Corporate Governance 2023 Comparisons

A company incorporated in terms of the Companies Act, No 71 of 2008, as amended (the “Companies Act”), is the principal form of corporate/business organisation used in South Africa. Companies are separate legal entities with shareholders that provide share capital (equity) and in certain instances debt finance to the company, and have a board of directors that manages the company and its affairs. The Companies Act distinguishes between two broad categories of companies, namely: profit companies and non-profit companies.

Profit Companies

Profit companies include the following entities with their suffixes shown alongside:

• public companies - Limited/Ltd;
• private companies – Proprietary Limited/(Pty) Ltd;
• personal liability companies – Incorporated/Inc.; and
• state-owned companies – SOC Ltd.

A private company cannot offer its securities to the public and its memorandum of incorporation (MOI) must restrict the transferability of its shares/securities.

A public company can freely transfer its shares to any member of the public. Public companies are ordinarily listed on a stock exchange, with the primary stock exchange in South Africa being the Johannesburg Stock Exchange (JSE).

Personal liability companies are private companies in which former and current directors may be held jointly and severally liable for any debts and liabilities incurred during their tenure in office. Businesses offering professional services, such as audit and law firms, are examples of such entities.

Non-profit Companies

In addition to the various types of profit companies discussed above, the Companies Act provides for the incorporation of non-profit companies which may be incorporated with or without members. Names of non-profit companies end with the expression “NPC”. Non-profit companies are also limited liability corporations and exempt from various provisions of the Companies Act.

Ring-Fenced Companies

When a company is ring-fenced (indicated by “(RF)” in its title), third parties are regarded as having notice and knowledge of any restrictive conditions contained in its MOI.

Other Business Entity Models

Further business entity models used in South Africa include:

• partnerships (which are not separate legal entities distinct from persons comprising the partnership);
• trusts (which have a separate legal personality for certain purposes usually provided in the deed of trust such as taxation and perpetual succession);
• sole proprietorships (in which, a sole proprietor trades under their own name with no limited liability – ie, there is no separation between their personal assets and liabilities and those of the business); and
• close corporations (which are corporations that do not exceed a limited number of shareholders and are simplified limited liability corporations – it should be noted that the ability to form new close corporations ceased as of 1 May 2011).

Foreign Companies

Foreign companies that carry on business activities within South Africa may be required to register as an external company in South Africa and are only required to comply with certain sections of the Companies Act.

For this chapter and unless otherwise specified, the term “corporate governance” is used widely to include the laws listed below as well as practices and rules, effectively guidelines that are imposed through instruments, such as the stock exchange rules and the King Report on Corporate Governance for South Africa (the “King IV”).

The principal sources of corporate governance in South Africa are the following:

• the Companies Act, which replaced the 1973 Companies Act with effect from 1 May 2011, and which (with certain surviving provisions from the 1973 Companies Act applicable to the winding-up and liquidation of companies) is the regime that governs the incorporation and management of companies in South Africa;
• the common law and under the Companies Act with respect to the regulation of the fiduciary duties of directors of companies;
• the Companies Regulations, 2011 (the “Regulations”), which came into effect with the Companies Act on 1 May 2011 and have subsequently been amended by the Companies Amendment Regulations 2023;

• the JSE Listings Requirements (the “Listings Requirements”) which applies to public companies listed on the JSE (see 1.3 Corporate Governance Requirements for Companies With Publicly Traded Shares);
• the Financial Markets Act, No 19 of 2012, which, amongst other things, regulates financial markets and exchanges, and contains the South African Insider Trading and Market Abuse Legislation;
• King IV, issued by the Institute of Directors in Southern Africa – King IV (the latest iteration of the code) which came into effect on 1 April 2017 (see 1.3 Corporate Governance Requirements for Companies With Publicly Traded Shares and 2.1 Key Corporate Governance Rules and Requirements for further details);
• the common law (derived from case law);
• sector-specific legislation and/or codes that regulate corporate governance of entities within the same industry, for example the Code for Responsible Investing in South Africa prescribes governance standards for institutional investors as asset owners (pension funds and insurance companies, etc), and their service providers (asset managers, fund managers, etc); and
• the Public Finance Management Act, No 1 of 1999 containing financial governance measures and the responsibilities of persons entrusted with financial management of state-owned entities.

The key source of a company’s corporate governance requirements is its constitutional document (eg, MOI, articles of association or trust deeds). The Companies Act contains both mandatory “unalterable” provisions and default “alterable” provisions, in terms of which the latter allows for variation by a company in its MOI. Significantly, certain provisions relating to corporate governance concerns (such as shareholder rights, annual disclosure requirements in the case of regulated companies and directors duties) cannot be altered by the MOI.

In addition to the requirements of the sources referred to in 1.2 Sources of Corporate Governance Requirements, companies with shares which are publicly traded and listed on the JSE, are required to comply with the following.

The Listings Requirements

The Listings Requirements impose continuing obligations on issuers including standards of disclosure and specific corporate governance practices relating to (i) the board composition of a company; (ii) the appointment of various board committees such as the remuneration committee, as well as statutory committees such as the audit and social and ethics committees; and (iii) the adoption of particular governance-related policies and compliance with King IV.

King IV

King IV is South Africa’s authoritative corporate governance code. While King IV compliance is voluntary, the Listings Requirements oblige issuers to adopt certain of its recommendations, with the remainder being implemented in accordance with King IV’s “apply and explain” disclosure policy. In order to give effect to this policy a company should (i) apply the recommended practices meticulously, with common sense, and proportionally in accordance with the company’s size, resources, and the extent and complexity of its activities; and (ii) provide a narrative explanation of that application with reference to the recommended practices. It is important to note that non-compliance with the principles of King IV can be interpreted as non-compliance with the Listings Requirements, and result in sanctions being imposed by the JSE.

In addition to the annual reporting requirement, certain facets of governance as set out in King IV must be complied with in terms of the Listings Requirements.

Whilst King IV is intended to apply to companies it is also intended to apply to other organisations irrespective of their form of incorporation, to broaden acceptance of corporate governance by making it accessible and relevant so that it can be applied across various sectors, organisations and organs of State.

