Corporate Law Policy in South Africa, 2004
Comments from ACCA
September 2004
The Association of Chartered Certified Accountants (ACCA) is pleased to have the opportunity to comment on the DTI's Draft Corporate Law Policy on the Reform of Company Law in South Africa, which marks the beginning of a comprehensive review of company law in South Africa.
ACCA supports the initiative whole-heartedly. The review will follow a number of comparable exercises which have taken place in the recent past in the USA, Europe and other jurisdictions, of which ACCA has given similar comment in the United Kingdom, Australia, Ireland, Singapore and Hong Kong.
The South African review should be prepared to absorb the benefit of the work already undertaken on these other reviews but should at the same time explore national solutions to the particular circumstances of this country.
We consider that the paper overall offers an excellent grounding for the review which is to take place. We welcome in particular the affirmation of transparent reporting as being an essential tool of ensuring responsible corporate behaviour, the commitment to wider, ¿triple bottom line' reporting and the interest shown in standardising the responsibilities of company directors. We set out below however some comments on specific aspects of the paper.
Simplification of the law for small companies
One of the main themes of the paper is that company law should be made easier to deal with on the part of the great majority of limited liability entities which are ¿small'. We accept that company law should acknowledge differences in size and structure in the way that it applies to different companies. Also, the law must not be so complex that it discourages economic activity at different levels. But in seeking to simplify compliance requirements for small companies, we would urge the review to avoid going so far in that direction that it blurs the distinction between companies and unincorporated bodies. It should remain the case that all limited liability entities, regardless of their size, have a legal character which is distinct from that of partnerships and other forms of unincorporated body.
In the light of this point, we are concerned at the apparent suggestion, in paragraph 2.2.3 of the paper, that because CIPRO is not currently capable of processing the statutory information which companies are obliged to file with it, such filing requirements should be cut back. The answer to that particular problem should, surely, be to take steps to ensure that the efficiency of CIPRO is enhanced. We believe more generally that creditor protection should remain a core concern of company law: without reasonable levels of transparent public reporting and effective legal measures to apply in the case of malpractice or non-payment, companies will be less reluctant to conduct business activity with each other. Such a consequence would clearly be in the interests of no-one.
For this reason we would urge the Department to proceed with caution when considering possible reforms to existing statutory requirements, such as the independent audit, which offer important protections for the interests of shareholders and creditors. Measures such as the audit must be viewed in the light of the contributions they make to good corporate governance and effective financial management, and not seen simply as compliance burdens.
Preserving the distinction between companies and unincorporated bodies
We note that the review will encompass non-profit making organisations and co-operatives but will exclude partnerships. We appreciate that partnerships are distinct from companies and understand why the technicalities of partnership law should remain outside the remit of this project. We would urge the review, however, to consider reforms to company law in the context of an understanding of the wider business framework in South Africa .
Instrumental to this wider understanding has to be an appreciation that different forms of business vehicle are appropriate to businesses of different sizes and purposes. The review should therefore aim to reform company law not on the basis that all businesses should be companies but on the basis that the company format will only be suitable for a particular type of business operation. Those businesses which are not suited to the company format or incapable of complying with reasonable legal demands should be encouraged to adopt other formats.
The purpose of companies
We welcome the undertaking given in Chapter 3 of the paper that the review will explore the core issue of to whom companies owe their legal duties. This is an issue which has become central to company law given the expansion, over the years, of share ownership and given evolving concerns in society that companies should not be allowed to pursue economic gain on an unconditional basis and in isolation from their responsibilities to other elements in society. The commitment that the review will consider the position of the company in the modern environment is, therefore, something which ACCA warmly supports.
In our view, though, any proposal to reform the law on this question should bear in mind that the incentive for individuals to form and run companies is ¿ and should remain - for those companies to become profitable means of carrying out economic activity. If the entrepreneurs concerned do not have a profit motive, their preferred mode of business format will be the non-profit-making vehicle. Further, if entrepreneurs do not consider that the company format offers them a realistic possibility of operating profitably, because of legal, fiscal or other obligations which are imposed on them, they will not be encouraged to form companies at all, or at least not in South Africa.
The effects of radical reform on outside investors and prospective investors is also highly relevant: if companies were to owe financial and other responsibilities to stakeholders other than to those who provide the finance on which companies operate, the incentive to invest will be diminished.
We suggest, therefore, that the review be cautious about the prospect of imposing responsibilities on companies and those who run them which have the potential to become onerous and an actual deterrence to the operation of corporate activity.
The solution decided upon by the UK Government, which calls for company directors to act in the best interests of their company as represented by its investors, but which requires directors by law to consider, within this context, the significance to the company of wider ¿stakeholder' issues, appears to us be an attractive model and worthy of consideration in the South African context.
ACCA trusts that these comments will be of help and we look forward to being able to contribute actively to the review process over the coming months.