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.

Attention Credit Providers: Affordability Assessment Regulations Suspended

The Department of Trade and Industry published a notice on 21 August 2015 (GG 39127) confirming the suspension of the affordability assessment regulations under the National Credit Act 34 of 2005 for a period of six calendar months effective from 13 March 2015. The notice further indicates that until the suspension is lifted on 13 September 2015, the affordability assessment guidelines that were published by the National Credit Regulator in September 2013 will be enforceable.

The affordability assessment regulations came into effect on 13 March 2015 which makes it mandatory for credit providers to “take practicable steps” to assess the consumer’s discretionary income in order to determine whether the consumer has the financial means and prospects to pay the proposed credit instalments. The National Credit Act prohibits credit providers from granting “reckless credit”. A credit provider must not enter into a credit agreement without first taking reasonable steps to assess the proposed consumer’s existing financial means, prospects and obligations (amongst other things). If this is not done, the credit agreement could be declared as reckless which gives a court or tribunal the power to either set aside the consumer’s rights and obligations under that agreement or suspend the force and effect of that agreement.

The affordability assessment regulations in essence require credit providers to consider the following before granting credit:

  • three months bank statements or payslips;
  • a consumer’s credit profile as contained at a credit bureau;
  • calculation of consumer’s necessary expenses such as accommodation, transport, medical, education, food, water and electricity (table provided in the regulations to ensure that consumers are not understating their expenses);

The publication of the notice seems to be somewhat superfluous. There is only a little over 3 weeks left for credit providers to implement the necessary “system changes” since the date of publication of the suspension notice was on 21 August 2015 and the date upon which the suspension will be lifted will be on 13 September 2015. After the suspension is lifted the affordability assessments will become compulsory and enforceable by the National Credit Regulator. This probably does not give credit providers the necessary time to comply which was their original grievance with the regulations. Safe to say, credit providers should finalise their system changes at this stage in order to ensure compliance with the regulations before the suspension is lifted.

 

Q&A with the co-founders of WooThemes, Mark Forrester and Magnus Jepson

Following on from the “featured client” insert which appeared in our May newsletter, we managed to pin down the co-founders of WooThemes to hear what they had to say about their experience working with our law firm, especially in light of the “WooMattic” transaction, as it has affectionately come to be known among the transaction team.

Why is it important for a law firm to build up a sound knowledge base about their client’s products and industry?

WooThemes is surrounded by an interesting tech ecosystem – the open source software world. Selling commercial software products for an open source platform comes with its fair share of niche license legalities and grey areas, especially around the GNU General Public License.

This, coupled with a good grasp of our intellectual property, where it is being generated, and an understanding of our international business is hugely important context for our legal team to make well informed recommendations.

What core skills should a law firm have?

Beyond an understanding of our ecosystem, it’s important for a law firm to have a genuine interest in the open source philosophy and legalities and to further believe in the values we operate with and carve out commercial protection around them. At WooThemes we always gravitate towards start-ups and more specialist companies with a hunger for catering for our niche requirements and providing customised solutions. Relationships matter to us, so it’s been great having a personal connection with Dommisse Attorneys and the specific attorneys dedicated to us. Two skills that are crucial are diplomacy when dealing with different parties and to be honest and upfront when navigating an area they are not particularly well versed in and willing to connect you with a network that is.

Communication is always a potential pitfall; so how can attorneys ensure that they communicate in a way that fits with your company’s style?

We’re a distributed company of remote workers, with co-founders on different continents. We thrive on communication systems like Slack, Google Hangouts and Skype to connect with our team of 55 people spanning 18 countries (and a lot of different time zones). Working with lawyers who understand how we communicate and are willing to adopt our processes has been refreshing. It’s also encouraging to see legal firms willing to adapt and embrace the change that the Internet brings.

What is the most valuable role that a law firm can play in a significant transaction, like the sale of WooThemes to Automattic?

Given that we were ill equipped in the areas of investments, mergers and acquisitions and due diligences, a significant role for our attorneys to fulfil was to facilitate and provide expert guidance to us, as well as maintaining an objective view of the deal and being able to help guide the negotiations. A role all start-ups’ attorneys’ should be able to fulfil is to humanise legal jargon and take the pain out of digesting lengthy contracts, highlighting the important items, whilst being willing to make judgements on other more minor points based on their understanding of the client (reading the client’s workloads and stress levels).

