Prior Authorisation

Prior Authorisation

The Protection of Personal Information Act 4 of 2013 (“POPIA“) requires that a responsible party obtain prior authorisation for certain processing of personal information where the specific processing of certain personal information is likely to cause a higher risk to the data subject. 

Unless exempt, a responsible party must apply for prior authorisation in the following instances:

  • Processing of unique identifiers. Where the responsible party processes a unique identifier for a purpose other than the purpose specifically intended at collection of the identifier AND with the aim of linking the information with information processed by other responsible parties. 

Unique identifiers include for example any account numbers; policy number; identity number; employee number; student number; or unique reference number.

  • Criminal, unlawful or objectionable behaviour. Where the responsible party processes information on criminal behaviour or unlawful or objectionable conduct on behalf of third parties

For example, where the responsible party is a company that carries out background check services on behalf of their clients.

  • Credit reporting. Where the responsible party processes personal information for credit reporting purposes. 

For example, credit bureaus and other persons processing information for credit reporting purposes. 

  • Cross border transfers of special and children’s personal information.  Where special or children’s personal information is transferred to a third party in a country that does not have adequate data protection laws. The current position is that the Information Regulator requires responsible parties to make a determination as to whether the country in which the third party is located has adequate laws and apply for authorisation to transfer the personal information to those countries (which transfers must be subject to contractual safeguards) who do not have adequate laws.                                                                                                                             
  • As further determined by the Regulator. The Information Regulator may determine that certain categories or types of information processing carries a particular risk for the legitimate interests of the data subject, in which case, a responsible party will need to apply for prior authorisation in respect of such information processing.

Unless a code of conduct has been published by the Information Regulator in respect of specific processing that is subject to prior authorisation, a responsible party will need to apply for prior authorisation to continue processing personal information that falls within the above categories of information / processing.  To date, the Credit Bureau Association has applied for a code of conduct for the processing by credit bureaus of personal information for credit reporting purposes. 

For most clients, the categories of processing that may be particularly applicable is the processing of unique identifiers, processing for credit reporting purposes and the transfer of special and children’s personal information cross border (for example, where medical information is processed for insurance purposes and transferred to countries without adequate data protection laws, most notably, the USA).   

Where a responsible party is required to apply for prior authorisation in terms of section 58(1), the Act requires that the responsible party must suspend its processing of the personal information subject to the prior authorisation application once the application has been submitted and until the Information Regulator has approved the application or found that prior authorisation is not necessary. Section 58(1) will however only become effective from 1 February 2022, so responsible parties will not need to suspend their processing for applications submitted before 1 February 2022, but if the Regulator has not finalised its consideration of the application, the position in law is that the responsible party will be required to suspend processing from 1 February 2022

Get in touch if you would like to discuss whether your processing may be subject to a prior authorisation application, and if you have any other questions about the implications of these provisions of POPIA.

COSEC SERIES: WHY AND UNDER WHAT CIRCUMSTANCES WOULD YOU WANT TO SET UP A NON-PROFIT COMPANY?

COSEC SERIES: WHY AND UNDER WHAT CIRCUMSTANCES WOULD YOU WANT TO SET UP A NON-PROFIT COMPANY?

INTRODUCTION:

A non-profit company (“NPC“) is defined in the Companies Act, 71 of 2008 (“the Companies Act“) as a company:

  • incorporated for a public benefit or other object as required by item 1(1) of Schedule 1; and
  • the income and property of which are not distributable to its incorporators, members, directors, officers or persons related to any of them except to the extent permitted by item 1(3) of Schedule 1.

Just like any company, an NPC is registered with the Companies and Intellectual Properties Commission (“the CIPC“) and once registered, will typically have the characteristics and benefits of a private or public company. As mentioned above, an NPC is usually a company which has been incorporated to serve some kind of public benefit or other object aimed at furthering one or more cultural or communal interest, including but not limited to, community social welfare, community youth development, community health care services, community economic empowerment, community training, educational development and religious worship, just to name a few. Organisations that can be registered as NPC’s include churches, charities and educational organisations. The primary objective of an NPC is to benefit the public and not to make profit. 

Following from the above, you will see that a main feature of an NPC is that its income may not be distributed to the incorporators, members, directors or officers, except as reasonable compensation for services rendered by them. All of the NPC’s assets and income must be used to advance its stated objectives, as set out in its Memorandum of Incorporation (“MOI“). You will also notice that an NPC does not have authorised share capital as there are no shareholders to whom shares can be issued. 

An NPC may be registered with or without members. The members are akin to the “shareholders” of a company who have the final say with regards to the appointment of directors as well as other vital aspects to key decision-making. The members are the highest decision-making body and typically, have the final say on all strategic decisions relating to the NPC. It is possible for the NPC to have only directors (and no members) in which case all strategic decisions (as well as decisions relating to the day-to-day operations of the NPC) will be directed through the board. It is a legal requirement for the NPC to have at least 3 directors and if the NPC is to register for PBO status further down the line, then it is a good idea for the directors to be unconnected (i.e. not related to each other). The decision is therefore whether to incorporate the NPC with members and directors or directors only. Ultimately, it boils down to a question of control.

HOW IS AN NPC DIFFERENT TO AN NPO:

An NPO is defined in the Non-Profit Organisations Act, 71 of 1997 as a trust, company or other association of persons:

  • established for a public purpose; and
  • the income and property of which are not distributable to its members or office bearers except as reasonable compensation for services rendered.

As can be seen above, an NPO is a much wider construct which includes not only companies, but a trust or a voluntary association as well. An organisation will typically be required to register as an NPO in order to receive grants and donor funding from government. An NPO is registered with the Department of Social Development (“DSD“). In addition to the prescribed DSD application form, two copies of the organisation’s founding document (a constitution for a voluntary association, an MOI for a company, or a deed of trust for a trust) must be submitted to the Directorate for Non-Profit Organisations.

