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Ms MA WilliamsSecretary to ParliamentParliamentPO Box 15Cape Town8000

Dear Madam:

07 August 2008

Commentary on the Companies Bill

We thank you for the opportunity for Ernst & Young South Africa to provide comment on the Companies Bill, 2008 (“the Bill”) which was published on 27 June 2008.

We support the Department of Trade and Industry’s efforts to develop a “clear, facilitating, predictable and consistently enforced law to provide a protective and fertile environment for economic activity”, as outlined in the Memorandum on the Objects of the Companies Bill, 2008.

We present our detailed commentary as follows:

– General Commentary

– Detailed commentary on specific sections of the Bill

Should you wish to discuss our comments or require clarity on any of the matters raised please do not hesitate to contact me at Ernst & Young, P.O. Box 656, Cape Town, 8000 or alternatively by way of telephone at (021) 443 0258 or 082 603 0772, or by way of email to [email protected].

Yours faithfully,

Michael BourneProfessional Practice DirectorNational Assurance Services

mailto:[email protected]

General Commentary

The view expressed in the Memorandum on the Objects of the Bill, “that company law should promote the competitiveness and development of the South African economy” is an important one. In performing our review and formulating comments we considered whether the proposals were consistent with the five objectives stated on page 215 of the Bill.

The Bill goes a long way towards simplifying the procedures for forming companies; and to some extent in reducing costs associated with the formalities of forming and administering a company. It is commendable that efforts are being made to remove barriers to conducting business and reducing the costs of operating and maintaining companies.

We welcome for instance the retention of the classification of companies as “private companies”, “public companies” and adding “state-owned entities” as opposed to the classifications originally suggested in the discussion draft of the Companies Bill, 2007. The proposed classifications are less complex, and accordingly welcomed and accordingly should result in greater conformance with the legislation.

We have set out in more detailed a list of comments on the Bill which we would be grateful if you would consider, the more significant of which are as follows:

1. The Bill currently does not address the process and implication of changing from a “private company” to a “public company” and vice versa. We would recommend that these matters be specifically addressed in the Bill.

2. We support the removal of Schedule 4 to the Companies Act ,1973 and other detailed accounting and financial reporting requirements from the Act. We believe the standards of financial accounting and disclosures should be left to the Financial Reporting Standards Council ( “FRSC” ) to determine. Presently section 29 of the Bill requires the Minister to gazette such standards after consulting the FRSC. We are of the opinion that the FRSC should be given the power to determine standards in the same way as the Independent Regulatory Board of Auditors (“IRBA”) sets auditing standards in terms of the Auditing Profession Act. This will ensure that ,as and when standards change internationally or where local circumstances demand a standard be published, the FRSC can ensure that changes are made in a timely manner without needing to involve the Minister in the process.

3. We are supportive of the selective exemption of certain companies to be subjected to a full scope audit by an independent Registered Auditor. We believe however that the IRBA should be given the power to determine the standards of “ independent review” introduced in section 30(4)(b)(ii)(bb) and section 30(10)(b) of the Bill in the same way that they set standards of auditing in terms of the Auditing Profession Act.

4. We do not, however agree with amendments which will allow certain companies to not maintain proper books of account nor annual financial statements. We have set out our reasons for this on pages 9 and 10 of the attached commentary.

5. The Bill presently does not allow a company to trade while its assets are exceeded by its liabilities, both fairly valued. We believe that in certain circumstances where adequate creditor protection is in place that such companies should be allowed to trade if there is a reasonable prospect of them returning to a solvent position.

07 August 2008 2

6. The Bill does not allow for the existence of a “wholly owned subsidiary” in terms of the requirements of section 35(3)(b). This is because the Bill requires at least one share of a company to be held by a person other than a company or juristic person controlled by a group company. In South Africa and internationally there are many wholly owned companies in groups of companies. We are concerned that such a requirement will be unfriendly to foreign investors. We believe that the proposed Bill should continue to allow all the shares of a company to be held by one person or company.

7. Sections 90(2)(b) and 92 seek to place a greater degree of limitation of circumstances in which a person or firm may act as the Registered Auditor of a company. We are of the opinion that matters relating to the independence or otherwise of auditors should be left to the statutory Ethics Committee of the IRBA to determine as required by the Auditing Profession Act.