Just as important as the acquisition, is to ensure a healthy pace through a nerve wracking due diligence, whilst ensuring no areas are left uncovered. In a transaction of this nature, ensuring over-communication, especially when dealing with so many different attorneys on the other side of the transaction, was vital.

What is the worst way a law firm could behave in the course of a deal like this?

When it comes to dealing with a company like WooThemes, a crucial failure would be making assumptions that the client has read all the legal contracts in the same detail that the law firm has! Also, not being willing to adapt to the communication needs of the client or the acquirer can put the transaction at risk. Trying too hard to impress the wrong client by losing focus of your client’s needs, as well as taking a long time to communicate, both to the client and to the acquirer, could have equally severe consequences.

One of the most important things to remember is that when it’s crunch time, don’t rush through the all-important last terms and amended agreements, and worry about missing a deadline rather than ensuring the client has all the information they need to make the best decision.

Introspection 101 for entrepreneurs: how attractive is your company to prospective investors?

All businesses start in exactly the same way: someone has an idea, then that person (and others) add money, resources, considerable effort and more ideas to refine the idea, create value and hopefully turn R1 into R2.

We were recently requested to address the participants at the 2015 Net Prophet Sparkup! event, as to the most fundamental legal challenges faced by start-up entrepreneurs. As the event is an exciting entry for some into the world of investor-entrepreneur relations, we spent some time discussing the manner in which investors measure the prospects of a start-up company.

We all know that in the real world, all great ideas are not created or developed equally well. Two entrepreneurs might have very similar business ideas, but the one’s name eventually shines brightly in Forbes magazine, while the other ends up among the sequestration notices in the local newspaper (with apologies to Henry Ford, Donald Trump, Walt Disney and the many more who played in both teams).

At Dommisse Attorneys, we have a passion for assisting our entrepreneurial clients in turning their sharp ideas into tangible value. On the other side of things, we also strive to see our investor clients adding real value to investment opportunities…the right opportunities! In light of this, we are in the perfect position to provide entrepreneurs with a very realistic overview of the things that make one company more attractive to investors than the next.

Although this article is certainly not the alpha and omega on this topic, we thought it well to pen down our thoughts on some of the most important legal factors that investors usually consider before taking the leap.

  1. Intellectual property

The number of tech startups that have emerged in recent years highlights the importance of intellectual property (IP) as an asset from investors’ perspectives. Most importantly, investors will want to know what measures have been taken to protect a startup company’s IP. While the company can patent certain aspects of its IP (if the IP is new, a result of an inventive step taken and useful in commerce), there might be more effective ways to protect IP. If the company has IP that is not in the public domain, which the company can keep secret even while using the IP in the market, then it might be more appropriate to protect the IP as a trade secret by imposing certain protective measures. This does not require a formal registration process and might be a very cost-effective strategy to apply. If you want to explore the option of patenting an idea, it is very important that you do not to start using IP in the market before submitting your patent application, as the idea will then lose its novelty and no longer be patentable.

In most cases it will also be important to determine how the company is planning to commercialise its IP, for example, by means of licenses or franchise agreements. It is therefore fundamentally important to have a clear idea of what your company’s essential IP is and how it will be protected, developed and commercialised.

  1. Capital structure

The manner in which the ownership of a company is structured, is often referred to as its “capital structure”. While investors are likely to require you to simply rectify anything they don’t like, it is important to think carefully about the shareholding proportions when issuing shares to founders. This may be extremely difficult early on in the company’s growth cycle. Be careful when issuing shares to some shareholders for cash contributed, while issuing shares to others for services rendered to the company. While both are acceptable, the net effect can be quite surprising if you don’t consider the tax implications (i.e. that shares issued for services rendered are subject to revenue tax) or have an inaccurate view of the company’s valuation. Further to this, a company is not allowed to issue shares upfront for any deferred performance, as things can then become messy when that performance is not measurable and the parties dispute whether performance was completed or not. For this reason shares that are issued in return for any deferred contribution should be held in escrow until performance is completed. Investors do not want to be dragged into future disputes regarding the founders’ shareholding and frankly, this is the crux of a founder’s hope to get monetary returns for hard work, so make sure that the initial subscription process and terms are handled correctly.