WHAT IS A PBO STATUS:

Registration as a public benefit organisation (“PBO“) is considered as a status rather than an enterprise. If you want your NPC to be approved as a PBO, application must be made by the directors or a registered tax practitioner on the NPC’s behalf to the South African Revenue Service (“SARS“). To qualify for approval as a PBO an organisation must be incorporated or established in South Africa as:

  • a non-profit company which has a memorandum of incorporation as a founding document;
  • a trust which has a trust deed as a founding document; or
  • an association of persons which has a constitution as a founding document.

It must be noted that the preferential tax treatment for a PBO is not automatic and organisations that meet the requirements set out in the Income Tax Act, 1962 (“the Income Tax Act“), must apply for this exemption with the Tax Exemption Unit (“TEU“). If the exemption application is approved by the TEU, PBO status will be granted and the entity will be assigned a special PBO reference code and will be exempt from income tax. 

The conditions for an entity to be granted PBO status are contained in section 30 of the Income Tax Act while the terms relating to how predetermined tax incentives for PBO’s work are contained in section 10(1)(cN) of the Income Tax Act. 

Importantly, approved PBO’s must continue to comply with the Income Tax Act and related legislation throughout their existence, which includes among other things, the submission of annual income tax returns. For more information on the process, please follow this link to the official SARS website: https://www.sars.gov.za/ClientSegments/Businesses/TEO/Pages/Tax-Exemptions-and-PBOs.aspx

TAX DEDUCTIBLE DONATIONS (SECTION 18A RECEIPTS):

The South African government has acknowledged that some PBO’s are reliant on donations and to incentivise this, has provided for certain allowable deductions to the donors under certain circumstances. If the entity concerned has been granted section 18A approval by the TEU then it will be allowed to issue tax deductible receipts to its donors, but the requirement is that the donations must be used to fund specific approved Public Benefit Activities. 

A taxpayer making a bona fide donation in cash or of property in kind to a section 18A-approved organisation, is entitled to a deduction from taxable income if the donation is supported by the necessary section 18A receipt issued by the organisation. The amount of donations which may qualify for a tax deduction is limited.

According to the basic guide issued by SARS, an application for approval under section 18A can be made simultaneously when an organisation applies for approval as a PBO under section 30 or as an institution, board or body under section 10(1)(cA)(i). If, however, a PBO subsequent to obtaining approval under section 30 or section 10(1)(cA)(i), wishes to apply for section 18A approval, it may do so by written request to the TEU. The following information and documentation must be provided:

  • The relevant PBAs in Part II for which approval is sought;
  • A detailed demonstration of how those activities are carried on; and
  • Relevant supporting documentation that may include the latest founding document and annual financial statements.

CONCLUSION:

We hope this article explains the circumstances under which an NPC would be beneficial and clarifies the correct terminology, which in our experience is often used incorrectly. For example, an NPC can become an NPO but an NPO is not always an NPC. Furthermore, PBO is regarded as a status rather than denoting an entity. For more information and assistance with setting up an NPC and registration for PBO status, you are welcome to contact our Company Secretarial Department and we will gladly assist.

The importance and value of a privacy policy

The importance and value of a privacy policy

The Protection of Personal Information Act 4 of 2013 (“POPIA“) is now effective, since 1 July 2021, meaning that compliance with the act is required. The focus of this post is on the value of a privacy policy/notice and how it can help you comply with your POPIA obligations when processing personal information. One of the obligations that POPIA places on a responsible party processing personal information is to inform data subjects about their rights in respect of their personal information and how and why the responsible party is processing their personal information (section 18). A privacy policy (or in some jurisdictions referred to as a privacy notice) is a tool widely used to comply with this notification obligation. In this blog, we discuss some of the aspects that are important to include in your privacy policy. 

What personal information you are collecting. It is important to inform the data subject what personal information of theirs you are collecting and processing, and whether you are collecting that information directly from them or from another source. The definition of personal information has a very broad ambit, and in South Africa, personal information includes information of both individuals and juristic persons.  Personal information includes, amongst others, name, identity or registration number, contact details, IP addresses and cookies, payment information, views and opinions and children’s or special (such as medical information and fingerprints) personal information. 

Why you are collecting and processing the personal information. The data subject must be informed for what purpose you are collecting the information – for example, identifying and contact information to create and manage an account with the data subject, address to deliver the goods that the data subject is ordering, consent records for purposes of sending marketing communications, etc.  

The responsible party also needs to inform the data subject whether the information that is being supplied is being provided voluntarily or whether it is mandatory to provide that information, and what the consequences are for not providing the information. 

Disclosure of personal information. Many responsible parties will need to disclose personal information of their customers to third parties for various purposes, and a privacy policy can be used to inform the data subject of the general reasons why their information might be shared. For example, an online retailer might make use of a third party delivery service to deliver goods, and will need to share contact information and address with the delivery service. Our view is that a privacy policy need not set out the specific third parties with whom information is shared and what information is shared with each party, but it should inform the data subject the general reasons why information might need to be shared. The privacy policy should also inform data subjects when information is shared cross border (i.e. outside of SA) and ensure the data subject that the recipient of the information complies with the minimum POPIA requirements.  

Data subject rights. The responsible party will also need to inform the data subject about his/her/its rights in respect of the personal information. These rights include the right to object to or restrict processing, right to erasure of personal information, right to request that information is corrected or updated and to request access to the personal information held by the responsible party. 

Complaints. Data subjects have the right to lodge a complaint about the processing of their personal information with the Information Regulator, and a privacy policy should set out the contact details of the Information Regulator. This section of the privacy policy can also be used to request that data subjects first approach you with any complaints that they may have before approaching the Regulator. 

