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.


Amending Your Agreements Through An Exchange Of Emails

If you have ever received a formally drafted contract, it will almost inevitably contain a ‘non-variation clause’ along the lines of “no amendment or variation of this Agreement shall be valid unless in writing and signed by or on behalf of each of the Parties“. These clauses have a long history in South Africa of being strictly interpreted, with the rationale being that this prevents uncertainty on the actual terms of the contract, and prevents ‘informal amendments’ which one party may not consider to be a true amendment. A recent judgment of the Supreme Court of Appeal (“SCA“) delivered in November 2014 has opened up the non-variation clause to a new and intriguing challenge by providing for an exchange of emails to have effectively cancelled an agreement between two parties, on the basis of certain provisions in the Electronic Communications and Transactions Act (“the Act“), and in particular the Act’s recognition and definition of ‘electronic signatures’.

Use of ‘signatures’ as proof of an individual’s identity or intent is a well-established global practice, and the notion of what constitutes a “proper” signature has evolved over the course of history – from the use of a personalised seal (still a strict company law requirement in several South East African countries), to handwritten signatures, to modern day’s digital signatures in email or other electronic communication.

In recent history, South African courts have placed emphasis on the importance of handwritten signatures (often requiring ‘wet signatures’ on original documents) to prove identity and approval in commercial agreements – it was generally accepted that these ‘signatures’ would be the most difficult to falsify. However, business reality has evolved so that more and more people are concluding agreements through emails (with name and address footnote ’email signatures’), over web-based platforms (with ‘click to accept’ signatures), and other faster, more efficient methods. The question inevitably arises as to whether or not, and in what circumstances, these new types of signatures could validly amount to proof of an author’s identity and agreement, and whether the law could keep pace with technology and commercial reality by recognising them as such.

In 2002, the legislature finally tackled this problem head-on, when it enacted the Electronic Communications and Transactions Act. The Act recognises and regulates electronic communications and transactions at large (broadly recognising the ability of two parties to conclude a valid agreement via email, for example). The relevant sections of the Act for our purposes are as follows –

Section 13(1): “Where the signature of a person is required by law and such law does not specify the type of signature, that requirement in relation to a data message is met only if an advanced electronic signature is used.”

Section 13(3): “Where an electronic signature is required by the parties to an electronic transaction and the parties have not agreed on the type of electronic signature to be used, that requirement is met in relation to a data message if –

(a)    a method is used to identify the person and to indicate the person’s approval of the information communicated; and

(b)   having regard to all the relevant circumstances at the time the method was used, the method was as reliable as was appropriate for the purposes for which the information was communicated.

The Act therefore essentially distinguishes and recognises two categories of signatures, namely an advanced electronic signature (section 13(1)) and an ordinary electronic signature (section 13(3)):

An ordinary “electronic signature” is defined in the Act as follows: “data attached to, incorporated in or logically associated with other data and which is intended by the user to serve as a signature”. This may for example include a scanned signature, or your name and details at the bottom of an email, provided the ‘signatory’ intended it to serve as a signature.

An “advanced electronic signature” is defined in the Act as follows: “an electronic signature which results from a process which has been accredited by the authority as provided for”. This essentially means a secure type of digital signature purchased from a third party who has been accredited by the Department of Communication (Law Trust was the first such authentication service provider to be accredited).

This brings us to the recent judgment delivered by the SCA in Spring Forest Trading CC v Wilberry:

Two parties, Spring Forest and Eco Wash respectively, had entered into an agreement in terms of which Spring Forest was appointed as operating agent for Eco Wash, and would be entitled to promote, operate and rent out the latter’s “Mobile Dispensing Units” (Eco Wash’s car wash equipment) to third parties. The parties’ agreement (“the Agreement“) contained a standard non-variation clause which required that any consensual cancellation or variation of the Agreement be in writing and signed by both parties.

