The Ins and Outs of Issuing shares to Employees

The Ins and Outs of Issuing shares to Employees

We are frequently asked to advise clients on the best way to incentivise their existing and future employees. This is an important consideration for any company (and particularly start-ups) who wish to, for example, attract and retain talent. There are a variety of ways in which employees can be incentivised, and it will always be important for the company to consider what the ultimate goal is that they wish to achieve by incentivising their employees. For the purposes of this article, we will only deal with one of these incentivisation options, namely: “Issuing shares to employees”.

In terms of the Companies Act, 71 of 2008 (as amended) (“the Companies Act”), any issuance of shares must be for “adequate consideration” as determined by the company’s board of directors. For example, where the founders of a company wish to award their long-serving employees with a stake in the company, the services rendered by those employees may be considered to constitute “adequate consideration” and the shares can be issued on this basis. Another example of incentivising employees is to offer identified employees a reduced salary together with an issuance of shares in the start-up company, which shares can be issued at a nominal value and could be considered “adequate consideration” in the circumstances. Alternatively, a company can issue shares to identified employees at the fair market value of such shares but the subscription price (being the fair market value) payable for those particular shares is loaned by the company to the employees (note that such loan would qualify as financial assistance and would require specific authorisation). The loan would then be repayable from any dividends that are declared and paid by the company to those employees as shareholders of the company.
Shares may also be issued for future services to be rendered by an employee to the company, but then these services must be rendered by the employee before he/she will be entitled to receive the shares. In such cases, the shares are held in trust and then transferred to the employee upon fulfilment of their service obligations in accordance with section 40(5) of the Companies Act.

More commonly, however, we are approached by start-up companies who wish to set up employee share ownership plans (generically referred to as “ESOPs”) for the purposes of issuing shares to (key) early-stage employees. Some larger or institutional investors require that companies commit to establishing an ESOP as a condition to their investment into the company. In other cases, a company may simply want to establish an ESOP to incentivise and reward their employees of their own accord.

ESOPs can be structured in a number of different ways, for example, employees may be offered direct shareholding in the company or options for the acquisition of shares in the future. Alternatively, a phantom / notional share scheme can be set up – for more information please see our previous article, EMPLOYEE SHARE OWNERSHIP PLANS: SOME ‘WHY’S’ AND ‘HOW’S’.

Once a company has decided that it wishes to incentivise some or all of its employees by way of one of the methods mentioned above, the next important consideration will be the terms and conditions upon which the shares will vest in the employees’ hands. The concept of “vesting” in broad terms means the moment when the employee becomes the full (or beneficial and registered) owner of the shares in question. Such shares may vest over any determined period of time, and may, for example, be subject to the employee meeting certain goals or milestones or remaining with the company for a particular period of time.

Regardless of the manner in which a company may decide to issue shares to its employees, it is key that the employee’s ability to transact with such shares is restricted in some manner. One of the more common restrictions placed on shares issued to employees is that such shares cannot be sold until the occurrence of a “liquidity event” – this is an event that allows the majority of shareholders to exit by selling their investments or realizing the value of their shares. The most common examples are: (i) the sale of all or a majority of the shares in the company; (ii) a sale of the company’s primary assets or business; (iii) a merger or acquisition of the company; (iv) an initial public offer (IPO); or (v) a change of control generally or a similar transaction.
Placing restrictive conditions on shares that are issued to employees is significant for two primary reasons. Firstly, if these shares are unrestricted and can be sold by the employee at any time, this somewhat undermines the motivation for retention of employees. While this purpose could also be achieved through the vesting of shares, there is a further reason why you should consider restricting the shares. In terms of the Income Tax Act, 58 of 1962 (as amended), any “income” that is derived from the disposal of shares that have been issued by a company to its employees by virtue of their employment is taxed in the hands of those employees as income tax. However, if these shares are “restricted” (i.e. cannot be freely disposed of), any “income” earned on a disposal of those shares by the employees will only be taxed in the hands of the employees upon the lifting of the restriction (for example, a “liquidity event” as described above), and the employees will only be required to pay such income tax at the time of disposal of such shares. Any disposal of shares may also attract capital gains tax, which employees should be aware of as well. Specialist tax advice in this regard should always be sought and we will gladly refer you to one of our trusted tax specialists for this purpose.

The Start-up Team have developed a ready-to-use suite of agreements for a simple, direct-shareholding based ESOP with the aim of providing a cost-effective and efficient service as one of our value-added offerings to our clients. If you are considering ways in which to incentivise your company’s valued employees, our dedicated Start-up Team would be happy to meet with you to discuss your needs and assist you in structuring the appropriate employee incentive scheme for your company.

Incoming Foreign Loans – “What, Why, and How?”

Incoming Foreign Loans – “What, Why, and How?”

