Companies Bill 2008: Enhancing Corporate Governance

1. PRESENTATION TO THE SELECT COMMITTEE ON ECONOMIC AND FOREIGN AFFAIRS Ms Zodwa Ntuli, Deputy Director-general: CCRD Mr MacDonald Netshitenzhe, Director: Commercial and Policy: CCRD Mr Desmond Ramabulana, Deputy Director, Company Law: CCRD Mr H.P. Dwinger, Legal & Regulatory Services: CIPRO Mr Rory Voller, Senior Legal Advisor: CIPRO Companies Bill 2008

2. Purpose • The purpose of the presentation is to give a high level overview of the Companies Bill as approved by the Portfolio Committee for Trade and Industry for approval by the Select Committee on Economic and Foreign Affairs

3. Background • On 31 January 2007, Cabinet approved publication for public comment of a draft “Companies Bill 2007”. • Following publication of the Bill, the dti conducted meetings, workshops, discussions and conferences across the country to receive comments. NEDLAC process was also followed. • The published draft elicited 134 written submissions from stakeholders, interest groups, government departments & agencies and individuals, amounting to more than 2 000 pages. • the dti also held workshops with the Portfolio Committee on Trade and Industry and the Select Committee on Economic & Foreign Affairs on the Bill in 2007. • The team is presenting a Bill that was enriched by the public hearings conducted by the Portfolio Committee in August 2008.

4. Rationale • The need for a review of the company law regime was necessitated by, amongst others: - outdated legislation that is highly formalistic - overly criminalizing even issues that are pure administrative omissions and commission - legislation that is creditor-oriented instead of shareholders and other stakeholders - globalization and the advent of democracy - scourge of corporate failures and scandals that undermine corporate governance - simplification of company registration and maintenance

5. Scheme of the Bill • Statistics on company registrations • Doctrine of substantial compliance (Chapter 1) • Types of Companies (Chapter 1) • Incorporation and Registration (Chapter 2) • Company Names (Chapter 2) • Corporate Finance (Chapter 2) • Corporate Governance (Chapter 2) • Transparency and Accountability Chapter (2 & 3) • Public Security Offering (Chapter 4) • Fundamental Transactions (Chapter 5) • Business Rescue (Chapter 6) • Enforcement (Chapter 7 & 9) • Institutions and Agencies (Chapter 8) • Commission Functions (Chapter 8 & 9) • Transitional arrangements: Relationship between the Act and the CC Act.

6. Statistics on registrations

7. CHAPTER 1 Interpretation & application • The Bill aims to: • Reduce formality and improve flexibility e.g. section 6 now provides for – • (i)  Companies to be granted exemptions from specific provisions if the requirements are inappropriate to the company, given its nature and structure; • (ii) electronic documents to be used in place of originals; and • (iii) electronic publication of documents, or electronic delivery of notices. • (b) Enhance compliance and prevent avoidance, section 6 also now provides – • a general anti-avoidance remedy, which allows a scheme to be declared void if it seeks to evade a requirement or prohibition in the Bill; and • a plain language requirement for documents, prospectuses and other notices required

8. Types of Companies • Companies incorporated in the Republic • Non Profit Companies: • Subject to special requirements set out in Schedule 2 • Must have at least one public benefit or social/cultural object • Must apply all assets to its stated objects • Residual value must be distributed to like organisations • May not merge with, or convert to a profit company • Profit Companies: • Public Companies • State Owned Enterprises • Personal Liability Companies • Private Companies • Companies incorporated outside the Republic • Foreign Companies • External Companies

9. CHAPTER 2 Company Registration • Incorporation is a right • Policy is to maximize freedom of association and contract - see s.13 • One or more person may incorporate a profit company, 3 or more may incorporate a non profit company. • Incorporation is by signing a Memorandum of Incorporation, and filing a Notice of Incorporation with fee. • Memorandum may be pro forma or bespoke, but form does not suggest or impose any provisions • Memorandum of a profit company must set out number of authorised shares, and rights, terms, etc of shares. • Memorandum may be in Schedule 1 form, which provides simple check box approach.

