The new Companies Act finally came into effect on Sunday.
The Department of Trade and Industry and the Presidency have kept business on tenterhooks since the new Companies Act became law as far back as April 2009. More than two years have elapsed and proposed implementation dates – the latest being April 1 this year – came and went without the button being pushed.
However, the very short lead time to implementation is regrettable. Business is entitled to expect a decent period of notice of the final effective date so that the myriad governance procedures essential for companies to function efficiently can be correctly timed to avoid traversing vastly different regulatory frameworks.
Firms will be compelled to review and overhaul their constitutions, their capital and governance structures and the way they have been doing business since the first Companies Act came into effect nearly 40 years ago.
Of the first of the far reaching measures in the new Companies Act, that is likely to have boards of directors scurrying to implement, is the requirement that directors’ remuneration be approved in advance by shareholders by way of special resolution.
As things now stand, directors are only required to disclose the emoluments which accrued to them retrospectively in the annual financial statements at the conclusion of a company’s financial year end. This gets approved by shareholders at the annual general meeting among other formal and special company business.
After the new Companies Act is implemented, directors’ remuneration must be disclosed and proposed to shareholders for approval up front by way of special resolution.
If no less than 75 percent of shareholders attending a duly constituted meeting or voting via electronic poll do not approve the remuneration in advance then directors are precluded from receiving these payments and benefits. Shareholders may only approve directors’ remuneration for up to two years in advance.
Presumably this new requirement is aimed at addressing the often publicised concerns around perceived excessive and exorbitant director payments and benefits in which shareholders do not have an adequate say.
This new requirement for shareholder approval in advance might be acceptable except that the wording of the relevant sections in the new Companies Act is ambiguous, leaving directors scratching their heads and company secretaries heading for help from their equally perplexed lawyers.
There is an unequivocal definition of “remuneration” for the purposes of preparation of the annual financial statements which is very broad and includes directors fees, salaries, bonuses, performance-based payments, expense allowances, pension contributions, share options, financial assistance and soft loans.
Hence it is most puzzling that the draftsman saw fit to omit a corresponding definition of “remuneration” for the purposes of deciding what remuneration requires prior shareholder approval.
The sole clue is a reference to the directors’ remuneration being “for their service as directors”.
What does this mean? Does it exclude only remuneration for services performed by directors, for example as contracted experts or suppliers to the company or is it broad enough to exclude the executive packages of the executive directors?
If so, how does one apportion these packages as undeniably some portion of these are attributable to the executive’s board position, duties and responsibilities. Almost invariably executives sitting on boards are better paid than executives who do not.
If the intention was to exclude executive packages from the requirement of prior shareholder approval then the draftsman need not have bothered with the restriction.
Board fees payable to executive and non-executive directors for attendance at meetings or as retainers are mostly insignificant and have not generated the same level of concern as executive director payments.
In the present uncertain environment boards may consider it perilous to adopt a narrow view of the legislation and risk proceeding without shareholder approval of their gross remuneration.
Unless boards had these special resolutions planned or in place on May 1, they will be precluded from being paid their fees, salaries and other benefits at the end of the month. Any contravention of this mandatory requirement will render directors liable to actions by shareholders and other interested parties.
Until Parliament or the courts clarify the legislation it would be advisable for boards to ensure that their fees and remuneration packages are duly approved by shareholders by way of special resolutions in good time for their month end salary payments.
Intikab Esat is a partner at Shepstone & Wylie Attorneys: Commercial Law Department
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