Introduction
Every transaction between a South African resident person or entity (“Resident”) and a non-resident person or entity (“Non-Resident”) in which funds are likely to flow (either in or out of South Africa) is subject to regulation by the South African Reserve Bank (“SARB”) in accordance with the Exchange Control Regulations that were promulgated in 1961 (“Regulations”). Many entrepreneurs and investors alike who are looking to expand their businesses in or into South Africa are unaware of the existence of the Regulations and the fact that these Regulations might be applicable to their ventures. In one of our previous articles posted on our website during March 2015 we focused on the procedures relating to the release of inward-flowing funds as a result of foreign equity investments into South Africa. This article, however, will provide you with some practical insight into the procedures for the release of inward-flowing funds in respect of incoming foreign loans, by asking: “What, Why, and How?”.
What are inward flowing funds?
Any funds flowing into the South African economy from an external (foreign) source are regarded as inward flowing funds for exchange control purposes. Generally speaking, in commercial scenarios inward-flowing funds most often take the form of loans or equity investments from Non-Residents provided to Residents.
Foreign loans
What are they?
Foreign loans, as the name suggests, are funds that Residents borrow from Non-Resident credit providers (“Non-Resident Creditors”), whether these Non-Resident Creditors are natural or juristic persons.
Why is this important?
Any foreign loans that are received by a Resident from a Non-Resident Creditor have to be repaid to the Non-Resident Creditor, most often together with interest on the borrowed amount, by the Resident. This entitles the Non-Resident Creditor to call on the country’s foreign exchange reserves at the time of repayment by the Resident.
How to receive inward flowing foreign loans?
While permission is generally granted for Residents to raise foreign loans, it is necessary for prior approval to be obtained from an authorised dealer (or the Financial Surveillance Department of the SARB in certain instances) to release such foreign loans. Authorised dealers (usually the Resident’s bank) may approve applications by Residents to release foreign loans from any Non-Resident Creditor, subject to the following specific criteria in respect of the foreign loan being met. Furthermore, these foreign loans are recorded via the Loan Reporting System by the authorised dealer:
1. the term of advancement of the foreign loan facility must be at least one month;
2. depending on whether the foreign loan is denominated in Rand or a foreign currency, different interest rates will apply. For foreign currency denominated loans, the rate of interest being charged may not exceed the prime interest rate (for shareholder loans) or the prime interest rate plus 2% (for third party loans). Interest payable on Rand denominated loans may not exceed the prime interest rate (for shareholder loans) or the prime interest rate plus 3% (for third party loans). For trade finance facility loans – interest may be charged at up to the prime rate plus 10% (including shipping and confirming fees, handling costs, administration fees, bank charges, commissions and raising fees);
3. the foreign loan may not be sourced from the following funds:
3.1. a Resident’s foreign capital allowance;
3.2. any other funds originally transferred from South Africa;
3.3. foreign earnings retained abroad;
3.4. funds for which amnesty has been granted; and/or
3.5. foreign inheritances.
In short there may not be any direct or indirect South African interest in the Non-Resident Creditor (not just the by the Resident, but by any South African natural or juristic person);
4. the foreign loan may not be invested into so-called “sinking funds”; and
5. importantly, no upfront payments of commitment fees, raising fees and/or any other administration fees are allowed to be paid by the Resident (these fees may be payable over the term of the foreign loan facility if so agreed by the relevant parties).
If the above application criteria are met by the Resident, the Regulations prescribe that documentary evidence be provided to the authorised dealer within 30 days of receipt of the funds into the bank’s systems in order to release any such funds to the Resident. The exact documentary evidence that may be required by the Resident’s bank is not defined in any great detail in the Regulations, but would, at a minimum, include the written loan agreement recording the detailed terms of the advancement of the foreign loan; the full details of both the Resident and the Non-Resident Creditor and a statement as to whether any non-resident (other than the Non-Resident Creditor) has any direct or indirect interest of 75% or higher in the Resident (interest includes shareholding, power of control, voting rights and right to capital or income).
If all the above requirements are met to the satisfaction of the authorised dealer, the foreign loan may be released to the Resident.

Conclusion
Any Resident wishing to do business with a Non-Resident, or vice versa, that involves the flow of funds (whether into South Africa or out of South Africa) must comply with the Regulations regulating the flow of those funds. With regard to incoming foreign funds, any failure to follow the correct procedures is likely to result in the release of those foreign funds being delayed by the relevant banks. This can of course have far-reaching implications for business-owners who are heavily reliant on the receipt of the foreign funds. In considering your own business activities, if you are dealing with the cross-border inflow or outflow of funds, do feel free to contact us and we will gladly assist you.

Disruptive Technology – lawyers need to keep up

Disruptive Technology – lawyers need to keep up

LEGAL SERVICES FOR DISRUPTIVE TECHNOLOGY START-UPS

We’ve been lucky enough to work with a number of exciting South African start-ups over the past few years, and we often find ourselves contemplating our role in this sphere, particularly in the disruptive technology start-up world. When a client walks into a first consultation describing their business as the “Uber for “X”” or the “Ebay for “X”” or a “Fintech Start-up”, it is the natural tendency for legal professionals to classify the client as a “private company” and service its legal needs in the same way they would the needs of any other private company running a business. And certainly, there will be times when this approach is the right one, however, we believe that there are a few ways in which legal professionals can distinguish their service offering for innovative or rapid-growth technology start-up companies, in the same way that they would tailor their services for individuals, or larger businesses established in heavily regulated industries. If you are a founder or investor in a technology start-up who is dreading the need to make a call to attorneys or other legal service providers, this article may be for you.

In the last few years there has been a fair amount of commentary in business forums on digital disruption, and how technology is changing the way we interact with our service providers, friends and customers. A few well-known examples are Uber (taxi company that owns no taxies), AirBnB (accommodation provider that owns no real estate), Slack, Skype, Wechat (communication providers that own no telecoms infrastructure), Google and Apple (software vendors that don’t develop the majority of the apps they sell), Kickstarter (funding provider that provides none of the funding), Twitter and YouTube (media and content providers who don’t produce their own content) and Amazon (retailer with no customer-facing retail premises). These companies have rapidly expanded nationally and internationally whilst providing sometimes conventional service solutions in an unconventional way. Despite this, legal services have not innovated to the same extent, or at all. We are therefore faced with the question of whether and how legal services should be forced to adapt for the disruptive technology start-up.

We believe there are a number of ways in which a legal service offering for this kind of company can be distinguished. We would point to the below basic principles underlying a legal service which can add value to most technology start-ups:

  1. A knowledge of, and willingness to embrace, technology in general as well as the specific service offering of the client. Your legal service provider should communicate with you using your preferred communication method (download Slack, call using Skype), be willing to use Google Docs or Dropbox for sharing documents if that’s what you need, or be a part of your Trello board for task management. Even more important, your legal service provider should understand what you mean when you talk about electronic payments, cryptocurrency, application program interface, app development, e-commerce or any other technology reference and how these pertain to your business. If they don’t, then they should be willing to invest in understanding your business so as to properly contextualise their services.
  1. A willingness to innovate, adapt quickly and add real value. The difference between a successful technology start-up and an unsuccessful one can often come down to timing – a delay of a few months can mean that your competitor captures the market while you are still debating whether or not to register your brand name as a trademark. Your legal services provider needs to move quickly and be willing to think outside the box. Your crowdfunding, cryptocurrency or renewable energy startup requires an innovative legal approach in light of the occasional lack of proper regulation regarding these business models, and perhaps bespoke nature of the actual business.
  1. Transparent costs. Whether you are bootstrapping your technology start-up or operating on funding, you will inevitably need to watch your expenses carefully, especially in the pre-revenue stage of your growth. By making fees and costs transparent and easy to understand, you will be able to budget appropriately and you won’t get an unpleasant surprise at the end of the month when the invoice arrives. Legal services can be expensive, however they can also add a great deal of value in the long-run, provided instructions and expectations are managed carefully.

