A good-news edition, on balance.
This month’s Walkers Newsletter highlights a pair of arenas in which the law is improving. There’s a streamlining of property transfer in so far as the Western Cape is concerned together with a revamping of BEE tendering requirements with an increased emphasis on pricing and deliverability.
Not that we lack alarm bells, too, for certain ratepayers, or a sobering warning for a wide spread of businesspersons in the field of Company Law. Then some tips in regard to the concept of "outsourcing".
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Property Rates Amendment Bill
Oh, we seem to have a rates hike – of 226%
by Liesl Winter
The purpose of the new Property Rates Amendment Bill, it is said, is to simplify the property rating system, making it uniform and easier to implement. But there is much concern as to the way the Bill has been drafted and in particular to the definition of “residential property”.
“Residential property” is the home an owner lives in. Other properties owned by the same person are defined as commercial properties, and commercial rates will apply to them.
This means that holiday homes, investment properties and second properties will encounter a 226% increase in rates!
Responding to a storm of protest, Deputy Minister Yunus Carrim has said that the legislation is not aimed at second properties, but at small hotels, bed-and-breakfasts and guesthouses. He says the draft Bill will be amended to make the legislature’s intention clear.
We await with bated breath!
Take pride, Cape Town, in your Deeds Office
by Liesl Winter
Transferring the ownership of fixed property is a complex procedure. Several elements come into play. There is transfer duty. There are rates and levies. There are electrical, beetle and gas certificates… and … and… and...
All these need to be attended to prior to lodgement in the Deeds Office.
In Cape Town, where new procedures are in place both at SARS and within the Municipality, efficiency is definitely on the up.
One factor is the city’s online procedure for obtaining rates figures. You get your answer on the day you apply as against the previous norm of 2 weeks! Then you must just pay the outstandings and wait for the clearance certificate, normally less than two weeks. Not bad at all!
SARS, too, has implemented an online system for submitting documents and paying transfer duty. So far, this works well enough when there are no hassles in the paperwork. However, in situations where you have to cope with a problematic document you now cannot speak to a person at SARS, because everything is done electronically. We believe this opening hiccup is being rectified, and soon the new system will in every case improve turnaround time.
Once your documents are ready to lodge, control shifts to the examiners at the Deeds Office. Their examination is a detailed one with several examiners checking each and every batch of documents lodged. Currently the “on prep” time – the period from lodgement to when the examiners advise that all is in order -- is ten to twelve working days.
This is relatively quick. We hope that the efficiency we are currently experiencing continues into the future.
Body Blow to the Tenderpreneurs
by Wouter Scholtz
Independent adviser Wouter Scholtz works with Walkers on tax and BEE issues
After many twists and turns, on December 7 the quest for Black Economic Empowerment comes up for yet another re-launch. The current focus on black co-ownership of enterprises is to be replaced by new, wider, tender criteria.
The aim is to harmonise the Preferential Procurement Policy Framework Act with the Broad Based Black Economic Empowerment Act. The essence is that while organs of state -- public sector entities -- will continue to prefer tenders from ‘well behaved’ companies, good behaviour will include all transformation objectives rather than merely the proportion of black ownership.
The common practice of government bodies insisting upon 30% black ownership as a threshold requirement will fall away. The new criteria prohibit any minimum level of black co-ownership as a prerequisite for participation.
‘Tenderpreneuring’ – the award of tenders to black-owned shell companies which sub-contract their delivery obligations – is cut out by a provision that no tenderer will qualify for preference points if more than 25% of the contract is subcontracted to enterprises with a lower BEE status than the tenderer.
There is also a new, optional, inclusion of ‘functionality’, or delivery capacity.
For tenders of up to R1 million, an 80/20 system will apply: 80 points will be awarded to the tenderer with the lowest price and 20 points will go to B-BBEE status. For tenders of more than R1 million, the ratios are 90/10.
Earlier this year Section 40 of the new Companies Act also smoothed the BEE path, by introducing a novel flexibility. It allows shares to be issued when partly paid, and held in trust until payment is complete. Moreover shares may be paid for by services or by set-off, allowing dividends to flow back to the company while the unpaid portion of the share price is reduced – valuably, in a climate where cash flow is vital. And directors may call up an outstanding balance, with the right to cancel the shares if the call is not met.
