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.