With the above basic principles in mind, there are a few specific areas in which your legal services provider can add serious commercial value to your business. If you have been asking yourself why you would ever need a commercial legal service provider – we find that the following are the areas in which we most often assist our start-up clients:

  1. Corporate Structure: You will need to set up the company or other entity which you will use to operate your business, set up the best possible capital structure (ownership structure) for that business, and make sure that everything is executed properly. It’s all fun and games until you realise that you never actually issued share certificates to your investor shareholders, over-subscribed on your authorised share capital and are faced with a personal liability risk.
  1. Funding: If you have found an investor willing to fund your endeavour, then that is often a big victory in and of itself – it will be important to structure that investment properly and carefully to ensure a mutually beneficial investment relationship that ticks the box for most of each party’s requirements and hopes for that investment. Your legal advisors should advise you on all available funding options (as well as the risks associated with these), whether this be through conventional equity, loan and hybrid instruments or perhaps more ‘out-there’ funding options like convertible notes, SAFE and KISS instruments, or crowdfunding.
  1. Intellectual Property: Many companies speak to ‘their IP’ without having much idea of what is contemplated by that IP. Your legal service provider should be able to assist you to assess what your company’s intellectual property is, and how best to protect it, whether that be through registration of a trade mark, maintaining a trade secret, or licensing rights appropriately to third parties.
  1. Employment: You may grow to a size where you have employees and contractors – we strongly recommend that these relationships be governed by employment or contractor contracts which (amongst other things) exclude any right that these employees/contractors have to the intellectual property that they develop whilst they are in the company’s employ. We also find that in the technology start-up there will more often be a real need to incentivise founders and key employees to remain with your business and add value with ownership rights, through an Employee Share Ownership Plan or other means.
  1. Operational: You may require website terms and conditions and privacy policy, advise on how to monetise your product, terms and conditions for the supply of your particular service (which carefully craft the ambit of the relationship and carefully limit your liability in terms of this relationship), as well as other affiliate relationship terms. These may be bespoke contracts or relatively standard written agreements, but they should always be crafted with proper knowledge of your product/service offering, and in line with your company’s objectives and culture.
  1. Expansion: One of the advantages of a technology start-up can be the scalability of the business model. You should have legal or other advisors who are capable of advising on the best ways in which you can export your services/product to other jurisdictions, and/or the cross-border structure that may work for you within the bounds of exchange control, whilst maximising tax efficiency and profit extraction in a responsible way.
  1. Exit: Whether you are a founder or an investor, you may at some point want to exit your start-up, and this should always be carefully handled, whether you exit through an IPO, acquisition, merger, or simply by sale to your fellow shareholders, everything from the due diligence through to final signature should be guided by each party’s goals for that transaction.

Whether or not the technology bubble eventually bursts, we believe the nature of doing business will (and should) be irreversibly changed by technology and automation, perhaps similarly to the way in which the industrial revolution irreversibly changed manufacturing and supply of goods. It is far more comforting for those in the legal services industry to stick with what they know, and follow the fork in the road that is well-trodden, however you as the investor or founder of a technology start-up have a right to legal services that are tailored to your specific needs, and should brief legal professionals who are brave enough to meet these needs. The nature of business is changing – your legal advisors need to keep up.

Pyramid schemes and other related practices: what you need to know.

Introduction

In terms of our law, a pyramid scheme is an unlawful practice in terms whereof the newest members fund the “investments” of the existing members. The return on “investment” is usually too good to be true and not at all market related. As soon as new members stop joining the scheme, it falls apart resulting in the newest members losing the most.

The law

The Consumer Protection Act 68 of 2008 (“CPA” or the “Act”) defines a pyramid scheme along with the other related schemes falling within the ambit of the CPA. The general prohibition on these schemes is found in section 43(2) of the Act, and includes multiplication schemes and chain letter schemes.

“(2)      A person must not directly or indirectly promote, or knowingly join, enter or participate in—

  1. a) a multiplication scheme, as described in subsection (3);
  2. b) a pyramid scheme, as described in subsection (4);
  3. c) a chain letter scheme, as described in subsection (5); or
  4. d) any other scheme declared by the Minister in terms of subsection (6), or cause any other person to do so.”

Let’s look at these schemes in more detail:

Pyramid scheme

A pyramid scheme is a system into which people buy in exchange for a pay-out at a later stage when new members are introduced into the system. One normally pays a “joining” or “admin” fee to become a member of the scheme. The people who recruit the new members are paid out from the new members’ joining and admin fees. In some instances the scheme will involve the new members purchasing a product; however the product is of very low value and is a distraction from the main objective of the scheme.

The new money coming into the scheme is not used to derive profits but is merely used in order to pay out the existing members of the scheme: repayments are paid from new capital and not from profits generated. As soon as people stop joining the scheme it will start to fail and eventually collapse.

In terms of the CPA a pyramid scheme is defined as follows:

“(4)      An arrangement, agreement, practice or scheme is a pyramid scheme if—

  1. a) participants in the scheme receive compensation derived primarily from their respective recruitment of other persons as participants, rather than from the sale of any goods or services; or
  2. b) the emphasis in the promotion of the scheme indicates an arrangement or practice contemplated in paragraph (a).”

Multiplication scheme

A multiplication scheme is different to a pyramid scheme in that the CPA clearly states that it will only occur when the return on investment is 20% above the REPO rate at the date when the person invested into the scheme. A multiplication scheme occurs as soon as the investor is offered, promised or guaranteed returns that are 20% above the repo rate. Multiplication schemes do not have a hierarchical structure like pyramid schemes but generate revenue through repeated or once-off investments of varying amounts by members. The investments are then used to finance the interest pay-outs owed on investments made at an earlier date.

In terms of the CPA a multiplication scheme is defined as follows:

“(3)      A multiplication scheme exists when a person offers, promises or guarantees to any consumer, investor or participant an effective annual interest rate, as calculated in the prescribed manner, that is at least 20 per cent above the REPO Rate determined by the South African Reserve Bank as at the date of investment or commencement of participation, irrespective of whether the consumer, investor or participant becomes a member of the lending party.”

Chain letter scheme

Chan letter schemes require participants to continually recruit more participants in order to start receiving pay outs from their investment. The investment made is a joining fee of sorts. Each new participant joins at the lowest level in the scheme and “move up” by recruiting new members below them. Once a participant reaches the highest level of the scheme they are removed from the scheme.

