NEWSFLASH ~ REVISED MEMORANDUM OF INCORPORATION & SHAREHOLDER’S AGREEMENT (30 APRIL 2013)


REVISED MEMORANDUM OF INCORPORATION (MOI) AND SHAREHOLDER’S AGREEMENT 

Further to the Newsflash below dated 22 November 2012, we would like remind you that the due date for submission of a revised Memorandum of Incorporation (MOI) and Shareholders Agreement in compliance with the Companies Act 71 of 2008 is approaching (30 April 2013).

As is explained in our Newsflash below, in light of the inherent deficiencies in the standard form MOI’s we would highly recommend that each company review their current shareholders agreements and MOi’s and submit a customized MOI by the cut off date of 30 April 2013 so as to avoid a situation in which the provisions of your current governing documents are declared invalid for non-compliance with the Act.

 If you have any further queries in relation hereto please don’t hesitate to contact us at: info@dawsons.co.za



NEWSFLASH ~ NEW COMPANIES ACT


NEW COMPANIES ACT  

With the enactment of the new Companies Act (the Act) there is an obligation on all existing companies to ensure that their governing documents are compliant with the Act.  Under the 1973 Act a company’s governing documents were the Memorandum and Articles of Association and in most cases a shareholders’ agreement which ultimately prevailed over the Memorandum and Articles of Association.

Under the new Act, a single document, the Memorandum of Incorporation (MOI) replaces the two part Memorandum and Articles of Association.  The new Act states that the MOI must be consistent with Act and is void to the extent that it contravenes or is inconsistent with the Act.  In terms of section 15 (2) of the Act the MOI may include any provisions (i) dealing with a matter that the Act does not address (ii) altering the effect of any alterable provision of the Act or (iii) imposing on the Company a higher standard greater restriction, longer period of time or any similarly more onerous requirement than would otherwise apply to the company in terms of an unalterable provision.  It is important to note that section 15 (d) states that the MOI must not include any provision that negates, restricts, limits, qualifies, extends or otherwise alters the substance or effect of an unalterable provisions of the Act.

The Act provides all companies with a two year grace period ending on 30 April 2013 within which to amend their current Memorandum and Articles of Association in compliance with the Act.  During this grace period your current Memorandum and Articles of Association will be of full force and effect and will prevail over the Act.  However Schedule 5 of the Act contains a number of exceptions and provides that the Act will prevail over a pre-existing Memorandum and Articles of Association during this grace period in respect of any clause relating to:

  •  the duties, conduct, and liability of directors;
  •  rights in terms of the Act of shareholders to receive any notice or have access to any information
  •  meetings of shareholders or directors and adoption of resolutions; and
  •  fundamental transactions, takeovers and offers, except to the extent that they exempted by or in terms of Chapter 5 of the Act.

 In the event that a company does not amend its Memorandum and Articles of Association in compliance with the Act by the cut off date your existing Memorandum and Articles of Association will be deemed to be your MOI and all provisions that are inconsistent with the Act will be void and the default provisions of the Act will apply.

Shareholders Agreements

Section 15(7) of the Act provides that all shareholders’ agreements must be consistent with company’s MOI and the Act and the agreement  is void to the extent of its inconsistency with either your MOI or the Act.  However, as is stated above, the Act allows for a grace period during which time the shareholders agreement in force before the Act came into effect will prevail over the company’s MOI and the Act. 

It is important to note that that the provision states that the shareholders agreement will be of full force and effect, for a period of two years from the effective date, or until changed by the parties to the agreement.  In this regard, it may be the case that that any change to the shareholders agreement or change in shareholding during this two year grace period may result in the company losing its two year grace period thereby rendering any provisions that are inconsistent with the MOI or the Act invalid. 

Submission of revised MOI:

In light of the above, we would advise that all companies revise their current governing documents to ensure that their MOI and shareholders agreement are in compliance with the Act.Being that it is highly unlikely that all the provisions of your existing MOI will be consistent with the Act you will need to submit a revised MOI by 30 April 2013. 

