply this to all companies.

The proposed sale or disposal of all or the greater part of the assets was now permitted, especially between subsidiary companies and holding companies. However this became invalid in the event of a business recovery plan / scheme coming into operation. A special resolution and activity in terms of Section 115 (the Takeover Regulation Panel) was required.

Of great importance was the solvency test so that the liabilities did not exceed. This was important with mergers and so details of the assets needed to be available at all times.

Schemes of arrangement referred to in Section 311 of the current Act could be undertaken by companies and in terms of Section 114 the shareholders and other interested entities, such as employees, were to consulted. To enter upon a scheme of arrangement, it was necessary to refer to an independent expert who was to apply an objective test and it was intended that Section 115 and 164 would provide an appraisal of the rights given to the shareholders.

Even creditors of the Company could apply for a Business Rescue Plan and again the Solvency and Liquidity Test was the test to be applied.

However, Banks required the consent of the Minister of Finance.

If there was an affected transaction this could be authorised or rejected by the Commission created in terms of CIPRO.

A Takeover Regulation Panel, to replace the Securities Exchange Control Commission, was contemplated, to pronounce upon the acquisition of, or announced intention to acquire a beneficial interest in any voting securities of a regulated company amounting to 5 %, 10%, 15% or any further multiple of 5% or the announced intention to acquire a beneficial interest in the remaining voting securities of a regulated company not already held by a person or persons acting in concert, a mandatory offer or a compulsory acquisition.

Should predators gain 90% of the voting securities of a company they were obliged to purchase the remaining 10% of the voting securities at a price of not less than that paid to the other voting security holders. This was an equitable provision.

Other jurisdictions had similar provisions and this would bring South Africa in line with others jurisdictions.

The Business Rescue provisions had given trouble and had to be aligned with section 197 of the Labour Relations Act and so Chapter 6 was now aligned with the provisions of the Labour Relations Act. Compromises had been intended in terms of Section 311 of the current Act but the Bill now contained provisions in terms of case law precedent on compromises.

Chapter 8
Regulatory Agencies and Administration of the Act
A CIPRO Commission with wider and more extensive powers was envisaged. In future the CIPRO Commission would not be a mere recorder but an interpreter of information reporting directly to the Minister but also empowered to undertake its own investigations into individual companies or the field in which companies operate.

The Ombud was a body empowered, and authorised, to adjudicate upon disputes

There was provision for Financial Reporting Statements provision for which would be made in terms of regulations or Secondary legislation.

Relationship with Close Corporations Act
The provisions relating to Close Corporations were intended to provide certainty and do away with uncertainty. The intention was the simplification of legislation but the Close Corporations Act was to be brought into line with the Companies Act, which would be abrogated at the effective date thereof.

Mr Mongalo said that that was in his opinion a summary of the major features of the Act.

Ms Ntuli added that criminal sanctions were changed to being administrative sanctions and everywhere there was the intention of adding value.

Discussion
The Chair thanked the department officials for a comprehensive summation.

Mr Labuschagne (DA) enquired as to what voting securities might be and was informed that they were the equivalent of shares. They were to be distinguished from debt securities which were analogous to debentures because the holders thereof had claims against the company and ranked with the other creditors on insolvency.

Mr K Marais (DA) asked for an explanation of the provisions for squeeze out, mandatory and hostile takeovers.

Ms M Ntuli (ANC) congratulated the officials. She referred to the aim of reducing formalities and asked what capacity there was for granting exemptions and the length of time taken to secure a name. With regard to Business Rescues how this could take place before insolvency.

Ms Ramodibe (ANC) also complimented the officials on their summary and asked whether there was the capacity to detect insolvency. Addressing the question of the provision for electronic submission, she stated that many people were illiterate not only computer illiterate. Was this applicable to all companies or only some companies? She asked for the difference between Profit and Non Profit entities and what reckless trading might be.

Ms F Mahomed (ANC) was of the opinion that access to the Ombud would prove a problem and suggested that most people did not know about Ombuds. She asked what safeguards there were about purchasing shares in companies. She was concerned about people who bought shares in companies and then could not sell those shares, and even the companies did not want to re-purchase the shares from them. She wanted safeguards for share purchasers. Additionally, she felt that creditors did not have sufficient knowledge about the financial status of companies and wanted to know whether this Act was going to remedy that. She wanted an explanation of companies acquiring through debt.

Prof B Turok (ANC) congratulated the officials on an impressive presentation. He stated that he was very cynical about companies as he felt that the figures produced by companies were at best doctored if not downright fraudulently manipulated. He for one was very cynical about the image of companies. In this regard he referred to information kept private and not in the public domain. Additionally, he claimed that all companies finance expansion through debt, only government financed through surpluses. He asked what standards of conduct were required from Directors and whether the Bill provided for the King recommendations regarding corporate governance.

He added that he had two impressions from this Bill; firstly that companies were freed up and he felt that there would be problems arising from this. Secondly, he mentioned that the Public Investment Corporation, PIC, was a minority shareholder in many companies and was being prejudiced especially with regard to the implementation of BEE and he felt that there was a lack of transformation. He wanted to know whether there was a profile on companies.

Mr Labuschagne (DA) was concerned about electronic filing. He felt that there were 500-year-old pieces of paper reflecting rights but would electronic filing be able to duplicate this? He doubted it and felt that after 80 to 90 years, records might be lost and irrecoverable.

