Credit where credit is due

Credit where credit is due

Have you ever thought about just how many laws there are in South Africa? After excluding the common law and criminal procedure, there’s still more legislation within our justice system than you can shake a gavel at. And as is almost inevitable when dealing with this amount of paper (although mostly digitalised nowadays), problems preventing harmonious interpretations of legislative provisions across this myriad of statutes become rife.

For example, the inclusion of the provision of “credit” as a financial product in the Financial Sector Regulation Act, 9 of 2017 (“FSRA“) added to the list of financial products we were used to referring to in the Financial Advisory and Intermediary Services Act, 37 of 2002 (“FAIS“). Not only this, but the regulation of credit was minding its own business in the National Credit Act, 34 of 2005 (“NCA“) until the FSRA rocked the boat.

This is not immediately problematic – a lot of other financial products are also regulated by separate legislation. And within this sphere of commercial law, we’re pretty comfortable with what is meant by financial products and financial services.

But it becomes interesting when the new law introduced – in this case the FSRA – may impact the interpretation of the existing law – the NCA.  Considering the NCA reference to a “financial services account” (without definition) alongside the recent inclusion of “credit” in the FSRA, we’re suddenly playing cricket with a golf club and the crowd is getting pumped up for a conversion kick. It’s all very confusing, but it might just make some sense when we consult the rulebook.

A matter of perspective:

By classifying credit as a financial product (barring a few exceptions), any financial service in relation to the provision of credit would constitute a financial service in terms of the FSRA. Thus, if you were to say that the rendering of an intermediary service for the provision of credit constitutes a financial service you would probably be correct. But if you were to say that it does not constitute the rendering of a financial service, you would probably also be correct. Contradictory? Not necessarily when you are provided with the requisite context.

The FSRA has not repealed FAIS, and both acts still operate concurrently. For FSRA application, a financial service will include a financial service as it relates to the provision of credit. However, where FAIS regulates financial services, services related to the provision of credit will fall outside this definition and will not find application.

In short, it’s like Schrödinger’s Credit – the provision of credit is both a financial product and not a financial product until you open the box and see whether FAIS or the FSRA was accompanying it inside.

However, what would happen if one were to switch up the variables? By replacing “Is this a financial service?” with “Why is this a financial service?”, you’re substituting a yes-or-no question with an essay request. This is what a consideration of the NCA now does.

A matter of interpretation:

Nestled away in section 101(3) of the NCA, one would come across this seemingly innocent provision –

If a credit facility is attached to a financial services account, or is maintained in association with such an account, any service charge in terms of that account—

(a) if that charge would not have been levied if there were no credit facility attached to the account, is subject to the prescribed maximum contemplated in subsection (1) (c) ; and

(b) otherwise, is exempt from the prescribed maximum contemplated in subsection (1) (c).

However, looks can be deceiving. This provision could potentially have significant consequences. A service charge for a financial services account that is contingent on a credit facility will be subject to a prescribed maximum. But, if this charge would have been levied independently – i.e. even if no credit facility was attached to it, you’re free to exceed this threshold.

Credit facilities are synonymous with the provision of credit – it is after all a defined class of credit agreements under the NCA. What is meant by a “financial services account” under the NCA, is open for debate, however. The term is not defined in the NCA. The term “financial services” however, is defined in both FAIS and the FSRA – each of which would have a very different effect here.

Is there an opportunity to see financial services account as an account relating to the provision of credit? If so, could this mean that mean that charging services fees above the maximum for the linked account will be allowed? This will be on the basis of the financial services account being tied to a credit facility, where that provision of credit would have had its own service fee if entered into separately.

Clearly a lot rides on what is meant by a financial services account. Not being defined in any of the NCA, FAIS or FSRA, speculation as to its meaning can lead one to some interesting questions. Is it a new financial product? Was it accidentally left undefined? And what is the true meaning of life anyway?

It could also mean something much simpler. Like an account held with a financial services provider. Or it could mean an account linked to a financial service. Or linked to a financial product. Although some have the opinion that this was intended to refer to an overdraft bank account facility, would it be unreasonable to conclude that other offerings could also fit this description of a financial services account?

And a matter of timing:

Before you get those credit bundling business ideas running through your head again, let us consider one last thing. As already alluded to above, legislative intention is crucial when there’s no real objective answer in front of us. Whether financial services accounts were meant to be construed as an overdraft facility or accounts relating to financial services in the wider sense of the meaning, it will still be subject to legislative intention and interpretation. At the time of drafting the NCA, the FSRA was well and truly not on anyone’s mind. Legislators don’t keep time machines in their offices (we’re assuming…).

