COMPETITION COMISSION INVITES COMMENTS ON DRAFT GUIDELINES FOR INFORMATION EXCHANGE BETWEEN COMPETITORS

COMPETITION COMISSION INVITES COMMENTS ON DRAFT GUIDELINES FOR INFORMATION EXCHANGE BETWEEN COMPETITORS

The exchange of information between competitors treads a thin line between enhancing efficiencies and potentially causing harm to competition. While the potential benefits of an information exchange system include the improvement of investment decisions, improved product positioning, lower research costs, benchmarking best practices and a more precise knowledge of market demand, such systems could also facilitate collusive / co-ordinated behaviour among competitors, to the detriment of consumers.

Recognising the difficulty in determining which side of the line an exchange of information falls, the Competition Commission (the “Commission“) intends to set out, based on its experience and international best practice, the general approach that it will follow in determining whether an exchange of information contravenes the Competition Act 89 of 1998 (the “Competition Act“).

The Commission has published and called for written comment on its Draft Guidelines on the Exchange of Information between Competitors (the “Draft Guidelines“) from any interested person. We set out the basic principles as set out in the Draft Guidelines below.

Legal basis for assessing information exchanges

Section 4 of the Competition Act regulates practices amongst competitors, with competitors including all firms that are in the same line of business (whether these firms actually or may only potentially compete with one another).

The section prohibits any agreements (including contracts, arrangements or understandings, whether legally enforceable or not) between competitors:

  • that have the effect of substantially preventing, or lessening, competition in any market (without sufficient technological, efficiency or other pro-competitive justifications); or

 

  • that involve cartel practices, including price-fixing, market allocation or bid rigging (which automatically fall foul of the Competition Act and for which no justifications may be advanced).

Where an exchange of information has the effect of substantially preventing or lessening competition in any market (without sufficient pro-competitive justifications for such exchange), or where it facilitates price-fixing, market allocation or bid rigging, such an information exchange system will therefore contravene the Competition Act.

General principles of assessment

Importantly, the guidelines only concern the exchange of information between competitors. Also, information in this context refers to “commercially sensitive information”, being trade, business or industrial information which has a particular economic value to a firm and its business strategy and is generally not available or known by others.

Information exchange systems between competitors are evaluated on the following general bases (among others).

  • The nature of the information sought to be exchanged: considerations will include whether the information is based on past, current or future conduct or outcomes, the level of aggregation of information, the frequency of sharing and the age of information;
  • The purpose for which the information is being exchanged; and
  • The market characteristics and dynamics: considerations include whether products are homogenous, the level of concentration in the market, the transparency of information in the market, the symmetry and stability of the market shares of competing firms and barriers to entry.

It is important to note that the Guidelines are just that – they are not binding on the competition authorities and will not be applied mechanically – there is no set formula / combination of the above factors that will ensure that an information exchange system is compliant with competition law and assessment will be multi-factorial and on a case-by-case basis.

Forums for information exchange

The Commission also set out an (open) list of platforms over which information exchange may occur and practical considerations and platform-specific guidelines to ensure competition law compliant exchanges over such platforms.

These platforms include, among others, trade / industry associations and regulators / policy makers, public announcements (which may constitute market signalling), joint ventures, cross-directorships / shareholdings, market studies and benchmarking and cartels.

Information exchange and your business

Whatever the final guidelines, given the inherent difficulties in determining whether an information exchange system between competitors will fall foul of the Competition Act, and the significant penalties and reputational harm that such conduct (even if unintentional) may incur, obtaining legal advice before embarking on any such practice may prove invaluable to your business.

The full draft guidelines can be found here.

Please note that the closing date for the submission of comments is 14 September 2017.

