Customers returning goods – what should you know as a supplier?

Customers returning goods – what should you know as a supplier?

You are a supplier of goods to customers – whether through a retail outlet at your business premises or online. The customer wants to return the goods purchased. Do you have an obligation in law to always allow the customer to return goods or are there exceptions? And what about the refund – should it be in full or can you deduct a “handling fee”? For defective goods, are you allowed to rather replace the goods? Can a customer return goods several months after the purchase date? These are all frequently asked questions in the industry which every new (or established) business should consider.

 The Consumer Protection Act 68 of 2008 (“CPA”) provides for a right to return goods only in specific circumstances. There is no such thing as an unlimited or “blanket” return right, even though customers often may think this is the case. Be careful though – the situation changes when it comes to online purchases.

The first thing to remember is that customers indeed have a “cooling off” right, but only in the following circumstances:

  • If not an online sale, a 5 day cooling off period for sales resulting from direct marketing applies (this means that the supplier directly approached the customer to sell him/her the goods and the customer bought the goods as a result of the marketing) – cooling off right in terms of the CPA.
  • If an online sale, a 7 day cooling off period applies in general (no marketing requirement as per the CPA) but note that some exceptions apply and not all goods can be returned in terms of this right – cooling off right in terms of the Electronic Communications and Transactions Act 25 of 2002 (“ECTA”).

During the cooling off period, the customer has the right to a full refund when returning the goods and does not need to give a reason why the goods have been returned. However, the customer will have to pay the costs associated with returning the goods to the supplier. With all the other return rights in terms of the CPA discussed below, the cost of the return will be on the supplier.

In addition to the cooling-off periods, customers may return defective goods in accordance with the so-called CPA implied warranty of quality (the “CPA warranty”). This means, that if there are any defects in the goods within the first 6 months after purchase or delivery (the later date), the customer can return the goods based on the CPA warranty. Whether a customer can return goods within the 6 month period or not will, however, have to be assessed on a case by case basis and there are certain exceptions that could apply. The supplier is entitled to first investigate the complaint and run tests to determine whether a defect is indeed present. If the customer caused the damage to the goods, it goes without saying that the supplier should not be liable and the customer should not be able to rely on the CPA warranty.

In the case of a return of defective goods, the CPA does not give a supplier a first right to repair or replace and provides the customer with the right to return the goods that does not meet the quality requirements for a (i) refund, (ii) replacement or (iii) repair – at the customer’s choice, not the supplier’s. However, the customer’s right to return goods in terms of the CPA warranty will not apply where the goods have been altered, contrary to the instructions of the supplier.

Customers may also return goods if the customer indicated the purpose for which it wanted to use the goods at the time of purchase and the supplier confirmed that the goods will be suitable for that purpose, but it then turns out that the goods cannot be used for the purpose initially intended.

Make sure you know your rights as a supplier and exercise all options when a customer cries “Consumer Protection Act”!

Lastly, suppliers often offer more return rights than the rights afforded to customers in terms of the law. These are regulated through “Returns Policies”. Next time we will do a post on “What should your Returns Policy look like?”.

Registering your company for VAT

Registering your company for VAT

WHY DO I NEED TO REGISTER MY BUSINESS FOR VAT?

Businesses, whether large or small, have a vital role to play as taxpayers in our economy. Any business (whether a CC, a company, a partnership or a sole proprietor) has various tax obligations it must meet. If certain conditions are met, it is required to register and pay value added tax (VAT) to SARS, which is the amount that is levied on the value of most goods and services, whether supplied by sale, rental agreement, instalment credit agreement or any other form of supply. The standard VAT rate is currently 14%.

Your business must register as a VAT vendor if its income earned in any consecutive 12-month period exceeds the prescribed threshold. If your income earned is less than the threshold, it may still be beneficial for your business to register on a voluntary basis – although this will add to your administration, you can then claim VAT back on your expenses (which is then deducted from the VAT you owe SARS).

WHEN DO I REGISTER MY BUSINESS FOR VAT?

Compulsory registration: It is mandatory for a business to register for VAT if the total value of the taxable supplies made in any consecutive 12-month period exceeded or is likely to exceed R1 000 000.

Voluntary registration: A business may also choose to register voluntarily for VAT if the value of the taxable supplies made or to be made is less than R1 000 000, but exceeded R50 000 in the past 12-month period.