So, looking at the different definitions (or lack of definitions) in the different legislation, this topic will certainly continue to be an interesting subject for debate and interpretation.

Gimme hype, Jo-anna!

Gimme hype, Jo-anna!

*Disclaimer – of course, a legal document needs to start with a disclaimer: our firm has a Slack channel called the #unlawyerzone, where we post adventures that team members get up to that are slightly less serious. This blog post comes from the hidden ether of our #unlawyerzone and should be read in that context. Also, I couldn’t resist butchering the title of that most famous and brilliant song (with apologies to Eddy Grant) to sugar up this rant.

I’ve been working as a commercial attorney for about 10 years and something that we inevitably see a lot of is how most of the business world seems to go into crazy mode whenever a new hyped idea comes along.

Any honest lawyer will admit that hype in the business world is to lawyers’ what blood is to sharks (with apologies to sharks). Hype does create work for us, but like that hairstyle you were so proud of in varsity: you may just be investing time and money in something that will be redundant (at best) and scary (at worst) a couple of years down the line.

Remember when the new Companies Act came into effect and you just had to adopt a new MOI for your company by midnight or the world would go up in flames? It was long before I joined our firm, but I’m glad to see that my partner Adrian Dommisse put things into perspective for our clients at the time with a slightly less Armageddonesque view on the situation.

Our firm has always been hesitant on hyped subjects (without being stuck in the past), but we’ve found that even if you don’t run towards the noise whenever there is an air of excitement in the business world, the party inevitably tends to move to your doorstep after a while.

I’m thinking of all the queries from people who wanted to put everything they ever owned into a Section 12J fund and how hyped that was a few years ago. People with no investment experience at all wanted to start Section 12J funds on every corner, until they learned about all the rules and red tape!

When every millennial with an online Python course in the bag started their own crypto fund from their garage, the queries took a different shape (often the misplaced shape of pyramids). Then there was the period when it was almost frowned upon not to refer to your start-up company as “the Uber of this or that…” or “the Spotify of organic vegetables”, but I see that we’re (mostly) past that now.

My goal is not to be the Grinch who stole hype – I have just been reflecting a lot over the years about what the best position is to take when the next best thing arrives. Our approach as a firm is simple: use hype to learn, but only spend your time and exert your energy on ideas or businesses that have substance.

For example, I think some of the hype around Section 12J has died down a bit over the last few years, with mostly only the serious players (who genuinely want to invest in exciting scalable businesses in the way that the Tax Man intended) still plying their trade in this way. Similarly, with the crypto world having come down to earth over the last year or two (read: the quick buck barbarians have left town), we can now focus on the amazing possibilities offered by blockchain technology.

Even though the dust has settled on the hype around topics like these, we are wiser on these topics now than we were before the circus came to town, so we can now use our tricks for real-world solutions. And how fulfilling it is to work with clients who are using blockchain technology to build or invest in real-world businesses that will improve the lives of people and take the friction out of exchanging and growing value.

So, you created some IP, now what?

So, you created some IP, now what?

Irrespective of whether you support the overzealous protection of intellectual property (“IP“) or believe in a more open-source world, one thing is certain in the world of technology and IP – the greatest economic value of IP stems from its use in licensing arrangements. Whether for commercial or development reasons, the concepts remain the same. The registration of IP is only your first step in a long and complex dance with any entrepreneur, service provider or developer who you wish to collaborate with.

The unique thing about IP is that it is subject to constant development. This means that new stand-alone IP can develop from base IP, thereby attracting unique and new avenues to attract its own separate IP.

This starts to blur the lines of ownership when more than one party is involved and the failure to properly regulate these relationships can mean the death of innovation; as the once exciting venture is distilled down to a playground battle with the participants’ crying over sand in their eyes.

This blog post serves to touch on the basic legal concepts which form part of standard commercial agreements involving IP. It also highlights what you need to start thinking about to ensure that the boundaries of ownership and use are clearly set out from the get-go.

In most licensing agreements there is a distinction between ‘Background IP’ and ‘Foreground IP’. Background IP is the term used to define that IP which the respective parties own prior to performing under an agreement, or IP that is developed or conceived independently of the agreement. ‘Foreground IP’, on the other hand, is usually used to define new IP developed in terms, and during the subsistence, of an agreement. An important element of these distinctions is that not only does Background IP lead to the creation of Foreground IP, but Background IP is often linked to Foreground IP and the ability to exercise it.

