Introduction to the Country
If you talk to a man in a language he understands, that goes to his head. If you talk to him in his language, that goes to his heart. Nelson Mandela
Pretoria (executive), Bloemfontein (judicial), Cape Town (legislative)
Primary sources of South Africa law are Roman-Dutch mercantile law and personal law with English Common law. Since 1910, it has passed laws through its own parliament.
By UN classification, South Africa is a middle-income country with an abundant supply of resources, well-developed financial, legal, communications, energy, and transport sectors, a stock exchange that ranks among the top twenty in the world, and a modern infrastructure supporting an efficient distribution of goods to major urban centres throughout the entire region. South Africa is ranked 25th in the world in terms of GDP as of 2007.
Finance and Tax matters
(a) Financial assistance
(i) Does the concept of financial assistance exist
There prohibitions and restrictions on the ability of a company to guarantee and/or give security are to support borrowings incurred to finance the direct or indirect acquisition of shares of that company; or any company which directly or indirectly owns shares in that company; or shares in a sister company. For many years, there was an outright prohibition on providing such assistance, and it was a criminal offence to do so (all of the company and its directors and officers being personally liable for such offence) and the transaction was void by law.
At present, a company can give such assistance but only if the directors are satisfied that the companys assets will exceed its liabilities after such assistance is given, and the assistance is sanctioned by a special resolution of the company in general meeting. The directors are personally liable for any contingent liability of the company that may arise, including any contingent liability arising pursuant to such assistance.
(b) Lending restrictions/banking monopolies
(i) Any restrictions applicable to the importation of capital by lenders?
South African entities and persons cannot incur financial obligations to foreign entities that are to be repaid outside of South Africa without the express approval of Excon. The consent of Excon will be required in respect of: (1) the incurring of the obligation to a non-South African resident in the first place; (2) the incurring of any financial liability expressed in a currency other than South African Rands; (3) the interest rate payable; (4) the timing of payments and the actual payments of interest and principal, and (5) the security granted to the lenders or their security agent.
Excon applies a number of broad principles set out in the Excon legislation, which principles it adapts and changes to suit the constantly changing international financial markets and South Africas financial position. Accordingly, it is not possible to state with certainty what Excon will approve in respect of a particular transaction.
(ii) Requirement for the lenders/security agent to be registered in the jurisdiction?
There is no requirement for the lenders or their security agent to be registered in South Africa in order to make loans into South Africa or to take security over assets in South Africa. However, Excons approval will be required in respect of the transfer of any shares (pursuant to a share pledge) into the name of a non-South African resident or the export of any proceeds following a realisation of any security. In addition, in the past, the Deeds Office has refused to register mortgage and notarial bonds in the name of non-South African residents because of the provisions of certain legislation. Furthermore, certain issues under South African laws governing various types of security prevent an agent from holding security on behalf of a principal. All of these issues mean that it is usual for a special purpose company to be established that has the function of holding the security as a principal and not an agent.
(iii) Can foreign lenders lend into the jurisdiction?
(c) Restrictions relating to repatriation of dividends
(i) Are there any restrictions relating to repatriating dividends?
There no restrictions relating to repatriating dividends provided that the share certificates issues in respect of the relevant shares held by the non-South African resident are clearly endorsed with the legend ânon resident shareholder. This endorsement can only be done by an authorised dealer appointed by Excon
(i) Are there any restrictions on the convertibility of the jurisdictions currency?
There are no restrictions on the convertibility of South Africas currency, the Rand.
(e) Interest payments
(i) Are there any restrictions on the payment and compounding of interest? If so, does this also affect both local and foreign lenders?
On the size of loans that are typically given in respect of power projects, there are no restrictions on the payment and compounding of interest. However, as stated above, if the loan is being made by a foreign lender into South Africa, both the interest rate and the payment of interest will be subject to the approval of Excon.
(i) Are there any withholding tax issues in relation to interest payments and fees to foreign lenders or payments received under any agreements?
