The Legal Issue: Commercial Department March 2022 Newsletter

The settlement arrangement included three classes of creditors, being market participant creditors, financial creditors and contractual creditors. The three different classes of creditors would be treated differently in terms of the settlement arrangement. Trevo Capital Ltd (“Trevo”) was dissatisfied with the manner in which market participation creditors would be treated in terms of the settlement arrangement, and in response instituted legal action against Steinhoff.

Trevo challenged the validity of the financial assistance that Steinhoff previously granted to Steinhoff Finance Holding GmbH (“SFHG”) and Lux Finco 1, which are both foreign companies related to Steinhoff. The basis of Trevo’s claim was that the financial assistance was granted in contravention of the solvency and liquidity requirements provided for in section 45.

Section 45 of the Companies Act

Section 45 provides that a company can’t offer financial assistance to an interrelated company unless the board of directors is satisfied that immediately after providing the financial assistance the company would satisfy the solvency and liquidity test (section 45(3)(b)). For the purposes of section 45, financial assistance includes lending money, guaranteeing a loan or other obligation, and securing any debt or obligation.

Financial assistance

Trevo alleged that Steinhoff granted the following financial assistance to foreign related companies:

  • in 2014 Steinhoff guaranteed convertible bonds which SFHG had provided to investors; and
  • in 2019, after Steinhoff’s financial irregularities were uncovered, Steinhoff entered into a conditional payment undertaking (“CPU)” with the abovementioned bondholders.

The High Court’s Judgment

The High Court had to answer the following questions:

  • does section 45 apply to financial assistance granted by a South African company to a related foreign company;
  • did Steinhoff’s board of directors ensure compliance with the solvency and liquidity requirements before approving the 2014 guarantee; and
  • does the abovementioned CPU constitute financial assistance as contemplated in section 45 of the Act?

Does section 45 apply to foreign companies?

The court had to determine if the phrase “or to a related or interrelated company or corporation” in section 45(2) included foreign companies. “Company” is defined in the Act and clearly does not include a foreign company, while “corporation” is not defined.

By reading section 45(2) in light of the overall purpose of section 45, and by having regard to the presumption against superfluity, the court determined that the legislature had intended for “corporation” to include foreign companies, and as a result had intended for section 45 to apply to foreign companies.

Did Steinhoff’s board of directors ensure compliance with the solvency and liquidity requirements before approving the 2014 guarantee?

Trevo argued that because Steinhoff’s financial irregularities had significantly exaggerated their profits and assets it would have been impossible for Steinhoff’s board to have satisfied themselves of the liquidity and solvency tests.

The court, however, rejected Trevo’s ex post facto approach and concluded that Trevo had provided no evidence that at the time of the 2014 guarantee Steinhoff’s board was unreasonable in approving the guarantee. Therefore, the 2014 guarantee was declared valid by the court.

Does the CPU constitute financial assistance as contemplated in section 45 of the Act?

The CPU replaced the 2014 guarantee by restating the bondholders existing debt while also revising several terms of the guarantee. The CPU essentially transferred the bondholder’s existing debt from SFHG to Lux Finco 1, a newly formed related company, while still requiring Steinhoff to guarantee the debt in question.

Trevo argued that the revised terms meant that Steinhoff had provided new financial assistance to Lux Finco 1, and therefore the provisions of section 45 of the Act should have been complied with before Steinhoff’s board approved the CPU.

Steinhoff argued that the CPU simply restated its existing debt under the 2014 guarantee and therefore could not constitute new financial assistance.

The High Court ultimately rejected Steinhoff’s argument on the basis that the restatement of a debt on new terms, and involving new parties, creates a new debt in terms of applicable South African law. The High Court concluded that the CPU resulted in financial assistance being granted to Lux Finco 1. Since Steinhoff’s board had not complied with section 45 of the Act before approving the CPU, the CPU and the resolution approving the CPU were both void.

Andrew Dutton

[email protected]

Tax

Temporary letting of residential property by developers

When a property developer sells residential property, he must charge VAT on the sale at the standard rate of 15%. Sometimes market conditions make it difficult for a developer to sell newly built properties for extended periods of time. In such circumstances a developer will often recover ongoing expenses by entering into short-term leases for the properties until buyers are found.