These concepts exist to protect and regulate one of our most basic human tendencies derived from those even our most primary of conquerors practiced, think “Veni, Vidi, vici”. Basically, what’s mine is mine and in some cases (especially where you fail to regulate your IP properly) what’s yours is mine too.

So to avoid being the subject of someone’s Odyssey, standard agreements usually start off with a definition of these two terms, thereby creating a split between each party’s IP prior to entering the agreement and the IP created from the agreement. This allows for the protection of each party’s previously developed IP and ensuring that any new IP is regulated by the terms of the agreement.

Regarding ownership of Foreground IP, different models will be appropriate in different sets of circumstances. For example, where an agreement opts for Foreground IP to be jointly owned, administration becomes a problem as every party must be consulted and agree on any further use, development or commercial exploitation of such IP. Further frustration can be present where an agreement doesn’t regulate a breakdown, as this could in effect mean that one party could potentially hold ransom the further exploitation and commercialisation of the IP.

Another ownership option could be that such IP is rather outrightly owned by one of the parties (by means of assigning the IP rights over to one party) and for that party to grant access to the other, which may include terms of use, extent of exploitation, as well as compensation. For the more seasoned entrepreneur, the possibility exists that this model could be used to strategically transfer IP into a new entity, by means of building and developing Foreground IP in a newly established entity, based on a Background IP licencing agreement with an older entity. This, however, is a topic for another day.

This second aspect in the above examples highlights the use component of IP licensing. Irrespective of whether you are licensing your Background IP to a partner or joint venture so as to create the Foreground IP, or whether you agree that one of the parties owns the Foreground IP so as to licence it to the other, the extent of a party’s use or participation in the particular IP is regulated by a use license.

The most renowned types of licenses which you should start to become familiar with include exclusive and non-exclusive licenses. From a high level, a non-exclusive licence will potentially grant a licensor the unfettered freedom to exploit the IP without giving the other party any say, as well as the ability to allow other licensees to exploit the same IP. Whereas an exclusive licence could potentially limit both licensor and licensee from exploiting the IP.

It is crucial to understand that your unique circumstances will guide which licence is the best option for you and the onus will be on you to ensure that you are aware of the effects of such a license. Inevitably, you will have to ensure that the licence reflects what was in fact agreed to and that you are not the recipient of a very attractively constructed Trojan Horse.

This blog post was only intended to open your mind to concepts tied to the complex nature of IP. It also provided some insight into how various commercial and licensing arrangements can impact on both ownership and use of your own Background IP, as well as any Foreground IP, which you may have had a hand in creating. A competent practitioner who can truly understand your offering and your vision for the future can make this process a breeze. With years of academic and practical experience in both IP and commercial law, our team here at Dommisse Attorneys is well placed to assist you with developing your IP strategy and to translate this into a clear and succinct agreement, thereby avoiding the exchange of any unruly phrases like “Et Tu, Brute?”.

Will marketing be able to stand the test of time?

Will marketing be able to stand the test of time?

In a previous life, suppliers could pretty much market as and how they wanted to. They could choose to whom, how, and what they wanted to market. Marketing messages were innovative, interesting and exciting (albeit not always true….).

This changed when a global emphasis on consumer and privacy rights started to emerge. In South Africa the position has not been any different and suddenly suppliers need to start considering complicated legal concepts like a “legitimate interest” when all they want to do is market their goods or services.

Data protection laws, like South Africa’s Protection of Personal Information Act, 4 of 2013 (“POPIA“), the EU’s General Data Protection Regulation, 2016/679 (“GDPR“) and Mauritius’ Data Protection Act, 2017 (“DPA“), all require that a lawful basis exists to use personal information – also for direct marketing.

WHAT IS A LAWFUL BASIS FOR PROCESSING PERSONAL INFORMATION?

These lawful bases are generally very similar across the different pieces of legislation in the different countries, and include various grounds, for example:

  • Consent – it seems obvious that if a person agrees to it, then the information may be used.
  • A requirement in law – again obvious that if there is a law that requires you to use information in a certain way, then you must do it – whether the person consents (and likes it) or not.

The most interesting one though, is the so called “legitimate interest” of the supplier or the person whose information it is. In terms of this lawful basis of use, it is lawful for a supplier to use personal information for direct marketing purposes, if the marketing is in the legitimate interests of the supplier. This begs the question: what would constitute a legitimate interest, especially considering that it is not defined by the law?

LEGITIMATE INTERESTS

A three stage ‘test’ has been derived from the GDPR:

  1. Purpose – is there a legitimate reason or purpose for the processing? (Potentially yes – the supplier wants to increase sales through marketing).
  2. Necessity – is processing the information necessary for that purpose? (Potentially yes – how else will he increase sales?).
  3. Balance – is the legitimate interest overridden by the interests, rights and freedoms of the data subject? (This is the more difficult one as a balancing act between the supplier and person needs to be considered).

