Born out of a chequered past, a democratic South Africa has unequivocally stated that it is open for business and ready to tackle the challenges it faces. While the rest of the world is still suffering from the impact of the global economic downturn, South Africa has remained relatively isolated due to its highly regulated banks having had minimal exposure to subprime or high-risk home loan securities. The country also embraces its African identity and promises to lead the continent politically, socially and economically into a period of growth driven by, among other things, its natural resources and untapped consumer market.
In November 2011 the South African government adopted the National Development Plan (NDP 2030), which sets out key targets for the country’s growth towards 2030, and the steps required to achieve these. NDP 2030 makes it clear that the nurturing of economic growth is a priority to facilitate the expansion of existing investor opportunities.
Moreover, the desire to encourage not only investor relations but also to stimulate business activity and entrepreneurship is echoed by various regulatory changes aimed at both improving corporate governance and at providing a more flexible regulatory environment in South Africa.
Company Law Landscape
Perhaps the most pertinent of regulatory reforms aimed at ensuring an investor-friendly environment has been the revamping of South Africa’s company laws with the enactment of the new Companies Act, No. 71 of 2008 (the Act), and New Companies Regulations 2011 (Regulations).
The Act came into effect on May 1, 2011, with the objectives of simplifying company law, increasing flexibility, ensuring corporate efficiency, encouraging transparency and accountability, and providing predictable regulation. While these objectives and the reforms discussed below are laudable in legislative form, the practical ease of interpretation and implementation of the Act will ultimately prove whether or not the legislature has achieved its stated aims of simplicity and flexibility. The Act replaced the Companies Act, No. 61 of 1973 (the 1973 Act) in its entirety, with the exception of Chapter 14, which deals with the winding up and liquidation of companies. The section will remain in force until a date determined by the minister.
The Regulations came into effect at the same time as the Act, and contain new Takeover Regulations that have replaced South Africa’s Securities Regulation Code on Takeovers and Mergers. Companies with shares listed on the Johannesburg Stock Exchange (JSE) are also subject to the JSE listings requirements, which may impose more stringent requirements on listed companies. Key changes introduced by the Act include new regulatory and enforcement bodies, the minimum requirements for company formation, and revised accountability and transparency requirements.
Enforcement & Regulation
The Act transformed the regulatory and enforcement bodies that existed under the 1973 Act by replacing the Companies and Intellectual Property Registration Office with the Companies and Intellectual Property Commission (the Commission). Among other powers, the Commission may issue compliance notices; conclude consent orders; and refer alleged offences for prosecution to the Companies Tribunal (Tribunal) or the courts.
Despite this, however, the High Court remains the primary forum for dispute resolution and for the interpretation and enforcement of the Act.
Transition
The Act provided for a two-year grace period (from May 1, 2011 to April 30, 2013) during which existing companies were required to harmonise their memoranda of incorporation (MOIs) (previously memoranda of, and articles of, association) as well as any applicable shareholders’ agreements, with the provisions of the Act. After the grace period, MOIs and any rules that are inconsistent with the Act are void to the extent of such inconsistency.
Provisions in shareholders’ agreements that are inconsistent with the Act and/or the MOI are void to the extent of such inconsistency. The continuation of companies incorporated and registered under the 1973 Act (i.e. “pre-existing” firms) is regulated, in terms of transitional provisions, in Schedule 5 of the Act.
Company Formation
Minimal requirements for the incorporation of a company are specified in the Act. One person may incorporate a profit company and three or more incorporators are required for a non-profit company. A company becomes incorporated by the adoption of a MOI, the filing of a Notice of Incorporation with the Commission and the payment of a fee. A company cannot “contract out” of the Act. Accordingly, the MOI must be consistent with the Act except to the extent that the Act allows otherwise.
The Act introduces the concept of “alterable” provisions, namely provisions of the Act that a company may negate, amend, limit or qualify in its MOI. All remaining provisions of the Act are “unalterable”.
