The Companies Amendment Bill published in South Africa in July 2005, came as a surprise to those patiently waiting for the much-anticipated overhaul of the Companies Act. Rather than wait, the Department of Trade and Industries (DTI) were understandably eager to bring into effect new rules regarding financial and accounting reporting.
The ramifications of the changes to accounting standards and the promotion of auditor independence have already been thrashed out in the media. Interesting to the legal profession is the introduction of the definitions ’limited purpose companies’ and ’public interest companies’.
The policy framework published by DTI in June 2004 hinted at doing away with the distinction between public and private companies. DTI proposed a uniform incorporation structure, with additional requirements for those companies which offer shares and/or other securities to the public. The rationale was that those companies should be obliged to conform to accountability and disclosure requirements which benefit public investors. Those that do not should be relieved of such onerous, expensive and time-consuming conditions.
The distinction comes down to simply whether the company offers its shares to the public, or takes deposits or loans from the public. In determining what ’public’ means, one has to ask whether it will be sufficient to use the same interpretation as is currently applied in determining whether a prospectus is required when offering shares to the public? In this context, the public includes any section of the public, whether selected as members or debenture-holders of the company itself or as clients of the person issuing the prospectus.
In the case of Gold Fields Ltd vs. Harmony Gold Mining Co Ltd, the Supreme Court of Appeal favoured an expansive interpretation of the word ’public’ as opposed to one that would limit it to a select section of the public. Generally, our law supports a case by case analysis of whether the public has been made an offer, with case law holding that the question cannot be answered in the abstract and must be looked at in the light of all the relevant facts.
If the same principle is applied to the categorisation of companies, the determination of whether the proposed reporting standards apply becomes a subjective task. This is quite different to the initial proposals which suggested financial thresholds as a means to differentiate. A more objective standard might have been easier to swallow, but it appears that DTI have done away with that idea and we will have to get used to this terminology.
Another interesting question is whether non-profit companies, which are commonly (and now confusingly) known as ’public benefit organisations’, will qualify as public interest companies. Such companies cannot offer shares to the public (although the committee tasked with corporate law reform is debating this current restriction) and do not take loans from the public. They are traditionally funded by way of donations and grants. Perhaps this is intended by the inclusion of the reference to ’deposits’, although this word usually refers to refundable financing arrangements. There would be arguments for and against the inclusion of such companies in the definition, with many arguing that they should be relieved of onerous requirements, while the fund-raising community would welcome an improvement in the accountability of such organisations.
It is believed that these accounting requirements are the first of many that will apply to public interest companies, with issues such as corporate governance and remuneration committees to follow.
At the time of writing, the Bill was not yet before Parliament. In the meantime, the drafting of the new Companies Act is, by all accounts, well underway.
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