  1. Liability

There are a million and one ways in which any company can be held liable for the loss or damages incurred by others. This may be as a result of defective products, injury caused to end users, sub-standard performance, technology glitches, etcetera. While there is no point in lying awake at night panicking about this, we understand that it can be very concerning and there are ways in which to curb a company’s risk from a legal perspective. Investors will be more comfortable investing in a company that knows exactly what its risks are and has found ways in which to carefully protect itself against exposure in this regard.

This may mean simply taking careful aim when determining the company’s “terms and conditions” with customers, but also to implement other measures like holding all the company’s assets in one entity and using a second entity as the “operational company”. This sounds fancy, but can be a very effective way to make sure that the essential business assets are not exposed to potential claims of creditors. Another option, especially for companies with more than one unrelated technology or product offering, is to hold each of these in a separate entity. This is beneficial to ring-fence each entity’s risk, but also gives prospective investors the opportunity to only invest in one technology or product offering. This level of flexibility might be very attractive for investors, especially the clever ones that insist on investing only in products that they understand.

  1. Funding

The company’s funding history is quite important and can be detrimental for chances of sourcing investment in the future. If the company has obtained too much debt funding or funding on risky terms in the past, investors will flag this as a massive risk and for that reason be reluctant to invest in the company regardless of how promising the business looks otherwise. For this reason it is important for founders to not only maintain a healthy debt : equity ratio, but also to make sure they understand the effect and terms of funding obtained.

  1. Continuity

Investors will also want to know that the founders will be prevented from exiting the company prematurely, especially if founders have essential skills required to grow the company to the next level. In terms of the company’s constitutional documents founders are often bound to vesting provisions, which determine that founders’ shares vest in the founders gradually over the first few years of the company’s growth cycle. This means that founders are prevented from selling their shares in the company before the lock-in period expires. In addition to that, founders can often be expected to “earn out” when they sell their shares in the company. This enables the company to replace the exiting founder with a new person in that role and complete the required handover process. The investor therefore knows that a founder’s exit will not derail the company. It is important to implement these protective mechanisms sooner than later in the company’s life cycle. Even if a first round of investors do not require it, the experienced investor most certainly will, but if the new round of investors see that there is already a vesting period implemented, they are unlikely to request that the vesting period be extended.

  1. Key management

Inexperienced entrepreneurs often struggle to differentiate between ownership and management of a company. The ownership is one element, which is covered in the constitutional documents of the company, but it is crucial to also understand the importance of regulating the founders’ roles as directors of the company. Founders and other key employees should have adequate agreements with the company, in terms of which they are restrained from competing with the company when they resign, assign all IP rights (to inventions made while working for the company) to the company and other terms to determine the performance measures to be applied to the person’s services to the company. These agreements should be seen in a positive light, as they clearly define what the company expects from each executive, even before investors come aboard.

In the same light, it is also important to consider incentivizing key employees in the company by, for example, implementing an employee share option pool (ESOP), which is basically a scheme that rewards key employees for their hard work by giving them the option to buy shares in the company. A manner in which to do this is by giving employees the option to subscribe for shares in the company at a fixed strike price, even if the valuation of the company increases. This is a very effective way to inspire employees to apply their best efforts to ensure that the company succeeds. Investors love to see an ESOP in place even before they invest, because that means the key employees are more committed to the cause. Another more obvious reason, is that if a limited amount of shares have already been allotted to an ESOP, the investor will not be diluted when it eventually happens.

While there are many more aspects to consider when getting your company in shape for investors, the ones mentioned above are some of the most crucial ones, at least from a legal perspective.

We are currently working on a Startup Legal Playbook, which we will soon make available on our website as a free document to guide entrepreneurs through the early years with more details on the above, as well as other challenges in this regard. In the meantime, please feel free to contact us should you have any queries, or require our assistance.

New NCA regulations

The last year has certainly stirred the credit industry, with consumers and credit providers struggling to keep abreast of latest developments, dos and don’ts. Various credit providers have also been called upon to defend their credit practices, by the National Credit Regulator and consumers alike.

The National Credit Amendment Act was assented to on 19 May 2014, and new draft regulations were published on 1 August 2014, both of which contain significant changes to credit law as we know it, with new procedures, factors and requirements in general.

