Limiting directors’ authority by reserving matters for shareholders’ decision

Limiting directors’ authority by reserving matters for shareholders’ decision

The concept of control in terms of the Companies Act

As a board member you may often be uncertain as to which decisions can be taken by the board without shareholder involvement and which matters can only be dealt with by shareholders. This is especially important if some shareholders in a company are not serving on the board.

Section 66(1) of the Companies Act 71 of 2008 (as amended) (“the Act“) provides that the business and affairs of a company must be managed by or under the direction of its board, which has the authority to exercise all of the powers and perform any of the functions of the company, except to the extent that the Act or the Memorandum of Incorporation of the company (“MOI“) provides otherwise.

This section places a positive obligation on the board of directors, collectively, to manage and control the company’s affairs. However, such authority is not without limit as the Act limits, restricts, and qualifies the authority of the board in various sections. In addition, the Act also provides that the MOI can further limit the authority of the board to perform acts on behalf of a company.

How to restrict directors’ authority

The Act does not provide guidelines in terms of the MOI can limit the authority of the board. Usually, our recommendation is to avoid wide and over-reaching restrictions on the authority of the board to perform acts on behalf of a company. Over-reaching restrictions may interfere with the boards’ primary mandate in terms of section 66 (1) of the Act, that is to manage and control the company’s affairs, if the approval framework is not alive to the need to sometimes make decisions regarding the operations of the company on an urgent basis.

One example in which the shareholders may agree to limit the authority of the board, is against concluding any transaction on behalf of the company above a monetary threshold. Before the board can conclude and implement any transaction above such monetary threshold, shareholders will be entitled to first deliberate and approve such matter at shareholder level.

The effects of reserved matters

Reserving matters for shareholder approval delays the decision-making process, which is sensible when it comes to major transactions that will materially impact the shareholders’ long-term interest in the company, but it can also mean that the board is frustrated in its purpose if the reserved matters are over-reaching.

It is important to remember that a shareholder can always vote thinking only of its own best interest, whereas the board of directors always need to apply their discretion in the best interest of the company. It is important, therefore, to use this as a guiding principle when determining which matters are to be decided on board or shareholder level.

Directors’ go-ahead with shareholder ratification  

This brings us a crucial question of what happens if the board needs to decide quickly if there is a time‑sensitive commercial activity? Also, what happens if the board is of the opinion that a pipeline transaction, being a reserved matter, is likely to increase the company’s revenue but the shareholders are at loggerheads? Can the board authorise that transaction without the shareholders’ approval?

Section 20 (2) of the Act provides that if a MOI limits the authority of the board to perform an act on behalf of the company, the shareholders, by special resolution, may ratify any action by the company or board that is inconsistent with any such limitation, subject to such ratification not being in contravention with the Act. Therefore, the board can go ahead with the reserved matter transaction without shareholders’ approval and only when the latter deems the transaction favourable, at a later stage, can they ratify by special resolution the transaction authorised improperly by the board.

Directors’ go-ahead without shareholder ratification 

However, remember that the ratification by shareholders is not a certainty, so the board should be very careful not to bind the company unconditionally to transactions that require shareholder approval. What happens if the shareholders resolve not to ratify a reserved matter transaction after it has already been concluded and currently under implementation? Will such transaction concluded by the board outside of the ambit of their authority be valid, voidable or void and unenforceable?

The answer to this question depends on the third party’s knowledge about the existing restrictions against the board to conclude a reserved matter transaction without shareholders’ approval. Under section 20 (7) of the Act, the common law Turquand rule has been codified. This rule provides that a person dealing with a company in good faith, other than a director, prescribed officer or shareholder of such company, is entitled to presume that a company, in making any decision in the exercise of its powers, has complied with all of the formal and procedural requirements. These requirements are in light of the Act, its MOI and any rules of the company unless, in the circumstances, the person knew or reasonably ought to have known of any failure by the company (represented by the board) to comply with any such requirement. The application of this provision must always be read in line with the common law position.