Greylisting of South Africa

In late February 2023, South Africa was “greylisted” by the Financial Action Task Force (FATF) for failing to comply with certain international standards relating to the combatting of money laundering and other serious financial crimes. In response to the 2021 FATF mutual evaluation report, which placed the country on the list of states that failed to meet these standards, the General Law (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act, No 22 of 2022 (GLAA) was signed into law in December 2022. The GLAA amends various pieces of legislation, including the Companies Act and the Trust Property Control Act, No 57 of 1988 (TPCA), which has an impact on corporate governance.

For instance, the GLAA has broadened the legislation set out in Section 69(8)(b)(iv) of the Companies Act, which would disqualify a person from being a director, to include the Protection of Constitutional Democracy Against Terrorist and Related Activities Act, No 33 of 2004 and the Tax Administration Act, No 28 of 2011, in addition to the Companies Act, the Insolvency Act, No 24 of 1936, the Close Corporations Act, No 69 of 1984, the Competition Act, No 89 of 1998, the Financial Intelligence Centre Act, No 38 of 2001 (FICA), the Financial Markets Act, No 19 of 2012, Chapter 2 of the Prevention and Combating of Corrupt Activities Act, No 12 of 2004 if such person is convicted of an offence thereunder. Furthermore, if such person is subject to a resolution adopted by the Security Council of the United Nations providing for financial sanctions, they would be disqualified from being a director of a company.

Regarding trusts, the GLAA introduces new offences, in the case of the TPCA, for trustees who fail to comply with the newly introduced provisions relating to the establishment, maintenance and submission of prescribed information relating to beneficial owners of trusts and accountable institutions used by trustees, and for trustees who fail to make specified disclosures to accountable institutions. A trustee who fails to comply with the above obligations will have committed an offence and on conviction can be liable to a fine not exceeding ZAR10 million, or imprisonment not exceeding five years, or both.

Key Corporate Governance Rules and Requirements

There is a Companies Amendment Bill currently in progress in South Africa (the Companies Amendment Bill, 2021) which was published for public comment on 1 October 2021, by the Minister of Trade, Industry, and Competition. The Companies Amendment Bill seeks to amend the Companies Act in several respects and to provide for greater transparency and the achievement of equity as between directors and senior management on the one hand, and shareholders and workers on the other hand, as well as addressing public concerns regarding high levels of inequality in society. Certain of the proposed amendments are designed to achieve more disclosure of senior executive remuneration and the reasonableness of the remuneration. The Companies Amendment Bill also seeks to enhance efforts to counter money laundering and terrorism.

Now more than ever, companies globally and in South Africa are recognising the need to implement a corporate strategy that is aligned with ESG best practice, taxonomies and disclosure requirements. Africa, as is the rest of the world, is affected by the global shift towards a more sustainable global economy.

The attainment of sustainable development, a just energy transition, black economic empowerment, climate change resilience, employment equity, improved governance and the introduction of anti-corruption practices are important ESG issues.

Obligations of JSE-Listed Companies

The majority of ESG disclosures or reporting obligations are voluntary. However, companies listed on the JSE have mandatory reporting obligations with respect to sustainability.

In this regard, the Listings Requirements suggest that integrated reporting on sustainability is to be applied on an “apply and explain basis”.

King IV requires companies to report annually in an integrated manner and promote good governance and transparency in leadership and decision-making. King IV emphasises sustainability reporting. In July 2021, a King IV Guidance document was published relating specifically to climate change. As noted above, compliance with aspects of King IV is mandatory for companies listed on the JSE.

Building on the requirements of King IV, the JSE released a notice and comment process including various documents titled Leading the way for a better tomorrow: JSE Sustainability Disclosure Guidance and Leading the way for a better tomorrow: JSE Climate Change Disclosure Guidance. The documents are based on international best practice and are an important distillation of the recommendations of multiple global initiatives on sustainability and climate risk disclosure, including GRI Sustainability Reporting Standards, the Taskforce on Climate-related Financial Disclosures recommendations, the IFRS Foundation’s ISSB prototypes and the Value Reporting Foundation’s Integrated Reporting Framework and Sustainability Accounting Standards Boards. Also not mandatory, they bring much-needed guidance for consistent, comparable, transparent and reliable disclosures.

Regulation 28 of South Africa’s Pensions Funds Act, No 24 of 1956 requires funds to consider all factors (including ESG) that may be relevant to the long-term success of a fund. A guidance note published in 2019, sets out the Financial Sector Conduct Authority’s expectations regarding certain disclosure and reporting requirements relating to sustainability.

The Companies Act requires certain companies to have a social and ethics committee. As part of its functions contemplated in the Regulations, this committee may report on the UN Global Compact’s ten principles on human rights, labour, environment and anti-corruption or other matters within its mandate.

South Africa’s first national Green Finance Taxonomy was published in April 2022. Although reporting against the taxonomy is not yet mandatory, it provides a useful benchmark for investors, issuers, lenders and other financial sector participants to track, monitor, and demonstrate the credentials of their green activities in a more consistent and efficient way.

ESG reporting requirements are also contained in specific legislation that seeks to deal with environmental impact. For example reporting obligations stipulated as conditions to environmental authorisations under the National Environmental Management Act, No 107 of 1998 or conditions to atmospheric emission licences under the National Environmental Management: Air Quality Act, No 39 of 2004. Further, certain categories of emitters are required to report on their emissions under the National Greenhouse Gas Emission Reporting Regulations (published in GN 275 of 3 April 2017) (GHG Reporting Regulations). Sectors covered by the GHG Reporting Regulations include energy, transport, industry, agriculture and forestry.

Specific reporting obligations are also imposed on “designated employers” subject to the Employment Equity Act, No 55 of 1998, as amended (the “Employment Equity Act”), which aims to eliminate unfair discrimination in the workplace and implement affirmative action measures for “designated groups”, including black people, women or people with disabilities. A designated employer means an employer who employs 50 or more employees, or has a total annual turnover as reflected in Schedule 4 of the Employment Equity Act, municipalities and organs of state. Employers can also volunteer to become designated employers. Designated employers are required to form an Employment Equity Committee and submit an annual Employment Equity Report to the Department of Labour.

