Companies Bill: Department briefing and adoption & Mineral and Petroleum Resources Development Amendment Bill: Amendments & adoption

Meeting report

Companies Bill (the Bill): Department of Trade and Industry (dti) briefing
Ms Zodwa Ntuli, Deputy Director General, CCRD, Department of Trade and Industry, noted that the presentation would present a high level overview of the companies Bill, as approved by the Portfolio Committee for Trade and Industry. Some changes had been effected during the Portfolio Committee process.

This Bill had been in a consultation process for some time. The dti had conducted meetings, workshops, discussions and conferences across the country and had followed the New Economic Development and Labour Council (NEDLAC) process. There had been 134 submissions in respect of the draft published, and workshops had been held. There had therefore been extensive consultation with the public and stakeholders and there had been specific focus group meetings as well. In 2007 there had been a workshop with this Committee as well as the Portfolio Committee on Trade and Industry.

Ms Ntuli summarised the reasons for the review process. The current legislation dated back to 1973, and there had not been a significant review of it since that time. The present legislation was highly formalistic, and overly criminalising towards purely administrative omissions and commission. The legislation was now being changed to one that was creditor-oriented instead of shareholders and other stakeholder-oriented, to address the results of globalisation and the advent of democracy, to address the scourge of corporate failures and scandals that undermined corporate governance and to simplify the company registration and maintenance of companies. 

Ms Ntuli summarised the schematic arrangement of the Bill. The Bill had been organised so that all pertinent matters had been grouped together. Chapters 1 and 2 contained all information relating to the running of a company. The Companies Commission would be established and would hold awareness programmes around the Bill. She tabled a summary of statistics from 2007, showing the numbers of close corporations (75%), private companies (24%), public companies (0.2 %), incorporated professional companies (0.5%), external companies (0.06%). She noted, however, that during the process of registration many of the non-active companies would probably fall away, and this would help with determining the types of business prevalent in the country. The Companies and Intellectual Property Registration Office (CIPRO) had already started the process of returns. She noted that unregistered entities comprised the informal economy (23.8%), and sole proprietorships (22.2%).

Ms Ntuli noted that Chapter 1 dealt with interpretation and application. The Bill aimed to reduce formality and improve flexibility. Previously there had been very little flexibility given to corporate entities as to how they wished to structure themselves, to allow them to achieve greater efficiency in their own market. Electronic documentation would be accepted. The Bill also aimed to enhance compliance while also providing a general anti-avoidance remedy, which allowed a scheme to be declared void if it sought to evade a requirement or prohibition in the Bill. There was furthermore a requirement for plain language to be used for documents, prospectuses and other notices.

The types of companies included in the Bill were non-profit companies (currently Section 21 companies as well as some of those limited by guarantee). They were subject to special requirements set out in Schedule 2, and must have at least one public benefit or social or cultural objective. It must apply all assets to its stated objectives and residual value must be distributed to like organisations. They could not convert to or merge with profit companies.

Profit companies were divided into Public Companies, State Owned Enterprises (SOEs), Personal Liability Companies and Private Companies. Those incorporated outside South Africa would be foreign and external companies. The process for all profit companies would be streamlined, so that SOEs might be able to obtain exemptions in respect of some of the requirements of the Companies legislation if adequately covered elsewhere. Incorporation was regarded as a right, and the policy was to maximise freedom of association and contract, and make the registration process far simpler. It would be essential to include some information, but there would no longer be set formats. Internet filing would be permitted, and certain matters must be completed otherwise the application would be rejected. The Companies Commission had no authority to judge the merits of the company's structure. She noted that even if the chosen name was unavailable, the company could be registered temporarily under the number. They would exist as juristic persons until de-registered. There was provision for approval of pre-incorporation contracts. Reckless trading or trading while insolvent was an offence. She summarised the specific provisions in relation to company names and the name reservations, as also the requirements relating to use of names and office and records of the company. A right of inspection of company records was included, and trade unions also had rights in this regard.