Additionally he pointed out that there was no definition of reckless trading. With regard to smaller companies and the requirement of financial reporting, he felt that this was an unsustainable burden on small companies and that complying with such might impoverish a small company.

He added that he was concerned about the powers given to the Board of Directors for he felt that all financial disasters could be ascribed to the Board of Directors and individual Directors and he wanted to know where the shareholders came into consideration. He noted that Chapter 6 was relatively untouched, because of case law, and he asked the reason for this. With regard to Close Corporations he wanted to know whether requirements would be simpler for such.

Ms Ntuli called upon her team to reply to the queries:

▪ Mr Mongalo stated that hostile takeover bids had not been defined, purposely. One share could be bought, as the basis, for a hostile takeover but there were provisions after 5% shares and bundles of 5% shares had been acquired and after 90% of the shares had been purchased there was provision for the operation of the squeeze out provisions. In short a hostile takeover bid was when the Board of Directors did not support the takeover operation. If the Board did, then there was a merger, or takeover, situation, which applied and this was with the acquiescence or concurrence of the Board of Directors. The Business Rescue or Financial Distress mechanisms were designed to prevent insolvencies. They were a moratorium to enable to company to survive, financially.
 
▪ Mr Roy Volker, Senior Manager: Legal Services CIPRO, stated that CIPRO was a multi purpose creation and was designed to be built upon and expanded and he felt that it would have capacity in future to monitor financial results and be an early warning system for insolvencies. Further, although the CIPRO head office was situated in Pretoria, the intention was to decentralise and negotiations were underway for every Post Office to be a CIPRO branch office at which business could be transacted so that there would be multi purpose facilities in future.

▪ Name reservations currently took less than a day, Close Corporations two days and Companies two to three days, dependent upon their complexity, to register. Public companies being more complex took longer.

▪ Currently there were plus minus 4 000 public companies, 400 000 private companies and 1 600 000 close corporations registered, many of which were dormant and as such were being de-registered.

▪ E-commerce and e-technology was constantly expanding and the CIPRO off ice had to maintain pace with developments, however a hybrid system was being maintained.

▪ Mr Mongalo said that the question of reckless trading must be viewed against other legislation after which a definition of reckless trading became apparent. Section 65 of the Close Corporations Act was very helpful in this and the cases decided in light of Section 65 served as a precedent.

▪ The purchase of companies through liabilities was well recognised.

▪ Nowhere was there provision for a shareholder to sell his shares back to the company in the ordinary course of events only when the Board of Directors had resolved on a buy-back scheme. The transferability of shares remains applicable.

▪ The chief criteria the company had to meet was the solvency test. There were no restrictions of the manner of financing expansion, save that it must be in the interests of the shareholders.

▪ No company could distribute assets or dividends without shareholder approval but there was now a tilt in favour of the Board. However, there were safeguards being that if the Board acted contrary to the best interests of the shareholders of the company, the Directors became personally liable jointly and severally with the company.

▪ Mr Flip Dwinger, Legal Counsel in Legal Services: CIPRO, stated that the Bill was designed to be operative in the internal and external fields of the companies and the CIPR Commission would be required to review the documentation submitted to it and play a role in the early detection of financial troubles which could lead to insolvency.

▪ Mr Mongalo stated that all companies were required to produce annual financial statements but that such did not have to be produced by chartered accountants but could be produced by a variety of persons.

▪ Because Chapter 6 had given rise to a lot of case law it was felt that it would be better to retain it rather than re-inventing the wheel.

Ms Ntuli said that concluded the presentation.

Mr Labuschagne remained concerned about the costs of financial statements to small companies.

▪ Mr Mangalo reminded the Committee that a company was free to choose the person preparing the financial statements and not compelled to use a chartered accountant.

In reply to a question on how the DOHA negotiations reconciled with this Bill, the Chair said that this meeting was intended to flag the provisions in the Bill and members would be provided with the opportunity to consider every aspect of the Bill and against other legislation.

Mr Turok remained concerned about the question of public interest which he felt was downplayed and that the awarding by Directors to themselves of share options was a racket and not in the public interest. Directors only looked to their own interests. In addition he felt that because independent experts would be paid by the companies (on restructuring of business recoveries) that they would colour their reports to favour those who paid them. He felt that this Bill was too internalised and protected the company too much.

Mr J Maake (ANC) complimented the Department’s presentation. He said that shareholder-director relations were fundamental to good corporate governance and that the shareholders were a competent brake upon the Directors. He felt the provisions for the scheme of arrangement was an excellent device. He wanted to know whether the Ombud would be analogous to the Competitions Tribunal and felt it should be if it was not. He wanted to know whether SARS could not play an expanded role in nipping insolvencies in the bud.

Ms Ntuli (ANC) said that the Financial Credit Control Act had been introduced with good intentions but the practice had not lived up to the intentions and she referred to the shelf company sellers.

▪ Mr Mongalo said that he was of the opinion that improved service delivery by CIPRO and the CIPRO Commission would put the shelf company into history and the sellers thereof out of business.

▪ Mr Volker said that there was increasing cooperation between all the regulatory authorities and SARS and he was of the opinion that incipient insolvencies would be spotted earlier, allowing remedial action to be taken.

▪ With regard to companies and the public interest, he stated that Chapter 7 and Chapter 6 both looked after the public interest more than before.

In conclusion Ms Ntuli stated that she felt that the Bill covered many of the lacunae of previous legislation and went a long way to protecting the interests of the public, more so than before.

The Meeting adjourned.

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