However, the MOI may impose on the company a higher standard, greater restriction, longer period of time, or other similarly onerous requirement, than would otherwise apply under the Act. Additional “rules” may be adopted regarding the governance of the company where matters are not dealt with either in the Act or in the MOI.
Investment Vehicles
South Africa affords investors an abundance of investment vehicles, depending on their particular legal and commercial imperatives. Each has its own advantages and disadvantages, and the selection is on par with global best practice in an increasingly sophisticated domestic marketplace.
The strength of the South African investment environment is centred on its ability to allow investors to structure their investments to take maximum advantage of their investments in South Africa, regionally and internationally.
Two main categories of companies exist, namely nonprofit and profit, and both types need to continuously maintain at least one office in South Africa.
A non-profit company is a successor to a so-called section 21 Company under the 1973 Act, and is incorporated with:
• a public benefit object; or
• another object relating to cultural/ social activities or communal/ group interests that are consistent with various stated principles. A non-profit company’s income and property will not be distributable to its incorporators, members, directors or related persons, except as permitted. Non-profit companies are identified by the suffix “NPC”, and may be exempted from income tax when registering as public benefit organisations with the South African Revenue Service’s Tax Exemption Unit.
A profit company is incorporated for the purpose of financial gain for its shareholders. Profit companies:
• have separate legal personality;
• enjoy limited liability;
• have perpetual succession; and
• need not have any local shareholders or directors; although all companies are required to appoint a public officer, who must be a South African resident, to act as the representative for tax purposes. Public companies include public, private, personal liability, state-owned, foreign and external companies, as outlined in the following paragraphs.
Public Companies
Public companies are similar to their predecessors under the 1973 Act, although only one member is required under the Act (compared to the minimum of seven members previously required).
If a company is not a state-owned company, a personal liability company, or its MOI does not satisfy both criteria for a private company, then it is a public company. A public company:
• has a least one shareholder and three directors, in addition to the minimum number of directors required to satisfy the requirements of an audit committee and, if applicable, a social and ethics committee;
• typically has no restrictions on the transfer of securities;
• is capable of raising capital from the public and of being listed on a stock exchange, including the JSE;
• must appoint a company secretary, auditor and audit committee;
• must prepare audited financial statements;
• must convene annual general meetings;
• has a quorum at general meetings of an aggregate of 25% of all the voting rights entitled to be exercised in respect of at least one matter to be decided on at the meeting (different thresholds may be specified in the MOI) and, if the company has more than two shareholders, the requirement that at least three shareholders are present; and
• is identified by the suffix “Limited” or “Ltd”.
Private Companies
Private companies are similar to private companies under the 1973 Act, although they are no longer limited to 50 members. Private companies are very popular investment vehicles due to their limited liability nature. A private company:
• has a minimum of one shareholder and director;
• must have a MOI that restricts the right to transfer the securities of the company and must prohibit any offer to the public for the subscription of any securities of the company;
• has a quorum at general meetings as outlined for public companies;
• may be required to prepare audited annual financial statements, if it is in the public interest, or otherwise be independently reviewed, unless exempted;
• is generally not required to comply with the extended accountability and transparency requirements, although it may elect to do so in its MOI;
• may have unequal voting rights; and
• is identified by the suffix “Proprietary Limited” or “(Pty) Ltd”. Personal liability companies: Previously known as section 53(b) companies, the Act allows any private company to provide, in its MOI, that it is a personal liability company. This means that its directors are jointly and severally liable with the company for all company debts and liabilities incurred during their term of office. The liability of the directors is limited to the company’s contractual debts and liabilities and does not, therefore, include delictual (tort) or statutory liability. Personal liability companies must meet the criteria for a private company, and the MOI of such company must state that it is a personal liability company. These companies are identified by the suffix “Incorporated” or “Inc”.