On Friday 13 March 2015, the mentioned Amendment Act and regulations were finally announced to be effective with immediate effect. The regulations however, contain numerous changes to the draft that saw the light in August last year, but the spirit and intention thereof remains. These regulations, in contrast with previous (2013) guidelines, for example require consumers to provide credit providers with authentic documentation to perform affordability assessments. Affordability assessment processes are also regulated more strictly, with defined items to be included in the assessment of income and expenditure. Reference is also made therein to obtain proof of income, even if a consumer does not receive formal payslips.

It is expected that most credit providers’ business models will have to change in line with these new requirements on an urgent basis.

For a detailed discussion on how these amendments may impact on you or your business, kindly contact our offices.

Introduction To The Exchange Control Rules And Regulations In South Africa

By: Kirsten le Roux and Tanya Lok

As a point of departure, it is important to understand why the Exchange Control Regulations of 1961 (promulgated in terms of the Currencies and Exchanges Act, 9 of 1933) (“the Regulations”) exist and how they apply to any person or corporate entity in South Africa, who/which intends interacting or doing business with any other person or entity abroad. To define their existence in the simplest terms, the purpose of the Regulations is to regulate the flow of funds into South Africa from external or foreign sources (non-SA resident natural persons or body corporates), as well as the outflow of funds by SA residents from South Africa to non-SA residents, with the over-arching reason being for the South African Reserve Bank to maintain control over South Africa’s balance of payments (or BoP as it is more commonly known).

For the purposes of this article, we have addressed one of the more practical issues our clients frequently face in cross-border transactions and the related requirements which need to be adhered to when a non-resident acquires shares in a resident company (by way of a transfer or a subscription for those shares).

It is very important to note the consequences of not following the correct procedure and obtaining the correct endorsement, i.e. the non-resident shareholder will not be entitled to repatriate any distributions of any kind or dividends declared by the resident company, or any sale proceeds from the disposal by the non-resident of its shares. In the event that the endorsement is not properly attended to within the time frame below, a condonation application will need to be made to the South African Reserve Bank in order to allow for such repatriation of funds to the non-resident shareholder.

Where a non-resident acquires securities (in this particular instance, shares) in a resident company, either by way of –

  • a subscription for a new issue of shares in that resident company; or
  • a sale and transfer of existing shares,

the funds which are paid across by the non-resident for the acquisition will be held back by the resident company’s (or the selling shareholder’s) bank until such time as the required documents are provided by the resident company (and/or the selling shareholder) to the authorised dealer (normally the resident’s bank) for approval and release of those funds.

In addition to the approval required for the release of the inward flowing funds, in accordance with the Regulations, when a non-resident purchases shares in a resident entity, certain specific and additional documentary evidence will be required to be produced to an authorised dealer before the funds will be approved for release, as well as for purposes of facilitating identification of controlled shares (shares registered in the name of a non-resident).

The latter purpose (being the identification of foreign-held shares as a regulatory requirement), is one of the most fundamental requirements for ownership by a non-resident of a resident company’s shares. The Regulations provide that within 30 days of a person acquiring ownership of shares in a resident company, that person must submit those shares to an authorised dealer, along with the following information / documentation –

  • the full name and country of residence of the non-resident who owns or is interested in the shares, together with a declaration as to non-residency;
  • the name of the resident company in which the shares are held;
  • the total number of shares held by the non-resident in the resident company; and
  • the full name and residential address of the non-resident in whose possession the shares are.

Practically, in addition to the above requirements set out in the Regulations, most authorised dealers will require the following information / documentation –

