South Africa

country flag country flag
Share this page
Twitter Linkedin Facebook email

Introduction to the Country

Quote
"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

Population
49,320,000

Capital
Pretoria (executive), Bloemfontein (judicial), Cape Town (legislative)

Government type
Constitutional Democracy

Legal system
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.

Economy overview
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.

Map

Next election due
2014

Legal and Regulatory framework

Department of Energy, which is the policy setting department ("DoE");

Eskom is the public utility (owned by the State), which currently is the principle generator of electricity in South Africa, is the national distributor and transmitter, and owns the national grid;

Department of Public Enterprise, which is the shareholder ministry of Eskom ("DPE");

National Treasury, which is the ministry of finance;

the National Energy Regulator of South Africa ("NERSA").

The structure of the power sector is currently being considered by DoE and National Treasury, together with NERSA, and it is possible that Eskom may be split into separate entities in respect of generation, transmission, systems operations and buyer's office.

At present, whilst there are a number of private independent power projects where the buyer is a member of the private sector, there are no independent power projects in respect of which Eskom is the committed long term buyer. Eskom did buy some power from independent power projects in 2008 but that was on a short term, emergency basis. Some independent power projects with Eskom as the long term buyer are planned but the timing on these is uncertain.

Eskom does import power from some neighbouring states, under PPAs. These imports of power are inter-utility.

 (a) Key enabling legislation

(i) List of key legislation and regulations

  • the Companies Act;
  • the Income Tax Act;
  • BBBEE legislation;
  • the Currency and Exchanges Act, and the Exchange Control Regulations, Orders and Rules promulgated under that act (together "Excon legislation");
  • the Electricity Regulation Act ("ERA") and the regulations promulgated under it ("ERA Regulations");
  • several pieces of labour legislation, such as the Labour Relations Act; the Basic Conditions of Employment Act; the Employment Equity Act; the Pension Funds Act; the Medical Schemes Act; the Skills Development Act; the Skills Development Levies Act; the Unemployment Insurance Act; the Promotion of Equality and Prevention of Unfair Discrimination Act;
  • the Occupational Health and Safety Act and the Compensation for Occupational Injuries and Diseases Act ("Safety legislation");
  • the Prevention and Combating of Corrupt Activities Act.

In addition to the legislation listed above, there could be specific legislation that is relevant to a project or a company, such as the competition legislation or the mining legislation. Accordingly, it is advisable to obtain advice in respect of each project as to any additional specific legislation that could be applicable to that project and accordingly, the company conducting it.

(ii) Overriding legislation and regulations

See above for list of relevant legislation.

 (b) Powers and capacity of the Government and Constitutional issues

(i) Governmental involvement

Power is dealt with at a national level, by the DoE and by Eskom (at present). Municipalities have the right to enter into contracts in respect of the supply to them of power. However, the power sector in South Africa is presently being restructured and the identities of the entities involved at a national level could change in the near future.

(ii) Powers of Government

The powers of DoE and the municipalities are derived from the Constitution of the Republic of South Africa. The powers of Eskom are derived from the Eskom Conversion Act.

(iii) Powers in respect of the project

The DoE and Eskom do not have any direct powers in respect of a project or a company. All parties to a power project will be required to comply with the applicable legislation and failure to comply with that legislation may result in a criminal offence and prosecution for such offence.

(iv) Power to contract

The Government (both national and municipal) and Eskom have the power to enter into the project documents to which they are party (and any direct agreement with the lenders relating to them) and to perform their obligations thereunder. However, the various applicable pieces of legislation require the approval of various functionaries (for example, National Treasury's approval is required in respect of financial commitments by DoE and the town council's approval is required in respect of commitments by a municipality) and often (particularly in respect of municipalities) require various procedures to have been followed before contracts become binding. It is essential that these procedures be followed and approvals are obtained as the high court has struck down contracts that have failed to comply with such procedures or to obtain the relevant approvals.

(v) Legislative restrictions applicable to the giving of sovereign guarantees

The Government (both national and municipal) and Eskom have the power to enter into the project documents to which they are party (and any direct agreement with the lenders relating to them) and to perform their obligations thereunder. However, the various applicable pieces of legislation require the approval of various functionaries (for example, National Treasury's approval is required in respect of financial commitments by DoE and the town council's approval is required in respect of commitments by a municipality) and often (particularly in respect of municipalities) require various procedures to have been followed before contracts become binding. It is essential that these procedures be followed and approvals are obtained as the high court has struck down contracts that have failed to comply with such procedures or to obtain the relevant approvals.

