South Africa: Commercial Law In South Africa

Last Updated: 19 December 2018
Article by Adams & Adams
Most Read Contributor in South Africa, April 2019

GENERAL INFORMATION

The Republic of South Africa ceased to be a member of the British Commonwealth of Nations and became an independent republic in 1961. After 1994 it rejoined the Commonwealth. South Africa lies at the extreme southern tip of the African continent, bordered to the north by Namibia, Botswana and Zimbabwe, and on the northeast by Mozambique.

Area: 1 219 090 km2

Population: 50 million

Capital: Pretoria (administrative) Cape Town (legislative)

Currency: Rand = 100 cents

GDP: USD 527.5 billion (2010)

Internet domain: .za

Languages: 11 official languages: English, Afrikaans, Ndebele, North Sotho, Sesotho, Swazi, Tswana, Tsonga, Venda, Xhosa, Zulu

Working week: Monday - Friday

Exports: Gold; other minerals and metals; foods; chemicals; manufactured goods

Imports: Machinery; transport equipment; chemicals; textiles; scientific instruments; petroleum products

COMPANY LAW

Business vehicles

There are four forms of companies commonly used by foreign investors:

  • Private companies.
  • Personal liability companies.
  • Public companies.
  • Non-Profit companies.

A private company is prohibited from offering its shares to the public and is restricted in the transfer of its shares. A private company is owned by its shareholders who contribute to the company via share capital.

A public company is largely similar to a private company, with the main difference being that a public company can freely offer its shares to the public, which facilitates the raising of capital for the company.

The transferability of the shares is not restricted. Due to their public nature, public companies have greater transparency requirements.

Personal liability companies are similar to private companies, however do not attain limited liability and are mainly used by professions which are prohibited from restricting their liability.

Non-profit companies are companies whose purpose is not to make a profit and are aimed at altruistic ventures.

Incorporation

The following steps need to be taken in order to incorporate a company:

  • The incorporation of a private company requires the reservation of a company name. This may be done simultaneously with the registration procedure and may be completed electronically. If a proposed name is rejected, the company may still be registered with its registration number as the name of the company at incorporation.
  • A notice of incorporation and a memorandum of incorporation (MOI) will need to be filed with the Companies and Intellectual Property Commission (CIPC). Although a standard MOI is available, a tailored MOI can also be prepared.
  • Where applicable, written consent of auditors to act for the company will also need to be submitted.
  • Lastly, a notice of the company's registered office and the submission of a register of directors is required.

Regulatory Reporting

Secretaries and auditors are not required for private companies.

A company will need to submit annual returns. No audited financial statements are required for most private companies. However, for public companies and private companies which have a high public interest score (determined in accordance with the Regulations promulgated under the Companies Act, 2008), such entities must file their annual financial statements with the CIPC.

Share capital

A private company must have share capital, but there is no minimum or maximum amount. Shares issued in accordance with the Companies Act do not have a nominal or par value.

Management

Private companies are managed by one or more directors who form the board of directors. The board of directors of a public company must comprise of at least three directors. The board of directors may delegate their power to non-board members for the effective management of the company.

The Companies Act sets out a number of categories of people who are ineligible or disqualified from acting as board members. However, foreign nationals are not restricted from acting as board members.

A company has to appoint a local public officer, for tax requirements.

Are local shareholders required?

There is no requirement that shareholders must be local.

Branch company

A foreign company not wishing to incorporate a subsidiary in South Africa may set up a branch. The key requirements and characteristics of a branch are that the foreign company must register as an external company within twenty business days after it first begins to conduct business, or non-profit activities within South Africa.

COMPETITION LAW

Law

  • Competition Act 89 of 1998.

The Act is enforced by the Competition Commission, the Competition Tribunal (in Pretoria) and the Competition Appeal Court (in Cape Town).

Mergers

A merger is notifiable where the following thresholds are met:

  • The merging parties' combined annual turnover or assets exceeds USD 56 million.
  • The annual turnover of the acquiring firm together with the target firm's assets exceeds USD 56 million.
  • The annual turnover of the target firm together with the acquiring firm's assets exceeds USD 56 million.
  • The target firm's annual turnover or asset value exceeds USD 7 million.

Mergers may not be implemented prior to approval.

Restrictive practices

The Act regulates both horizontal and vertical restrictive practices. In addition to prohibiting such practices where they are likely to result in a substantial lessening or prevention of competition, certain practices are specifically listed.

Abuse of dominance

The Act prohibits the abuse of a dominant position. Firms with a 35% market share are presumed to be dominant.

Sanctions

A contravention of the Competition Act may result in the imposition of a penalty of up to 10% of the firm's turnover.