Spring Forest eventually began to struggle to meet its rental commitments. Following a meeting between the parties to discuss how they would proceed, a string of emails were sent between the parties. Based on the content of this string of emails, Spring Forest believed that the agreement had been validly cancelled by both parties’ agreement expressed through these emails. When Spring Forest began competing with Eco Wash, Eco Wash applied to the Kwazulu Natal High Court for an interdict restraining Spring Forest from doing so on the basis of the competition being in breach of the Agreement. Eco Wash alleged in its court papers that its representatives viewed the emails as negotiations only, and not as a consensual agreement to cancel their previous Agreement. Eco Wash were granted their interdict by the Kwazulu Natal High Court, and Spring Forest appealed to the SCA.

In the course of the SCA’s judgment, the court found Eco Wash’s contentions that the emails merely record a negotiation and do not amount to an agreement to cancel to be “utterly without merit”, based on a reading of this exchange of emails. The court acknowledged the history and efficacy of the non-variation clause, which has been consistently upheld in previous judgments. The court then determined that the legal question at hand was the proper interpretation of ss 13(1) and (3) of the Act. Referring to the aims of the Act and the wording of the sections, the SCA found that it was clear the Act distinguishes between situations where the law requires the signature, and situations where the parties to a transaction impose this obligation upon themselves:

  1. Where a signature is required by law and the terms of the Act do not specify the type of signature required, then s 13(1) of the Act requires that an advanced electronic signature be used. An example of this would be the National Credit Act that specifically provides in the “Interpretation” section, for an advanced electronic signature to be used if the Act requires any document to be “signed”.
  2. Where, however, an agreement between two parties requires signature and does not specify the type of signature, then an ordinary electronic signature will suffice in terms of s 13(3) of the Act.

The court found that the email signatures used by each party constituted ordinary electronic signatures within the definition of the Act, and accordingly found the Agreement to be validly cancelled by way of the parties’ email correspondence agreeing to the cancellation (which satisfied the requirements of the non-variation clause in that the emails were ‘in writing’ and ‘signed’ by way of ordinary electronic signatures).

We believe that there are a few very interesting lessons to be learnt from the Spring Forest judgment. The first is of course to be careful what you put in your emails to commercial partners, clients and third parties with whom you have concluded written agreements. The second is that, if you would prefer amendments only through more “formal” means, we recommend requesting your legal representatives to strengthen the non-variation clause to require (for example) only handwritten or advanced electronic signatures for amendment or cancellation of an existing agreement. The judgment is ultimately a triumph of pragmatism over formalism, however it does open up the possibility of parties perhaps unwittingly amending or cancelling important agreements. It should be borne in mind that ultimately the question of when email correspondence will amount to an amendment or cancellation will depend on the content of those emails, which should be relatively clear and unequivocal on the part of both parties. Which brings us back to our first point – be mindful of what you put in writing.



Prescribed Rate of Interest Lowered to 9%

The Prescribed Rate of Interest Act, No. 55 of 1975 (“the Act”) prescribes the maximum (and minimum) interest rate that a creditor can claim on interest-bearing debts in instances where an applicable interest rate has not been agreed by the parties contractually, or is not regulated by another law, or is not governed by a trade custom.

Previously the prescribed interest rate was 15.5% per annum, and a typical example of where this would find application was a judgment debt where one of the prayers in a summons would typically include “interest at 15.5% per annum from date of judgment”. This prescribed interest rate of 15.5% has however been lowered to 9% with effect from 1 August 2014. This means that all interest-bearing debts that started to bear interest on or after 1 August 2014 and which fall within the ambit of the Act, will bear interest at 9%. The amendment to the interest rate will not apply retrospectively and the rate applicable to debts that started bearing interest before 1 August 2014 will remain at 15.5%.

So let’s look at situations where the rate of 9% per annum will apply: A typical example would be where parties agreed to a date of repayment for a specific amount of money, and the party under the obligation to pay the agreed amount by the agreed date, then fails to pay in terms of the agreement – meaning that the debtor is “in default” or in “mora”. Another example where this “mora interest” will also apply is where parties didn’t agree on a date for repayment, but one party has demanded repayment from the other – thus putting the other “in mora”.

As the interest so charged is simple interest, one cannot compound the interest annually (i.e charging interest on interest). The interest is simply calculated with regard to the original capital amount that was owed.