Conclusion. Please get in touch with us if you have questions regarding your POPIA compliance in general, whether your privacy policy is POPIA compliant or if you require a privacy policy, and whether you may also need to comply with data protection laws prescribed in other jurisdictions (such as the GDPR).

Guarantee Your Business Legacy: Why You Need to Build Up a Trade Mark Portfolio

Guarantee Your Business Legacy: Why You Need to Build Up a Trade Mark Portfolio

Legacies are created by those who are willing to take action, and in this case by those who are smart enough to build up their trade mark portfolios.

Many have a false belief that the registration of a company, and the resulting automatic registration of a company name, results in sufficient protection of a company’s branding. Sooner rather than later, this misguided faith will come crashing down and unfortunately, when it comes to branding, the damage might not be reversible. What this article aims to do is to elaborate on the commercial justifications behind registering trade marks and if anything, should make you realise that a trade mark portfolio is not only an insurance policy, but also an investment – but with way less uncertainty and way more upside. 

First off, it is important to understand that the incorporation of your company and the check by the CIPC of whether your company name is available, does not protect your company name or brand. A company name and the following ‘(Pty) Ltd’ abbreviation merely represents the legal character of your business. It does not distinguish your business, products or services from those of another. That’s the job of your trade marks. In this regard, it is possible for you to register trade marks for your business name, products and services, which can be in the form of word marks, device marks or even slogans. 

In general, trade marks are product and service identifiers. For registration purposes, a trade mark must be able to distinguish the products or services of your business from those of others. This criterion is satisfied if, at the date of application, your trade mark is capable of distinguishing your goods or services, either inherently or due to prior use. 

If you meet these requirements, a trade mark provides you with protection for an infinite amount of time (provided you renew your trade mark every 10 years); it secures exclusive use of the mark for you; and allows you to prevent others from using the same or even confusingly similar marks in the marketplace.  Why is this important you may ask? You will find a recurring pattern in the marketplace unfortunately, made up of copycats using similar or even the same branding as yours, to ride the wave of your success. This can be achieved by creating competitive products or services, either in competition or just as a subpar version of your offering. This results in clientele being funnelled away from your doors and into the hands of a copycat. What is important to note is that you are not just losing customers, it could tarnish your brand if customers start confusing a subpar offering with your branding. How do you prevent this? Registering a trade mark allows you to prohibit anyone from using the same or even confusingly similar marks in the marketplace.

The above are all excellent reasons for registering trade marks, but if you need a little more of a push, then consider the following compelling commercial reasons. We now know that trade marks help consumers identify the source of goods or services. Psychologically, human beings are more inclined to place their trust in what they believe are reputable products. Branding and marketing strategies are based on the understanding that consumers value brand names more than no name or generic brands. This is because consumers align themselves with trade marks and their accompanying set of qualities. Further to this, consumers are usually willing to pay more for a brand name, because they know where the product or service comes from and as a result, places their trust in that brand. 

The above is referred to in the industry as goodwill – the ability to attract and establish clientele. This goodwill is seen as an asset and can either be sold or licensed via its attachment to a trade mark. This means that your trade mark itself is an asset, based on the fact that it has accompanying goodwill attached to it. The more goodwill, the higher the value and the more important protection is. This is in contrast to Jon and Jane Doe who opted not to register a trade mark – any goodwill built up will form part of their business and now cannot be separated like with a trade mark. This means that the only way to sell their goodwill is to sell the business as a going concern, which also makes the commercialisation of their goodwill that much harder. 

This is excellent news for trade mark proprietors and forms the basis of franchise arrangements in general. When a company develops a product or service, the initial aim in registering a trade mark is defensive (the ability to prevent others from entering the market with the same or similar marks for the same or similar good, i.e. your insurance policy). However, when we consider trade marks further, an entire new revenue model opens up. Inevitably, the use of a trade mark (and the attached goodwill) can be licensed out to third parties on exclusive or non-exclusive terms for a royalty fee. See these royalties as guaranteed dividend pay outs. For franchise arrangements, a main asset that is licensed and forms the basis of a franchise relationship is the franchisee’s ability to use the franchisor’s trade mark and thereby draw the clientele (via goodwill) attracted to that trade mark within their pre-defined territory. This principle of goodwill sounds odd – I know it did to me the first time – but when considered from a commercial perspective, this ability to garner goodwill is considered an asset and a really rewarding one for that matter.

Trade marks are seen as intangible assets. What this means is that your trade mark develops an intrinsic value as your product or service becomes more successful. Further to this, the stronger your trade mark, the more valuable it is. Strength of a trade mark turns on its distinctives, which is made up of its uniqueness and physical appearance, as well as the trade mark register and the number of similar marks on the register. One way of ensuring that the register does not become overpopulated with similar marks is to get your registration on the register as soon as possible, thereby stopping the register from becoming overpopulated with marks similar to yours for similar categories of products or services.

When you are in the process of doing an equity funding round, you will immediately pinpoint the intellectual property section on your due diligence checklist. At this stage, you do not want to be fumbling around trying to get your trade mark registrations in order as it may well be too late, either because of a total block on the register or because of a deal’s time sensitivity. In most cases, an investor will want to see the registration certificates for your trade mark portfolio, failing which, they will have to conduct a search of what currently is on the trade mark register and analyse the risk of investing in a company that has failed to secure this form of protection. At this point you would have invested significant time, money and the building up of goodwill in a particular brand. It will for that reason be all the more devastating if a search indicates that your trade mark cannot be registered due to an existing mark on the register, or if the mark turns out to be weak due to the register being overpopulated with similar marks.

Trade marks can even be pledged as security to secure loan facilities, similar to the manner in which immovable property can form the subject of a bond. 

