The Committee continued to hear public submissions on the Companies Bill, from the Johannesburg Stock Exchange (JSE), the Independent Regulatory Board for Auditors (IRBA), the South African Institute of Professional Accountants (SAIPA), the South African Institute of Chartered Accountants (SAICA), the Accounting Practice Board (APB), the Freedom of Expression Institute (FXI) and the Banking Association of South Africa (BASA).
Each institution broadly supported the legislation. BASA pleaded that more time be given for a fuller consideration of all issues, pointing out that any mistakes inadvertently not identified now would not be able to be corrected for several years, and there was no particular urgency.
All submissions discussed the Financial Reporting Standards and all suggested that the Financial Reporting Standards Council should be permitted to set the standards, as opposed to the Bill’s provision that this be done by the Minister of Finance. JSE and the IRBA stressed the importance of ensuring that international standards were observed, noting that any changes must be applied in South Africa simultaneously with their application in other countries. In relation to implementation and monitoring, SAICA and APB urged that the Council should set standards only, not implement them. Another implementing body should be more clearly defined in the Bill; JSE suggested that specific references to proactive and reactive monitoring functions be set out in the Bill. It suggested monitoring perhaps by a panel of the Companies and Intellectual Property Commission. SAIPA proposed an independent regulator, or following the Canadian model.
JSE believed that criminalisation of non-compliance was not always appropriate. The JSE, APB and BASA all suggested that the common law and other penalties by the professional bodies provided sufficient sanction. BASA suggested that the strict liability provisions be removed.
Every submission commented on the new provision in clause 25(1)(b) that wholly owned subsidiaries would henceforth be required to have one external shareholder, with each commenting that no reasons were advanced for the change and raising concerns on the possible abuse of this process, as well as unintended consequences such as variation of contracts on a change of shareholding.
All submissions also addressed the Bill’s proposal that only 50% of directors need be appointed by the Board, and indicated that they did not support this, in the interests of corporate governance and the principle that all directors should be fully accountable to the shareholders. The JSE and SAICA also criticised the provision that an audit committee could be appointed by shareholders, believing that this distorted reporting functions and had the possibility to create incorrect influences.
Concerns were raised around the new definition of the “group” of companies. JSE believed this was contrary to the common understanding of a group and the definition in the Financial Reporting Standards, and would be impossible to execute. APB raised concerns around the “related persons” concept, saying that it saw no need to change the current provisions.
The Bill set out distinctions between companies, stating that only some needed to have accounting records, prepare financial statements or be audited. IRBA, SAICA and APB believed that all companies must keep financial records. IRBA and SAIPA believed that all must also prepare financial statements. SAIPA suggested that different levels of statements should apply, as well as different levels of review, and made specific proposals. SAICA suggested that subsidiaries should not be given any exemptions, as they would require audit as part of a group. APB suggested that the wording be clarified further with “prepare and publish” financial statements to clarify which was the final statement. Full audits for every company were not supported. IRBA however suggested that some form of review, but not necessarily an audit, should be conducted on all, and asked that it be consulted on auditing regulations.
IRBA noted that the Bill made no provision for removal of auditors, but suggested that any provisions must be consistent with its Code of Ethics and the International Federation provisions. Rotation internationally was on a seven year basis, whereas the Bill proposed five, and the “cooling off” period internationally was two years, as opposed to the Bill’s five years. It suggested the Bill be brought in line with this.
In respect of definitions, IRBA noted inconsistency in definitions of ‘audit’ and ‘designated auditor’ and suggested that these be brought in line with the Auditing Professions Act. It recommended that liability should extend to firms, not just individuals. SAIPA and SAICA noted that ‘accounting records’ were not defined. SAICA also believed there was a need to re-define the solvency and liquidity tests. Financial statements were referred to in Clause 76(5) but not defined, nor was the standard of conduct, although offences were prescribed under clause 214(1)(d). SAIPA suggested that further attention be paid to the penalty regime, a link between causality and reckless trading and more attention to protection of whistleblowers. Amplification of the provisions on whistleblowers was also suggested by the Freedom of Expression Institute. BASA suggested the need to clarify the use of ‘securities’ and ‘shares’ that were sometimes used interchangeably, and also called for clarity on the timing and triggers for solvency and liquidity tests, and whether liabilities included contingent liabilities.
Other miscellaneous provisions were also addressed. SAIPA suggested that close corporations continue as at present. SAICA suggested that regulations must be issued up front and all the transitional provisions be in place before the legislation came into effect. BASA asked for clarity on the reservation of names, complained that seven years was too long and too costly to keep records, that the list of activities listed in the Bill was too narrow and that the special challenges around “beneficial interest” in relation to the Financial Intelligence Centre Act meant that companies should have to disclose their ultimate beneficiaries. BASA also suggested that although a juristic person should be permitted to act as company secretary, only those directly involved in such activities should have to be vetted. JSE raised queries around the prohibition of a financial reporting period of longer than 15 months, and the lack of direct reference to JSE listing requirements taking precedence in the event of any conflict with the Companies Act, suggesting that the indirect reference in clause 84(2) be removed for clarity. The Freedom of Expression Institute further suggested the need to enhance the list of those who could acquire information to include professional bodies, trade unions and the media.