It is important to realise that this rate is a peremptory provision, which prescribes 9% (previously 15.5%) as both a minimum and a maximum, if the interest rate is not governed by other agreements or laws, and the debt was not intended to be interest-free. One must however remember that nothing prohibits parties from agreeing to a different rate contractually – provided that no other legislation regulates the specific agreement (an agreement in terms of the National Credit Act will be an example where another law regulates the applicable interest rate allowed).

Build your own Blackstone: legal aspects to consider

The global economic meltdown of recent years has turned the financial environment on its head, I don’t expect anyone reading this to disagree with that. However, as the well-spoken Sir Winston Churchill would remind us: “Difficulties mastered are opportunities won,” which stirs us to explore ways in which the current economic climate can be utilised to generate sustainable growth. One such opportunity is private equity, which has become quite a buzzword in the global financial space over the years. Private equity funds like the US based Blackstone Group have sailed very well through the waves of economic turmoil over the last few years.

The copybook private equity deal can be illustrated by the following example of the ideal leveraged buy-out transaction, obtained from David Carey and John E. Morris’s highly recommended book “King of Capital”:

Company X generates R1 million of cash annually and Company A is interested to buy Company X for R10 million. If Company A were to buy Company X using its own cash, it would earn a 10% return on its investment on an annual basis. Not bad, but considering the risk involved this would be a relatively low-yield return. However, Company A can opt to only use R1 million of its own cash and R9 million borrowed from a bank or other funder. As security for the loan from the bank Company A cedes and pledges to the bank the Company X shares to be acquired and pays interest of R600 000 per year using Company X’s proceeds to repay the loan to the bank. After paying the interest, Company X is left with R400 000 generated per year. Company A has then effectively acquired an income bearing asset by investing R1 million of its own money and earning R400 000 returns per year on such investment, constituting an annual return of 40% on its capital investment. Hence the label “leveraged buyout.” The ideal company to acquire, is therefore one that looks likely to produce enough cash to cover the interest on the debt needed to acquire the company.

In this article, we intend to discuss some of the most fundamental legal considerations in structuring a private equity fund between third party South African resident investors (excluding strictly regulated investors such as pension funds, collective investment schemes and other financial institutions as defined in the Financial Services Board Act, 1990, as these will require more rigorous regulatory measures to be complied with) and South African fund managers.

Private companies are usually not preferred as investment vehicles for private equity funds, as it can be quite a daunting task to create a capital structure in a company that is flexible enough to accommodate the goals of a private equity fund. For instance, the shareholders of a company usually contribute capital to a company in proportion to their shareholding, which is not ideal if investors intend to reserve the discretion as to whether they intend to invest in a particular opportunity or not. As discussed below, flexibility in the structure applied is key to ensuring that the fund is positioned to act on the opportunities presented to it by fund managers.

The most common private equity fund structures in South Africa are investment clubs, bewind trusts and limited liability partnerships (also called en commandite partnerships). Further details on these options are as follows:

i)                    Investment clubs

Investment clubs have only in recent years become more popular in South Africa. These may be seen as vehicles by which investment opportunities are presented in a closed environment, rather than being an investment vehicle in its own right. The basic framework in this case, is that fund managers would source suitable investment opportunities for the club, which opportunities may then be invested in by the members of the club at their discretion. The club members may include high-net-worth individuals or other entities, which pay annual membership fees to fund managers. The membership fees are applied to fund the fund managers who quit their day jobs to actively look for investment opportunities. Members do not make any capital commitments toward the club, subject to the rules of the club, unless they opt to participate in a particular opportunity. The rules of the club should record the type of investment vehicle to be used when investments are made by club members, the options are discussed below.

ii)                  Bewind trusts

Those readers that are familiar with the concept of trusts under South African law will understand this quite easily. The trusts used on a day-to-day basis in South African business and estate planning are mostly discretionary trusts. In these trusts, the trustees obtain ownership of trust assets, but only in a fiduciary capacity (which means they own and manage assets for the benefit of the beneficiaries). Bewind trusts are different in the sense that the trustees merely hold and manage assets on behalf of the beneficiaries. Therefore, ownership of trust property remains vested in the beneficiaries and never in the trustees.