This is unfortunately a rather technical legal approach to the question and will require that the specific facts of each matter be considered before determining whether the legitimate interest justification ground can be relied on.

ADDITIONAL LEGISLATIVE REQUIREMENTS

It is important to take note that in addition to the general justification grounds, specific legislation or provisions may require consent in certain circumstances. If this is the case, it will not be possible for a supplier to rely on the legitimate interest justification ground in all circumstances. An example is section 69 of POPIA which requires consent for electronic direct marketing in certain specified circumstances, for example, if you want to electronically market to someone who is not your customer yet. This means that if the intended marketing falls within the ambit of the section 69 consent requirements, the supplier will not be able to rely on the legitimate interest justification ground and will indeed need to obtain consent before being able to lawfully do the electronic marketing.

CONCLUSION

Sometimes you will need consent to do direct marketing. And sometimes you will be able to rely on your legitimate interests to do direct marketing. Make sure you understand your rights and obligations.

Please get in touch with us if you’d like advice on the specifics covered in this blog post or data protection laws in general. Although we are South African lawyers, we have experience in various data protection laws, including the GDPR, and the data protection acts of Mauritius and Botswana, amongst others.

Key-man insurance policies vs buy and sell agreements: Which is more appropriate for your business?

Key-man insurance policies vs buy and sell agreements: Which is more appropriate for your business?

INTRODUCTION

There is an important distinction between a key-man insurance policy and a buy and sell agreement. While they are both used in the context of ensuring the ongoing profitability and sustainability of a business in the event of the untimely death, severe disability or critical illness of a key business partner, their underlying purpose is different. We briefly unpack these differences below.

KEY-MAN INSURANCE

The value of a business is largely dependent on the input of key employees or partners in the business. The sudden loss of a key individual may put the business at serious risk. As such, a key person can be seen as someone whose absence (through death, disability or critical illness) will have a material adverse effect on the future of the business. What a key-man insurance policy seeks to do, is to protect the business in the event of the premature death of a key individual or if such key individual becomes disabled or critically ill. Such a policy is taken out and paid for by the company and upon the death, disability or critical illness of the key individual (who may or may not be a shareholder), the policy proceeds are paid to the company (rather than to the deceased estate in the case of a death of the individual). This provides the company with cash flow to enable the business to continue operations while a suitable replacement is found.

BUY AND SELL AGREEMENTS

A buy and sell insurance policy is typically used to fund a buy and sell agreement. The buy and sell agreement itself contains several important provisions to facilitate the orderly transition of ownership of the business, should one of the owners die prematurely, become disabled or critically ill, which provisions may include (amongst others):

  • What events may trigger a buy-out by the remaining shareholders – will it only be the death, disability or critical illness of the shareholder concerned, or will it include other events such as retirement or bankruptcy?
  • What shares each of the remaining shareholders are entitled or required to purchase – all shares or only shares of a specific class?
  • In what proportions the remaining shareholders will purchase the shares – pro rata or in a specified proportion?
  • How the buy and sell agreement will be funded – by way of an insurance policy or other method?
  • How the shares of the company will be valued.

Where a company has numerous shareholders, a buy and sell agreement provides the mechanism to provide for the funds that the remaining shareholders will need to acquire the deceased shareholder’s shares. This has an important bearing on the sustainability of the business as it may not always be a good idea for these shares to be passed on to the heirs – they may not necessarily have the skill set nor the desire to work in the business.

TAX IMPLICATIONS OF KEY-MAN POLICIES

The tax implications relating to the treatment of premiums paid and the proceeds received from a key-man policy are often overlooked. We discuss the various tax consequences briefly below.

Income Tax:

In terms of the Income Tax Act, 58 of 1962 (ITA), a company may be able to claim certain insurance premiums paid on the life of the key-person as a deduction. Whether the premiums could be deducted, will depend on whether the conditions and requirements as set out in the ITA have been met and in each case the particular policy wording will need to be reviewed in order to determine whether it is likely that a deduction will be allowed.