The Southern African Music Rights Organisation submitted its proposed amendments to the Companies Bill. The organisation proposed that the Bill had to be amended to show that non-profit companies would be recognised as public companies. The current Memorandum on the Objects of the Companies Bill, which stated that non-profit companies were the “successor to the current Section 21 companies” had to be amended, as it went against the spirit of the Bill and the undertaking that was given to them by the Department of Trade and Industry. The Bill had to be amended to reflect that non-profit companies were both the successor of the current Section 21 companies as well as “existing companies” designated as companies “limited by guarantee”.
Members wanted clarity from SAMRO on what “limited by guarantee” meant and how they operated as both a non-profit company and a public company.
Dr Daan Ribbens proposed amendments to the Companies Bill and said that there had to be private policing of the stock exchange for the sake of the economy and the markets.
The Committee asked for more clarity from Dr Ribbens on what he was proposing for Clause 56 that dealt with beneficial interest in securities. He was requested to submit a clearer written submission.
Nedlac and Cosatu were due to present but would provide oral submissions at the next public hearing date.
Companies Bill (the Bill): Continuation of public hearings
Johannesburg Stock Exchange (JSE) submission
Mr Louis Cockeran, Legal Counsel, JSE Ltd, commended the way in which the Department of Trade and Industry (dti) had attempted to incorporate previous comments in the Bill. His submission focused on matters of principle, but more detail would be included in the written submission.
JSE firstly commented on the provisions around the Financial Reporting Standards (FRS) and the Financial Reporting Standards Council (FRSC), which were now significantly different from what had been set out in the Company Laws Amendment Act (CLAA). The FRSC was now mentioned only as an advisor, not a standard setter. The JSE was very concerned at this, particularly as the Ministerial processes would not be fast tracking, this provision called for Ministerial approval and could probably only be implemented in special circumstances. If South Africa was not able to adopt international standards within a short space of time, South African companies might not any longer be in compliance with various existing requirements. The International Financial Reporting and Accounting Standards (IFRAS) was a simple standard to meet, and once new financial reporting standards were adopted and issued, the JSE would immediately adopt them to ensure that its listed companies remained compliant. He pointed out that last year there had been 20 new standards. Obtaining approval from the Minister to adopt these would be administratively difficult and could lead to severe unintended consequences for companies. Not only would companies not comply with international competitors, they might have to re-do their figures for the purposes of comparison and have them re-audited. In no other legislation were standards set in this way. The JSE acknowledged the dti’s comment that the Minister could not delegate powers as standard setting was a law-making function. However, from a practical point of view there were severe difficulties. A balance must be struck on the objectives without jeopardising the credibility of South African financial reporting.
JSE submitted that criminalisation was not an appropriate sanction for non-compliance. If there was a transgression of generally accepted accounting practices, then the common and existing statutory law already catered adequately for sanction. Fraud could be prosecuted, and it was suggested that administrative action and sanctions should be the primary method for enforcement outside of this. Criminal enforcement could be cumbersome, as well as not being appropriate to meet the goal of improved standards. FRSC might be the appropriate body for enforcement, similar to other legislation.
JSE noted that the CLAA had introduced important principles on monitoring, and enhanced the credibility of markets. The Bill made no reference to proactive enforcement as set out in the CLAA. Dti had suggested that this might be dealt with by the Companies and Intellectual Property Commission (the Commission). JSE suggested that clause 191 be expanded, and that the Minister should appoint a panel. It also suggested that specific reference be made to monitoring of compliance, proactive investigation of contraventions or alleged contraventions, and appropriate legal action.
JSE raised the point of shareholders and the Board. Clause 66 implied that shareholders would only be able to appoint 50% of the directors to the Board. From a corporate governance viewpoint, it was important that a company's affairs be managed by shareholders, to whom the Board must be accountable. JSE believed that this must apply to all directors.
By contrast, the audit committee, which was a sub-committee of the Board and accountable to it, had been assigned too much power, as the Bill mentioned instances in which it would be accountable to the shareholders. This created contradictions in the reporting line.
The JSE was concerned about the definition of a group of companies. The definition in the Bill was contradictory to the common understanding of a group, also to the definition in the Financial Reporting Standards. The “group” principle now incorporated was wider than the “common control" principle and would be impossible to execute.
The JSE was also concerned that no valid reason had been advanced as to why clause 25(1)(b) was requiring a wholly owned subsidiary to have at least one share held by someone outside the group.
The JSE also queried why a company was, in terms of the Bill, not permitted to have a financial reporting year of more than 15 months, instead of 18 months. A company changing its year end might have to submit one set of financial statements for only 4 months, and then another soon afterwards, rather than have one set covering 16 months.
Mr Cockeran pointed out that currently all companies had to comply with the Companies Act, and any listing requirements by the JSE were in addition to that. In the event of conflict, the listing requirements would take precedence, as the JSE was allowed to regulate companies. There was nothing specific in the Bill around this issue. Although Clause 84(2) addressed a limited circumstance, this was far too narrow, and it was feared that the inclusion of this, seen against the exclusion of the general circumstances, could be interpreted as meaning that this principle was now being changed. The JSE therefore requested the deletion of the reference to the precedence in clause 84(2), and a noted that all listing requirements be in terms of the agreement.
The Chairperson asked for clarity on the allegation that the promulgation of accounting standards by the Minister might be inappropriate. He asked what suggestion was made in place of this, and said that examples and statements would be helpful.
Mr Njikelana asked a similar question.