A trade mark offers you so much more than just security and if you play your cards right it can provide you with a lucrative platform for commercialising what can be seen as one of your most important company assets. Talk about the ultimate side hustle. It is undeniable that building your trade mark portfolio is an extremely easy process and carries endless benefits. The sooner you get started the easier it is. Just keep in mind that the trade mark register can be an unforgiving place as well and if you drag your feet, you could find yourself having to either rebrand down the line, possibly losing some goodwill that you worked so hard for, or spend unnecessary costs battling it out with a clowder of copycats that already made it to the register before you. Be smart about your intellectual property strategy from the beginning. If you need any advice, we are here to help you draw up your battleplan.

COSEC SERIES: CAN A DIRECTOR BE REMOVED BY THE SHAREHOLDERS WITHOUT GIVING PROPER REASONS?

COSEC SERIES: CAN A DIRECTOR BE REMOVED BY THE SHAREHOLDERS WITHOUT GIVING PROPER REASONS?

INTRODUCTION:

A central theme coming out of the Companies Act 71 of 2008 (“the Companies Act“) is the clear separation of powers between the shareholders of a company on the one hand, and the directors of such company on the other. In a number of our previous articles exploring the Companies Act, we touched on the idea that directors are given the statutory power to take responsibility of the effective management of a company and occupy a fiduciary position in this regard. Shareholders, on the other hand, are not legally obliged to observe any duties as their main aim is to ensure that the company is able to secure a profit from their investment. Since the Companies Act lays out a clear distinction between ‘management’ and ‘control’, shareholders sometimes elect their own directors to protect their interests and the interests of the company alike. Having said that, we are often asked what recourse is available if that relationship of trust subsequently breaks down and the director concerned is no longer able to carry out his/her duties in a manner that would best serve the interest of the company or shareholders. Can such director then be removed by the appointing shareholder or do all shareholders have to consent; what is the process; and do reasons need to be given for such removal? For the purposes of this article, we will focus specifically on the process of removing a director by the shareholders. The right of the board itself to remove a director will be discussed in our next article. 

REMOVAL OF DIRECTORS IN TERMS OF SECTION 71(1) AND (2) OF THE COMPANIES ACT:

Section 71(1) of the Companies Act states the following: 

Despite anything to the contrary in a company’s Memorandum of Incorporation or rules, or any agreement between a company and a director, or between any shareholders and a director, a director may be removed by an ordinary resolution adopted at a shareholders meeting by the persons entitled to exercise voting rights in an election of that director, subject to subsection (2).

Section 71(2) further reads:

Before the shareholders of a company may consider a resolution contemplated in subsection (1) –

(a) the director concerned must be given notice of the meeting and the resolution, at least equivalent to that which a shareholder is entitled to receive, irrespective of whether or not the director is a shareholder of the company; and

(b) the director must be afforded a reasonable opportunity to make a presentation, in person or through a representative, to the meeting, before the resolution is put to a vote.

Following from the above, it can be seen that a director can be removed as long as the majority of the shareholders entitled to exercise voting rights in the election of that director agree by ordinary resolution (i.e. 50% plus 1) provided that a duly constituted shareholders meeting is held (you can refer to some of our previous articles for the legal requirements for calling a shareholders’ meeting) and the director concerned is afforded a reasonable opportunity to make a presentation. Based on our interpretation of section 71(2) no particular grounds for removal need to be provided, but in practice, the notice of meeting itself will put forward a number of reasons which the director will then be able to answer to when making the presentation. 

PRACTICAL STEPS THAT NEED TO TAKE PLACE:

It is a statutory right of shareholders to remove a director, but since the potential impact can be quite drastic, the Companies and Intellectual Property Commission (“the CIPC“) has prepared a guidance note (see Notice No. 42 of 2019) setting out the process requirements that need to be adhered to before it will amend the status of a director in this manner and remove him/her from the CIPC records, despite internal requirements of the company having been met. In order for the notice of removal of directors to meet the processing requirements of the CIPC, the following documents must be filed:

  • Notice regarding the meeting and the resolution, as well as proof that the director to be removed was awarded the opportunity to make a presentation; 
  • Statement setting out the reasons for removal; minutes of meeting or copy of the resolution by the shareholders; 
  • Proof that a quorum was reached at the meeting (i.e., attendance register); 
  • Proof of shareholding (certified copy of share register and share certificates); and
  • Notice of Change of Company Directors (i.e., CoR 39) reflecting the correct status change (i.e., removal).

In our experience, it is not enough to simply meet the legislative requirements for the removal of a director, since failure to meet the CIPC requirements can lead to a number of unnecessary queries and ultimately result in the application to be rejected. Practically, the CIPC requirements will need to be met in addition to what is prescribed by legislation.

CONCLUSION: 

The removal of directors is a seemingly simple process and even though the Companies Act does not prescribe that any reasons need to be provided, it is advisable that sufficient reasons are provided in advance so as to allow the director concerned to be afforded a “reasonable opportunity” to make a presentation.

To Tea or Not to Tea: Securing Trade Mark Protection for Rooibos Tea

To Tea or Not to Tea: Securing Trade Mark Protection for Rooibos Tea

What do you think of when someone mentions rooibos tea? Is it the abundant health benefits, the taste of home, a good conversation on a balcony when it may still be a tad too early for a glass of wine? No, it is probably the intricate legal battles that erupted behind the now world-renowned tea… yes, that’s it, right? 

Rooibos tea is exclusively farmed in the Western Cape of South Africa and the distinctive aspalathus linearis plant requires very specific conditions to grow successfully. Conditions which the Western Cape and more specifically the Cederberg region provide. In the 1900s, Pieter Nortier and a partner developed the methods and processes to germinate the plant and brew the well-known drink that is now more of a household name than ‘Cremora’. In 2021, The Rooibos Council of South Africa has secured a Protected Designation of Origin mark from the European Union and I am certain that Pieter Nortier would be doing backflips, if he was– alive today.