The difficulties involved in setting up and managing Section 12J Venture Capital Companies

The difficulties involved in setting up and managing Section 12J Venture Capital Companies

“Section 12J Venture Capital Companies” (Section 12J VCC) seem to be a bit of a buzz phrase doing the rounds in the South African entrepreneurial world at the moment. We have had several requests from new and existing clients to set one up, mainly because of the attractiveness of these structures to investors.

A Section 12J VCC is a company formed in terms of section 12J of the Income Tax Act, 1962 (ITA) – it is essentially a pooling mechanism created by the South African Revenue Service (SARS) to encourage largely high net worth individuals to invest in start ups. The incentive to invest in a Section 12J VCC comes from the fact that investors get a full tax rebate on the funds invested into the Section 12J VCC. So, if a person in the highest tax bracket (presently 45%) invests R 1 million, they will get a tax rebate of R 450,000, meaning that the net investment is R 550,000.

The Section 12J VCC itself is relatively simple to set up, but the real complexity and difficulty comes with the management of it. The legislators have included several anti-avoidance provisions in section 12J of the ITA, which have made it particularly difficult, and in our experience prohibitive, for anyone to manage and run a Section 12J VCC. In fact, at the moment, there are only fifty six Section 12J VCCs approved by SARS and according to the information that we have gathered, and less than half of those are actually trading. It is interesting to note that the legislation allowing these funds was put in place in 2009 – that equates to, on average, seven of these companies formed (not necessarily even operating) every year since inception.

So why is it so difficult to get a Section 12J VCC off the ground? Below we have highlighted some of the major difficulties that some of our clients have had:

  1. No investor into the Section 12J VCC may be a “connected person” in respect of the Section 12J VCC, which essentially means that a natural person cannot own 20% or more of the shares in the Section 12J VCC (directly or indirectly) and a company can own up to 50%, in limited circumstances, of the Section 12J VCC (directly or indirectly), but no more.
  2. No more than 20% of the capital raised through the issue of shares may be invested into any one investee company.
  3. An investee company cannot be a “controlled group company”, meaning that a Section 12J VCC cannot own 70% or more of the equity shares in an investee company.
  4. To be recognised by SARS, the Section 12J VCC must be registered in accordance with section 7 of the Financial Advisory and Intermediary Services Act, 2002 (FAIS), meaning that the company must have a “key individual” in its employment and the Financial Services Board must issue it with a certificate.

There are many more nuances to a Section 12J VCC that we have not highlighted here as they are too lengthy to get into, but they also make for significant barriers to entry.

Regarding point one above – the issue of being a “connected person” – this provision was clearly put in place to avoid situations where a single investor uses this platform to invest in a company where he ordinarily would have done so in any event, but he simply sets up a Section 12J VCC to reap the tax benefit on an investment that he was always going to make.

What we have seen is that there are legitimate arm’s length transactions where investee companies are told that the investor will only invest in them if they are able to use the section 12J of the ITA structure and because of the anti-avoidance restrictions, investee companies are losing out on a potential investment as it is often not possible for this to be done.

Regarding points two and three above, Section 12J VCCs are often restricted in the manner that they can invest when they see a good potential investee company, as they cannot invest more than 20% of their raised capital into the investee company. This means that investee companies can, and do, miss out on obtaining more funding or any funding altogether.

It can also prevent arm’s length investors from investing into one investee company, as they cannot use the Section 12J VCC vehicle to invest into a qualifying investee company because they cannot own more than 70% of the investee company and they cannot use more than 20% of the funds raised in the Section 12J VCC to invest in the investee company. The investor also cannot hold 20% or more of the equity shares in the Section 12J VCC.

The final point is possibly the most difficult, FAIS approval is difficult to obtain as you must have a person who fits the criteria to be a “key individual” in terms of FAIS, which requires experience in the industry and further study. With the fast pace of the business environment, it is often too much of a hurdle to cross to find a party with the correct industry experience to write the exam and become qualified as a key individual.

If you have a legal team that thinks laterally about it, there are ways to manoeuvre within the compliance framework, but even then, there are limitations to the extent that it can be done.