Broad-Based Black Economic Empowerment (B-BBEE) is a policy of the South African government, which is aimed at increasing participation by previously disadvantaged South Africans in economic activities. The Broad-Based Black Economic Empowerment Act 53 of 2003, as amended (the “B-BBEE Act”) is the primary legislation through which this B-BBEE policy is implemented. In terms of the B-BBEE Act, B-BBEE consists of measures and initiatives that are aimed at increasing levels of equity ownership by black people in businesses operating in South Africa, increasing the numbers of black people who participate in management roles in business, improving the skills of black employees, assisting small and medium-sized businesses that are majority-owned by black people, procuring goods and services from businesses that are good contributors to B-BBEE and corporate social investment and development. To aid the South African government to assess the state of transformation of publicly listed companies, the B-BBEE Act, read together with the B-BBEE Regulations, requires that all companies listed on the JSE and government entities report to the B-BBEE Commission annually on their compliance with B-BBEE.

Other sector specific reporting regulations include the Consumer Protection Act, No 68 of 2005, which requires the establishment of national norms and standards relating to consumer protection that promote a fair, accessible and sustainable marketplace, including consumer education concerning the social and economic effects of consumer choices.

Sustainability Reporting/Environmental, Social and Governance (ESG) Guide

A significant development in the field of ESG is the recent publication of the second Code for Responsible Investing in South Africa (CRISA 2) by the CRISA Committee. The first Code for Responsible Investing in South Africa (CRISA) was published in 2011 and aimed to encourage institutional investors and service providers to incorporate ESG issues into their investment decisions. CRISA 2 builds on CRISA and sets out five voluntary principles for stewardship and investment as a key component of the governance framework in South Africa. CRISA 2 has since been endorsed by various institutions including the Financial Sector Conduct Authority (FSCA).

The principal bodies and functions involved in the governance and management of a company in South Africa are as follows.

The Board of Directors

The Companies Act entrusts the board of directors with the authority to direct and regulate the business and affairs of the company, save to the extent that the Companies Act or the MOI provides otherwise. The board can delegate functions to individual directors, committees, management and employees.

The Company Secretary

A public company or state-owned company is required to appoint a company secretary in terms of the Companies Act and the Listings Requirements. A company secretary must maintain independence from the board and amongst other activities, is tasked with providing guidance to the board on their roles, responsibilities and powers, compliance with applicable laws and the company’s MOI.

Prescribed Officers

The Companies Act and Regulations include the concept of a prescribed officer. A prescribed officer is a person who (i) exercises general executive control over, and management of the whole or a significant portion of, the business and activities of the company; or (ii) regularly participates to a material degree in the exercise of general executive control over and management of the whole, or a significant portion, of the business and activities of the company. Prescribed officers have the same fiduciary responsibilities as directors, notably a responsibility of care, skill, and diligence and the duty to avoid a conflict of interest. Alongside directors, prescribed officers can be held personally liable for breaching their duties. 

Social and Ethics Committee

These committees are a relatively new structure in South African company law also introduced by the Companies Act and Regulations. The social and ethics committee is not a sub-committee of the board and therefore does not enjoy all of the common law powers that a sub-committee of the board would otherwise enjoy. It is, however, entitled to require any information or explanation from any director or prescribed officer and may request from any employee any information or explanation necessary for the performance of its functions; attend any annual general meeting(s) of shareholders (AGM(s)) and receive all notices and other communications relating thereto; and be heard at AGMs on any part of the business of the meeting that concerns the committee's functions. Its functions are limited to those set out in the Regulations which are, inter alia, (i) to monitor the company’s activities having regard to any relevant legislation, other legal requirements or prevailing codes of best practice; (ii) good corporate citizenship (iii) to draw matters within its mandate to the attention of the board as occasion requires; and (iv) to report, through one of its members, to the shareholders of a company at the AGM on the matters within its mandate.

Shareholders

Ownership and control of a company vests with the shareholders whose primary governance role relates to monitoring and holding the board accountable (see 3.2 Decisions Made by Particular Bodies, 3.3 Decision-Making Processes, 5.1 Relationship Between Companies and Shareholders and 5.2 Role of Shareholders in Company Management for further details).

Other Stakeholders

King IV endorses a “stakeholder-inclusive approach”, in which the board takes into account the legitimate and reasonable needs, interests and expectations of all material stakeholders in exercising its duties in the best interests of the organisation. Employees are viewed as a key constituency of a company and are afforded the right to apply to a court in order to prevent a company from doing anything inconsistent with the Companies Act, and a trade union or employee representative may invoke the statutory derivative action.

A company’s MOI ordinarily designates the decision-making powers to the board of directors (although there are some decisions that are reserved for shareholder consideration). The main decisions made at each level of the management of the company are as follows:

• The board of directors – makes the majority of decisions which are customarily related to a company’s strategy and general management. In this regard, the business and affairs of a company must be managed by or under the direction of its board, which has the authority to exercise all of the powers and perform any of the functions of the company, except to the extent that the Companies Act or the company’s MOI provides otherwise.
• Management – in instances where the board of directors is different to the management team, the latter will make decisions on a company’s day-to-day operations within the ambit of the powers delegated to management by the board.
• The shareholders – in accordance with the Companies Act, there are a number of decisions that are specifically reserved for shareholders and that can only be passed by either a special or ordinary shareholder resolution (see 3.3 Decision-Making Processes for further details). A company’s MOI might include matters in addition to those required in terms of the Companies Act. In certain instances, the shareholders’ approval relates to decisions of directors.

The board of directors, management team and shareholders ordinarily make decisions in the following ways.