You have probably noticed the little yellow and red sticker on your tea box during your monthly ‘FreshPak’ run. This, my friends, is the coveted Protected Designation of Origin mark, resulting in exclusivity for Zaffa production. This article is more an expression of pride and pays homage to South Africans’ ability to keep on fighting the good fight, no matter the size of the opponent. This mark practically ensures the indefinite protection of this product as being ‘Proudly South African’.

Trade marks in general are a crucial element of any commercial endeavour. It acts as a badge of origin and ensures customers that the product or service they are presented with stem from one unwavering source. In effect, a trade mark identifies the goods or services of a particular company or person. Similarly, there are Geographical Indications, similar to trade marks, however, these marks identify the goods or services of a particular place, rather than a person or company.

There are three main forms of Geographical Indications, one of them being a Protected Designation of Origin (PDO). A PDO is registrable for food, agricultural products and wines and will only be registrable for products that have the strongest links to the place in which they are made. What this means is that every part of the production, processing and preparation must take place in a particular region or area.

Tell me – what does Feta cheese, Champagne and Prosciutto have in common? Each product has that little red and yellow PDO sticker. This now explains why these products are always of a similar quality, taste and standard, no matter where they are purchased. The same goes for Parmigiano Reggiano, Black Forest Ham, Kalamata olives, and the list goes on. What this means for South Africa is that no one, save for those in a designated area, producing rooibos tea in a documented and specific manner, is allowed to link the designation ‘rooibos tea’ to their brand, irrespective of how perfect their recipe is. 

Rooibos tea has provided a clear case of why it is so important to secure a PDO and why trade marks in general are so important. It is well known that companies in the United States and France have attempted to register the ‘rooibos’ brand, which they would get away with, seeing that the registration of Afrikaans dialect in a non-Afrikaans speaking country could avoid the bar of registering descriptive trade marks – and they actually did get away with such registrations. Lucky for us, the PDO is like a draw four card in the hand of a kid playing ‘Uno’, meaning that everyone is barred from registering the ‘rooibos’ brand and slapping it on any random tea with red food colouring in it. It thereby not only protects every student’s favourite procrastination drink but also protects the name from being tarnished by inferior quality products.

Without the PDO in place, the bespoke South African tea would most definitely crumble under the weight of mass production and international competition, rendering the South African product and the actual methodology behind rooibos tea, nearly obsolete. The Rooibos Council of South Africa, however, fought tooth and nail to secure this PDO and was officially awarded its certification this year. As a result hereof, we can sleep soundly at night knowing that the cup of tea which just quenched our thirst is from a specific source and produced subject to strict guidelines, otherwise it would most definitely not have a reference to ‘rooibos’ anywhere.

This article acts as a salute to South Africa for securing a PDO, but what I am really hoping for, is that you recognise how important it is to protect your brand, irrespective of whether it is a general trade mark for your business or a Geographical Indication. This form of intellectual property secures indefinite protection for the proprietor and guarantees that your winning recipe remains protected under your banner. If you would like to talk about anything related to trade marks, or if you require assistance with registering your brand, then you are welcome to give our trade mark department at Dommisse a call.

COSEC SERIES: DOES MY COMPANY NEED A COMPANY SECRETARY?

COSEC SERIES: DOES MY COMPANY NEED A COMPANY SECRETARY?

INTRODUCTION

In our previous cosec series, we talked about the role of the board of directors (“the Board“), and how it is often regarded as the management arm of a company. For the purposes of this article, we will focus on the role of a company secretary, which is often overlooked but equally as important to ensure accountability and good corporate governance in the context of South African company law. 

THE ROLE OF A COMPANY SECRETARY

A company secretary is responsible for the legal administration of a company, often playing an advisory role to the Board on what its responsibilities are and to ensure that the Board carries out its duties effectively. The King Report on Corporate Governance for South Africa (“King III“), which is often regarded as the go-to authority for corporate governance guidance outside of the Companies Act 71 of 2008 (“the Companies Act“), states that the Board should always “be assisted by a competent, suitably qualified and experienced company secretary”. As the most senior administrative “officer of the company”, a company secretary must oversee the efficient administration and compliance of a company and is the primary source of advice on the conduct of the business (CIPC Guidance Note 1 of 2017: The Role of the Company Secretary in a Modern Company). 

IS IT COMPULSORY FOR MY COMPANY TO HAVE A COMPANY SECRETARY?

Section 86(1) of the Companies Act makes it compulsory for a public company or a state-owned company to appoint a company secretary. It is not mandatory for a private company to appoint a company secretary, but the absence of this requirement does not mean that a private company is automatically exempt from observing the relevant requirements of the Companies Act from a governance perspective. 

WHO CAN BE COMPANY SECRETARY?

Section 86(2) of the Companies Act states that every company secretary, irrespective of whether such appointment is a requirement in terms of the Companies Act or a company’s memorandum of incorporation (“the MOI“), must:

  • have the requisite knowledge of, or experience in, relevant laws; and
  • be a permanent resident of the Republic of South Africa and remain so while serving in that capacity.

If a public company or a state owned company (or, in the case of a private company, it elects in terms of its MOI to abide by the extended accountability provisions), appoints a company secretary, then such appointment may be made by the incorporators of the company or within 40 business days after the incorporation of the company by either the directors of the company or an ordinary resolution of the holders of the company’s securities (i.e., its shareholders). 

Section 87(1) of the Companies Act further states that a juristic person or partnership may be appointed to hold the office of company secretary, provided that:

  • every employee of that juristic person who provides company secretarial services, or partner and employee of that partnership, as the case may be, satisfies the requirements contemplated in section 84(5) (i.e., that person has not been disqualified as director); and 
  • at least one employee of that juristic person, or one partner or employee of that partnership, as the case may be, satisfies the requirements contemplated in section 86 (i.e., requirements to be appointed company secretary).