Section 12J VCCs look very attractive from the outside, but when you scratch below the surface, there is a structure that is complex and difficult to manage and balance, which is probably the reason that they have not taken off in South Africa yet. That is not to say that forming a Section 12J VCC cannot be done, as we have assisted in setting up several of them, but it is worth considering it a little bit deeper to see whether this is going to be the best structure for you.

The Edcon Ruling: What to take away from it

The Edcon Ruling: What to take away from it

1. BACKGROUND

Credit providers assist customers who cannot afford to make all payments in cash. In turn for the risk they take, they are allowed to charge certain costs and fees.  When credit agreements are within the ambit of the National Credit Act 34 of 2005 (“NCA” or “the Act“), the Act imposes maximum limits on these fees. Irrespective of the type of credit agreement, section 101 of the NCA provides for a closed list of the fees that a credit provider may charge the consumer in relation to a credit agreement. These fees include, amongst others, initiation fees, service fees, interest, credit insurance and/or default administration charges

2. INTRODUCTION

It has become common practice for retailers to make membership clubs available to consumers in exchange for a monthly “membership/club fee”. Typically, when a consumer becomes a club member he or she would earn points or similar consideration for different reasons – such as a percentage of the purchase price being earned in points. Depending on the type of club joined and/or amount of points earned by that club member, he or she would be entitled to convert his or her points into some form of benefit or product (for example, entertainment, travel, spa, gym etc.). For credit providers who want to offer similar “clubs” there is a challenge in that the NCA does not provide for this kind of “club fee”.

3. THE EDCON RULING

More recently, the National Credit Regulator (“NCR“) started to investigate this business practice and focused on a well-known credit provider retailer: Edcon Holdings Limited (“Edcon“). Following the investigation, they initiated action against Edcon by referring the matter to the National Consumer Tribunal (“NCT“) seeking an order declaring that Edcon has, among other things, repeatedly contravened the provisions of the NCA relating to prohibited charges – by charging a fee not allowed for in the NCA.

The NCT considered the matter from a broader legal perspective, namely whether the NCA allows a credit agreement to contain any fee or charge other than those permitted by the NCA. Edcon argued that the club membership was a stand-alone product, not intended to be part of the credit agreement.

As a starting point, the NCT concluded that the NCA unambiguously prohibits credit providers from charging any fee or charge other than those listed in and provided for in the Act.  The NCT found that Edcon was not allowed to charge its credit customers any fee or charge other than that permitted by the NCA and could therefore not charge the club membership fees. In conclusion, it was held that, by doing so, Edcon had engaged in repeated prohibited conduct in terms of the NCA.

The NCT emphasised that the business practice of charging “membership/club fees” is explicitly prohibited by the NCA and any credit provider who does business in this way may face dire consequences. From perusal of the ruling, the likely consequences that Edcon faces may include being directed to refund consumers charged club and membership fees from 2007 to date and/or an administrative fine on Edcon. According to media reports, Edcon has indicated that they will appeal the ruling.

4. CONCLUSION

The above ruling raises a red flag to many credit providers or credit retailers who may be involved in similar business practices. Retailers should take the following away from this ruling:

  • irrespective of whether customers voluntarily choose to purchase this type of (club) product, a membership/club fee may be seen as a cost of credit if it is inseparably linked to a credit agreement; and
  • review your credit agreements to ensure you do not include any provisions or charges not allowed in terms of the NCA.

Please note that not all club memberships will fall within the ambit of this ruling and club structures will need to be considered on a case to case basis. Please do not hesitate to contact us should you have any queries.

Due diligence: an inevitable destination on any start-up’s yellow brick road to investment success

Due diligence: an inevitable destination on any start-up’s yellow brick road to investment success

In the age old classic, The Wizard of Oz, Dorothy is advised to follow the yellow brick road through the surreal and unfamiliar world of Oz until she reaches the Emerald City. Red boots and all, she, together with her travel companions, set out on this journey, facing some unnerving scenarios along the way. Sound familiar?

