Controversial changes proposed in the Companies Amendment Bill
Perhaps one of the most controversial changes to the Companies Act, 2008, proposed in the Companies Amendment Bill which was published for public comment on 1 October 2021, is the seemingly unqualified access of third parties to a private company’s annual financial statements.
At the moment, a private company’s annual financial statements are only available to its shareholders and third parties can only access a private company’s securities register in terms of section 26 of the Companies Act. But the amendments to section 26 of the Companies Act, proposed by the Bill, appear to permit any third party, including a competitor, to access and copy a private company’s annual financial statements at any time, without question. Failing to satisfy a request for access is an offence.
During 2016, in the case of Nova Property Group Holdings v Cobbett, the Supreme Court of Appeal held that the provisions of section 26(2) of the Companies Act gave third parties an unqualified right to access and copy a company’s securities register regardless of the motive for the request. This decision was based on the Court’s observation that section 26 of the Companies Act only gave third parties a “narrow right of access”, limited to the securities register, and the “minimal implication” of such access on the shareholders and directors of a company. Although this decision now applies to the interpretation of access rights of third parties in terms of section 26 of the Companies Act in general, the access is not as narrow and the impact might not be as minimal when it comes to the disclosure of information contained in a private company’s annual financial statements.
Aside from section 26 of the Companies Act, a third party may request access to a private company’s records, including its annual financial statements, in terms of the Promotion of Access to Information Act (PAIA), but such a request can be refused on various grounds specified in PAIA, including if the requested record contains financial, commercial or other information which if disclosed, would be likely to harm the company’s commercial or financial interests.
The Companies Act does not contain any grounds on which a private company may refuse access to its annual financial statements. In this regard, the Court in the Nova case stated that because securities registers do not contain financial and other information on which a request may be refused in terms of PAIA, Parliament rightfully considered it unnecessary to permit a company to refuse a request for access made by a third party in terms of section 26 of the Companies Act. If the securities register had contained financial information, perhaps the Court (or Parliament) would have come to a different conclusion.
The decision in the Nova case is underpinned by prior decisions in which the courts have held that because of the impact of business within the social and economic spheres and the concomitant objective of the Companies Act to foster a culture of transparency and high standards of corporate governance, the manner in which companies operate and conduct their affairs is not a private matter. Having said this, the Court in the Nova case recognised that that the right to privacy is reduced but not entirely obliterated. If PAIA, being the legislation that promotes access to information, recognises that access should be denied if the disclosure of financial and other information would likely harm a company’s commercial or financial interests, it is not clear why these considerations should be completely disregarded by the proposed changes introduced by the Bill.
Every private company is required to produce annual financial statements containing prescribed information, including the remuneration of its directors. Handing out this information freely to all requesting members of the public appears to be contrary to the constitutional right to privacy, but as we all know, the right to privacy is not absolute and has to be balanced against the countervailing constitutional right to access information. The outcome is to a degree dependent on the particular facts of each case. But in light of the proposed changes introduced by the Bill and the interpretation of section 26 of the Companies Act by the Supreme Court of Appeal, it looks quite likely that the public’s right to access a private company’s annual financial statements will always outweigh a private company’s rights to privacy to the extent that they do exist.
Note that a company which has a public interest score of 100 and prepares its annual financial statements internally or has a public interest score of less than 350 and has its annual financial statements independently prepared, is not required to disclose its annual financial statements to third parties as provided in the Bill.