Companies Bill: Department response to public submissions

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Trade and Industry

21 August 2008
Chairperson: Mr B A D Martins ANC
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Meeting Summary

The Department of Trade and industry noted that it had prepared some preliminary responses to the numerous submissions made during the public hearings, but in some cases the Department would like to hear from the Committee what policy it wished to adopt. The Department summarised the underpinning of the new approaches, particularly the duties and obligations of directors, reform of the mergers and acquisitions regime, the introduction of the business rescue concept, the decriminalisation of some aspects and the solvency and liquidity tests. The Department had decided to amend the degrees of relationship to two degrees of consanguinity, but believed that the “control” of a company was already clear. In the case of conflict between provisions of legislation, the more onerous would prevail. The Department agreed with the trade unions that the notices required under any of the provisions of the Bill could be served on the head offices of the trade unions. The Department was still studying the submissions around the solvency and liquidity tests. It agreed also that a process be provided for obtaining financial statements. The Department agreed that for best practice purposes financial statements should be drawn but was still considering whether all would require to have them reviewed or audited. The Department noted that whilst companies could appoint non executive directors who were not shareholders, they were not obliged to do so, and consideration was being given to reducing the percentage of such directors. Clause 23 of the Bill was acknowledged as too restrictive and was to be made less onerous.

Members queried the obligations of the directors and their role specifically in relation to state owned enterprises, their role in relation to management, the precedence ranking of conflicting laws, the need to thoroughly examine all issues, and sanctions against directors. They discussed the concerns raised by overseas fund managers, the submissions in relation to the constitutional principles that should be embodied in the Bill, and several Members suggested that financial statements should be produced in a standard form, and expressed concerns that there was still effectively “fronting” in the appointment or true powers granted to certain directors. There was still some doubt whether the fundamental purposes of the legislation were being achieved.

Meeting report

Companies Bill (the Bill): Responses by the Department of Trade and Industry (dti) to the public submissions
Ms Zodwa Ntuli, Deputy Director General, Department of Trade and Industry noted that the dti had prepared responses to the submissions, but that they were not yet conclusive. In many cases the Department was seeking guidance from the Committee on the issues. She would try to address each and every aspect of the submissions, save where there were merely technical amendments required to the Bill.

Ms Ntuli noted that several questions had been raised about the numbers of businesses registered in South Africa and what category they fell into. Slide 3 of her presentation summarised the current number of business entities falling in the different categories

Ms Ntuli then set out a chronology of the Bill and she reflected that this Bill had evolved as a result of an extensive consultation process. Contrary to the observation that there had been no urgency in its evolution, she submitted that there had been some urgency and that the public submissions had enriched the process.

She tabled a slide relating to the core aspects of the Bill, especially the abolition of the concept of par value and nominal capital, and the introduction of the concept of solvency and liquidity testing, provisions regarding financial assistance for the purchase of shares, and the introduction of an enhanced regime for the protection of shareholders.

She then summarised the underpinning of the new approach, and reflected the introduction of non exclusive concepts concerning the duties and obligations of directors towards companies; a reform of the mergers and acquisitions regime, the introduction of a business rescue concept, the decriminalization, where appropriate, of certain aspects of the current company legislation and the establishment of appropriate bodies and institutions for the effective enforcement of the Bill.

She then described the scope of the Bill, setting out what was contained in each of the Chapters. She proceeded to summarise the main submissions made, chapter by chapter.

Chapter 1
In respect of concerns raised about the degrees of consanguinity used in the Bill, she confirmed that the submissions had been supported and the dti had decided to restrict these to two degrees of consanguinity. The dti would attend to the necessary wording of the clauses.  Several commentators had also raised the question of what constituted “control” of a company. A group of companies would be defined in terms of the relationship between companies, not persons.
Questions had been raised about State Owned Enterprises (SOE) and where they would fall to be regulated. She suggested that if any SOE registered under this legislation would fall to be governed by it.

In response to concerns about which legislation should prevail, in the case of conflict, as raised by a number of submissions, she stated that if any conflict should arise, then the more onerous legislation should prevail so that all its requirements would be met. She particularly referred to the Banking legislation.

Ms Ntuli said that dti had agreed that notices required in terms of any provisions of the Bill should be served on the Headquarters of Trade Unions.

She noted that there had been no realistic and challenging submission regarding the solvency and liquidity test, as only the application of this test had been questioned. However, the dti would study the submissions further.
 
Discussion
Prof B Turok (ANC) wished to discuss the obligations of the Directors and the lack of obligations by Management, and, arising from this, the role of SOEs. He pointed out that the primary obligation of a Director was to act in the interests of the company of which he was a director. However, directors of SOEs seemed often to have other obligations and the SOEs might be running at a loss, and might even in fact need to do so. He felt that the SOEs should comply with the Public Finance Management Act (PFMA) but also achieve a balance.

Ms Zodwa Ntuli responded that this was a very apt point.  She conceded that SOEs might be subject to double, even triple, compliance issues, but that it was the choice of the SOEs how they wished to constitute themselves, and whether to subject themselves to the Companies legislation. Having made a conscious choice, they must comply with the requirements in full.