If done appropriately the outstanding balance need not constitute debt by the shareholder – which is especially helpful as 8 of the 20 points on the generic BEE ownership scorecard measure how free black shareholders are of debt related to the acquisition of their shares.
The current changes come as regulations under the PPPF Act. Proposed amendments to the B-BBEE Act are currently being reviewed by the cabinet. It is understood that the amendments are directed at giving still greater weight to ‘good behaviour’ factors other than ownership – in particular, to enterprise development.
The bared teeth of the Companies Act
Walkers’ clients know that the Companies Act, No 71 of 2008, marks a turning point in the company law of South Africa, dramatically departing from the 1973 Act which it repeals.
But although it is six months since the Act came (somewhat belatedly) into force, new laws take time to trickle into consciousness. As usual, many businesspersons take the (understandable) view that they have fires to fight, leaving no time for vague legal refinements. As usual, some of them will rue delaying.
Most immediately, every company is required to replace its Memorandum and Articles of Incorporation with a single document, the Memorandum of Incorporation. There is a two-year window to do this, starting from the effective date of the Act. That is to say, one quarter of your time is up, though nowhere near one quarter of companies have done the work.
Watch out for a frantic scramble in early 2013, while company lawyers become worth their weight in gold. To draft a Memorandum of Incorporation requires not only a grasp of the Act as a whole, but a thorough picture of which of its provisions are mandatory and which may be varied.
Other potentially nasty surprises are less general and may not come soon. For one, it remains widely unrecognised that the Act extends the provisions regarding director’s liability to “prescribed officers”, who exercise general control over the management of the whole or a significant portion of the business, but need not be on the board. That is to say, what we have always known as “directors’ liability” is now senior managers’ liability too.
The Act has also substantially changed corporate governance. For example, while shareholders have historically been free to regulate their dealings by agreement, the Memorandum of Incorporation now prevails in any conflict with the shareholders’ agreement. Furthermore the Act prescribes certain mandatory features of the Memorandum, as well as default positions for cases where permissible variations have not been taken up. The former freedoms of shareholders are gone.
Here are Walker’s business tips for the month:
(1) get your Memorandum done before the crush
(2) be sure you are not unwittingly operating under assumptions that the Act has invalidated.
Look Hard at the Outsource Option
by Renier Kriek
The key to business survival in the current economic climate is a question to which few lawyers will venture an answer. But one does not need an MBA to understand the advantages of slashing overheads when times are tough, and outsourcing seems to be a favourite way of achieving savings. We have recently been involved in drafting a number of high value outsourcing contracts and offer some insights as a rough guide to making outsourcing work for you:
The reduction of fixed overheads such as payroll and infrastructure (think office space, telephones…) seems to be the primary motivation for outsourcing. By outsourcing certain non-core business processes your overheads become proportional to services actually rendered in place of retaining a bulky cost base. Additionally, by shedding non-core functions, the rainmakers at the apex are freed of nursing staff and given the time to return to what they’re there for – making the rain.
Outsourcing harnesses specialised skills and assigns tasks to trained hands. The more closely an industry’s costs relate to its unit output, the higher is outsourcing’s potential to increase revenue by increasing output. Higher output, combined with unitisation of fixed costs, means that you pay for nothing you don’t use. Some well-managed pruning pushes your competitiveness right up the scale.
Before embarking on an outsourcing endeavour, though, consider that some risk is inherent. You manage it firstly by outsourcing only the processes that are truly suitable, and secondly by ensuring a correct transaction.
When you consider outsourcing, we suggest a few steps. The first is fact-finding, identifying what is right for you to outsource and who it is right to outsource to. Know precisely what to expect from service providers, noting what you gain and what you lose compared to your insourced alternative.
Secondly, step back to consider the risks. This is a good time to engage with your lawyer, who will help you assess the contractual and risk-related aspects, and draft your “request for proposals”.
Thirdly, obtain quotes. The “request for proposals” will prove invaluable here by ensuring that the quotes you receive are for comparable baskets of services (and have factored in insurance, confidentiality and other risk-avoiding measures).
In the post-selection stage, let your lawyer draft the contract, or at least analyze the documents and advise you of both legal pitfalls and opportunities for value-adding. You will thank him later, especially since the cost of optimising the transaction, to avoid disputes, is far more bearable than the cost of litigating after the fact!