The long-awaited First and Second Companies Amendment Bills were signed into law by the President according to a Presidential announcement on 26 July 2024). The most material changes introduced by the Bills are those pertaining to remuneration disclosures and, from an M&A transaction perspective, the new thresholds that will trigger the requirement for private companies to comply with the Takeover Regulations and the scrutiny of the Takeover Regulation Panel when implementing affected transactions. This article has a brief summary of the most noteworthy provisions.
Once gazetted we will be in a position to advise on the effective date of the changes. The next step will then be to watch for amendments to the Regulations to bring them into line with the new provisions.
In the interim, the time is nigh for:
- Public and state-owned companies to prepare for the structuring of binding remuneration policies, alignment of remuneration reporting and pay gap disclosures, and new social and ethics committee requirements;
- Private companies with 10 or more direct or indirect shareholders that are contemplating an affected transaction to ready themselves for the potential of additional regulatory scrutiny of their deals by the Takeover Regulation Panel;
- All companies to give thought to the alternative dispute resolution mechanisms that they have agreed to in their corporate documents and whether or not these are still appropriate considering amendments; and
- Corporates to be aware that their annual financial statements and any disclosures included in their financials, director and officer remuneration or otherwise, will become public information.
A brief summary of the most noteworthy provisions follows below. As a reminder, the majority of the provisions are contained in the Companies First Amendment Bill which was first tabled in 2018 and has undergone several iterations of changes since then. The Second Amendment Bill includes changes proposed by the Zondo Commission coming out of the State Capture enquiry and extending time bars for director delinquency and director liability for fiduciary duties.
Remuneration Disclosures
There have been two noteworthy changes to remuneration disclosures, one noteworthy for private and public companies that are already required to be audited under the Act, and the second for public and state-owned companies.
For public and private companies required to be audited under the Act (section 30(4)), remuneration disclosure requirements in annual financials will now need to list each individual director and officer by name rather than by grouping or anonymously. This is noteworthy in that these annual financial statements will now also be available to the public since the new threshold rendering private company annual financial statements public aligns largely with the thresholds for financials to be audited. This amendment is anticipated to result in greater public scrutiny of private company affairs where companies are large enough to meet this threshold of public interest.
For public and state-owned companies (section 30A) there is a new duty to prepare a remuneration policy for directors and prescribed officers, to be approved by ordinary resolution at the annual general meeting of the company and thereafter every three years or whenever there is a material change. If not approved, it must be presented at the next annual general meeting or shareholder meeting of the company called for the purpose, until approved. Changes may not be implemented until approved.
There will also be an obligation on public and state-owned companies to prepare a remuneration report consisting of:
- a background statement;
- remuneration policy;
- implementation report (with details of remuneration and benefits of each director and officer);
- the total remuneration including salary and benefits of the highest paid employee;
- the total remuneration including salary and benefits of the lowest paid employee;
- the average and median remuneration of all employees; and
- the remuneration gap of the top 5% highest paid and the bottom 5% of lowest paid employees.
The remuneration report must be approved by the board of the company, presented to shareholders at the annual general meeting, and voted on by ordinary resolution. Where the implementation report is not approved, the remuneration or director committee for remuneration must present at the next annual general meeting to explain how shareholder concerns have been taken into account. Non-executive directors must stand for re-election as members of the remuneration committee at the annual general meeting at which the explanation is presented.
If, at the next annual general meeting, the remuneration report for the previous financial year is not approved, the non-executive directors who serve on the remuneration committee may continue to serve as directors provided that they successfully stand for re-election, but they are not eligible to serve on the remuneration committee for two years after such non-approval. Members of the remuneration committee who have served for less than 12 months in a year under review will be exempt from the consequences flowing from a failed shareholder vote (ie, the need to stand for re-election or ineligibility for two years after non-approval).
Where the director’s remuneration report becomes subject to audit, company policies and the background statement of the remuneration report must not be made subject to such audit.
Social and Ethics Committees
There have been numerous changes to the provisions of the Act dealing with social and ethics committees. Most of these changes do not, however, result in material adjustments in practice. The existing provisions of the Regulations which to date have contained the bulk of the requirements for the social and ethics committee have not yet been amended and will remain in force and effect until that date, but will be trumped by the new provisions of the Act to the extent of the inconsistency.
The triggers to appoint a social and ethics committee remain unchanged. The requirements apply to state-owned companies, listed public companies and other companies that have in any two of the last five years scored above 500 public interest points, excluding companies that are subsidiaries of another that has a committee that performs its functions, or if it has been exempted by the Tribunal.
In so far as exemption provisions are concerned, requirements have been slightly relaxed, in that exemptions may be made to the Tribunal if it is not reasonably necessary in the public interest having regard to the nature and extent of the structure and activities of the company (as is the current position) or if the company has a formal mechanism that performs the functions of the social and ethics committee, even if that alternative structure is not a requirement by other legislation (previously an additional requirement). Exemption applications will also now be more public, in that there is a new requirement for companies to publish an intention to lodge the application for exemption in the yet to be prescribed manner. Exemptions still last five years or such shorter period determined by the Tribunal.
Social and ethics committee membership requirements will be unchanged for all companies except public and state-owned companies which will now require that a majority of the members must be non-executive directors who have not been involved in the management of the company during the previous three financial years. As is the current position, all companies must have a minimum of three members. For companies other than public and state-owned companies, members may be directors or prescribed officers and at least one must be a non-executive director, independent for at least the previous three financial years.
As is currently the position, companies have 12 months to make membership appointments (from the effective date of the relevant provisions or the date on which the requirements are triggered).
Social and ethics committee member appointments must be made annually at an annual general meeting for public and state-owned companies and by a board for other companies. Vacancies must be filled within 40 days.
The social and ethics committee report must be prepared in a ‘prescribed manner and form’ describing how the committee performed its functions. The report must be presented at the annual general meeting of a public or state-owned company or for other companies, annually at a shareholder meeting or with a resolution.
Revised Triggers for Private Company Takeover Regulation
There will be a new trigger for private companies under the takeover regulations. This amendment will replace the current trigger (if a company has in the previous 24 months had a transfer of 10% or more of its securities other than between related or interrelated parties).
Instead, private companies will be caught by the takeover regulations if they:
- have 10 or more shareholders with a direct or indirect shareholding in the company; and
- meet or exceed the financial threshold of annual turnover or asset value to be determined by the Minister in general or about specific industries. This threshold has not yet been provided.
The result of this amendment is that companies not previously caught by these additional requirements, when implementing affected transactions (ie a sale of all or a greater part of the assets or undertakings of a company; a merger; a scheme; a change in beneficial shareholding in increments of 5%; mandatory offers or squeeze outs; etc), will have to comply with or obtain exemptions from compliance with the takeover regulations.
Companies that are in the throes of a deal should take this into consideration from a timing and conditionality perspective.
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