In relation to transparency, there were a number of matters covering the issue. Previously, documents may not have been given in a transparent way, and that too was being addressed and the department was trying to provide some guidance. All companies must maintain accurate accounting records, have a financial year, and it would be an offence to fail to keep proper records or publish false information. All financial statements given to another person must bear a disclosure, under Clause 29. All companies - both large and small - must prepare annual financial statements. There had been many concerns raised on this point during the public hearings, as it was felt that this would encourage sound financial management, sustainability, and in order to comply with other regulatory requirements (such as tax requirements), and so the original proposal to exempt certain companies from preparing financial statements had then fallen away. However, the regulatory burden would be lessened by exempting certain companies from having their statements audited or reviewed, and with differential reporting standards, based upon certain thresholds. Non compliance with form and content of financial statements would no longer be a criminal offence.  

Ms Ntuli highlighted the issues around the audit committee, which had been the subject of various comments. She stressed that this related to the internal audit. The Audit Committee was to be appointed, and any vacancies on that Committee filled by the shareholders, as a sub-committee of the Board. The reason was that there should be some form of separation between the Board and the Audit Committee, and this type of appointment would put more distance between the two. The Audit Committee report must be included in the Director's report to the Annual General Meeting (AGM). The rotation period for appointment of external auditors would be five years, with a "cooling-off" period of two years. Finally she pointed to Clause 159, which provided protection to whistle-blowers, and provided also that information must be given to the Board or Company Secretary. Comment had been raised during the public hearings that the information should also be able to be given to the media, but the final decision had been that the information should be disclosed to those who had the power to act on the information.

Mr MacDonald Netshitenzhe, Director, dti, moved to the issues of reporting. The Financial reporting Standards Council (FRSC) was created, to try to correct the current position where there was no recognised financial standard. The function of this Council would be to take International Financial Reporting Standards (IFRS) and adapt them for local needs, and advise the Minister on their suitability. The Minister would issue the standards as regulations, and there had been particular provision, following public comment, that the standards must be issued without delay.

In respect of corporate finance, the Bill allowed the Board of Directors, subject to the Memorandum of Incorporation, to increase or decrease the number of authorised shares, to reclassify any authorised but not yet issued shares, or determine preferences, rights, limitations or other terms of shares in a class, in terms of Clause 36(3). This was similar to the manner in which other countries operated. In addition, in view of the Board's broad power to finance the company through debt, the Board was also given power to approve equity financing, which would enable all companies to compete for capital more effectively in world markets. Furthermore it could now give financial assistance to third parties to buy its own shares, provided that the company satisfied the solvency and liquidity tests. It also allowed pro rata and non pro rata share acquisitions if approved by the Board, and the Board could also approve distributions without shareholder approval, but subject to the existing equity solvency and balance sheet solvency tests, and subject to express standards of conduct and liability provisions set out in Clauses 76 and 77. The King duties of care were thus now incorporated in the Bill. The Directors would be jointly and severally liable for distributions in excess of those permitted by law.

Corporate governance in general was dealt with under Part F of Chapter 2. Clauses 58 to 78 covered issues such as shareholder rights to be represented by proxy, shareholders acting other than at a meeting, the fact that 10% of shareholders could demand that a meeting be called, their conduct of meetings and the quorums. Modernised rules concerning shareholder resolutions were contained in Clause 65, and the Board, directors and officers' conditions were set out in Clauses 66 to 78, with the liability of directors and prescribed officers being dealt with under Clause 77.