When a developer leases newly built residential property it constitutes a change of use from residential property development to residential letting.  This triggers the change of use provisions in the Value Added tax Act, 1991 (“VAT Act”) which provide for a deemed supply of the property that is being let. To understand why this happens one must consider the difference between a taxable and exempt supply. The sale of residential property by a developer is a taxable supply, while the leasing of residential property is an exempt supply. This means that a developer who builds to sell residential properties, as opposed to building to lease, is entitled to deduct input VAT for the build costs. If the developer cannot sell the properties and temporarily leases them (i.e., changes his use from a taxable supply to an exempt supply), he is required to make an output VAT adjustment in terms of section 18(1) of the VAT Act, based on the open market value of the property when the property is leased.

Section 18B was introduced into the Act providing for temporary relief for developers between 10 January 2012 and 1 January 2018. Since this provision ended the inequitable value attributed to the change of use adjustment has once again become a concern. It is proposed that, with effect from 1 April 2022, a new section 18D be introduced into the VAT Act to address the concern.

The new provision provides that, where a developer temporarily leases a residential property for less than 12 months, the property is deemed to be supplied for a consideration equal to the adjusted cost to the developer of the construction, extension or improvement of the property. The time of supply is deemed to be the tax period in which the lease agreement comes into effect.

It is important to note that the new provision only applies to property that is temporarily used for residential letting. This is defined as one or more lease agreements which do not exceed a combined total of 12 months. Lease agreements for fixed periods exceeding 12 months are specifically excluded and, in such circumstances, the change of use adjustment in section 18(1) would apply.

If the developer subsequently sells the property during the 12-month temporary letting period, it will be considered a taxable supply in the course of the developer’s enterprise. The supply is deemed to be for a consideration equal to the purchase price. However, where the property is:

  • supplied by the developer within the ‘temporarily applied’ 12 month period; or
  • no longer applied in supplying residential accommodation immediately after the expiry of the 12 month ‘temporarily applied’ period; or
  • is subject to the section 18(1) adjustment,

the developer will be entitled to a deduction which is deemed for this purpose to be input tax.  The deduction is for an amount equal to the adjusted cost to the developer of the construction, extension or improvement of the residential property supplied.

Graeme Palmer

[email protected]

The tax implications of holding shares as a nominee

A company’s issued shares may be held by, and registered in the name of one person (“nominee”), for the beneficial interest of another person (“beneficial owner”). The South African Revenue service (“SARS”) has released a new Binding Private Ruling 370 (“ruling”) on the tax implications when the shares are de-registered from the nominee’s name and registered in the name of the beneficial owner.

The facts presented to SARS for the purpose of its ruling were that both the nominee and the beneficial owner of the shares were natural persons who resided in South Africa. The beneficial owner of the shares needed a property from which he could conduct his business. He arranged with his attorney for the property to be purchased in the name of one of the attorney’s employees. The attorney and employee acted as a nominee in the acquisition and registration of the property.

The property was later transferred to a company and the shares in that company, like with the property, were held in the name of an employee of his attorney on behalf of the beneficial owner.

During the time when the property and later the shares, were held by the nominee, the beneficial owner had complete control of the property. He funded and maintained the property, paid all rates and taxes on the property, and incurred all the costs of renovations and extensions. In other words, despite the shares of the property-owning company being in the name of the nominee, the beneficial owner had possession and control of the property since its acquisition.

SARS ruled that the registration of the shares in the name of the beneficial owner and the contemporaneous deregistration of the shares from the name of the nominee would not constitute a disposal for capital gains tax purposes. Furthermore, the transaction would not constitute a donation or deemed donation that would trigger donations tax. Given that there was no transfer of shares, no securities transfer tax would become payable on the transaction. Similarly, the provisions that cause transfer duty to be payable when there is a change of ownership in a property-owning company would not apply.

It is important to be able to demonstrate that the beneficial owner, and not the nominee, held a beneficial interest in the shares.  This could be in the form of an agreement giving the beneficial owner the right to dividends, voting rights, or the right to sell the shares. Without being able to demonstrate a beneficial interest, the change of registered shareholder could be seen as a sale or donation that triggers tax.