VAT registration when the value of your taxable supplies is less than R50 000: Per the new VAT Registration Regulations, an enterprise which has not made R50 000 in taxable supplies in the past 12 months may still register for VAT if it can satisfy SARS that, as at the date of the application, the following circumstances exist:

  • where you have made taxable supplies for more than two months (but not exceeding 11 months), you must prove that the average value of taxable supplies in the preceding months prior to the date of application for registration exceeded R4 200 per month;
  • where you have made taxable supplies for only one month preceding the date of application for registration, you must prove that the value of the taxable supplies made for that month exceeded R4 200;
  • where you have not made taxable supplies yet, you must have a written contract, in terms of which you are required to make taxable supplies exceeding R50 000 in the 12 months following the date of registration;
  • in any other case, you have entered into a finance agreement with a bank, specified credit provider, designated entity, public authority, non-SA resident or any other person who continuously or regularly provides finance, wherein finance has been provided to fund the expenditure incurred or to be incurred in furtherance of the enterprise, and the total repayments in the 12 months following the date of registration will exceed R50 000; or
  • in any other case, you have proof of expenditure incurred or to be incurred in connection with the furtherance of the enterprise as set out in a written agreement or proof of capital goods acquired in connection with the commencement of the enterprise and proof of payment or an extended payment agreement evidencing payment has either exceeded R50 000 at the date of application for registration; or that it will in any consecutive period of 12 months beginning before and ending after the date of application, exceed R50 000; or will in the 12 months following the date of application for registration exceed R50 000.

HOW DO I REGISTER MY BUSINESS FOR VAT?

You can either elect to register your business for VAT yourself or you can make use of the services of a registered tax practitioner to handle the whole process for you. In both instances, the VAT 101 application form must be submitted to the SARS branch nearest to the place where your business is situated, together with the following supporting documentation:

  • if your business is operated through a company, certified copies of your company registration documents (i.e. CoR 14.1 Notice of Incorporation, CoR 14.1A Notice of Incorporation – Initial Directors, CoR 14.3 Registration Certificate, CoR 15.1A Standard Short Form MOI or custom-drafted MOI (as the case may be);
  • certified copies of the identity documents of all the directors / members / partners;
  • originally signed and stamped letter from the bank confirming the business account’s banking details;
  • latest original copy of the business municipal account;
  • if the business’ property is leased, a certified copy of the signed lease agreement;
  • latest three months’ bank statements; and
  • latest three months’ invoices to confirm income.

THINGS TO NOTE WHEN REGISTERING / PAYING VAT

  • For any sale of more than R50, you must issue a tax invoice (with the words “tax invoice” printed on it). This is the most important document in the VAT system so make sure you get it right.
  • The frequency with which you have to pay VAT to SARS depends on your “taxable period”. For businesses who file their returns and make payments electronically, VAT is due by the 25th day of the first month commencing after the end of the taxable period, while for businesses that file via eFiling, the due date is the last business day of the month after the end of the taxable period.
  • Failure to submit a VAT return at the end of each VAT cycle can lead to a business facing heavy penalties and interest on late submission.
  • You must keep your records for a period of five years from the date of the last entry in any book, as SARS can ask to see these records at any time within this timeframe.
The Art of the Exit: drags, tags and everything in between

The Art of the Exit: drags, tags and everything in between

In the world of venture capital funding, it’s easy for the role players involved (lawyers included) to make the mistake of losing sight of the other party’s objective in an intended funding transaction. There are a myriad of fears and expectations that need to be balanced and measured in order to formulate a funding and capital structure that speaks to the parties’ bespoke needs. It is therefore fundamentally important for investors and investee companies alike to appreciate the main objectives of the party on the other side of the term sheet. In this article we look at investors’ main aims. Hint: it’s not to get a free T-shirt with your company’s logo on it.

Some investors are genuinely driven to expose their cash and commit their expertise (at least in early-stage funding) by an interest in the business they are investing in and a desire to see the economy flourish as investee companies grow and generate economic welfare. This might be true in most cases, but even the most start-up friendly investor has one primary objective: to realise returns from their investment that matches the relative risk associated with the investment. Your uncle who waived his morning coffee to crowd-fund your potato salad (https://www.kickstarter.com/projects/zackdangerbrown/potato-salad) wants to know when he is getting his bite of the salad. That’s just how life works.