Estate Duty:

Section 3(3)(a) of the Estate Duty Act, Act 45 of 1955 (Estate Duty Act), includes the proceeds from a life insurance policy on the life of the deceased as “deemed property” of the deceased estate, if it meets the requirements of this section, irrespective of who the owner of the policy was or who paid the premiums. However, the full proceeds are not always included in terms of these deeming provisions. The section further provides that where the policy proceeds are not recoverable by the estate, but by the company, and the company also paid the premiums, only the amount by which the proceeds exceeds the total premiums paid plus interest thereon, is deemed to be the property of the deceased estate. However, section 3(3)(a)(ii) of the Estate Duty Act contains an estate duty exemption for these policies, resulting in them not being included as the deemed property of the deceased estate, provided all the requirements listed for the exemption to apply, have been met. If this is the case, no estate duty will be payable on the policy proceeds.

Capital Gains Tax (CGT):

In terms of paragraph 55 of the 8th Schedule to the ITA, the proceeds of key-man policies are exempt from CGT in the following instances:

  • where the person is the original beneficial owner of the policy;
  • where the person, whose life is insured, is or was an employee or director and any premiums paid by the person’s employer were deducted in terms of section 11(w) of the ITA;
  • where the policy is a risk policy with no cash or surrender value;
  • where the policy’s proceeds are exempt from income tax under section 10(1) of the ITA.

TAX IMPLICATIONS OF BUY AND SELL AGREEMENTS

Income Tax:

If the policy to fund a buy and sell agreement meets the requirements of section 11(w) of the ITA, the premiums payable may be deductible and the proceeds may be subject to income tax, again depending on the nature of the receipt.

Estate Duty:

The insurance policy to fund a buy and sell agreement must have been taken out for the purpose of buying out the interest of the deceased person, or a part of the interest – otherwise the policy will not be exempt from the “deemed property” and will be included in the deceased estate.

The deceased must not have paid any of the premiums of the policy. If a deceased has paid premiums on a buy and sell policy, it is likely to be regarded as the deemed property of the deceased and in which case it may not qualify for the exemption referred to earlier.

CGT:

If risk policies are used to fund the buy and sell agreement, the proceeds are exempted from CGT in terms of paragraphs 55(1)(a), (c) and (e) of the 8th Schedule to the ITA.

Any life insurance payments to the original beneficial owners and where no premiums were paid by the deceased, have always been exempted from CGT in terms of the 8th Schedule to the ITA.

If a deceased shareholder cedes his or her policy to a new shareholder, the policy ceded is a 2nd hand policy and historically gave rise to CGT consequences when the ceded benefit is eventually paid out, which is now alleviated by paragraph 55(1)(e) of the 8th Schedule to the ITA, subject to the policies being pure risk policies.

CONCLUSION

Replacement of a key individual or ensuring the orderly transition of ownership of a business (as the case may be) can take time. Although the memorandum of incorporation (MOI) or the shareholders’ agreement of the company may contain provisions on what should happen to the shares on the death or disability of a particular shareholder, they often do not take into account, the practical aspects involved. Additional funding and/or a separate buy and sell agreement is therefore required to ensure that all the necessary requirements and relevant processes are carefully set out and planned for. It’s important to note that, in terms of the Companies Act, 71 of 2008, no other agreement may supersede the shareholders’ agreement or MOI, so the company will need to ensure that if it is a buy and sell agreement they want to enter into, such agreement is properly aligned with the MOI and shareholders’ agreement.

SOURCES:

Job offer: Senior Associate

Job offer: Senior Associate

About the Position

Description of Work: A senior associate who has a strong commercial background, can work independently and who will be responsible for their own client portfolio, developing client relationships and building a team.

Requirements:

  • 3/4 years post article experience in commercial law at a reputable firm.
  • Good understanding of commercial and legal aspects of transactional work.
  • Working experience in private equity, venture capital, mergers & acquisitions and generally the legal aspects of corporate finance is essential. Drive to be market-leading attorney is these fields.
  • Advanced computer knowledge with emphasis in MS Word, MS Excel and MS PowerPoint.
  • Excellent communication, reporting and interpersonal skills, verbal and written.
  • Ability to work independently and be proactive.
  • Ability to work within pressurized environment and adhere to tight deadlines.
  • Quality of work: accuracy, attention to detail.
  • Organisation: being meticulous in planning & prioritising work tasks.
  • Problem solving: anticipating and identifying problems, pro-actively solving them.
  • Leadership: managing, leading and building a team.
  • Consistently excel in the three core deliverables for senior team members: meeting and exceeding their own budget; managing team members to do quality work and also their targets; grow the value of the firm by bringing in new clients.

Competencies:
Primary competencies

  • High level transactional drafting and deal management experence.
  • Corporate finance transactions and specifically M&A work in mid-market environment; local and cross-border transactions
  • Fund raising (debt/equity).
  • Venture capital and private equity transactions – ability to negotiate and draft complex transactional documents without getting intimidated or overwhelmed.
  • Corporate restructuring.
  • Cross border transactions.