The Board of Directors

The board acts through board resolutions, and makes decisions by a majority vote, with each director normally carrying one vote although this may be varied in the MOI. Board meetings must be called on reasonable notice, and the quorum necessitates the presence of a majority of directors at the meeting. It is important to note that a company’s MOI may require unanimous or another consent threshold, if the default position (ie, the majority requirement) in the Companies Act is altered. Moreover, instead of holding a board meeting, the board can make decisions via “round robin” written resolutions, which require approval by a majority of directors of the subject matter of the round robin resolutions. These resolutions generally have the same status as if passed at a meeting of the board.

The board of directors may appoint as many committees as it deems necessary and assign any of its authority to them (while maintaining ultimate accountability for their decisions and conduct). Refer to 1.2 Sources of Corporate Governance Requirements for mandatory committees to be appointed by public companies.

Management

The management team implements board decisions within its delegated and prescribed authority. Management may include prescribed officers of a company which are discussed further in 3.1 Bodies or Functions Involved in Governance and Management.

The Shareholders

The following matters require shareholder approval by a special resolution (generally by 75% of shareholders; however, the threshold may be higher or lower if specified in terms of a company’s MOI, provided it must be 10% higher than the threshold for an ordinary resolution):

• amending (or ratifying a consolidated revision) of the MOI;
• ratifying ultra vires acts by the board;
• providing financial assistance to directors or to related companies (such as group companies);
• providing financial assistance to acquire securities of the company or of a related company;
• approving certain “fundamental transactions” such as major asset disposals, schemes of arrangement or statutory mergers/amalgamations;
• certain issues of shares, securities or options;
• certain share repurchases;
• remunerating directors in that capacity; and
• winding up the company on a voluntary basis.

Shareholders must approve, by way of an ordinary resolution (generally 50% plus one vote), the appointment of auditors and an audit committee where applicable. A company’s MOI may stipulate particular “reserved matters” that can only be considered after shareholder approval. Moreover, the Listings Requirements require shareholder approval before the implementation of certain transactions, either by ordinary resolution (eg, a category 1 major transaction) or by special resolution (eg, a share buy-back). The approval threshold of JSE listed companies for special resolutions is 75% and 50% for ordinary resolutions.

South African company law provides for a single-tier, unitary board structure. The Companies Act does not distinguish between executive and non-executive directors and both are full board members. King IV does, however, distinguish and recommend specific roles for executive and non-executive directors.

In terms of the Companies Act, a private company or personal liability company must have a minimum of one director, whereas a public, a non-profit and a state-owned company must have a minimum of three directors. Certain industries, such as the banking and financial sector, may impose additional governance requirements on boards.

King IV recommends that the governing body (ie, the board of directors) should assume responsibility for its composition, including setting out the processes required for it to achieve the appropriate balance of knowledge, experience, skills, independence and diversity to effectively and objectively perform its governance responsibilities. King IV recommends that the board should consist of a majority of independent non-executive members. In determining the required number of board members, King IV recommends that the board consider, inter alia, the appropriate mix of executive, non-executive and independent non-executives; diversity; and the need for a sufficient number of members that qualify to serve on the committees of the board. In relation to committees, King IV recommends an audit committee (which is a statutory requirement for some companies), nominations committee, risk governance committee, remuneration committee and a social and ethics committee. The audit committee is primarily responsible for providing independent oversight of the integrity of the annual financial statements (AFS). The nominations committee is primarily responsible for the process of nominating, electing and appointing the board of directors.

Position Under King IV

King IV recommends that the board of directors comprise a combination of executive, non-executive and independent non-executive directors. As a minimum requirement, King IV recommends that a chief executive officer (CEO) and one other executive (for example a chief financial officer (CFO)) should be appointed to the board of directors of a company so as to ensure that the board of directors has more than one point of direct contact with management.

In addition to the role of CEO (and CFO), it is recommended that the board of directors elect an independent non-executive director as chair to lead the board of directors in the effective and objective discharge of their governance role and responsibilities. The CEO leads the implementation and performance of a board-approved strategy and policies and should serve as the main link between management and the board of directors.

The Companies Act prescribes a minimum number of directors for, inter alia, private and public companies as set out in 4.1 Board Structure. A company’s MOI may require a higher number of directors than the minimum number required by the Companies Act.

King IV recommends that a board of directors should possess the appropriate mix of skill, knowledge, expertise and experience, including the business, industry and commercial experience needed to govern a company (see also 4.1 Board Structure for further details).

Concept of B-BBEE

B-BBEE encourages companies to constitute diverse boards of directors as this has an impact on a company’s ability to conduct business or conclude contracts with the state or state-owned companies (see also 2.2 Environmental, Social and Governance (ESG) Considerations for further details on B-BBEE).

Position Under the Companies Act

Appointment of directors

Directors are generally elected to the board by a majority vote of the shareholders. The company’s MOI can allow directors to be appointed directly by any party specified in it, or it can allow directors to serve as ex officio directors. The Companies Act specifically provides that at least 50% of the directors of a profit company; ie, a company incorporated for purposes of financial gain for its shareholders, must be elected by shareholders.

Removal of directors

In terms of the Companies Act, directors can resign or be removed by shareholders or the remainder of the board.

Shareholder removal

The Companies Act contains an unalterable provision providing for the removal of directors from the board by an ordinary resolution of shareholders at a general meeting. Before this resolution is considered by the shareholders, the director(s) concerned must be given proper notice of the proposed meeting and the resolution, and the director(s) must be afforded a reasonable opportunity to make a presentation to the shareholders, either in person or through a representative.

Board removal

Furthermore, if a director becomes incapacitated, ineligible or disqualified, or has neglected or been derelict in the performance of their duties, the board will be able to remove the director in question. Moreover, a company’s MOI may indicate additional processes for the removal of a director.

A shareholder, director, prescribed officer or company secretary can also approach the High Court to remove a director by:

• invoking the oppression remedy in terms of the Companies Act; or
• having a director declared a delinquent in accordance with the Companies Act, if they are in material or gross breach of their duties.