Graeme Palmer

[email protected]

Non- Profit

Changes are on the cards for non-profit organisations

The Non-Profit Organisation Amendment Bill 2021 (“Bill”) intends making important changes to the Non-Profit Organisations Act, 1997 (“Act”). While the Act was meant to establish an environment in which non-profit organisations (“NPO”) could flourish, gaps have been identified, particularly for smaller NPOs and community-based organisations.

The amendments proposed by the Bill include:

  • The compulsory registration of foreign organisations operating within the borders of South Africa.
  • The constitution of a NPO that intends to register must specify the organisational structures and mechanisms for its governance, which shall at a minimum include the office of or designation of the chairperson, secretary, and treasurer with their deputies.
  • An NPO that has a similar or identical name to an existing NPO, or any other organisation and such name is likely to cause confusion with any other organisation or individual person shall not be permitted to register, unless there is sufficient proof that the applicant has a legal right to that name or has consent to use that name.
  • Disclosure will be required on whether an office bearer has previously been found guilty of an offence relating to the embezzlement of money of any NPO and the status of the conviction.
  • Doing away with the NPO directorate to be replaced by the Office of the Registrar which will assume the functions currently designated to the Directorate.
  • When registering only one copy of the NPOs Constitution is required, where previously two copies had to be submitted. The Constitution submitted must bear the name of the organisation to be registered.
  • Previously any member of the public had the right of access to, and to inspect any document (in a manner and in circumstances prescribed by the Minister) that the director was obliged to preserve. This provision has been deleted and any access to information must now be in accordance with the Promotion of Access to Information Act, 2000.

Provision is made in the preamble to the Bill for an Arbitration Tribunal. Aside from indicating that establishment of the Arbitration Tribunal is intended for the purposes of the resolution of disputes, no further mention is made of the Tribunal in the Bill. There is however already provision for an Arbitration Tribunal in section 9 of the Act.

Section 12(1) of the Act makes it clear that registration for South African organisations as an NPO is voluntary. While the intention of the Bill is to make registration compulsory for foreign organisations only, some doubt is cast on this by the proposed subsection 12(5). This says that “any non-profit organisation, including foreign nonprofit organisations…must be registered in terms of this Act before operat[ing]”. (author’s emphasis). This suggests that local NPOs will also be required to register. The Explanatory Memorandum on the Bill, issued by the Department of Social Development, sheds no light on this and contains the same apparent contradiction regarding compulsory registration. Hopefully this ambiguity is rectified before the amendments become law.

Clea Rawlins

[email protected]

 

Competition

Mergers and the right to health care    

In Competition Commission of South Africa v Mediclinic Southern Africa Pty Ltd the Constitutional Court (“ConCourt”), had to consider whether the Competition Appeal Court (“CAC”) had correctly interfered with the findings of, and remedy given by the Competition Tribunal in a merger between Mediclinic and Matlosana Medical Health Services (Pty) Limited.

In 2019, the Tribunal prohibited the merger holding that there would be significant competition concerns, inter alia, that that the proposed merger would result in the removal of the lower tariffs available to insured and uninsured patients at the target hospitals, and significantly limit patient’s ability to negotiate and switch to these cheaper hospitals.  The CAC reversed the Tribunals decision and approved the merger with conditions.

Before the ConCourt, the majority found that interference with factual findings by appellate courts can only be justified in the event of a misdirection or a clearly wrong decision and for the sole purpose of achieving justice. Reviewing case law, the ConCourt held that section 12A of the Competition Act requires that the Tribunal make a determination after a holistic inquiry into whether the proposed merger is likely to substantially prevent or lessen competition. The Court should take account of the composition and expertise of the Tribunal as well as the nature of the enquiry and that courts must be cautious before imposing their own conception of the policy considerations adopted by the Tribunal. A court should seek rather to examine and test rigorously the justifications offeredby the Tribunal for the decision to which it has arrived before it invokes its powers.

The ConCourt held that what had happened in the present case was the imposition of the CAC’s conception of what was right and replacement of its factual findings and remedy. However, the Tribunal could not be said to have misdirected itself or been clearly wrong in its factual findings or policy decisions.