While this may be obvious to some, parties often fail to think “exit” when they start a journey together. It is important for both the entrepreneurs and investors as they seek to get a return on their investment (whether time, money or other resources) to understand and manage their exit strategies in order to strike a balance between their own aspirations and motivations on the one side and the stark commercial realities on the other.  It is therefore crucial to determine and negotiate the best exit strategies well in advance. In light of the above, this article will aim to provide an overview of the exit strategies commonly found in later stage Seed Round investments or Series A investments.

Difference between Seed and Series A investments

Seed Round (Series Seed)

A Seed Round is an early round of investment into a start-up entity which is meant to support the business until it generates its own cash or until it is ready to receive further investments as soon as it is cash-generative. Terms associated with Seed Rounds are usually still fairly simple and exit strategies are still relatively low priority in most of these transactions, although investors typically aim to be protected from negative events and benefit from positive events.

However, investors would typically subscribe for a different class of shares, which gives them certain preferential rights (senior to that of ordinary shareholders) when a liquidation event occurs in the company.

 

Series A

Series A investments are mostly made by astute and experienced venture capital firms. They are less flexible on their funding terms – for good reason. Venture capital firms are mostly structured as funds managed by persons or a separate entity (called a managing partner) on behalf of various investors in the fund (called limited partners). Limited partners can include high net worth individuals or institutional investors. The managing partners have a very clear and limited investment mandate and have an investment committee that are obliged to ensure that the firm invests on specific terms and has a clear exit strategy as to how the investment may be realised. For this reason, Series A funding is provided on more strenuous terms and includes various provisions aimed at securing and advancing the return on investment for the firm and eventually, the limited partners. All of these usually activate on an exit event occurring.

Like Seed shareholders, Series A shareholders subscribe for preference shares, but their shares will rank senior to ordinary shares and Seed shareholders when a liquidation event occurs. So if a liquidation event occurs, the liquidation preferences are paid first to Series A shareholders, then to Seed shareholders and then only will all the other shareholders participate in the balance on an as-converted basis.

Basic liquidation events

An exit on equity investments (such as Seed and Series A investments) will see the parties cashing in on the equity they own and receiving monetary reward (and hopefully some upside) for taking the initial commercial risk. The following methods are referred to as “liquidation events” in funding documents:

  1. transferring ownership of the investee company, business or other assets owned by the investee company to a third party (by way of sale of business, mergers, acquisitions or management/employee buyouts);
  2. listings or other offers of shares to the public by way of an Initial Public Offering (IPO); or
  3. by liquidating the company.

There are various ways in which each of the methods above can be applied to realise a return for shareholders. Liquidation is very rarely a feasible option, as there is simply too much value lost on liquidation costs. It therefore falls beyond the scope of this article.

Exit strategies: the good, the bad and the ugly

When considering liquidation events, it is important to consider who controls the occurrence of a liquidation event. In other words, who needs to approve an event before it can occur? This is often referred to as a “drag along” right. If the preference shareholders have the drag along right and can force an event without the ordinary shareholders’ approval, this might, on face value, seem like an effective exit strategy for the investors. However, in reality, this means that founders will not be motivated to grow the value of the company as investors can simply force a liquidation event that merely repays their liquidation preference. If the founders of the company (who usually hold ordinary shares) have the drag along right, this means that the Seed shareholders and Series A shareholders will be forced to accept a liquidation event if the ordinary shareholders approve it. This is not an ideal scenario either, as the preference shareholders are unlikely to receive any returns until the company has grown in value to such an extent that the ordinary shareholders receive a favourable return after payment of the liquidation preference to preference shareholders.

A good balance to strike is to require a high percentage of ordinary shareholders to approve a liquidation event (i.e. considerably more than majority), but then to give the preference shareholders the right to convert their preference shares to ordinary shares and vote accordingly. This means that there is no possibility of a sale at low value if the company is doing well as the drag along right is not held by the shareholders who have the liquidation preference rights. If the company is not doing well and raises funding at a lower valuation at some point (also called a down-round), the anti-dilution rights will enable the preference shareholders to convert to more ordinary shares in any event. This means that if a sale is done after a down-round, the preference shareholders will enjoy a higher participation in the liquidation event if they convert to ordinary shares.

