OFFSHORE COMPANIES AND DOING BUSINESS IN SOUTH AFRICA: A COMPANIES ACT PERSPECTIVE

a2bAccording to the most recent statistics released by the South African Revenue Service, South Africa remains a net importer of goods and services. Put differently, one could say that South Africans are more often clients in cross-border transactions than they would be the service provider. Many of our clients operate in this space, including foreign incorporated companies which are doing business in South Africa. This article is aimed at those specific clients of ours: those clients doing business in South Africa through companies incorporated outside of South Africa.

Section 23 of the Companies Act, 71 of 2008, regulates when foreign companies are required to register as “external companies” in South Africa. In terms of that section an external company must register with CIPC within 20 business days after it first begins to conduct business, or non-profit activities, in South Africa. The question is then when will the company in question be considered to be conducting business here?

A foreign company is, by virtue of the provisions of the Companies Act, regarded as conducting business in South Africa if either it is a party to at least one employment contract in South Africa, or if it is conducting such activities for a 6-month period “as would lead a person to reasonably conclude that the company intended to continually engage in business or non-profit activities within the Republic.” (section 23(2)(b)) Therefore, having even one employee in South Africa requires a company to register.

Certain exclusions may apply and where the Act is explicit that certain activities should not be considered to establish sufficient enough a presence in South Africa to deem the company to be one conducting business here (and therefore required to register with the relevant authorities). However, these exclusions are illuminating in the sense that it presents a rather low bar of activity (such as having shareholders’ meetings here or maintaining a bank account), therefore potentially hinting that the bar for being considered to conduct business in South Africa and therefore required to register as an external company may not be very high.

In terms of section 23, any foreign company required to register as an external company in South Africa must maintain an office in this country. Moreover, failure to adhere to the requisite registration requirements may ultimately lead to a company being notified that it is no longer allowed to carry on business operations in South Africa. Although this article does not consider the implications of registering as external company, we also wish to alert affected clients thereto that this legislative registration requirement may have certain tax and exchange control related implications inherent to them, and on which advice should be taken to manage these requirements in a sensible and responsible manner.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

FINANCIAL ASSISTANCE BY COMPANIES TO ISSUE SHARES

Section 38 of the Companies Act, 61 of 1973 (now repealed) contained a prohibition against companies issuing shares to prospective shareholders on loan account.  This was identified as one of the hurdles in the way of BEE empowerment deals specifically (which quite often involves BEE participants requiring funding to be able to subscribe for shares in a company).  Consequently, this was addressed in the Companies Act, 71 of 2008, through the introduction of section 44 which now specifically provides for new share issues to be undertaken on loan account, subject thereto that this is not prohibited by the company’s memorandum of incorporation.

The board of directors of a company may now authorise financial assistance to be provided by the company by way of a loan, guarantee or the provision of security to any person for the purpose of subscribing for shares issued in that company.  However, and despite any provision of a company’s memorandum of incorporation, the company’s directors may not authorise any financial assistance unless the financial assistance is for either an employee share scheme, or has been authorised through a special resolution by the shareholders of the company.  (A special resolution involves a resolution adopted with the support of at least 75% of the voting rights exercised on the resolution, or a different percentage which may potentially be allowed for in the company’s memorandum of incorporation.)  In addition, the company’s directors must be satisfied that the terms of the loan (or other form of financial assistance) is fair and reasonable to the company, and that the company would, after providing the financial assistance, still be both solvent and liquid.  If the company’s memorandum of incorporation specifically imposes certain further conditions on the company granting financial assistance for the issuing of its shares, these requirements too need to be adhered to.

Any agreement to provide financial assistance which would be contrary to the requirements set out above in terms of either section 44 of the Companies Act, or the memorandum of incorporation of a company, would be void.  Directors in breach of this may be held personally liable for damages caused.

The new regime in the ‘new’ Companies Act is enabling for business, but directors should caution against applying this without due consideration to the above requirements.  Of specific relevance would be if for example the recoverability of a loan granted to enable the borrower to subscribe for shares is doubtful.  If this is the case, the duty of care of the directors towards the company may be called into question by other shareholders prejudiced as a result, potentially leading to delictual claims against the directors in personal capacity for not displaying the statutory required duty of care towards the company.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)