Position Under the Companies Act

Conflicts of interest

Avoiding a conflict of interest is one of the central fiduciary duties of a director. The Companies Act provides that in the event that a director has a material/substantial personal financial interest in a matter before the board, or knows that a “related person” has an interest, such director must disclose such interest to the board and recuse themselves from the board deliberations on that matter. Family members within specific degrees of consanguinity or affinity, second entities of which the contemplated director is also a director, and organisations under the director’s control or influence are all regarded as “related persons”.

In relation to the audit committee of a public or state-owned company, the test for independence under the Companies Act is that the director must not be:

• involved in the day-to-day management of the company’s business or have been so-involved at any time during the previous financial year;
• a prescribed officer or full-time employee of the company and must not have held such office during the previous three financial years;
• a material supplier or customer of the company such that a reasonable and informed third party would conclude that the director’s integrity, impartiality or objectivity is compromised by that relationship; and
• related to any person who falls within any of the above categories.

If the company appoints an audit committee with persons not considered as “independent” in terms of the Companies Act, any functions undertaken by such audit committee will be considered as not performed by a suitably constituted audit committee.

Position Under King IV

Independence and conflicts

King IV recommends that at least a majority of the company’s non-executive directors should be independent and that the chair of the board should be independent. King IV sets out certain factors to consider when determining whether a director is considered “independent”, including whether:

• the director holds any equity interest in the company or group that is material to their personal wealth;
• the director holds directorships on a number of other group companies;
• the director is a material lender or financier to the company; or
• the director’s remuneration is in any way based on the performance of the company.

Position Under the Takeover Regulations

The Takeover Regulations (Chapter 5 of the Regulations) (the “Takeover Regulations”) require an independent board to be established in certain circumstances in relation to affected transactions, which include certain fundamental transactions, such as major disposals, schemes of arrangement and mergers, as well as the acquisition of control of a regulated company.

Directors and prescribed officers are subject to a number of duties under both the Companies Act and the common law. These duties can be traditionally categorised into two groups:

• fiduciary duties; and
• the duty of care, skill and diligence.

Position Under the Companies Act and the Common Law

Fiduciary duties

The Companies Act, in part, codified the common law principles regulating fiduciary duties and mandates that all directors, alternate directors, prescribed officers and members of board or audit committees must, amongst other things:

• exercise their powers and functions in good faith, for a proper purpose, and in the “best interests of the company”;
• disclose personal financial interests in certain instances; and
• not use their office or position to secure an advantage or knowingly cause harm to the company.

Directors remain subject to their common law fiduciary duties to the extent that the Companies Act does not specifically deal with particular duties. These common law duties encompass the fiduciary duties to:

• act within designated powers;
• maintain and exercise unfettered discretion and independent judgement; and
• avoid conflicts of interest.

The duty of care, skill and diligence

Each director should act with the degree of care, skill and diligence that may reasonably be expected of a person:

• carrying out the same functions in relation to the company as those carried out by that director; and
• having the general knowledge, skill and experience of that director.

Under South African law, directors owe their fiduciary duties and the duty to act with reasonable care, skill and diligence to the company (this entails acting only in the bona fide interests of the company and its shareholders as a body). Directors as such owe no fiduciary duty to the shareholders individually.

Furthermore, King IV endorses a stakeholder inclusive model (or enlightened shareholder value approach), in terms of which the needs and interests of stakeholders should be taken into account by the board, alongside those of the shareholders.

Directors do not owe fiduciary duties to third parties and creditors; however, the Companies Act provides that a company may not trade recklessly, with gross negligence or with the intent to defraud any creditors. In the event of a breach of the relevant provisions of the Companies Act, directors may be held personally liable to creditors or other third parties where loss or damage was suffered as a result of the transgression.

Position Under the Companies Act

The Companies Act provides, inter alia, that a director may be held responsible (i) in accordance with the principles of the common law relating to breach of a fiduciary duty, for any loss, damages or costs sustained by the company as a consequence of any breach by the director of their duties; or (ii) in accordance with the principles of the common law relating to delict for any loss, damages or costs sustained by the company as a consequence of any breach by the director of their duty of care, skill and diligence, certain other provisions of the Companies Act, or any provision of the company’s MOI.

Note that the liability above, for example for a breach of a fiduciary duty by the director, is to the company and not to third parties under the Companies Act. This is consistent with the principle of reflective loss, which principle has recently been reaffirmed in South African courts. In other words where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss, and a shareholder does not have the right to claim for a reduction in the value of its shares as this loss merely reflects the loss suffered by the company itself as the result of wrongdoing (see 5.4 Shareholder Claims (Statutory Derivative Action)).

Furthermore, defaulting directors are jointly and severally liable to the company for any loss. The Companies Act provides a legal avenue to pursue an action on behalf of a company in order to recover losses associated with a breach of directors’ legal duties (further details on such actions is set out in 5.4 Shareholder Claims).

Position Under the Companies Act

A director is liable for any loss, costs or damages suffered by a company as a direct or indirect consequence of a director, inter alia, having:

• acted on behalf of the company without the requisite authority, despite knowing that the director lacked the authority to do so;
• acquiesced in the reckless trading of the company’s business;
• engaged in conduct calculated to defraud stakeholders; or
• being party to false or misleading communications in financial statements and/or in a prospectus.

Directors may be subjected to criminal penalties in limited circumstances, with stricter consequences designated for offences including false statements or reckless behaviour.

Directors may not be relieved of any legal duties, liabilities or any legal consequences arising from an act or omission constituting wilful breach of trust or wilful misconduct on the part of a director negated or limited by virtue of a company’s MOI, any agreement or any resolution of a company.

Limitation of Liability

Business judgement rule

The Companies Act provides for the business judgement rule, which is a protective and defensive mechanism for directors who face liability for potential breaches of their legal duties (see 4.6 Legal Duties of Directors/Officers for a further discussion).

In terms of the Companies Act, the defence is available to a director (other than for breaches of duties of good faith) if the following requirements are met:

• the director took reasonably diligent steps to become informed about the matter at hand;
• the director had no material personal financial interest in the subject matter of the decision, and had no reasonable basis to know that any related person had a personal financial interest in the matter, or had dealt with those personal financial interests as required by law; and
• the director made a decision, or supported the decision of a committee or the board, with regard to that matter, and the director had a rational basis for believing, and did believe, that the decision was in the best interests of the company.