If investors insist that provision is made for the approval of a majority of preference shareholders before a drag along is triggered, then you may want to provide for the liquidation preference to fall away once the company reaches a certain valuation. This still forces the liquidation event and allows Series A and Seed investors to get a return on their investment, but removes the hurdle of the liquidation preference. This ensures that founders are adequately incentivised to grow the value of the company and get the company to a favourable liquidation event that promises returns for all shareholders.

Other ways in which exits are achieved (especially in Series A funding) are as follows:

Co-sale rights: if a founder intends to sell his/her shares to a third party on favourable terms, he/she has to provide the opportunity for the Series A shareholders to convert a proportionate number of its Series A shares to ordinary shares and then tag along on the founder’s sale. The Series A shareholder has a put option to sell any portion of its converted tag along shares to the founder before the founder can proceed with the sale to the third party. This enables the Series A shareholders to exit when a key founder exits the company and forces the company to negotiate exit terms for the Series A shareholder. Depending on the circumstances this can be very restrictive to founders and founders should aim to negotiate a right for them to sell their shares to third parties by means of a gradual earn-out without triggering the co-sale right.

Registration rights: this is a right provided to Series A shareholders in Series A funding documents and is essentially a right (based on the registration of securities in terms of Rule 144 of the Securities Act of 1933 – USA) to either force the company to register the Series A shareholders’ preference shares (convertible to ordinary shares) if the company undergoes an IPO (called demand registration rights). An alternative to demand registration rights are “piggyback” registration rights, in terms of which a Series A shareholders have the right to register their shares with other shares if the company or another shareholder registers its securities. Both options have the effect that Series A shareholders will be entitled to sell their shares when the IPO is done. In the absence of that, they will have to wait at least a year before shares may be sold. Registration rights are usually quite standard and Series A investors are not upon for material negotiation. However, the cost of registering securities can be fairly significant, so from the company’s perspective the less severe “piggyback” registration rights are favourable.

Put option/redemption right: this is when the preference shareholders have a put option to sell their shares back to the company or force the company to redeem the shares and get their invested funds back if certain negative events occur. This is a good example of a provision that should be avoided at all cost. There are various reasons for that, one being that redemption rights for preference shares should always be handled carefully, as they may cause the preference shares to be classified as debt rather than equity, which may render the company insolvent in certain scenarios. It will also cause any dividends or other returns on the capital invested to be taxed as interest in the hands of the investor.

Exit rights are found in various shapes and sizes, especially in Series A transactions. It is very important to formulate an exit regime that strikes a healthy balance between the interests of all stakeholders in the company. This ensures that all the role players are incentivized to drive the company to a healthy exit with favourable returns for all involved.

Deciding on joining an incubator: the ins and outs

Deciding on joining an incubator: the ins and outs

WHAT IS IT?

A business incubator is a programme that helps new and start-up companies to grow, by providing an assortment of business support services, ranging from the potential provision of start-up capital (which may or may not involve the acquisition of equity in the start-up company), structured training and guidance on how to commercialise an idea and to develop a business out of it, operational support (data, phones, admin etc), networking activities, links to strategic partners and investors, marketing assistance and office space, amongst other things.

Unlike many business assistance programmes, business incubators do not serve any and all companies. Entrepreneurs who wish to enter a business incubation programme, must first apply for admission. Acceptance criteria vary from programme to programme, but in general, only those with feasible ideas and a workable business plan are admitted.

WHY SHOULD YOU JOIN AN INCUBATOR?

Focus: Joining a good incubator gives you incredible focus. You can make great leaps in realising and achieving your business goals.

Credibility: As a start-up business, it’s always a good idea to be affiliated with a well-known / prestigious institution, since investors will know that you have undergone a stringent selection process, giving investors more confidence in your ability to commit and deliver.

Administrative Support: The administrative side of the business, including basic bookkeeping and secretarial work, is taken away from you so that you can focus on developing your business.

Professional services: Incubators often have a wide range of support structures and professional networks which will be able to offer assistance that is suited to your business needs, ranging from legal to tax and even immigration.

Facilities: Joining an incubator offers advantages of being able to work (together with other entrepreneurs) in a professional atmosphere (rather than in your basement or garage for instance), which includes a shared office space, board rooms and access to computer and internet facilities.

Access to capital: All types of investors work with incubators, ranging from angels, seed funds, and venture capital.