Limitation of Liability of Auditors

The auditing profession in many developed and developing countries of the world have for many years had some form of limited liability for independent external auditors in respect of the work they conduct as auditors to express an opinion on the financial information of companies. South Africa is presently out of line with such countries. We recommend that a Task Force be formed to investigate this matter further with a view to considering possible amendments to the Companies Act and Auditing Profession Act in due course.

07 August 2008 3

Detailed Commentary on Specific Sections of the Bill

Pg no Section Theme Comment

Pg 13 Definitions Correction of grammatical error

There appears to be a grammatical error in the definition of “distribution”. Correction to subsection (c) is required as follows: “… owed to the company by one or more holders of any of the shares …” The word “or” should be added to the sentence as indicated.

Pg14 Definitions Juristic Person Juristic person is defined to “include” foreign companies and trusts. We suggest that local companies and close corporations also be specified.

This will align with the definition of “company” and “close corporation” on page12 of the Bill

Pg 14 Definitions

S1 and S29

Definition of financial statements

The definition of “financial statement” makes reference to “interim or preliminary reports” in subparagraph (b). However, the Bill does not require the preparation of “interim or preliminary reports” in any of its sections.

We recommend that the references be removed entirely

Or the new Act would need to deal with Interim and Preliminary Reports.

Pg 14 and Pg 82

S1 and S92(1)

Meaning of “designated auditor”

There is no definition for “designated auditor”, although section 92 of the Bill refers to it. Section 92(1) of the Bill indicates that the same individual may not serve as the “auditor or designated auditor of a company for more than five consecutive financial years”. It is unclear what the difference between “auditor” and “designated auditor” is. We recommend that the reference to “designated auditor” be removed from Section 92 if there is no difference between “auditor” and “designated auditor”.

Pg 19 S4(1)(a) Interpretation of “consolidated” in the application of the solvency and liquidity test

The “solvency and liquidity test” has to be applied using “the assets of the company, or if the company is a member of a group of companies, the consolidated assets of the company…”

The meaning and application of “consolidated assets of the company” is unclear for example, it could be construed as meaning that:

If a subsidiary is “insolvent”, but the group as a whole is “solvent”, that the subsidiary would pass the test; or

Unless the company is also a parent company, only that company’s assets are considered (i.e. ignoring the assets

07 August 2008 4


of that company’s parent company).

Given the various possible interpretations, we recommend that this requirement is clarified.

It is submitted that the intention of the legislation is to require the company’s assets to equal or exceed the company’s liabilities, both fairly valued and therefore reference to the “consolidated” assets and liabilities is superfluous.

This is a problem with the existing Corporate Laws Amendment Act as well.

Pg 19 S4(2)(b)(i) Application of “fair valuation” in the solvency and liquidity test

This section of the Bill requires the company to “consider a fair valuation of the company’s assets and liabilities…” when applying the solvency and liquidity test.

The meaning of “fair valuation” is unclear.

We recommend that the terms “fairly valued” and “fair valuation” be specifically defined as “The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.”

This definition is taken from International Financial Reporting Standard 1 ( Appendix A -- Defined Terms )

Alternatively, the manner or process in which fair value should be determined must also be specified in the Bill.

Pg 19 S4(2)(c) Sentence construction

The section currently reads as though the “person” is not to be regarded as a liability, whereas it would appear that the amount of a “distribution” should not be regarded as a liability.

Pg23 S8(3) Significance of 31 December 1939

Section 8(3) of the Bill is currently section 31 of the current Companies Act ,1973.

The significance of this section is not apparent to the reader.

We do not understand whether this section needs to be retained in our corporate law. If not then we suggest consideration be given to removing it.

Pg 23 S10(2)(c) Referencing error

The references are incorrect. There is no Section 67(9) or (10). It is unclear what the correct reference should be.

Pg 24 S11(2)(a)(ii) Criteria for names of

In light of the changes proposed to the naming of companies we recommend that consequential amendments are made to

07 August 2008 5


companies the Business Names Act to ensure consistency. For example, the Business Names Act refers to the registrar and deals with the basis of rejection of company names while the equivalent provisions in the Bill refer to a Commissioner and a more simplified basis of rejection.