Further, the ConCourt emphasised the importance of the Constitution and particularly the Bill of Rights in the interpretation of the Competition Act, confirming that the CAC, in its decision, did not promote the spirit, purport and object of section 27 of the Constitution which provides for the fundamental human right “to have access to health care services”.

The ConCourt commented that, among other things, the already high and ever-escalating costs in the private health care services sector, the already dominant position of a company seeking to take over, and the constitutional imperative to fulfil the right of access to health care services, did justify the Tribunal’s prohibition of the merger. Therefore, the ConCourt upheld the appeal and set aside the decision of the CAC.

Rishal Bipraj

[email protected]

Tyresome collusion: tribunal hearing into alleged tyre cartel

In a matter before the Competition Tribunal, evidence was heard that the four major tyre manufacturers in South Africa (Goodyear, Continental, Bridgestone, and Apollo Tyres, previously  known as  Dunlop) as well as the South African Tyre Manufacturers’ Conference (SATMC), a representative body of South African tyre manufacturers, allegedly held meetings and telephone conversations from 1999 until at least 2007 in contravention of the Competition Act to discuss and agree price increases and coordinate the timings of increases.

It is also alleged that the participants discussed which of them would lead the announcement of the price increases, the size or range of the increase and also the date from which the price increase would become effective.  At one meeting, the representatives of the companies in the form of the managing directors and chief executives, met at OR Tambo International Airport on 27 January 2000, to discuss high manufacturing and raw material costs in South Africa. All discussions were informal with no record of minutes.

The discussions focused on the manufacture and supply of passenger tyres, light truck/commercial tyres, truck and bus tyres, off-the-road tyres, agricultural tyres and earthmover tyres in South Africa. The main customers were tyre dealers who purchase tyres for resale to consumers, vehicle manufacturers who purchase tyres for new vehicle models, and the government, which procures tyres for state-owned vehicles and fleets through a tender process managed by the State Tender Board.

An owner of a fleet of trucks, Parsons Transport, came forward in October 2006 and brought the alleged cartel conduct to the attention of the Competition Commission. Parsons complained that the tyre manufacturers simultaneously adjusted their product prices as and when they liked and that they used marketing structures and pricing techniques to disguise their price fixing.

The Commission on 4 April 2008, obtained a warrant, and conducted search and seizure operations at the premises of Bridgestone, Dunlop and the SATMC. According to the Commission, documents were seized which uncovered evidence that corroborated the complaint of Parsons Transport, but also revealed other collusive conduct between the tyre manufacturers, including evidence of division of markets, collusive tendering and the exchange of competitively sensitive information.

In September 2009, Bridgestone applied for and was granted conditional immunity from prosecution in terms of the Commission’s corporate leniency policy. Apollo Tyres thereafter finalised a settlement agreement with the Commission in terms of which the company agreed to pay a R45 million fine, confirmed by the Tribunal in December 2011. Bridgestone, in support of its leniency application, gave the Commission information to corroborate the Parsons complaint and other evidence of collusive conduct beginning in 1999.

Bridgestone also included evidence regarding agreements to reduce the size of the discounts that dealers were offering to customers and evidence of certain interactions between the tyre manufacturers regarding the supply of tyres to original equipment manufacturers.

It is reported that the Commission has requested the Tribunal to impose an administrative penalty amounting to 10% of the total turnover of each of the SATMC, Apollo, Goodyear and Continental.

Rishal Bipraj

[email protected]

Contract

The effect an unenforceable sale agreement has on interlinked contracts

In the recent Supreme Court of Appeal (SCA) case of Van der Merwe v Bonnievale Piggery (Pty) Ltd the court determined that where there is an interlinked contractual relationship for sale of products and the parties are unable to reach agreement on price, there is no consensus between the parties and the entire contractual arrangement between them ends.

During 2005 the parties entered into an oral business relationship in terms of which Bonnievale would supply pig carcasses to Van der Merwe on a continuing basis. As part of the business relationship, it was agreed that the pig carcasses would be supplied at “reasonable market related wholesale prices that would follow market fluctuations”.