The provisions around business rescue were set out in Chapter 6. The concept of business rescue was designed to provide a mechanism to a company that had financial difficulties but had not reached the stage of insolvency. This Bill did not intend to deal with insolvency. The expression "financially distressed" was properly defined, and did not give the impression that business rescue was associated with insolvency. Speed was of the essence and therefore the business rescue practitioner was given powers under Clause 140 to control the process, including the power to suspend transactions temporarily. There was a consultation process provided for in the Bill, allowing for participation by relevant stakeholders. This Bill notably now protected 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 developing the business rescue plan, and permitting them to address creditors before a vote on the plan. They also had the right, as a group, to buy out any dissenting creditor who had voted against approval of a business rescue plan. The claims of the workers were aligned with the Insolvency Act, and also the ranking under the International Labour Organisation Convention. The definition of pension schemes also included provident schemes.

Chapter 8 dealt with the institutional framework. The Commission would register local and external companies, maintain proper records and information and promote education and awareness. Specialist Committees would advise the Minister on company law and policy and the resources of the Commission. The Companies Tribunal would resolve disputes in a transparent manner. The Takeover Regulation Panel would regulate affected transactions and offers in terms of Chapter 5. The Financial Reporting Standards Council would operate as previously described.

In the transitional period, the Bill provided for the co-existence of the new Companies Act and the Close Corporations Act. The amendments to the Close Corporations Act would harmonise the two laws with respect to regulation, while preserving the internal features of existing close corporations. Existing close corporations could retain their current status until their members decided to convert to a company. However, in order to avoid regulatory arbitrage, the Close Corporations Act would be closed as an avenue for incorporation of new entities, or the conversion of companies into close corporations. However, the ease of the new registration process meant that those organisations who would have opted previously to become close corporations would not be prejudiced by registering under this Bill.

Ms Ntuli summarised that the key principles were simplicity and flexibility, and encouragement being given to new entrants into the corporate world, whilst investors were now able to rely upon the legal environment created. The Bill championed corporate governance and would create a good corporate culture for doing business, increasing competitiveness, and improving director responsibility. Directors could also be disbarred if there had been violation of responsibilities, and companies would not be permitted to pay the fines of directors. New and well-resourced institutions such as the Commission and the Financial Reporting Standards Council would result in efficient and effective enforcement, and awareness and education campaigns would form the cornerstone of successful implementation of the Bill. 

Discussion
Mr Z Kolweni (ANC, North West) appreciated the level of clarity and commended the Department on its presentation. He questioned the business rescue provisions. He noted the involvement of workers at the end of the proceedings, but he asked whether they could be in any way involved in the planning - such as downsizing - if the company was in financial difficulties.

Ms Ntuli responded that the Bill would allow for, but not impose any requirements in respect of trade unions appointing workers to the Board, if the Company so wished. It also envisaged that a Social Ethics Committee could be created, to advance issues raised by environmentalists, trade unions and so forth. The Bill encouraged participation when possible. In relation to business rescue, which had to happen within six months, the business rescue practitioner would be required to consult with affected stakeholders, which would include the unions. Therefore the business rescue plan would be finalised only after consultation with the trade unions, creditors and shareholders, and would have to have the buy-in of all.

Mr Kolweni asked about the relationship between the Financial Reporting Standards Council and the Ombudsman.

Mr Netshitenzhe said that the FRSC was to conduct research, consult with the public, develop goals, and deal with those who were aware of the international standards. All companies would have to follow the standards they set. Auditors would need to certify whether or not the standards had been complied with, as a factual issue. The public would not generally need to approach the FRSC. The ombudsman provided for in the Bill was the Companies Tribunal, which would regulate rather than setting standards.

Ms L Ntembe (ID, Northern Cape) commended the ease of the registration process, and the provisions in regard to electronic registration, plain language requirements and names. She asked what reckless trading would entail.

Mr Rory Voller, Director: Legal Services, Companies & Intellectual Property Registration Office, replied that although there was no one definition of this, it had been given interpretations in previous cases by the Courts. Reckless trading could include trading under insolvent conditions, entering contracts while knowing full well that there was not the capacity or financial resources to fulfil them, thus impacting adversely on suppliers and producers.

Ms Ntembe asked about the exact protection given to whistleblowers, and what would happen if the Director or Company Secretary was involved in the offence.

