Companies Amendment Bill 2010 Briefing

BRIEFING TO PORTFOLIO COMMITTEE ON TRADE AND INDUSTRY 16 November 2010 Ms Zodwa Ntuli – Deputy Director General: Consumer and Corporate Regulation Division (CCRD) Mr MacDonald Netshitenzhe – Director: Commercial Law and Policy, CCRD Adv Rory Voller – Director: Legal and Regulatory Services, Companies and IP Registration Office (CIPRO) Adv Flip Dwinger – Legal Consultant, CIPRO Mr Desmond Ramabulana – Deputy Director: Commercial Law & Policy, CCRD Companies Amendment Bill, 2010

Outline • Purpose • Introduction • Rationale for Reform • Policy Objectives of the Companies Act • Discussion on the Bill • Domestication of Foreign Companies • Powers of Business Rescue Practitioners • Registration of External Companies • Independent Review of Financial Statements • Licensing of Business Rescue Practitioners • Conversion of Par value shares • Empowering Minister to regulate Public Offerings • Void and Voidable resolutions provisions • Legislation taking precedent over the Companies Act

Purpose The purpose of this presentation is to brief the Portfolio Committee on Trade and Industry on the Companies Amendment Bill, 2010, which seek to rectify technical errors in the Companies Act 3

Introduction • The Companies Act No.71 of 2008 (“the Act”) was passed by Parliament in late 2008, and assented to by the President in April 2009 • The Act will take effect on a date fixed by the President in terms of section 225, which requires that at least one year elapse between the date of assent and the effective date • During process of developing regulations to give effect to the Act, it was discovered that several sections of the Act contained errors which necessitated rectification of those matters • On 22 December 2009, the Minister of Trade and Industry published a Notice in the Government Gazette soliciting public submission and comment on matters that may need to be corrected before the Act • The correction process was only confined to apparent errors and does not extend to a review of policy matters already endorsed by Cabinet in 2007, which are currently contained in the Act.

Introduction • The scope of the correction was therefore limited to identifying items inadvertently omitted from the Act, including errors pertaining to inconsistencies, incomplete sentences, misalignment, and similar technical concerns with the text of the Act • The purpose of the Bill is therefore to settle the Act by more perfectly representing its policy in coherent and consistent provisions of the text • The Bill contains a number of amendments correcting syntax, spelling, grammar, numbering, punctuation, alignment, reference, typographical and similar patent technical errors in the text • It also entails correction of text to address inconsistencies and disharmony among provisions of the Act, as well as addressing possible conflict with other regulations

Rationale for Reform Need for a review of the existing company law regime • Outdated company legislation • Globalisation and advent of democracy • Scourge of company scandals • Developments in the field of financial reporting standards • Easing regulatory burden especially for small businesses • Increasing market transparency • Simplification of company registration

Policy Objectives Policy Objectives of the Companies Act • The repeal of the current Companies Act, 61 of 1973 and the introduction of the new company legislation. • Simplification of company law in regard to the registration, maintenance, regulatory and institutional frameworks • The abolition of the concept of par value and nominal capital • The introduction of the equity solvency and balance sheet solvency tests to determine proper protection of creditors • The introduction of an enhanced regime for the protection of shareholders, particularly minority shareholders

Policy Objectives • The introduction of the non exclusive concepts concerning the duties and obligations of directors towards companies • The reform of the mergers and acquisition regime and the introduction of proper mergers in the proposed legislation • The introduction of a business rescue regime in the Companies Act • Decriminalization, where appropriate, of the company legislation and • Establishment of appropriate bodies and institutions for the effective enforcement of the proposed legislation

Discussion The discussion will focus on important clauses in the Bill – • Domestication of Foreign Companies • Powers of Business Rescue Practitioners • Registration of External Companies • Independent Review of Financial Statements • Licensing of Business Rescue Practitioners • Conversion of Par value shares • Empowering Minister to regulate Public Offerings • Void and Voidable resolutions provisions • Legislation taking precedent over the Companies Act

Domestication of foreign companies (section 13) • Section 335 of the 1973 Companies Act provides for a scheme for domestication of foreign companies that may wish to transfer their registration to the Republic of South Africa, and thus regulated as if they had been incorporated in the Republic • It was the policy intention to migrate this scheme into the new dispensation to facilitate ease of transfer by foreign companies but an omission occurred, which we now propose to correct • The Bill proposes to re-enact the domestication of companies in order to simplify registration of companies and ease the burden of doing business • Section 49(b) and (c) of the Bill were introduced to ensure that the arrangements for domestication are reciprocall Issues