In terms of the CPA a chain letter scheme is defined as follows:

“(5)      An arrangement, agreement, practice or scheme is a chain letter scheme if—

  1. a) it has various levels of participation;
  2. b) existing participants canvass and recruit new participants; or
  3. c) each successive newly recruited participant—
  4. i) upon joining—
  5. aa) is required to pay certain consideration, which is distributed to one, some or all of the previously existing participants, irrespective of whether the new participant receives any goods or services in exchange for that consideration; and
  6. bb) is assigned to the lowest level of participation in the scheme; and
  7. ii) upon recruiting further new participants, or upon those new participants recruiting further new participants, and so on in continual succession—
  8. aa) may participate in the distribution of the consideration paid by any such new recruit; and
  9. bb) moves to a higher level within the scheme, until being removed from the scheme after reaching the highest level.”

Characteristics of these schemes

The characteristics of these schemes include:

  • No product or product of little value being purchased by new participants.
  • A hierarchical, pyramid shaped structure where the members at the top benefit the most and the members nearer the bottom only benefit after the “top dogs” have been paid.
  • The incentive to recruit members is to ensure that a pay-out to the existing member recruiting and not in order to sell them a product of value.
  • The main source of income generated is from the introduction of new members and not through investment or other forms of wealth creation.

Outcomes of these schemes

  • The possible outcomes to these schemes:
    • The founding member or principal of the scheme gathers as much money from the scheme as possible and disappear with the funds.
    • The scheme collapses due to its “weight”. The scheme starts to lose speed as fewer members join resulting in a lack of funds available for existing members.
    • The scheme is unveiled as a pyramid or other prohibited scheme and authorities put a stop to the scheme.

Can members claim money back?

It is possible for the investors in pyramid schemes to attempt to claim their money back once the scheme collapses, however, chances of successfully retrieving all the funds you have invested are slim. Once the schemes collapse they are liquidated, as the scheme is declared insolvent. The liquidators will ensure that they receive their fee along with as many creditors of the scheme getting paid at least a portion of their outstanding debts leaving little to nothing for the victims of the scheme.

Prosecuting pyramid and related schemes along with their founding members is a major concern and problem faced by the South African Reserve Bank. Investigations into the schemes can take years to complete, depending on the complexity of the scheme. Another catalyst to the extended investigation period is the fact that the initiators of the schemes tend to disappear with investor funds as soon as the scheme starts showing signs of collapsing or gains too much attention from authorities.

The Companies Act, 2008, provides a mechanism for placing financially distressed businesses under “business rescue proceedings”. These proceedings are also often a barrier to investigation by the Reserve Bank and further prosecution.

Consequences for the person starting the scheme

Charges that could be laid against the founders of such schemes, as well as any persons involved in the schemes who should have noticed that fraudulent schemes were taking place include: theft, fraud, reckless trading, forgery and uttering, tax evasion, contravention of the Gambling Act, contravention of the Companies Act and contravention of the Banking Act.

Things to look out for

  • Interest rates that are “too good to be true” and much higher than interest rates offered by established institutions, such as banks and investment portfolios.
  • Promises of a guaranteed return on investment in a short amount of time.
  • The requirement to recruit additional members.
  • No link to established organisations.
  • When the investment does not disclose how returns are made.
  • The institution running the scheme is not licensed as a financial services provider with the Financial Services Board.
  • Where there is little or no information or an official mandate or documentation relating to the scheme.

Recent developments

The National Consumer Commission (NCC) have over the last 6 months launched investigations into the business practices of various companies, based on suspected pyramid scheme practices and other prohibited practices in terms of the CPA.

One example is the DiPESA scheme that was investigated earlier this year, but the investigation indicated that the business was in fact legitimate as it did not meet all the characteristics of any of the prohibited schemes in terms of the CPA.

Conclusion

In economically distressed times, companies may consider and initiate different kinds of business opportunities. It is important to understand that when considering your business model, prohibited practice in terms of consumer laws like the CPA, should be considered as a first step.

When considering pyramid and other related schemes it is also important to also take into account section 38 of the CPA, which regulates referral selling. The prohibited referral selling model aims to protect consumers against “unfair” marketing practices in terms whereof the consumer would agree to enter into an agreement (and pay for) goods or services on the basis that the consumer could possibly receive a benefit after entering into the agreement.

The regulatory vacuum of equity crowdfunding in South Africa: time bomb or open door?

The concept of crowdfunding has been making ripples in startup funding talks over the last few years, but as with any new phenomenon, it is interesting to consider whether this concept is as new as we think it is. If not, why did it not work before and what is different now? Before we start, for those of us who have been “trekking” in the Andes for the last ten years and don’t know what crowdfunding is, firstly: lucky you; and secondly: crowdfunding is when someone raises money for a project from a large number of people, promising something in return for the funding.

Contrary to word on the street, the concept of crowdfunding is not as new and shiny as we might think. In 1713, Alexander Pope decided to have Homer’s Iliad translated into English, which took translators more than five years and no doubt numerous sleepless nights. To fund all of this, Pope offered 750 people the opportunity to each pledge two gold guineas in return for a mention of the donation in an early edition of the translation. There are numerous other examples of crowdfunding over the last three centuries and the emergence of social media has brought with it endless possibilities when it comes to funding projects, businesses, adventures, charities, bravery or silliness – through crowdfunding.

One form of crowdfunding that has been in the limelight since it was first used by the U.S. based Grow VC Group in 2009, is equity crowdfunding. This is a form of investment crowdfunding (the other being debt crowdfunding), in terms of which an investor would fund a company or project in return for equity (i.e. shares) in the company that owns the project when it takes off. If you’re familiar with angel investment, this is a similar concept, but implemented on a bigger scale and with even less control by investors over investee companies.

This all sounds pretty exciting, especially if you’re good at creating new ideas and getting people excited about them. According to a report by Massolution, global Crowdfunding is expected to exceed venture capital as a funding mechanism for early stage companies in 2016. However, there are a few thorny issues around equity crowdfunding that might just spoil the party – none more so than the regulation of these transactions.

Since 2011, financial regulators in the UK, USA and elsewhere in the world have been trying to find ways to regulate equity crowdfunding without turning out the lights completely. Until recently, crowdfunding was allowed in these countries, as long as benefits other than equity are offered to the public. The essence of the conundrum for regulators when it comes to equity crowdfunding is that there needs to be a balance between the need to protect public investors and the need to promote capital raising activity that could stimulate the economy. This explains why all forms of crowdfunding are illegal in countries like Singapore. In 2013 the U.S. Securities and Exchange Commission (“SEC”) proposed a 500 page set of rules to regulate the offer and sale of securities through crowdfunded private offerings, which are now set forth in Title III of the “Jumpstart Our Business Startups (JOBS) Act”. As the rest of the world usually follows suit, we need to use this as an indication of what lies ahead from a South African perspective and very importantly, consider how these regulations were received worldwide.