State-Owned Companies
State-owned enterprises can either fall within the meaning of “state-owned enterprise” under the Public Finance Management Act, No. 1 of 1999 (PFMA), or they are owned by a municipality as contemplated in the Local Government: Municipal Systems Act, No. 32 of 2000. These companies are similar to an enterprise referred to in the PFMA. Provisions of the Act that apply to public companies also apply to state-owned companies, unless the minister of trade and industry has granted an exemption.
Foreign & External Companies
A foreign company not wishing to incorporate a South African subsidiary may instead set up an external company – namely a company incorporated outside of South Africa irrespective of whether it carries on business or non-profit activities within the country. Foreign companies are not required to register with the Commission (subject to the conditions below). However, provisions of the Act relating to public securities offerings in South Africa will apply to the securities of a foreign company, whether or not it carries on activities in the country. The concept of an “external company” is from the 1973 Act and is defined as a foreign company that is:
• a party to one or more employment contracts within South Africa; or
• is engaging in a course of conduct; or
• has engaged in a course or pattern of activities within South Africa over a period of at least six months, such as would lead a person to reasonably conclude that the company intended to continually engage in business or non-profit activities within South Africa. Companies that meet one of the above terms is required to register as an external company in South Africa. Registration as an external company must take place within 20 business days after the company begins to conduct its business or non-profit activities in South Africa. If a foreign company meeting these criteria fails to register within this period, the Commission may issue a notice requiring compliance within a specified time-frame, failing which it may require the company to cease business or activities in South Africa.
Close Corporations
Close corporations are regulated by the Close Corporations Act, No. 69 of 1984. While the existence of currently registered close corporations is not affected by the Act, it is no longer possible to establish new close corporations. The Act provides for conversion of a close corporation into a company.
Partnerships
Because of their flexibility, partnerships are frequently used to create joint ventures between two corporate entities. A partnership may be constituted by contract or by implication from the conduct of the partners. They are not regulated by statute, but by common law.
Trusts
In South African law, the operation of trusts is governed by the Trust Property Control Act, No. 57 of 1988, and trust property is held or administered by trustee(s) for the benefit, at least partially, of other persons. A trust has no separate legal personality (except, generally, for taxation purposes).
Joint Ventures
A joint venture is an association of two or more natural or legal persons combining property and expertise to carry out a single business enterprise and having a joint proprietary interest, a joint right of control, and a sharing of profits and losses.
Joint ventures may be conducted through any of the vehicles discussed above and be constituted between any two such vehicles. The structure is inherently flexible and offers foreign investors many advantages over setting up business alone in South Africa.
International joint ventures represent a significant proportion of international operations in South Africa, particularly among larger enterprises. The economic sectors of activities in which joint ventures are most common, include: buying and selling, engineering and construction, national resource exploration and exploitation, production or manufacturing, research and development, and the provision of services.
The choice of joint venture vehicle will depend on various factors. The choice will usually be between incorporating a profit company, and creating a partnership or unincorporated association (neither of which offer limited liability).
Accountability & Transparency
The Act imposes certain common accountability and transparency requirements on all companies regarding the maintenance of records and financial statements. However, public and state-owned companies are subject to a more demanding disclosure and transparency regime.
Corporate Finance
According to the new capital maintenance regime, companies may not authorise new par value shares; and financial assistance, intra-group loans and distributions are all subject to the “solvency and liquidity” test and shareholder approval, among other requirements.
Company Directors
The Act prescribes the minimum number of directors for each type of company, and additional mechanisms for the removal of directors. Boards of companies generally have the powers to:
• increase, decrease, classify and reclassify authorised shares;
• determine preferences, rights, limitations or other terms of authorised shares; and
• determine the consideration for shares. The common law relating to directors’ duties is partly codified in the Act. However, directors are still subject to common law fiduciary duties that are not specified in, and do not conflict with, the Act.
Fundamental Transactions
The Act governs “fundamental transactions” (which include takeovers, schemes of arrangement and amalgamations/mergers) and dissenting minority shareholders are given “appraisal rights” in certain circumstances to demand payment from the company of “the fair value” of the shares they hold, subject to compliance by the shareholder with requirements set out in the Act.
