Business commentators complained of short notice and bad timing for “myriad governance procedures essential for companies to function efficiently” and changing to a “vastly different regulatory framework.”
Employers would have to review and overhaul their constitutions, capital, and governance structures, against the former Companies Act of the last 40 years, writes Intikab Esat, a partner at Shepstone and Wylie Attorneys Commercial Law department, in a Hollard circular.
Remuneration of boards of director must now be disclosed, proposed, and approved in advance by shareholders, by special resolution, limited to two years in advance.
If 75% or more of shareholders at a constituted meeting, or voting via electronic poll, do not approve remuneration in advance, then directors are precluded from receiving payments and benefits.
Formerly, directors were required to disclose emoluments that accrued to them retrospectively in annual financial statements at financial year end, to be approved by shareholders at annual general meetings among other functions.
Nine types of director payment
Directors are perceived to be overpaid, at the behest of themselves or of executives.
Wording of the relevant sections in the new Companies Act, however, is ambiguous, and company secretaries and lawyers would await clarity form the legislator, or form case law, writes Esat.
Remuneration, defined in terms of preparation of annual financial statements, is very broad, including directors fees, salaries, bonuses, performance based payments, expense allowances, pension contributions, share options, financial assistance and soft loans.
The definition is puzzling and there is no corresponding definition of remuneration for the purposes of deciding what forms of remuneration require prior shareholder approval.
Exec directors pay puzzle
The sole clue is a reference to directors’ remuneration being “for their service as directors”. Does it exclude only remuneration for services performed by directors, for example as contracted experts or suppliers to the company, or is it broad enough to exclude the executive packages of executive directors?
How should employers apportion packages to executive’s board positions, duties and responsibilities? Executives sitting on boards are usually much better paid than executives who do not.
If the intention was to exclude executive packages from the requirement for prior shareholder approval, then the legislator need not have drafted a restriction.
Board fees payable to executive and non-executive directors for attendance at meetings or as retainers, are mostly insignificant, and have not generated as much concern as executive director payments.
Boards should ask full remuneration approval
Boards would probably consider it perilous to adopt a narrow view of the legislation, and risk proceeding without shareholder approval of their gross remuneration.
Unless boards already had special resolutions in place by May 1, 2011, they will be precluded from being paid fees, salaries and other benefits at the end of May 2011. Contravention of this mandatory requirement will render directors liable to actions by shareholders and interested parties.
Until Parliament or the courts clarify the legislation, it would be advisable for boards to ensure that their fees and remuneration packages are approved by shareholders, by special resolution, in good time for their monthly payments.
The Department of Trade and Industry published the new Act in 2009 and implemented it two years later, at short notice of the effective date.
• Intikab Esat is a partner at Shepstone and Wylie Attorneys Commercial Law department.
• The above comment was posted in a Hollard company secretarial circular.