Pg 25 S11(3)(b) Meaning of “RF” and incorrect references

S11(3)(b) of the Bill requires: “if the company’s Memorandum of Incorporation includes any provision contemplated in section 15(2)(b) or (c), the name must be immediately followed by the expression ‘‘(RF)’’…”

It is unclear why this section refers to “section 15(2)(b) or (c)”. There appears to be no correlation with these sections. We recommend that the reference to “section 15(2)(b) or (c)” be removed or, if the reference is incorrect, that the reference be updated to refer to the intended sections of the Bill.

The meaning of “(RF)”, is unclear, as it has not been defined anywhere in the Bill, nor is it used anywhere else in the Bill. We recommend that the reference to “(RF)” be clarified.

If the term “RF” is clearly defined then it may assist with an understanding of section 11(3)(b) and the cross references to section 15.

Pg 26 Part B – Purpose and application

Changes in company type

The Bill currently does not provide details regarding procedures to be followed whenever a company changes from private company to public company or vice versa. Given the significant impact that this may have on a company, for example having to prepare financial statements, having its financial statements audited and various corporate governance requirements, the Bill should provide the relevant transitional provisions to cater for these changes. These matters are currently dealt with in Sections 22 to 29D of the Companies Act, 1973.

Pages 28 and 68

Pg 83

S15 (6)(c) (ii) and 72 (2)(a)

S94(4)(a)

Composition of audit committees

Committee member must be a director

These subsections recognize persons who are not directors, acting on the audit committee can be members of such a committee. We question the rationale of having non-directors as members of the committee. To date only directors have been members with a number of other persons attending only by invitation. We would recommend that only directors be allowed to be members of the audit committee.

We also bring to your attention an anomaly in the Act insofar as Section 94(4)(a) requires members to be directors only while S15 and 72 allow persons other than directors to be members.

07 August 2008 6


Pg 32 S22(1)(b) Insolvent circumstances

This section does not allow a company to “trade under insolvent circumstances”.

The term “insolvent circumstances” is not defined. To enable compliance we suggest these words be defined.

For instance where a company’s assets are exceeded by its liabilities and it has received a subordination agreement from a creditor which , when taken into account, would mean that the other liabilities of the company are exceeded by its assets would these circumstances be such that the company would have to cease trading ? If so we would submit that many companies in South Africa would have to stop trading.

Furthermore, if a company can not trade in such circumstances it needs to be understood that the company will then have no opportunity to trade out of its predicament.

Pg 35 S27(6) Financial year ending on Saturday, Sunday of public holiday deemed to be on the next business day.

According to section 27(6) if: “ in a particular year, the financial year of a company ends on a Saturday, Sunday or public holiday, that financial year will be regarded to have ended on the next following business day.”

It is not clear why this provision of the Bill has been inserted.

Whether a financial year ends on a Saturday, Sunday or public holiday is irrelevant and accordingly we are of the view that this section should be deleted.

Furthermore, it is common knowledge that the retail industry prefers to end its financial reporting period at the end of day on the last Sunday of the last month of each of their financial years. In terms of the proposed section 27(6) these companies will no longer be able to do so.

Pg 36

Pg34

S28(2)

S25(1)

Accessibility of company records

Section 28(2) currently states that the “company’s records must be kept at, or be accessible from, the registered office of the company.”

Section 25(1) states that the “records” must be accessible at or from the company’s registered office “or another location, or locations, within the Republic.”

To accommodate companies which operate in multiple locations we recommend that Section 28(2) be amended to read similarly to Section 25(1) which allows companies to have their records located in a number of locations across the

07 August 2008 7


Republic.

Pg 36 S29(1)(e)(ii) First page of financial statement to contain name of person responsible

This section requires the name of “the individual who prepared or supervised the preparation of” the financial statement to be stated on the first page.

Ultimately it is the directors who are responsible for such a process of preparation and supervision.

In many medium to large companies more than one person has the responsibility to prepare and supervise such a process.

Accordingly we suggest that the word “individual” be replaced by “individuals”.

Page 37

S29 (4) Timely issuance of Financial Reporting Standards

Section 29(4) tasks the Minister, after consulting the Council, with making regulations prescribing financial reporting standards and the form and content of summaries of financial statements.

We are concerned that there may be delay in the prescribing of regulations regarding IFRS which may lead to a situation where compliance with IFRS may constitute non compliance with the Act in cases where certain accounting standards have not been gazetted.

This , by way of example , may have serious consequences for companies listed on the JSE as the JSE has prescribed the use of IFRS for listed companies in order to attract and satisfy foreign investors. If there was any delay in the Minister gazetting changes to financial reporting standards then JSE listed companies may have to issue two differing sets of financial statements.

