Company Law Developments
Debrief on the DTI company law seminar
On 24 and 25 August, the Department of Trade and Industry (DTI) and the Specialist Committee on Company Law hosted a Company Law Seminar in Johannesburg. The purpose of the seminar was to discuss important developments and trends in company law both in South Africa and internationally under the theme "Burning Issues in Company Law".
The Companies Act 2008 (Act) turns 10 next year and the DTI is now considering amendments to enhance the interpretation and implementation of certain provisions of the Act. The DTI is of the view that the Act and its regulations are of high standard and generally fulfil their stated purposes.
Three key themes were highlighted by the DTI at the seminar and are summarised below:
- Business rescue: whilst the DTI acknowledged there were some teething issues with the business rescue regime under the Act, it was satisfied that it generally worked and helped secured jobs and protect the economy. The DTI was of the opinion that the courts would provide guidance where necessary and assist with the interpretation of the business rescue provisions.
- Social and ethics committees: the DTI expressed the view that companies operating in South Africa (and not merely companies incorporated in South Africa) should also be required to establish a social and ethics committee.
- Companies tribunal: the DTI raised awareness of the role of the Companies Tribunal as an alternative dispute resolution mechanism. If utilised effectively, the DTI believes that the Companies Tribunal could assist in the efficient implementation of the Companies Act. The DTI also emphasised that the Companies Tribunal's processes were easy and cost-effective and faster than going through the normal courts.
The DTI's consultation process on other amendments to the Act is still ongoing. Unfortunately, the DTI did not give much away at the seminar on how extensive the amendments to the Act are likely to be nor did it provide a timeline for the amended legislation.
Exemption from unalterable provisions of the companies act 2008
The Companies Tribunal highlights in its latest bulletin the provisions of section 6(2) and (3) of the Companies Act 2008 (Act), which permit a person to apply to the Companies Tribunal for an administrative order exempting an agreement, transaction, arrangement, resolution or provision of a company's MOI from a prohibition or requirement imposed by an unalterable provision of the Act. The Companies Tribunal insisted that the purpose of the provisions is to promote flexibility and that the introduction of unalterable provisions in the Act does not mean that one can never escape the application of these provisions.
Section 6(3) sets out the circumstances in which an exemption may be granted. The Companies Tribunal must be satisfied that:
- the agreement, transaction, arrangement, resolution or provision serves a reasonable purpose other than to defeat or reduce the effect of that prohibition or requirement; and
- it is reasonable and justifiable to grant the exemption, having regard to the purposes of the Act and all relevant factors, including-
- the purpose and policy served by the relevant prohibition or requirement; and
- the extent to which the agreement, transaction, arrangement, resolution or provision infringes or would infringe the relevant prohibition or requirement.
The Companies Tribunal notes that the provisions of section 6(2) and (3) are underutilised and encourages companies to make use of these provisions where appropriate. It believes the use of the provisions can help shape company law as applications for exemptions may inform the Companies Tribunal in relation to necessary amendments to the Act.
B-BBEE Developments
Memorandum of understanding between the b-bbee commission and the competition commission
The Competition Commission has signed a memorandum of understanding (MOU) with the Broad-Based Black Economic Empowerment (B-BBEE) Commission. The MOU provides for consultation between the two regulatory bodies in relation to mergers, as well as when a complaint referral is lodged regarding a practice in respect of which the Competition Commission and B-BBEE Commission have concurrent jurisdiction. The MOU also provides for the establishment of a Joint Working Committee between the Competition Commission and the B-BBEE Commission. Click
here for a copy of the MOU.
Treatment of broad-based trusts under the B-BBEE codes of good practice
The B-BBEE Commission delivered a presentation in July 2017 to the Cape Law Society, at which it discussed, among other things, its opinion of broad-based schemes which are established as trusts under the B-BBEE Codes of Good Practice. The B-BBEE Commission expressed the opinion that such broad-based schemes should not qualify for black ownership recognition if the economic benefits that flow to the ultimate black natural persons are subject to restrictions. For example, if the economic benefits from the trust can only be used for educational purposes, the B-BBEE Commission would consider this as a restriction, as the economic benefits would not freely vest in the hands of the ultimate black natural person beneficiaries. The B-BBEE Commission considers such trust arrangements as eligible for corporate social investment recognition rather than black ownership recognition.