The responses to the regulatory framework set in the USA and UK have been varied: some say the regulation is too strict; while others say that the regulation falls short of addressing the level of risk involved when offering equity to the public in this manner. One thing is certain, the regulation is likely to take the joy out of the process for managers of most equity crowdfunding platforms and it seems to have been designed this way. Michael Piwowar, the U.S. SEC Commissioner, told the Market Mogul that there are traps hidden in the new regulations which are expected to burden small investee businesses that don’t keep regulatory compliance as a top priority. However, considering the level of risk of financial fraud that investee companies and investors can be exposed to, extensive disclosure and financial reporting requirements are of paramount importance.

From a South African perspective, there are a few crowdfunding platforms that are starting to make suggestions that they intend to go the equity route. For the moment these initiatives will be clouded by the lack of certainty when it comes to the regulatory framework. What we do know, is that a South African equity crowdfunding platform will be deemed as an “offer of securities to be issued to any section of the public” in terms of section 95 of the South African Companies Act, 2008 (“the Act”). This means that unless the offering of securities falls within one of the exclusions listed in section 96 of the Act (such as “offers to persons whose ordinary business is to deal in securities”), the entity that owns the platform will be required to be a public company. The platform will therefore be regulated by all the disclosure, financial reporting, auditing and general governance requirements regulating public companies in terms of the Act and other financial legislation. Considering the extent of an equity crowdfunding platform’s public presence and risk involved for investors and investee companies alike, this level of regulation is inevitable. Cross-border equity crowdfunding activity will also need to comply with South African exchange control regulations, which may add another hurdle to those aiming to streamline the funding process.

The question is whether the regulation of equity crowdfunding will kill the initiative in its tracks. There is definitely a place for capital raising in this manner in the South African market, but creating a cost-effective platform that addresses the risks involved while still providing a streamlined alternative for capital raising will prove to be no small task.

ADVERTISING LAW – HAVE YOU CONSIDERED THE ASA CODE?

When working on new marketing campaigns and strategies the legal rules and regulations that restrict creative brain-storming are usually last on the agenda. Marketing should be fun! And thinking about the law and possible restrictions will hamper the fun…. These restrictions do however deserve careful consideration at the beginning of each campaign. Do not be that company that receives a complaint from the Advertising Standards Authority.

Advertising law is, generally speaking, a very broad area of law. Specific rules apply depending on the type of product or service you are advertising. However, the overarching piece of legislation for companies to consider when advertising to the public is the Consumer Protection Act 68 of 2008 (“the CPA”), which promotes the advertising of products in a fair and reasonable manner. It also forces advertisers to ensure that no misrepresentation is made about their products. Some of the requirements in terms of the CPA to consider are:

  • Section 29 – requires the marketing of goods or services to be done in a manner that is not reasonably likely to imply a false or misleading representation concerning those goods or services and not misleading, fraudulent or deceptive in any way.
  • Section 30 – an advertisement may not advertise goods or services as being available at a specified price in a manner that may result in consumers being misled or deceived in any respect relating to the actual availability of those goods or services at that advertised price – this is also known as “bait marketing”.
  • Section 32 – if the goods or services are marketed directly to the consumer, further requirements in terms of the CPA must be met, for example: the consumer must be informed in the prescribed manner and form of the right to rescind that agreement (also known as the right to “opt-out”). With direct marketing activities, the Protection of Personal Information Act 4 of 2013 should also be considered.
  • Section 33 – when marketing goods where the consumer will not have the opportunity to inspect the goods that are the subject of the transaction before concluding the agreement (so-called “catalogue marketing”), certain information must be disclosed to the consumer, including: the supplier’s name and address, the supplier’s cancellation and refund policy, the manner in which complaints must be lodged, etc.

In addition to the general CPA provisions, the actual content of an advertisement is regulated through a self-regulatory system with the Advertising Standards Authority of South Africa (“the ASA”) at its head. The Code of Advertising Practice (“the Code”) is the guiding document of the ASA. To read more on the ASA, see http://www.asasa.org.za/.

As a starting point, advertisers must ensure that the content of their advertisements comply with the Code. Depending on the specific product or service being promoted, specific legislation may also need to be considered. For example, in addition to the Code, if you are an advertiser who promotes:

  1. food products – you must consider the Foodstuffs, Cosmetics and Disinfectants Act 54 of 1972;
  2. medicines – you must consider the Medicines and Related Substances Act 101 of 1965 and its related Code of Marketing Practice;
  3. credit products or services – you must consider the National Credit Act 34 of 2005 as it relates to advertising practices by credit providers;
  4. insurance products – you must consider the Short -Term Insurance Act 53 of 1998, the Long -Term Insurance Act 52 of 1998, and/or the Financial Advisory and Intermediary Services Act 37 of 2002, where applicable.

And so the list goes on.

What is considered an “advertisement” in terms of the ASA Code?

Firstly, you will have to determine whether the content of your product or service promotion falls within the definition of an “advertisement” in terms of the Code. The definition reads:

advertisement means, any visual or aural communication, representation, reference or notification of any kind –

  1. which is intended to promote the sale, leasing or use of any goods or services; or
  2. which appeals for or promotes the support of any cause.

Promotional content of display material, menus, labels, and packaging also fall within the definition. Editorial material is not an advertisement, unless it is editorial for which consideration has been given or received.

The word ‘advertisement’ applies to published advertising wherever it may appear. It does not apply to editorial or programming publicity.”

It is common knowledge that each specific social media platform, such as Twitter or Facebook, has its own advertising rules to follow. In South Africa there is currently no legislation aimed at dealing specifically with advertising on social media. It can however be argued that the definition of “advertisement” is so wide and flexible that it could allow for the inclusion of new types of advertising such as websites, SMS’s, emails, and social media posts. Laws and regulations applicable to traditional advertising should therefore also apply to social media advertising. It is expected that the Code will also apply to social media advertising and that complaints about social media advertisements will be considered by the ASA in the same manner as those in more traditional formats.

What are the main aspects of the Code?