10. Company Registration • Bill contemplates future internet based completion and filing of Notice and Memorandum of Incorporation - See s. 6 (13) • All companies must file Memorandum of Incorporation • Notice of Incorporation may be rejected only if incomplete, or if it names too few directors, or initial directors are disqualified • Commission has no authority to judge the merits of the company’s structure • Commission must register company, even if chosen name is unavailable, by assigning registration number as interim name of the company • All companies have all compatible legal powers, unless restricted by its Memorandum of Incorporation • Company exists continuously as a juristic person until de-registered • Pre-incorporation contracts by company are binding unless rejected, and are deemed to have been ratified 3 months after incorporation, unless rejected before that • Reckless trading, or trading while insolvent is an offence

11. Company Names Requirements for Names • Policy is to allow freedom of expression, see s. 11 • No limits except to prevent fraud and misrepresentation, and to avoid use of hate speech, and similar offensive names • Company name may be the Registration Number • Company name may include numbers or symbols as well as words • Company Name must end with designating abbreviation Name Reservations • Reservation is optional • Reservation is for 6 months, and may be extended • Reservation is transferable • Provisions included to address cases of name squatting and trading

12. Company Names Use of Names • Policy is to abandon formalities, but prevent misrepresentation and fraud - see s. 32 • Company is free to use its name as and when it sees fit • Name and registration number must be provided accurately on request - offence to fail to do so. • Offence to misrepresent by use of a company’s name • Offence to pass off as a company, when not incorporated in terms of the Act. • Defensive names are catered for Office and records • Company must maintain a registered office in the Republic. • Company must keep records at its registered office, or another disclosed location. • Shareholders and members of the public have right of access to company records s. 26 • Trade unions given limited access to financial statements for purposes of initiating Business rescue process

13. Transparency Accounting records and statements • All companies must maintain accurate accounting records. • All companies must have a financial year. • Offence to falsify or fail to keep proper records or to publish false financial statements • All financial statements given to another person must bear a disclosure statement - See s. 29 • All companies, large and small must prepare annual financial statements (AFS) -sec 30. • Need for all companies to prepare AFS: • To encourage sound financial management • To ensure sustainability of companies of all sizes • To comply with other regulatory requirements • However reduce regulatory burden by • Exempting these companies from having AFS audited or reviewed • Differential reporting standards: small companies will comply with less onerous standards; s29(5) • The Commission will direct private companies to prepare an audited AFS if certain threshold is attained • Decriminalise non-compliance with form and content of FS; s29(6)

14. Transparency • Appointment of audit committee • Shareholders must appoint the Audit Committee as a sub-committee of the Board; s94 • Audit Committee report must be included in the Directors report to the AGM • Filling of audit committee vacancy to be done by shareholders instead of board; s94(6) • Regarding the appointment of auditors, rotation period is five years with the cooling-off period of two years. • Section 159 - protection of whistle-blowers - Information must be given to persons, e.g. board and company secretary that have power to act on the information

15. Reporting • Role of the Financial Reporting Standards Council(FRSC) • FRSC will consider International Financial Reporting Standards (IFRS), consult, research and adapt IFRS to local needs and advise Minister on their suitability - s203 • Minister will issue standards as regulations upon considering advice from FRSC – s29(4) and s223 • Issuance of standards will be done with speed

16. Corporate Finance • The Bill allows the board of directors, subject to the Memorandum, to increase or decrease the number of authorised shares of any class of shares; re-classify any classified shares that have been authorised but not issued; classify any unclassified shares that have been authorised but are not issued; or determine the preferences, rights, limitations or other terms of shares in a class - See S36(3). • In view of the board’s broad power to finance the company through debt, the holders of which will have rights superior to the shareholders, the board is given power to approve equity financing for the company as well. This approach will enable South African companies to compete for capital more effectively in world markets with companies whose boards already have the power to finance their businesses quickly and efficiently. • A company is allowed to give financial assistance to third parties to buy its own shares. Provided the company satisfies the solvency and liquidity tests

17. Corporate Finance • The Bill permits, subject to any limitations in the memorandum, both pro rata and non-pro rata share acquisitions if approved by the board, without requirements that could delay a desirable transaction without providing significant benefit to the company or protection for shareholders. • It also permits any company to make any distribution upon approval by the board and without shareholder approval but subject to the existing equity solvency and balance sheet solvency tests (See s46) and subject to express standards of conduct and liability provisions (S76 – 77).

