The president signed the Companies Amendment Act and the Companies Second Amendment Act in July.
Amendments to the Companies Act are now in force after the presidential proclamation was published in the Government Gazette on Friday.
Madelein van der Walt, partner, Nasrin Kharsany, senior knowledge lawyer and Serena Kalbskopf, senior knowledge Lawyer at Webber Wentzel, explain that the Companies Amendment Act aims to enhance transparency and provide for more disclosure by companies.
It also aims to reduce red tape to enhance the ease of doing business in South Africa and clarify certain technical provisions in the Companies Act.
The Companies Second Amendment Act is based on the recommendations of the Zondo Commission of Enquiry into State Capture and aims to extend the time bars applicable to applications for director delinquency and proceedings to recover loss due to director liability.
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Companies Amendment Act – new remuneration provisions
The key provisions in the Companies Amendment Act include new remuneration provisions for public and state-owned companies, applications of takeover provisions for private companies, naming of Individual directors and prescribed officers, third-party access to company records and social and ethics committee (SEC) requirements, Van der Walt, Kharsany and Kalbskopf say.
Public and state-owned companies will now have a duty to prepare and present a remuneration policy once every three years or whenever there are material changes to the policy as well as a remuneration report to present at the annual general meeting for approval by ordinary shareholder resolution.
The takeover provisions will now apply to affected transactions involving a private company that has ten or more shareholders with a direct or indirect shareholding in the company and meets or exceeds a financial threshold of annual turnover or asset value to be determined by the minister of trade, industry and competition.
In addition, companies are now required to have their annual financial statements (AFS) audited under the Companies Act, while each director and prescribed officer must be named in the remuneration particulars.
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Not everyone believes the Companies Amendment Act is business-friendly
Cosatu said it welcomes the promulgation and sees it as a boost in the fight against corruption, with its parliamentary coordinator, Matthew Parks, saying that the amendments are pro-worker and anti-corruption.
However, everybody does not share Cosatu’s view, with Laurence Grubb, an exco member at the South African Reward Association (SARA), saying that the Companies Amendment Act is anything but business-friendly.
“Some of the amendments are understandable, but there are a few which are not clearly drafted and others where the implications could pose risks to remuneration governance and ultimately the performance of companies.”
Grubb says companies must be aware of specific amendments which are very concerning for the implementers, as they will require important changes to remuneration policies and practices as well as the reporting on remuneration in the Annual Integrated Report.
“In an ideal world, decisions and disclosures are based on principle as opposed to being forced by law, so that all stakeholders have a say in reaching an ideal outcome, not just shareholders.
“However, we do not live in an ideal world,” Nicol Mullins, president of SARA, said after parliament passed the Companies Amendment Act.
Section 30A provides for shareholders, by ordinary resolution (50% +1), to approve or reject a company’s proposed remuneration policy or any amendments every three years, unless there is a “material” change that warrants shareholder approval within the 3 years.
Mullins points out that this means that unless shareholders approve material changes to the remuneration policy, it cannot be implemented.
“Although we believe that shareholder consultation is necessary and should be in place, we are concerned about the fact that the inability to make required changes to the policy could restrict the ability of the remuneration committee to introduce changes which are appropriate in a certain set of circumstances or context.”
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Disclosing the pay gap in companies
Section 30B also requires that companies report the pay gap between the top five percent of their earners and the bottom five percent, which is different from the Labour Relations Act’s requirements.
Grubb says the South African media has positioned this amendment as a sure way to lower the country’s terrible Gini coefficient.
However, he points out, the Gini coefficient factors in unemployment and by halving unemployment our Gini coefficient drops to the average of the global figure.
“Reporting the pay gap will not improve the Gini coefficient. It can only be achieved by reducing unemployment.”
According to Grubb, the Act draws the definition of “employee” from the Labour Relations Act, which includes learners and part-time workers without determining that the earnings of these part-time employees be annualised.
“In addition, although learners and graduate trainees are considered employees, they typically do not receive a salary but a stipend while they learn and develop which improves their ability for future full-time employment and commensurate earnings.
“This ratio will increase a company’s real pay gap, for which it may be chastised by its shareholders.
“A more informative reporting framework needs to be adopted to factor out data points which will lead to spurious results which are not a true reflection of the remuneration practices implemented.”
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Is holding directors accountable for five years enough?
The Companies Second Amendment Act covers the extension of the director liability time bar and extension of time bars to bring director delinquency and probation applications.
It extends the time bar to hold directors accountable for delinquency from 24 to 60 months, or even more with good cause.
CEO of the Institute of Directors in South Africa Professor Parmi Natesan says while this is a good move in the right direction, the question is whether five years is enough.
“Directors, along with other prescribed officers in companies, can be held accountable for a considerable period after they committed the alleged offences.
“This is something that the institute has championed for long. We commend the extension of the timeframe but want to emphasise that this is not the whole answer.”
She says the reality is that the cost and length of time it takes to bring an application of director delinquency to court deters companies from using this remedy.
“With no fast or easy means to address delinquency, directors guilty of gross misconduct are often simply removed from a board.
“However, without censure or statutory action, they continue to serve on other boards and the misconduct, corruption and maladministration continue which is very costly for everyone.”