Mr Cockeran noted that accounting standards changed at least once a year, because they were of a technical nature, to keep in line with international best practices. IFRAS could do this quickly and in answer to the needs of the industry. The JSE suggested that all companies should simply be required to comply with IFRAS, and that this should be specified in the Bill.
Mr S Njikelana (ANC) noted that reference was made to criminalisation, and he noted that the CLAA did make some references to criminal offences. He wondered if the suggestion was being made that any non-compliance should be de-criminalised in this Act.
Mr Cockeran said that the JSE believed that a better form of enforcement would be a hybrid situation. He cited the Security Services Act, where, in the case of insider trading, an enforcement committee was appointed to take immediate action, but this could also be coupled with a financial penalty, and the possibility of further criminal prosecution to follow. The JSE believed that criminal sanctions alone would not be effective in punishing transgressors.
Mr Njikelana referred to 2.3 around monitoring, noting that the indications were that dti had suggested that the Commission should deal with these instances, but that it should be spelt out in the Bill. He asked for further clarity. He also asked to whom the specialist committee would report.
Ms Linda de Beer, Consultant, JSE Ltd, said that at the moment the CLAA made provision for a monitoring function, but there was no such inclusion in the Bill. Its omission had implications on public interest. JSE therefore recommended that the Bill create an enabler so that the Commission could set up a monitoring function, at least on a proactive basis, but ideally also to deal with complaints. It was recommended that the reporting be to the Commission and that administrative action be taken.
Mr Njikelana asked for further clarity on the objections raised in respect of the shareholding.
Mr Cockeran explained that the Bill provided that a wholly owned subsidiary would in future have to have one outside shareholder. No reason had been advanced for the prohibition against wholly owned companies, which had hitherto been allowed.
Mr Njikelana asked what the JSE was suggesting in respect of the listing requirements.
Mr Cockeran explained that the JSE’s concern was that the listing and the preference attached to these requirements was not carried over to this Bill. All companies would have to continue to comply with the Companies legislation. However, if there was any conflict between this and the additional requirements of the JSE, there was no longer any indication, in general circumstances, which would prevail.
Independent Regulatory Board for Auditors (IRBA)
Mr Bernard Agulhas, Acting CEO, IRBA, congratulated the Department on the Bill it had produced. He noted that he would touch on matters of principle, although there were further more detailed comments in the written submission. The IRBA’s primary mandate was to protect the public interest. It was the statutory regulator for the auditing profession, mandated under the Auditing Professions Act (AP Act) and in addition was expected to issue a code of ethics. It further aimed to promote investment and employment, and protect minority interests. The IRBA would support auditors, but not protect them as such. It reported to the Minister of Finance.
Mr Agulhas explained the difference between a chartered accountant and a registered auditor. An auditor had to be registered under the AP Act before he would be allowed to express any assurance on the services provided.
Mr Agulhas noted that it was extremely important to recognise the international standards of auditing, as an audit conducted in South Africa, upon which the auditor expressed an opinion, should be readily understood by anyone elsewhere in the world. There were international standards on auditing and reviews.
IRBA commented on the independent review of financial statements. Clause 30(10) provided for the categories of companies to be audited, and the manner and form of the independent audit and regulations. IRBA felt very strongly that whenever regulations were to be issued, IRBA should be consulted.
IRBA supported the provisions in the Bill requiring all companies to have an alternate assurance service, (what IRBA described as “a review”), but not necessarily an audit. IRBA requested the Committee to give careful consideration to what it wanted to achieve under this Clause. It also suggested that this review should not be the same as a Close Corporation report, which did not include any assurance by the accounting officer. Although a smaller company may not need a high level of assurance, it was nonetheless recommended that there be some "limited assurance". Reviews were not as detailed as audits, but were governed by review standards issued by IRBA. IRBA, in anticipation of internal review, had started to participate in auditing standards with a review standards authority, and was participating on the committee. It would be beneficial to have that standard in South Africa. Whatever it entailed, it should be recognised and issued by a credible and recognised standard setter. International bodies should be able to rely on the standard. He pointed out that not only IRBA members could provide a service, as the AP Act allowed other institutions to be accredited if they complied with standards – such as the South African Institute of Chartered Accountants. However, it was important to have compliance with the same standards. The AP Act already made provision that auditors must report on "reportable irregularities" whether they were discovered during audit or review, and a failure to do so would attract heavy penalties. This was an attempt to curb white collar crime. He further indicated that all registered auditors were subject to inspection to check whether they were complying with standards, whether for audit or review, and they also had to comply with the code of professional ethics. Auditors not complying would be subject to disciplinary action and could be struck off the Roll. This provision served to protect the public.
IRBA noted that the Bill required only certain categories of companies to keep accounting records. It did not agree with this and suggested that, for the sake of good corporate governance and accountability, all companies should be keeping accounting records, as well as preparing annual financial statements. IRBA supported that not all financial statements need be audited, but at least they must be prepared.
IRBA noted that the Bill made provision for standards consistent with IFRAS. Whatever framework was used, it must be recognised internationally, as this would have a direct impact on financial credibility. IRBA recommended that reports should be issued by the FRSC and be recognised and acceptable. An auditor could not express an opinion on a framework not recognised locally or internally. However, the Bill did not make it clear whether the role of the FSRC was merely to advise the Minister (set out in clause 204), or set standards. South Africa had until now followed a set process and IRBA believed that the standard setter should be able also to issue guidance and circulars to implement those standards. IRBA requested that due process be followed and all be allowed to comment on standards.