Section II contains the “flesh” of the Code which has been interpreted and qualified by numerous ASA rulings. The most obvious content to stay clear of include:

  • Advertisements that contain “offensive advertising” – usually based on sex, religion, race and politics (clause 1). The main question is whether the hypothetical reasonable person would be offended by the commercial.
  • Advertisements that (i) play on fear without a justifiable reason (clause 3.1); (ii) contain any content which might lead to acts of violence (clause 3.2) or illegal activities (clause 3.3); (iii) is discriminatory (clause 3.4); or (iv) contains gender stereotyping or negative gender portrayal (clause 3.5). With some of these prohibitions exceptions to the general rule may apply.
  • Advertisements that contain any statement or visual presentation which, directly or by implication, omission, ambiguity, exaggerated claim or otherwise, is likely to mislead the consumer (clause 4.2.1). Advertising in this context will again need to be considered as a whole, in context and objectively from the viewpoint of the hypothetical reasonable person who is neither overcritical nor hypersensitive.
  • Advertisements that take advantage of the advertising goodwill relating to the trade name or symbol of the product or service of another – also known as exploitation of advertising goodwill (clause 8).
  • Advertisements that consciously copy or imitate the original intellectual thought of another (clause 9).
  • Advertisements that encourage children to do dangerous things, exploit their innocence; encourage them to nag; and sexually exploit them (clause 14).
  • Advertisements that attack, discredit or disparage other products, services, advertisers or advertisements directly or indirectly (clause 6.1). The guiding principle in all comparisons shall be that products or services should be promoted on their own merits and not on the demerits of competitive products (clause 7.4). Comparative advertising is not illegal in South Africa, but certain requirements must be met. For example: “Works faster than our nearest competitor”. The claim makes a factual comparison with the competitor, does not use another’s trademark, and does not belittle the competitor – therefore it will be acceptable as long as it is true.

Mine is better than yours, or is it?

The intention behind clever marketing campaigns is, in essence, to make the product or service “stand-out”. To achieve this, advertisements often contain short and memorable phrases such as “Fastest in Cape Town” or “Best Boerewors in the World”. Such slogans have led to a number of complaints to the ASA. Probably the most often cited clause in such complaints is that of “substantiation” – clause 4. In short, the requirement of substantiation requires an advertiser to hold in its possession, before an advertisement is published, documentary evidence to support claims that are capable of objective substantiation. For example: if an advertiser claims that his transportation service is the “Fastest in Cape Town”, the advertiser must hold proper independent substantiation for the claim he is making if the claim can be objectively substantiated (meaning, if consumers think that there is some evidence behind the claim the advertiser must hold such evidence).

Things that are not capable of objective substantiation include “puffery”, which is not illegal in South Africa. Puffery refers to matters of opinion or subjective assessments where it is clear that what is being expressed is an opinion which is not likely to mislead consumers about any aspect of a product or service (clause 4.2.2). The ASA has previously held that the phrase “Best Boerie in South Africa and probably the world” is clearly an exaggerated claim and would be understood by consumers to be an expression of opinion rather than fact, therefore it constitutes acceptable puffery. However, if the claim changes to “the most sought after boerewors brand in South Africa”, the claim becomes capable of being objectively substantiated and the advertiser must hold evidence to that effect.

It is therefore important for advertisers to distinguish between claims that are capable of objective substantiation and those that will merely be regarded as puffery. Previous rulings of the ASA provide particularly useful guidance in this regard. For example, in Complete maintenance dog food / montego feeds / 18193 / 2011 the advertisement claimed that the particular product was “excellent value for money”. The ASA was not convinced that the hypothetical reasonable person will regard the claim to be an objectively substantiable comparative claim. The claim was rather seen as a matter of opinion, therefore there was no contravention of clause 4.

Conclusion

As the industry moves away from traditional media to digital media, advertising law faces new challenges. The vast amount of rules to consider, depending on the product or service being promoted, may further complicate matters. The Code should be every advertiser’s starting point. The Appendices to the Code contains industry specific rules that should further be considered. For example: alcohol advertising (Appendix A), advertising of collective investments (Appendix H), food and beverage advertising (Appendix J), etc. In addition to the Code and its Appendices, further laws regulate the advertising practices of particular products such as foodstuffs, medicine, etc. Consumer legislation adds to the advertising law maze and requires all advertisers to comply with the CPA. The Code and related laws should indeed be recognised as an important part of any company’s compliance assessment when deciding to advertise products or services to the public.

Companies Act, 71 of 2008 Series Part 4: Board meetings

Introduction

The Companies Act, 71 of 2008 (“the Act“) expressly provides that the business and affairs of a company must be managed by or under the direction of the board of directors (“the Board“), which has the authority to exercise all of the powers and perform any of the functions of the company. This general authority of the Board is curtailed by other provisions of the Act and may also be limited in terms of a company’s Memorandum of Incorporation (“MOI“). Following on from our previous article that dealt with shareholders’ meetings, this article explains the purpose and importance of meetings of the Board by deconstructing them under three basic questions: “Why, When and How?“.

Why?

The directors of a company are required to exercise their powers to ensure effective management of the company by passing resolutions at meetings of the Board. These meetings must be properly convened – meaning that notice of the meeting must be given to each of the directors and a quorum must be present before any meeting may commence or any matter may begin to be considered. See “How?” below for more information regarding the notice and quorum requirements.

Given that directors hold a fiduciary position to exercise duties of care, skill and diligence towards the company, to act in the best interests of the company and not their own financial interest (as opposed to shareholders who are entitled to act in their own self-interest), Board meetings are subject to far less regulation in the Act than shareholders’ meetings. As directors are expected to have a level of qualification and experience, the Act is not overly prescriptive with regard to the manner in which Board meetings are convened and administered.

When?

A Board meeting may be called at any time by a director of the company who is authorised to do so by the Board. In addition and subject to the provisions of the company’s MOI, which may specify a higher or lower number of directors, a Board meeting must be called if required by at least 25% of the directors (where the Board has 12 or more members), or at least 2 directors (where the Board has fewer than 12 members).

How?

Notice:  The Act provides that the form of notice to be given to directors and the notice period may be determined by the Board in its discretion. The further relevant provisions are as follows:

  • notice must be given to all directors, otherwise a Board meeting may not be convened;
  • the form and notice period for giving the notice as determined by the Board must comply with any provisions of the MOI or rules of the company dealing with Board meetings;
  • if all the directors of the company acknowledge actual receipt of the notice, are present at the meeting, or waive notice of the meeting, the meeting may proceed even if the company failed to give notice of the meeting, or if there was a defect in the giving of the notice (unless the MOI provides otherwise); and
  • where no specific time periods are prescribed in the MOI for the calling of a Board meeting, fair and reasonable notice must be given to each director.

