Potential pitfalls in South Africa’s expanded access to company information proposals

Many changes are expected in South Africa’s company law, with the public hearings on the proposed amendments to the Act scheduled to commence on 20 February. Among the proposed changes is an attempt to broaden third party access to company information, which could become an area of concern for many private companies in South Africa.

Under the current iteration of section 26 of the Act, third parties have access to a company’s securities register – but the proposed amendments expand access to company information a third party can request to, among other documents, its memorandum of incorporation, annual financial statements, and the disclosure of a beneficial interest in the company.

At present, only ‘affected companies’, meaning regulated companies and private companies that are either controlled by or subsidiaries of a regulated company, are required to establish and maintain a register of disclosure of beneficial interests in terms of section 56(7) of the Act.  A company that does not fall within the meaning of an “affected company” must file a record with the Companies and Intellectual Properties Commission.  Presently, no requirement in terms of s26 of the Act exists for an “affected company” or private company to disclose beneficial ownership information to a third party. However, the latest amendments could significantly broaden the number of “affected companies” or private companies that are required to provide third parties with an expanded range of company information, which includes the register of the disclosure of beneficial interest of a company, at their request.

The latest amendments bill also makes reference to a ‘public interest score’ for purposes of determining which companies are obliged to provide access to company information. Only companies that fall below a certain public interest score will not be subject to the right of third parties to inspect and copy their annual financial statements. For example, companies with a score of less than 100 could refuse a third party’s request to inspect their internally prepared financial statements, while companies with a score of less than 350 could refuse to disclose their independently prepared financial statements to third parties. This means only smaller private companies would not be affected by the changes to s26.

These changes, if introduced, would create tension between the revised s26 and the current iteration of s31 of the Act. The proposed amendments to s26(2) allow anyone to request annual financial statements from a private company for any purpose. However, a limitation on those who can request companies’ annual financial statements already exists under s31. It provides that third parties who are not shareholders of a company can request a company’s annual financial statements to execute a judgment debt, and trade unions have the right to request financial information for purposes of initiating a business rescue process.

Concerns over ‘unqualified’ right of access to company records

The Supreme Court of Appeal’s 2016 judgment in the case of Nova Property Group Holdings Ltd v Cobbett confirmed that the right for the public to access a company’s records, as presently formulated under s26, is unqualified, or absolute, despite the purpose and motive of the person seeking to inspect the records. The court made it clear that companies cannot decline a request for access to a company’s share register under s26 even where it is reasonable to do so – for example, where the information is sought for unlawful purpose. Unlike s113 of the Companies Act No. 61 of 1973, which preceded the Act and specifically provided that the court could compel compliance with a request for access to information, s26 of the Act is not subject to a discretionary override.

The amendments to s26 have been proposed with a view of improving transparency of ownership and beneficial interest, curbing corruption, and combating money laundering.

However, there are concerns among private companies that an absolute right of access to company records, as articulated in the proposed amendments to s26, is open to abuse by third parties, such as those who may use the financial or personal information to harass shareholders and directors or to commit fraud.

In contrast to the above, the UK’s Companies Act 2006 (‘UK Act’) contains provisions limiting the right to inspect and obtain copies of a company’s register of members. S116(4) of the UK Act requires that a request for such access must contain the address of the requestor and specify the purpose for which the information is to be used as well as whether the information will be disclosed to another person, among other details.

Additionally, s117 of the UK Act also allows companies to apply to the court for an order directing that the company must not comply with the request if the court is satisfied that the inspection or copy is not sought for a proper purpose. Presently, under s26 of the Act, no such right exists for South African companies which refuse to provide access to company information in response to a request by a third party. The proposed amendments to s26 do not make any reference to circumstances where a company can refuse an information request. The extension of these rights of access to information, and whether they will remain “unqualified”, will need to be tested and the precedent of the Nova case considered.

While South Africa’s bill to amend the Act is going through the consideration and approval process, there may still be a chance for further amendments to be adopted to limit the “unqualified” right. It is important to strike an appropriate balance between the public’s right of access to information and the directors’ and shareholders’ right to privacy, as well as to provide a way for companies to fend off improper requests.

Companies that receive requests for information under s26 of the Act should seek legal advice on their disclosure obligations, especially in light of the changing legal landscape, to make sure that that they meet their statutory obligations on the one hand and guard against the potential abuse or misuse of the company information on the other.