IRBA noted that there was no provision in the Bill to deal with removal of auditors. The provisions around rotation were noted. Mr Agulhas pointed out that the AP Act required the setting up of a Committee for Auditor Ethics, and one of its first priorities had been to issue a Code of Ethics, which would be finally approved on 20 August and be widely publicised from about October. That Code included provisions on the rotation of auditors and independence. At present, the International Federation provisions also addressed the independence aspects, and any auditor not complying with this would be subject to discipline. He requested that the Bill must be consistent with international best practice, as well as the Code, lest it cause confusion. Internationally, rotation took place on a seven-year basis (whereas the Bill mentioned five), with a two year cooling off period (the Bill mentioned a five year period).
IRBA finally commented that some of the definitions were not consistent. “Audit’ and “designated auditor” were sometimes used interchangeably, and it suggested that the definition of “auditor” should be consistent with the definition in the AP Act, which could include an individual or a firm. Where liability applied, this should also be extended to the firm, not just the individual. IRBA also aligned itself with some of the other comments raised earlier by members of the accounting profession.
Members did not raise any questions.
South African Institute of Professional Accountants (SAIPA) submission
Mr Shaheed Daniels, Chief Executive Officer, SAIPA, also congratulated the dti on this Bill, and hoped that the comments would serve to strengthen some aspects of the Bill. There had been wide consultation with corporate law experts.
Ms Lerato Sebata, Chairperson, Technical Committee on Commercial Law, SAIPA, gave a background to SAIPA and its membership. It was a members of the International Federation of Accountants and the Eastern, Central and Southern African Federation. It set mandatory requirements in regard to continuing professional education and professional indemnity, could issue reports, gave training and advised on local and international best practice.
Mr Nicolaas van Wyk, Technical and Standards Executive, SAIPA, noted that SAIPA’s written submission also included an appendix with proposed amendments to the Bill. SAIPA had noted that the Bill provided for different types of companies, and agreed that different provisions should apply to them. It believed that financial statements be mandatory for all companies (as it had been in the Close Corporation and Companies Acts) because the establishment of differential financial reporting standards would make this less burdensome. It suggested that there should be three levels of standards; Generally Accepted Accounting Principles (GAAP) should be applicable to public companies, IFRS to small and medium companies if they were non-owner manager or companies with public interest, and micro-level reporting standards should be developed by dti for micro enterprises. Dti seemed to have accepted the principle of differentiation but had not expanded it fully in the Bill.
SAIPA supported that the Business Rescue provisions should remain in the Bill. There should be focus on protecting the employees. However, it believed that the benefits of the Business Rescue should apply only if financial information was available; a further reason why financial statements should be mandatory. The fact that certain penalties were also included in the Bill for the preparers of financial statements also supported the mandatory preparation.
The submission and scope of accounting records should be addressed, and this was more fully set out in the Appendix. The Bill did not define what “accounting records” were and proposals were made in the written submission. “Fair presentation” should also be defined as in accordance with certain standards. Clause 76(5) noted that directors were entitled to rely upon financial statements prepared by an accountant, but these were not defined. The standard of conduct was similarly not defined, although clause 214(1)(d) set out an offence.
The reports on financial statements was linked to the preparation of financial statements. SAIPA requested that, as well as preparing financial statements, all companies should have to report on financial statements. It agreed that all assurance reports be regulated by IRBA. Other statutes made provision for other report providers (such as in the Non Profit Organisations Act, the Schools Act and so forth) and it was suggested that the provisions of the Close Corporations Act be carried over to this Bill. SAIPA also noted the difference between an independent review, the audit, and the factual findings. Different approaches could again be used for the different companies, and page 19 set out some proposals. The independent review should be designed as a joint effort in the profession, including IRBA. Owner managed companies should have a similar model as Close Corporations. Once again, this was consistent with the offences prescribed for incorrect financial statements, and linked also to professional indemnity provisions.
In relation to the FRSC, SAIPA proposed that either there should be an independent regulator, or the Canadian model must be followed.
SAIPA proposed that close corporations be allowed to continue, and noted that although the Bill provided for private companies, there were some difference in governance.
Other general proposals were described very briefly. These included that dti must look at the penalty regime; some penalty clauses did not distinguish between action, negligence and intention. Reckless trading should be linked to causality, there should be attention paid to the protection of whistle blowers and more attention to business rescue provisions.
The Chairperson pointed out that the members would read all the contributions in detail, and he would like to see focus on the substantive issues. The Committee would take all the point raised into account.
Mr Njikelana raised a point on the penalties, saying that a call had been made for "appropriate" penalties. He would like more detail on what exactly was being called for.
Mr van Wyk noted that the harshest penalties should apply to fraud, where there was intention. Gross negligence should not attract as harsh a penalty. There should be provision that bona fide actions and mitigating factors could be taken into account. Where there was no clear intention to defraud, or where there was a minor divergence, imprisonment would not be considered appropriate.
South African Institute of Chartered Accountants (SAICA) submission
Mr Ignatius Sehoole, Executive President, SAICA, commended dti on the Bill, which was believed to be an appropriate and proper intervention.