The Act does allow for the submission of standard form MOI’s (the CoR 15.1A being the Short Standard Form for Private Companies and the CoR 15.1B being the Long Standard Form for Private Companies).  These standard form MOI’s have been provided for by the Act to help facilitate the process of amending ones MOI in compliance with Act, however these standard forms are deficient in a number of respects in that  the standard form MOI’s do not restrict the transferability of shares which brings with it the risk of having to meet the requirements of a Public Company; the standard form MOI’s do not limit the authority of directors in any way; wording is often vague and confusing and requires a great deal of deference to the Act which itself is not always clear; and most importantly each company is unique in relation to its shareholders and directors with specific requirements relating to authority levels and the rights of shareholders and directors and as such it is highly unlikely that the standard form MOI’s will cater for most companies needs.

Furthermore, if you have a  shareholders’ agreement in place, this agreement will ultimately need to be consistent with your MOI and the Act and as such you will have to submit a customized MOI which reflects the provisions of your shareholders agreement as far as possible.  In these circumstances your options are twofold:

  1. Effectively your shareholders agreement under the new Act may only deal with matters that are not dealt with by the Act or your MOI and when the shareholders agreement does deal with an aspect that is dealt with by the Act or the MOI, the shareholders agreement and your MOI will have to be consistent and if not the MOI will prevail.  As such our advice would be to have all matters not dealt with by the Act in a separate shareholders agreement, these would include provisions relating to pre-emptive rights, loan accounts, internal management, etc.  You will then need to submit a revised MOI dealing with all aspects covered under the Act including the amendment of alterable provisions of the Act, director and shareholder meetings, elections in terms of the optional provisions of the Act etc. Being that your shareholders agreement is not open to public scrutiny and does not need to be submitted with CIPC, this way you will be able to keep certain aspect relating to the governance and management of your company confidential.
  2. Scrap your shareholders agreement and have a comprehensive MOI that deals with both matters not covered by the Act and those provisions that in terms of the Act must be dealt with in your MOI. The benefit of following this route is that you will have one comprehensive document which may be more practical than having to refer two separate documents. On the downside this document will be open to the public and may not suite companies that are wanting to keep certain information confidential.

In light of the above and the inherent deficiencies in the standard form MOI’s we would highly recommend that each company review their current shareholders agreements and MOi’s and submit a customized MOI by the cut off date of 30 April 2013 so as to avoid a situation in which the provisions of your current governing documents are declared invalid for non-compliance with the Act



NEWSFLASH – DIESEL REFUND ISSUE


Many of you may already have been on the receiving end of SARS correspondence threatening to reclaim diesel refunds previously allowed together with interest and penalties.

The diesel refund system is primarily regulated by the provisions of the Customs & Excise  Act No.91 of 1964 and in particular Schedule 6 , Part 3, note 6 thereof. Note 6 (ij) sets out specific provisions relating to Commercial Fishing.

 

The SARS letters set out proposed adjustments to diesel refunds previously granted. The adjustments are generally  based on the SARS contention that the claimant does not engage in qualifying activities. The alleged ground for this contention is that the claimant  “is not the holder of any fishing permits” and that this is a requirement in terms of the said Schedule 6 ,Part 3.

As a result notwithstanding that a vessel owner (registered as a user) purchases diesel and uses the diesel in the activity of “sea fishing”  in terms of a valid fishing permit  , SARS argue that such a user is not entitled to claim a diesel refund due to the vessel owner not being the holder of the fishing permit. However, the provisions of Schedule 6 , part 3 (ij)(ii) (aa)(C) only require that the “master is in possession of a valid commercial fishing permit” issued in terms of the Marine Living Resources Act no.18 of 1998. There is accordingly no stated requirement that the permit must be in the name of the vessel owner (user) ie that the vessel owner is the “permit holder”. In addition, the vessel owner (user) also complies with one of the other key requirements that the sea fishing activity is “carried on by the user” ( (ij)(ii)(cc) ).

If we follow the logical conclusion of the SARS argument then only rights holders would be able to claim refunds as users.  Thus if we take the small pelagic , hake trawl or rock lobster sectors for example (being TAC sectors)  , even though there may be a number of rights holders’ permits on one vessel, SARS require that each of the rights holders should register as users , purchase the diesel and supply it to  the vessel so that it can be used while catching their particular allocation. This in our view would be virtually impossible  to implement from both the industry and SARS perspective. Moreover , SARS has only recently put forward this interpretation while industry has continued to operate as it has always done from long before the introduction of diesel rebates in the fishing sector. Most importantly the SARS argument in our view is not supported by a literal interpretation of the relevant provisions.

