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.

Consumer law expert Jana van Zyl rounds out Dommisse Attorneys team

Commercial law firm Dommisse Attorneys has been joined by new partner Jana van Zyl, an expert in consumer law, following the firm’s recent acquisition of RTK Attorneys.

“Jana’s presence on the team means we can offer a rounded set of compliance and commercial skills to our clients,” says lead partner Adrian Dommisse. Many of the firm’s clients are in the ICT industry, and Dommisse says there is an increasing need for guidance on how to comply with the raft of new consumerrelated legislation that has been introduced in recent years.

The more recent laws include not just the Consumer Protection Act (CPA), but also the National Credit Act (NCA), the Electronic Communications and Transactions Act (ECT), and more recently the Protection of Personal Information Bill (POPI) which is expected to be enacted soon.

“POPI compliance will need to be considered by any business who processes information” says Van Zyl, who is assisting several large clients in the retail industry, “and a compliance project can be a significant exercise. Typically one would conduct a gap analysis, develop an action plan and then help the client to implement appropriate business processes.”

On CPA side, Van Zyl says clients also often ask for one-off consultations and opinions relating to the application of the CPA to their particular business operations. These could include everything from the wording of customer facing documentation, policies and competition terms to how to practically implement a particular section of the legislation.

“Training is a fairly large component of what I do,” she adds. “A number of common practices around marketing and promotions, for example, have had to change with the introduction of the CPA and POPI will add to that once enacted. Clients often need in-depth training before they can understand and implement the new laws in their everyday business practice.”