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Compliance

What the Companies Act means to you

What does the Companies Act 2008 meant for executive and non-executive directors?

Nicolene Schoeman-Louw

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The Companies Act 61 of 1973 (the ‘old Act’) distinguished between the rights and duties of executive and non-executive directors.

The relationship between the company and its executive directors was regulated by their employment or service agreements and by prevailing corporate laws.

Under the old Act, executive directors are employees of the company, while non-executive directors are not.

Issues created by the old Act

This distinction created many practical problems.

One issue was that directors who have decision-making powers would be responsible for regulating matters that directly influence employment policies and remuneration.

This is a clear contradiction because the executive directors are also employees of the company.

The conflict could affect the notion of division of power and transparency in company structures.

The other issue was that if an executive director was not formally appointed as a director, then they could not be held accountable for their actions.

The new Act gives directors more power

The new Companies Act 71 of 2008 (the ‘new Act’) makes no distinction between directors, and in the new Act, the concept has been broadened extensively to include executive and non-executive directors, prescribed officers and directors ex officio.

The board of directors also has more power in terms of the new Act.

If this power is not limited by shareholders in the company’s memorandum of incorporation, there is a real risk that power could potentially be abused. This risk exists despite the amendments to company law.

Shareholder limitation — general meetings

Besides the division of power inherent in the company structure, it has always been important to maintain the division between ownership and management to promote corporate accountability and transparency.

The old Act promoted this distinction and the associated institutional transparency.

Under the old Act, decisions that affect ownership were always taken at shareholders’ meetings, and not just by management. The old Act stipulated that a general meeting is convened for the general body of shareholders, regardless of class of shares held.

By contrast, the annual general meeting (AGM) is a compulsory meeting with specifically defined discussion items described by statute.

In other words, the decision-making power does not lie in the hands of the board at a general meeting.

This is also a prime example of where the inherent distinction between ownership and management is historically personified in companies.

Although the provisions relating to the general meeting have remained constant in the new Act, the AGM is only compulsory for public companies (under section 61(7)), and not for all companies.

The memorandum of incorporation and other contracts with directors

The articles and memorandum make provision for certain rights and duties of directors. Under the old Act, these rights were not seen as a contract between the director and the company and were not legally enforceable.

This meant that the articles only guided the rights of directors regarding various aspects such as their rights, terms and conditions of service, termination of service and remuneration.

In reality, the directors’ rights and duties were determined by the existing contracts between the company and the directors, such as the contract of employment or service agreement.

Section 15(6) of the new Act has amended this position. The new Act makes the memorandum of incorporation and the governance rules legally binding between the company, its shareholders and its directors.

This change may make the contents legally enforceable if the service contract with a director is poorly drafted. But issues may arise where the contracts are contradictory.

In such cases, it would be advisable to review service agreements and to align the memorandum of incorporation (previously known as the articles and memorandum of the company) with the new Act.

Dismissal employment contracts

Because executive directors were also employees of the company, their contracts and service agreements and termination of employment conditions should comply with the prevalent labour legislation.

In addition, in terms of the prevailing labour legislation — specifically the Labour Relations Act 66 of 1995 (referred to here as the ‘LRA’), and the Constitution of the Republic of South Africa  — every employee has the right to fair labour practices and not to be unfairly dismissed.

In terms of section 192 of the LRA where the company seeks to terminate a director’s contract of employment, it must follow a fair procedure which is in terms of the law.

It is generally accepted that a disciplinary hearing is regarded as a pre-dismissal procedure.

This is further reiterated as a legal right by the common law rule audi alteram partem which translates into to ‘hear the other side’.

Even though LRA does not expressly prescribe form or process for disciplinary hearings, the code of good practice does require that the employee has an opportunity to state his case.

The new Act has not overridden this principle, although there is now no distinction between executive and non-executive directors. Accordingly, the employment relationship is terminated by following the provisions of labour law.

Removal as director

Under the legislation cited above, and also under section 71 of the new Act, it is clear that the termination of the employment relationship is just that. It does not result in the termination the office of director.

This means that both aspects of the relationship must be terminated: the office of director and the employee contract.

In terms of section 220 of the old Act, a company may remove a director from office by ordinary resolution at a general meeting, before the termination of his office.

In addition, section 220(7) explicitly provides that this shall not detract from any power to remove a director which may exist apart from section 220.