A significant factor in terms of this section is the fact that the third party must be dealing with the company in good faith. This means that any person who would have reasonably known that the board did not have authority to act on behalf of a company in a reserved matter transaction, such as the company’s director, prescribed officer or shareholder (also acting in a third party capacity), amongst others, would not succeed if attempting to enforce or uphold such reserved matter against the company.

Shareholders’ recourse against directors

If the court, upon an application by an interested person, upholds a restricted transaction against the company without the shareholders’ ratification, shareholders will remain entitled to recourse against the board. Section 20 (6) of the Act provides shareholders with a claim for damages against any person who intentionally, fraudulently or due to gross negligence causes the company to do anything inconsistent with the Act or with a limitation imposed by the MOI.

Conclusion

It is therefore important not to impose restrictions on the board’s authority in a manner that may hamper operational decision-making. If this is done without careful consideration the company may be restricted from moving to make key commercial decisions quickly and the board may expose itself if it takes the gamble to conclude transactions outside the scope of its authority.

Keeping your business afloat in the time of COVID-19 – tax and other considerations

Keeping your business afloat in the time of COVID-19 – tax and other considerations

INTRODUCTION:

The devastating impact of COVID-19 is being felt across all sectors of the economy in one way or another. Coming out of the hard lockdown, the South African government is taking a risk-adjusted approach, which seeks to balance between the continued need to limit the spread of the virus and the need to reinvigorate the economy.

According to the South African Reserve Bank, South Africa’s economy may contract by between 2% and 4% this year as a result of the pandemic. This figure ultimately depends on certain policy responses, for example whether the National Treasury will continue to commit more spending in line with its fiscal policy and how the private sector will respond.

To this end, government has promised a massive social relief and economic support package of up to R500 billion which amounts to around 10% of South Africa’s GDP, to mitigate against the blow of COVID-19 in our country. Government support towards businesses in this regard, forms part of the country’s three phase economic response to

(1) stabilise the economy;

(2) address the extreme decline in supply and demand and protect jobs; and

(3) to jumpstart the recovery of the economy as the country emerges from this pandemic.

So, let us examine what these measures are in a nutshell:

TAX RELIEF MEASURES:

Certain legislative amendments will be required to implement the tax relief measures which were proposed by the government around late March. These come in the form of the Draft Disaster Management Tax Relief Bill, 2020 and the Disaster Management Tax Relief Administration Bill, 2020.

Some of the proposed relief measures apply only to small and medium sized enterprises or SMEs (for example the deferral of Pay-As-You-Earn or PAYE), while others apply to all taxpayers (for example the Employment Tax Incentive or ETI). The various tax relief measures are summarised immediately below:

  1. PAYE:

Tax compliant businesses with a turnover of less than R 50 000 000 will be allowed to delay 20% of their PAYE liabilities over the next four months (started 1 April 2020 and ending on 31 July 2020).

  1. Deferral of payment of provisional tax:

Deferral of a portion of the payment of the first and second provisional tax liability to the South African Revenue Service (SARS), without SARS imposing administrative penalties and interest for over the next six months.

The first provisional tax payment due from 1 April 2020 to 30 September 2020 will be based on 15% (rather than 50%) of the estimated total tax liability, while the second provisional tax payment from 1 April 2020 to 31 March 2021 will be based on 65% (rather than 100%) of the estimated total tax liability.

Provisional taxpayers with deferred payments will be required to pay the full tax liability when making the third provisional tax payment in order to avoid interest charges.

  1. Expansion of the Employment Tax Incentive (ETI):

The ETI programme was introduced in 2014 as an incentive aimed at reducing unemployment (particularly among the youth) by encouraging employers to hire young work seekers. The impact of COVID-19 on employment during this period may be far-reaching as the majority of the South African workforce is forced to stay at home.

