Overview of Policy on Corporate Law Reform Parliamentary Committee Cape Town 20 August 2004

Objective of Presentation To provide an overview of the corporate law review To inform parliament about public consultations on draft corporate law policy framework To update the portfolio committee on next steps

Summary Policy document essentially sets out to address 3 issues: –Provides an improved platform for companies to raise capital –Provides new definition of role of company (including social aspects) –Defines split between primary and secondary market for shares (clarification of roles)

Background to Policy Review initiated in 1998 Initial document prepared and presented to SACCL in about 2000 Initial document rejected Process reinitiated in 2002 Workshop with international and local experts in June 2003 Project Manager appointed in September 2003 New document prepared and presented to various international and local experts in December 2003 Workshop with SAC on 27/2/2004 – document largely accepted with inputs

Chapter 1: Introduction Objectives of company law –Encouraging entrepreneurship and enterprise diversity by simplifying company formation –Promoting investment and innovation –Promoting efficiency of firms and their management –Encouraging transparency and high standards of corporate governance, recognizing broader social role of enterprises –Encouraging compatibility and harmonsiation with best practice jurisdictions Set out scope of review

Chapter 2: Rationale for Reform Companies Act 30 years old – internationally, company laws have been reviewed Changed political, economic and social environment Changed global and corporate environment Corporate failures and scandals in SA and internationally Current law excessively formalistic, increasing cost of company formation and maintenance and eliciting sham compliance

Chapter 3: General Principles Scope of company law – fundamental question: “In whose interest should the company be run?” –Moves away from traditional company law principles defining only relationships with shareholders and directors and managers to more inclusive concept that recognizes broader public interest –Public interest best regulated through specific laws, with company law facilitating interface through disclosure and optional board representation Simple, comprehensive and accessible legal framework –Single Act, simplified company formation, maximum flexibility for companies with mandatory and optional rules Accountability and transparency Harmonisation with other company laws

Chapter 4: More Detailed Guidelines Company formation –Introduces single corporate entity – removes distinctions between Close Corporation, Private and Public Companies –Mandatory rules and optional rules (90% opt out requirement for some mandatory) –The bigger you are, the more obligations –Only distinction between listed and unlisted companies –Simple registration of foreign firms – accreditation system

Chapter 4: More Detailed Guidelines Corporate finance –US style balance sheet and liquidity test –Flexibility around type of shares –No nominee shareholding –Review of voting arrangements

Chapter 4: More Detailed Guidelines Corporate governance –Recommendations on CG to have regard to: –the predominance of controlling shareholder groups in South African companies –the lack of shareholder activism as a natural force for improving cg –the separation of ownership from control in listed companies and the consequent need to bolster managerial accountability standards for executive directors, and

Chapter 4: More Detailed Guidelines –CG to be divided into 3 distinct areas; Directors Shareholders Corporate Reporting/disclosure

Chapter 4: More Detailed Guidelines Directors (a)The structure of the board including the establishment, where appropriate, of audit, executive, nomination and remuneration committees and the representation of some stakeholders in the board of directors;

Chapter 4: More Detailed Guidelines (b)The roles and functions of the Chairman and Chief Executive Officers; (c)The roles and functions of the executive directors; (d)The roles and functions of the non ‑ executive directors;

Shareholders Make specific recommendations, inter ‑ alia, in respect of (a)The possible development of institutional investors as a force for promoting shareholder democracy and good corporate governance;

Shareholders (c)The development of a proxy system, having regard to the rights of persons other than registered shareholders, (d) Restraints on controlling shareholders' voting, –Controlling shareholders’ interest –Transactions at arms length

Corporate Reporting/ Disclosure Make specific recommendations in respect of ‑ (a)Reforming and strengthening Part XI of CAT, taking account of ‑ statements by big companies and exclusion of other companies from compliance with filing provisions; (b)Non ‑ statutory disclosure requirements

Corporate Reporting/disclosure (c) Improving compliance with the accounting standards in accordance with the FRB and related legislation.; (d)The use of information technology to report and distribute, among others, annual reports,etc

Chapter 4: More Detailed Guidelines Mergers and takeovers –Maintain the existing division of power between merger oversight namely: – (1)that SRP to continue examine M&As from the pov of protecting minority shareholders and the credibility of the markets,and –(2) the CA examines only the anti-competitive or public interest aspects of mergers –New provision for mergers

More Detailed Guidelines –Revision of corporate rescue provisions as part of broader corporate governance regime

More Detailed Guidelines Administration and enforcement –Greater involvement of state in enforcement –Combination of criminal, civil and administrative penalties –Dispute resolution mechanism to enhance redress –New institutional framework: –Current institutional fragmentation addressed and roles clarified (DoJ, FSB, JSE, dti, CIPRO)

Proposed Institutional Framework Companies and Intellectual Property Commission Education and awareness (small business, investors, corporates, promotion of shareholder activism, education of directors) Information collection and dissemination Monitoring and enforcement (including vetting of prospectuses and mergers and takeovers etc) Company registration (primarily electronic) JSE & FSB Advisory function Regulation of securities trade Competition and Companies Tribunal Deals with mergers and takeovers and other administrative penalties (Replaces current SRP) Courts Minister of Trade and Industry Makes rules and regulations Advisory Panel

Next Steps process) Activity End Date Consultation with Nedlac May – June 2004 Concurrent public consultation on the policy document May – June 2004 Finalisation of policy framework July 2004 Research into international and existing company law January – September 2004 Review of legislative options & preparation of drafter’s memorandum September – December 2004 Drafting of legislation and exposure draft January – August 2005 Cabinet approval for publication September 2005 Publication of exposure draft for public comment, including workshops and other public consultation September – December 2005 Evaluation of comments & preparation of revision instructions to drafters October - December 2005 Revision of Bill by drafters October - December 2005 Submission of Bill to Parliament January 2006 Proclamation of Bill by President June 2006 Launch of new institutions June 2006 ActivityEnd Date Consultation with Nedlac June- Sept 2004 Concurrent public consultation on the policy document June-Sept 2004 Research into international and existing company law January – September 2004

Next Steps ActivityEnd Date Drafting of legislation and exposure draft September – December 2004 Cabinet approval for publication September 2005

Next Steps ActivityEnd Date Proclamation of Bill by President June 2006 Launch of new institutionsJune 2006

Corporate Law Reform Thank You