The company may elect which procedure to follow. However, if he or she is removed from office, a director may institute action for breach of contract (section 220(7)) or for any losses or damages suffered as consequence.

Section 71 of the new Act replaced the old section 220. Section 71 of the new Act states that the directors may be removed by ordinary resolution.

Both the board and the director involved must be served notice, giving directors sufficient time to prepare a defence against the issues raised, which should be heard at the specified time.

After the director has made representations to the board, the board shall vote on the resolution.

As in the case of a disciplinary hearing for an employment relationship, the audi alteram partem common law rule provides the right to be heard and has now also been included in our Company law.

If he is removed from office, a director may institute action for breach of contract (section 71(9)) or for any losses or damages suffered as a consequence.

It should be noted that — under the transitional provisions of schedule 5 of the new Act — a person has the right to seek a remedy occurring before the effective date of the new Act, unless proceedings have commenced in a court of law.

Many feel this provision implies that the new Act is retrospective. This is purely based on interpretation and there is no precedent to support this contention.

Damages for breach of director’s duties

Where a director’s conduct breaches their fiduciary duties and/or their duty of care and skill and they have been removed as employee and director, in terms of section 77 and 218 of the new Act or common law, it is possible to institute a damages claim against them.

When terminating the relationship with its directors, it is crucially important that companies appoint an attorney to help ensure absolute compliance with the relevant labour legislation and corporate laws.

As a preventative measure, it is important to recruit directors wisely by selecting the right people and regulating their relationship with the company most appropriately from the outset.

 

 

Nicolene Schoeman – Louw is an admitted attorney of the High Court of South Africa, as well as being a Conveyancer, Notary Public and Mediator. She is the Managing Director of Schoemanlaw Inc Attorneys, Conveyancers and Notaries Public (Schoemanlaw Inc Attorneys) in Cape Town. Visit www.schoemanlaw.co.za for more information or email enquiries@schoemanlaw.co.za

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Company Posts

An Introduction To COID Registration And The Letter Of Good Standing

Company Partners is a leading COID Registration Service Provider in South Africa. They also assist Companies to obtain a Letter of Good Standing from COIDA.

Company Partners

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Compensation for Occupational Injuries and Diseases Act

What is COIDA?

The Compensation for Occupational Injuries and Diseases Act (Act 130 of 1993) replaced the “Workmen’s Compensation Act” (Act No. 30 of 1941), and was amended in 1997.

The Compensation Fund provides compensation for occupational injuries or diseases sustained or contracted by employees in the course and scope of their employment, or their dependents for death resulting from such injuries or disease, and to pay reasonable medical expenses incurred.

Who must register with COID?

According to prescription, anyone who employs one or more part- or full time workers must register with the Compensation Fund and pay annual assessment fees. The Compensation Fund is a trust fund that is controlled by the Compensation Commissioner and employer contributes to the Compensation Fund. The Commissioner is appointed to administer the Fund and approve claims lodge by employees or their dependants.

An employer must register with COID within seven days after the day on which he employs his first employee. An employer must register with the Commissioner by submitting Form W.As.2 with the particulars required therein to the Commissioner.

During COID registration copies of the following documentation should be included:

  • the registration certificate from the Register of Companies if they are a company or closed corporation;
  • or their ID document, if they are sole owners of the business.

What are assessment fees?

The annual assessment fee is of an employer is based on their employee’s earnings and the risks associated with the type of work or profession. Before 31 March each year, all employers (including contractors) must submit a statement (return) of earnings reflecting amount paid to all their workers from the beginning of March to the end of February.

Assessment tariffs, reviewed annually, are based on the risks related to a particular type of work.

Payment of assessments

  • Employers must pay within 30 days of receiving the notice of assessment;
  • Employers must apply in writing to settle assessments in installments (not exceeding 12 months);
  • 20% of the outstanding balance due is required upfront before instalment arrangements can be applied for;
  • Should the instalment fall overdue, the full amount becomes due and payable immediately.