Whilst there are there no legislative restrictions applicable to the giving of sovereign guarantees, there are various procedures that need to be followed and consents that need to be obtained under the Constitution of the Republic of South Africa and the Public Finance Management Act in order for valid sovereign guarantees to be issued. In the past, the South African government has refused to guarantee the obligations of Eskom. It is anticipated that this stance will change in the near future.

 (c) Regulator

(i) Overview of regulators and their powers

NERSA regulates the power sector in South Africa. NERSA is an independent body, with the power to grant and withdraw export, import, generation, transmission and distribution licences in the power sector, as well as to amend and vary the terms of such licences. NERSA is established under the National Energy Regulator Act and has the powers granted to it under that act as well as the powers granted to it (in respect of the power sector) by ERA. NERSA has wide powers to monitor and enforce compliance with the terms of the licences it grants, and to undertake investigations to check whether there is compliance with such terms. In addition, it has the power to develop policy and rules to implement such policy.

(ii) Does the regulator typically enter into project documents relevant to the Project?

NERSA does not typically enter into project documents relevant to the Project with the counterparties to the Project.

(iii) What is the form of licence issued and can it be amended?

NERSA has and is developing precedents as to the form of licences it issues. ERA sets out a number of categories of conditions that NERSA can impose on a licence, such as: the form and content of the agreements entered into by the licensee; the energy source or fuel; the setting and monitoring of performance standards, as well as any other conditions that NERSA may decide to impose. These licences have been negotiated and agreed with NERSA in the past.

(iv) Is the regulator regarded as being genuinely independent from government/the utility? How is the regulator funded?

NERSA is regarded as being genuinely independent from government and from Eskom. Certainly, the legislation that creates it and from which it derives its power requires it to be independent. NERSA is funded out of the National Revenue Fund by National Treasury. Despite this, NERSA has taken decisions in the past that are contrary to the decisions that DPE and Eskom wanted it to take, thus demonstrating its independence.

 (d) Procurement

(i) Procurement or tender process

South Africa has a very developed and detailed legislative framework in respect of procurement by any of the 3 tiers of the State and any organ of state or state owned entity. The legislative framework has its foundation in the Constitution of the Republic of South Africa ("Constitution") and the requirements of the Constitution are echoed in a number of pieces of legislation that are applicable in the power sector, such as the Public Finance Management Act ("PFMA"), Municipal Finance Management Act ("MFMA") and ERA. The case law in this area is well developed. Attention must be paid early on in a project to the procurement legislation as contracts with organs of state, state owned enterprises and various levels of the State have been struck down by the high court and the constitutional court on the basis that the award of such contract or contracts has failed to comply with the procurement legislation.

(ii) Other specific procurement requirements

Eskom has reached agreement with DTI that it does not have to participate in the NIPP and instead has Competitive Supplier Development Programme ("CSDP"), which involves "procuring in such a way as to increase the competitiveness, capacity and capability of the local supply base, where there are comparative advantages and potential competitive advantages of local supply". Again, these requirements are individually negotiated in respect of each transaction.

 (e) Power plants

(i) Is there a standard form of power purchase agreement?

At present, there is not a standard form PPA in respect of base load projects. However, NERSA has stated that it intends to issue a standard form PPA for such projects. NERSA has issued a draft standard form PPA for renewable projects.

(ii) Independent Power Projects: are there any IPPs in existence?

Please see “Legal and Regulatory Framework” section.

(iii) Merchant power: are there merchant power plants and if so, are they allowed to (or obliged to) sell power back to the grid?

South Africa has a single buyer at national level and there is no merchant power market. At present, Eskom is the single buyer at a national level. On the basis of the ERA Regulations, it appears that a single buyer's office will be established but it is not yet clear whether this office will remain within Eskom or will be independent of Eskom.

Municipalities have the right to enter into PPAs and procure the provision of power capacity directly to themselves. However, the financial standing and creditworthiness of each municipality should be investigated on an individual basis, especially in light of the provisions of Chapter 13 of the MFMA. Furthermore, their ability to enter into long term financial commitments need to be carefully considered in respect of each transaction, pursuant to the provisions of the MFMA.

 (f) Consents required and authorisations from other ministries

(i) List of key licences, permits or consents

  • environmental consents (which are dealt with in more detail below);
  • approvals under the Excon legislation;
  • depending on whether the land has been rezoned, conditions and consents imposed pursuant to a rezoning of the land;
  • depending on the nature of the fuel being used, consents may be required for storage and piping of fuel, if the fuel used is a petroleum product or gas;
  • if water is being used in any large quantities on a project, then water permits will be required.