DUTIES OF COMPANY SECRETARY

A company’s secretary is accountable to the Board and section 88(2) of the Companies Act states that a company secretary’s duties include, but are not restricted to, the following: 

  • providing the directors of the company collectively and individually with guidance as to their duties, responsibilities and powers;
  • making directors aware of any law relevant to or affecting the company;
  • reporting to the Board any failure on the part of the company or a director to comply with the MOI or rules of the company or the Companies Act;
  • ensuring that minutes of all shareholders’ meetings, board meetings and the meetings of any committees of the directors, or of the company’s audit committee, are properly recorded in accordance with the Companies Act;
  • certifying in the company’s annual financial statements whether the company has filed required returns and notices in terms of the Companies Act, and whether all such returns and notices appear to be true, correct and up to date;
  • ensuring that a copy of the company’s annual financial statements is sent, in accordance with the Companies Act, to every person who is entitled to it; and
  • carrying out the functions of a person designated in terms of section 33(3) (i.e., filing of annual returns).

CONCLUSION 

As can be seen, the role of a company secretary is an extensive and important one, often to facilitate the Board in carrying out its duties. Even if it is not mandatory for your company to appoint a company secretary, it is advisable that such company delegates or outsources this responsibility to an appropriate person or organisation. Our firm has a dedicated Company Secretarial Department and even though we will not accept an appointment as company secretary, we do offer such services on an ad hoc basis. Please do get in touch if you require more information or how we can assist with your company secretarial needs.

COSEC SERIES: REGISTRATION OF AN EXTERNAL COMPANY IN SOUTH AFRICA

COSEC SERIES: REGISTRATION OF AN EXTERNAL COMPANY IN SOUTH AFRICA

As a foreign company, if you are looking to expand your business operations into South Africa then going the route of establishing an “external company” might just be the best approach. Before a foreign company is allowed to conduct business in South Africa, it must establish a branch office by registering itself as an external company with the Companies and Intellectual Property Commission (“the CIPC“). An “external company” is defined in section 1 of the Companies Act, 71 of 2008 (“the Companies Act“) as “a foreign company that is carrying on business, or non-profit activities, as the case may be, within the Republic, subject to section 23(2)“. 

The requirements for the registration of an external company in South Africa in terms of section 23(1) of the Companies Act is that an external company must register with the CIPC within 20 business days after it first begins to conduct business in South Africa either as: 

  • an external non-profit company if, within the jurisdiction in which it was incorporated, it meets the legislative or definitional requirements that are comparable to the legislative or definitional requirements of a non-profit company incorporated under the Companies Act; or 
  • an external profit company (i.e. a private, personal liability, state-owned or public company) in any other case. 

Section 23(2) of the Companies Act lists a series of activities that will be regarded as “conducting business” if that foreign company:

  • 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. 

For the purposes of the above, the Companies Act specifically points out that a foreign company must not be regarded as conducting “business activities” or “non-profit activities” in South Africa solely on the ground that the foreign company concerned is or has engaged in one or more of the following activities:

  • holding board or shareholders’ meeting(s), or otherwise conducting any of the company’s internal affairs in South Africa;
  • establishing or maintaining any bank or other financial accounts within South Africa; 
  • establishing or maintaining offices or agencies within South Africa for the transfer, exchange or registration of the foreign company’s securities; 
  • creating or acquiring any debts, mortgages or security interests in any property within South Africa; 
  • securing or collecting any debt or enforcing any mortgage or security interest within South Africa; or 
  • acquiring any interest in any property within South Africa. 

Once the foreign company has been registered as an external company with the CIPC, it will be assigned a unique registration number to differentiate it from a typical South African private or non-profit company. The registration number of an external company usually ends with the number “10” rather than an “07” or and “08” as in the case of a South African private company or non-profit company, for example. 

The process of registering the foreign company as an external company with the CIPC requires the following prescribed forms to be lodged:

  • Form CoR 20.1 Notice of Registration of External Company;
  • Form CoR 20.1’s Annexure A, entitled Directors of External Company; and
  • Form CoR 21.2 Notice of Person Authorised to Accept Service.

The application is then submitted to the CIPC together with the following supporting documents:

  • a certified copy of the foreign company’s Memorandum and Articles of Association or equivalent constitutional document; 
  • the Certificate of Incorporation or comparable document registered in the foreign jurisdiction; 
  • the current Registration Certificate of the company (if different to the Certificate of Incorporation); and 
  • certified copies of the identity documents or passports of all the incorporators, directors and representatives of the foreign company. 

As can be seen, while there is no requirement for a physical presence of any shareholder or director in South Africa, there is a requirement for a South African resident to be appointed as a local representative of the external company, who will be the person largely responsible for its operations and accepting service on behalf of the external company.

There are numerous issues one would need to consider when setting up a local branch and our international structuring team and CoSec department will be able to advise on the appropriate set-up, legal structure, tax and exchange control implications if you want to set up a branch office in South Africa. 

THE MILD, MILD WEST: A horse named Crypto

THE MILD, MILD WEST: A horse named Crypto

Space: the final frontier. Not too long ago, the expanse of central North America was seen as such a frontier line. In time, railroads, telephone wires and highways sketched their lines across its unspoiled canvas, setting the stage for future generations to draw poor analogies about the connectivity of Western society from a computer down in Southern Africa. After getting acquainted with our place amongst the stars, we set our sights outwards for new analogies to butcher.

The American frontier. The Wild West. It immediately conjures up imagery of saloon shoot-outs, train robberies and cowboys. Perhaps a result of indulging in too many Westerns, but nevertheless a consequence of doting on the subject. Harsh, untamed and seemingly lawless, the Wild West was, well, wild.

With cleaver in hand, let’s compare this to South Africa’s crypto asset regulations. This analogy has done the rounds quite a bit and I’m definitely not breaking new ground in following suit. Its aptness remains evident (new territories; unexplored opportunities; the dangers that insufficient infrastructure and ill-willing individuals may pose – you get the picture) and doesn’t really need these explanators to drive the point home. But seeing as there are new developments happening in crypto here in South Africa, it may just be excusable to give this analogy one more spin.