Draft B-BBEE defence sector code
On 4 August, the Department of Trade and Industry (DTI) published the Draft Defence Sector B-BBEE Code. The draft code is applicable to the defence commercial industry involved in research and development, engineering, production, and the servicing of military material, equipment, and facilities, including military veterans. Comments on the draft code must be submitted in writing within 60 days. Click here for a copy of the draft code.
Guidelines on the interpretation of fronting
In the case of Passenger Rail Agency of South Africa v Swifambo Rail Agency (Pty) Ltd (2015/42219) [2017], the High Court set guidelines on the interpretation of the 'fronting practices' definition contained in the B-BBEE Act of 2003. The court set aside a contract concluded between PRASA and Swifambo for the purchase and supply of locomotives due to irregularities during the tender process. The court determined that Swifambo acted as a front for a company called Vossloh to win the tender contract with PRASA. Vossloh was unable to win the tender on its own and concluded an agreement with Swifambo to achieve the required B-BBEE rating. In reality, Vosloh controlled every aspect of the contract with PRASA and Swifambo's involvement was merely administrative. The court found that there was "no substantive empowerment evident under the agreement between Vossloh and Swifambo. There is no transfer of skills during the agreement or after". It was evident to the court that their relationship frustrated substantive empowerment and the B-BBEE Act. The court determined that the arrangement between Vossloh and Swifambo fell within the ambit of sub section (d) of the definition of "fronting" in the B-BBEE Act, whereby the arrangement between Swifambo and Vossloh was merely concluded to achieve B-BBEE status.
Employment equity compliance
The Department of Labour is in the process of investigating JSE-listed companies for employment equity compliance. The inspections began in July 2017 and will continue until the end of the year. Companies that do not comply and/or falsely report on their employment equity plans may be subject to fines and/or criminal prosecution.
Corporate Governance
Mandatory audit firm rotation
In June 2017, the Independent Regulatory Board for Auditors (Irba) issued a rule prescribing that all South Africa Public Interest Entities (including all listed companies) must rotate their audit firms after a period of maximum audit tenure. This tenure is set at ten consecutive financial years, after which an audit firm will only be eligible for reappointment as the auditor after the expiry of at least five financial years. Mandatory audit firm rotation will become effective for financial years commencing on or after 1 April 2023.
Ahead of the implementation date, the Public Investment Corporation (PIC), the largest investor on the JSE, has strongly endorsed the push for mandatory rotation of audit firms by voting against the reappointment of audit firms at JSE-listed companies where there has been a 10-year plus relationship. The PIC’s voting results for AGMs held during the December quarter show it voted against the reappointment of auditors at 14 of the 40 AGMs it attended. This means mandatory rotation of auditors is now at the top of the PIC’s list of corporate governance issues. However, in no instance did the PIC’s vote result in an audit firm not being reappointed as it mostly holds minority shareholdings. It remains to be seen whether the PIC will include a voting recommendation on auditor reappointment in its proxy policy and how other investors will approach this issue.
Ethics and compliance handbook
Social and Ethic Committees may find the
Ethics and Compliance Handbook helpful in performing their functions. The handbook was issued by the Ethics Institute, South Africa (TEI) in partnership with the Institute of Business Ethics (IBE) in the United Kingdom. While many organisations around the globe tend to combine ethics and compliance functions, the preference in South Africa appears to be for separating these functions, mainly due to the framework set out in King III. However, with the advent of King IV, many South African organisations are relooking at their models. This handbook explores the benefits and drawbacks of the two different approaches.
Global Trends - Corporate governance reform in the UK
The UK Government published proposals for corporate governance reform. The key proposals relate to executive remuneration, strengthening the voice of employees, customer and suppliers in the boardroom, the development of a voluntary set of corporate governance for large private companies. To find out more, click here to read the Government's proposals.
The reforms are intended to be brought into effect by June 2018 and to apply to company reporting years beginning after that date. The proposals, once finalised, will be incorporated in the UK Corporate Governance Code.
Publications
International comparative legal guide to private equity
Webber Wentzel contributed to the International Comparative Legal Guide to Private Equity 2017 published by Global Legal Group. Click
here to read the guide.
Cracking the property code
Adam Ismail, partner in Webber Wentzel's Corporate Practice, discusses B-BBEE compliance and the Amended Property Sector B-BBEE Code and considers how the code impacts estate agents and agencies. Click
here to read the article published by Property Professional.