Business Rescue
A new “business rescue” regime has been introduced by the Act to facilitate the rehabilitation of companies that are “financially distressed” and may be instituted by shareholders, creditors, registered trade unions and employees that are not represented by trade unions.
Labour Relations
Significant changes have been proposed to the South African employment landscape by means of a raft of new labour and employment laws, with some on the dawn of promulgation. Other amendments may yet be influenced by the Marikana crisis. Changing legislation to look out for include the Labour Relations Amendment Bill, the Basic Conditions of Employment Bill, the Employment Equity Amendment Bill, and the Employment Services Bill. Aspects that stand to be affected by amendments include the status of strikes, the relationship between employers and trade unions, and the nature of atypical employment (affecting labour brokers, part-time and full-time employees). For the moment, the pivotal legislation regulating employment and labour relations in South Africa includes the:
• Constitution of the Republic of South Africa, 1996, which enshrines the right to fair labour practices, the right to strike, the right to form and join trade unions and participate in trade union activities, and the right of trade unions and employers to engage in collective bargaining;
• Labour Relations Act, No. 66 of 1995 (the LRA), which governs collective bargaining at the workplace, regulates the right to strike and recourse to lockout, the dismissal of employees, and the relief to which unfairly dismissed employees are entitled;
• Basic Conditions of Employment Act, No. 75 of 1997, which establishes and governs minimum terms and conditions of employment; and
• Employment Equity Act, No. 58 of 1998, which governs affirmative action measures implemented to eradicate discrimination against disadvantaged groups in the workplace, prohibits unfair discrimination in any employment policy or practice, and requires employers to formulate employment equity plans and report on implementation of such plans. There is also other important legislation applicable to employment and labour relations, including, for example, the Occupational Health and Safety Act, No. 85 of 1993 (the OHSA); the Skills Development Act, No. 97 of 1998; the Unemployment Insurance Act, No. 63 of 2001; the Compensation for Occupational Injuries and Diseases Act, No. 130 of 1993; and the Immigration Act, No. 13 of 2002. Various statutes make provision for the publication of Codes and also provide that such Codes are taken into account in the application or interpretation of relevant law. Some of the more important Codes that affect the employment relationship are, for instance, the:
• Code of Good Practice on Dismissal and the Code of Good Practice on Dismissal based on Operational Requirements (both in terms of the LRA); and
• Code of Good Practice the Occupational Health and Safety Act, No. 85 of 1993 (the OHSA), which provides for the health and safety of persons at work and for the establishment of an advisory council for occupational health and safety.
Foreign Nationals & Companies
South African employment and labour legislation applies to all employees employed in South Africa irrespective of their nationality or the status of their employer. Foreign nationals employed in South Africa normally enjoy the protection of South African employment and labour legislation. In certain confined circumstances a South African court may decide it cannot exercise jurisdiction over a foreign entity to the extent that the entity has no presence or assets in South Africa. Under these conditions an employee – whether South African or foreign – might be required to launch an application to confirm jurisdiction before a court would be prepared to entertain a claim against the entity. The terms of the employment contract could play a decisive role, particularly where an employee has expressly disavowed reliance on the protections available under South African legislation and submitted to an alternative jurisdiction linked to the entity’s domicile.
Employment of an employee – whether a South African or a foreign national – by a foreign entity without a formal presence in South Africa may amount to the establishment of a presence in South Africa, thereby triggering taxation consequences. Specialist tax advice is recommended to avoid this consequence.
Black Economic Empowerment
Black Economic Empowerment (BEE) is a process aimed at encouraging transformation, following the devastating effects of apartheid, by increasing the number of black people who participate in the mainstream South African economy. BEE is fundamental to economic activity in South Africa and aims, through a mixture of economic persuasion and incentives, to increase the number of black people who participate in the South African economy. It is driven by the South African government through legislation and policies that aim to remedy historical racial imbalances and achieve economic transformation. The Constitution provides a constitutional mandate for BEE, as it authorises measures aimed at advancing categories of persons disadvantaged by unfair discrimination.