CONSUMER PROTECTION

Consumer Protection is regulated by the Consumer Protection Act, 2008 (CPA). The CPA applies to, among other things:

  • Every transaction occurring with the Republic of South Africa
  • The promotion or supply of any goods or services within the Republic of South Africa

However, the CPA will not apply if the consumer is a juristic person (i.e. a company, close corporation, body corporate, partnership, association or trust) whose asset value or, annual turnover equals or exceeds USD 172 920.

Consumers have various rights under the CPA, including the following:

  • The right to privacy
  • The right to equality in the consumer market
  • The right to choose
  • The right to fair and honest dealing
  • The right to disclosure and information
  • The right to fair value, good quality and safety
  • The right to fair and responsible marketing
  • The right to fair, just and reasonable terms and conditions

The CPA also has specific provisions applicable to:

  • Franchising agreements
  • Business names
  • Lease agreements
  • Promotional competitions
  • Marketing
  • Warranties
  • Cooling of periods

Failure to comply with the provisions of the CPA can result in the imposing of administrative fines of up to 10% of the perpetrator's annual turnover or USD 86 460, whichever is the greater, or imprisonment for up to ten years.

DATA PROTECTION

The President of South Africa signed the Protection of Personal Information Act, 2013 (POPI) on 19 November 2013. However, POPI did not come into force on that day. Certain sections (relating to establishments of the Information Protection Regulator and the drafting of regulations) commenced on 11 April 2014. The remaining sections are still pending and, when they come into force, there will be a one year phase in period during which organisations can implement compliance with POPI.

POPI sets out eight conditions for the lawful processing of personal information namely:

  • Accountability
  • Processing limitation. Purpose specification
  • Further processing limitation
  • Information quality
  • Data subject participation
  • Security safeguards
  • Openness

These principles are very similar to the OECD principles and those contained in the EU Directives.

Processing of personal information must be lawful and justifiable. This means that personal information may only be processed if:

  • The data subject consents to the processing.
  • The processing is necessary in terms of a contract to which the data subject is a party.
  • The processing complies with an obligation imposed by law.
  • The processing protects a legitimate interest of a data subject.
  • Processing is necessary to fulfil a public law duty obligation.
  • Processing is necessary for pursuing the legitimate interests of the responsible party or a third party to whom information is supplied.

As a general rule one may not transfer personal information to a third party in a foreign country unless:

  • The recipient of the information is subject to a law, binding corporate rules or a binding agreement which provide adequate level of personal data protection.
  • The data subject consent to the transfer.
  • The transfer is necessary for the conclusion of a contract that is in the interest of the data subject.
  • The transfer is for the benefit of the data subject and it is impracticable to obtain the data subject's consent (and if it was practicable to obtain the consent, the data subject would have given the consent).
  • The transfer is necessary for the performance of a contract between the data subject and the responsible party. POPI further regulates aspects relating to direct marketing, the processing of special personal information (i.e. relating to religion, race, ethnic, political persuasion, health, criminal behaviour etc.), and the processing of personal information relating to children.

DISPUTE RESOLUTION

Court structure

The Constitutional Court is the highest court in all constitutional matters, and deals exclusively over constitutional matters and related issues. The Supreme Court of Appeal is the highest court of appeal, except in constitutional matters, and its decisions are binding on all lower courts. The Magistrate's Courts are lower courts dealing with less serious criminal and civil cases.

Security by foreign litigants

Foreign plaintiffs and applicants may, subject to a court's discretion, be required to furnish security for costs when instituting formal proceedings in South Africa, in the event that a defendant or respondent so demands. Foreign litigants acting as respondents or defendants in formal proceedings are not required to furnish security for costs.

Costs

Successful litigants are generally entitled to recover legal costs, the determination of which involves the exercise of judicial discretion.

Legal practitioners

The legal profession in South Africa has a split bar consisting of advocates (the bar) and attorneys (the side-bar), and no dual practice is permitted. The attorneys' and advocates' professions each have their own regulatory systems and admission requirements.

Alternative dispute resolution

Arbitration in South Africa is governed by the Arbitration Act 42 of 1965, which provides for resolution of disputes by arbitration tribunals and the enforcement of awards. The Act applies only to arbitrations pursuant to written agreements, unless other legislation provides otherwise. Recognised arbitration institutes include the Arbitration Foundation of South Africa, the Association of Arbitrators, the Commission for Conciliation, Mediation and Arbitration, and the Africa ADR. South Africa acceded to the New York Convention, and subsequently enacted The Recognition and Enforcement of Foreign Arbitral Awards Act 40 of 1977 to give effect to the New York Convention.

EMPLOYMENT LAW

Governing legislation

  • Labour Relations Act, 66 of 1995, as amended.
  • Basic Conditions of Employment Act, 75 of 1997, as amended.
  • Employment Equity Act, 55 of 1998, as amended.

Particulars of employment

Contracts of employment must be in writing and comply with section 29 of the BCEA.

