MD Genesis Corporate Solutions
During the height of the Covid-Pandemic lockdown, the business rescue industry had to show some creativity. Business was increasing as more companies found themselves in financial distress, but the Government enforced lockdowns made it impossible to conduct due diligence and hold creditor meetings in the same way they were held before. Despite this, value still needed to be provided to creditors.
The answer came in the form of online meetings which proved to be a saving grace for the profession. However, as Webber Wentzel points out, there are some legal challenges associated with these meetings.
Stipulations in the Companies Act
The Companies Act, 2008 (the Act) requires all public companies to convene an annual general meeting (AGM) and various entities are also required to do so by their relevant constitutions. At the height of the pandemic, electronic participation in meetings (including meetings of shareholders with a large number of attendees) became widespread practice and in many instances they included a facilitator.
Convening a virtual AGM may necessitate the use of a facilitator to:
- receive questions from the individual shareholders;
- convey communication to the board or the other AGM participants; and
- switch the microphones on and off to control who speaks and when.
The Webber Wentzel article points out that Section 63(2)(a) of the Act states that:
unless the MOI states otherwise, a company may provide for a shareholders meeting to be conducted entirely by electronic communication as along as the electronic communication employed ordinarily enables all persons participating in that meeting to communicate concurrently with each other without an intermediary, and to participate reasonably effectively in the meeting.
The article adds that the Act is flexible and recognises that companies may conduct a virtual AGM, if it is not prohibited by the MOI. Some commentators have suggested that electronic participation and voting encourages shareholders to play a more active role in the company’s affairs and would promote shareholder activism.
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Open to interpretation
The article points out that, although virtual AGMs are permitted, and their convening must comply with the requirements of the Act, Section 63(2)(a) of the Act is yet to be interpreted by the courts.
The term intermediary is not defined in the Act, but the ordinary meaning of intermediary (mediator or agent for example) would suggest that the Act prohibits any limitation on the rights of shareholders to communicate effectively for themselves or by proxies at a shareholders meeting.
Webber Wentzel believes that reasonable and effective participation in a virtual AGM (and/or any other meeting of shareholders by electronic means) should (without creating an exhaustive list):
- ensure that the participants are free to speak and pose questions in real time;
- ensure that participants can communicate without excessive moderation and may be allowed to communicate verbally or in writing;
- afford shareholders the same rights as in an in-person AGM; and
- where there is a facilitator, the facilitator must not assume controlling power over the shareholders’ communication and limit their communication as if it were acting as an intermediary (which would contravene s63(2) of the Act).
King IV
The Webber Wentzel article points out that the King IV Codes state that the board of directors (the Board) should adopt a stakeholder-inclusive approach that balances the needs, interests and expectations of material stakeholders in the best interests of the organisation over time. In addition:
- the Board should oversee that the company encourages proactive engagement with shareholders, including at the AGM of the company;
- all directors should be available at the AGM to respond to shareholders’ queries on how the Board executed its governance duties; and
- the Board should ensure that shareholders are equitably treated, and that the interests of minority shareholders are adequately protected.
The article adds that it is important to preserve shareholders’ rights in virtual AGMs and allow them to hold the Board to account in a reasonable and effective manner. Shareholders must be enabled to participate to the fullest extent at a virtual AGM.
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Common practice
The article points out that the increase in electronic communication at shareholder meetings has become common practice following the pandemic. Consequently, companies, now more than ever, are required to ensure that such electronic means adhere to the Act.
The article adds that, to improve good corporate governance and compliance with the Act, a company should ensure that shareholders’ rights to participate in a reasonable and effective manner are upheld at a virtual AGM. Also, care should be taken to prevent any facilitator from acting as an intermediary at a virtual AGM by limiting the participation of the shareholders.
Finally, the article points out that the electronic platform used must be accessible, reliable, secure and allow all participants to hear one other in real time. This platform should allow the shareholders to ask questions at any time and vote freely and effectively.
It is important that turnaround professionals take note of this and adhere to every letter of these principles. The very essence of business rescue is to not only to preserve jobs and return company to profitability, but to preserve the value of shareholders and to provide them with every opportunity to receive a suitable ROI. This is a fiduciary duty and not a tick box exercise.
Phahlani Mkhombo is the MD of Genesis Corporate Solutions and is a Senior Business Rescue Practitioner.