Secondary competencies

  • Joint venture deals – and the related sale of shares, shareholders’ agreements, partnerships.
  • Regulatory aspects with doing business across borders.
  • International expansion.
  • Ability to learn new areas of law and apply that to new jurisdictions.

Qualification:

  • LLB
  • LLM in commercial law and business courses will be advantageous but not a requirement.

Remuneration:

  • Market related

Desired Skills

  • Commercial Law
  • Mergers & acquisitions
  • Drafting legal documents
  • Staff management
  • Cross border transactions

Desired Qualification Accreditation

  • Degree

Kindly send your motivation and CV to: info@dommisseattorneys.co.za

Vehicle finance “Extra fee”: strip it or bill it?

Vehicle finance “Extra fee”: strip it or bill it?

The National Consumer Tribunal (“NCT“) recently came out guns blazing and caused a stir in the motor vehicle industry. The application by Volkswagen Financial Services SA (“VWFS“) for the review and setting aside of a compliance notice previously issued against them by the National Credit Regulator (“NCR“), was dismissed by the NCT during the month of April 2019.

First, some background: the NCR issued compliance notices against VWFS and BMW Financial Services in 2017. In terms of these compliance notices, the NCR held that the “on the road” fees (colloquially termed as “Service & Delivery Charge” or the like) by the respective vehicle financiers constitute prohibited charges in terms of the National Credit Act, 34 of 2005 (“NCA“) and ordered each of these financiers to refund consumers who paid such fees. VWFS subsequently applied to the NCT to review and set aside the compliance notice issued by the NCR against them. The NCT however rejected their application and confirmed the decision taken by the NCR in their compliance notice (in a somewhat amended form, but in principle the same). The NCT ruled that VWFS were to: (i) refund all affected consumers; and (ii) cease adding any such or similar fees on their (vehicle finance) credit agreements as from 10 April 2019.

VWFS have since indicated that they will appeal the decision of the NCT, the effect of which then suspends enforcement of the ruling until the appeal has been finalised by the relevant court. Simply put, VWFS need not to comply with the compliance notice until the matter has been settled by the relevant High Court.

Please follow the link below to access a copy of the relevant NCT ruling:

https://www.thenct.org.za/wp-content/uploads/2019/04/Volkswagen-Financial-Services-South-Africa-pty-Ltd-v-National-Credit-Regulator-NCT-94937-2017-5612.pdf

Incentivising employees: Phantom scheme or esop?

Incentivising employees: Phantom scheme or esop?

As we receive more requests from entrepreneurs who want to incentivise valued employees in an optimistic effort to either attract top talent, retain top talent or even benefit their business’ BEE status profile, we realised that the motive behind such incentives are not always aligned to the type of incentive instrument that entrepreneurs request. In this blog, we aim to provide you with a basic distinction between two popular incentive instruments, namely the phantom share scheme (“Scheme“) and the employee share ownership plan (“ESOP“) to assist you in electing the best instrument for your valued employees.

PHANTOM SHARE SCHEME

Beneficiaries of a Scheme are awarded notional shares or units (not real shares but rather units giving participant employees the right to certain cash bonuses). The notional shares are linked to the issued shares in the share capital of the company. The Scheme is essentially a cash bonus plan under which the amount of the bonus is measured by reference to the increase in value of the shares in the issued share capital of the company. Such notional shares ordinarily grant the holder the same economic rights and privileges equal to all other actual issued shares in the company on a 1:1 ratio.

Therefore, instead of issuing authorised shares in the share capital of the company, notional shares are created and then awarded to participating employees (with or without vesting conditions). No shares are factually issued or transferred to the employees. Employees do not become actual shareholders of the company. This is illustrated in the fact that  they do not receive rights such as ownership rights in the company; rights to inspect records of the company; rights to attend shareholder meetings, nor voting rights – which would result in less control or decision-making influence from beneficiaries. Employees do however, have the opportunity to receive cash bonuses in the actualisation of certain events, such as when profits are declared by the company or any other “liquidity event”.

A Scheme is an excellent tool for attracting top talent and motivating employees who do not have a particularly long serving history with the company. In this respect, the Scheme allows shareholders to retain complete control and ownership of the company. The flexibility of the Scheme ensures that an employee receives a cash-in-hand benefit without enjoying other shareholders rights.