Forms of contracts

  • Permanent contracts - probation clauses are not mandatory. If included, the period should be reasonable to determine the employee's suitability. During probation, his performance must be assessed, if found below standard the employer has an obligation to assist him by giving reasonable counselling, training etc. to render a satisfactory service. Probation may be extended or terminated.
  • Fixed term contracts are differentiated between employees earning below, or in excess of, the earnings threshold determined by the Minister of Labour from time to time. Regarding the former, the contract must be in writing, state the reasons for fixing the term and he may only be employed on a fixed term for longer than 3 months if the work is of a limited duration or the employer can demonstrate any other justifiable reason failing which the employee is deemed to be permanent.
  • Part-time employees earning below the earnings threshold must be treated no less favourably than a full time employee unless there is a justifiable reason.
  • Where an employee of a temporary employment service (TES) works for the client of a TES for 3 months or less, the employee will be regarded as providing a temporary service and the employee of the TES. Where an employee works for the same client for more than 3 months, the employee will be deemed to be the employee of the client and employed on an indefinite basis unless the work qualifies as a temporary service.

Termination / Dismissal

  • A dismissal will be regarded as unfair if not effected for a fair reason based on the employee's conduct or capacity; or the employer's operational requirements and in accordance with a fair procedure.
  • Provision is made for unfair labour practices and automatically unfair dismissals and remedies in the LRA and for unfair discrimination and affirmative action and remedies in the EEA.

Dispute resolution mechanisms and remedy

  • Dismissal disputes must be referred to the CCMA within 30 days from date of dismissal. Failing conciliation, unfair dismissal disputes for misconduct or incapacity may be referred to arbitration within 30 days; reviewable on application by either party to the Labour Court.
  • Remedies: reinstatement; re-employment or compensation.

EXCHANGE CONTROL

South Africa has exchange control systems in place which regulates the transferring of capital (goods or money) in and out of South Africa.

Exchange control is regulated by the Exchange Control Regulations of 1961 (promulgated in terms of the Currency and Exchanges Act 9 of 1933) (Excon Regulations) together with certain orders, rules and rulings, promulgated in terms of the regulations.

The National Treasury has delegated the administration of exchange control to the South African Reserve Bank (SARB), which is responsible for the day to day administration and regulation of exchange control. SARB has, in turn, delegated some of its powers in relation to exchange control matters to certain banks, which are known as authorised dealers in foreign exchange.

A transaction dealing with the in or outflow of capital from South Africa may require exchange control approval from SARB. Exchange control approval is required for, inter alia, dealings in non-resident owned securities and an outward transfer of capital.

The Excon Regulations further provide that no person may acquire or dispose of a controlled security without the permission of SARB. A controlled security is any security which is registered in the name of a non-resident or of which a non-resident is the owner, or in which a non-resident has an interest. The control over the acquisition or disposal of controlled securities is exercised by placing the endorsement "non-resident" on all securities owned by non-residents or in which non-residents have an interest. The purpose of this form of control is to ensure that the proceeds of any sale are remitted abroad or to the relevant non-resident.

South African residents, for purposes of exchange control, is any person (i.e. natural person or legal entity) who has taken up permanent residence i.e. domiciled or registered, in South Africa, irrespective of whether that person is of South African nationality or not.

A non-resident is a person whose normal place of residence is outside of the common monetary area (i.e. South Africa, Lesotho, Swaziland and Namibia).

TAX LAW

Income tax

South Africa has a national tax system predominantly governed by the Income Tax Act (ITA). Residents of South Africa are taxed on a residence basis whist non-residents are taxed on a source basis.

Any income accruing from a South African source is taxable within South Africa, and residents are taxed on their worldwide income, with relief granted in some instances for taxes paid in other jurisdictions.

Types of taxable income

The following taxes are payable:

Capital gains Tax (CGT), corporate income tax, dividends tax, donations tax, estate duty, excise duty, income tax, securities transfer tax, transfer duty and value added tax (VAT).

Tax rates

Resident companies are taxed at 28% whist non-resident companies which trade in South Africa through a branch is subject to tax of 33% on income.

Dividend withholding tax is 15% and donations tax is 20%. CGT is not taxed separately from normal income but rather as an integral part of income tax.

Double taxation treaties

South Africa is currently party to approximately 80 double taxation treaties.

Indirect taxes

The principle source of indirect taxation revenue in South Africa is VAT, levied in terms of the Value Added Tax Act.

At present, the standard rate of VAT is 14%. The VAT Act makes provision for certain goods and services to be either zero rated or exempt from VAT.

Additional indirect taxes include transfer duty levied on the sale of immovable property, payment of securities transfer tax on the transfer of beneficial ownership of shares of companies incorporated in South Africa or listed on the South African Stock Exchange.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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