In order to minimise the loss of jobs during this period and beyond, government proposes expanding the ETI programme for a limited period of four months, beginning 1 April 2020 and ending on 31 July 2020 as follows:

  • Increasing the maximum amount of ETI claimable during this four month period for employees eligible under the current ETI Act from R1 000 to R1 500 in the first qualifying twelve months and from R500 to R1 000 in the second qualifying 12 months.
  • Allowing a monthly ETI claim in the amount of R500 during this four month period for employees from the ages of (1) 18 to 29 who are no longer eligible for the ETI as a result of the employer having already claimed ETI in respect of those employees for 24 months; and (2) 30 to 65 who are not eligible for the ETI due to their age.
  • Accelerating the payment of ETI reimbursements from twice a year to monthly as a means of getting cash into the hands of tax compliant employers as soon as possible.

This expansion will, however, only apply to employers that were registered with SARS as at 1 March 2020. An employer is not eligible to claim the ETI if the employer is not compliant in respect of its tax obligations i.e. if the employer has any outstanding tax returns or an outstanding tax debt.  Furthermore, the current compliance requirements for employers under sections 8 and 10(4) of the ETI Act will continue to apply.

  1. The Unemployment Insurance Fund (UIF):

The government is exploring the temporary reduction or setting aside of employer and employee contributions to the Unemployment Insurance Fund (UIF) and to the Commissioner for Compensation for Occupational Injuries and Disease Fund (COIDA contributions). It is speculated that UIF obligations will be set aside for at least four months.

  1. Donations tax:

Donations tax is payable by tax residents of South Africa as follows:

  • a donations tax rate of 20% applies in relation to the donations not exceeding R30 million per year; and
  • a donations tax rate of 25% applies in relation to the donations exceeding R30 million per year.

During this period, any donation to registered public benefit organisations as well as the SOLIDARITY Fund shall be tax deductible.

Taxpayers would generally only be able to benefit from the tax stimuli if they are compliant. As a result, taxpayers would need to ensure that their tax affairs are up to date, in respect of all taxes. The Finance Minister is expected to flesh out further details on the tax-related announcements when he tables the adjusted budget at the time of writing this so additional tax relief measures are anticipated.

TEMPORARTY EMPLOYEE / EMPLOYER RELIEF SCHEME:

A new directive under the Disaster Management Regulations now offers relief to employers and employees who have been affected during the lockdown in the form of a COVID-19 Temporary Employee / Employer Relief Scheme (TERS). All employers and employees who contribute to the UIF had the opportunity to claim if they filled out an application before 30 April 2020.

The calculation of the benefit is based on the last payment made to the employee but capped at the maximum of R6 638.40. The benefit amount is then determined in line with the current sliding scale which ranges between 38% to 60% in terms of a formula. Please refer to the directives issued by the Department of Labour for more information and how the formula works.

We hope you found this article informative and wish you all the best during this period.

Disaster Management Tax Relief is coming!

Disaster Management Tax Relief is coming!

Public comments for the Draft Disaster Management Tax Relief Bill and the Draft Disaster Management Tax Relief Administration Bill are now open. These two tax relief bills, aimed at combating the negative economic effects the spread of COVID-19 holds, were published on 1 April 2020 for public comment. These bills include provision for –

  • Amendments to the Employment Tax Incentive Act by expanding the employment tax incentive age eligibility criteria, as well as the amounts that can be claimed and changing the payment of employer tax incentive reimbursements from occurring twice a year to occurring on a monthly basis;
  • COVID-19 disaster relief trusts to be set up: Donations to these trusts are to fall within the ambit of section 18A of the Income tax Act and the provisions relating to how amounts received from these trusts should be treated; and
  • Deferrals for employees’ tax and provisional tax for certain businesses.

Aptly named, these tax relief bills aim at employing measures that include assistance to over 4 million workers and 75 000 small and medium term enterprises.

You can access these bills and the explanatory memorandum for a more thorough read at the following links:

Public comments are open until the 15th of April 2020 and can be submitted to 2020AnnexCProp@treasury.gov.za.

