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THE COMPULSORY APPOINTMENT OF SOCIAL END ETHICS COMMITTEES: SECTIONS 72(5) AND (6) AND REGULATIONS 26 AND 43 OF THE COMPANIES ACT, 2008 – EXEMPTIONS FOR NON-PROFIT COMPANIES.

NON PROFIT COMPANIES

We came across an interesting obstacle while preparing a new Memorandum of Incorporation for a pre-existing Non-Profit Company, the particulars of which we would like to share.

In terms of Regulation 26(2) of the Companies Amendment Act, every company is obliged to calculate its “public interest score” at the end of each financial year.

Regulation 43 deals with social and ethics committees and in accordance with Regulation 43(1), this regulation applies to every state owned company, every listed public company and for purposes of this article – “any other company that has in any two of the previous five years, scored above 500 points in terms of regulation 26(2)”.

Regulation 43(2) provides:

“A company to which this regulation applies must appoint a social and ethics committee unless –

(a)   it is a subsidiary of another company that has a social and ethics committee;

(b)   it has been exempted by the Tribunal in accordance with section 72(5) and (6).”

In the case of the NPC that we dealt with therefore, it would have been obliged to appoint a Social and ethics committee if its public interest score exceeded500 points as indicated above.

How is the public interest score calculated?

According to regulation 26(2) it is calculated as follows:

It is the sum of:

a)          a number of points equal to the average number of employees of the company during the financial year;

b)            a point for every R1 million (or portion thereof) in third party liability of the company;

c)            one point for every R1 million (or portion thereof) in turnover during the financial year, and

d)            one point for every individual who, at the end of the financial year, is known by the company –

(i)                  in the case of a profit company, to directly or indirectly have a beneficial interest in any of the company’s issued securities; or

(ii)                in the case of a non-profit company, to be a member of the company, or a member of an association that is a member of a company.”.

The company for which we acted is a normal homeowners association NPC and a previous section 21 company. However – it is a very large company with over 700 members. On this evidence alone (forget all the other factors mentioned above) the company is already well in excess of the 500 points which would compel it to appoint a social and ethics committee. Indeed, it would probably “qualify” to appoint such a committee many times over in the point’s category.

It was only when we perused the many and the onerous functions of a social and ethics committee as set out in regulation 43(5), that we became concerned for the enormity of the task that faced the committee of this NPC.

This committee, comprising of not less than 3 directors or prescribed officers of this company, must now attend to matters of the company such as:

  • social and economic development (including principles set out by the United Nations!);
  • consumer relationships;
  • good corporate citizenship, which includes contributions to communities in the area of operation of the company, sponsorships and donations;
    and many other such complicated tasks.

The committee must report to the company at its AGM on the above-mentioned matters.

All of these idealistic tasks, in the case of our company, would have had to be conducted by this committee, for a non-profit company run by a board of directors who, like the members of this committee, will not receive a cent in remuneration. Moreover, section 72(9) of the Act details that the company is liable for all the expenses of such a committee, including the costs of the appointment of consultants, if the committee deems it fit to appoint them.  Add to that the fact that this company is one hundred percent reliant upon the contributions of its members through the levies that they pay, and this picture, in our view, is simply absurd.

In our view, the application of the abovementioned legislation was not really intended to apply to the company we described. We say such committees belong to companies actually running a business – not companies such as homeowners associations.

We do not think, however, that the legislator necessarily erred in including non-profit companies as a category which could be the subject of the compulsory appointment of such committees. Not all non-profit companies necessarily do not make a profit – if this sounds logical. Both section 21 of the previous Companies Act and Item 1(2) of Schedule 1 to the new Companies Act have clear provisions to the effect that all of the assets, property and income of such companies, must be applied to the advancement of the main object of such companies. In other words, the legislator foresaw that such companies could well generate an income of their own and not necessarily be totally dependent upon donations.

Certain “non-profit” companies indeed, make huge profits. We can recall that a certain NPC (well known in SA) was reportedly so financially successful a few years ago that the financial press reported that many stock-brokers were of the opinion that if it were possible, this company would have been a winner if the company decided to go to the stock exchange.

In our opinion, such financially successful non-profit companies should rightfully be included as companies which should appoint social and ethics committees if they are required to do so by the Act. Such companies are “big business” – they have huge impact on many people and their environment and they are huge employers.

Section 72(5) (b) of the Act has, in our humble view, the ideal outlook on this issue in that it affords a company in the position of the company we dealt with, the opportunity to apply for exemption of the obligation to appoint such a committee if:

“it is not reasonably necessary in the public interest to require the company to have a social and ethics committee, having regard to the nature and extent of the activities of the company.”.

We think, with respect, that the considerations of the “nature” and of the “extent” of the activities of a company provide fair and equitable ways of establishing whether it is in the public interest or not, to require a company that exceeds the public interest score, to be afforded the relief of not having to appoint such a committee. In the case on hand, we think that it is clear that the nature of the activities of our client clearly differentiates it from other companies who actually do business. The extent of its business, as well, is negligible when compared to companies who really do business. The only “business” that a homeowners association would probably undertake is to purchase gardening requirements, maintenance requisites and to pay the few salaried employees in its service.

NPC’s and other companies should avail themselves of the relief afforded in terms of section 72(5) and (6), mentioned above. We have – an application was filed with the Tribunal on behalf of this company and we are happy to report that the Tribunal resolved to exempt the company from the appointment of a social and ethics committee for the next five years (the maximum period of exemption).