Failure to comply may result in:

  • Penalty can be imposed for late submission of ROE (Sect 83(2) – 10%);
  • Estimations will be done if no returns (ROE) are submitted (Sect 83(6)(a);
  • Penalty on non-payment of assessments (Sect 87(1) – 10%);
  • Interest on late payment of assessment (prevailing prime rate);
  • Penalty for late reporting of accidents
  • A penalty is imposed where an employee meets an accident / death and employer is not registered with the Compensation Fund (not exceeding full compensation payable to the employee (Sect 87(2)(a))
  • An employer who fails to comply with a provision of this section shall be guilty of an offence – Sect 81(3)

Contractors and sub-contractors: 

  • Contractors and sub-contractors must register with the Compensation Fund and pay assessments;
  • Failure to comply with the COID Act by the sub-contractor will make the mandatory or main contractor to be responsible for any claims from the sub-contractor’s employees (thus the need for a letter of good standing);
  • The contractor may recover any such payments directly from the sub-contractor.

Letter of Good Standing:

The Letter of Good Standing is a certificate issued by the Compensation Fund to verify that a business actually exists, has paid all its statutory dues, has met all filing requirements and, therefore, is authorised to operate.

Conditions when applying for a letter of good standing:

  • Employer must be registered with the Fund as per section 80 of the COID Act,
  • Employer must have submitted all returns of earnings as per section 82 0f the COID Act,
  • Employer must be fully assessed as per section 83 of the COID Act,
  • Employer must have paid/ settled all outstanding debt as per section 86 of the COID Act.
  • Employers that have entered into an instalment arrangement will only be issued with a letter of good standing on a month‐to‐month basis.

Related: Register A Company In South Africa

What happens if an employee is injured?

employee-injury

The amount of compensation paid to you, depends on how much you were earning when you got injured or diagnosed. If you’ve stopped working by the time a disease is diagnosed, the compensation will be worked out according to what you would’ve been earning.

Types of compensation:

Medical costs: All your medical expenses will be paid for up to 2 years, from the date of the accident or the diagnosis of the disease. You are free to choose a medical service provider you want to consult with. All medical accounts and reports should be submitted to the Commissioner.

Temporary disability:  When you’re unable to work or can’t do all your work because of an injury or disease.

All medical expenses are also paid if the medical accounts are submitted to the Commissioner.

You can claim compensation for temporary disability for 1 year. This can be extended to 2 years, after which the Commissioner may decide that the condition is permanent and grant compensation on the basis of permanent disability.

Permanent disability:  A permanent disability is an injury or illness that you will never recover from. The seriousness of the disability will determine whether you’ll never be able to work again or whether you’ll find work more difficult.  If the disability is more than 30% disability, you will get paid a monthly pension. The size of the pension depends on what your wages were and on the seriousness of the disability.  If the disability is 30% or less, you’ll get paid a lump sum. The lump sum payment is a once-off payment.

Death benefits:  Burial expenses will be paid and the spouse of the deceased and children under the age of 18 (including illegitimate, adopted and step-children) are entitled to compensation.  If a family member that earns money to support the family (breadwinner) is killed by an occupational injury or disease, dependants can claim from the fund.

Company Partners

Company Partners is a leading COID Registration Service Provider in South Africa. They also assist Companies to obtain a Letter of Good Standing from COIDA.

Established in 2006, Company Partners guarantees that the services they offer meet the standards of the best in the industry. Over 30 full-time Consultants offer services and standards of the highest quality.


Useful Links

  1. COID Registration
  2. Letter of Good Standing

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Compliance

How To Stay On The Right Side Of The Law With A Marijuana Business

The verdict is in: It’s not (yet) legal to commercially grow cannabis, but there are multiple business opportunities for home growers that are on the right side of the law.

Nicole Crampton

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“The use, possession and cultivation of cannabis outside of a private space, or by, or around, under-age persons, still remains illegal,” says Paul-Michael Keichel, Partner at Schindlers Attorneys. “The caveat to this appears, however, to be that you may carry concealed cannabis in public, if the intention is to only consume it in a private space, away from under-age or non-consenting individuals.”

“What we are seeing is that most of our clients’ focus has been on the cultivation and commercialisation of cannabis itself. What is seemingly being overlooked are the secondary industries that will emerge or benefit from the legalisation of cannabis,” explains Maurice Crespi, Partner at Schindlers Attorneys.

“Take our M&R (medical and recreational) Cannabis Department as an example. Whilst not planned, it has emerged as a key department at Schindlers Attorneys. If cannabis legalisation presents an opportunity for attorneys, it begs the question as to what industry would not be presented with some form of opportunity as a result of its legalisation.

