22 January 2020 by and Corporate & Commercial Alert

Social and ethics committees – what subsidiaries should know about exemption

Subsidiaries in terms of the Companies Act that would ordinarily be obliged to appoint a social and ethics committee, need not apply for an exemption from the Companies Tribunal if the exemption in Regulation 43(2)(a) of the Companies Act applies to them, since their exemption is outright.

Regulation 43(1) of the Regulations to the Companies Act 71 of 2008 (Companies Act) (Regulations) prescribes the categories of companies required to appoint a social and ethics committee (SEC) as follows:

  • every state-owned company;
  • every listed public company; and
  • any other company that has in any two of the previous five years scored above 500 “public interest score points” in terms of Regulation 26(2).

A private company will score a high number of “public interest score points” based on a substantial number of employees and/or a substantial number of individuals that directly or indirectly have a beneficial interest in any of its issued securities and/or if its third party liabilities exceed multiples of R1 million at the end of a financial year and/or if its turnover exceeds multiples of R1 million during a financial year.

The SEC is, in terms of Regulation 43(5), tasked with monitoring inter alia the company’s standing in terms of social and economic development, good corporate citizenship, environmental and health and safety matters, consumer relationships and labour and employment matters.

Companies that are required to appoint a SEC can rely on Regulation 43(2) of the Regulations to the Companies Act to obtain exemption from this obligation in one of two ways:

  • Regulation 43(2)(a) provides that a company which is a subsidiary of another company which has a SEC that will perform the needed functions on behalf of the subsidiary, does not need to have a SEC; and
  • Regulation 43(2)(b) provides that a company that has been exempted by the Companies Tribunal in accordance with section 72(5) of the Companies Act need not have a SEC either.

An exemption application in terms of section 72(5) of the Companies Act, will be granted if a company can satisfy the Companies Tribunal that it is required to have a formal mechanism that substantially performs the function of a SEC in terms of some other legislation, and that the company adheres to this legislation, or that it is not reasonably necessary in the public interest to require the company to have a SEC, having regard to the nature and extent of its activities.

There is some confusion about whether an application should be made to the Companies Tribunal before the exemption in terms of Regulation 43(2)(a) takes effect, or whether it is automatic, and no application is required. As noted by the Companies Tribunal in 23 January 2017 ADT Kusela Proprietary Limited (CT002Jan2017) “The words ‘automatically exempted’ may carry various meanings. It may mean that the Applicant is not required to bring this application to the Tribunal and that it is automatically exempted without having to prove that it is a subsidiary of another company, or that upon applying to the Tribunal, it will be automatically exempted.

In other decisions the Companies Tribunal has, however, made it clear that the exemption that applies to subsidiary companies in terms of Regulation 43(2)(a) is an automatic exemption for which no application to the Companies Tribunal is required. The Companies Tribunal has accordingly in certain instances refused to make orders when approached for exemption by subsidiaries, as the application was, at the outset, not needed. The Companies and Intellectual Property Commission also confirmed in its non-binding opinion dated 30 April 2012 (issued in terms of section 188(2)(b) of the Companies Act), that the Section 43(2)(a) exemption is an automatic statutory exemption and that it must be strictly interpreted.

On 26 February 2014 Main Street 167 (RF) Proprietary Limited (CT 004 Feb 2014), the Companies Tribunal stated “Regulation 43(2)(a) provides a company with an automatic exemption […] Thus, in such a case no exemption application is required to be made to the Tribunal” and that “exemption is automatic and that in that event no application to the Tribunal ought to have been made since the Applicant is in fact a subsidiary”. This statement was echoed in 20 March 2014 Blue Titanium Conduit (RF) Limited (CT007/Jan/2014) wherein the Companies Tribunal stated, with reference to Regulation 43(2)(a), that “an application for exemption is […] not necessary and the Tribunal is not required to make an order under these circumstances”.

Companies that are subsidiaries of another company that has a SEC that will perform the needed functions on behalf of the subsidiary should therefore note that exemption applications to the Companies Tribunal in terms of section 72(5) of the Companies Act are therefore unnecessary and could cause the Companies Tribunal to order the subsidiary to appoint a SEC if the Companies Tribunal rejects their exemption application in terms of Section 72(5) of the Companies Act which order will negatively impact the subsidiary.

These companies should, however, ensure that:

  • they qualify as “subsidiaries” as contemplated in Section 3 of the Companies Act, i.e. that their holding company (1) is directly or indirectly able to exercise, or control the exercise of, a majority of the general voting rights associated with their issued securities, whether pursuant to a shareholder agreement or otherwise or (2) has the right to appoint or elect, or control the appointment or election of directors who control a majority of the votes at a meeting of the board; and
  • the SEC of the holding company in fact performs all the duties and functions of a SEC as required in terms of Regulation 43(5) on its behalf and that the SEC also complies with Regulation 43(4) which requires that the SEC must comprise not less than three directors or prescribed officers of the company and at least one of whom must be a director who is not involved in the day-to-day management of the company’s business, and must not have been so involved within the previous three financial years.
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