Building your network: Connecting with fellow incubatee companies and the opportunity to interact with like-minded people presents an excellent shared space to work in. You get real life business people to review, critique and / or validate your business idea, allowing you to start off on a better footing than if you had no input or support.

Learning Opportunities: The more structured incubators will involve you in formal lectures and workshops, dealing with the most important elements of starting, funding, growing, and presenting a business to investors, customers and / or buyers.

WHAT SHOULD YOU WATCH OUT FOR?

The success of any business depends ultimately on the company being able to deliver on its goals, to develop the products and services people care about and the ability of the founders to adapt and innovate. An incubator will only take you so far. Although incubators are a good place to consider when starting out, different incubators have different requirements and goals of their own. An incubator is run just like any other business, and has specific goals which they want to achieve. Understand what that goal is and what they want from you, so that you are well-informed and know what is expected of you and what to expect of them.

Some incubators may really just be investment vehicles which use the incubator as an opportunity to find early stage businesses and create the opportunity to invest in them. The incubator will most likely want preferential terms, so be very careful to make sure you understand what these terms are and how they could affect the way another investor views your company. Good incubators add enough value to justify their equity stake in your company (rather than tagging along for a free ride). So, as with any investor, remember that their money is the least valuable contribution to your business and that they should add value strategically first!

POPI: First meeting for the Information Regulator

POPI: First meeting for the Information Regulator

In our blog post on 7 November 2016 we referred you to the appointment of the members of the Information Regulator – which is an independent juristic person in terms of the Protection of Personal Information Act – commonly referred to as “POPI”. The Information Regulator will be responsible for monitoring and enforcing compliance with both POPI and the Promotion of Access to Information Act 2000 (PAIA).

The 5 members of the Information Regulator (Chairperson, 2 full-time and 2 part-time) have been appointed for a 5 year period that commenced the beginning of the month and according to a media statement issued by Adv. Tlakula (the Chairperson) on 2 December 2016, the Information Regulator held a meeting on 1 December 2016 to commence their function and duties. It has been confirmed that the full time member responsible for PAIA is Adv. Stroom-Nzama and the full time member responsible for POPI is Adv. Weapond.

The POPI commencement date has not been confirmed yet, but the general view in the industry is that 24 May 2017 is the likely day – as this will mean that compliance with POPI will be required as from the 25th of May 2018, which is also the date for compliance with the European Union’s General Data Protection Regulation.

In practice we are starting to see more clients focussing on POPI requirements and starting to create POPI awareness through training sessions and implementation of amended policies and practices. It would probably be unrealistic to think that POPI will mean a “quick fix” for all data concerns, but POPI will certainly play a big role to regulate the way in which companies manage data in future.

Takedown notices

Takedown notices

What is a takedown notice?

A takedown notice is a procedure set out in section 77 of the Electronic Communications and Transactions Act 25 of 2002 (“ECTA”) that provides for a process to request that unlawful content on a website be removed from the internet. A takedown notice is initiated by the person alleging that the content is unlawful as a result of the content being their information which they have not consented to displaying on the website or where the content infringes your copyright. Often, the offending content is a photograph or personal information, such as credit card or banking details.

What is ISPA (The Internet Service Providers’ Association)?

ISPA was established in 2002 in terms of chapter 11 of the Electronic Communications and Transactions Act 20 of 2002 (“ECTA”) and is as a result classified as an Industry Recognised Body (“IRB”). ISPA only has jurisdiction over its members and membership is voluntary. Members of ISPA are those entities that operate as Internet Service Providers (“ISP”) in South Africa and joined ISPA.

The function of ISPA with regard to takedown notices is of an intermediary nature, as ISPA merely checks that applications are complete, that the ISP is a member and that the remedy requested is feasible. If the application complies, ISPA forwards it on to the applicable ISP who responds either by removing the content or by refusing the request. Most correspondence occurs between the ISP and ISPA, however, the ISP may contact the complainant directly as well.

What ISPA considers

The first thing ISPA looks at is whether the ISP is registered as a member of ISPA. If the ISP is not, then ISPA will not be able to assist with the takedown application. ISPA also does not assess the validity of the allegation in the takedown notice, i.e., ISPA will not consider the legality or lawfulness of the allegation.

Is ISPA effective in South Africa?