Accordingly we recommend that the Act allows the Financial Reporting Standards Council (“FRSC”) to issue new or amended standards as and when it needs to do so rather than requiring the Minister to gazette such standards as and when they frequently change.

This would then be similar to the way in which auditing standards are set and amended. When the Auditing Profession Act was introduced in 2006 the power to determine auditing standards was given to the Independent Regulatory Board for Auditors(“IRBA”). From time to time when international standards are issued the IRBA issues them locally as being effective in South Africa without having to get the

07 August 2008 8


Minister to gazette them.

Part C Issuance of local accounting guidance and interpretations

The current provisions are silent as to the issuance of local accounting guidance and interpretations. We propose that the FRSC be charged with these responsibilities as well.

Pg 37 and pg 58

S30 (1) and S61(7)

Annual financial statements to be prepared within 6 months and

Section 30(1) of the Bill requires a company to “prepare annual financial statements within 6 months after the end of its financial year…”

Section 61(7) of the Bill requires a public company to convene an annual general meeting “once in every calendar year, but no more than 15 months after the date of the previous annual general meeting…”

Section 179 of the Companies Act, 1973 allows for the AGM (where the annual financial statements have to be approved) to be held 9 months after the year-end, i.e. allowing the company 9 months to prepare the financial statements and present it to the AGM for approval. We recommend that the 9 month period be retained for both the preparation of the financial statements and the time within which the annual general meeting should be held.

Pg 36

Pg 37

S28(1)

S30 (1)

Certain companies not required to maintain accounting records

nor prepare annual financial statements

In terms of S28(1) a company “must keep…accounting records…-- (a) as necessary to enable the company to satisfy its obligations in terms of this Act … with respect to the preparation of financial statements;” This means that if a company does not have to prepare financial statements as defined then it does not need to keep accounting records.

Secondly, in terms of S30(1) certain companies do not need to prepare “annual financial statements” nor any other type of financial statement if not required by the Act or any other law.

Whilst we can appreciate why an audit and audit committee would not be required for entities given exemption by this section, we question the wisdom of a company not being required to maintain accounting records nor to prepare financial statements.

We believe there should be a requirement for all companies to maintain accounting records and to prepare financial statements, for the following reasons:

a) A number of regulatory returns and statistics are generated from financial statements. For example the submission of

07 August 2008 9


tax returns and National Credit Regulatory returns for credit providers. There will be a risk that returns / statistics presented by / prepared from companies not required to prepare annual financial statements may be misstated or manipulated.

b) Even small closely held private companies need to ensure that financial records are maintained and financial statements produced from time to time to assist its directors to evaluate the company’s financial performance and financial position.

c) Companies of all sizes are likely , for example , to declare dividends and may wish to buy back shares. If they do not have accounting records or financial statements they will have great difficulty in complying with the solvency and liquidity test in Section 4 of the Bill.

d) Section 22 does not allow a company to “trade under insolvent circumstances.” If a company has no accounting records nor prepares financial statements it will have great difficulty, if not find it impossible, to know whether it has complied with this section .

e) Mergers and acquisitions in an economy take place based on transparency brought about by a regime of good governance and accountability. Sometimes small entrepreneurs grow their companies into large public companies. At times they might also need to raise capital for their business. These opportunities may be significantly restricted when such companies do not have credible financial records or financial statements to use in negotiations related to mergers and acquisitions or the raising of third party capital.

f) Finally a company offers the shareholders and directors “limited liability”. We are of the opinion that to have such limited liability there should be an obligation at a minimum to maintain proper accounting records and to prepare financial statements, even if they are not audited or reviewed.

g) Maintaining accounting records and producing financial statements will assist directors to discharge their fiduciary duties as directors to the company and its shareholders.

Pg38 S30(5)(b)(ii) Content of the This section requires a directors report to be inserted into the annual financial statements when the preparation of annual

07 August 2008 10


directors report financial statements is required in terms of this Bill or any other legislation. Such a report should deal with :

“(i) any matter material for the shareholders to appreciate the company’s state of affairs; and(ii) any prescribed information;”

The “prescribed information” referred to in subsection (b)(ii) is not clearly specified. Please clarify the information required.

