The Companies Amendment Bill, which made a brief appearance in September 2018 before disappearing into the depths of the department of trade, industry & competition (DTIC)’s offices, looks to be headed for a rough ride ahead of its expected approval some time next year.
It’s not just the vigorous pushback from business on the issue of disclosing the wage gap, or the likely opposition to the favourable position created for landlords during business rescue. Activist investors are up in arms over the proposal to scrap shareholder protection in the event of a significant share repurchase by a company.
Within days of the October 1 publication of the latest — by some counts fifth — iteration of the proposed amendments to the 2008 Companies Act, the DTIC was served with an unprecedented request for access to submissions and committee deliberations relating to one section of the bill.
Whether successful or not, the move highlights the secrecy that tends to shroud the company law-making process.
Once proposed amendments have passed through the National Economic Development & Labour Council (Nedlac), the bill is published, opened for public comment, and becomes the focus of parliamentary portfolio committee hearings, at which the public can again make submissions. It’s a commendably open process. But by the time the bill has emerged from Nedlac — some say before it even gets to the council — the amendment dye is already set. And therein lies the transparency problem.
There is growing frustration that submissions made before and during the parliamentary process receive scant attention. The critical law-making phase is the months — or in this case, years — during which the Specialist Committee on Company Law (SCCL) and the DTIC interrogate the need to change the law. Little is known about what goes on at this stage.
The background note and explanatory memorandum attached to the bill provides an anodyne explanation: "The SCCL proposed various amendments to the act. The SCCL considered these amendments as necessary or desirable in light of various problems experienced since the act came into operation [in 2011]. Other stakeholders also proposed some amendments."
The background note lists 16 "other stakeholders", including the SA Institute of Chartered Accountants, the Banking Association of SA, the SA Institute of Professional Accountants, the JSE, the Institute of Directors, the Independent Regulatory Board for Auditors, Who Owns Whom, the Helen Suzman Foundation and investigative journalism outfit amaBhungane. But nowhere is there any indication of who recommended or influenced which amendments.
If a body gives up its minutes it can inhibit robust discussion; it’s not healthy for an advisory body to give these up
— Michael Katz
Cape-based law firm Pike Law wants to change that. In particular, attorney Adam Pike wants insight into the origin of what is likely to be a particularly controversial proposal, relating to companies’ ability to buy back their own shares.
Pike was stunned by the proposed gouging out of section 48(8)(b) of the 2008 act, which protects minority shareholders from unfair treatment as a result of a company (under instruction from the board) buying back its shares. Under the Promotion of Access to Information Act (PAIA), he lodged an application with the DTIC seeking access to the SCCL’s deliberations on the proposed overhaul of the section.
Judging by the initial response, Pike looks to be headed for a tough battle. But he’s likely to pick up allies along the way.
A prominent corporate law academic has welcomed the move, saying it’s time the company law-making process is made more transparent. The academic believes transparency is all the more important these days because business interests have come to dominate SCCL membership (previously influential academics played a countervailing role).
"There is a risk attached to short-term business interests having too much influence in the process," the academic warns.
So far, Pike has been rebuffed by the DTIC, with the department’s director of records & information management, Gerhard Calitz, explaining that the submissions he seeks don’t belong to the DTIC but to the stakeholders who participated in the comment process.
"You are welcome to approach the stakeholders directly to access their submissions and the memorandum of their opinion on the proposed amendment," Calitz wrote in response to Pike’s PAIA request.
"The DTIC is unfortunately not able to share the memorandums with any member of the public except specifically with the owner of the memorandum based on his/her comments. Access to the records is therefore refused."
Calitz referred Pike to SCCL chair Michael Katz, who also chairs law firm ENSAfrica.
Pike, who disputes Calitz’s interpretation of the PAIA, approached Katz, whose colleague Miranda Feinstein told him the SCCL will brief senior counsel for an opinion on the request. It will thereafter issue a formal response.
Feinstein, who is also a member of the SCCL, assures the FM that the SCCL intends to respond to Pike within a 30-day deadline, ending on December 2.
Katz, for his part, seems puzzled by the fuss.
"It’s straightforward; the existing section [48(8)(b)] has been a major source of dispute in the profession and has given rise to uncertainty ... By eliminating that section we eliminated the uncertainty," he tells the FM, adding that the proposed amendment addresses a defect in the system.
