The Department of Trade, Industry and Competition (“DTIC”) recently held a briefing on the Draft Companies Amendment bill 2021 (“Bill”), which follows the Draft Companies Amendment Bill of 2018.
The Bill proposes various amendments to the Companies Act No. 71 of 2008 (“Companies Act”) by following a transparency-driven approach, which allows shareholders to have overview on director remuneration, to limit the high levels of inequality in South Africa, to improve the ease of doing business, corporate governance, to reduce certain of the onerous provisions contained in the Companies Act and to address anti-money laundering and finance of terrorism.
There are various amendments to the Bill, with the three main categories of policy objectives being:
- making it easier to do business;
- achieving fairness between directors, senior management, shareholders, workers and addressing public concern pertaining to high levels of inequality in South Africa; and
- addressing anti-money laundering and terrorism.
This article will briefly examine the Bill in order to assess whether these suggested amendments contained in the Bill will be to the benefit of companies or whether it will make doing business more onerous for companies.
Proposed Amendments contained in the Bill:
The Bill proposed to amend section 26 of the Companies Act to allow any person to inspect and copy certain records of the company which excludes the application thereof to private companies, personal liability and non-profit companies that fall below a certain threshold.
Such an amendment may cause potential disputes for private companies, public liability companies and non-profit companies who would like to maintain their confidentiality and keep their financials away from competitors.
In the event that the suggested amendment to section 26 of the Companies Act proceeds, this may result in members of the public requesting copies of the annual financial statements of companies, unless they fall within the below exempted categories:
- the annual financial statement is prepared internally within the company and has a Public Interest Score of less than a 100; or
- the annual financial statement is independently prepared in a company with a Public Interest Score of less than 350.
The upside to the proposed amendment to section 26 of the Companies Act is that it will require company records to provide clarity and promote transparency. The proposed amendment to section 26 makes further provision for members of the public to inspect and copy a company’s memorandum of incorporation and any amendments thereto, the records in respect of the company’s directors, the annual financial statements, securities register, and the register of the disclosure of beneficial interests of the company.
The proposed amendment to section 30(A) of the Companies Act makes it obligatory for public and state-owned companies to include in their financial statements and report details of directors and prescribed officer remuneration including gaps between their highest paid and lowest paid employees. This proposed amendment arises from concerns around inequality in South Africa. The benefits of the disclosure of executive remuneration includes, amongst other things:
- allowing shareholders to provide input and respond to dissatisfaction of unequal remuneration; and
- reducing boards of companies and senior management from awarding and receiving excessive remuneration.
The suggested amendment to Section 30(A) of the Companies Act does however make it rather complex and onerous as it will require companies to put in place the following:
- a remuneration policy which sets out the remuneration of directors and prescribed officers;
- an implementation report which details the remuneration and benefits received by each director and prescribed officer as stipulated in sections 30(4), (5) and (6) of the Companies Act; and
- a remuneration report which consolidates the remuneration policy and implementation report.
The remuneration report referred to above must additionally include the following:
- a background statement;
- details of the total remuneration consisting of all salaries, benefits, short-term incentives and long-term incentives; and
- details of the average remuneration of all employees and the gap reflecting the ratio between the total remuneration of the top 5% highest and bottom paid employees.
The remuneration report must be presented for approval by the board and once approved, the report must be presented at the annual general meeting of the company for approval by ordinary resolution of the shareholders. Thereafter, the report must be presented every three years or when significant changes are made to the remuneration structure of the company.
The proposed amendments contained in the Bill, as outlined above, echoes the King IV report on corporate governance which introduces a new pre-requisite for public companies and state-owned companies to prepare a remuneration report which consists of, inter alia, the remuneration policy and implementation report.
The proposed amendments contained in the Bill can be seen in both a positive and a negative light.
On the negative side, the Bill fails to provide context of paying fair and market-related remuneration against the financial sustainability of a company and remuneration gaps between employees may give rise to companies outsourcing entry-level employees to avoid such remuneration gaps. There is furthermore no clear indication in the Bill on what will take place when the remuneration report is rejected by shareholders – will the non-executive directors who serve on the directors committee who are responsible for remuneration be required to stand down for re-election, and will this be for re-election as directors and not just for the committee itself?
On the positive side, the Bill does assist shareholder concerns pertaining to exorbitant executive pay by disclosing the details thereof in the annual financial statements thereby strengthening shareholders’ rights to approve the remuneration reports and policy. Although section 30(A) provides a positive development to corporate governance, it is recommended that this provision be clarified, especially with regards to the intricate reports and policies required.
Overall, the proposed amendments contained in the Bill provides can be seen in a positive light, especially the effect which it will have in increasing shareholder activism.
VDMA’s team of experts are available to assist you and your business with company law matters or queries on the Bill.
Published 27 January 2022