Secondly, Section 299 of the Companies Act, 1973, currently provides an exemption from preparing a directors report to “a wholly owned subsidiary of another company incorporated in the Republic”. This exemption was not retained in the 2008 Bill. A private company, where one person holds all of the beneficial interest in any securities issued by the company, is exempt from preparing annual financial statements in terms of Section 30(1)(b)(ii)(aa) of the 2008 Bill (and therefore also from preparing a directors report). Such a company may, however, be required to prepare annual financial statements in terms of an administrative notice as contemplated in Section 30(2) of the Bill. Such a company will then also need to prepare a directors report in terms of Section 30(5)(b). We recommend that the exemption in Section 299 of the Companies Act, 1973, be retained.

Pg 38 S30(8)(e) , (f) and (g)

Future directors These subsections of section 30 refer to “future directors”. Section 41 also refers to future directors.

To avoid widely differing interpretations of who is a “future director” we suggest that these words be defined for the purposes of section 30.

We note that section 41(6) provides a definition , however it limits its application to section 41 only.

Page 39

S30 (10) (b) Requirements for a review

This section allows the Minister to make regulations regarding the manner, form and procedures for the conduct of an “independent review” for private companies who has to prepare financial statements, but choose not to be audited.

Where an “independent review” is required we propose that this be carried out in terms of guidance and standards issued by the IRBA. The current proposals may result in duplicity and potential conflict with assurance standards issued by the International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (IFAC) and adopted by the Independent Regulatory Board for Auditors

07 August 2008 11


(IRBA).

Page 39

S31(2)(b) Requirement to prepare financial statements for judgement creditor

Where certain companies have been exempted from preparing financial statements in ordinary situations, we are doubtful if 60 days will be sufficient to enable financial statements to be prepared for a judgment creditor. We would rather propose that all companies be required to prepare annual financial statements. The distinction between which companies should be audited or not would then be made thereafter.

Pg 40 S33(1) Annual Information Return

Every company must file an annual information return. It is not clear as to whom this must be sent ? We presume that in terms of the provisions of S187(4)(b) on page 147 that it needs to be filed with the Commission.

If that is the intention we recommend that S33(1) be amended to make this clear.

Pg 40

Pg 18

S35(3)(b)

and S3(1)

Proposed abolishment of wholly owned subsidiaries

Section 3(1)(b) states that a company is a “wholly owned company” if all of the general voting rights associated with issued securities of the company are held or controlled , alone or in any combination , by any of the persons referred to in section 3(1)(a). Section 3(1)(a) allows all the shares of a company to be held by one company.

Section 35(3)(b) requires that a company: “(b) must at all times have at least one share issued to at least one person other than—(i) a company that is part of the same group of companies; or(ii) a juristic person that is controlled by one or more companies within the same group of companies.”

These two sections appear to be in conflict.

Furthermore section 35 seems to imply that one company can no longer hold 100% of the shares of another company, because if they did, the company would not “have at least one share issued to at least one person other than a company that is part of the same group of companies”.

We do not understand the merit in legislating this requirement and therefore question whether this was the intention of the Bill.

This could have a negative impact on foreign investment and could have a significant impact on many groups of companies within the Republic where their operations are conducted in companies where the holding company owns all the shares.

07 August 2008 12


Many foreign companies form wholly owned subsidiaries in South Africa through which they conduct business. This section would imply that they would need to have at least one other, unrelated shareholder, which, in many cases would be undesirable and sometimes impractical. Many South African groups also use wholly owned subsidiaries to conduct business for various reasons. Wholly owned subsidiaries are also a very common phenomenon in the international corporate environment.

It would also result in a very limited application of Section 30(1)(b)(ii)(aa) which exempts a private company from preparing annual financial statement if “one person holds, or has all of the beneficial interest in, all of the securities issued by the company” as Section 35(3)(b) would limit this to instances where an individual , as opposed to a company, holds all of the shares in a particular company.

We therefore strongly recommend that this position is reconsidered and that Section 35(3)(b) be revised so that it requires that every company should have at least one issued share, but allows all shares to be held by one person, company or other juristic person.

Pg 43 S40(1)(a) Shares to be issued for adequate consideration

In terms of section 40(1)(a) of the Bill the board of the company may issue shares "for adequate consideration".