EMPLOYEE SHARE OWNERSHIP PLAN (ESOP)

An ESOP structure allows participating employees to acquire actual shares in the share capital of the company. By virtue of holding actual shares, such employees will become part owners of the company, they will have voting rights in the company (involving them in decision-making) and they will benefit financially when dividends are declared, as well as during an exit or other liquidity events. An ESOP, as opposed to a Scheme, is potentially an excellent instrument for incentivising long standing employees who have material interests in the growth of the company. Our recommendation is that ESOP shares should only be awarded to trusted individuals as holders acquire much more extensive rights, for example, the right to inspect sensitive company documentation and records.

CONCLUSION

While other complexities may influence your election of setting up and implementing either an ESOP or a Scheme, we recommend that the instrument selected should be guided by each entrepreneur’s true intentions.

Decrypting crypto: The anticipation for South Africa’s crypto-regulations continues

Decrypting crypto: The anticipation for South Africa’s crypto-regulations continues

With cryptocurrency regulations seemingly just around the corner for South Africa,[1] the extent of their practical ramifications can be speculated over quite a bit. According to a recent survey, South African internet users topped the rankings for cryptocurrency ownership worldwide.[2] Already accounting for 10.7% of all local internet users,[3] this number could climb if regulations serve to alleviate trust and security concerns.[4] Furthermore, South Africa has consistently topped global rankings as the country with the highest internet searches for Bitcoin.[5] But what is the catalyst behind this popularity?

Arguably, the growth in demand cannot be ascribed to one particular factor. Events such as the firing of Pravin Gordhan as South Africa’s finance minister and the downgrade of South Africa’s local currency debt to that of junk status were seen as mentionable contributors to the surge in new users trading Bitcoin in 2017, constituting a 671% rise from January to November on eToro.[6] More recently, cryptocurrencies have received an increase in popularity amidst growing political and economic uncertainty.[7]

Contrary to what a Hollywood-portrayed high school would have you believe, there are downsides to popularity. Hypothetical risks in an unregulated market include:

  • a decreased demand for fiat currency, which in turn poses problems for the South African Reserve Bank’s (SARB) monetary supply control;
  • a financial stability risk if market capitalisation reaches the $1 trillion threshold (which, although constituting roughly 1.5% of the total global market capitalisation of the S&P 500 Index, is not entirely far fetched when one considers the 3 200% growth rate in market capitalisation in 2017),[8] which figure is seen as the psychological threshold that, when crossed, will lead to increased regulatory scrutiny by financial institutions and legislatures around the globe; and
  • potential threats to the national payment system.[9]

Due to its meteoric rise in popularity, regulations to address consumer protection become paramount.[10]

What will the scope of these regulations be, and how will they affect South Africa and its prevalent participation in the cryptocurrency market? It might still be too early to say for certain. However, the SARB has suggested a phased approach to regulation,[11] with the first phase constituting a registration process for persons offering crypto-asset services and arguably aligns nicely with the current regulatory overhaul for financial services.[12] The second phase contemplates a review of existing regulatory frameworks to determine whether new requirements need to be introduced or existing requirements need to be amended.

And lastly, the third phase contemplates an assessment of the effectiveness of the regulatory actions.[13] With the first phase expected to be implemented in the first quarter of this year,[14] interesting times lie ahead for both consumers and service providers of cryptocurrency.


[1] Ruggieri N “South African Reserve Bank Begins To Plan Crypto Regulations” (18-01-2019). EHTNews. Available at: https://www.ethnews.com/south-african-reserve-bank-begins-to-plan-crypto-regulations (accessed on 21-02-2019).

[2] Gogo J “Survey ranks South Africa top for cryptocurrency ownership” (20-02-2019). Bitcoin.com. Available at: https://news.bitcoin.com/survey-ranks-south-africa-top-for-cryptocurrency-ownership/ (accessed 21-02-2019); “Digital 2019: Essential insights into how people around the world use the internet, mobile devices, social media, and e-commerce” (31-01-2019). Wearesocial; Hootsuite. 205.

[3] Supra n2. 205.

[4] Rangogo T “Half of richer, online South Africans want to buy cryptocurrencies – here’s what’s holding them back” (06-11-2018) Business Insider South Africa. Available at: https://www.businessinsider.co.za/half-of-richer-online-south-africans-want-to-buy-cryptocurrencies-heres-whats-holding-them-back-2018-11 (accessed on 20-02-2019).

[5] Avan-Nomayo Osato “Cryptocurrency continues to thrive in South Africa” (07-07-2018). Bitcoinist. Available at: https://bitcoinist.com/cryptocurrency-continues-to-thrive-in-south-africa/ (accessed on 20-02-2019).