There are generally no withholding taxes in relation to interest payments and fees to foreign lenders on loans used by a project company; payment of principal on debt; or payments received under any agreements. However, the tax laws are extensive, constantly changing and complex and it is advisable to obtain specialist tax advice in respect of each project and loan, as a particular lender may be regarded as subject to taxation in South Africa as a result of its personal history or circumstances.
(ii) List of double taxation treaties.
South Africa is party to a large number of double tax treaties â please consult local counsel. The countries with whom South Africa has concluded DTAs include most European, East European, many Asian and African countries, as well as the USA.
(iii) Lender risks in respect of tax liabilities/tax domiciliation as a result of providing debt and/or taking/enforcing security interests
South African lenders will be subject to taxation on the income that they earn from a loan (in accordance with the laws of South Africa that are generally applicable to them). It is advisable for foreign lenders to obtain specific advice in respect of the possible taxation of the income that they earn from a loan as, whilst generally such income is not taxable, the personal history and circumstances of that lender could make that income taxable in South Africa.
(iv) Can loan repayment / enforcement proceeds be treated negatively from a tax perspective for the lenders?
Please consult local counsel.
(g) Stamping costs
(i) Details of stamp duty costs
No stamp duty or similar duty applies in respect of finance documents and security documents and security interests. Transfer duty or VAT is payable on the registration of the transfer of immovable property, at a rate of 8% of the value of the property where the seller of the property is not a VAT vendor and at a rate of 14% where the seller of the property is a VAT vendor. Transfer duty at 0.25% is payable on the transfer of shares. Any increase in share capital will attract creation duty at 0.5%.
Security, Enforcement and Insolvency
(a) Overview of security regime
(i) Can a security interest be obtained over a companys assets, e.g.:
(A) accounts receivable (book debts);
(B) inventory (stock in trade);
(C) shares of a company (issued and authorised);
(E) real property;
(F) insurances; and
(G) project contracts.
The nature of the security depends on the nature of the underlying asset. Movable tangible assets are subject to notarial bonds, shares are pledged, immovable property is subject to mortgage bonds and intangible rights are subject to security cessions.
(ii) Can shares of a project company validly be pledged and enforced under an English law share charge?
The shares of a project company cannot be validly pledged and enforced under an English law share charge. Any security taken over shares would have to be a South African share pledge.
(iii) Can a company grant a security interest in order to secure its obligations (i) as a borrower under a credit facility, and (ii) as a guarantor of the obligations of other borrowers and/or guarantors of obligations under a credit facility?
A company can grant a security interest in order to secure its obligations (i) as a borrower under a credit facility, and (ii) as a guarantor of the obligations of other borrowers and/or guarantors of obligations under a credit facility, provided such security is not granted in respect of the acquisition of an shareholding in that company or its holding or sister company and provided that Excons approval will be required if that security is being provided in respect of the obligations of a non-South African borrower.
(iv) If the borrowings to be secured are under a revolving credit facility, are there any special priority or other concerns?
If the borrowings to be secured are under a revolving credit facility, there are no special priority or other concerns.
(v) Can the relevant security interests be granted to a security agent or trustee on behalf of the lenders from time to time?
As stated previously in this document, certain issues under South African laws governing various types of security prevent an agent from holding security on behalf of a principal. All of these issues mean that it is usual for a special purpose company to be established that has the function of holding the security as a principal and not an agent. This SPC grants the lenders a guarantee on the basis of a counter-guarantee or indemnity from the borrower entity, which counter-guarantee or indemnity forms the causa for security. This guarantee can be given to a class of lenders and not specifically named lenders, which allows the lenders to be changed from time to time. As the incoming lenders need to accept the benefits of the various rights granted to them and become party to the finance documents, it is usual that procedures are put in place to enable these lenders to accept the rights granted to them and become party to the various finance documents. Unless the new lenders become parties to the finance documents, they will not get the benefit of the security.
(vi) Please indicate the claims that would have priority over the relevant security interests.
The South African Revenue Service, employees of the insolvent entity secured creditors with real security (such as pledges of movables and quasi-pledges of intangibles, mortgage bonds and special notarial bonds) and preferred creditors (holders of notarial bonds and conditional cessions) will rank ahead of the concurrent creditors. No creditor will rank ahead of a secured creditor in respect of the asset over which the secured creditor has security, and preferred creditors will rank ahead of the other creditors in respect of the asset over which they have security, if the asset is still in the possession of the borrower at the time of insolvency.