SAICA also suggested that the Bill confer authority to issue standards to the FRSC. The Ministerial process would be technical and time consuming, and it must be recognised that the date of issue of standards was critical to international harmonisation of standards. If implementation in different countries was staggered, certain companies would not be in compliance with international standards and this would have dire consequences on the capital markets. The FRSC could issue standards in consultation with the Minister, as opposed to the other way around, as was currently in the Bill.
SAICA noted that the establishment of the financial reporting investigation panel was not clearly enough detailed in the Bill. Some years ago the JSE and SAICA had set up a governance panel, which was doing what the financial investigation panel would do. It urged that the investigation panel should be a separate body as there was a separate function.
SAICA noted that wholly owned subsidiaries and owner managed businesses were currently exempt from the preparation of financial statements. If that clause was to be included, then SAICA thought that it should not apply to subsidiaries, who should be audited as part of the group and therefore would have to prepare statements. Even owner-managed businesses would have to prepare tax returns, for which some form of financial statement would be needed, and therefore SAICA did not understand the significance of this exclusion.
There were no attempts in the Bill to defined what the accounting records must constitute, and there was a need to do so. Banks and creditors would be able to demand financial records, and if companies were not given guidance, it was believed that they would be poorly served by this lack of clarity as they might find that they did not have proper records some years down the line.
SAICA was also concerned with the solvency and liquidity tests. It suggested that the test should be that solvency would be judged if assets were “greater than” liabilities, not “equal to” liabilities, as currently stated. This should be applied at individual company level. If a head office was insolvent, then for protection there was a need to look at each legal entity in the group. It often happened that an insolvent subsidiary was part of a group.
SAICA also had concerns on the requirement that a wholly-owned subsidiary must have one outside shareholder. SAICA wished to hear what objective the dti was seeking to achieve. There were many companies whose were wholly owned by groups.. It would be difficult for companies to have to find one shareholder to ensure that they complied.
The requirement that shareholders appoint an audit committee was also seen as problematic. In South Africa, in both the public and private sector, the board took responsibility for governance issues in an organisation. If the shareholders were now to appoint the audit committee, it would become a separately appointed organ, and the shareholders would then take the responsibility of the financial statements. This was contrary to the premise that the Board should be taking responsibility. In Germany a system similar to that set out in the Bill had been applied, and had created difficulties. Mr Sehoole pointed out that the Chairperson of each of the Board committees should be present at the AGM to account to shareholders on the Committee’s activities, but this did not mean that shareholders should appoint them.
Mr Sehoole noted that there were a number of areas in the Bill that would be governed by regulation, including which companies should be audited, the setting up of the FRSC, and the like. Experience suggested that the Act would be better regulated if all regulations were issued up front and all transition provisions were also published up front.
Mr Sehoole finally referred Members to other comments set out in the written submission.
Members did not raise any queries.
Accounting Practice Board
Mr Moses Kgosama, Chairman, Accounting Practice Board, noted that the APB had been setting standards for financial reporting for more than 35 years. It was independent, consisted of several members, and represented professional bodies, the government sector, and the business community in general, including academics and specialist fields such as banking and mining, regulators like IRBA and the JSE. Therefore it would address itself largely to clauses relating to financial reporting. He commended the dti on this Bill, which APB thought did meet the objectives set out in the Memorandum to the Bill.
APB raised some concerns around the “related persons” aspect of the Bill, which referred to the third degree of consanguinity. APB had prepared a table, which showed that because of the way that “control” was set out, it was possible for the owner of company X to have control over company Y, although Y had nothing to do with what was done in Company X. The result would be that these companies would not be able to trade with each other; to take the point even further the owner of X could not even buy clothing from the clothing retailer Y without first determining solvency. He submitted that there was no need to change the current position, which was working well.
APB believed, in relation to clause 28, that all companies should have accounting records, especially since they would determine whether appropriate relationships had been entered into. The current CLAA had some good requirements, which APB suggested be incorporated into the Bill.
Clause 29(1)(a) had to do with the form and content being presented fairly, and the situation where there was arguments about standards and whether they had been correctly applied. A statement that the business of the company should be presented in terms of set FRS would give a fixed point of departure and would strengthen the position of the regulator. Clause 29(4) related to the regulations on FRS. He agreed that the Minister should have the power to establish the FRSC. However, the development of standards required high technical knowledge and rapid work. It would, in the view of the APB, be appropriate that the FRSC be given authority for researching, developing and setting those standards, and advise the Minister. That would assist in ensuring that there was no delay. Furthermore, in subclauses 29(4) and (5) there was reference to financial reporting standards, but this should also include interpretations of financial reporting standards issued by the FRSC for specific local issues.
Mr Charl Cocks, Member, APB, noted that, for example, Black Economic Empowerment (BEE) transactions were not as well understood in the rest of the world and so it was crucial to have a body that could give guidance on these matters in addition to international standards.
Mr Cocks noted that clause 30(1) made mention of “prepare” financial statements, but did not say “prepare and publish”. It was possible to have several versions of the financial statements. “Publish” would not necessarily mean "publish to the public", but the word must be included to give clarity as to which was the final financial statement.
Mr Cocks commented on the requirement that a wholly owned company have one outside shareholder, set out in clause 35(3)(b. A company may have only 10 shares. If one was to be held by another person, this would mean 10% of the shareholding. This had critical implications on shareholder support, such as with the banking sector, where the fact that many companies were wholly owned promoted investor confidence. He pointed out that many contracts required notification of any change of shareholding, and this might lead to cancellation of leases or other unintended consequences.