We are concerned that there is no requirement for shareholder approval when shares are issued at a "discount". The current Companies Act requires in Section 82 that a special resolution must be obtained when issuing shares with no par value at a price lower than an amount derived at by dividing the capital by the number of shares, as follows:

"82. Issue price of shares of no par value requiring special resolution.—(1) No company shall issue shares having no par value of a class already issued at a price lower than an amount arrived at by dividing that part of the stated capital contributed by already issued shares of that class, by the number of issued shares of that class, unless the issue price of such shares is authorized by a special resolution of the company.(2) The notice convening the meeting for the purpose of passing the special resolution referred to in subsection (1) shall be accompanied by a report by the directors setting out the reasons for the proposed lower issue price.(3) A special resolution under subsection (1) shall not be capable of being registered in the Companies Registration Office unless the copy thereof lodged with the Registrar is accompanied by a copy of the report by the directors referred to in subsection (2).

07 August 2008 13


(4) This section shall not apply where the issue of shares is in pursuance of an offer for subscription to all existing members in proportion to their shareholdings, whether with or without the right to renounce in favour of other persons."

We suggest that consideration be given to requiring a special resolution of shareholders if shares are to be issued at a discount of more than say 10% to the existing fair value of the shares.

Page 46

S43 (1) (a) (ii)

Definition of debt instruments

The intention of excluding promissory notes and loans from debt instrument is not clear. We believe these are debt instruments.

Page 48

S45(5) Meaning of “net worth”

The section makes reference to “the company’s net worth”. The term “net worth” has not been defined in the Bill.

Pg 60 S62(3)(d) Financial statements included with shareholder notice

The Bill presently requires a summarised form of the financial statements to be circulated with the notice of shareholder meeting. This would mean that in all instances both a summary and the full form of financial statements will need to be prepared by companies . This will be costly and in many instances would be unnecessary.

We recommend that section 62(3)(d) allows companies to send shareholders the full form of financial statements if they wish.

Pg 63 S65(11) Special Resolutions

This section lists some examples of when a special resolution is required. This list is incomplete. It would be helpful to include a complete list of special resolutions in one place. For example the Bill also includes the following special resolutions:

Section 18(1): "The Memorandum of Incorporation of a company, as altered or amended, prevails in any case of a conflict between it and—(a) a translation filed in terms of section 17(3); or(b) a consolidated revision filed in terms of section 17(5), unless the consolidated revision has subsequently been ratified by a special resolution at a general shareholders meeting of the company."

Section 20(2): "If a company’s Memorandum of Incorporation limits, restricts or qualifies the purposes, powers or activities of that company, or limits the authority of the directors toperform an act on behalf of the company, the shareholders, by special resolution, may ratify any action by the company or the directors that is inconsistent with any such limit,restriction or qualification, subject to subsection (3)."

07 August 2008 14


S36(2)(a): "The authorisation and classification of shares, the numbers of authorised shares of each class, and the preferences, rights, limitations and other terms associated with each class of shares, as set out in a company’s Memorandum of Incorporation, may be changed only by—(a) an amendment of the Memorandum of Incorporation by special resolution of the shareholders;"

S41(1): "Subject to subsection (2), an issue of shares or securities convertible into shares, or a grant of options contemplated in section 42, or a grant of any other rightsexercisable for securities, must be approved by a special resolution of the shareholders of a company, if the shares, securities, options or rights are issued to a—(a) director, future director, prescribed officer, or future prescribed officer of the company;(b) person related or inter-related to the company, or to a director, future director,prescribed officer, or future prescribed officer of the company; or(c) nominee of a person contemplated in paragraph (a) or (b)."

S44(3)(a): "Despite any provision of a company’s Memorandum of Incorporation to the contrary, the board may not authorise any financial assistance contemplated in subsection (2), unless—(a) the particular provision of financial assistance is—(i) pursuant to an employee share scheme that satisfies the requirements of section 97; or(ii) pursuant to a special resolution of the shareholders, adopted within the previous two years, which approved such assistance either for the specific recipient, or generally for a category of potential recipients, and the specific recipient falls within that category"

These are just some of the examples. There are other instances as well.

We suggest that either this section be deleted from the Bill or alternatively and preferably, the list should include all instances where special resolutions are required.

Pg 64 S66(10) Approval of directors’ remuneration

This section of the 2008 Bill requires a special resolution ( to approve director’s remuneration ) to have been passed by shareholders “within the previous two years”.

