CHANGES TO SOUTH AFRICA'S COMPANIES LEGISLATION

Recent amendments to South Africa’s Companies Act have introduced significant changes to corporate law, effective from December 27, 2024. These updates aim to improve transparency, accountability, and governance, while simplifying certain processes to make doing business easier. Below is a breakdown of the key changes and their relevance to small business owners (less than 50 employees).

1. Transparency in Executive Remuneration

Large companies (public and state-owned) are now required to draft remuneration policies every three years and publish annual reports detailing executive pay. These reports must disclose pay disparities between executives and the lowest-paid employees. If shareholders reject the report for two consecutive years, members of the Remuneration Committee may face re-election or removal.

Impact on Small Businesses:

This change primarily affects large corporations. For small businesses, it signals an increased focus on fairness and transparency in pay structures.

2. Extended Accountability for Directors

The time frame for holding directors accountable for misconduct has been extended from three years to five years. This retroactive provision allows legal action against directors for breaches of fiduciary duties or misconduct committed before the amendments were enacted.

Impact on Small Businesses:

If you own or manage a business, ensure compliance with legal obligations and carefully vet business partners to avoid long-term liabilities.

3. Employee and Landlord Protections in Business Rescue

In cases of financial distress leading to business rescue proceedings, employees now have first priority for unpaid wages. Landlords also gain stronger rights to claim unpaid rent and utilities during business rescue but rank behind employee claims.

Impact on Small Businesses:

If you rent your business premises, this could affect your relationship with landlords during financial difficulties. Additionally, prioritizing employee wages during crises is now legally mandated.

4. Strengthened Corporate Governance

Amendments to a company’s Memorandum of Incorporation (MOI) now take effect within 10 business days unless otherwise specified. Social & Ethics Committees (SEC) in public and state-owned companies must be elected by shareholders at Annual General Meetings (AGMs), with most members being independent non-executive directors.

Impact on Small Businesses:

While these changes mainly affect larger entities, they highlight the importance of ethical decision-making. If you plan to expand or attract investors, understanding these rules will be essential.

5. Share Buybacks

Companies must now obtain special shareholder approval for all share buybacks, except for pro-rata offers or buybacks conducted on stock exchanges. Solvency and liquidity tests are required before executing buybacks.

Impact on Small Businesses:

Unless your business is listed or involves complex shareholding structures, this change is unlikely to affect you directly.

6. Simplified Financial Assistance for Subsidiaries

Holding companies can provide financial assistance to subsidiaries without special approvals unless offshore transactions are involved.

Impact on Small Businesses:

If you operate multiple businesses under a group structure, this amendment simplifies intra-group financial transactions.

Bottom line for Small Business Owners

• Most changes won’t directly impact daily operations.

• If you plan to grow, hire staff, or engage investors, these amendments may become relevant over time.

What should you do?

• Keep Finances in Order: Ensure compliance with wage prioritization rules in case of financial trouble.

• Monitor Rental Agreements: Understand how landlord protections might affect your lease arrangements.

• Stay Informed: Consult legal or financial experts if you're unsure about how these changes apply to your business.

• Prepare for Growth: Familiarize yourself with governance rules if scaling your operations is part of your future plans.

While these amendments aim to improve corporate governance and transparency across South Africa’s business landscape, small businesses should focus on maintaining ethical practices and staying informed about potential impacts as they grow.

Companies Act Amendments: Key Provisions

Table 1: Remuneration Policy and Reporting Requirements

Table 2: Social and Ethics Committee Requirements

Table 3: Social and Ethics Committee Key Responsibilities

Table 4: Public Interest Score (PIS) Calculation