At a recent SARS workshop on diesel refunds held in Stellenbosch on the 20 February 2013 (which we attended), it appeared that the SARS position was motivated by a complete lack of understanding of the fishing sector both from an operational and legislative/administrative perspective. Not to mention that the SARS approach is certainly not in line with the spirit of the legislation.

At the end of the workshop the SARS presenters were aware of the universal objection by industry to their skewed interpretation. They therefore proposed that the fishing industry through a representative association make substantive representations to SARS regarding the application of the refund system in the fishing industry and if required propose changes to the legislative provisions.

Based on our recent experience in dealing with several of these SARS’ claims against users, if industry does not take decisive action now in dealing with SARS, the accumulative effect of the adjustments will be financially crippling to the fishing industry.

Suggested Action:

  1. Subject to legal advice , individual users faced with proposed adjustments should reply to and where required appeal against any unlawful claims by SARS; and 
  2. Industry through a representative association must make clear , detailed and unified representations to SARS . 

In Closing:

Should you require our firms assistance in dealing with this issue either on an individual client basis or at industry level, please contact our Peter Edwards at petere@dawsons.co.za .



FISHING INDUSTRY NEWS ARTICLE – DECEMBER 2012


2013 RIGHTS ALLOCATIONS

 

INTRODUCTION:

It is hard to believe that at the end of December 2013 eight years would have passed since the granting of the first long term rights allocations commencing at the beginning of 2006.

Long term rights in the following sectors expire at the end of December 2013, and accordingly will be up for re-allocation next year:

  • Tuna Pole
  • KZN Prawn Trawl
  • Demersal Shark
  • Hake Handline
  • Traditional Linefish
  • White Mussels
  • Oysters

 

In a previous article dealing with proposed changes to the Marine Living Resources Act (MLRA), I commented that the Department would be under extremely tight time constraints to bring about the proposed amendments to the MLRA as well as completing the future rights allocation process. However, at a recent portfolio committee briefing in Parliament on the 6 November 2012 the Department through Mr Saasa Pheeha presented a report dealing inter alia with the 2013 fishing rights allocation process. The following timeline was proposed for the allocation process:

ACTIVITY  TARGET DATE 
Public consultation process on policy considerations February 2013
Public consultation of Industry “Rule Books” February 2013
Design the rights allocation guidelines March 2013
Setting up of structures March 2013
Design of application forms March 2013
Call for applications May 2013
Determination of size of allocations June 2013
Processing applications forms and data capturing July 2013
Allocations by the delegated authority September 2013
Calls for appeals September 2013
Processing of application forms and data processing October 2013
Announcement of appeals November 2013
Amendment of rights register December 2013

 

DAFF also appear to be ad idem regarding our concern that not only the above objectives must be met but at the same time MLRA amendments need to be enacted as well.

We can summarise below certain important issues for industry which were raised by DAFF during the presentation:

Transformation:

Unlike during the previous long term rights process where a comparative scoring process was used to assess Rights Holders, DAFF have confirmed that during next year’s process an external bench mark system will be used where specific targets will be set for sectors. DAFF did not clarify whether a minimum transformation level would be set which had to be surpassed in order to be allocated a right or whether a simple bench mark scoring system would be utilised by which certain levels of transformation would score a certain number of predetermined points.

New Entrants:

Of importance in the division of future TAE’s and TAC’s, DAFF made it clear that the next round of allocations would benefit new entrants more than in the previous long term rights process where minimal provision was made for the entrance of new Rights Holders particularly in established sectors. In the next round of allocations new entrants would be considered and DAFF intends to reserve a portion of the available rights / effort for allocation to new entrants and SMME’s, particularly in order to improve transformation in certain sectors.

Economic Viability of Rights:

DAFF further expressed the view that in the previous rights allocation process certain Rights Holders were allocated a quantum that was not economically viable, as such in the next round of allocations DAFF have taken a decision to ensure that there is a minimum threshold right (quantum or effort) for each sector to ensure that rights holders are given economically viable rights. Obviously the knock on effect of this would be to reduce the number of participants in sectors. It is unclear whether this will mean fewer existing Rights Holders or fewer new entrants but with increased quantum.