18. Corporate Finance • Directors should be jointly and severally liable to the company for distributions in excess of that permitted by law. • It was further considered appropriate to require proof of violation of the director’s standard of conduct, especially since that is set forth by statute, as a prerequisite to liability for an unlawful distribution (S46(6). • The Board is allowed to take certain actions that would allow the company to be competitive. That must be done within the confines of the Memorandum of Incorporation.

19. Corporate Governance This is dealt with under Part F of Chapter 2 and it covers issues such as • Shareholder right to be represented by proxy (S58) • Shareholders acting other than at a meeting (S60) • 10% of shareholders may demand that a meeting be called • Shareholders meetings and conduct of such meetings (S61 & 63). Shareholders are allowed to abstain in meetings • A meeting which does not form a quorum must be adjourned and the members at the adjourned meeting shall be deemed to form a quorum at the next meeting (S64) • Modernised rules concerning shareholder resolutions (S65) • Board, directors and prescribed officers (S66) • Election of directors (S68) • Ineligibility and disqualification of persons to be director or prescribed officer (S69) • Director’s personal financial interests (S75) • Standards of directors conduct (S76) • Liability of directors and prescribed officers (S77), and • Indemnification and directors’ insurance (S78). Directors are not to be indemnified where they are in breach of their duties

20. Chapter 6 • Business rescue • Concept of business rescue designed to provide rescue mechanism to a company that has financial difficulties but has not reached stage of insolvency • This Bill not intended to deal with insolvency • The expression “Financially distressed” is properly defined and it does not give an impression that business rescue is associated with “insolvency” • In business rescue, speed is of essence. Therefore Business Rescue Practitioner is given appropriate powers (s140) to control the process including power to suspend transactions temporarily (s136) • Consultation process provided for in Bill caters for participation by relevant stakeholders

21. Business Rescue • Notably, the chapter protects the interests of workers by - • Providing access to financial statements • recognising them as creditors of the company with a voting interest to the extent of any unpaid remuneration • requiring consultation with them in the development of the business rescue plan • permitting them an opportunity to address creditors before a vote on the plan, and • according them, as a group, the right to buy out any dissenting creditor who has voted against approving a rescue plan

22. Chapter 6 • Claims of the workers are aligned with Insolvency Act, for consistency with regard to equal treatment of those claims. This is also in line with the preferred ranking of employee claims in terms of Insolvency Act and ILO Convention • The Bill as it stands, in s140(1)(d), caters for development of business rescue plan ‘after consultation’ with all “affected” stakeholders, as opposed to ‘in consultation’ • Business rescue practitioners` report will be available to the trade unions and employees, in terms of the Bill • Definition of pension schemes also include provident schemes

23. Chapter 8 Institutional Framework Commission should amongst others, efficiently and effectively register local and external companies, accurately maintain proper records and information on companies, promote education and awareness on the legislation. Specialist Committees to advise the Minister on company law and policy and the other on the resources of the Commission. Companies Tribunal should amongst others, resolve disputes in a transparent manner. Takeover Regulation Panel should regulate affected transactions and offers in terms of chapter 5. Financial Reporting Standards Council should amongst others develop financial reporting standards and also develop standards for small businesses.

24. Transition RELATIONSHIP WITH CLOSE CORPORATIONS ACT • The Bill provides for - • the co-existence of the new Companies Act and the Close Corporations Act; • amendments to the Close Corporations Act to harmonize the two laws with respect to regulation, while preserving the existing internal features of close corporations; • existing close corporations are free to retain their current status until such time as their members may determine that it is their interest to convert to a company; and • In order to avoid regulatory arbitrage, the Close Corporations Act to be closed as an avenue for the incorporation of new entities, or for the conversion of companies into close corporations, as of the effective date of the Bill. 24

25. Conclusion • Simplification of the registration process and maintenance of an updated register will be an order of the day. This will encourage new entrants into the corporate world and investors can rely on the legal environment created • This law champions corporate governance and it is believed that this will create a good corporate culture of doing business in South Africa. This will result in competitiveness of South African companies • Establishment of well resourced institutions such as the Commission and the Financial Reporting Standard Council will result in the efficient and effective enforcement of the Bill in South Africa • Awareness and education campaigns will be some of the cornerstones for successful implementation of the Bill

26. THANK YOU