Quorum:  The default quorum for a Board meeting is the majority of directors, unless the MOI states otherwise. If a director has a personal financial interest (i.e. a direct material interest of that person of a financial, monetary or economic nature, or to which a monetary value can be attributed) in a matter to be decided at a Board meeting, section 75(5) of the Act sets out the steps that an interested director must take in such situation, namely, the director:

  • must disclose the interest and its general nature to the Board before the matter is considered at the meeting;
  • must disclose any material information relating to the matter and known to the director to the Board;
  • may disclose any observations or pertinent insights relating to the matter to the Board if requested to do so by the other directors;
  • must leave the meeting immediately after making any relevant disclosure;
  • must not take part in the consideration of the matter; and
  • must not execute any document on behalf of the company in relation to the matter unless specifically directed to do so by the Board.

While a director is absent from a meeting due to following the above process, he / she will be regarded as being present for the purposes of determining whether a quorum is present, but will not be regarded as being present at the meeting for the purpose of determining whether a resolution has sufficient support to be adopted.

Voting:  Each director has one vote on a matter before the Board and a majority of votes cast on a resolution is sufficient to approve the resolution, except to the extent that the MOI provides otherwise. In addition, in the case of a tied vote, the chairperson of the Board will hold a casting vote only if he or she did not have or did not cast a vote initially, but in any other case, the matter being voted on will fail (unless the MOI provides otherwise).

Minutes and resolutions:  A company must keep minutes of its Board meetings in order to verify the business that was discussed and resolved at the meeting. The minutes must include every resolution adopted by the Board and any declarations given by notice or made by a director regarding the director’s financial interests in any matter. Resolutions adopted by the Board must be dated and sequentially numbered and are effective as of the date of the resolution, unless the resolution states otherwise. Every company must maintain the minutes of all meetings and resolutions of directors for a period of 7 years after the date of each meeting or the date on which the resolution was adopted. Furthermore, these records must be accessible from the company’s registered office or another location within South Africa (by filing a notice setting out the alternative location).

Electronic communication and written resolutions (round robin resolutions)

Except to the extent that the Act or MOI provides otherwise, Board meetings may be conducted by electronic communication, provided that the electronic communication allows all meeting participants to participate reasonably effectively in the meeting and to communicate concurrently with each other without an intermediary.

The Act also provides that any decision that could be voted on at a formal meeting of the Board, may instead be adopted by written consent of a majority of the directors, which consent may be given by that director in person or by electronic communication. Decisions may only be passed in this manner if every director has received notice of the matter to be decided. Such written resolutions have the same effect as if they had been approved by voting at a formal meeting of the Board.

Our highly-skilled company secretarial and corporate governance unit here at Dommisse Attorneys will be glad to assist you with any queries or assistance you may need with regard to the convening and administering of your company’s Board meetings.

Legal Services for Disruptive Technology Start-ups

We’ve been lucky enough to work with a number of exciting South African start-ups over the past few years, and we often find ourselves contemplating our role in this sphere, particularly in the disruptive technology start-up world. When a client walks into a first consultation describing their business as the “Uber for “X”” or the “Ebay for “X”” or a “Fintech Start-up”, it is the natural tendency for legal professionals to classify the client as a “private company” and service its legal needs in the same way they would the needs of any other private company running a business. And certainly, there will be times when this approach is the right one, however, we believe that there are a few ways in which legal professionals can distinguish their service offering for innovative or rapid-growth technology start-up companies, in the same way that they would tailor their services for individuals, or larger businesses established in heavily regulated industries. If you are a founder or investor in a technology start-up who is dreading the need to make a call to attorneys or other legal service providers, this article may be for you.

In the last few years there has been a fair amount of commentary in business forums on digital disruption, and how technology is changing the way we interact with our service providers, friends and customers. A few well-known examples are Uber (taxi company that owns no taxies), AirBnB (accommodation provider that owns no real estate), Slack, Skype, Wechat (communication providers that own no telecoms infrastructure), Google and Apple (software vendors that don’t develop the majority of the apps they sell), Kickstarter (funding provider that provides none of the funding), Twitter and YouTube (media and content providers who don’t produce their own content) and Amazon (retailer with no customer-facing retail premises). These companies have rapidly expanded nationally and internationally whilst providing sometimes conventional service solutions in an unconventional way. Despite this, legal services have not innovated to the same extent, or at all. We are therefore faced with the question of whether and how legal services should be forced to adapt for the disruptive technology start-up.

We believe there are a number of ways in which a legal service offering for this kind of company can be distinguished. We would point to the below basic principles underlying a legal service which can add value to most technology start-ups:

  1. A knowledge of, and willingness to embrace, technology in general as well as the specific service offering of the client. Your legal service provider should communicate with you using your preferred communication method (download Slack, call using Skype), be willing to use Google Docs or Dropbox for sharing documents if that’s what you need, or be a part of your Trello board for task management. Even more important, your legal service provider should understand what you mean when you talk about electronic payments, cryptocurrency, application program interface, app development, e-commerce or any other technology reference and how these pertain to your business. If they don’t, then they should be willing to invest in understanding your business so as to properly contextualise their services.
  1. A willingness to innovate, adapt quickly and add real value. The difference between a successful technology start-up and an unsuccessful one can often come down to timing – a delay of a few months can mean that your competitor captures the market while you are still debating whether or not to register your brand name as a trademark. Your legal services provider needs to move quickly and be willing to think outside the box. Your crowdfunding, cryptocurrency or renewable energy startup requires an innovative legal approach in light of the occasional lack of proper regulation regarding these business models, and perhaps bespoke nature of the actual business.
  1. Transparent costs. Whether you are bootstrapping your technology start-up or operating on funding, you will inevitably need to watch your expenses carefully, especially in the pre-revenue stage of your growth. By making fees and costs transparent and easy to understand, you will be able to budget appropriately and you won’t get an unpleasant surprise at the end of the month when the invoice arrives. Legal services can be expensive, however they can also add a great deal of value in the long-run, provided instructions and expectations are managed carefully.