(vii) Is there a public security registry?
There is no public registry that can be searched to confirm whether a project company has any security documents or any document dealing with any finance arrangement in place, such as guarantees, indemnities or suretyships given by or for the benefit of a project company. The only security documents that have to be registered in a public registry that can be searched are mortgage and notarial bonds, which are registered at the Deeds Office.
(viii) Formalities in respect of security creation:
In connection with the creation of a security interest in shares or other assets:
(A) Statutory perfection requirements;
No governmental or other consents or filings are required, unless the security is being given in respect of a loan from a foreign lender, in which case the consent of Excon is required;
(B) Any other formalities.
No formalities (for example, notice to creditors, shareholder approvals, notarisations, etc.) are required other than in respect of mortgage and notarial bonds which have to be undertaken by a registered conveyancer and notary (respectively). Notice to the creditors of the security taken by a lender may be advisable in certain circumstances, but this needs to be considered on a case by case basis as it might not be desirable in the particular circumstances of a company. If a company is giving security over a major part of its assets, then the consent of the shareholders in the form of a special resolution will be required.
(C) Steps for perfection and length of time taken
Notarial and mortgage bonds are registered at the Deeds Office. This is a relatively quick process, taking some weeks, if the documents are correctly prepared and lodged. Share pledges are not registered and are perfected by the pledgee taking possession of the share certificates issued in respect of the relevant shares. Other forms of security can only be perfected once the asset over which security is taken or the evidence in respect of an intangible asset (such as a document in respect of a right) is in the possession of the security holder. In respect of mortgage and notarial bonds, as detailed previously in this document, that can only be after obtaining a court order and having that enforced by the sheriff of the high court. In respect of other security, there is no need to obtain a court order first and possession can be taken without involving the sheriff of the high court but then fair value must either be given by the security holder to the borrower for that asset or the security holder must sell that asset for fair value.
(D) Any significant financial costs or significant time delays required to create and perfect the relevant security interest?
There are not significant financial costs ( or significant time delays) which would be required in order to create and perfect security interests, other than mortgage and notarial bonds. There can be significant costs to the creation and perfect of mortgage and notarial bonds and there can be time delays in respect of the registration of such bonds.
(b) Insolvency and enforcement regime
(i) Is there a court or similar register that can be searched in respect of proceedings and insolvency actions ?
There is no court or similar register that can be searched in respect of proceedings and insolvency actions.
(ii) Summary of the different options for an insolvency related process.
The different options for an insolvency related process are complex and detailed. There are several manners of proceeding in respect of an insolvent company. If it is possible that the company could be managed out of its insolvent circumstances, a judicial manager can be appointed to undertake such management. It is also possible for a company to enter into a scheme of compromise with its creditors where it agrees and undertakes to pay each of its creditors a specified number of cents in the Rand, in discharge of its debts. Finally, there is liquidation, in which one or 2 liquidators are appointed to liquidate the assets of the company and finally wind it up. The judicial manager and the liquidators are granted wide powers and whilst appointed to a company, they have full control over that company. They are not controlled by any one creditor or even a body of creditors, and they do not answer to any one creditor or group of creditors. Whilst the creditors have certain rights in respect of voting at creditors meetings and can nominate appointees to the roles of judicial manager and liquidator, the Master of High Court decides who will be appointed to those roles. There is no concept akin to the English law concept of a receiver. Before placing a company into judicial management, a scheme of compromise or liquidation, it is advisable to explore all other options.
(iii) Are any governmental or other consents required in connection with:
(A) the enforcement of a security interest in shares;
Other than the consent of Excon will be required in respect of the export of the capital realised outside of South Africa.
(B) the enforcement of a security interest in other assets
Other than the consent of Excon will be required in respect of the export of the capital realised outside of South Africa.or
(C) the enforcement of a guarantee (sovereign or otherwise)?