Mr Kgosama noted that clause 187(3) referred only in passing to the "financial reporting investigating panel". SAICA believed that the issuing of FRS and the monitoring of compliance should be seen as two completely separate functions, and APB did not believe that the FRSC should monitor compliance. This should be set out clearly.
Mr Kgosama referred Members to the other points set out in the written presentation (see document)
There were no questions from Members.
Freedom of Expression Institute (FXI) Submission
Ms Melissa Moore, Attorney, FXI, noted that this Institute was established in 1994 with the primary aim of promoting access to information, to the media and promotion of knowledge. It agreed that the Companies Act was in need of review and updating. The objects of the Bill were supported, specifically points 5 and 7 which set out how the Bill must be interpreted and applied, balancing he rights of shareholders and directors.
Ms Moore noted that section 16 of the Constitution guaranteed freedom of expression and the right to impart ideas, and she quoted the statement in South African National Defence Union v Minister of Defence that freedom of expression lay at the heart of democracy. The importance of public interest could not be overstated. Any restrictions on publication must pass the constitutional test. Section 32 of the Constitution dealt with access to information and the Promotion of Access to Information Act (PAIA) was promulgated to give effect to that, and to permit someone requesting records to be given access to them, with any limitation on that having to be justified under Section 36.
FXI and the Centre for Open Democracy had concerns around the whistleblower rights in the interest of corporate governance. In clause 159(3)(a) there was a list of those who could receive disclosure. FXI suggested that this not be seen as an exhaustive list. It suggested that the media, trade unions and professional bodies should also be entitled to disclosure. Trade unions and professional bodies would be one step removed from the company, and were likely to know of contraventions. The range of potential whistleblowers would support this contention. Inclusion of the media was important.
Ms Moore suggested that in clause 159(3)(b) the words ‘reasonably believed" should be replaced with "reasonable grounds to suspect" which was a lesser test. The current threshold was too high, and the suggested term had been extensively discussed in the courts, including in the van Heerden case. This test also provided more protection to the whistleblower.
The Bill should also provide sufficient protection for the identity of whistleblowers. Clause 159(7)(a) did mention confidentiality, but it should go further to say that the identity must be protected unless a whistleblower agreed otherwise.
Clauses 212 stated that when submitting information to named bodies, a person could claim confidentiality. The FXI believed that the current wording was uncertain, as there was no definition of “confidential information”, nor was this term generally understood by the public or in other legislation, and no guidelines or other points for consideration were provided. The authority was left merely in the discretion of the Council of the investigator. Ms Moore suggested that the clause must be clarified and redrafted.
Clause 26 protected the rights of shareholders around access to company records, but did not refer to the rights of investigative journalists and the public, which FXI believed was a serious omission. It was desirable to include a provision to state specifically that such rights existed, and make specific reference to access to information.
Mr Njikelana asked to what extent professional bodies were already providing some assurance of good governance.
Ms Moore replied that the role of trade unions in good governance was more as the voice of the employees. Good governance would be promoted if they were included in the list of those to whom disclosure could be made, as it would make it easier for employees to address their unions.
Mr Njikelana said that might apply to trade unions, but he also questioned the role of professional bodies and the media, who were outside the role of the company.
Ms Moore said that it was important to remember the overarching rights of all citizens and employees to address the media on all rights of public importance and interest. This was closely related to the confidentiality clause. Good grounds and good information should exist. That was why other remedies were in place. Professional bodies played a similar role to trade unions.
Mr Njikelana said that it would be useful to have Ms Moore’s suggestions for a re-draft of Clause 26.
Ms Moore offered to attempt a redraft and send it to the Committee.
Mr Njikelana noted the reference to investigative journalists having access to records. They acted for the public benefit, although they were members of the public.
Dr P Rabie (DA) noted that a number of companies had marketing information that allowed them to operate to a competitive advantage. He asked how a distinction could be made between confidential information that had a direct bearing on a company’s market share, and whether it would be fair to force disclosure of this.
Ms Moore replied that certainly some information did need to be protected. The determining factor must be the public interest - and matters such as money laundering, insider trading, corruption, should be disclosed, without having to overcome the hurdle of a “confidential information” challenge.
Banking Association of South Africa (BASA) submission
Mr Stuart Grobler, General Manager, Banking Association of South Africa, also referred Members to his written submission. He expressed concern at the short time allowed for comment, saying that it had been difficult to analyse the Bill, and prepare comment for the BASA constituency, as the Bill had an impact on the institutions, their clients, accounting processes and products provided to clients and business rescue. BASA pleaded that further time be given to consider the requirements and implementation difficulties in more detail. If this Bill was passed, given the pressure on the legislative programme it was likely to be another five years before it could be amended. Experience with the National Credit Act had shown the regulators having to turn to the courts to give declaratory interpretations. There was no need for urgency as the current legislation was presently operating quite well.
Mr Grobler also pointed out that anyone operating a small company had to go through this entire lengthy document, rather than being able to assess simply, as he could have done under the Close Corporations Act, exactly what had to be done.
BASA was concerned that the “companies Ombud” had functions that departed quite radically from those traditionally associated with an Ombud, which was generally recognised as a free service for adjudication of disputes. The body referred to in this Bill was more akin to an appeal tribunal, with powers to implement fines and so forth.