With the above basic principles in mind, there are a few specific areas in which your legal services provider can add serious commercial value to your business. If you have been asking yourself why you would ever need a commercial legal service provider – we find that the following are the areas in which we most often assist our start-up clients:

  1. Corporate Structure: You will need to set up the company or other entity which you will use to operate your business, set up the best possible capital structure (ownership structure) for that business, and make sure that everything is executed properly. It’s all fun and games until you realise that you never actually issued share certificates to your investor shareholders, over-subscribed on your authorised share capital and are faced with a personal liability risk.
  1. Funding: If you have found an investor willing to fund your endeavour, then that is often a big victory in and of itself – it will be important to structure that investment properly and carefully to ensure a mutually beneficial investment relationship that ticks the box for most of each party’s requirements and hopes for that investment. Your legal advisors should advise you on all available funding options (as well as the risks associated with these), whether this be through conventional equity, loan and hybrid instruments or perhaps more ‘out-there’ funding options like convertible notes, SAFE and KISS instruments, or crowdfunding.
  1. Intellectual Property: Many companies speak to ‘their IP’ without having much idea of what is contemplated by that IP. Your legal service provider should be able to assist you to assess what your company’s intellectual property is, and how best to protect it, whether that be through registration of a trade mark, maintaining a trade secret, or licensing rights appropriately to third parties.
  1. Employment: You may grow to a size where you have employees and contractors – we strongly recommend that these relationships be governed by employment or contractor contracts which (amongst other things) exclude any right that these employees/contractors have to the intellectual property that they develop whilst they are in the company’s employ. We also find that in the technology start-up there will more often be a real need to incentivise founders and key employees to remain with your business and add value with ownership rights, through an Employee Share Ownership Plan or other means.
  1. Operational: You may require website terms and conditions and privacy policy, advise on how to monetise your product, terms and conditions for the supply of your particular service (which carefully craft the ambit of the relationship and carefully limit your liability in terms of this relationship), as well as other affiliate relationship terms. These may be bespoke contracts or relatively standard written agreements, but they should always be crafted with proper knowledge of your product/service offering, and in line with your company’s objectives and culture.
  1. Expansion: One of the advantages of a technology start-up can be the scalability of the business model. You should have legal or other advisors who are capable of advising on the best ways in which you can export your services/product to other jurisdictions, and/or the cross-border structure that may work for you within the bounds of exchange control, whilst maximising tax efficiency and profit extraction in a responsible way.
  1. Exit: Whether you are a founder or an investor, you may at some point want to exit your start-up, and this should always be carefully handled, whether you exit through an IPO, acquisition, merger, or simply by sale to your fellow shareholders, everything from the due diligence through to final signature should be guided by each party’s goals for that transaction.

Whether or not the technology bubble eventually bursts, we believe the nature of doing business will (and should) be irreversibly changed by technology and automation, perhaps similarly to the way in which the industrial revolution irreversibly changed manufacturing and supply of goods. It is far more comforting for those in the legal services industry to stick with what they know, and follow the fork in the road that is well-trodden, however you as the investor or founder of a technology start-up have a right to legal services that are tailored to your specific needs, and should brief legal professionals who are brave enough to meet these needs. The nature of business is changing – your legal advisors need to keep up.

We’re hiring!

  1. COMPLIANCE AND REGULATORY ATTORNEY

Description of Work: An experienced attorney in the Regulatory and Compliance fields with an in-depth knowledge and understanding of the subject matters and who has matured to work independently with clients on compliance projects and provide opinions and advice on the interpretation of law.

Requirements:

  •  3 – 5 years Regulatory and Compliance experience in the following fields:
  • Protection of Personal Information Act 4 of 2013,
  • National Credit Act 34 of 2005 (as amended),
  • Consumer Protection Act 68 of 2008,
  • Electronic Communications and Transaction Act 25 of 2002,
  • Financial Advisory and Intermediary Services (FAIS) Act 37 of 2002 and Long Term and Short Term Insurance Acts.
  • The candidate will be required to run compliance projects and / or provide legal services and advice on any queries relating to the above legislation.
  • As such an in-depth knowledge and interpretation of the legislation will be required.
  • The candidate should have the ability to work independently on matters, but will also be required from time to time to work in a team on bigger projects and manage more junior team members.
  • Experience in managing client relationships and dealing with clients directly.
  • Accept responsibility and be accountable.
  • Excellent drafting skills and analytical thinking as a considerable percentage of time will be spent on opinion work.
  • Advanced computer knowledge with emphasis in MS Word, MS Excel and MS PowerPoint.
  • Excellent communication, reporting and interpersonal skills.
  • Ability to work within pressurized environment and adhere to tight deadlines
  • Quality of work: accuracy, minimising level of review required by manager
  • Organisation: being meticulous in planning & prioritising work tasks
  • Problem solving: anticipating and identifying problems, pro-actively solving them.

Responsibilities:

  • Client meetings and interface
  • Work with in-house counsel on compliance projects
  • Run and manage compliance projects independently
  • Writing opinions and advice notes on the interpretation and application of the law to the client’s particular business operations
  • Review agreements, terms, policies and other company documentation from a compliance point of view
  • Presenting training courses (face to face training)
  • Drafting and preparing training material
  • Manage junior staff members of the team

 

Remuneration: Market related – depending on skill level and experience
Commencement: 1 October 2015 or as close as possible

Note: The Candidate must have their own transport.

Recent Adventures

Members’ voluntary winding-up

We recently assisted one of our clients in the winding-up of two of their solvent companies as part of a restructuring process, and we thought that it would be worthwhile sharing our experience with the rest of our clients by identifying some of the key features involved in such a procedure.

The process in winding-up a company voluntarily, involves both the office of the Master of the High Court (“the Master“) as well as the Companies and Intellectual Property Commission (“the CIPC“). Before the procedure can commence with the CIPC, the company to be wound-up must set security with the Master for the payment of the company’s debts or if the company has no debts, to obtain the consent of the Master to dispense with the need of furnishing security. The Master will require the following documents before the consent to dispense with security can be given –

  • a sworn statement by a director of the company authorised by the board, stating that the company has no debt; and
  • an auditor’s certificate stating that, to the best of its knowledge and belief, the company appears to have no debt.

Once the consent of the Master has been obtained, the process is then initiated with the CIPC where the following documents will need to be furnished –

  • CoR 40.1: Notice of Special Resolution to Wind-up a Solvent Company;
  • written resolutions of the shareholders of the company authorising the winding-up of the company and the appointment of the liquidator;
  • Master’s consent to dispense with security; and
  • originally certified identity document of the authorising director.

The service turn-around time for the CIPC to change the status of the company to “in liquidation” can take anything between 2 to 4 weeks. Once the certificate of confirmation has been issued by the CIPC, the next step would be to approach the Master in order to appoint the liquidator. The Master will require the certificate of confirmation together with the following documents –

  • proof of publication in the Government Gazette, of the notice to wind-up the company voluntarily and to appoint the liquidator; and
  • affidavit of non-interest deposed by the liquidator.

Once the liquidator is appointed, the powers of the directors will cease to exist and the liquidator will generally be given a free hand to wind-up the affairs of the company.