ISPA does seem to be effective in South Africa. Its website contains statistics, dating back to 2006, showing, amongst others, the number of takedown requests lodged, the outcomes of such requests and the reasons for rejected requests. For more information in this regard, please see the website. In cases where the content on the website is obviously unlawful or problematic the website or content is usually removed immediately.

However, ISPs are not required to comply with takedown notices. If they refuse, they may run the risk of incurring liability in terms of the common law, but this may be a low risk. In circumstances where the ISP wants the content to stay up, the ISP must indemnify ISPA against any and all liability that may arise from the content.

How to request a takedown notice

Requests must be made to ISPA in writing and include the following information:

  1. Your information: name, address, contact number and email;
  2. The service provider against who you are making the complaint;
  3. A clear identification of the unlawful or problematic content, including the URL and an optional screenshot of the content;
  4. A description of the right that you think has been infringed;
  5. The remedy that you seek;
    • This remedy should be reasonable and should not request the entire website to be taken down
  6. A statement that the content of your complaint is true and correct to your knowledge and that you are acting in good faith; and
  7. Your signature.
POPI News: Appointment of the Information Regulator

POPI News: Appointment of the Information Regulator

“Are you ready for POPI??” This question has been asked so many times in marketing material over the last couple of years. Answering this question has lately become very relevant, since the POPI Information Regulator has (at last) been appointed!!  Advocate Pansy Tlakula, former chairperson of the South African Independent Electoral Commission, has been appointed as the chairperson of the office of the Information Regulator.  The remainder of the office is made up of four others, two full-time members and two part-time members. Advocate Cordelia Stroom and Johannes Weapond will fulfil the full-time positions with Professor Tana Pistorius and Sizwe Snail as the part-time members.  The office of the Information Regulator will be effective from 1 December 2016 and members will hold office for five years. They will be eligible for reappointment after the first five-year period.

The office of the Information Regulator has been granted widespread powers, amongst others, to investigate alleged breaches of POPI as the office provides a platform for data subjects to approach with any complaints.

With the appointment of the Information Regulator we are likely to receive a date for the commencement of POPI relatively soon.  This will result in the remainder of the Act commencing and will grant responsible parties a “grace period” of one year from the effective date to become compliant with the Act.  The sections of POPI which have already commenced are:

  • Section 1, the definitions clause;
  • Part A of Chapter 5, which deals with the establishment, staffing, powers and meetings of the Information Regulator;
  • Section 112 which authorises the Minister and Information Regulator to make regulations; and
  • Section 113, the procedure for making regulations.

The Information Regulator has been granted a budget by the Minister of Finance. This budget is to be used for the establishment and capacitation of the office. R10 million has been set aside for the 2016/2017 financial year, R26 million for the 2017/2018 financial year and R27 million for the following financial year.

What we can expect to happen next:

  1. Regulations will be promulgated;
  2. And the commencement date will be announced.

Contact us for more information on all POPI questions.

When is a company subject to the Takeover Regulations?

When is a company subject to the Takeover Regulations?

What are the Takeover Regulations?

Since the Companies Act No. 71 of 2008 (as amended) (“the Companies Act“) came into effect on 1 May 2011, there has been a paradigm shift in the regulation of South African mergers and acquisitions (also known as “fundamental transactions”).  It is understood that the changes introduced into the Companies Act were intended to afford greater protection to minority shareholders in companies where certain transactions are concluded by such companies.  However, these new provisions have also brought with them some trepidation as for many small or medium-sized private companies, the administrative duties associated with the regulation of those transactions are fairly onerous and costly.

If a company intends concluding any transaction contemplated in Chapter 5 of the Companies Act, it is important to ascertain whether the Takeover Regulations apply to that transaction.  If so, various disclosures, approvals and reporting requirements will then need to be met or sought from the Takeover Regulation Panel (“TRP“).  The TRP is the regulatory body that was established under the Companies Act to regulate certain transactions.

Non-compliance with the Takeover Regulations

If there is non-compliance with these laws by a company, a complaint may be filed by an interested party with the TRP, who may investigate such complaint and, if deemed necessary, the TRP may issue a compliance notice to the infringing company.  If this compliance notice is not complied with, a court may impose an administrative fine on the infringing company that may not exceed the greater of 10% of its turnover for the period of non-compliance, or R1 million.

It is therefore vital to consider whether these laws are applicable in order to comply and avoid any penalties for infringements.  However, if the transaction has already taken place and the non-compliance has already happened, it is possible to apply for exemptions or condonations for late filing.

