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.

22 Jan 2020 4 min read Corporate & Commercial Alert Article

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:

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:

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:

The information and material published on this website is provided for general purposes only and does not constitute legal advice. We make every effort to ensure that the content is updated regularly and to offer the most current and accurate information. Please consult one of our lawyers on any specific legal problem or matter. We accept no responsibility for any loss or damage, whether direct or consequential, which may arise from reliance on the information contained in these pages. Please refer to our full terms and conditions. Copyright © 2024 Cliffe Dekker Hofmeyr. All rights reserved. For permission to reproduce an article or publication, please contact us cliffedekkerhofmeyr@cdhlegal.com.

Subscribe

We support our clients’ strategic and operational needs by offering innovative, integrated and high quality thought leadership. To stay up to date on the latest legal developments that may potentially impact your business, subscribe to our alerts, seminar and webinar invitations.