“Transport, courier services, injection moulding, advertising, fashion, accountants, medical, textiles and so on, are now all in a position to exploit the legalisation of cannabis to their benefit. I’m yet to think of an industry that will not be in a position to benefit from the legalisation of cannabis. Even Coca-Cola has found a way,” says Maurice.

Related: 10 Cannabis Business Opportunities You Can Start From Home

Grey areas yet to be resolved

“The question that has been left open, of course, is how and where does one get the cannabis seeds to grow the plants that one is now permitted to cultivate at home, or in private? Must these be shared, or can they be sourced or sold commercially?” says Paul-Michael.

“Until this answer is clear (we’re researching presently), it’s better to err on the side of caution. However, now that the major part of the fight is lost for them, I would be very surprised if Parliament doesn’t start appreciating the massive potential for increased tax revenue that would flow from a formalised and regulated cannabis industry.

“It serves almost everyone’s interests for them to entertain this option, especially because studies show that full legalisation decreases associated harms more than decriminalisation. Consider quality control, de-stigmatisation, elimination of the black market, beneficiation, and the list goes on,” explains Paul-Michael.

“That stated, SAHPRA (www.sahpra.org.za) is entertaining licence applications by growers and distributors for medicinal use of cannabis. The requirements are very tight but, for those able to comply and get licences, the commercial opportunity is almost unquantifiable,” says Paul-Michael.

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Compliance

Innovative Business Solutions And Compliance

Compliance with certification is a strong way to demonstrate that you are managing your business proactively.

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As a business owner, you are probably aware of where your business could improve. Sometimes a business owner would like to improve their business but is not sure how to begin. Therefore, it is of the utmost importance to develop an environment which will foster innovation and create key steps to improve your business while simultaneously trying to comply with all of the necessary legalities.

It is important for an entrepreneur to assess their situation first. Most business owners will ask the question why? Why can’t everyone will follow the same steps to success. Every business is different and unique, therefore, before you start making changes within your business, it is a good idea to make sure you have a full understanding of the factors affecting your business success and whether you are complying with necessary legalities.

Compliance may actually improve performance by giving your business a competitive edge. Legal compliance can assist you with improving your customer relations, enhancing your reputation and most importantly avoiding the cost of legal proceedings.

There’s this saying, ‘What gets measured gets improved’ explains Charles Gaudet, founder and CEO of Predictable Profits, a consulting firm that offers advanced marketing techniques to entrepreneurs who are passionate about expanding their small businesses.

Related: Compliance For Entrepreneurs

Here are a few strategies that you can use to make your business more profitable in the future.

Innovative Marketing solutions

For every business owner, marketing is an important tool to improve their businesses. You may think that you are missing an opportunity if you don’t jump right attracting customers with some type of marketing message.

However, as quoted by John Rampton ‘’one of the best things you can do to achieve growth is to slow down and spend time studying the trends.” What does this mean?  While rushing into marketing your product you tend to forget certain details, and once it is out in the public its difficult to forget or to undo. Therefore, its very important to research the market and consumer trends before launching anything.

This becomes very important when you consider the potential risk to your business for the infringement of another product, which is confusingly similar to your product. You also do not wish to be guilty of using a similar brand name, slogan or logo as one of your competitors.  Therefore, before you set out your personalised solutions when designing ads and directing messages to consumers ensure you are not infringing on anyone else’s rights as this will likely lead to expensive legal costs for your business.  

Compliance Breeds Confidence

It is important to remember that clients are concerned whether suppliers are properly compliant. Compliance with certification is a strong way to demonstrate that you are managing your business proactively and that the money a customer will spend i.t.o. buying your goods or services, is in safe hands. Conversely a failure in compliance can, as well as exposing you to the risk of regulatory sanctions, severely damage your business’ credibility.

Related: Why HR Legislation Compliance Can Curb Business Failure

For example, in the financial services industry there is an increasing requirement to demonstrate strong security to both external auditors and prospective customers.

With regulation that you feel is of no value, determine how to satisfy the requirements with the minimum effort necessary. Do, however, double check that you are not missing out on a benefit that may be rewarding for your business.

In conclusion, it is important to note when improving your business one always need to act in accordance with the correct laws and procedures. Therefore, if a company is embracing the difficult task of being compliant, I recommend using this as a competitive weapon to improve your business. It just might end up making you and your team better which is usually rewarded with more business.

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