BASA regarded the Business Rescue provisions as important. However, it was uncertain who the professionals would be, and where they would be sourced, to undertake the business rescue management function. The practical considerations about how long they would work, what they would do between assignments and the length of appointments were key to the process and were at the moment unclear.
BASA believed that there were serious problems, in the Business Rescue provisions, around the possibility of cancelling, suspending or amending contracts. Banks relied, for their security, on sanctity of contracts. The ability of an outsider to terminate conditions put the law of contract in doubt, would have a serious effect on securities and have implications under the Basel II obligations, and may require banks to hold additional capital or additional security, which would be a serious challenge and cost, perhaps not only to the banking sector. BASA therefore asked that these provisions be reviewed. The same applied to sections 35A and B of the Insolvency Act and there were some questions around the impact and the interpretation and whether the Insolvency Act would then apply.
BASA noted that the preferences for post-commencement finance were dealt with to some extent. The date / time sequencing would determine the preferences, but it was not clear how transparent these would be, or what would happen if one financier was ahead of another in the queue. Reference had been made to all unsecured creditors having the same ranking, but it was unclear whether this was post- or pre- finance.
The Bill contained a reference to the Security Services Act definition for securities, but the words “securities” and “shares” were sometimes used interchangeably and indiscriminately, without due regard to the differences between the two concepts, which could lead to confusion.
BASA concurred with the difficulties expressed by others around the FRS standards and their issuing.
BASA also noted the definition of subsidiary had been somewhat changed by the Bill as the concept of control became relevant. It shared concerns around the issue of wholly owned companies having to have one outside shareholder. There were differing definitions in the Bill and the FRS in relation to shares and debt instruments, and there should be alignment with IFRAS wording.
BASA understood the need for insolvency and liquidity tests, but noted that there was no clarity on the timing and the triggers, although the reference to “trading recklessly” suggested continued action. There were differing valuation models on assets and liability, and it was not clear whether contingent liabilities were also to be considered. It was also not clear how stakeholders other than company shareholders would be able to achieve transparency or how they could assess that the company was failing.
BASA noted that the Bill contained several references to strict liability. It suggested that the strict liability provisions be removed. The Bill provided for damages, and there was enough here and in the common law to cater for the deliberate, grossly negligent, and negligent situations. It would be “a regulatory minefield” to try to address damages in this legislation.
BASA noted the provisions in regard to reservation of names. The question arose whether translations of a reserved name would be automatically reserved; if not then the defensive reservation principles needed to be re-examined.
BASA noted that there were basically eight types of business listed in the Bill, but the list of activities was too narrow and had unintended consequences. In regard to record-keeping, he argued briefly that to require documents to be kept for seven years was too long and too costly.
Mr Grobler noted that those affected by the Financial Intelligence Centre Act (FICA) had certain challenges in connection with the term “beneficial interest”. The Bill required a second level where there was a nominee. FICA, on the other hand, complied with international best practice and its guidance and supervisory model required a piercing of the corporate veil, and compliance with JSE rules, support requirements and corporate registration. He believed that companies should perhaps be forced to disclose who were their ultimate beneficiaries.
In relation to the requirement for one outside shareholder for a wholly owned company, Mr Grobler said that whilst he appreciated the need for shareholder activism, he urged dti also to consider the implications of an abuse of the process, where “one-share” shareholders could be deliberately obnoxious and vexatious, and disrupt meetings.
BASA also wished to comment on the deeming provision for directors, which it suggested should be removed, and the election of 50% of the board by shareholders. This, interestingly enough, did not apply to State Owned Enterprises (SOEs), where the Minister did have the power of appointment of a certain number of directors, and where government was the sold shareholder. Currently, all members of the Board must be elected by shareholders and BASA believed that this position should remain. Although the Board should be permitted to fill vacancies between general meetings, this should still be confirmed by the shareholders at the next general meeting.
BASA supported that a juristic person could act as Company Secretary. However, the current wording used in the Bill suggested that if, for instance, a firm with 130 partners and several hundred employees was to be appointed, every member of the firm must be vetted. BASA would suggest that only those partners having a direct connection with the other company should need to be vetted.
BASA finally repeated its plea that this piece of legislation not be rushed through. Any mistakes not identified now would take far too long to repair, and careful consideration was required before replacing the current regime
Mr Njikelana took the point about the Ombud and asked for a suggestion.
Mr Grobler said that very few of the clauses in the Bill that referred to the Ombud were referring to the commonly-understood function of consumer complaints and assistance. There was the possibility to appeal to the Ombud on compliance notices, a change to the Articles of Association, administrative penalties and the like; none of which were the “usual functions” of an Ombud. He was not suggesting that there was a need to re-assign the duties, but instead suggested that it was probably more correct to call it “appeal tribunal” or similar wording.
Mr L Labuschagne (DA) asked what BASA regarded as so serious about the board asking another director to join the board, probably for special expertise that he could offer.
Mr Grobler said that the traditional model was that all directors be approved by the shareholders. In America they could be appointed by the board, and this was self-perpetuating. If a Board in South Africa required skills, it could make an appointment, but that would still need to be approved or confirmed at the next general meeting, so in effect all directors were appointed by shareholders. The Bill was now changing that position, but there was no indication how the remaining directors not appointed by shareholders would be appointed, creating confusion, all the more so because this provision did not apply to SOEs. BASA saw no good reason to depart from the current 100% appointment by shareholders.