The business relationship included several interlinked contracts including: (i) contracts for the sale of pig carcasses where the parties would negotiate the sale price before the conclusion of each contract of sale; (ii) an exclusive supply agreement; and (iii) a sole distributorship agreement. The business relationship, and with it the interlinked contracts, were of indefinite duration. For many years the parties managed to negotiate suitable prices for several sale agreements, however, in 2013 the parties could not reach consensus on price and the agreement between them came to an end.

Thereafter, Bonnievale instituted action against Van der Merwe for failing to pay for pig carcasses sold and delivered to Van der Merwe during January and February 2013. In response, Van der Merwe instituted a counterclaim for breach of contract on the basis that the Bonnievale would not accept a market related price for the pig carcasses. After the court a quo and, on appeal, the full bench of the High Court dismissed Van der Merwe’s counterclaim, he was given leave to appeal to the SCA.

The pertinent questions the SCA had to answer were:

  • in light of the requirement that the price of the pig carcasses should be market related and adjusted in accordance with market fluctuations, did the inability of the parties to agree on a price constitute a breach of the sale agreement; and
  • what effect did the parties’ inability to agree on a price for the pig carcasses have on the business relationship and the interlinking contracts?

The court first looked at the enforceability of a provision which states that goods will be sold at market related prices. The court looked at the manner in which the parties had interpreted the market related provision (in all previous years, Van der Merwe had agreed to Bonnievale’s prices even where these prices had not been reduced in accordance with market fluctuations) and determined that the market price was simply a standard against which the parties would negotiate prices rather than an objectively determinable standard or mechanism to resolve a deadlock.

In order for the market related requirement to have been enforceable, the parties would have needed to explicitly agree that should they not be able to reach consensus on the price of the carcasses, they would be sold at the prevailing market price. The court stated that in such circumstances, contracting parties could appoint a third party to determine what constitutes a reasonable market price to break a deadlock.

The SCA essentially reaffirmed the position that an “agreement to agree” is not enforceable unless it expressly includes enforceable provisions.

Regarding the effect that the unenforceability of the sales agreement had on the interlinking contracts, the SCA concluded that when there are interlinked contracts for the sale of products, and the parties are unable to reach agreement on price, there is no consensus between the parties and the entire contractual arrangement between them comes to an end.

Andrew Dutton

[email protected]

Services

Commercial Department Services

The department offers a full range of expert services in all aspects of corporate and commercial law. This division is involved locally, nationally and internationally with:

  • Agency, distributorship, licensing and franchising structures
  • Amalgamations, restructuring and unbundling
  • Banking and finance, including conventional and Islamic banking and finance
  • Black economic empowerment (BBBEE) structures
  • Business rescue, insolvency and liquidation
  • Credit, hire purchase, instalment sale and asset lease agreements
  • Competition law
  • Company formations, secretarial work and CIPC registrations
  • Consumer protection laws
  • Contracts including options, offers and memoranda of understanding
  • Corporate governance, director, member and shareholder issues
  • Due diligences and legal audits
  • Exchange control matters
  • Energy and petroleum matters
  • Information and communication technology law
  • Leasing and occupational rights
  • Mergers and acquisitions
  • Mining agreements
  • Partnerships and joint ventures, including public private partnerships (PPP)
  • Property development and planning schemes
  • Standard trading terms, disclaimers and statutory warranties
  • Structured finance, lending, preference share schemes and securities
  • Tax law
  • Sugar industry law
  • Trusts, their structure, formation and alteration
  • Takeovers, sales of businesses, offers to minorities and management buyouts
  • Water law

Company secretarial services

We have in-house expertise providing comprehensive company incorporation and secretarial work and services, including the following:

  • Incorporation of new companies in SA or anywhere in Africa or the rest of the world
  • Replacement or amendment of MOI
  • Purchase and tailoring of shelf companies/CCs
  • Company/CC de-registrations
  • Restoration of deregistered companies
  • Voluntary winding up of companies and CCs
  • Changes of directors and shareholders
  • Filing of audited AFS and conversions to iXBRL format (through our agents)
  • Company name, auditor, financial year end, MOI changes for registration
  • Maintenance of share registers and minute books
  • Close corporation conversions
  • Submission of annual returns
  • Minutes and resolutions