Amendments to the National Credit Act

The National Credit Act (NCA) came into effect on 1 June 2007. One of the objectives of the NCA was to stop credit providers from providing credit to consumers who could not afford the credit. Six years down the line and the unfortunate reality is that a rather large percentage of credit consumers are in fact over-indebted. Fingers often point to credit providers and whether their business practices are in line with the NCA requirements. It is therefore imperative that credit providers revise their processes to ensure that they conduct business in accordance with the spirit and intent of the Act.

Considering the current credit position in our country, it is clear that despite the good intentions of the Act, some of the content needs clarification. On 29 May 2013 the Department of Trade and Industry therefore published the draft Amendment to the Bill, together with the draft Policy Review Framework, with the stated aim being to address problem areas identified in the practical
application of the NCA.

Some of the proposed amendments apply to the following aspects of the Act:

1. Amendments to some definitions like the definition of “lease” and “secured loan”;
2. Registration of debt counsellors;
3. Cancellation of registrations;
4. Changing the conditions of registration;
5. Suspension of reckless credit agreements;
6. Consent of spouse where married in community of property;
7. Registration and accreditation of alternative dispute resolution structures and agents.

Depending on your business model, some of the proposed amendments may have a big impact on your business operations. It is therefore necessary that you review current practices, and also consider the approach that the National Credit Regulator is likely to take in future.

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.”

Want a new investor for your business? Six housecleaning tips for success.

Many businesses, especially in the technology sector, are started with the idea of selling them one day. Even if that isn’t on the cards, it’s a rare company that won’t one day want outside investment to grow the business, whether you’re seeking venture capital from an international fund or a new partner to take up a shareholding. In either case, your task as a business owner will be immeasurably easier if you lay some basic legal groundwork early on.

The essential principle to keep in mind is this: complication and clutter can alarm Investors. The less complex your capital structure and financial statements, the more reassured they can be that they know exactly what they’re getting themselves into.

 So here’s a checklist of things to put in place before you ever need to open your doors, and your books, to a potential investor:

  1. Keep things tidy. Start -ups and young companies typically have multiple loans and elaborate contracts designed to help fund growth in the early days, for example, loans which are convertible into shares or even by granting an option to a landlord in return for lower rent. If that’s you, take action now to consolidate your balance sheet, especially your loan funding, as much as possible.
  2. Maintain a clean shareholding structure. Where there are lots of “rats and mice” minority shareholders there is potential for      uncertainty and confusion for investors.  Beware of giving real shares to your employees (as opposed to phantom shares or other instruments that track the value of the company). However, fundamentally valuable members of the management team MUST have an equity incentive of some sort.
  3. Allocate shares to your founders and anchor investors early on. The later you leave it, the more value they have, and the greater the tax hit will be (gifted shares can be taxed as income, so tax may be payable now, on a share that can’t be sold for years).
  4. Give up any thoughts you may have of recouping all that sweat loan account in cold hard cash – here we are talking about salary’s sacrificed or other money foregone. It’s very unlikely you’ll find an investor who’ll be prepared to treat sweat loans by a founder as a true cash loan. If you actually dipped into your own pocket for cash to fund operations there’s a better chance, but in reality almost all the founders’ sweat loan funding may be written off when a new investor comes in. Rather pay yourself decently from the start – then loan that cash back to the business, and keep a written record of your loan arrangement!
  5. Take a good hard look at your board: Do the directors add real value to the business or are they largely family members, angel investors and other founders with experience as limited as your own? Look for board members who can provide useful advice and guidance, and whose CVs will make you look credible to potential investors – remember, they are buying into the executive team.
  6. Especially relevant for software and other IT companies: Check who actually owns your fundamental means of production! If you’ve built a product, be extremely careful that you own the “building blocks” and/or have a valid license to use those components. In the case of open source software, are you within the licence terms? Also make sure that your employees have all properly assigned to you the intellectual property rights to anything they develop in the course of their employment.
  7. Pay attention to all the standard due diligence issues: Make sure all existing contracts (employment, supply, lease, etc.) are in place and up to date and not overly skewed against you, that your incorporation documents are up to date, and so on.