Dr Rabie asked for further clarity on the points raised about who would attend to the Business Rescue work. He noted that there was a skills shortage, and asked if there were adequate resources in South Africa to deal with winding up of insolvent businesses; as it seemed that many liquidators were already very busy and high interest rates might exacerbate the problem. There was also apparently a great shortage of credit controllers.
Mr Grobler responded that he did not believe that there were sufficient numbers of skilled people. He pointed out that the Business Rescue managers would not be judicial managers or liquidators, who, traditionally, had been focused on the winding up and the settling of assets and liabilities and paying of creditors. These people had not been required to manage a company through financial distress to success. Business Rescue managers would probably be consultants, but requiring them to manage the business was very different to requiring them to offer advice from the sidelines. He noted that not enough statutory counsellors were available when the National Credit Act came into force, and alternatives had to be found to try to resolve the large volumes, through a mediation process.
Southern African Music Rights Organisation (SAMRO) submission
Advocate Joel Baloyi, General Manager: Legal and Governance Services: SAMRO Limited (Limited by Guarantee), stated that there were a few aspects of the Bill that could be amended in order to provide more clarity. This related to the equation of the non-profit company with the present Section 21 Company, which potentially excluded companies that were limited by guarantee.
At present, SAMRO was recognised as a public company. It appeared that non-profit companies were excluded from the definition of “public company” in the Bill. SAMRO thought it was important that non-profit companies, as public benefit organisations, continued to be recognised as public companies.
Clause 10(2)(c) in the Bill made reference to Clause 67(9) and (10) as well as to Clause 68. There was, however, no Clause 67(9) and (10) in the Bill. This had to be amended.
Clause 4(1)(d)(ii) made provision for an existing company that was limited by guarantee to become a non-profit company. However, the Memorandum on the Objects of the Companies Bill continued to provide that non-profit companies were “the successor to the current Section 21 companies”. SAMRO believed this to be an oversight, as it went against the spirit of the Bill and the undertaking given to them by the Department of Trade and Industry (Dti). SAMRO therefore requested that the section be amended to reflect that non-profit companies were both the successor of current Section 21 companies as well as “existing companies” designated as companies limited by guarantee.
Mr S Njikelana (ANC) asked what “limited by guarantee” meant. He noted that SAMRO claimed to be a public company but at the same time they operated as a non-profit company. He wondered how they combined the two types of companies.
Adv Baloyi stated that a public company was usually a company where shares were made available to the public. So, there would be shareholders joining the company. A company “limited by guarantee” was recognised in law as a public company. Section 19(3) of the 1973 Act said that all companies limited by guarantee, including such existing companies would be deemed public companies for the purposes of the Act. SAMRO was a public company. The difference between a company limited by guarantee and a public shareholding company, was that rather than the members of the company contributing to the capital of the company by buying shares in the company, the owner’s contributed a certain limited amount called a “guarantee amount”.
Mr Njikelana stated that the Committee would see how the Department would respond to SAMROs proposals.
Personal Submission from Daan Ribbens
Dr Daan Ribbens proposed a few amendments to the Companies Bill such as the amendment to Clause 56 Beneficial Interest in Securities. On request from the Committee, a concise written proposal with amendments to the Bill would be submitted to the Committee at a later stage.
Mr Njikelana noted that Dr Ribbens claimed that beneficial ownership applicable to a state was not part of South African law and that Clause 56 had to be revisited. Mr Njikelana did not understand what Dr Ribbens was proposing. Submissions should provide alternative suggestions.
Dr Ribbens stated that he could not come up with a clear-cut suggestion as to how the problem should be dealt with, as people seemed to “skirt around” the issue. He thought that the proposals had to be thought through very carefully before the Bill was brought into operation because it would have far reaching ramifications.
Dr Ribbens added that he was at a loss as to why the concepts of “membership” and “shareholdership” were done away with. He thought that the country was in for a “free fall” without those concepts. He added that he felt there was to be private policing of the stock exchange, as there were stock manipulations and accounting “mispractices” in the stock market. The integrity of the markets and the economy, and the well being of nations would be compromised if the stock market were not policed properly.
Dr Ribbens agreed to Mr Njikelana proposal that he redraft his proposal and make it clearer and send it to the Committee.
The Chairperson stated that Nedlac and Cosatu were absent and would therefore submit their proposals at the next public hearing date.
The meeting was adjourned.
- Freedom of Expression Institute submission
- Institute of Internal Auditors South Africa submission
- UNISA submission 2
- UNISA submission 1
- Transnet Limited submission
- South African Human Rights Commission submission
- Public Investment Corporation Limited submission
- Old Mutual submission Annexure A
- Old Mutual submission
- Legal resources centre submission
- Financial Services Board submission
- Eskom submission
- Corporate Governance submission 2
- Corporate Governance submission1
- BDO Spencer Steward
- Accounting Practice Board submission
- Southern African Music Rights Organisation submission
- Banking Association of South Africa submission
- South African Institute of Professional Accountants presentation
- South African Institute of Chartered Accountants submission
- South African Institute of Chartered Accountants presentation
- South African Institute of Professional Accountants submission
- Independent Regulatory Board for Auditors submission
- Independent Regulatory Board for Auditors presentation
- Johannesburg Stock Exchange submission
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