  • a declarationon an official letterhead of theresident company that the beneficial owner of the shares is permanently resident outside of the common monetary area, alternatively confirming emigrant status. The declaration should also confirm that the funds being introduced into South Africa do not form part of a resident’s foreign investment allowance, foreign earnings, foreign inheritances, or funds for which amnesty has been granted or in respect of a voluntary disclosure programme, and that there is no South African interest in the non-resident (this is to identify and prevent the so-called “loop structures”);
  • in the case of an individual non-resident, a copy of their passport and a written declaration confirming that they were never resident in South Africa or details of their emigration from South Africa would be required. If a non-resident entity, an organogram of that entity;
  • a resolution of the board of directors of the resident company authorising the equity investment transaction;
  • the agreement in terms of which the equity investment is being made, for example, a shareholders’ agreement, funding agreement,sale of shares agreement orsubscription agreement;
  • an independent auditor’s written confirmation that the transaction was concluded at arm’s length and at a fair market related price, illustrating the basis upon which the value of the transaction was determined;
  • latest annual financial statements of the resident company;
  • organogram of the resident company (including the full names of the shareholders, domiciles and percentage shareholding);
  • in the case of a transfer of shares, the existing original share certificate as well as the new original share certificate;
  • in the case of a subscription for shares, the new original share certificate; and
  • a copy of the securities register, the share transfer forms (where applicable) and the resident company’s registration and incorporation documents.

Once the authorised dealer has received and assessed the above information and is satisfied with the findings, they will affix their stamp to the new share certificate, along with any endorsements determined by the Minister of Finance (this process is commonly referred to as “endorsing the share certificate as non-resident”).

While it may appear that the authorised dealers require a high level of documentary evidence for purposes of releasing funds and endorsing the related share certificates, we are dedicated to making a seemingly cumbersome process as painless and effortless for you should you require our assistance with this approvals process.

Launching Your Corporate Expansion Into Africa

At a certain point in a business’ corporate lifecycle, the question arises as to whether expansion opportunities into new territories should be explored. This is often an exciting question to ask internally, as the prospects for the growth of your business then increase exponentially. However, we recommend (whenever possible) asking ‘the tough questions’ before jumping into your expansion plans – this (boring) exploratory work is all too often overlooked, but may ultimately save you time and money.

Our firm has prepared a basic guidance note for African Expansion (available to any client on request), which is intended to provide an introductory list of questions and considerations for your expansion plans. These considerations are included in this article in a simplified form, and we would encourage you to engage with these before even meeting with the legal and/or accounting professionals who will assist you with your corporate expansion:

  1. General Considerations

Political, financial, economic and socio-economic considerations, communications, electricity and road infrastructure, language, culture, labour force – these considerations are all too often overlooked when investors and companies scope out opportunities in new territories. These factors may have a massive initial impact on your budget and forecast for expansion spending, and an ongoing impact on your ability to do business in an efficient and cost-effective way. In our experience, these factors are very rarely prohibitive, but we do recommend taking them into account, particularly if specifically relevant for your industry.

  1. Regulatory Considerations

Consider arranging a meeting with the in-country regulator specific to your industry before commencing your expansion plans, and scope out the regulations which apply to your industry so that you can address these early. Consider visa and work permit requirements, competition law implications, consumer protection laws, and any bilateral and multilateral relationships between countries which might affect you.

  1. Financial Considerations

These considerations can be broadly lumped into three essential categories: profit extraction, taxes, and exchange control. We have yet to meet a for-profit business which is not ultimately interested in making a profit in a new territory, although of course many businesses have a comfortable buffer in place which enables new territory operations to operate at a loss for an extended period of time. Profit extraction, taxes and exchange control will inevitably have an impact on the best way in which to invest in a new territory, and we recommend obtaining this advice as one of your first expansion steps, in a way which addresses all the relevant considerations of your business type and group structure.

  1. Corporate Structure and Secretarial Considerations

In general, there are 4 ways in which investors and companies can expand into a new territory for the purpose of commencing business in that territory:

(i)                  Incorporating a new subsidiary in the local market

(ii)                Partnering with an existing local entity or person for a joint enterprise or partnership

(iii)               Licensing a product or service to an existing local entity or person

(iv)              Acquiring shares in, or merging with an existing local business entity

We recommend carefully considering the costs, implications, benefits and pitfalls of each of these expansion structures before launching your expansion. Some businesses may also want to expand into a new territory to open a branch office or to set up a billing entity without the need for employees and on-the-ground operations: this is often a worthwhile group structuring goal and a less intensive investigation of the above considerations would then apply.

Ultimately, we believe that asking the necessary questions above so as to choose your new market and plan your next steps carefully, will assist your successful expansion. If and when your business finds itself asking itself expansion questions, please feel free to contact our offices to discuss the considerations addressed above in a way that is specifically relevant to your industry.