The government’s strategy to promote BEE was outlined in its 2003 BEE strategy, published by the Department of Trade and Industry. The underlying principle is the use of the state’s purchasing and regulatory power to increase participation by black people in the South African economy by giving recognition and preference to enterprises that contribute to BEE. The BEE strategy paved the way for the introduction of legislation to promote BEE, and led to the Broad-Based Black Economic Empowerment Act, No. 53 of 2003 (B-BBEE Act). The B-BBEE Act does not itself establish any set targets for BEE, but rather provides a framework for the implementation of BEE initiatives.
With BEE intended to be broad-based, there is a drive to spread the potential benefits of BEE across a wide group of black people including, among others, black women, youth, workers, unemployed people and black people with disabilities. A scorecard approach has been adopted, with companies being rated in terms of pillars of empowerment, including ownership; management control; preferential procurement; employment equity; skills development; enterprise development; and socio-economic development contributions. The BEE regulatory hierarchy comprises, among other things:
• the B-BBEE Act, which defines “black people” as “Africans, Coloureds and Indians”. Chinese South Africans, as from June 16, 2008, are also considered black people in terms of the B-BBEE Act;
• the B-BBEE Bill (gazetted for public comment on December 9, 2011 and subsequently revised and gazetted again for public comment on November 23, 2012), aims to clarify and expand on issues that were already included in the B-BBEE Act, but also to deal with the issue of ‘’fronting’’;
• regulations in terms of B-BBEE Act, which primarily consist of the Codes of Good Practice on BroadBased BEE (the Codes). The Codes are intended to provide a standard framework for the measurement of B-BBEE across all sectors of the economy. The definition of “black people” in the Codes is broadened to include African, Coloured and Indian persons who are natural persons and are citizens of South Africa by birth or descent; and
• Sector Codes, which enjoy the same status as the other elements of the generic scorecard, incorporated as part of the Codes, and are binding on organs of state as well as public entities. Sectors that have Sector Codes include the agriculture, chartered accountancy, construction, financial, forestry, information and communication technology, mining, petroleum, property, tourism and transport sectors.
Real Estate
South Africa’s real estate industry is continuously challenged to address regulatory requirements and financial risks while still expanding globally and achieving sustainable growth. As result the last decade or so has seen significant increases in the capital value of real estate in the country. While the real estate market has, like many in emerging markets, been marred by the global economic crisis and real estate prices have declined somewhat, there are still many favourable investment opportunities in the country.
Registration
South Africa has one of the finest land registration systems in the world, with a framework that favours the guarantee of secure land ownership. Generally, land available for private development is surveyed and recorded on either a diagram or a general plan, and given a unique number. The precise location, status and identity of any given surveyed land parcel are therefore beyond doubt. The registration of a deed of transfer in the Deeds Registry is the usual procedure to effect transfer of ownership in, or limited real rights over, land. The Registrar of Deeds is afforded responsibility and powers by law to keep and systematise information in the registers, in a manner which best and most efficiently ensures security of title.
Foreign Land Ownership
Ownership in a land title may be held by a natural person, partnership, company, close corporation, trust, association or any other recognised entity. Land may be owned by foreign natural persons or foreign legal entities. Ownership by foreign legal entities is subject to certain restrictions contained in the Act and the interpretation the Chief Registrar of Deeds has placed on the relevant provisions. Generally speaking, a foreign company wishing to acquire land in South Africa may be required to register as an external company with the Commission. In principal, any foreign legal person recognised as such in the country of its origin and/or registration may own property in South Africa subject to the above limitations. However, the Registrar of Deeds may require proof that the relevant legal entity has, in its jurisdiction of origin, legal personality (i.e. that it is capable of having its own rights and obligations). This is relevant in the context of foreign (registered) limited partnerships, which in some foreign jurisdictions enjoy legal personality.