Who is subject to the Takeover Regulations?

The Takeover Regulations apply to a regulated company with respect to an affected transaction or an offer, but there are some exceptions.

In considering the applicability, it is first necessary to ascertain whether the company is a regulated company.  According to the Companies Act (sections 117(1)(i), 118(1) and (2) and Takeover Regulation 91), this is either:

  • a public company; or
  • a state-owned company (with some exemptions, see section 9); or
  • a private company:
    • that expressly elects to be regarded as a regulated company in its memorandum of incorporation, or
    • if more than 10% of its issued securities have been transferred within the previous 24 months (other than by transfer between related or inter related persons).

It is important to note that when using a shelf company and transferring the shares from the incorporator to a new shareholder/s, the initial transfer will not be subject to the Takeover Regulations, however the shelf company will be categorised as a regulated company for the following 24 months.

If a transaction involves a regulated company, the next step is to consider whether the transaction in question is an affected transaction as defined in section 117(1)(c) as follows:

  • a transaction (or series of transactions) amounting to the disposal of all or the greater part of the assets or undertaking of a regulated company (sections 112 and 118(3));
  • an amalgamation or merger involving at least one regulated company (sections 113 and 118(3));
  • a scheme of arrangement between a regulated company and its shareholders (sections 114 and 118(3);
  • the acquisition of, or announced intention to acquire, a beneficial interest in any voting securities of a regulated company (section 122(1);
  • the announced intention to acquire a beneficial interest in the remaining voting securities of a regulated company not already held by a person or persons acting together;
  • a mandatory offer (section 123); or
  • a compulsory acquisition (section 124).

According to section 117(1)(f), an offer means a proposal of any sort, including a partial offer, which, if accepted, will result in an affected transaction (except for a transaction which is exempt in terms of clause 118(3)).

However, the Takeover Regulations do not apply if:

  • an approved business rescue plan requires or contemplates the fundamental transaction;
  • the transfer of more than 10% of the issued securities is due to a company buy-back; or
  • the transfer is between related or inter-related persons (sections 118(3) and 121(b)(ii) and Takeover Regulations 91 (2)(b) and 83).

Exemption from the application of the Takeover Regulations

It is possible to apply to the TRP for an exemption and such application must include:

  • an explanation of the transactions involved;
  • a justification as to why the TRP has jurisdiction;
  • the argument as to why the applicant should be entitled to exemption (section 119(6); and
  • consent of all shareholders in the form of waivers of their rights pursuant to the takeover regulations.

The TRP is entitled to grant an exemption if:

  • there is no reasonable potential of the affected transaction prejudicing the interests of any existing securities holder of a regulated company;
  • the cost of compliance is disproportionate to the relative value of the affected transaction; or
  • doing so is otherwise reasonable and justifiable in the circumstances.

The TRP is not supposed to or required to consider the commercial advantages or disadvantages of any transaction or proposed transaction, but rather to ensure the integrity of the marketplace and fairness to the holders of the securities of regulated companies. In addition, the TRP must prevent actions by a regulated company designed to impede, frustrate or defeat an offer or the making of a fair and informed decision by the holders of that company’s securities.

This area of law is not always straightforward and easy to navigate, but the TRP is an approachable organisation if help is needed in understanding the applicability of the Takeover Regulations to certain transactions.  Our commercial teams have been involved in many transactions involving the Takeover Regulations and the TRP and are available to assist with any queries.

FICA – Potential Amendment of Schedules might affect credit providers

FICA – Potential Amendment of Schedules might affect credit providers

The Financial Intelligence Centre (FIC) has issued a notice in September 2016 regarding possible amendments to the existing Schedules to the FIC Act. The intention is to consider whether activities that currently fall outside of the ambit of the FIC Act should in actual fact be included.

According to the notice issued: “The proposal to include certain businesses or institutions is based, in part, on the Centre’s view that these businesses or institutions may present a higher risk of being used to carry out money laundering or terror financing activities.”

Some of the categories specified in the notice that will be considered to fall within the ambit of FICA going forward include:

*         Dealers in high value goods (like motor vehicles)

*         Co-operatives which provide financial services

*         Credit providers

*         Short term insurers

We have been in contact with the FIC Centre and they have confirmed that the consultation process will start soon. Next steps will therefore be for the Centre to consult with the relevant industry representatives such as the National Credit Regulator.