Director’s indemnity insurance

Companies are prohibited from providing indemnity or insurance to a director for wilful misconduct or for a wilful breach of trust. Nevertheless, on a case-by-case basis, the company may indemnify its directors, or purchase insurance policies that safeguards directors in the event that they have contravened their legal duties in a non-wilful manner. This is subject to certain restrictions, for example, a company is prohibited from indemnifying or insuring its director for:

• fines arising from criminal offences;
• reckless or fraudulent trading; or
• acting without proper authority.

A director is allowed to obtain insurance against personal liability. If a company obtains the requisite approvals, they may also pay the insurance premium for the directors.

Position Under the Companies Act

The Companies Act provides that, except to the extent provided otherwise by a company’s MOI, directors may be remunerated for their services (as director) subject to the passing of a special resolution of shareholders, which in turn, must be approved two years prior to such remuneration being paid.

The Companies Act also contains certain matters which require shareholder approval so as to limit benefits that may go to directors and prescribed officers, such as:

• an issue of shares if the class of shares being issued (including as a result of a transaction or series of transactions) will be equal to or exceed 30% of the voting power of all the shares of that class held by shareholders immediately held before the transaction(s);
• a decision by the board determining that the company may acquire a number of its own shares; and
• a decision by the board for the company to provide financial assistance to a director or prescribed officer.

Listings Requirements and King IV

The Listings Requirements have endorsed the King IV recommendation that shareholder approval in respect of remuneration is to be pursued as follows.

Where either the remuneration policy or the implementation report, or both were voted against by 25% or more of the non-binding advisory voting rights exercised at the AGM, King IV advocates that the following should be disclosed in the background statement of the remuneration report succeeding the voting:

• persons whom the company engaged, and the manner and form of engagement to ascertain the motives for dissenting votes; and
• the nature of steps taken to address legitimate and reasonable objections and concerns.

Consequences for Failing to Comply With Approval Requirements

The company may not pay remuneration to its directors for their service as directors, except to the extent that the MOI provides otherwise. Remuneration may be paid only in accordance with a special resolution approved by the shareholders within the previous two years (note that this is not salary but payments to directors for their services as such). If the board of a company proceeds to remunerate its directors without first obtaining the requisite shareholder approval, such payment is unlawful (see 4.6 Legal Duties of Directors/Officers for further discussion) and could be liable to the company for any loss, damages or costs suffered by the company as a result. The shareholders could challenge the board decisions relating to director remuneration (see 5.4 Shareholder Claims for and 4.4 Appointment and Removal of Directors/Officers for a further discussion).

A company that is required to have its AFS audited in terms of the Companies Act must disclose all remuneration and other benefits paid to its directors and prescribed officers in its AFS. This should be done on an individualised basis.

Furthermore, the Companies Act requires that the AFS of a company contain the following particulars relating generally to directors and prescribed officers:

• their remuneration and benefits received;
• the amount of any pensions paid to them by the company;
• any amount paid or payable by the company to a pension scheme;
• the amount of any compensation paid to them in respect of loss of office;
• the number and class of any securities issued to them, and the consideration received by the company for those securities; and
• details of their service contracts.

All remuneration paid to or receivable by a director or prescribed officer must be disclosed and this encompasses not only the remuneration paid to or received by the director or prescribed officer for services to the company, but also all other remuneration received by the director or prescribed officer for services rendered as a director or prescribed officer to any other company within the same group of companies.

Companies Amendment Bill, 2021

The Companies Amendment Bill proposes that companies, whose AFS are required in terms of the Companies Act to be audited, publish the names of company directors and prescribed officers who have received remuneration and benefits. The Companies Amendment Bill further proposes that public and state-owned companies prepare and present a director’s remuneration report for the approval of shareholders at an AGM. Furthermore, a remuneration policy is to be presented at an AGM for approval of shareholders.

According to the Companies Amendment Bill, companies will also be required to publish details of the average and median remuneration of all employees, and the remuneration gap reflecting the ratio between the total remuneration of the top 5% highest paid employees and the total remuneration of the bottom 5% lowest paid employees.

The relationship between the company and its shareholders is statutory and contractual in nature as it is generally regulated by the Companies Act and the company’s MOI, which generally sets out rights attaching to shares. The relationship between shareholders and the company may also be regulated by a shareholders’ agreement but nothing contained in such a shareholders’ agreement may conflict with or be inconsistent with the MOI and the Companies Act.

Generally, the principle of separate legal personality entails that shareholders are not liable for the company’s acts or omissions. Shareholders do not owe any legal duties under the common law or the Companies Act to the company.

Only in exceptional circumstances can a court impose personal liability on shareholders who have flouted the common law principle of separate corporate personality, or the court may invoke the Companies Act’s statutory mechanism to pierce the corporate veil in cases of “unconscionable abuse” of a company’s separate legal personality.

Shareholders are entitled to a share of the company’s distributed profits in proportion to their respective shareholdings and, in the event of a company winding-up, to the surplus assets after the company’s creditors have been fully paid. Typically, preference shareholders are entitled to receive their respective portions before ordinary shareholders upon winding up of a company.

Position Under the Companies Act

As mentioned in 4.4 Appointment and Removal of Directors/Officers, shareholders are responsible for the appointment of a certain percentage of directors to the board of a company. As set out in 4.2 Roles of Board Members, the management of a company is primarily done by the directors but in addition to matters and actions that require shareholder approval in accordance with the Companies Act provisions, a company’s MOI may set out certain actions that may not be carried out unless approved by a majority approval of shareholders. Such actions are generally known as reserved matters.

The Companies Act enables shareholders to perform their duty of oversight by allowing them to invoke their right to a statutory derivative action (see 5.4 Shareholder Claims for a further discussion). This statutory derivative action can also be brought against any third parties who have committed any wrongdoing towards the company.