Issues Powers of Business Rescue Practitioner • The concern was raised that the phrasing of the provision seems to give unfettered powers to the Business Rescue Practitioner (BRP) to cancel contracts during a business the application of the Business Rescue Chapter • Such powers could in the most extreme cases make it possible for the practitioner to repudiate a security agreement or arbitrarily renounce a contract without compensation to the other party • This could have also made it difficult for local companies to access finance or capital from foreign companies with the risk of such contracts subject to cancellation by BRP • This unfortunate reading is clearly unintended and is inconsistent with the policy on business rescue scheme, and section 136(2) is revised in the Bill to clarify the powers of BRP • BRP powers are now expressly subject to a court process which will address the concern

Issues • The amendment in the Bill will harmonise section 134 dealing with security of property obtained by the company with section 136(2) on cancellation of contracts in order to provide certainty regarding the obligations of the company • The Bill requires the practitioner to seek court approval before proceeding with the process of cancellation of a contract in order to ensure the principles of fairness and reasonableness are applied • This will reduce potential for abuse and unfair treatment of creditors which might have unintended consequences

Issue Registration of external companies • Section 23 deals with registration of external companies who do business within the Republic while remaining primarily regulated by their country of registration or origin • The policy intention of this section is to reduce some regulatory burden on such external companies by deferring to the incorporating jurisdiction to carry out the primary regulation of their own companies. • The phrasing of section 23 imposes obligation on such companies to register even for activities that in terms of policy were not intended to be considered doing business • The impact is that the current formulation could place at risk the country’s ability to attract debt financing for both public and private enterprises

Issues • The Bill has revised section 23 to deal with the defect which renders the policy rationale ineffective by rearranging the factors that would trigger the requirements by external companies to register in South Africa • The Bill also ensures that external companies who enter into employment contracts in South Africa are required as a matter of must to register in South Africa as that automatically means they conduct business in South Africa • Companies that merely hold meetings for instance in South Africa will not be required to register as a company in South Africa – but the Commission will monitor such activities to prevent possible evasion .

Issues Independent review of financial statements • Section 1 deals with amendment to definitions such as “audit” to clarify that it does not have the same meaning as the one contained in the Auditing Profession Act of 2004 • In this Bill it has to be elucidated that an “independent review” in terms of the Companies Amendment Bill does not have the same meaning as that contained in the Auditing Profession Act (APA) - In terms of APA an “audit” also includes an “independent review”. • Parliament was mindful that the policy behind the Act is to reduce regulatory burden and cost to business, and that the above interpretation was not intended • Regulations to be issued by the Minister in this regard will regulate the scheme of independent review.

Issues Licensing of Business Rescue Practitioners (Section 138(1) and (2) ) • The formulation of these two subsections are inconsistent with each other in that, the expression “regulated authority” as used in subsection (1) has a defined meaning, and does not extend to the type of entity contemplated as being “designated” by Minister in terms of subsection (2) • The current formulation makes it impractical for this section to be implemented because there is currently no entity that satisfies the criteria contemplated in both subsections • The amendment seeks to ensure that the scheme adopted will allow for appointment of business rescue practitioners with minimum prescribed qualifications who may fall outside the regulated professions • The Companies and IP Commission will license those persons who are not subject to a regulated authority, and ensure a simple and efficient process subject to vetting and approval is followed

Issues Conversion of Par Value Shares • Parliament in the Act intended to do away with Par Value Shares and in this regard have them converted within certain period to phase them out completely • The Act intended the phasing out mechanism to be a subject to be discussed and agreed upon by the Minister of Trade and Industry and Minister of Finance and expressed through regulations • There is a concern that the conversion process might attract tax implication and loss of voting rights – it is proposed that the Act merely abolish the system and not allow further issuing of par value shares • The Bill proposes the amendment to Schedule 5, Item 6 of the Act to remove paragraphs that may attract the implication mentioned above from a tax perspective • Regulations should therefore be in accordance with the amendment

Issues Empowering Minister to regulate Public Offerings • Section 95 of the Act seeks to regulate Public Offerings of company securities • In this regard there is no provision giving the power to the Minister to issue regulations to regulate this regime and this might result in uncertainty and different interpretation by courts • The Bill amends the provision to empower the Minister to issue Regulations to regulate the scheme accordingly

Issues Void and Voidable resolutions provisions • Section 218 of the Act provides that nothing in the Act renders an agreement, resolution, or provision thereof that is prohibited void or voidable unless a court declares it void • The phrasing of this provision makes it unclear which contracts are void or voidable as the terms mean different things • The Bill amends the provision to provide clarity in terms of contracts that are voidable after the court of law has so ordered

Issues Legislation taking precedent over the Companies Act • Section 5 of the Act provides for certain legislation such as the Banks Act and the PFMA to take precedent over the Companies Act in the event of conflict between them • There is an omission that occurred in that the Municipal Finance Management Act (MFMA), which is a provincial version of the PFMA has not been included • The Bill amends the provision to provide for the inclusion of the MFMA • Recommendations for a general exemption for all laws relating to financial or tax without a proper assessment being undertaken on their implications was not agreed to.

Thank You!!!

Companies Amendment Bill 2010 Briefing