In Part 1 of this three-part series, we focused on the proposed amendments by the Companies Act Amendment Bill, 2021 (“the Amendment Bill”) that seek to amend various sections of the Companies Act No. 71 2008 (“the Act”) that will impact all companies going forward.
Despite there being proposed amendments that impact all companies at all levels, there are specific amendments that will impact private companies directly. It is therefore important for businessmen and women to be aware of these proposed amendments as they affect medium- to small-sized businesses in South Africa.
In Part 2 of this series, we will focus specifically on two proposed, important amendments that will affect private companies in relation to (i) the appointment of auditors and (ii) the jurisdiction of the Takeover Regulation Panel.
Proposed amendments that will have an impact on Private Companies
Requirement for the appointment of Auditors
A private company is not required to appoint an auditor in terms of Section 90(1) of the Act unless it elects to do so in terms of such a private company’s constitution or Memorandum of Incorporation (“MOI”).
The Act provides that private companies must have their financial statements audited if it is in the “public’s interest” to do so. Regulation 28 of the Act provides the framework to determine when it is indeed in the public’s interest to have a private company’s financial statements audited.
Private companies may voluntarily elect either: (i) by way of a directors’ resolution or shareholder resolution (depending on the wording of its MOI) to have its financial statements audited; or (ii) by including an express audit requirement in its MOI to that effect.
In contrast, private companies that are not mandated to have their financial statements audited may elect to obtain an independent review of their financial statements in terms of section 30(2)(ii)(bb) of the Act.
Currently, the cooling-off period for an audit firm contemplating serving as an auditor of a company is five years, as set out in Section 92 the Act. The Amendment Bill proposes to amend the aforesaid section to reduce the cooling-off period to two years.
Clause 16 of the Background Note and Explanatory Memorandum on the Companies Amendment Bill (“Explanatory Memorandum”) proposes an amendment to Section 90 of the Act as to when the appointment of an auditor must take place, which is annually at a shareholders meeting. Furthermore, the Amendment Bill seeks to amend section 92 of the Act to reduce the cooling-off period for auditors’ involvement in a company from five to two years.
The proposed amendment recognises the impact of the new regulations published by the Independent Regulatory Board for Auditors (“IRBA”) requiring a mandatory audit firm rotation going forward. The introduction of mandatory audit firm rotation will commence in April 2023. This will increase the selection of auditing firms in an economy that has a shortage of suitably resourced auditing firms.
The proposed amendment to Section 90 of the Act clarifies when an auditor needs to be appointed, as well as widening the pool of auditing firms that a private company will now have access to by reducing the cooling-off period arising from an auditor’s involvement in aspects of a company, thus making it easier for companies to appoint other adequately resourced auditing firms to manage their financial affairs (if required).
Limitation of the scope of application of Takeover Regulations on Private Companies
Section 118(1) of the Act deals with the jurisdiction of the Takeover Regulation Panel (the “Takeover Panel”) with respect to regulated companies. A private company will be regarded as a regulated company if (i) its MOI makes provision for the Takeover Regulations (which form part of the Companies Act Regulations 2011) to apply and (ii) in the instance where more than 10% (ten percent) of the issued securities of that company have been transferred within a period of twenty-four months immediately preceding the date of a particular “affected transaction” or offer.
The Takeover Panel is a juristic person established in terms of section 196 of the Act that reports to the Minister of Trade and Industry. The functions of the Takeover Panel include, inter alia, the regulation of affected transactions or offers (as set out in Part B and C of Chapter 5 of the Act) and investigating complaints relating to affected transactions and offers.
The existing Takeover Regulations governing the Takeover Panel are impractical and cumbersome, as they have resulted in significantly increasing the workload of the members serving on the Takeover Panel. The current jurisdiction requirement(s) of the Takeover Panel with respect to private companies has also created an unnecessary regulatory compliance burden on such companies.
Clause 18 of the Amendment Bill proposes the amendment of section 118 of the Act by providing a new definition of a “private company” for purposes of establishing the jurisdiction of the Takeover Panel. In order for the Takeover Regulations to apply to a private company, such company must have 10 or more shareholders with a direct or indirect shareholding in that company and meet or exceed the financial threshold of annual turnover or asset value, which shall be determined by the Minister in consultation with the Takeover Panel in terms of section 118 (2) of the Act. The proposed amendment further grants the Takeover Panel the discretion to exempt any particular transaction affecting a private company in terms of section 119(6) of the Act.
The Amendment Bill seeks to remove the existing 10% or more share transfer in the preceding 24 months immediately before the date of a particular transaction or offer” (regardless of the value) test that applies to a transaction that constitutes a disposal of all or the greater part of a seller’s assets and move back to a position similar to the previous takeover regime governed by the old Companies Act of 1973,, which did not deem a seller as a “regulated company” entering into an “affected transaction” under the aforesaid circumstances.
It is important to keep up to date with the legislative amendments that affect any businesses, as the latest proposed amendments to the Act affecting private companies are significant. With the proposed substantial limitation of the scope of application of the Takeover Regulations and the widening of the pool of audit firms to which a company will now have access, it will no doubt be easier for private companies to conduct business in South Africa.