Position Under the Companies Act

The Companies Act provides that a public company must convene an AGM initially, no more than 18 months after the company’s incorporation and thereafter, must convene annually (and within 15 months after the preceding year’s AGM). AGMs are not required for private corporations; however, they are commonly included in the company’s MOI.

The following matters must, at a minimum, be covered at an AGM of a public company:

• the presentation of the directors’ report, the audited financial statements of the company for the immediately preceding financial year and an audit committee report;
• the election of any directors, to the extent required by the Companies Act or the company’s MOI;
• the appointment of the company’s auditor for the ensuing financial year and an audit committee (in the case of public and state-owned companies only); and
• the AGM must also address any other issue presented by shareholders, irrespective of whether the company was given notice of the subject matter.

Furthermore, shareholders’ meetings may be convened to deliberate on specific company matters, such as the approval of a fundamental transaction, as and when requisitioned by the board, a person indicated in the company’s MOI or rules, or shareholders who, in aggregate, hold at least 10% of the voting rights entitled to be exercised on the subject matter to be voted on (except where a court decides that the subject matter in question is frivolous, vexatious, or has already been decided by shareholders).

Any general meeting of shareholders can be conducted entirely or partially by electronic communication provided that the electronic medium allows all shareholders to participate reasonably effectively as set out in the Companies Act.

Default positions

In terms of the Companies Act, the following are the default or standard positions, which can be altered by the company’s MOI:

• for a public and non-profit company, the notice period is 15 business days (and in any other case, the notice period is ten business days);
• the quorum prerequisite for shareholders’ meetings for any company is shareholders representing at least 25% of the total votes exercisable at the meeting, whether the shareholders are physically present or represented by proxy;
• at minimum, three shareholders must be present in person or by proxy, if the company has three or more shareholders;
• in the event that a quorum is not attained at the first assembly, the meeting will be postponed by a week and those present at the postponed meeting will be considered to comprise a quorum; and
• for JSE-listed companies, the Listings Requirements permit round robin resolutions only for very limited shareholder decisions and the balance of shareholder decisions must be approved at general meetings.

The board of a company, or any other person specified in the company's MOI or rules, may call a shareholders’ meeting at any time. The board of directors must call a shareholders’ meeting if a shareholder, or a group of shareholders, with a combined holding of at least 10% of the voting rights, demand the board to convene a shareholders’ meeting to discuss a specific issue or demands are made for substantially the same purpose. If the board fails, the shareholders may pursue an order of the court. Moreover, any two shareholders can require that the company include particular proposed resolutions on the agenda of a meeting demanded as aforesaid or at the next shareholders’ meeting or by round robin.

Position Under the Companies Act

In terms of the Companies Act, a shareholder who has been subjected to oppressive or prejudicial conduct due to, inter alia:

• any act or omission of a company; or
• the exercise of a director’s powers,

may seek judicial relief, and a court may make any order it deems appropriate, including an order restraining the conduct complained of or setting aside an agreement or transaction.

Furthermore, shareholders may approach the court for any order sufficient to safeguard any of their rights or to remedy any harm done to them by:

• the company due to a violation of, inter alia, the Companies Act or the MOI; or
• a director insofar as that director may be liable for a breach of their legal duties.

Moreover, in limited instances, a shareholder may launch an application with the court to impede:

• the company from breaching any provision of the Companies Act; or
• the company or the directors from violating any constraint included in the MOI regarding the company’s capacity or the directors’ authority.

A claim for damages may also be brought by shareholders who have endured a loss due to a breach of the Companies Act by directors.

Statutory Derivative Action

The Companies Act empowers shareholders to mandate a company to institute legal proceedings, or take related steps, to protect the legal interests of the company. A company, however, within 15 business days may launch an application to set aside the shareholders’ demand only on the grounds that it is frivolous, vexatious or devoid of merit.

Position Under the Companies Act

The new amendments to the Companies Act (see below) have inserted the definition of an “affected company”, which essentially means a regulated company and a private company that is controlled by or a subsidiary of a regulated company.

In terms of Section 122, a person must notify an affected company in the prescribed manner and form within three business days after that person­

• acquires a beneficial interest in sufficient securities of a class issued by that company such that, as a result of the acquisition, the person holds a beneficial interest in securities amounting to 5%, 10%, 15%, or any further whole multiple of 5%, of the issued securities of that class; or
• disposes of a beneficial interest in sufficient securities of a class issued by a company such that, as a result of the disposition, the person no longer holds a beneficial interest in securities amounting to a particular multiple of 5% of the issued securities of that class.

Upon having received the notice above, an affected company must file a record of that notice with the CIPC.

A regulated company must, upon receiving such notice:

• file a copy with the Takeover Regulatory Panel (TRP); and
• report the information to the holders of the relevant class of securities unless the notice concerned a disposition of less than 1% of the class of securities.

The Takeover Regulations require a mandatory offer to be made to the remaining shareholders when a party (operating alone or in concert) acquires securities in a regulated company that increases the acquiring party’s beneficial interest in the voting rights of such company to 35% or more.

New Amendments to the Companies Act

The GLAA was introduced in December 2022 in order to strengthen South Africa’s system of anti-money laundering (AML) and combating the financing of terrorism (CFT). These laws are intended to strengthen the fight against corruption, fraud and terrorism, and also assist South Africa in meeting the international standards on AML/CFT. The GLAA amends five different Acts, including the TPCA; the Non-profit Organisations Act, No 71 of 1997; the FICA; the Companies Act; and the Financial Sector Regulation Act, No 9 of 2017. See 2.1 Hot Topics in Corporate Governance (Greylisting of South Africa).

The Companies Act has been amended to include the definition of a “beneficial owner” and to provide for a mechanism through which the Companies and Intellectual Property Commission (CIPC) can keep accurate and updated beneficial ownership information. The amendments will require a company to keep a record of a natural person who owns or controls the company in terms of the definition of “beneficial owner”, and it prescribes specified timelines within which the company must record any changes in this information. Companies must also file a record of any natural person who owns or controls the company in terms of the definition of “beneficial owner”, with CIPC. Finally, persons who are convicted of offences relating to money laundering, terrorist financing, or proliferation-financing activities or are subject to a resolution of the UN Security Council are prohibited from registering as company directors.