Although not written with start-ups in mind, this story can easily serve as a metaphor to illustrate the fascinating world start-up entrepreneurs must navigate on the “yellow brick road” to their next “Emerald City” destination – be it funding rounds, impossible deadlines, incubator pitches or that big exit – this journey has it all. One of the most important, however, not-so-often-discussed, destinations on this “yellow brick road” are due diligence investigations. This article explains why start-ups (or investors) should always keep this often-forgotten destination, and its potential impact on future investment success in mind.

What is a due diligence investigation (commonly referred to as a “DD”)?

Startuplawyer.com defines a due diligence as “an investigatory process performed by potential investors or acquirers to assess the viability of an investment or acquisition and the accuracy of the information provided by the target corporation (or start-up)”.

As such, although a due diligence is usually done by the investors, any start-up would be well-advised to consider the due diligence implications of all their actions leading up to that point. Simply put, this starts by ensuring that internal processes are in place to accurately and continuously record, save and timeously update documentation from the get go. More specifically, documentation and official company records, items relating to internal governance procedures, stakeholders’ communications and company information (i.e. organisation information, market size, team structure), key and material agreements, financial management and annual statements, asset valuation, regulatory approvals, product development and proof of intellectual property (IP) protection are all important for the start-up to keep on record. Furthermore, saving these documents in an orderly and easily accessible folder system eases the process of any due diligence investigation, which in turn, speeds up negotiations and valuations, potentially staving off weeks on an investment timeframe.

Why is it important?

Any sensible investor likes to determine beforehand exactly what it is that they are investing into and in doing so, considers various factors, including: compliance with the potential investor’s investment model, the financial position and investment viability of the start-up, material risks related to its business model, management structure, founders’ commitment, company valuation, legal standing and regulatory compliance. In short, investors are eager to get an all-inclusive and well-rounded snapshot of the start-up to encourage them to provide the necessary funding and to see if the two parties fit. Therefore, if a start-up can provide this information accurately and timeously, it may well contribute to investment negotiations being concluded far more easily than anticipated. Both parties are advised to note that due diligences generally take longer than anticipated, but by being adequately prepared and organised many a pitfall can be avoided.

Does a due diligence benefit the start-up at all?

Yes, regardless of whether the investment proceeds, the preceding due diligence is a good trial by fire for any start-up. Usually, by way of the investor providing a due diligence report, concerns or queries are highlighted in detail, providing an objective and holistic view of all the facets contributing to the start-up’s business. This can greatly assist the start-up in determining further strengths, weaknesses, opportunities or threats. Start-ups are, however, advised to not be duped into a due diligence too easily. Especially during early stage negotiations, a commitment from investors (usually in the form of a term sheet) is important to ensure mutual benefits are derived from the due diligence investigation.

Concluding remarks

Although a due diligence is a high level and intense review of the start-up’s business, it need not be a daunting experience. It is important to remember that both the investor and the start-up should benefit from this process – the start-up showing off its true colours, and the investor justifying its investment. As such, communicating honestly to avoid any confusion, disappointment or time wastage is well advised before any due diligence and subsequent negotiations commence. Considering the above, if a start-up is aware and is pro-actively engaging this inevitable destination from the get-go, the due diligence need only be a brief stopover on your “yellow brick road” to the next Emerald City destination.

Website terms – purpose, importance and consequences

Website terms – purpose, importance and consequences

Nowadays, websites almost always contain policies and terms that govern your use of the site. Sometimes these policies will appear as banners on the site (which you have to “agree” to in order to make them disappear), links in the page footer (like we have on our website) or as a statement along with a tick box saying that you have “read and agree with” the terms (usually when transacting online).

The questions on peoples’ minds are firstly, why do I need all these different sets of terms and, secondly, are these policies binding.