[6] “This graph shows just how popular Bitcoin is in South Africa” (05-01-2018). Business Tech. Available at: https://businesstech.co.za/news/banking/218099/this-graph-shows-just-how-popular-bitcoin-is-in-south-africa/ (accessed on 20-02-2019).

[7] O’Brien K “Cryptocurrency remains popular in South Africa, but scams and questions still loom” (05-08-2018). Bitcoinist. Available at: https://bitcoinist.com/cryptocurrency-remains-popular-south-africa-scams-questions-still-loom/ (accessed on 20-02-2019). 

[8] “Consulation paper on policy proposals for crypto assets” Intergovernmental Fintech Working Group: Crypto Assets Regulatory Working Group. 13-14.

[9] Jenkinson G “Report by South Africa’s Reserve Bank Makes Strides Toward Crypto Clarity in the Country” (22-01-2019). Cointelegraph. Available at:  https://cointelegraph.com/news/south-africa-is-making-strides-toward-crypto-clarity-with-the-reserve-banks-latest-report (accessed 20-02-2019).

[10] Rattue R “Cryptocurrency regulation essential for everyone” (15-02-2019). FAnews. Available at: https://www.fanews.co.za/article/cryptocurrencies/1407/general/1408/cryptocurrency-regulation-essential-for-everyone/26192 (accessed on 21-02-2019).

[11] Vermeulen J “South Africa’s plan to monitor Bitcoin exchanges” (20-02-2019). MyBroadband. Available at: https://mybroadband.co.za/news/cryptocurrency/296454-south-africas-plan-to-monitor-bitcoin-exchanges.html (accessed on 21-02-2019).

[12] Supra n10.

[13] Omarjee L “February deadline for public comment on cryptocurrency regulation” (27-01-2019). Fin24. Available at: https://www.fin24.com/Economy/february-deadline-for-public-comment-on-cryptocurrency-regulation-20190127 (accessed on 21-02-2019).

[14] Supra n13.

Arbitration: Is it a good idea?

Arbitration: Is it a good idea?

You may have seen an arbitration clause come up in one of your agreements and just thought that it fills the legal jargon section at the end of your contract. These are typically standard “boilerplate” clauses that have been developed over many years of contracting –these clauses are important and there is good reason for them being relatively standardised. However, missing or misusing one of them could land you in a bit of hot water. An arbitration clause is one that flirts with being a “boilerplate” clause but should be used with caution.

Arbitration is a private dispute settlement arrangement agreed to between people entering into a contract. The beauty of it is that the process can be, to a degree, managed by the people who choose arbitration as a means of dispute resolution. This means that arbitration can take a fairly broad variety of forms, although, most people prefer for it to take the form of a more traditional court. You can also choose for the arbitration to be final and binding on you, meaning that it cannot be appealed. This helps speed up the dispute resolution process, but it also exposes you to the risk that your arbitrator makes a bad decision, which you are stuck with.

A big question that should be asked when seeing this clause pop up is: “Is it worth it for me to use arbitration?” This article will spell out some of the pros and cons to arbitration versus the normal court process.

Cost complication

Arbitration is far more costly than a typical court process, as the people who want the arbitration must pay the costs of the arbitrator, and if that person is a highly skilled individual (which they tend to be) they don’t come cheap. If you go through the courts, however, this is a free public service, so you do not pay for the cost of the magistrate or judge to have your process heard.

Unless you expect your claim to be in the hundreds of thousands of Rands, it may be better to exclude an arbitration clause as it may not be worth the expense.

Time implication

Whilst the court process is cheaper, in the South African context, it is very slow as the courts are inundated with commercial matters. It can take in excess of 3 years from the date that a claim is lodged to the date that your matter is heard by a court and, even then, it can be delayed further. When it comes to arbitration, you are not relying on anyone else to get the matter moving and you can agree to expedited rules to govern the arbitration (meaning they are designed in such a way that the dispute is moved forward quickly). All in all, arbitration tends to be much faster than going to court.

Expertise

When it comes to our courts, magistrates and judges are distributed on a rotational basis and, whilst they are very skilled, they do not specialise in one area of commerce per se, but rather deal broadly with commercial disputes. With arbitration, however, you can pick an expert in a particular field as the arbitrator, which then ensures that there is less room for a decision that may not necessarily consider all the aspects of a particular field. So, if your matter is in, for example, international shipping, you can then elect a maritime lawyer with significant experience to be the arbitrator which should give you comfort that your matter will be decided fairly.

Whilst arbitration can be useful, it can also be an unnecessary burden. Consider this carefully when you see this clause in the next contract you sign.