Other than the consent of Excon will be required in respect of the export of the capital realised outside of South Africa.
(iv) Do lenders inherit all environmental liabilities when they become owner of the shares upon enforcement (or at any other time)?
It is possible that the lenders will inherit all environmental liabilities when they become owner of the shares upon enforcement, as the National Environmental Management Act has provisions that look through the polluting entity to those persons who have derived a benefit as a result of the pollution. These provisions are operative at all times and it is arguable that lenders are exposed to environmental liabilities at all times. In the past, the Department of Environmental Affairs and Tourism (as it then was) considered prosecuting lenders for the environmental breaches committed by their borrowers.
(vi) Can security interests be enforced by both private sale and public auction, and is it necessary to appoint a court or other official to carry out the enforcement?
Security interests taken in the form of security cessions and pledges be realised by both private sale and public auction. Security interests in the form of mortgage and notarial bonds are realised by way of public auction conducted by the sheriff of the high court and it is necessary that the enforcement of such interests is carried out by the sheriff of the high court.
Corporate, Insurance and Employment matters
(a) Corporate vehicle
(i) Project company incorporation:
(A) Type of corporate vehicle
The usual form of vehicle for a power project is a limited liability company. Depending on whether the company is a private or public company, there is a requirement for either one or 7 shareholders. Authorised and issued share capital is not required to be large and can be small numbers. However, the existing Companies Act will be replaced during the course of 2010. Some of the changes to the existing companies law are considerable and it is recommended that specific advice be sought in respect of the impact of these changes on a particular company.
It is not possible for a foreign company to operate in South Africa as the legislation requires that, within a few days of establishing a presence in South Africa, a foreign company must either establish a South African company to undertake its activities in South Africa or it must incorporate itself as a branch office under the South African Companies Act. Failure to do so is a criminal offence.
(B) Issues relating to thin capitalisation
Thin capitalisation is an issue that arises under the Income Tax Act in respect of companies that have foreign shareholders and should be carefully considered in respect of each company. It is advisable that specialist tax advice is sought in respect of each company that will have a foreign shareholding.
(C) Requirement to have indigenous shareholdings
South Africa has legislation implementing broad based black economic empowerment (BBBEE). All tenders issued by any of the 3 tiers of the State, organs of state and state owned enterprises have specific BBBEE requirements. These requirements generally fall into 4 broad categories: (1) equity holding and company management requirements; (2) employment requirements; (3) subcontracting and purchasing requirements, and (4) corporate social investment requirements.
These requirements have their foundation in the Broad-Based Black Economic Empowerment Act; the Codes of Good Practice issued under that act, and the Preferential Procurement Policy Framework Act. It is important to note that these pieces of legislation only lay down the basic requirements and it is usual for tenders issued by any tier or organ of the State or state owned enterprise to have more onerous requirements. Accordingly, the requirements of each tender need to be individually considered and addressed, using specialist advice.
In addition, as the legislation places obligations on all private sector entities to achieve various levels of black economic empowerment, it is usual for private sector entities to place obligations on their suppliers of goods and services in respect of black economic empowerment.
Whilst the legislation is a good starting point for determining the various levels of black economic empowerment that are to be achieved, it must be appreciated that the definitions and determination of levels of black economic empowerment are complex and that the requirements imposed by various tenders add additional requirements and complexities. Accordingly, it is important to obtain specialist advice on the black economic empowerment requirements in respect of any tender or project.
(D) Thin capitalisation requirements
(E) Can a limited liability company be established?
Please refer to local counsel.
(F) Is it possible to use a foreign company or a branch of a foreign company to act as project company?
Please refer to local counsel.
(G) Estimated timescale for incorporation in the country. Are there any specific fees or other costs payable to governmental authorities in respect of incorporation?
It is possible to acquire a so-called shelf company from the auditing or law firm that is being briefed. This is a company that is a newly incorporated company which has never traded, has no assets or liabilities and is incorporated for the purpose of being sold by the law or auditing firm to a client. The constitutional documents and name of the company can then be amended to suit the purchaser. This is the quickest manner of proceeding.