If you require any assistance in making such a submission, please feel free to get in contact with us. As you may be aware, we have already started providing our legal services from home  prior to the national lockdown in an effort to help flatten the curve. Our office number is being forwarded to our executive assistant, who will happily place you in contact with the relevant practitioner – or you can email your queries directly to us at info@dommisseattorneys.co.za.

My lease agreement and COVID-19 – what’s the legal position?

My lease agreement and COVID-19 – what’s the legal position?

During the lockdown, tenants may not be able to access and use their lease premises. Where does that leave you legally? Different scenarios may apply – your lease agreement may not have a force majeure clause, or the force majeure mechanism may seem not to apply squarely in these circumstances.

Broadly speaking we believe the same principle applies as for most commercial lease agreements during the lock down period if there is no force majeure clause or if the clause does not specifically include a pandemic: if a tenant is denied access to the premises by a supervening event that occurred after the start of the rental arrangement, and it isn’t their fault (assuming the supervening event was not self-created, foreseen or consented to by either party), then they can claim that both tenant and landlord have been hit by the supervening event, and are therefore entitled to suspend payment of rental for the duration of the supervening event. If the lockdown continued for a significant period, termination of the lease may even be an option.

An interesting case which supports this position, is Peters Flamman and Co Appellants v Kokstad Municipality Respondents 1919 AD 427, which involved a company which entered into an agreement with the Municipality to light its streetlamps (which in those days were gas).

The contract was intended to endure for a period of 20 years, however after approximately 10 years World War I broke out. The company was run by a group of people who were considered enemies of the state and were required to work in prisoner of war camps, at which point the company was handed over to and wound up by the state.

The Judge held that, owing to the supervening circumstances, the performance under the contract was objectively impossible (casus fortuitus), and that the contract should therefore be terminated. The company’s failure to perform was excused, as no-one in those circumstances would be able to perform the contract and the impossibility is not due to the company’s fault.

The relevance of this case to the current situation is the fact that during the lockdown, neither tenant nor landlord are in a position to perform on their obligations under the rental contract due to the supervening impossibility created by the lockdown regulations.

Further case law which supports the fact that if a tenant is disturbed in the use or enjoyment of the property let by a superior force (i.e. a legislated lockdown) over which the parties have no control, the tenant is entitled to a pro-rata remission of rent. Put differently, if the landlord’s obligation to protect the tenant’s use and enjoyment of the property let becomes impossible to perform due to a superior force, the tenant’s reciprocal obligation to pay the rent is also extinguished or reduced proportionally. The case confirming this position is Baylee v Harwood [1954] 3 SA 459 (A).

Both of the above cases support the tenant’s position to withhold or reduce the amount owed under the lease agreement for the period of the legislated lockdown and tenants would need to argue that the above-mentioned principles should trump any conflicting clauses in the agreement.

On the other hand, where the lease agreement directly envisages an unforeseen event such as a pandemic or act of God in a classic force majeure clause, which would likely include a legislated lockdown to combat a widespread virus, then the case may be different. The landlord would on a balance of probabilities be in a good position to argue that the short and temporary nature of the lockdown is not significant enough to override the abovementioned principles. Landlords could further argue that tenants should not be allowed to disrupt the contractual certainty relied on by commercial landlords across the nation and that in the greater scheme of things, landlord’s remain capable of delivering access to the premises, and the contract should therefore remain valid in all respects.

On balance, if these arguments were made, depending on the length of the lockdown, the amount in question would soon be dwarfed by legal fees, notwithstanding the fact that the outcome will be completely reserved for our courts. It’s therefore important to recognise that you’re not alone in this crisis and the effects of the Covid-19 pandemic are far reaching and do not discriminate between landlords and tenants. Be conscious of the fact that you are not in this predicament by the hand of your landlord, and accordingly, in your pursuit of a remedy to address your situation, whether you are a landlord or a tenant, be sure to consider the other side of the coin. Failure to do so now could result in more costly and drawn out consequences later.

Any solution should be planned with the necessary foresight that will enable you to continue in your contractual relationship amicably once the lockdown is lifted and life returns to some sense of normality.