As far as management was concerned, she noted that its position should be subordinate to directors and shareholders. 

Mr MacDonald Netshitenzhe, Director: Commercial Law & Policy, Consumer & Corporate Regulation Division (CCRD), dti, added that there were indeed obligations on Directors, and that the Board of Directors occupied a supervisory position over the management, which was subordinate to the Directors. If this was not happening, then there was not good and effective corporate governance, and if there was fraud and negligence the Directors were responsible. He agreed that in the structure the management was subordinate to the directors.

Mr Desmond Ramabulana, Commercial Law & Policy CCRD, dti, noted that the office of Director carried with it prescribed duties and obligations to perform.

Mr J Maake (ANC) sought clarification on the comments about certain laws taking precedence.

The Chairperson explained that other pieces of legislation that applied to certain types of companies might have stricter requirements and, if so, then these would prevail over the lesser requirements set out in this Bill.

Mr S Njikelana (ANC) noted that the Congress of South African Trade Unions (COSATU) had raised the question of the Solvency and Liquidity tests and wished to know if that was also applicable to this instance.

Mr Netshitenzhe said that the reply by the Chairperson had addressed the issue. That would also apply in respect of the solvency issues.

Ms N Khunou (ANC) stated that before legislation was embarked upon there should be a thorough investigation into all the issues. She had frequently found, in her constituency, that people would approach her with problems that did not appear to have been foreseen when the legislation was being drafted. She was worried that this Bill would run into similar problems.

The Chairperson said he felt that everything humanly possible was being done with every piece of legislation and that what was being produced was the best possible legislation under the circumstances. Nobody could foresee every eventuality and it was not possible to cover all unintended consequences of legislation that may only arise later. It was the responsibility of Parliament to oversee legislation, but not to implement it. He conceded that no law was 100% satisfactory but the best was done. Notwithstanding this, someone could challenge it

Ms F Mahomed (ANC) said there was an article on a building disaster which she found quite worrying and she wanted to bring it to the attention of the Committee.

Ms Ntuli replied that research was done before the legislative process was embarked upon. This could be discussed. Likewise if there were outstanding discrepancies or deficiencies identified, she said that these too should be raised and attempts made to address them.

Prof Turok referred to Clause 77, and said that there seemed to be no distinctions made between liability of the Directors and the prescribed company officers. He asked for further elaboration, especially in the light of the historical situation with Enron, where the Board stated that they had not known what management was doing. He queried whether this could be described as good law. 

The Chairperson noted that one of the media reports recently had praised this Committee for the way in which it had dealt with the Competition legislation, for listening to all arguments advanced, and working without fear or favour. He advised Members to read newspapers but to stay close to the facts.

Mr Fungai Sibanda, Chief Director: Policy and Regulations, dti, said that Members must remember the distinction between ownership of the Company and management of the Company, which were two separate concepts. In company law, the directors were ultimately liable. The company was to appoint directors, would hold them responsible, and put them in control of management.

Mr Njikelana asked about sanctions.

Ms Ntuli replied that it was important to view the Directors’ core responsibilities. She said that a director could not be held responsible where he had been defrauded. The major test was the test of foreseeability.

Continuation of presentation
Ms Ntuli commenced to comment on Chapter 2. She noted that there had been quite a number of comments around access to company information. This was of interest to the media, the shareholders, and other various and potential stakeholders. As it would be time consuming and costly to have to approach the Court for the necessary orders it had been envisaged that this would be a better option. However the ambit would be extended to provide access to the register of members and directors, as in Section 113 of the current Companies Act.

With regard to the questions around which companies should have annual financial statements, and which might be exempt, Ms Ntuli said that businesses were advised to have annual financial statements drawn up, for their own management functions. However, the Bill had required only certain categories of companies to have financial statements audited or reviewed professionally. This was done in an attempt to reduce the cost of doing business. Much had been said in submissions, and this had to be the subject of further debate. The tax legislation might in any case require all financial statements to be audited or reviewed, and if so, then companies would have to comply with this.

Ms Ntuli noted that the provisions in Clause 64(8) of the bill regarding quorums for meetings were questioned, as it suggested that court relief be sought where there was not a quorum. The dti noted that it would revert to the provisions in the current Act, where a meeting without a quorum would simply have to be adjourned.

Ms Ntuli noted that the Bill made provision for a Company to appoint non executive directors who from other than within the shareholder net, but companies were not obliged to do so, merely could do so if in line with the Memorandum of Incorporation. It was felt that this was in line with the submission by the trade unions about worker representivity. The further submission by COSATU calling for implementation of the co-determination model of directors was noted, but there would not be any compulsion on companies to follow this route.

Several comments had been made on the duties and responsibilities of directors.  provided for the nomination of Directors by the Public Investment Corporation (PIC), but subject to Directors acting in the best interests of the companies and not being beholden to other interests. She noted that the provisions of Section 50 of the present Companies Act was now being carried forward, regarding the use of the Company name and registration number on all documentation, to answer concerns expressed, in particular, by COSATU. 

It was conceded that the provisions of Clause 23 of the Bill were too restrictive and these were now to be considered individually, so that if any one of the listed requirements was met, the registration would be triggered.

