All South African companies are governed by the Companies Act which was originally based on English company law. The Act prescribes the procedures to be followed to form a private or public company. The Companies Act is administered by the Registrar of Companies, whose offices are in Pretoria.
All South African close corporations are governed by the Close Corporations Act. There are no formal procedures relating to the formation of partnerships and sole proprietorships.
The trustees of a trading trust must be authorised to act as trustees by the Master of the High Court. Actions by trustees prior to the issue of such authorisation are void. Please refer to Part 3 for more information on the above forms of business enterprise.
Incorporation of a company entails the following steps –
reserving a company name;
filing the memorandum and articles; and
filing the written consent of auditors to act for the company.
A company name must be reserved with and approved by the Registrar of Companies. It is advisable to suggest alternative names in case the first name is deemed unsuitable by the Registrar.
The memorandum and articles must also be filed with the Registrar of Companies. The memorandum must indicate, among other things –
the name of the company;
the company’s main object, although there may be any number of ancillary objects; and
the amount of authorised share capital (not all of which is required to be issued).
There is no minimum capital requirement. However, for a company which is controlled by nonresidents, if the tax authorities consider the ratio between equity capital and borrowings to be inadequate, they will disallow the deduction for tax purposes of interest and similar amounts paid by the company to the nonresident shareholders.
A standard format for the memorandum and articles is available and can be adapted to the company’s requirements. Incorporation takes about four to six weeks to complete and costs approximately R3 000 (excluding VAT and disbursements). It may in many cases be more convenient to purchase an existing “shelf company” (for a cost of approximately R3 500 (excluding VAT and disbursements) plus a fee for ancillary company secretarial work) and adapt it to suit the requirements of the new business. The “shelf company” has no assets or liabilities and no previous trading history ie it is effectively a “clean” and dormant company. When compared to incorporating a new company, buying a “shelf company” saves time and this is an important practical advantage.
If a foreign company wishes to establish a branch or external company in South Africa, registration is required as an “external company”. This is accomplished in much the same way as for a domestic company. A certified copy of the memorandum and articles (or their equivalent) of the foreign company, authenticated by a South African diplomatic representative or in certain circumstances notarised by a registered notary, must be filed with the Registrar of Companies. An external company is in most respects subject to the same regulations as a South African company. Registration also takes about four to six weeks and costs about R2 000 (excluding VAT and disbursements).
Registration of a close corporation (CC) is much simpler and quicker. It does not have a memorandum or articles of association. The only constitutional document required is a founding statement, which must be filed with the Registrar of Close Corporations. Registration takes about four to six weeks and costs approximately R1 000 (excluding VAT and disbursements). A private company that meets the requirements of a close corporation may convert to a close corporation, and a close corporation may convert to a private company.
In addition to meeting the requirements of the Companies Act (and/or the Close Corporations Act, where applicable) a business generally has to register with the authorities that regulate VAT, employees tax, provincial and regional services levies, workmen’s compensation and the unemployment insurance fund. Companies and individuals must also register for income tax purposes. Business licences are required for certain activities and are generally easily obtainable from the licensing authorities, subject to compliance with the relevant requirements.
The establishment of a factory generally requires the consent of several different Government departments. The industrial development branch of the Department of Trade and Industry provides an advisory service covering all aspects of the establishment or expansion of industrial undertakings in South Africa.
Shareholders and Directors
For a private company, the minimum number of shareholders and directors is one (the sole shareholder may also be the sole director), while a public company must have at least seven shareholders (unless it is a wholly-owned subsidiary of another company) and two directors. No residence or nationality restrictions apply to either shareholders or directors.
The minimum number of members of a close corporation is one member. Certain disqualifications apply – a juristic person such as a company may for instance not be a member of a close corporation. A close corporation is managed by its members and does not have a separate board of directors.
Labour Supply and Relations
The Labour Relations Act of 1995 (LRA), and a number of other Acts promulgated since 1996, have fundamentally altered the legal framework in which labour relations are conducted. Before embarking on any venture which has labour implications, it is advisable to consult with a specialist labour lawyer or consultant to establish the legal position. This is particularly so in the light of the aforementioned change.
Principles Governing Employment in South Africa
The contract of employment and the employment relationship are regulated by the provisions of the Basic Conditions of Employment Act of 1997 (the BCE Act), the Wage Act and the provisions of the LRA.
In addition to these statutes, the Employment Equity Act provides for the eradication of discrimination in all employment policies, practices, procedures and the working environment in all work places as well as the implementation of affirmative action programs by certain designated employers in respect of previous disadvantaged persons.
Basic Conditions of Employment
The Basic Conditions of Employment Act provides for minimum terms on which employees must be employed in relation to, inter alia, annual leave, sick leave, overtime, daily and weekly maximum working hours. Certain provisions of the Act are regarded to be terms of an employment contract whether or not the employer and employee intended differently. The Act provides for a maximum working week of forty five hours and a minimum annual leave entitlement of 21 consecutive days on full remuneration per every annual leave cycle.