While much of this looks like basic common sense to lawyers, in reality many entrepreneurs just don’t get around to these details – they’re too busy doing the work. If you’re one of those, it’s time to seriously consider interviewing some lawyers to find out what they can do for you. If nothing else, it could save you a fortune in a few years’ time.

 

Companies Act deadline an opportunity to “get house in order”

If you’ve been slack in complying with the Companies Act of 2009, the April 2013 deadline probably has you sweating bullets, but according to attorney Adrian Dommisse, there’s no need to get hysterical. Dommisse Attorneys’ Tracy Hockly says companies who are in the process of becoming compliant have nothing to worry about, but should use the opportunity to review their founding documents.

Since the Act was passed in 2009, companies were granted a two-year grace period to ensure that provisions in their founding documents, such as shareholders’ agreements, are in accordance with the 2009 Act. According to Hockly this means that information in your founding documents that conflicts with the new Act is null and void. “Perhaps most importantly, anything in your shareholders agreement that is inconsistent with the Act or the MOI is null and void,” she said.

While Hockly believes owner-managed private companies aren’t really affected by the ghosts of deadlines passed, the deadline is a good reminder to “get your house in order”. “The end of the grace period doesn’t mean you can no longer amend your MOI, or that you’ll be charged any penalty for failing to do so (aside from a nominal fee for the amendment, payable to the CIPC). But you do need to know that the assumptions you’re operating under are correct,” she warns.

The situation is more urgent for those who have two or more shareholders, especially if there is a difficult relationship between shareholders. If you aren’t completely confident that your rights under old founding documents are adequately protected under the new Act, it’s wise to
check with an attorney how best to deal with this as soon as possible.

Hockly advises preparing a good brief, should you decide to approach an attorney to review founding documents to keep costs down.

“As well as your existing documents, be sure to include exact details of all your current shareholders and directors, how directors are appointed, how decisions should be made, and any agreements you currently have in place around transfers of shares, loan accounts and soon. If you’re thinking of bringing in an outside investor or selling shares, mention it; and also point out any red flags or areas of actual or potential conflict. Write down all the questions you have before any meeting, and don’t be afraid to ask what might seem like stupid questions.
The new Act is in many ways intended to be less onerous and better for business than the old version, so it’s to your benefit to develop a good grasp of the basics.”

What you need to know about offshoring your business

How to move one’s business offshore is a popular topic among entrepreneurs – but, says corporate law expert Adrian Dommisse of Dommisse Attorneys, the decision is not as easy as many seem to think.

“There is lots of excitement about Mauritius because their corporate tax rate much lower (potentially just 3% as opposed to 28% in South Africa), but offshoring needs to be a substantial and genuine exercise – just because you think you can avoid tax is the wrong way to go about it,” says Dommisse. “SARS is very aware of this issue. If you have a company registered in Mauritius but all your management and employees are in South Africa, you’re going to attract unwelcome attention.”

Dommisse says there are two good reasons companies should consider establishing an offshore office: If they’re genuinely expanding their activities beyond the borders of South Africa, or to meet the needs of major international investors.

In the first case, says Dommisse, entrepreneurs should be aware that there are major costs associated with setting up offshore.  “There must a real separation between your South African and international operations. You can’t just have a postal address in Mauritius but still run everything from Johannesburg: there needs to be real substance.”

“You will need to prove to anybody enquiring that key management decisions are made in the offshore jurisdiction,” he adds. “That means local offices, resident senior staff and all your board meetings will need to be held there, just for starters. That cost will need to be weighted against the benefits of actually running a business from that office. So if you’re genuinely looking for a good base from which to expand into South Asia, for example, go for it.”

Dommisse also cautions against “loop structures” in which South Africans have an interest in an offshore holding company that in turns owns assets in South Africa. “It’s a fairly obvious way to try and avoid paying tax, and it could make criminals of your entire board,” he says. “It’s a rookie mistake.”

