Two essential keys to unlocking the new Companies Act - Carl Stein

The Act contains a host of new rights, obligations, remedies, procedures and sanctions, many of which are innovative, and some of which may even be termed revolutionary. A large number of these innovations are based on two fundamental decisions taken by government. The first, a philosophical decision, was to adopt the ‘enlightened shareholder value’ model. The second was to forbid the formation of new CCs and, instead, to attempt to ensure that the Act caters for the needs of small businesses at least as well as the CC Act. These two decisions and their profound impact on the Act are explained below.

Adoption of the enlightened shareholder value model

As the power and influence of the private sector, in particular the multinational company, has grown, the fundamental philosophical question as to the role of a company in society has become increasingly vexed. During the past 20 to 30 years, strong arguments have increasingly been made, and by and large accepted, that companies should be compelled to care about more than just maximisation of profits for their shareholders. Intense debates on this subject preceding the Act’s finalisation saw discussion of different models of a company’s (and, therefore, its directors’) duties and responsibilities. These debates and models are evidence that company laws are integral to the macro‑economic policies of South Africa’s various political groupings and, therefore, to the South African economy as a whole. There are three fundamental models:

• The classic model holds that a company’s duties are essentially to promote and protect the interests of its shareholders only, to the exclusion of all its other stakeholders, including its employees. The 1973 Act was based on this capitalistic model.
  
• The pluralist model sets the interests of stakeholders as an ‘end in themselves’, requiring a company to continuously balance the interests of all its stakeholders and to prefer the interests of one stakeholder above those of another only where it is in the best interests of the general body of stakeholders to do so. This holistic approach was advocated by the Congress of South African Trade Unions in debates on the Act.
  
• The enlightened shareholder value model, like the classic model, puts the interests of shareholders first, but holds that in pursuing shareholders’ best interests in the long term the interests of all other stakeholders, including employees, suppliers and creditors, as well as the environment and the community at large, must be considered. The ‘triple bottom line’ concept — that it is good for business for companies to be good corporate citizens and to consider social, environmental and economic interests — was favoured by the 2002 King Report on Corporate Governance (‘King II’). King III goes somewhat further by recommending that companies strive to achieve the correct balance between their various stakeholder groupings in order to advance the interests of the company. The principles of the King Code are not legally binding except, to some extent, in the case of companies listed on the JSE.
  

The enlightened shareholder value model has been adopted by the Act, as it has been by most Western countries, including the UK in its 2005 Companies Act. The DTI’s stated approach in the 2004 Policy Paper was that, in developing new companies legislation, it would be guided by a legislative framework that
‘reflects the recognition that the company is a social as well as an economic institution, and accordingly that the company’s pursuit of economic objectives should be constrained by social and environmental imperatives’.

On the face of it, the definition of a ‘profit company’ in s 1 of the Act as ‘a company incorporated for the purposes of financial gain for its shareholders’ contradicts this philosophy. It certainly does evidence the fact that the primary duty of the directors of a profit company remains that of maximising profits for its shareholders, but it is equally certain that this duty is severely tempered by a host of other provisions which confer rights on, and impose obligations on companies towards, all their other stakeholders.

The Act has partially codified the common-law fiduciary duties of directors, the most important of which requires that directors ‘act in the best interests of the company’. Protagonists of the pluralist approach argued that the Act should spell out exactly what this duty entails and that it should include social and environmental responsibilities. The position taken by government was to embrace the enlightened shareholder value model, but not to legislate on the specifics as to what a director’s duty to act in the company’s best interests means. Instead, government has chosen to leave it to our courts to determine the ambit of directors’ duties through the development of our common law. It also concluded that the manifestation of the enlightened shareholder value model in various new provisions of the Act, particularly those which give stakeholders significant new rights and remedies, coupled with the rights and remedies given to stakeholders by numerous other statutes, provided sufficient protection for them. It decided that this approach, coupled with the self-regulating principles of the King Code, should encourage companies to comply not just with the letter of the law but with the spirit of good corporate governance.

Protagonists of the pluralist approach also argued that a voluntary self- regulating approach such as the enlightened shareholder value model disregards the fact that companies are legally bound by the Bill of Rights in terms of s 8(2) of the Constitution. Therefore a specific duty should be included for directors to realise and comply with fundamental human rights in the Constitution and the Bill of Rights to the extent that companies are required to do so. This did not happen, but there are nevertheless a number of provisions of the Act which refer to sections of the Constitution. For example, s 7(a) states that one of the purposes of the Act is to ‘promote compliance with the Bill of Rights in the application of company law’.

The adoption of the enlightened shareholder value model has resulted in a host of new provisions being introduced into the Act to give effect to it. It is epitomised in s 7(a), (b)(iii) and (d), which state that two other purposes of the Act are to:

• ‘promote the development of the South African economy by encouraging transparency and high standards of corporate governance as appropriate, given the significant role of enterprises within the social and economic life of the nation’; and
  
• ‘reaffirm the concept of the company as a means of enhancing economic and social benefits’.
  

Section 7 is given legal backing by s 5(1), which states that the Act must be interpreted ‘and applied’ in a manner that gives effect to these purposes.

Another important innovation occasioned by this new approach is the obligation of public and certain other companies to have a social and ethics committee.

John F Olson describes the Act’s corporate social responsibility model as follows:

‘Over the past twenty years, corporate governance has seen a surge in interest with regard to corporate responsibilities to society. Often, these interests have not been embedded in statutes but instead have been implemented through guidelines and codes. The Companies Act directly provides a clear framework for the empowerment of stakeholders and includes a directive that companies operate to enhance not only shareholder-profits but also societal welfare. To ensure that these purposes are fulfilled, the South African Government is provided greater power in governance decisions than is typically found in most other general corporate statutes.’   (‘South Africa moves to a global model of corporate governance but with important national variations’ in Tshepo H Mongalo (ed) Modern Company Law for a Competitive South African Economy (Juta 2010) 219.)

The Act also gives significantly greater rights and remedies to stakeholders, including minority shareholders, and thus encourages stakeholder activism. Two of the most striking — even alarming, in some instances — aspects of the Act are:

• the number of remedies it provides, in particular the number of remedies it provides to minority shareholders, employees and directors; and
• the number of methods by which its remedies may be enforced.

In both these respects the Act generally goes further than the companies legislation of other Western countries, including the USA and the UK. Unfortunately this could lead to increased litigation and a fair amount of ‘remedy shopping’.

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This is an extract from Chapter Two of Carl Stein's forthcoming The New Companies Act Unlocked - A Businessperson's Guide, which will be published by Siber Ink in late October 2011.  It is currently available on a special prepublication offer at a 20% discount on the published price.  To purchase online now at this discounted price, click here.