DealMakers - Q3 2019
Marauding through the related party requirements' inconsistencies
by Brian Jennings and Nikhil Sham
Section 10.6 of the JSE Listings Requirements (JSE LR) features a category of transactions which are not regarded as being "related party transactions" for the purposes of the JSE LR. As such, these transactions would not be required to comply with s10 of the JSE LR (Related Party Provisions). On 18 December 2017, the Johannesburg Stock Exchange (JSE) amended s10.6 of the JSE LR to include a new subsection 10.6(c), of which the relevant portion reads:
"10.6 The related party transaction provisions will not apply in the following situations:
(c) in respect of other agreements:
(v) financial assistance to related parties for subscription of securities pursuant to Section 44 of the Companies Act No. 71 of 2008 (Companies Act);
(vi) loans and other financial assistance to directors pursuant to Section 45 of the Companies Act;" (our edits).
For present purposes, the most pertinent inclusions are s10.6(c)(v) and s10.6(c)(vi) (Exemption Sections). On first blush, it appears that these inclusions on the list of exclusions exempt transactions that fall within the purview of s44 and/or s45 of the Companies Act from being classified as a related party transaction, as per the Related Party Provisions; however, such assumption is incorrect on a closer reading.
There are inconsistencies between the wording of the Exemption Sections and the actual content of s44 and s45 of the Companies Act. It seems apparent to us that the JSE has missed the detail in s44 and copied and pasted the title of s45, neglecting the nuances and substance of these sections. We have dealt with the inconsistencies between s10.6(c)(v) of the JSE LR and s44 of the Companies Act on the one hand, and s10.6(c)(vi) of the JSE LR and s45 of the Companies Act on the other hand, below.
Section 10.6(c)(v) of the JSE LR and Section 44 of the Companies Act
Section 10.6(c)(v) of the JSE LR merely refers to "financial assistance to related parties for subscription of securities pursuant to s44 of the Companies Act" while section 44(2) of the Companies Act provides for financial assistance "to any person for the purpose of, or in connection with, the subscription of any option, or any securities, issued or to be issued by the company or a related or interrelated company, or for the purchase of any securities of the company or a related or interrelated company," (our emphasis).
The bold text above illustrates the disconnect between s10.6(c)(v) of the JSE LR and s44 of the Companies Act, as the JSE LR does not include persons other than related parties despite s44 permitting financial assistance to be provided to "any person", nor does it cater for financial assistance which may be provisioned for the purchase of securities and not just the subscription of securities as per s10.6(c)(v) of the JSE LR.
Section 10.6(c)(vi) of the JSE LR and Section 45 of the Companies Act
Similar to the above, s10.6(c)(vi) of the JSE LR only references "loans and other financial assistance to directors pursuant to Section 45 of the Companies Act" while s45(2) of the Companies Act is worded, "the board may authorise the company to provide direct or indirect financial assistance to a director or prescribed officer of the company or of a related or interrelated company, or to a related or interrelated company or corporation, or to a member of a related or interrelated corporation, or to a person related to any such company, corporation, director, prescribed officer or member" (our emphasis).
Again, the bold wording above highlights the inconsistency between the JSE LR and the Companies Act – the scope of the Companies Act is clearly much wider than the scope of the corresponding exclusion in the JSE LR. It is not only financial assistance to directors that needs to pass muster in s45, but financial assistance to all other related persons listed therein, as well.
We do not think that the wording of the Exemption Sections by the JSE was deliberate, if the reason for including such Exemption Sections was because s44 or s45 contain their own requirements, of which a special resolution from shareholders is but one. Under the current construct, the Exemption Section only permits non-compliance with the Related Party Provisions in the very specific instances set out above. This cannot have been the intention of the JSE, if one has regard for the purpose behind the Exemption Sections.
If we accept that the JSE included the Exemption Provisions because the mischief they were trying to manage is already dealt with by complying with either s44 or s45 of the Companies Act, then we can also agree that the Exemption Provisions are insufficient as they are currently drafted, and that they ought to be amended. Our simple (yet effective) suggestion would be to amend the Exemption Sections so as to include all transactions which fall within the ambit of s44 or s45 of the Companies Act, which would capture the entire scope of both sections without complication.
Jennings is an Executive and Sham an Associate in ENSafrica’s Corporate Commercial department.