Mr D Douglas (ACDP, Western Cape) commended the Department on a good and clear presentation. He also sought further clarification on whistle-blowing, expanding upon Ms Ntembe’s remarks by pointing out that in the past there had been cover-ups at Board and management level. He asked if there was any other process that a whistleblower could follow to give himself protection, or in cases where he did not know how deep the corruption went, and exactly who was involved.

Mr Kolweni also asked about whistleblowers’ protection.

Mr Flip Dwinger, Manager: Legal Services, CIPRO, noted that the Bill provided for protection of whistleblowers if they made disclosure to the Company Secretary, an audit committee or director. However, protection would also be provided if the information was reported to any regulatory authority, which could include the Stock Exchange, the Financial Services Board, the Regulatory Panel on Takeovers, or even South African Revenue Services, the Companies Tribunal, the Commission or the internal auditors. This was allowed precisely because the person giving the information might not trust the internal auditors or company officials. However, protection would not extend to reports to the media. If false claims were made to the press, or claims without proper proof, this could have dire consequences for the company.

Ms Ntuli added that disclosure could of course be made to anyone, but the protection would apply only if the disclosure was made to the proper authorities, as set out by Mr Dwinger. Disclosure and protection must be well-managed. It must be recognised that some people may have other motives for making disclosures. The intention was to encourage whistle-blowing while minimising the possible negative impacts

Mr Douglas enquired, in respect of business rescue, whether the business rescue practitioners would extend their investigations to the Board or management, who might have participated in mismanagement, and whether any disciplinary action could taken against wrongdoers as part of the process.

Mr Voller responded that the Clauses 141 of the Bill did make provision for what the business rescue practitioners must report upon, including mismanagement and fraudulent or reckless trading that could have resulted in the downfall of the company. Any wrongdoing should be reported to the National Prosecuting Authority.

Ms J Terblanche (DA, North West) asked about trade unions and workers having access to financial statements, saying that the provisions seemed to be contradictory.

Mr Dwinger noted that only public company financial statements needed to be disclosed. Those of a private company were not necessarily disclosed. The access to the records, as set out in the presentation, was in fact in relation to the register of directors and shareholders, which were public documents. Trade unions, however, might need access to financial statements in order to deal with business rescue.

Ms Ntuli added that in her presentation the words "worker" and "trade unions" were used interchangeably. Workers, either individually or in an organised manner, could get access to financial records in order to be able to assess whether the company was in financial distress, so that they could initiate a business rescue process. In other circumstances, however, neither the unions nor individual workers would necessarily have that access.

Mr Kolweni noted the comments in respect of electronic registration and asked what would be done about getting signatures on documents.

Mr Netshitenzhe said that electronic signatures were now possible, in terms of the Electronic Communications Act.

Mr Kolweni noted that there had been mention of SOEs, which had to comply also with the provisions of the Public Finance Management Act (PFMA). He asked at what stage their burden could be reduced in respect of reporting.

This question was not specifically answered.

Ms S Chen (DA, Gauteng) said that in the past many property holding companies had registered as close corporations. She asked if they would be regarded as active, or non-active, and if they had to convert from close corporations to companies.

Mr Voller noted that if close corporations lodged their annual returns, they would be regarded as active.

Ms M Themba (ANC, Mpumalanga) asked about the requirements in relation to the quorum, and what would be the situation if no quorum could be established for a number of consecutive meetings.

The Chairperson amplified on this by asking whether, if the quorum was ten, and could not be met, the meeting would not be postponed, and whether those appearing at subsequently arranged meetings would be deemed to form a quorum.

Mr Netshitenzhe responded that if the quorum was ten, but only eight attended the meeting on the first date, it would be adjourned. If, on the second date, two or three others then attended, it would be deemed that a quorum had been reached, and the meeting would then proceed. The purpose of the quorum was to protect and bind those who were not in the meeting, but it was not intended to delay matters indefinitely.