The incorporation of a company can take several months, depending on how long it takes to gather all the information and documents required for a registration and to settle the constitutional documents, but the registration of a company, once the complete papers are properly lodged at the Companies Office, does not take more than a few weeks.
Creation duty is payable on the creation of share capital of a company and then the issue of all or part of that share capital. Whilst the rate of this duty is not high (0.5%), it is advisable to consider the amount that would be payable if the number of authorised and or issued shares is to be large.
(b) General corporate issues
(i) Is a private company free to lend and/or issue guarantees?
Please refer to local counsel.
(ii) Are there any restrictions on dividend distribution?
Other than the account rules and standards, there are not restrictions on dividend distribution.
(i) Mandatory insurance: are there any insurances which the project company or the Project is required to have by law (or regulations or similar)?
There are no insurances which the project company or the Project is required to have by law other than the insurances required by the Safety legislation and the Unemployment Insurance Act.
(ii) Is there any minimum requirement to place the insurance with local insurers or any other similar restrictions? If so, can reinsurance be lawfully placed internationally?
Insurances must be placed with insurers registered in South Africa. These local registered insurers then reinsure their exposure lawfully in the international reinsurance market.
(iii) Are there any restrictions in respect of granting security rights over the insurances or reinsurances?
There are no restrictions in respect of granting security rights over the insurances or reinsurances. It is common practice for the borrower to grant a security cession of over its insurances and claims against that insurance and for the local insurer and the reinsurer to agree to the granting of that security over its policies of insurance or reinsurance.
(i) Legislative/regulatory issues: is there any legislation or regulation impacting on foreign employees, in particular the conditions relating to work and residence permits? Please give an indication of the process and costs in relation to obtaining work and residence permits.
It is essential for foreigners working in South Africa to obtain work permits and residence permits. These permits can be difficult to obtain and renew, if not undertaken correctly, and it can be time consuming to obtain them. It is a very specialist area of law and it is advisable to consult an expert in this area. The use of foreign employees on a permanent basis may also have an adverse impact on issues such as the BBBEE, NIPP and CSDP compliance by the project company.
(ii) Foreign restrictions: are there any restrictions that apply to foreign employees and foreign contractors/subcontractors and if so what do they need to do in order to comply with local legislation?
There no restrictions that apply to only to foreign employees and foreign contractors/subcontractors. However, it is not possible for a foreign company to establish a business operation in South Africa and operate it. Having employees working in South Africa would be evidence of establishing a business operation in South Africa. In terms of the Companies Act, that company will have to conduct its business operations in South Africa either through a branch company or a locally incorporated subsidiary, which would be the employer of the employees in South Africa.
(a) Land registry: is there a land registry (or similar) in the country that can be searched to confirm whether a project company has granted of any mortgage, charge, option assignment, lien or other encumbrance over the whole or part of the properties or assets of a company?
The South African Deeds Office keeps accurate, current records of all land ownership, registered rights over land, mortgage bonds and notarial bonds. The records of the Deeds Office are accurate and can be searched to ascertain whether a company owns any land, or if it has granted any mortgage or notarial bonds. However, other types of security such as pledges of movable assets and security cessions are not registered with any registry and it is not possible to conduct a search to ascertain whether a company has granted any such security.
(b) Landlords rights: please indicate whether there are any rights which accrue to the landlord (or the government or any other bodies) that may override the terms of a land lease or threaten the rights of a project company particularly any right of repossession or acquisition.
Validly granted short term leases, that are granted by a landlord with the right to grant leases, are enforceable in accordance with their terms and are generally not overridden by any rights or laws, unless the relevant lease is granted subject to those rights. Long term leases (namely any lease that has an initial term of 10 years or an initial term that together with the renewal term will endure for 10 years, or more) are only enforceable against third parties if they are entered into and registered as notarial leases with the Deeds Office. Notarial leases grant real rights in the relevant land to the tenant.
The national government and various state owned enterprises are granted powers of expropriation of land by various pieces of legislation. Under such legislation, the expropriating entity has to pay the market price of the land to the owner, who has the right to dispute the price being offered to it. To date, however, the South African government has not expropriated any land, nor has any state owned enterprise. All land acquired by the government and state owned enterprises has been on the basis of âwilling buyer, willing sellerâ.