We will keep you updated on any news in this regard.

Close Corporations: a member’s authority to bind it and personal liability for its debts

Close Corporations: a member’s authority to bind it and personal liability for its debts

As a result of changes to South Africa’s company laws, effective as from 1 May 2011, it is no longer possible to register a new close corporation (“CC“) in South Africa.  However, there are many CCs that have remained in existence that still require regulation.  In this article, we have considered a few of the most common CC-related questions our clients have been faced with.

One of the main benefits of a CC is that it is often administratively easier to regulate than a company, while also being a juristic person distinct from its members who have limited liability.  The individual members’ interests in the CC are determined according to their percentage of ownership, as opposed to a company where shareholders acquire shares in the company.

The regulation of CCs is governed by the Close Corporations Act, 69 of 1984 (as amended) (“the Act“) and the terms set out in the association agreement that has been concluded between the CC and its members (if any).  If no such agreement has been entered into, the Act must be relied on as the default position regulating the CC and its members’ rights and obligations.

Can the conduct of a member of a CC bind the CC?

Members have the authority to act on their own and this can have the effect of binding the CC, unless the authority of the member in question has been restricted and the other party to the transaction knows or ought to have known of that restriction.  Section 54(1) of the Act states “Subject to the provisions of this section, any member of a corporation shall in relation to a person who is not a member and is dealing with the corporation, be an agent of the corporation…”.

The effect of this section is that each member of the CC has the ability to bind the CC in their individual capacity, except where there is an association agreement which states otherwise or it is expressly dealt with in terms of the default internal relations rules set out in section 46 of the Act.  Section 46(b) provides that members shall have equal rights with regard to the management of the business of the CC and with regard to the power to represent the CC in the carrying on of its business, provided that the consent of a member (or members) holding a member’s interest of at least 75%, shall be required for the following fundamental decisions:

  • a change in the principal business carried on by the CC;
  • a disposal of the whole, or substantially the whole, undertaking of the CC;
  • a disposal of all, or the greater portion of, the assets of the CC; and
  • any acquisition or disposal of immovable property by the CC.

Section 46(b) protects individual members to a degree, in that 75% or more of the members’ interests acting together are required to successfully bind the CC if they wish to give effect to any of the material changes or substantial transactions recorded in that section.

Can members be held personally liable for the debts of the CC?

The default position for personal liability in terms of the Act is that the members of a CC shall not merely by reason of their membership be liable for the liabilities or obligations of the CC (section 2(3) of the Act).  As such, members are not ordinarily held liable for the liabilities and obligations of the CC as the CC is treated as being independent of its members. As with a company, the members would not be liable for the liabilities and/or other obligations of the CC unless a member has signed as surety, guarantor or indemnitor for such debts and/or obligations of the CC.

However, in certain circumstances members are deemed to be personally liable for the liabilities and obligations of the CC, as set out in sections 63, 64 and 65 of the Act.  In summary, these sections provide for a member’s personal liability if a member disregards their duties, commits acts of gross negligence in the carrying on of the business of the CC and/or abuses the separate juristic personality of the CC.

In addition, members can agree to be held personally liable for debts of the CC but this will require the members to enter into a separate agreement for these purposes.  For example, in the case of a sale of a members’ interest or the business of a CC, one or more members may decide to agree to be held personally liable to the buyers for any liabilities of the CC that arose prior to the sale.

How to deal with oppressive conduct by members

The fact that members can act on their own and bind the CC in certain situations, regardless of the other members’ wishes, can lead to unfair and/or prejudicial situations.  If a member of a CC feels that his/her fellow members have unfairly prejudiced him/her in any way or that their acts have been oppressive, in terms of section 49 of the Act, that member can apply to the court for the granting of a remedial order in respect of such conduct.

Section 49 gives the court wide discretionary powers to make orders “with a view to settling the dispute” between the members of a CC, if it is just and equitable to do so.  Such an order could include ordering the offending member to purchase the member’s interest of the affected member (or members) at a fair price, whether he/she wants to or not, in order to compensate an affected member for the binding of the CC in a transaction or other arrangement that is deemed by the court to be unjust and/or inequitable.

This short outline provides some general advice relating to CCs, but there may be unusual situations where it is advisable to obtain specific advice from your attorney.