Whilst these amendments are not specific to M&A, it is expected that these changes to the Companies Act will feature strongly in due diligence investigations in M&A matters for the foreseeable future, as well as the other legislation amended by the GLAA.

Listings Requirements

The Listings Requirements mandate issuers to disclose shareholdings of 5% or more in their annual report and circulars.

Companies Amendment Bill

The amendments proposed to the Companies Act aim to identify the true owner of shares of a company, on not only the first level of beneficial holders but also to require companies to identity the ultimate beneficial owners of their shares.

The effect of the amendments is the following:

• it places an obligation on all companies (and not only public companies) to determine from their registered shareholders details of the identity of persons who hold beneficial interests in the company’s shares;
• they strengthen the prevailing provisions relating to companies establishing and maintaining a register of the owners of beneficial interests in their shares and disclosure by shareholders relating to the persons who hold beneficial interests in their shares; and
• it requires all companies to publish in their AFS details of all persons who, alone or in aggregate, hold beneficial interests amounting to 5% or more of a particular class of shares.

Position Under the Companies Act

On an annual basis, a company must prepare AFS within six months after the end of its financial year or such shorter period as may be appropriate in accordance with the Companies Act.

The Companies Act provides that the AFS of a public company must be audited and in the case of profit and non-profit companies, the AFS may:

• be audited if it is in the public interest to do so under the Regulations;
• be audited voluntarily if the company’s MOI so provides; or
• be independently reviewed in a manner required by the Companies Act.

The AFS must be approved by the board and be presented to the first shareholders’ meeting after the AFS have been approved by the board and generally includes the following information:

• a director’s report detailing the state of the company; and
• an auditor’s report.

The AFS must satisfy financial reporting standards as to form and content if such standards are prescribed.

Position Under the Listings Requirements

In addition to the requirements discussed in 6.1 Financial Reporting, the Listings Requirements impose a number of ongoing obligations on public companies.

As a result, issuers must comply with financial reporting and disclosure requirements in critical areas such as periodic financial information, price sensitive information, profit forecasts, and major company activities.

As per King IV, good governance can be attained through its “apply and explain” disclosure framework, which requires a company to:

• apply the recommended practices thoughtfully, with common sense, and proportionally (ie, in line with its size, resources, and the scope and complexity of its operations); and
• provide a descriptive account of that implementation with reference to the recommended standards.

This account, together with the company’s AFS (and other external reports), code of conduct and ethical codes, and integrated reports, should be published on the company’s website (or other widely accessible media or platforms).

Position Under the Companies Act

In terms of the Companies Act, all companies (including external companies and close corporations) are required to file annual returns with the CIPC within a specified time period. Companies must file their annual returns within 30 business days after the anniversary date of their registration date, irrespective of whether they were active or not. Notably, the new amendments to the Companies Act require companies to include in their annual returns a copy of their AFS and a copy of their securities registers and, in the case of affected companies, a copy of the register of disclosure of beneficial interest.

If annual returns are not filed within the specified time frame, the company may be deregistered as CIPC will assume that the company is inactive. The deregistration procedure has the legal consequence of terminating the juristic personality of the company or close corporation, with the effect that the company or close corporation ceases to exist.

Furthermore, all entities are required by law to file their taxable returns with the South African Revenue Services to determine their taxable income.

Position Under the Companies Act

The Companies Act prescribes that only certain types of companies require an external auditor to be appointed to audit its financial statements. In terms of the Companies Act, it is mandatory for public and state-owned companies to appoint an auditor and to have their financial statements audited.

The appointment of an auditor must occur upon incorporation of the company by the incorporators or, within 40 business days of incorporation by the directors of the company. The first auditors of a company will hold office until the first AGM of the company, and are re-appointed on an annual basis at every AGM.

An appointed auditor may not be a:

• director, prescribed officer, employee or consultant of the company;
• director, officer or employee of the person appointed as company secretary;
• person who habitually or regularly performs the duties of accountant or bookkeeper of the company; or
• person appointed in the immediately preceding five years as the auditor of the company.

The Companies Act provides that the same individual is prohibited from serving as an auditor or designated auditor of a company for more than five consecutive financial years.

It is not mandatory for a private or personal liability company to appoint an auditor, unless the company is required to produce audited financial statements (see 6.1 Financial Reporting).

The Regulations set out a guideline to determine when it is in the public’s interest to have the financials of a company audited. The Regulations provide that a private profit company’s financials must be audited if they meet any one of the following criteria:

• if such a company, in the ordinary course of its primary activities, holds assets in a fiduciary capacity for persons who are not related to the company, and the aggregate value of such assets held at any time during the financial year exceeds ZAR5 million;
• any other company whose public interest score in that financial year is 350 or more; or
• any other company whose public interest score in that financial year is at least 100 (but less than 350) and whose AFS for that year were internally compiled.

Certain categories of private, personal liability and non-profit companies that are not subject to audit requirements may be required to have its AFS independently reviewed by an accountant.

If a company is not required to be audited but is not exempt in terms of the Companies Act, then its AFS must be independently reviewed.

King IV

Generally speaking, this requirement would fall under the general duty of care, skill and diligence under the Companies Act. In addition, King IV recommends the board of directors of a company to appoint a risk committee that will be in charge of overseeing and mitigating all of the company’s potential risks. King IV recommends that the risk committee should comprise of at least three directors, the majority being non-executive directors. The chairperson of the committee should be a non-executive director. The chairperson of the board may chair this committee. It is advised that the committee generates reports that are reviewed and signed by the whole board as acknowledgement that their duties have been appropriately performed in this respect.

King IV emphasises the board’s role in risk and opportunity oversight, proposing that the risk committee’s membership intersects with that of the audit committee for greater efficiency, and that the meeting agenda should address audit, risk, and opportunity as distinct agenda items if the risk and audit roles are integrated in a single committee.