South Africa has been cautious to try and tame crypto for quite some time now. Over several years, its nature and mannerisms were scrutinised and we have finally, it would seem, come to a conclusion – albeit being in draft format and only hinting at things to come: late in November of 2020, a draft declaration delineating crypto assets as a financial product was issued. Public comments closed near the end of January 2021. The wheels are in motion.

Backing the right horse: Assets and Currency

The draft declaration provides for a “crypto asset” definition as well, which emphasises South Africa’s continued aversion to seeing crypto assets as crypto “currency”. Although the average consumer would view these as synonymous terms and reference them interchangeably, there’s meticulous reasoning behind viewing crypto assets as crypto assets rather than crypto currencies. Although it may just be semantics for some, considering crypto assets as a currency is not something South Africa seems to be ready for yet.

Divergence exists the world over as to what legal status crypto assets should be given, and pinning a “currency” tail to something has more implications than its colloquial usefulness where it isn’t recognised as readily exchangeable. So although South Africa isn’t requiring your local saloon to accept Bitcoin in lieu of ZAR just yet, it’s at least come to terms with the fact that crypto may be here to stay.

It should be noted that the declaration is most likely only the tip of the iceberg of crypto regulations in South Africa. The press release following the draft declaration states that “[t]he draft Declaration is merely intended to be an interim step in mitigating certain immediate risks in the crypto assets environment pending the outcome of broader developments currently taking place through the [Crypto Asset Regulatory Working Group] which will inform future policy interventions to be implemented across a variety of regulators and laws.

Blazing new trails with trusty horseshoes: Financial products and FAIS

Slotting crypto assets into the “financial product” definition cannot be said to be surprising – there’s already massive differences between the different financial products that are currently being combed with the same brush. In addition, when considering Conduct of Financial Institutions Bill’s (COFI) expansion on the financial product definition, this approach in a regulatory sphere that is progressing towards streamlining regulatory authorities, is almost expected.

While some are strong advocates of cryptocurrency being used as a form of, well, currency, others treat crypto assets in a way that can somewhat be compared to trading in stocks. Whether these positions are two sides of the same coin or not (pun intended), the treatment of crypto assets, at least more recently, has resulted in extreme fluctuations in large amounts of value. With a two-day window allowing for double-digit percentage fluctuations, one can hardly say that changes are negligible.

It is within this tumultuous, new and exciting yet confusing environment that consumers are at risk of running into trouble. Only days after comments on the draft regulations were closed, the FSCA issued a press release stating that it is receiving a large number of complaints from consumers aggrieved with losing savings to scams premised in crypto assets or through crypto investments they did not fully understand.

The statement goes on to say that “[c]rypto-related investments are not regulated by the FSCA or any other body in South Africa. As a result, if something goes wrong, you’re unlikely to get your money back and will have no recourse against anyone.” It is this exact position that is sought to be changed by including crypto assets within the FSCA’s ambit by denoting it as a financial product.

Accordingly, South Africa has taken an approach that, in comparison to the current position, will essentially herald the FSCA’s arrival as sheriff to the scene. FAIS is a battle-hardened piece of sectoral legislation, so having crypto assets included in its ambit is a big step forward for consumer protection. And with promising prospects of further regulation on the horizon, the corralling of crypto assets into the financial product pen is just the start. Putting the reigns on crypto assets through directly involving the FSCA may be just the thing that is needed to bring some order to the wild.

Minimal Mercy for Miscreant Marauders: Delinquency Orders for Directors and the Effects in terms of the Companies Act

Minimal Mercy for Miscreant Marauders: Delinquency Orders for Directors and the Effects in terms of the Companies Act

One of the most significant innovations of the Companies Act No. 71 of 2008 (“Companies Act“) includes an order declaring a director a delinquent in terms of section 162 of the Companies Act. This powerful protective remedy “ensure[s] that those who invest in companies are protected against directors who engage in serious misconduct of the type that violates the ‘bond of trust’ that shareholders have with the people they appoint as directors” (Gihwala and Others v Grancy Property Limited and Others, 2017).

Recent articles on our blog discuss director duties as set out in the common law and section 76 of the Companies Act. What this should make you recognise is that this represents the one side of the coin, being the duties that are owed to the company and its true stakeholders. On the other side of the coin, however, are the consequences of such actions. One is a declaration of delinquency or probation in terms of section 162.

The object of this section clearly establishes such an order as a protective remedy in the public interest. The remedy provides an applicant with protection from a director that proves unable to manage the business of a company or has failed or neglected their duties and obligations owed to a company. In other words, the remedy not only protects the applicant but serves to protect other companies from the delinquent director’s conduct as well.

This remedy takes the form of a court application for an order declaring a director a delinquent, the result being a prohibition on being a director for any company for seven years, or even indefinitely in serious cases, being placed on a register of delinquent directors and, as an “automatic inherent effect of such a declaration” (Kukama v Lobelo, 2012), a director found guilty of such conduct shall automatically be removed from any current board seat held.

What is interesting to note is that this amounts to an indirect manner for the removal of a director from a company and it does not matter what the subjective motive of the applicant is; if there is objective merit for delinquency this may be a viable way to remove a director, even if the sole motive of the applicant is to have the director removed by a court (Msimang NO and Another v Katuliiba and Others, 2013).

Following from the above, it is, of course, important to recognise who can bring an application for delinquency. Quite a wide net is cast in this regard, which may include the company itself, a director, shareholder, company secretary or a prescribed officer of a company. The right to initiate such an application goes even further and includes a registered trade union that represents the employees of the company or another employee representative, the Companies and Intellectual Property Commission, the Takeover Regulation Panel and, to a limited extent, an organ of state responsible for the administration of any legislation.