With regard to the access to financial statements and other business information for the specific purpose of a business rescue plan the submission by the trade unions had been noted, as was the call for requirements that non executive directors be independent of the company, and this extended to not receiving soft or any loans from the company concerned. In response to criticisms around the criteria for disqualifications of directors being considered not stringent enough, the dti believed that the Bill was already wide enough in relation to directors’ duties and their subsequent disqualification in instances of misconduct.

Discussion
Prof B Turok said that he was disappointed and did not consider that the Bill was fully in agreement  with the Memorandum on the Objects of the Bill, or the Constitutional imperatives. He stated that he was very impressed by the presentation from Hermes, the overseas fund managers, who had taken the trouble to make submissions. He had understood these submissions to be suggesting that unless there was increased democratic shareholder activism Hermes could not consider investing in South African companies with their investor funds.

Prof Turok therefore specifically suggested that the Financial Statements be produced in a standard form, adding that he felt that the proliferation of different forms of financial statements was done with the intention of hiding, rather than revealing information. He was also concerned that there was no formal equivalent to the Ombud for the Social and Ethical Committee that it was envisaged every company would have. Finally, he felt that with so many Directors holding inter-locking directorships there remained an effective cartel-type relationship among companies.

Ms Khunou said that she felt that it was important to have access to company financial statements, and information, for there were too many companies whose directors drove expensive cars and lived in the leafy suburbs, and yet when there was a request for money from the companies concerned there was inevitably a response that the companies had no money; she believed that the directors were simply hiding it. She added that close corporations did not have financial statements, in fact many did not even have a bookkeeper, and she wanted to know what was happening with them. She wanted to know what the impact of the Bill would be on small enterprises. Further, she felt that the granting of exemptions from providing financial statements to certain companies was simply opening the door to unsavoury practices.

Mr Njikelana also agreed that there was a need to have financial statements. Whatever else they provided, they were also a management tool and could lead to the sustainability and growth of the small, medium and micro enterprises. He asked what were the intentions in the Bill and the law enforcement provisions. He noted that a human rights organisation had made a good submission and raised several important human rights issues, especially around shareholder activism. He also asked about the provisions of the annual general meetings. He noted that many black economic empowerment (BEE) directors were being appointed to boards, but never seemed to perform any functions, either being side-stepped by management, or being content to take their fees and do nothing.  He said that he felt that this was fronting.

Prof Turok added that sometimes BEE directors were appointed but then meetings would take place without them being present.

Ms Khunou said the Bill should promote growth

Ms Ntuli replied that it was very difficult to legislate for socio ethical considerations in the Companies Bill. She added that environmental issues should be in environmental legislation, and should find their teeth of enforcement there. She said the attitude sometimes seemed to be adopted that companies were doing the public a favour if they complied with the legislation, but it was actually shareholder pressure and activism, in addition to stakeholder and public opinion, that should be putting pressure on companies to comply. The Bill provided the mechanism, but the enforcement must lie with other bodies or interest groups. She suggested that the correct approach was to ask whether the Labour Relations Act or the environmental legislation did have the ability to address the challenges and then lobby for sufficient enforcement to be inserted or strengthened in that legislation. The Bill was intended to achieve a balance between shareholder and public interest, and for shareholders to curb their directors and management.

Mr Johan Strydom,
Senior Legal Adviser: Legal Services, dti, said that all companies were required to have financial statements, but the exemptions related to the auditing or review, and the expenses associated with that.

Mr Netshitenzhe explained that the provision that only 50 % of the Directors needed to be shareholders was inserted to give companies the option to extend their Directorates to include a wider range of stakeholders, such as labour or interest groups. There was no compulsion upon companies to do this, and the intention of the Bill was for voluntary participation.

Mr Sibanda stressed that there was indeed no compulsion upon companies to have directors who were not shareholders. He thought that a proper understanding of Clause 6 would allay the fears expressed by Hermes. He also said that there was a possibility that these “external” directors could even be lowered to 10%. He reminded members that any tampering with these provisions would mean that any transactions performed could be voidable, with consequences to the directors. In regard to the remarks on the alleged sidelining of BEE Directors, he said that all directors, irrespective of how they achieved appointment, were bound by the same obligations. If it was so that the BEE directors were neglecting their duties or allowing themselves to be sidelined, they were committing an offence and would be liable as provided for in the Bill and the common law. He responded to Ms Khunou that the general provisions in the Bill had an overarching intention, but that there were no specific clauses that would address the problems that she had cited.

Prof Turok felt that the fundamental purposes of the Act were not being achieved and that the Directors could misuse the Memorandum of Incorporation.

Mr Njikelana added that he too was very cautious about accepting the Bill wholesale, and felt that the interesting human rights issues raised by SAIFEC had not been addressed adequately.

Ms Ntuli said that the issues of voluntary stakeholder participation had been provided for. She noted that questions of fraud and mismanagement were being addressed in the legislation. “Fronted” BEE activities fell into such categories. She noted that the dti would re-examine the submissions made by SAIFAC

The meeting was adjourned. 


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