On 1 October 2021, the Minister of Trade, Industry and Competition, Ebrahim Patel, published the Companies Act Amendment Bill, 2021 (“the Amendment Bill”). The Amendment Bill seeks to amend certain provisions of the Companies Act 71 of 2008 (“the Act”), which commenced more than a decade ago, by providing clarity, reducing the regulatory regime on businesses, intensifying anti-money laundering provisions, improving the disclosure requirements, and enhancing shareholder powers in a company.
This three-part series article focuses on the proposed amendments that aim to reduce the regulatory regime on businesses.
The first part of this three-part series will focus on amendments that impact all companies. The second part will focus on amendments impacting private companies, and the third and final part will focus on amendments that will impact public companies.
Objectives of the proposed Amendment Bill
With the complicated and burdensome administrative processes in the Act, many businesses find themselves swamped with regulatory hurdles that constitute a barrier to economic growth. This ultimately impacts negatively on employment, revenue generation, and the competitive environment in which a business finds itself.
The proposed amendments are intended to bring about a piece of legislation that provides for the ease of doing business. The elimination of excessive administrative processes is necessary to remove the entry barrier for small and medium businesses, and provide for a more cost-effective piece of legislation.
The Amendment Bill is also intended to be more cost-effective. Cost efficiency is an important policy objective of all legislation and regulations. The Amendment Bill aims to achieve this by reducing the compliance requirements and lessening the administrative burdens placed on businesses.
Furthermore, the Amendment Bill identified the changes needed to keep up with the current trends and close any loopholes by providing for the strengthening of disclosure requirements, enhancement of shareholder powers in a company, tightening anti-money laundering gaps, as well as providing for greater transparency and accountability in companies.
Proposed amendments that will have an impact on all companies
Definition of “True Owner”
South Africa is part of an international effort that is intended to address the concerns of terrorism and money laundering around the globe. South Africa’s rating in the Mutual Evaluation Assessment pointed to weakness in determining who the true owner of shares is in companies.
At present, the Act currently lacks adequate provisions to establish the identity of the true owners of a company. The Amendment Bill addresses this weakness by providing for a definition of “true owner” and creating additional steps to establish and report a company’s true ownership.
The term “true owner” is defined in the Amendment Bill as “a natural person, who would in all the circumstances be considered to be the ultimate and true owner of the relevant securities, whether by reason of being capable either directly or indirectly (via the intermediation of others in the chain of holders of beneficial interest in the relevant securities) of directing the registered holder with regard to the securities or because of being a person for whose benefit the securities ensure or for any other reason, not limited to the same kind or class, which could be the registered holder itself, or if the registered holder is not the true owner, or the only true owner, would be the last person in the chain of any holders of beneficial interest in the relevant securities”.
It is important to note that the proposed definition of “true owner” is in line with the definition of “beneficial owner” in the Financial Intelligence Centre Act 38 of 2001. This demonstrates that the purpose of the amendment is to eliminate company ownership arrangements that are used for illicit and criminal purposes.
The term “beneficial interest” in the Act will now include a true owner. The Amendment Bill further requires companies to be aware of their beneficial shareholders. Should a company be unaware of its beneficial shareholders, it is a requirement that an enquiry will need to be conducted with the registered shareholders, beneficial shareholders, and the true owner of the company for confirmation.
The proposed introduction of the definition of “true owner” will place an obligation on companies to enquire from the registered shareholder details of the identity of the persons who hold beneficial interests in companies. The definition places a positive obligation on companies to establish and maintain a register of owners of beneficial interests in it’s shares and to publish in it’s audited financial statements, details of all persons who hold beneficial interests amounting to 5% or more of the total number of shares of that class.
Power of the Court to rectify invalid creation, allotment, or issue of shares
There exists an unintended omission in the Act which permitted an application to a competent court to ratify an invalid allotment of shares in certain circumstances.
This omission creates unnecessary impediments to commercial transactions, with the result being that there is doubt as to the legal remedies and routes available to correct and validate on good cause such an invalid allotment.
The proposed section 38A will remedy the aforementioned deficiency. Section 38A provides that a company or any interested party may make an application to the relevant court for the validation of an invalid creation, allotment, or issue of shares should the court find it to be just and equitable to do so. Section 38A will protect persons who are defrauded or cheated by companies issuing or creating invalid shares if the court finds it just and equitable to do so.