These trusts are created by means of trust deeds and are subject to the regulatory control of the Master of the High Court in the same manner as discretionary “family trusts”. From a private equity perspective, the fund managers will be the trustees of such a trust, administrating the trust property (shares and claims in investee companies) for the benefit of the pool of investors, as beneficiaries. In this scenario the trust will have certain rules that apply to provide a discretionary framework for fund managers (trustees) to guide the private equity activity in accordance with the investors’ risk appetite and other financial considerations.

It is of course possible to form an investment club as indicated above, which is presented with investment opportunities by the fund managers. The investing club members are then plugged into the trust structure once they decide to act on a particular investment opportunity. Such club members will then become the beneficiary of the trust, created to pursue the particular opportunity. The benefit of this structure is that the beneficiaries may be ring-fenced to be exposed to certain investment opportunities only. As indicated above, “club members” need not commit any capital unless they want to act on a specific investment opportunity.

iii)                Limited liability partnerships

Limited liability partnerships are more common in the private equity world and are created like any other partnership, except for the requirement that the parties must expressly agree to form such partnership. The fund managers (called general partners in this context) manage the funds of the partnership and are the public face of the partnership. The investors are called en commandite or “silent” partners, contributing capital to the partnership to enable the general partners to invest in opportunities in terms of the partnership agreement. The silent partners’ limited liability lies therein that their liability to creditors is limited to their investment in the partnership and nothing more. The general partners’ liability to creditors is, however, not limited in this manner. The silent partners are therefore mostly on the background and share in the profit or loss of the trust in proportion to their respective capital contributions to the partnership.

The type of vehicle chosen depends on numerous factors, including the track record of the fund managers, investors’ appetite for risk and as always, the relevant tax considerations. Eventually the parties should ensure that a structure is implemented that protects investors optimally, whilst still enjoying enough flexibility to enable investors to get involved in suitable investment opportunities in their discretion.

“Opportunity comes like a snail, and once it has passed you it changes into a fleet rabbit and is gone.” ~ Arthur Brisbane

Look for a firm of attorneys that are willing to invest

Four years ago, I left a large legal firm to start my own practice with an ambitious goal that had nothing to do with developing a large firm of my own.  I wanted to move away from that model so that I could move closer to my clients. Overall, it’s a more rewarding way to work.

The simple fact is that successful law practices are the ones who actually care about how their clients’ legal issues affect the clients’ business and their personal lives. Some attorneys would be quick to argue that we’re not in the business of holding our customers’ hands, but that’s the very reason why it’s important for us to do so – just like any other service industry, going the extra mile is what really distinguishes you from the rest. It might mean that you have to listen and advise clients on matters above and beyond what you have been contracted to do – even personal matters. It will probably mean that you will invest time and resources without being able to bill for it. But it will also mean that when you do send your bill, your client won’t see it as a grudge payment.

Legal issues should always go beyond going to court, filing papers and signing the necessary documents. The best use of an attorney’s services is to bring them into your boardroom. Not only will you gain a legal perspective and guidance on the matters affecting your business, you will also gain an objective viewpoint. This is especially important when shareholders aren’t present at meetings. Your attorney will be the one who acts as their voice and custodian, and offer up an outsider’s angle on decisions that are being made.

It doesn’t matter if you are at the helm of a start-up that is trying to raise funds or at a large corporate that hopes to expand with private equity, your lawyer should be at your side for the long haul. When he or she constantly has his head in your business, you are not only sure that you’ll receive the most appropriate advice, but also all the associated benefits that comes with working with someone who is passionate about what you do, and willing to lend their expertise to achieving your goals.

I tell my associates that the three most important qualities of any attorney is Availability, Affability and Ability – in that order of importance. The image of the evil genius lawyer might have been popularised by television, but it is not necessarily whom you want to engage with. It’s important to work with someone who really understands what you do, and who is readily available to help you do it.

Bring your attorney into the loop, the boardroom and your business. If you partner with the right one, you’ll both be in it for the long haul.