Mr Kolweni asked for more clarity whether the internal Audit Committee accounted to the Board or the shareholders.

The Chairperson noted that both the Board and the internal Audit Committee were appointed by the shareholders. He asked what would happen if there was a disagreement between the Board and Committee, for instance in the case of dissatisfaction by one with the other, and whether the respective bodies would then have to approach the shareholders. He also asked, in view of the appointment process, why the Audit Committee was deemed to be a subcommittee of the Board.

Mr Netshitenzhe said that the Audit Committee would generally oversee how issues pertaining to audits should be done. The Board generally represented the shareholders in the running of the company. They would write their own reports, for instance in relation to the appointment of auditors, and would have to report also to the shareholders on any disagreements. The final duty of care and reporting to shareholders rested with the Board. The question was whether the shareholders should not directly appoint the Audit Committee, but it was decided that, in order to avoid problems such as had arisen in Enron, an appointment by the shareholders would enable the Committee more easily to approach the shareholders.

In relation to the status of the Committee and the Board, Mr Netshitenzhe reiterated that the Board was to run the company. Directors on the Board could appoint internal committees, to be staffed by non-executive directors. This particular Audit Committee was, however, appointed, by the shareholders, and not by management.

Ms Ntuli added that this point had been raised during the public hearings, and the reason why the Audit Committee was regarded as a sub-committee of the Board related to the functioning of the company. The independent report of the Audit Committee must form part of the general report of the Directors. The shareholders could require the Audit Committee to report directly to shareholders. The “ranking” was accorded purely for practical purposes and did not reflect any particular weighting.

The Chairperson asked for an explanation of "competitiveness" across markets, asking how, for instance, a woollen garment from South Africa would be competitively marketed against one from England or Australia.

Mr Netshitenzhe said that “wool” and “lamb” were labels that were guaranteed. The competitive edge would arise from one country, for instance, offering trade incentives, or putting a certain infrastructure in place to export to a market, or arranging for quotas.

Ms Themba asked how a person would qualify as a director.

Mr Dwinger noted that any person of good legal standing could qualify as a director, unless he was disqualified. The Bill set out certain requirements, including that a person must not be a minor, an unrehabilitated insolvent, have been found guilty of certain offences involving fraud or dishonesty, not have been removed from a professional post, office, or discharged by reason of fraudulent activities. 

Ms Themba asked for further clarity on the disclosure on financial statements given to another person, in particular who that “other person” might be, and who was entitled to get financial statements.

Mr Dwinger noted that this provision was aimed at the situation where a third party might request and receive financial statements – such as a bank who had been approached by the company for a loan. Some financial statements would in any event be public documents.

Proposed amendments to the Bill
Mr Johan Strydom, Legal Adviser, dti, tabled a document setting out the proposed amendments. He noted that none related to matters of law or policy. They were merely intended to correct printing errors on the printer's B-version of the Bill, or were consequential amendments.

He described the amendments (see attached document) to Clauses 30, 69 and 71. Each of these arose as a consequential amendment following amendments effected by the Portfolio Committee on Trade and Industry, deleting the requirement, in Clause 70, that directors should at all times be resident in South Africa. 

Clause 185 (4)(b) was to be deleted from line 28, and replaced. No change in the wording was proposed, but the formatting was being changed to reflect the correct indentation of parts of the wording.

In Clause 203, the word "Council" was to be substituted for "Committee", which had been used mistakenly.

Under Schedule 3, there had been various printers' errors. There was nothing of substance in the amendments now proposed; it was merely a matter of neatening up the numbering and descriptions.

The Committee agreed that the Bill should be considered page by page. It then proceeded to approve each page of the Bill. Pages 37, 65, 66, 67, 145, 153, 165, 170, and 174 were noted as accepted with amendments.

The Chairperson read out the Motion of Desirability. The Members accepted it unanimously.

The Chairperson read out the Report of the Select Committee and this too was approved unanimously.

The Members then passed the Bill unanimously.