(ii) Are consents capable of being secured and are transferable to the lenders?

Not all of these consents are capable of being the subject matter of security taken by the lenders or transferred to the lenders. Many of these consents need to be held by the company undertaking the relevant activities (such as shipping gas). Certainly, none of them can be sold on the open market place and transfer of these consents is only with the consent of the issuing authority, who will need to be satisfied that the transferee has the resources and capability of undertaking the activities detailed on the consent and the resources to fulfil the obligations and conditions contained in the consent.

(iii) Process of application for consents

The process for application of the various permits is detailed in the relevant legislation. In addition, the relevant authority usually has details of the application procedures and forms on their website. The fees payable for the various consents will be detailed in the relevant legislation and on the website of the relevant authority.

The exception to the usual manner of proceeding is in respect of approvals under the Excon legislation managed by the Exchange Control Authority of the South African Reserve Bank ("Excon"). Only authorised dealers (namely banks appointed as such by Excon) can approach Excon for approvals under the Excon legislation. In addition, the rules and procedures applicable to such consents are not available on Excon's website, so it is essential to obtain the advice of an authorised dealer in respect of any application to Excon for approval.

 (g) Competition law

(i) Exclusivity: are any rights of exclusivity granted to a project company enforceable?

The Competition Act prohibits restrictive horizontal and vertical practices (such as collusive tendering and pricing) and abuse of dominant positions. The fines imposed can be high (up to 10% of the turnover in South Africa). Accordingly, it is advisable to obtain advice on any practices that could be prohibited in terms of the Competition Act.

(ii) Restrictions on competition: are there any restrictions on the ability of a project company to compete freely in the country?

See above.

 (h) Environmental regulations

(i) Regulations: are there any environmental or health and safety regulations or legislation applicable to power plants?

  • the Safety legislation detailed above is applicable to all businesses in South Africa;
  • the National Environmental Management Act;
  • the National Environmental Laws Amendment Act;
  • the National Water Act;
  • the Atmospheric Pollution Prevention Act;
  • the Air Quality Act;
  • the Environmental Conservation Act;
  • the National Heritage Resources Act;
  • the Hazardous Substances Act;
  • the Health Act; and
  • the Nuclear Energy Act.

In addition, the National Environmental Management: Waste Bill is anticipated to be passed into law in the near future. South Africa is a signatory to various international environmental agreements and the requirements of its various pieces of environmental legislation are in accordance with the requirements and standards of the Equator Principles.

(ii) Additional consents required by a project company

The nature and extent of these permits and consents, as well as how long they will take to obtain, and their costs are dependent on the nature of the project, where the project is situated, the impact of the project on the environment as well as its socio-economic impact and the community response to the project. Accordingly, it is difficult to give hard and fast rules as to what permits and consents will always be required and how long it will take to obtain them, as well as the cost of obtaining them. However, obtaining environmental consents and heritage consents has been a cause for delay on numerous projects. Therefore, it is advisable that the environmental and heritage impacts of a project are analysed at the earliest stages of a project and the process of conducting the scoping reports and impact assessments are commenced as soon as possible in order to avoid undue delays.

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 company's 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 Africa's 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, Excon's 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?

See above.

(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 "non resident shareholder". This endorsement can only be done by an authorised dealer appointed by Excon

(d) Convertibility

(i) Are there any restrictions on the convertibility of the jurisdiction's currency?

There are no restrictions on the convertibility of South Africa's 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.

(f) Tax

(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 - 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 company's assets, e.g.:

(A) accounts receivable (book debts);
(B) inventory (stock in trade);
(C) shares of a company (issued and authorised);
(D) equipment;
(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 Excon's 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

As above.

(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.

(c) Insurance

(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.

(d) Employment

(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.

Land

(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) Landlord's 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 "willing buyer, willing seller".

(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.

(b) Arbitration

(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 "Convention")?

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.

Renewable Energy

(a) Has the country enacted any legislation specifically designed to promote and enable the development of renewable energy projects?

NERSA has issues Guidelines and a draft PPA in respect of renewable energy. At present, these documents are in draft form, as NERSA is considering the comments that it received back from the public on these documents. Once these documents are finalised and published, they will have the force of law (in terms of the ERA Regulations) and all participants in renewable energy will be required to comply with them.

(b) Is the country is a signatory to the Kyoto Protocol?

South Africa is a signatory to the Kyoto Procotol and is participating in the Copenhagen talks. There have been a number of CDM projects in South Africa.

Legal and Disclaimer    |    Copyright Trinity International LLP 2010