Katz says the committee has no desire to be opaque, but it won’t hand over the documents Pike is looking for. "If a body gives up its minutes it can inhibit robust discussion; it’s not healthy for an advisory body to give these up," he stresses.
Calitz has also encouraged Pike to contact Business Unity SA (Busa) for its opinion, saying: "As far as the Nedlac process is concerned, the provision was scrutinised by business, labour and government as social partners, and the clause was agreed to as it appears in the bill."
Pike hasn’t communicated with Busa, but that organisation’s policy director Olivier Serrao tells the FM that business has supported the amendment "with the proviso that the wording needed to be clear that, if it is a pro rata arrangement across the board from all shareholders, a special resolution would not be required, even if it includes directors and related parties, for part of the share buyback".
When approached for an update, Calitz referred the FM to the DTIC’s director of media relations, Bongani Lukhele. Lukhele confirmed the department would respond to Pike within the 30 days allowed.
The section on the chopping block is supposed to protect minority shareholders when companies buy back their own shares
— What it means:
The issue that’s vexing Pike relates to buying back shares — corporate action that is fraught with potential conflicts of interest. Juta’s Commentary on the Companies Act of 2008 describes it as follows: "Repurchase places the directors in a position of severe conflict of interests, and invites abuse of powers. If the directors hold shares, they are for that reason alone interested in the transaction. They may be tempted to repurchase at a premium or at a discount, or to obtain or consolidate their control."
Academics have little problem in describing the dangers of buybacks; business people are less clear. This is why the Companies Act included the section 48(8) safeguard. It imposes restrictions on corporate boards that are intended to protect shareholders from the potential for self-dealing.
Share buybacks have become such a commonly used tool of capital management by JSE-listed companies — running to scores of billions of rands each year — that it’s difficult to imagine that they were prohibited until 1998. Previous drafters of the law were exercised by the importance of capital maintenance, and alert to the danger of capital being reduced to accommodate a board’s short-term strategy.
In 1998, an amendment was introduced in response to short-selling of major JSE-listed companies by international traders such as George Soros. The ability to buy back your own shares was thought to provide a defence against this kind of activity.
Buybacks were also a useful way of accommodating the growing numbers of BEE transactions involving JSE-listed companies.
Given how commonplace buybacks had become by 2008 — Anglo American famously destroyed tens of billions of rands of value in an ill-considered buyback around that time — it was inevitable that the new Companies Act would completely update the 1973 version.
But it’s an indication of just how controversial the issue is that the section now on the chopping block was added at the last minute in 2011, the year the 2008 act came into effect.
That crucial addition requires a special resolution if a company buys back more than 5% of the issued share capital. This triggers other protections for shareholders, including appraisal rights.
It’s not hard to imagine that the addition was forced in after much heated discussion between those who thought company boards should not face too many restrictions and those who wanted to see some protection for affected shareholders.
Ten years later, it appears the restriction-lite camp has prevailed.
Pike is not at all happy. He is also perplexed by the pithy explanation for the dramatic change. "The approval of such buybacks by means of a special resolution is currently required. Such a requirement would be entirely unnecessary where the buyback occurs on a recognised stock exchange or is pro rata to all shareholders," the note in the bill explains, before stating rather casually: "In such circumstances the protection envisaged by the requirement of a special resolution is unnecessary, time consuming and costly. This has been removed."
Pike is far from comforted by the current JSE regulations, which require a special resolution. The JSE is, after all, a listed entity, which can easily change its listing requirements. And, of course, if the JSE places the obligation on listed companies, the time and cost referred to by the bill aren’t saved, unless the company is listed on one of the smaller exchanges.
Pike hasn’t launched into a resource-consuming battle with the authorities just for the good of the investing public. He has a number of clients who have used the existing section to exercise their shareholder rights to exit companies at a "fair" price when unhappy with a buyback transaction.
Inevitably, Pike’s clients tend to be smaller activist shareholders; they’ve been criticised by some deal-makers as opportunists looking for short-term profits. It’s a puzzling criticism, given that most deal-makers are themselves in business to make profits.
However things turn out for Pike, the public will have been served by the attention he has drawn to a troubling situation.
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