Whether you are the landlord or the tenant, rather be proactive and put yourself in a position that will enable you to make a commercial decision which will create long term value for your organisation rather than making a hasty decision which will result in a win-lose situation.

Dommisse Attorneys helping to flatten the curve

Dommisse Attorneys helping to flatten the curve

Levels of concern around COVID-19 have certainly ramped up in the last week, and as many of you are aware, on 15 March 2020 President Cyril Ramaphosa declared the spread of the virus a “national disaster” in terms of the Disaster Management Act 57 of 2002.

This Act governs the regulatory effects of a national disaster and allows for extra measures to be taken in addition to existing legislation and contingency arrangements where special circumstances warrant it.  Interestingly, in terms of the Act any national state of disaster automatically lapses three months after it has been declared but can be terminated earlier or extended by a notice in the Government Gazette.

What measures are Dommisse Attorneys taking during this time?

  • Our team will be working from home for the foreseeable future
  • We will limit face to face meetings and meet through online channels only, unless absolutely impossible for a client
  • You will be able to contact us on our numbers and email as usual
  • If you call the office number it will be forwarded to our friendly assistant Gerry who will get the relevant attorney to return your call
  • We will continue “business as usual” as far as possible!

Why do we do this?

  • Although we have not been affected directly – meaning that none of our team has shown any symptoms or tested positive for the Coronavirus – we want to be pro-active in support of the national approach to do whatever we can to limit the virus from spreading as much as possible.
  • We also do this, because we can! As a law firm that embraces technology and the advantages it offers, we are able to do this without too much of a direct effect – except of course that we will miss the face time with fellow team members and clients!

All the best to all our clients during this challenging time. And remember that we are continuing business as usual – remotely!

Taxation in South Africa: Does it even matter where my company is registered?

Taxation in South Africa: Does it even matter where my company is registered?

“I don’t want to pay tax in South Africa. I have therefore registered a company in Delaware (or the UK or Mauritius or wherever). So I won’t pay tax in South Africa, right?”

Right…

Clients have asked us this question so many times. And strangely enough, they come to us for advice, but once we have listened to the story and conclude that the company will indeed pay tax in South Africa, it is as if they simply cannot believe it.

A lot has been written on the taxation of offshore registered companies in South Africa. The so called Place of Effective Management of a company, or POEM principle, is nothing new. And yet, there is a common misunderstanding around what it actually means practically.

Let’s start with the basics on taxation in South Africa. South Africa applies a residency tax regime, meaning that if you are a South African (tax) resident, SARS can tax you in South Africa.

When will a company be (tax) resident in South Africa? A company will be tax resident in South Africa in one of two scenarios:

  1. It is incorporated in South Africa (your typical (Pty) Ltd incorporated through CIPC); or
  2. It has its POEM (place of effective management) in South Africa.

It is the second scenario that is causing the headache for so many clients.

Let’s unpack the principle in a bit more detail. A company registered in an offshore country can still be taxed in South Africa, if its POEM is in fact in South Africa. From a SARS point of view it therefore does not matter that your company is registered in Delaware, the UK, Mauritius, or wherever. If the POEM is South Africa, SARS can tax. Note, however, that the offshore country may also be able to tax, and this is where Double Taxation Agreements become relevant, but more on this topic in a later article.

It is also important to understand that the foreign incorporated company bears the onus to prove where the POEM is, meaning that if your company wants to claim POEM in a foreign country, the company must prove this on the facts of the matter.

Now for the big question: when will the POEM be considered South Africa?

As is often the case with tax, the answer is not always clearcut. For starters, our Income Tax Act does not define what POEM means. And in terms of local case law, there is little available to guide us through this.

SARS has published what is called an Interpretation Note to explain how SARS sees the position.