(c) Direct agreement: are you aware as to whether a direct agreement in respect of a lease has been previously been provided to lenders on other transactions?
Direct agreements have been entered into between the lenders to a project and a landlord in respect of the relevant piece of land. It is more usual, however, in respect of long term notarial leases that the lenders take a mortgage bond over such notarial lease.
(d) Forfeiture rights: do relief from forfeiture rights exist and would the lenders be entitled to rely on such rights?
South African law has no concept of forfeiture rights.
(e) Is there any additional legislation governing property rights?
Agricultural land can only be subdivided or certain rights granted (for example, servitudes or leases over part of the land) in respect of such land with the consent of the Minister of Agriculture, Forestry and Fisheries. This is an important issue that should not be overlooked as the process of obtaining such consents can be time consuming and it is advisable to consider whether the land use could be structured in such a way as to avoid having to obtain that consent.
(f) Are there any formalities with which lenders need to comply when enforcing security over land?
Prior to enforcing security over land (namely mortgage bonds), the lenders will have to obtain a court order and will have to use the sheriff of the high court to enforce that court order. Such court orders are obtained and enforced on a daily basis.
International law and arbitration
(a) Supra-national treaties
(i) List all Bilateral Investment Treaties to which the country is party.
South Africa is a party to a large number of bilateral investment treaties. It should be investigated in respect of each project whether any bilateral treaties could be of relevance. It should also be considered whether a project should be structured in such a way as to take advantage of any bilateral treaties.
(ii) Is the country a signatory to the Energy Charter Treaty?
South Africa is not a signatory to the Energy Charter Treaty.
(i) Requirements and restrictions applicable to the choice of arbitration roles and place of arbitration
Generally, South African courts will recognise and uphold choices of governing law, arbitral fora and rules. However, a choice of law of contract will not be upheld by the courts of the Republic of South Africa if such choice of law is made by the parties with the intention of evading the provisions of another, appropriate and applicable legal system (fraus legis).
Furthermore, under South African law, a court will not accept a complete ouster of jurisdiction, although generally it recognises party autonomy and gives effect to a choice of law. However, jurisdiction remains within the discretion of the court and a court may, in certain instances, assume jurisdiction provided there are sufficient jurisdictional connecting factors. Similarly, the courts may, in rare instances, choose not to give effect to a choice of jurisdiction clause, if such choice is contrary to public policy.
Proceedings before a court of the Republic of South Africa may be stayed if the subject of the proceedings is concurrently before any other court.
(ii) Are foreign arbitral awards / decisions are enforceable in the country (i.e. is the country a party to the New York Convention on the Recognition of Foreign Arbitral Awards (the âConventionâ)?
South Africa is a member of the New York Convention on the Recognition of Foreign Arbitral Awards. The principles applicable to the enforcement of foreign judgments are also applicable to the enforcement of foreign arbitral awards.
Subject to the permission of the Minister of Trade and Industry in terms of the Protection of Businesses Act (as amended) being obtained, a judgment obtained in a competent court of a jurisdiction other than South Africa will be recognised and enforced in accordance with ordinary procedures applicable under South African law for the enforcement of foreign judgments, provided that:
- South African courts will not enforce a foreign arbitral or court decision where recognition of such decision may be so repugnant to the values of South African law that the decision will be excluded on grounds of public policy;
- the judgment was final and conclusive, and not obtained by fraud or in any manner opposed to natural justice or contrary to the international principles of due process and procedural fairness, the enforcement thereof is not contrary to public policy and the foreign court in question had jurisdiction and competence according to the applicable rules on conflict of laws;
- a foreign judgment will probably not be recognised in South Africa if the foreign court exercised jurisdiction over the defendant solely by virtue of an attachment to found jurisdiction or on the basis of domicile alone;
- the South African courts will not enforce foreign revenue or penal laws; and
- the South African courts have, as a matter of public policy, generally not enforced awards for punitive damages.