There is a distinction in the application of Section 162 as it relates to an order of delinquency and an order for probation. Whereas an order for probation requires a court to apply its discretion, an order of delinquency does not require such discretion, meaning that, for purposes of an order of delinquency, a court must declare a director delinquent if one of the following grounds are established as provided in the Companies Act, this being considered by the courts as a substantive abuse of power (in terms of sections 162(5)(a),(b),(d),(e) and (f)):

  • consenting to serve as a director, or acting in the capacity of a director or prescribed officer, while ineligible or disqualified in terms of the Companies Act;
  • while under an order of probation, acting as a director in a manner that contravened that order;
  • repeatedly being subject to a compliance notice or similar enforcement mechanism;
  • being convicted twice personally of an offence or being subject to an administrative fine or penalty in terms of any legislation; or
  • within a period of 5 years, being a director of one or more companies or being a managing member of one or more close corporations, or controlling or participating in the control of a juristic person (irrespective of whether concurrently, sequentially or at unrelated times) that was convicted of an offence or subjected to an administrative fine or similar penalty in terms of any legislation.

The Companies Act, furthermore, provides for more substantive abuses under section 162(5)(c) of the Companies Act, the confirmation of which will result in an order for delinquency as well and includes:

  • gross abuse of the position, while acting as a director;
  • taking personal advantage of information or an opportunity, or intentionally or by gross negligence inflicting harm on the company or a subsidiary of the company, contrary to section 76(2)(a) of the Companies Act; or
  • acting in a manner that amounts to gross negligence, wilful misconduct or breach of trust or in a manner contemplated in sections 77(3)(a), (b) or (c) of the Companies Act (unauthorised acts, reckless trading or fraud).

Of interest is the repetition of sections 76 and 77 of the Companies Act in the above-mentioned grounds, which refers to the fiduciary duties of directors and their personal liability. What this means is that, in addition to personal liability, it is possible for a director to also be declared delinquent. This remedy takes the common law duties of directors, which have been codified in section 76 of the Companies Act, and gives them teeth – quite significant teeth.

Regarding the grounds recorded in section 162(5)(c), case law has provided a significant amount of guidance and it is clear that the common law principles codified in sections 76 and 77 of the Companies Act continue to steer the courts’ approach, these being regarded as substantive abuses of office, leading to a lack of genuine concern for the prosperity of a company (Grancy Property Limited v Gihwala, 2014).

Regarding gross abuse of the position of director (see section 162(5)(c)(i) of the Companies Act), a court will have to use its discretion as to whether a gross abuse is present, this term not being defined in the Companies Act. However, an abuse must relate to the use of the position as director and not relate to the performance of the director. An example of such an abuse would include the usurping of confidential information or a corporate opportunity meant for the company and using this for the director’s personal advantage, whether for another company or personally (Demetriades and Another v Tollie and Others, 2015), this amounting to a breach of a director’s fiduciary duties, irrespective of whether the actions undertaken by the director have caused harm to the company or not. This seems to overlap closely with the common law corporate opportunity rule (which has been codified to a certain extent in section 76 of the Companies Act) and which dictates that any contract, opportunity or information that arises for a company, irrespective of whether it could be taken up or used by a company or not, belongs to the company and a director is prohibited from usurping the aforementioned for him or herself.

Taking personal advantage of information or an opportunity meant for a company (see section 162(5)(c)(ii) of the Companies Act) is a ground similar to the above-mentioned ground of abuse, however, it is narrower in that it applies only if a director usurped information or an opportunity meant for a company, for the personal advantage of the director as a natural person. To date, courts have found this ground to be present for two dominant types of conduct, one being the appropriation of a business opportunity that should have accrued to the company and secondly, insider trading.

The grounds established in terms of sections 162(5)(c)(ii) and (iv) of the Companies Act, being the infliction of harm intentionally or by gross negligence and/or breaching trust, whether directly or indirectly places an element of discretion on the court. In effect, conduct aimed at harming a company or recklessness while aware of the harm that certain conduct may cause, will be used by the court to navigate the relevant questions in this regard. Actions which could result in the presence of these grounds could include the conducting of a business by a director in competition with a company that he or she is also a director of, the misappropriation of company funds, the failure to keep proper accounting records and possibly the appropriation of financial benefits for certain directors to the exclusion of shareholders. What is important to note is that the court will take into consideration holistically the actions undertaken by a director and will have to establish whether or not such action amounts to wilful misconduct or gross negligence, thereby intimating of course that a bona fide mistake or error will not automatically result in an order for delinquency. What is required is more, namely gross negligence, wilful misconduct or a breach of trust.

Further common law rules that may influence the above-mentioned grounds (in addition to the corporate opportunity rule) may include the common law no-conflict rule and no-profit rule. In terms of the no-conflict and no-profit rule, which to an extent overlaps, a director owes a company a fiduciary duty not to place themselves in a position in which there may be a conflict between their personal interests and the interests of a company. Furthermore, profits made by a director acting in that capacity are for the company and cannot be retained by him or her, resulting in those profits having to be disgorged. It is important to note in such circumstances that ‘profit’ is not only limited to money but could be any advantage or gain experienced by a director and, furthermore, it is irrelevant whether a company could have secured the particular profit for itself.

This discussion should clarify that a director acts as an extension of a company and therefore has more strict obligations placed upon his or her shoulders when compared to an agent, for example. It goes further in that a core misuse of this position for his or her own benefit or a serious conflict can be responded to with severe consequences. Many individuals think that they can use a company and play the victim card thereby side-stepping personal liability, in legal terms, hiding behind the corporate veil. However, you can note from the above that the Companies Act does indeed have some teeth and, depending on the veracity of the grounds, a court will not and, to a certain extent, cannot hesitate when relevant grounds for delinquency are proven and if they do, may a Judge have mercy on your miscreant soul.