Fronting:

One of the concerns raised by DAFF regarding the utilisation of the current rights  was that in their view the true benefit of rights in many cases was being acquired by third parties who were attending to the catching, processing and marketing of such allocations. It was stated that the Rights Holders “were missing out on economic opportunities due to their inferior bargaining position” and DAFF would attempt to address this issue during the next long term rights allocation process. It was not stated how they intended to address this issue but it was recorded that access to vessels was  a key factor in this regard.

Economic Unit Consolidation:

DAFF recorded that they had noticed that larger companies had made acquisitions since the 2006 allocations and as a result there were many wholly owned subsidiary companies holding rights in the same sectors as their parent companies. As such DAFF recorded that they would be determined to stop “economic disguises” and prevent wholly owned subsidiaries from obtaining rights in the same sector as the parent company. Our interpretation of this is that where Rights Holders have wholly owned subsidiaries in the same sector DAFF may force a consolidation of economic units so that ultimately there is only one right holder representing the group per sector and such rights holder would have in effect a consolidated allocation rather than split amongst various subsidiaries and the parent company.

Rule Books:

One may recall that during the long term rights allocation process the application forms were accompanied by “explanatory notes” and “schedules” to assist with the completion of the application forms. From the presentation it would appear that DAFF intends to replace such explanatory notes and schedules with an industry / sector “rule book”. It is proposed that this rule book will contain the criteria to be used for the rights allocation process and will be subject to a public consultation process.

The Process:

Based on the presentation it would appear that the 2013 rights allocation process would follow a similar methodology as in 2005. Therefore the Minister will appoint a delegated authority (“DA”) for each sector who will adjudicate and allocate rights for such sector. A verification unit will be appointed to audit applications and in addition a rights allocation unit will evaluate and score all applications submitted. Thereafter all applications that have been scored will be sent to the DA who will make a final decision. After decisions have been made appeals will be invited and only once the appeals have been processed will allocations be granted to successful Rights Holders.

Another issue which was not in fact raised at the presentation on the 6 November 2012 but which is of paramount importance to future rights allocations in 2013 are the many outstanding Section 21 applications, particularly in those sectors which are to be reallocated. The Department has informed industry that there is in fact a Section 21 Committee dealing with all Section 21 applications,  and decisions on all Section 21 applications will be made and communicated to applicants by the end of November 2012. This was confirmed in writing by the chairperson of such Section 21 Committee being Ms Sue Middleton. There have been many undertakings in the past by the Department regarding Section 21 applications and it remains to be seen whether they will comply with this undertaking. In our view should such undertaking not be complied with in those sectors which are up for re-allocation in 2013 then urgent Court proceedings should be instituted to obtain a decision on such applications. Applicants should not go into the next rights allocation process with outstanding Section 21 applications.

Preparing for Future Rights Applications

My advice to Rights Holders would be to start preparing for next year’s rights allocation process now and consult with one’s experts regarding the process and the best possible way to prepare therefore. By way of example our firm is offering its assistance to Rights Holders based on two approaches, one more formal and one less formal. They are as follows:

  1. On a less formal basis we would consult with Rights Holders to discuss their pre submission self-assessment and their approach to the Rights Allocation Process. This would assist them in accurately assessing where they stand relative to the rest of the participants in the sector and what their potential risk areas are. This would assist Rights Holders in considering any possible changes or any areas of improvement that they may wish to implement prior to the submission of applications. 
  2.  

  3. The more formal approach is our appointment to conduct a preliminary audit of a Right Holder’s status having regard to their performance and position relative to the 2005 LTRAMP Process, the 2009/2010 Performance Review Process and current position. This would then provide them with a strong indication of areas where their performance is above or below the rest of the participants in their sector. We would then be able to recommend areas that require attention and support the Rights Holder in the preparation of their data and annexures for the long term rights application process. Right Holders would then have an opportunity to timeously remedy any potential weak areas in their application form in order that they maximize the points awarded in the process which in turn will assist them to maximize their allocation in the 2013 Rights Allocation Process.

 

Preparation now by Rights Holders is key for next year’s process as we have seen during previous rights application processes that last minute preparations, structuring and agreements are risky and may be disregarded by the Department.

As this may be my last column for 2012 we would like to take this opportunity of wishing our readers a relaxing and enjoyable festive season and a positive and successful 2013.