Amendments proposed to Mineral and Petroleum Resources Development Amendment Bill (the Bill): Briefing by the Department of Minerals and Energy
Ms Lindiwe Mekwe, Chief Director, Mining and Mineral Policy, Department of Minerals and Energy, presented the amendments proposed to selected clauses of the Mineral and Petroleum Resources Development Amendment Bill (the Bill). She stated that these were all of a technical nature. She noted that the Bill had already been presented before the NCOP, but had been referred back to the Committee now that the Department of Environmental Affairs and Tourism and the Department of Minerals and Energy had resolved the policy issues relating to the environmental management plans.

Ms Mekwe then described the amendments, which were fully set out on the document tabled (see attached presentation). The amendments were as follows:

Clause 1
On page 3, from line 33, to omit the definition of “environmental authorisation” and to substitute:

“environmental authorisation” has the meaning as assigned to it in section 1 of the National Environmental Management Act, 1998 (Act No. 107 of 1998);

Clause 18
1. On page 10, from line 38, to omit “within 180 days from the date of notice”:
2. On page 10, in line 40, after “1998” to insert: “, within 180 days from the date of notice”

Clause 23
1. On page 12, from line 26, to omit “within 60 days from the date of notice”.
2. On page 12, in line 28, after “1998” to insert: “, within 60 days from the date of the notice; and”.

Clause 32
On page 14, line 13, to omit “and any of its related and specific environmental management
Legislation”.

Clause 34
On page 15, line 43 to omit “[section 41]” and to substitute “section 41”.

Clause 57
On page 21, in line 49, after “reports” to insert: “required in terms of Chapter 5 of the National Environmental Management Act, 1998,”.

Clause 61
On page 23, from line 18, after “reports” to insert:, to omit: “required in terms of Chapter 5 of the National Environmental Management Act, 1998,”.

Clause 72
1.  On page 25, in line 41, to omit “ [environmental management programme]” and to substitute
“, environmental management programme”.
2.  On page 25, in line 43, after “1998” to insert “, as the case may be”

Clause 94
1.  On page 30, after line 39, to insert the following subsections:

2. Notwithstanding subsection 1, the following sections of the principal Act as amended by this Act come into operation on the date contemplated in section 14 of the National Environmental Management Amendment Act, 2008…

”3. Any provision of the principal Act as amended by this Act relating to prospecting, mining, exploration and production and related activities that is in conflict with any provision relating to prospecting, mining, exploration and production and related activities contemplated in section 14 (2) of the National Environmental Management Amendment Act, 2008, on the date that it comes into operation in terms of that section, shall lapse with effect from that date.”

Discussion
Ms Terblanche indicated that the DA opposed the Bill. However, this was not related to the amendments proposed. She did not give any extensive motivations, but merely mentioned the deletions from the Mineral and Petroleum Resources Development Act.

No other Members interrogated the DA’s position.

The Chairperson sought guidance from the Members and law advisers present about procedures to be followed for finalising the adoption of the Bill. The principle involved was whether the Committee had to be presented with a version of the Bill that included all the proposed amendments incorporated, before it could proceed any further.

Ms Terblanche asserted the necessity of incorporating all amendments in the Bill.

Other Members disputed this, and after some discussion, the view prevailed that the Committee had seen enough to proceed further.

Ms Ntombi Mnyikiso, Senior State Law Adviser, Office of the Chief State Law Adviser, noted that this was a Section 75 Bill and therefore that full amendments would not have to be incorporated before the Committee could deliberate on the Bill.

Mr Kolweni also assured the Committee that it would not constitute a departure from accepted practice to proceed now.

The Chairperson then read out the Motion of Desirability.

Ms Terblanche formally indicated that the DA opposed the Bill.

Ms Themba moved that the DA be left to its decision, and that the Committee should proceed. The Motion of Desirability was formally moved and seconded.

The majority of Members then resolved to adopt the Bill.

The meeting was adjourned.