Property Rights & Expropriation
The Constitution restricts the deprivation of property, except in the case of expropriation in terms of a law of general application. Expropriation must be subject to just and equitable compensation and agreed on by affected persons or approved by a court. The Expropriation Bill, published in April 2013, proposes changes to, and a consolidation of, the laws governing expropriation in South Africa. The new bill is intended to assist with expediting land reform in South Africa.
Foreign Capital
Exchange controls in South Africa were implemented to regulate the flow of capital out of and into the country. The legal framework is based on a total prohibition on dealing in foreign exchange, except with the permission of, and on the conditions set out by, the National Treasury. Over time, exchange controls have been relaxed with the aim of making South Africa more investment friendly. The stated policy is to gradually relax controls and implement a system to monitor capital flows rather than control them.
Because of its obvious impact on the conduct of normal international trade and payments, the underlying economic policy is not totally prohibitive. The purpose of exchange control in this context is thus to:
• ensure the timely repatriation into the South African banking system of foreign currency acquired by South African residents; and
• prevent the loss of foreign currency resources through the transfer abroad of real or financial capital assets held in South Africa. In essence, South African exchange control regulations try to prohibit capital export from South Africa by residents. Exchange controls affect cross-border transactions and are subject to approval. The administration of exchange control has been delegated to the South African Reserve Bank (SARB) and is administratively performed by the Financial Surveillance Department ( FinSurv) of the SARB. Certain powers, set out in the Exchange Control Rulings, have been delegated to authorised dealers (banks licensed to deal in foreign exchange). This delegation was performed with a view to streamlining and simplifying the approval process. All foreign exchange transactions are required to comply with exchange control regulations. Funds being transferred from abroad to South Africa, or vice versa, have to be declared with the SARB. While there are no limitations as to how much money can be brought into South Africa, there are limitations as to how much money can be transferred from the country.
Capitalisation & Shareholders’ Loans
FinSurv does not prescribe the manner or extent to which foreign-owned companies or entities must be capitalised.
The Income Tax Act, No. 58 of 1962 provides for measures to combat thin capitalisation schemes. No approval is required from FinSurv for the introduction of the fixed capital of the company (i.e. share capital and share premium or the fixed capital of a branch of an external company). However, the acceptance of foreign loans and the payment of interest are subject to prior approval being obtained from an authorised dealer or FinSurv. The loan(s) may be either denominated in a foreign currency or South African rand.
In terms of policy, the interest rate applicable to shareholder loans is limited to the a rate not exceeding the base or prime lending rate applicable to the currency in which the loan is denominated. The interest rate applied to unrelated third-party loans is limited to a rate not exceeding the base or prime lending rate applicable to the currency in which the loan is denominated plus 2% in respect of foreign currency denominated loans and plus 3% in respect of rand denominated loans. The repayment of foreign loans is also subject to approval being obtained from either an authorised dealer or FinSurv. There are no restrictions on the repatriation of capital investments by non-residents.
Local Financial Assistance
In terms of the Exchange Control Regulations and Rulings, the extent to which “affected persons” (entities in which there is a 75% or more non-resident interest) and non-residents may avail themselves of local funding is restricted. Financial assistance includes lending currency, granting credit, taking up securities, concluding an instalment and/ or hire-purchase sale or a lease agreement, financing sales or stocks, discounting, factoring, guaranteeing or accepting credits, guaranteeing or accepting any obligation, suretyships, buy-backs, and leasebacks, but excludes normal trade credits. Non-residents and parties to cross-border transactions should consult an advisor or authorised dealer prior to any transaction, to ensure compliance with exchange controls.
Conclusion
The South African Department of Trade and Industry has been formulating new policies and consolidated existing ones to reintegrate into the global economy since 1994. Transformation has been a focus of the department, while it also works to attract domestic and foreign investment; increase global market access for South African products; and create a fair, efficient and competitive marketplace for all parties. The country offers investors several vehicles for establishing businesses and potential for good returns, but the value of sound legal advice cannot be over-estimated.
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