Why do we need all of these terms?

The website terms which we feel are important are browser terms, privacy policies and commercial/transactional terms. Each one of these deals with specific aspects of the website’s use, including, for example, the collection of personal information, social media integration, payment methods and your rights as a user of the website. Below we discuss each policy and its importance. These policies also protect your rights and interests in your website and can allow for you to have a claim in law against people who infringe your rights.

Browser terms

Although browser terms are not a legal requirement, they are useful to ensure that the “web surfer” understands and agrees to certain key points. Browser terms should be used to inform the surfer that:

  1. you, as the website owner, owe them no responsibilities;
  2. they get no rights to any services or IP merely by browsing;
  3. they are required to respect your website and the content thereof; and
  4. you comply with all necessary legal disclosure requirements.

Browser terms are “agreed” to through the surfer continuing to browse the website. These types of agreements are called “web-wrap” agreements. More on this below.

Privacy policies

Privacy policies are essential whenever the website collects or makes use of personal information. Personal information is often collected through cookies as well as when browsers become users of a website by creating an account or by integrating their social media accounts with the website.

The Protection of Personal Information Act 4 of 2013 (“POPI”) sets conditions for the lawful processing of personal information. Included in POPI’s ambit will be the mere storage of personal information when it is collected by cookies. POPI also requires that companies make certain information available to users when they collect their personal information. This can be achieved through a privacy policy. Privacy policies therefore also assist the website owner to comply with legal requirements

Privacy policies usually include the following important aspects:

  1. the use of cookies to collect certain information;
  2. the purposes for the processing of the personal information;
  3. the sharing of personal information by the website owner with certain select third parties;
  4. the storage of personal information, including the security measures taken and whether cross-border storage will occur; and
  5. the user’s rights in relation to his/her personal information and the recourse that he/she has.

Privacy policies are, like browser terms, usually agreed to by browsing, however, a recent trend has been to display the fact that cookies are used as a banner on a website requiring a “click-wrap” agreement to be entered into in order to remove the banner.

Commercial/transactional terms

As the name suggests, the commercial terms become applicable where the website enables users to transact with the website owner through the website. These terms serve as the terms of the contract which you conclude with the user when the user becomes a customer. The important aspects that this policy should govern includes:

  1. a general explanation of the service or product being offered by the website;
  2. the fees that are payable, which may be a once off purchase price or a subscription fee, as well as the fees relating to delivery costs, insurance and VAT;
  3. the terms applicable to returns;
  4. limitation of liability, which will be subject to the Consumer Protection Act 68 of 2008 (if it applies);
  5. the applicability of promotional codes and vouchers; and
  6. acceptable use policies, however, this is more applicable where the website offers a service and not a product.

The Electronic Communications and Transactions Act 25 of 2002 (“ECTA“) requires certain disclosures in terms of section 43 by the website owner when goods or services are offered for sale or hire through an electronic transaction. Some of the disclosures required include:

  1. company name, registration number and contact number;
  2. addresses, including physical, website and e-mail;
  3. a description of the main characteristics of the goods/services offered (which fulfils the requirement of informed consent;
  4. the full price of the goods, including transport costs, taxes and any other and all costs;
  5. the manners of payment accepted, such as EFT, cash on delivery or credit card, as well as alternative manners of payment such as loyalty points;
  6. the time within which delivery will take place;
  7. any terms of agreement, including guarantees, that will apply to the transaction and how those terms may be accessed, stored and reproduced electronically by consumers;
  8. all security procedures and privacy policy in respect of payment, payment information and personal information; and
  9. the rights of the consumer in terms of section 44 of ECTA.

ECTA also requires that the customer must have an opportunity to review the transaction, correct any mistakes and withdraw from the transaction without penalty before finally concluding the transaction. ECTA non-compliance gives the consumer the opportunity to cancel the order and demand a full refund.