Effective date of amendments to Memorandum of Incorporation (MOI)
The current Section 16(9) of the Act, which deals with amendments to a company’s MOI, is unclear on the effective date of amendments to MOI’s. Many adopted the view that the amendments to the MOI were effective immediately upon filing.
The Amendment Bill proposes that amendments to MOI’s, excluding amendments in relation to a name change, will take effect only after 10 business days of the same being filed with CIPC. The amendments to a company’s MOI will not come into effect if it is endorsed or rejected with reasons by CIPC prior to the expiry of the 10 business day period or the date set out in the Notice of Amendment, provided that such date shall not be a date prior to the expiry of the 10 business days mentioned.
This will enable a company and its stakeholders to know with precision the effective date of amendments to the company’s MOI and it eliminates the significant uncertainty that currently exists.
Amendments to the requirements for share repurchases
Section 48 of the Act regulates the acquisition of own shares by a company or by a subsidiary of its holding company. Subsection 8 provides for additional requirements in respect of certain transactions. The exact ambit is, however, not clear. Subsection 8 of the Act currently places a burden on companies to obtain independent expert reports for every repurchase of shares consisting of more than 5% of the company’s issued share capital.
The aforementioned requirement is entirely unnecessary where the share repurchase occurs on a recognised stock exchange or is proportional to all shareholders. In such circumstances, the protection intended by the requirements of Section 48(8) of a special resolution is unnecessary, time-consuming, and costly. Therefore, should subsection 8 be substituted in terms of the proposed amendment Bill, the requirement that a repurchase of more than 5% of the issued shares requires compliance with sections 114 and 115 of the Act no longer applies.
This proposed amendment will be welcomed, as it takes away a time-consuming and costly process, as well as closes the door on the debates as to whether the provision means that such repurchases of shares must be undertaken by way of a scheme of arrangement.
Intra-group financial assistance
Section 45 of the Act regulates financial assistance to directors and prescribed officers of the company as well as related or inter-related companies. Section 45 further applies to related or interrelated companies and corporations and to members of such corporations or anybody related or inter-related thereto.
The Amendment Bill proposes that such financial assistance requirements contained in section 45 of the Act will no longer apply to financial assistance by a company to its own subsidiary companies. This is in recognition of the fact that the protections contained in section 45 create an unnecessary compliance burden.
This amendment recognises that the prohibition of financial assistance by a company to its subsidiaries did not have commercial rationality and was an unnecessary and costly burden. It also facilitates the ease of doing business.
Public access to securities register of companies
Section 36 of the Act deals with access to company records. The Amendment Bill provides that companies must file a copy of their securities register and a register of disclosure of beneficial interest with the CIPC annually with their annual returns.
At present, non-shareholders are only entitled to access a company’s securities register or members’ register. With the proposed amendments, provisions are made for members of the public to copy and inspect a company’s MOI and any amendments made to it, as well as the company’s annual financial statements, records of the company’s directors, securities register, and the register of the disclosure of beneficial interests of the company. Should the amendments come into practice, the aforementioned information would be available at the CIPC upon request on an anonymous basis.
However, the broadened information right does not extend to reports to annual meetings or minutes of annual meetings. The requirement to allow persons to inspect and copy information will not apply to companies below a certain size.
The proposed new section 26(2A) purports to limit the rights of non-shareholders to access certain company records of private, personal liability, and non-profit companies where an annual financial statement is internally prepared in respect of a company with a Public Interest Score of less than 100 or an annual financial statement which is independently prepared for a company with a Public Interest Score of less than 350, as not to justify burdening such small companies.
The Amendment Bill proposes to broaden the offence of failing to accommodate any reasonable request for access to information, or otherwise refusing, impeding, or frustrating the reasonable exercise of the information rights, in section 26 to include the directors and prescribed officers of the company. However, the Amendment Bill also introduces a defence to this in that a director or prescribed officer will not be guilty of an offence if he shows that he took all reasonable steps to secure the company’s compliance.
The aforementioned amendments are intended to combat money laundering and financing of terrorists, providing for the ease of doing business, to provide for clarity in instances of uncertainty, cost and administrative efficiency, as well as transparency while doing business.
All the above amendments affect all companies at all levels. That is why it is important to stay up to date with what impacts the efficiency of your own company and business. Stay tuned for part 2, which focuses on amendments that impact private companies exclusively.