Reducing the regulatory burden in SA
Proposed amendments to the Companies Act are meant to close loopholes and bring SA practice in line with broader trends. The reduction of regulatory burden is welcome, but some aspects are problematic
Two events last month may just shake up the sometimes staid landscape of corporate SA. First, the JSE released a consultation paper containing the most substantive changes to its listing requirements since the first King code in 1994. Then, two days later, the department of trade & industry (DTI) put out its proposed amendments to the Companies Act – the most substantial since 2011.
The DTI says the proposed changes in its Companies Amendment Bill are intended "to keep up with the current trends and also close some loopholes in the act" that have been discovered since its implementation in 2011.
Unlike the JSE’s proposals, not all of the long-awaited amendments to the Companies Act seem intended to create a "trusted space" for investors. Some will simply make it easier for companies to operate.
For example, section 45 of the act governs the provision of loans or financial assistance to company directors or subsidiaries. These are subject to particular requirements, including that the company will be solvent and liquid after providing such assistance. The amendment aims to relieve companies looking to provide financial assistance to their own subsidiaries from having to meet these requirements.
Law firm ENSafrica describes the intention behind the exclusion — to reduce regulatory burden — as laudable. However, it says its means of implementation are questionable.
Another possibly problematic amendment from the perspective of "trusted spaces" is the proposal to give the court the authority to validate the issue and allotment of shares that were issued invalidly. This represents a return to the authority allowed by the 1973 Companies Act, and, suggests ENSafrica, could prejudice existing shareholders.
In terms of the need to create "trusted space" for investors, a stand-out concern in the DTI’s amendments relates to possible changes to section 48 of the Companies Act, which deals with share buybacks.
The DTI is proposing a huge step backwards in the oversight of a practice that has become an important part of every listed company’s capital management strategy, but is rife with potential conflicts of interest.
To date SA’s lax disclosure requirements on buybacks have helped to camouflage the extent of their use in this country. But Goldman Sachs recently estimated that US companies would authorise more than $1-trillion in share buybacks during 2018. That is $1-trillion of demand being pumped into the US equity market on the say-so of directors who frequently hold shares or options. It provides a very useful underpin for the share price during a period when retail investors have been pulling out of equities.
If the DTI’s proposed amendment is implemented, shareholders of listed companies will have to rely on the JSE’s listing requirements — essentially private regulation that can be changed without the intervention of parliament — to protect them from the unrestrained self-dealing of executives.
A shareholder activist, who asked not to be named, says board-planned share repurchases are so fraught with conflicts of interest that the DTI should be tightening oversight, not relaxing it. He says last year’s controversial purchase of former Shoprite CEO Whitey Basson’s shares highlighted just how much caution is needed. The repurchase was delayed for critical months by the requirement to pass a special resolution.
"Implementation of the repurchase gave Christo Wiese control of Shoprite and put shareholders on course to become part of the Steinhoff group until plans were derailed by Steinhoff’s chilling announcement about accounting irregularities on December 6," says the activist. "If it hadn’t been for DTI and JSE requirements, there’s no doubt Shoprite would be part of Steinhoff now."
Remarkably, given what is at stake, the DTI is proposing that repurchase transactions "effected in the ordinary course on a recognised stock exchange on which shares of the company are traded" will not need to be approved by a special resolution.
Two problems are immediately apparent: the definition of "ordinary course", and what constitutes a recognised stock exchange.
Madelein Burger of Webber Wentzel says the section 48 amendment might require rethinking by the DTI. "It is strange that just days after the JSE’s discussion document raised concerns about recognising the authority of other stock exchanges, the DTI is taking a far more lax approach."
As it stands, says Burger, the resolution will potentially weaken minority protection.
On a more positive note, she welcomes the bill’s proposal to provide easier access to the list of shareholders of listed and unlisted entities. Companies will have to submit these details to the Companies & Intellectual Property Commission with their annual returns. "This is a significant step as it means people will no longer have to go to the offices of the company to get this important information. Now it can be done anonymously through the [commission’s] website."
The bill’s plan to broaden the scope of remuneration disclosure to include the names as well as remuneration details of prescribed officers is expected to meet with some resistance, not least because the disclosure of directors’ remuneration has done nothing to restrain the dramatic increase thereof, says Burger.
Comments on the bill must be submitted to the DTI by November 20.