We believe that this requirement may be too onerous and that a normal majority vote at a general meeting should be sufficient to approve the directors’ remuneration. We therefore recommend that Section 66(10) be adjusted to require the approval of the directors’ remuneration at a general meeting by

07 August 2008 15


way of an ordinary and not a special resolution.

Secondly, in certain circumstances the Act should allow shareholder approval being given retrospectively. For example, where a director resigns and is replaced by another director, and this takes place between shareholder meetings, it would be necessary to set the remuneration of the new director before the shareholder meeting and to have the shareholders ratify or amend the remuneration at the subsequent shareholder meeting.

Pg 65 S68(2) Filling director vacancies

This section refers to a director “vacancy”. In section 66(3) the Bill states that the Memorandum of Incorporation(MOI) “may” specify the number of directors required. Section 66(2) (a) or (b) specifies the minimum number of directors. In certain circumstances a board may wish to have more than the minimum specified in Section 66(2) (a) or (b). If this is the case are these additional positions considered “vacancies” ? or is it only the minimum number specified by the Act or MOI to which a company refers when identifying whether a “vacancy” exists ?

If not then it is unclear as to the way in which such additional directors are to be appointed.

We suggest that the term “vacancy” be defined.

Pg 69 S74(1) Written electronic consent by directors

This section allows a decision to be voted on at a meeting of the board of directors in writing or by electronic communication, provided all directors received notice of the matter to be decided.

We recommend that a period for such notice to be given such as ten business days be a requirement specified in the Act.

Pg 75 S80(3) (b) Certificate by auditor regarding liabilities of the company

When the voluntarily winding up of a solvent company takes place, this section requires the auditor to issue a certificate indicating that, to the best of the auditor’s knowledge and belief and according to the financial records of the company, the company appears to have no debts.

In terms of International Standards on Auditing, the auditor would not be able to make such a representation. We propose that this is a representation that the directors should make to the Master (as required by S80(3)(a)).

At most, the auditor may be able to perform certain agreed upon procedures and report the results of such procedures in

07 August 2008 16


terms of International Standards on Related Services (ISRS) 4400, Engagements to perform agreed-upon procedures regarding financial information.

Pg 81 S90(2)(b) Persons prohibited from holding office of auditor

This section of the Bill is not clear in terms of its intended application. Some possible interpretations follow:

The section starts by referring to “person or firm”.

1. It could be interpreted as being the “person” and any “person” related to the “firm” (“related and interrelated persons” is determined in terms of Section 2(1)(a) of the Bill) which could include all the directors of the audit firm, i.e. none of the directors / partner of the audit firm may hold one of the specified positions in the company; or

2. It could also mean any “person” related to the “firm” and the persons related to those persons as determined in accordance with Section 2 of the Bill as being up to “three degrees on natural or adopted consanguinity or affinity”. This interpretation would imply that no director / partner, nor that director / partner’s spouse, children, parents or even grandparents may hold, or have hold for the preceding 5 years, any of the positions outlined in this section. This interpretation would be impractical and very difficult to monitor and comply with.

These provisions appear to go further than the Independence Rules set out in the Code of Ethics issued by the International Federation of Accountants.

We question whether it was the intention of the legislature to restrict further these rules of independence .

We request that this section be clarified.

We furthermore suggest that rules relating to Auditor Independence be left to the statutory Ethics Committee of the Independent Regulatory Board for Auditors to set in accordance with the provisions of the Auditing Profession Act.

Accordingly we would prefer Section 90(2)(b) be deleted.

Page 82

S91 Filing notice of resignation of

This section states that an auditor’s resignation “ is effective when the notice is filed”. The section does not indicate whether the company or the auditor should file such a notice. It does

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auditor not specify to whom the filing should be made.

We recommend that both the auditor and the company have the responsibility of issuing the notice referred to in the section and that the Commission be the party to whom the notice is required to be sent.

Pg 82 S92 Rotation of auditor required for all companies

This section of the 2008 Bill requires auditor rotation for ALL companies.

Section 274A of the Companies Act, 1973 (as amended by the Corporate Laws Amendment Act, No 24 of 2006) currently only requires the rotation of auditors of “widely held companies”.

Furthermore the Code of Ethics issued by the International Federation of Accountants only specifies a time period limit of 7 years and a “cooling off” period of 2 years for “Listed” company auditors. They do not specify a time period limit for other company auditors.