The second reason to consider setting up offshore is to secure a major international investor who is wary of putting money into South Africa because of currency and political risk, the tax regime and exchange control regulations.

“The truth is that investors will only put their capital into a country like South Africa if they can take it out again easily,” says Dommisse. “We see investors who are willing to carry the cost of moving the whole operation offshore to avoid exchange control and political risks.  Obviously that assumes underlying operations that transcend national borders.”

They are also likely to insist that intellectual property be developed outside South Africa, he says. “IP that is developed locally will be classified as a South African asset, which is a  situation that international investors may not accept,” he says. For this reason, a significant part of key development resources will probably have to be located outside of South Africa.

In summary, says Dommisse, “establishing an international office only makes sense if you’re a genuinely international business. Choose your advisors very carefully, and accept that this is not a low-cost exercise. You will need a tax expert with specific experience in this area, as well as good legal advice. “

No need to panic as new Companies Act deadline expires

Adrian Dommisse of Dommisse Attorneys reads the prophesies by near-hysterical commercial attorneys across South Africa with bemusement.  Certainly, the expiry of the deadline for compliance with the “new” Companies Act of 2008 is important, and has consequences, but for most companies there is certainly no need to panic, says Dommisse.

Attorney Tracy Hockly of Dommisse Attorneys says elaborates: “While companies who aren’t yet fully compliant probably have no need to panic, they should use the opportunity to review their founding documents.”

“For many companies this is one of those important-but-not-urgent things that can too easily fall off busy people’s agendas,” says Hockly. “But it’s wise to make some time to deal with it.”

Hockly explains that the new Act “contains some provisions that conflict with what companies may have specified in their old founding documents, such as shareholders’ agreements and the Memorandum of Incorporation (MOI) (previously known as the articles and memorandum of association). The Act provided for a two-year grace period to give companies time to amend all their documents and harmonise these with the Act, which has now expired.”

What this means, she adds, “is that since the deadline passed, anything in your founding documents that conflicts with the unalterable provisions in the new Act is now null and void (unless your MOI imposes a higher standard, greater restriction, longer period of time or any similarly more onerous requirement). Also, importantly, anything in your shareholders agreement that is inconsistent with the Act or the MOI is null and void.”

For many companies the end of the transition period is not too much cause for concern, says Hockly, especially private companies that are owner-managed. It will ultimately be more important to ensure that the unalterable provisions in the Act are being complied with by your directors. Nevertheless, she says, “it’s still a good idea to get your housekeeping in order. The end of the grace period doesn’t mean you can no longer amend your MOI, or that you’ll be charged any penalty for failing to do so (aside from a nominal fee for the amendment, payable to the CIPC). But you do need to know that the assumptions you’re operating under are correct.”

The situation is more urgent for those who have two or more shareholders, especially if there is a difficult relationship between shareholders. If you aren’t completely confident that your rights under old founding documents are adequately protected under the new Act, it’s wise to check with an attorney how best to deal with this as soon as possible. Hockly adds that “we really don’t recommend using a standard-form MOI. They tend to be very sparse and don’t encourage engagement with the issues. Your MOI should be the expression of an agreement all the shareholders have come to after really thinking through the options. The Act lays down the minimum requirements, but you are quite entitled to have more demanding founding documents in place to manage your relationships and avoid future conflict.”

If a company does decide to approach an attorney to review its founding documents, concludes Hockly, “you can shorten the process and manage your costs by preparing a good brief. As well as your existing documents, be sure to include exact details of all your current shareholders and directors, how directors are appointed, how decisions should be made, and any agreements you currently have in place around transfers of shares, loan accounts and so on. If you’re thinking of bringing in an outside investor or selling shares, mention it; and also point out any red flags or areas of actual or potential conflict. Write down all the questions you have before any meeting, and don’t be afraid to ask what might seem like stupid questions. The new Act is in many ways intended to be less onerous and better for business than the old version, so it’s to your benefit to develop a good grasp of the basics.”