Additional requirements are placed on suppliers transacting online regarding payment systems. The payment system used must be sufficiently secure in terms of current accepted technological standards. Failure to comply with these security standards can render the website owner liable for any damages suffered due to the payment system not being adequately secure.

Are these policies binding?

Essentially, yes, website terms will be binding based on the principles of contract law. Website users must be made aware of the terms that apply to their use of the website and you should always ensure that you include wording to the effect that by anyone continuing to use the website they agree to the terms.

To this effect, web-wrap and click-wrap agreements come into play.

Web-wrap agreements

Web-wrap agreements (also referred to as browse-wrap agreements) are used to acknowledge the terms of use of a website by continuing to use the website. The user indicates acceptance of the terms by using the website and does not expressly indicate acceptance of the terms. Such agreements are usually used in browser terms and privacy policies.

Click-wrap agreements

Click-wrap agreements require the user of a website to indicate their agreement with the terms through positive action – usually by clicking “I accept” before proceeding with their activity on the website. These agreements are usually used for more important agreements, such as when installing new software on your computer or when entering into online transactions.

Conclusion

Even though all of these policies may seem excessive, they are worth having. Yes, copying and pasting clauses from other policies will get the job done, but you may leave yourself vulnerable to certain consequences that you haven’t thought about. These consequences may be even worse when it comes to commercial terms. Contact us for a free quote and ensure that your online business is fully protected!

Do all credit providers need to register?

Do all credit providers need to register?

It has been widely reported that all credit providers should now register with the National Credit Regulator (the “NCR”) as a result of the new threshold for registration as a credit provider of R0 (nil) which was published on 11 May 2016. But is it really required that every business that lends money, regardless of the amount, must now, strictly speaking, register as a credit provider with the NCR?

Section 40 of the National Credit Act 34 of 2005 (“NCA”) requires a person to register as a credit provider if the total principal debt owed to that credit provider under all outstanding credit agreements, other than incidental credit agreements, exceeds the threshold determined by the Minister of Trade and Industry. Prior to the recent amendments of the NCA a person had to register as credit provider if it was the credit provider of at least 100 credit agreements or the principal debt owed to him or her in terms of all current credit agreements exceeded R 500 000. After the amendment of the NCA by the National Credit Amendment Act 19 of 2014, a person was only required to register as a credit provider if the total principal debt owed to him or her in terms of all current credit agreements exceeded R 500 000 (meaning that the number of 100 credit agreements or not became irrelevant and even if the number of 100 was exceeded but the total principal debt owed in terms of the total agreements was less than R 500 000, then no registration was required). On 11 May 2016, however, a new threshold of R 0 (nil) was published and from 11 November 2016, 6 months after the publication of the new R 0 (nil) threshold, all credit providers (irrespective of the number of credit agreements) should register as credit providers with the NCR. Failure to register as a credit provider could result, amongst others, in the credit agreement between the credit provider and its debtor being declared void as an unlawful agreement.

This does, however, not mean that every single person or business that lends money must register as a credit provider. The following should be considered to determine whether to register or not:

  • Is the credit agreement an incidental credit agreement? Section 40(1)(a) of the NCA does not require the registration of a credit provider if the transaction relates to an incidental credit agreement.
  • Is the person a credit provider as defined in the NCA?
  • Is the transaction a credit agreement as defined in the NCA?
  • Will the credit agreement be concluded within, or will it have an effect within the Republic?
  • Are the parties to the credit agreement dealing “at arm’s length“?
  • Do any of the exceptions provided in section 4 apply? For example: the NCA does not apply to a credit agreement where the consumer is a juristic person whose asset value or annual turnover, together with the combined asset value or annual turnover of all related juristic persons, at the time the agreement is made, equals or exceeds the threshold value determined by the Minister (currently R 1 million).

To determine whether you are required to be registered before the due date of 11 November 2016, do not hesitate to contact us.