Companies Amendment Bill, 2010
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
Outline
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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
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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
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Introduction
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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
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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
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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
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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.
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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
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• 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
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Rationale for Reform
Need for a review of the existing company law regime
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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 of the Companies Act
Policy Objectives
• 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 –
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Domestication of Foreign Companies
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Powers of Business Rescue Practitioners
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Registration of External Companies
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Independent Review of Financial Statements
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Licensing of Business Rescue Practitioners
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Conversion of Par value shares
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Empowering Minister to regulate Public Offerings
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Void and Voidable resolutions provisions
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Legislation taking precedent over the Companies Act
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Domestication of foreign companies (section 13)
Issues
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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
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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
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The Bill proposes to re-enact the domestication of companies in order to
simplify registration of companies and ease the burden of doing business
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Section 49(b) and (c) of the Bill were introduced to ensure that the
arrangements for domestication are reciprocall
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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
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Issues
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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
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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
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This will reduce potential for abuse and unfair treatment of
creditors which might have unintended consequences
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Registration of external companies
Issue
• 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
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Issues
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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
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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
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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
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Independent review of financial statements
Issues
• 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.
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Issues
Licensing of Business Rescue Practitioners (Section 138(1) and (2) )
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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)
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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
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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
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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
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Conversion of Par Value Shares
Issues
• 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
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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
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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
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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.
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Thank You!!!