The Wage Act establishes minimum wages and conditions of service for particular industries and trades.
The Labour Relations Act
The LRA restricts the concept of the unfair labour practice to specific acts on the part of the employer and has codified the principles established by the Industrial Court relating to the requirements that dismissals be substantively and procedurally fair.
The LRA aims to encourage voluntary collective bargaining and the settlement of disputes, and does so by enhancing the powers of new forums designed to facilitate those objectives.
Collective Bargaining and Dispute Resolution
Under the LRA, the concept of “Bargaining Councils” has been introduced which extends the concept of Industrial Councils. A Commission for Conciliation Mediation and Arbitration (CCMA), a new Labour Law Court and a Labour Appeal Court have been established. Disputes regarding dismissals (other than retrenchments and dismissals based on a prohibited ground of discrimination) must be resolved in accordance with statutory conciliation, mediation and arbitration requirements through the CCMA and, in certain instances, the relevant Bargaining Council. Disputes regarding retrenchments, dismissals based on a prohibited ground of discrimination and disputes requiring the intervention of a court (for instance, where applications for interdictory or mandatory relief are made) must be resolved in the Labour Court and the Labour Appeal Court. The Industrial Court and the Conciliation Boards have been abolished. The LRA also introduced requirements for the establishing of workplace forums in certain enterprises, which promote employee participation in decision making and require employers to furnish a wide range of information to employee representatives in those workplace forums.
Transfer of Contract of Employment
A fundamental change introduced by the LRA which will affect acquisitions of businesses as going concerns (but not acquisitions of shares in companies) is the automatic transfer of contracts of employment of the employees of businesses being acquired. In terms of the LRA, if the whole or any part of a business is transferred by an employer as a going concern then the purchaser will automatically assume the rights and obligations of the previous employer in respect of all employees.
In order to promote the training of employees, the Skills Development Levies Act has been passed. Employers are obliged to pay a skills development levy of 0,5% of payroll from 1 April 2000. The levy increases to 1% of payroll with effect from 1 April 2001.
Employment Equity and Affirmative Action
The Employment Equity Act commenced on 1 December 1999 and is intended to promote equal opportunity, eliminate unfair discrimination and implement affirmative action measures. The Act requires each employer (other than certain small businesses) to implement affirmative action measures and to prepare and implement an employment equity plan for its business. There are various reporting requirements by employers to the Department of Labour. A labour inspector may issue a compliance order to an employer to implement its employment equity plan and/or otherwise comply with its obligations under the Act. Compliance orders may in certain circumstances be made orders of the Labour Court.
The Government-operated social welfare system is not as comprehensive as those to be found in Europe and North America. A number of constraints prevent the extension of South Africa’s social welfare system. These include finance, manpower, diffi- culties experienced in maintaining accurate records of those eligible for pensions and the long distances people must sometimes travel to reach welfare centres.
There is at present no national pension scheme, but a Government appointed committee is examining the issue. Apart from pension funds operated for civil servants, the Government provides social pensions, old age pensions, pensions for the blind, disability pensions and war veterans’ pensions. Private pension funds are operated by employers and administered in various ways, often by insurance companies. Pension funds are subject to statutory regulation, and contributions to a pension fund are usually made by both employer and employee.
The Unemployment Insurance Fund provides benefits for unemployed people and for the dependants of deceased contributors. Taxfree benefits are distributed at the rate of 45% of previous earnings (provided certain criteria are met).
Illness and maternity benefits are also paid. Revenues are obtained from the contributions of employees whose annual incomes do not exceed a certain level (currently R81 000), their employers and the Government.
The Compensation for Occupational Injuries and Diseases Act provides a system of “no fault” compensation for employees who are injured in accidents that arise out of and in the course of their employment or who contract occupational diseases. The Act compels employers to insure their employees against industrial accidents or illness that could result in death or disability. The Act provides for the compulsory insurance cover of employees.
South Africa does not have a national medical insurance scheme. Private medical aid schemes are operated under the Medical Schemes Act and cover most types of medical expenses in accordance with scales of benefits (tariffs) established by each scheme, which are revised from time to time. These expenses include the costs of private medical and dental services, prescribed medicines, and hospital and nursing home fees. Contributions are usually made by both employer and employee in equal shares. However, the scales of benefits usually do not equal the charges actually levied. The excess must be borne directly by the patient. A number of insurance schemes are available to cover these excesses and other medical expenses which are not provided for by the medical aid schemes. Medical schemes are increasingly establishing and operating managed health care programs, in an effort to control steeply escalating claims and abuses of the benefits provided by them.
The Medical Schemes Act provides for the establishment of a Council and Registrar of Medical Schemes and contains provisions relating to the registration and control of certain activities of medical schemes and the protection of the interest of medical scheme members. The Act also seeks to extend the ambit of medical aid cover to less advantaged South Africans.