The following considerations are relevant from the available international and local case law:

  • Operating a bank account in the foreign country in the name of the company is not necessarily enough to establish POEM in that country
  • What is meant by effective, is “realistic, positive management” (in the foreign country)
  • POEM is “where the shots are called”
  • POEM is where the “real top level management” takes place
  • There is a difference between key management decisions and day-to-day management decisions. It is the place where the key management decisions are taken, that will indicate the POEM

Modern day technology and operations add to the complexity around determining the POEM of a company. Various factors need to be considered in order to decide whether it is likely for your company to have its POEM recognised in the offshore country or not.

The bottom line remains – incorporating offshore is not enough to establish tax residency in the offshore country.

Save time and get quicker financial support with a term sheet

Save time and get quicker financial support with a term sheet

Prince Mathibela

A well-known method for financing a company is to issue equity shares for a capital contribution. There is often much deliberation around the essential terms which regulate this transaction, before it’s recorded in binding transactional documents.

It is standard practice for a potential investor to withhold investment proceeds until transactional documents have been finalized. This results in the investee company having to bootstrap for another month or two to carry out operational activities while drafting and implementing documents.

The likelihood of a longer waiting period can be increased if parties fail to use a term sheet that sets out the salient terms of the investment. This instrument will assist a commercial attorney to glean insight and draft the investment documents quicker and prevent endless back and forth between a potential investor and an investee company.

The value is that the transaction parties state their intent on the most essential elements of the transaction upfront. This removes a lot of the friction out of the process of reaching consensus in the transaction documents.

Term sheet

A term sheet, also called a letter of intent or a memorandum of understanding in some circles, is a document outlining the material terms and conditions of a proposed transaction.

Unlike binding contracts such as a subscription agreement, term sheets are generally not binding. However, parties may elect to adopt a wholly or partially binding term sheet.

In most cases, only the confidentiality undertakings and provisions that bind the parties to exclusive negotiations will be binding. The remaining terms can only be enforced against a defaulting party if expressly accepted as having immediate force and effect.

In a term sheet, investors focus largely on terms that bestow economic advantages and controlling power in an investee company. As such, a representative of any investee company must have a firm grasp of the materiality of each provision on a term sheet before investment discussions. In this way, the representative’s focus is not misdirected to immaterial provisions of no value to existing shareholders in the long term.

Ideally, each provision must be negotiated separately, and the outcome thereon accurately recorded. For example, if a potential investor wishes to secure voting rights on board level, part of the completed term sheet must state that the potential investor will have the right to appoint a director to the investee company’s board of directors and that on some matters that require the affirmative approval of the investor representative, a board resolution passed without the appointee will be void.

Always remember that most signed term sheets merely demonstrate the intent to invest. Investors usually refrain from disbursing funds until the date when a subscription agreement or other transactional documents come into full force and effect.

The benefit of using a term sheet is to facilitate investment discussions, ascertain outcomes and speed up the process involved in drafting final transactional documents. The investment funds are then disbursed more quickly resulting in the investee company reverting their focus to the main business of the company and generating their next revenue.

We have also seen that in practice a potential investor is more likely to conclude an investment transaction once a term sheet has been signed than after a verbal discussion and a handshake.

Subscription agreement

A subscription agreement is a document in which at least, a subscriber, being a potential investor, is bound to advance a subscription consideration in return for a specific number of equity shares in an investee company.

Ideally, the terms and conditions surrounding the amount of capital to be invested together with the disbursement terms and the purview of privileges and limitations of the equity shares has already been settled through a term sheet and then detailed to a subscription agreement.

The real value of using a term sheet is the ease with which a subscription agreement is finalised as most of the hard work would have been completed and discussed during the negotiation stage and the outcome already accurately recorded therein.

Lastly, seek assistance from your trusted legal practitioner to create a legally sound subscription agreement. The binding effect of this agreement and its enforceability is dependent on the extent to which it is consistent with the Companies Act, 71 of 2008 and the following constitutional documents of the investee company:

  • memorandum of incorporation;
  • shareholders’ agreement; and
  • the company rules (if any).

Good luck fund raising!

Job offer: Senior Associate (POSITION FILLED)

Job offer: Senior Associate (POSITION FILLED)

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

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.