In terms of Section 30(4) of the 2008 Bill, a private company that prepares annual financial statements has to have them audited if so required by the regulations issued by the Minister in terms of section 30(10) or they can choose to have those financial statements audited or reviewed in terms of section 30(4)(b). In those instances where a private company voluntarily chooses to be audited or is required to be audited in terms of the regulations issued by the Minister, we believe that the rotation requirements currently outlined in Section 92 of the 2008 Bill should not apply. We therefore suggest the adjustment to Section 92(1) of the Bill by adding the word “public” as follows:

“The same individual may not serve as the auditor or designated auditor of public a company for more than five consecutive financial years”.

Pg 82 S92(2) Period for which a person may not act as auditor after rotation

The Code of Ethics for Professional Accountants issued by the International Federation of Accountants (IFAC), requires in paragraph 290.154 that the “engagement partner” should be rotated after a pre-defined period, normally no more than 7 years. It also requires that such an individual should not participate in the audit engagement for a further period, normally 2 years.

We believe that the requirement for an auditor rotating off the engagement to not act as the auditor of that company for a further 5 years is too stringent and that the requirement in

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Section 274A of the Companies Act, 1973 (as amended by the Corporate Laws Amendment Act, No 24 of 2006), should be retained.

We suggest that the matter of auditor rotation and the cooling off period be left to the statutory Ethics Committee of the IRBA to determine. Such rules should form part of the Code of Ethics which the Ethics Committee of the IRBA is currently finalising.

Pg 82 S93(1)(b) Right to access information and explanations

This section allows the auditor of a holding company to have access to “any information and explanations” in connection with the financial statements of those entities. We recommend that “documents” also be included to ensure the auditors scope is not unintentionally limited by legislation. The relevant section would be amended to read “…any information, document and explanation…”

Pg 84 S94(8)(a)(ii) Incorrect referencing

This section refers to subsection 6(d). The reference should be to subsection (7)(d) and not (6)(d) as there is no subsection (6)(d).

Pg 87 S97(1) Incorrect referencing

This section makes reference to section 44(2)(c)(i) and 45(2)(c)(i) – these sections do not exist. The reference should be to 44(3)(a)(i) and 45(3)(a)(i) respectively.

Pg 98 S115 Incomplete title This heading “Required approval for transactions contemplated in Part” appears to be incomplete. It should probably refer to Part A

Pg 135

S164(17) Typographical error

Section 164(17) should be adjusted to refer to “pay” instead of “pays”.

Pg 155

S205(2) Disqualification from membership of the Companies Ombud, the Panel and the Council

Given the purpose and functions of these bodies, we believe that a person who has been found guilty of an offence and sentenced to imprisonment without the option of a fine, should not be allowed to be a member of the Companies Ombud, the Panel and the Council. We therefore suggest that this disqualification should be reinserted into section 205 of the Bill, as previously included in section 206(2)(e) of the Companies Bill, 2007.

Pg 156

S206 (5) Conflicting interests of agency members

There appears to be no protection for the aggrieved party even though it is possible that a decision was influenced by the member with a conflict of interest, i.e. the decision may have been unfairly biased in favour of the member with the interest. This would not be in line with the objective of the Companies Bill, 2008, to “provide a protective and fertile environment for

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economic activity” as outlined in the Memorandum on the Objectives of the Companies Bill, 2008. We suggest that this section either be deleted, or that it is updated to allow the aggrieved party to object to the decision on the basis of such conflict of interest, for example, by applying to the courts for an appropriate order.

Pg 190

Schedule 3 Part B

Referencing error

The subheading currently reads "In terms of item 4(c)(i)" the reference is incorrect. It should refer to 4(2)(c)(i).

Pg 197

Schedule 3 Part C

Referencing error

The subheading currently reads "In terms of item 4(c)(ii)" - the reference is incorrect. It should refer to 4(2)(c)(ii). This reference is also incorrect in section 30 of Schedule 3.

Pg 211

Schedule 7

S7(6)

Uncertainty regarding the period before the commencement of this Bill that these requirements apply to

This section states that "Approval of any distribution, financial assistance, insider share issues, or options, are subject to this Act, even if any such action had been approved by a company's shareholders before the effective date, despite anything to the contrary in the company's Memorandum of Incorporation".

It is not clear how far the retrospective application of this section will be required. We propose that this section be clarified and that a cut-off date be added so that it is clear as to how long before the implementation of this Bill, the requirements of this section should be applied.

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