Business Day Law & Tax (June 2023)

BUSINESS LAW & TAX

The structuring of IP assets

• Keep in mind tax, IP law and exchange control considerations

Waldo Steyn & Lavina Daya ENSafrica

Despite challenges faced in recent years with the global pandemic as well as political and economic instability, SA has a booming fintech and technology industry

In particular, we are seeing tremendous growth in interest and investment in South African technology businesses

These companies are all rich in intellectual property (IP), as IP underpins the technology assets that their businesses are based on Funding from nonresident investors is often a major stumbling block for start-ups

One of the reasons is that SA has exchange controls and restricts the externalisation of IP owned by SA exchange control residents to related nonresident parties

Nonresident investors are often reluctant to invest into a South African company where the primary asset, the IP, is subject to exchange control restrictions

Furthermore, South African exchange controls previously prohibited socalled loop structures

Loop structures typically entailed the formation by a South African resident of an offshore structure, which by a re-investment into SA acquires shares or some other interest in a South African resident company or South African asset

To overcome this issue, parties often had to resort to complex structures such as mirrored shareholdings On January 1 2021, the financial surveillance department of the SA Reserve Bank abolished its policy on loop structures to encourage inward investments into the country However, loop structures set up before January 1 2021 are still considered to be “ unauthorised” and are required to be reported to the Bank and regularised

Many South African companies are looking to externalise their South African IP to attract foreign investment and/or to grow their business in the international markets

There are three main areas to consider when dealing with a South African-owned IP:

● Exchange controls;

● Tax; and

● IP law

So can you sell your South African IP?

From an exchange control perspective, while the Bank

has relaxed the exchange control rules applicable to IP, at present authorised dealers are only permitted to approve the outright sale, transfer and assignment of IP to unrelated nonresident parties if:

● The transaction is at an arm ’ s length and the price represents a fair and marketrelated price;

MANY COMPANIES ARE LOOKING TO EXTERNALISE THEIR SOUTH AFRICAN IP TO ATTRACT FOREIGN INVESTMENT

● The authorised dealer views the sale, transfer or assignment agreement;

● The authorised dealer is provided with an auditor’ s letter or IP valuation certificate confirming the basis for calculating the sale price;

● The transaction is subject to appropriate tax treatment; and

● The assigned or transferred IP is not licensed back to a South African resident party

Where a South African company undertakes IP development work for a nonresident party under a subcontract, any IP developed by the South African company would need to be assigned to

the nonresident party for such nonresident party to legally own any IP developed under a subcontract Any such assignment requires approval in terms of the South African Exchange Control Regulations

The sale, assignment, cession and/or waiver of IP rights in favour of a related nonresident party requires the Bank’ s prior approval

What about cross-border licensing arrangements?

What is possible is the licensing of IP by South African residents from nonresident parties, both related and unrelated, provided it is done at a fair market-related price Similar to the case of

the assignment or transfer of IP, the authorised dealer is required to view:

● A copy of the licence agreement; and

● An auditor’ s letter confirming the basis of the calculation of the royalty rate or licence fee

What are some of the tax considerations?

From a tax perspective, it is important to understand that IP is considered to be an asset for capital gains tax (CGT) purposes and assuming such IP is held on a capital account, the disposal/sale of such IP will trigger CGT

If South African companies are paying a royalty in respect of the use of the IP of a nonresident party, their tax deductions may be limited in terms of the Income Tax Act This applies to licences for so-called tainted IP In this regard, the Income Tax Act contains anti-avoidance provisions which target IP saleand-leaseback arrangements where certain parties are located outside the tax net IP will be “tainted” in situations where South Africandeveloped IP is sold to a nonresident or tax-exempt entity and is then licensed back to the South African creator, or other South African end users who pay and claim as a tax deduction the licence fees to use such IP

While there are ways in

PROTECT THOSE LIGHTBULB MOMENTS

/123RF PERFECTPIXELSHUNTER

The structuring of IP assets

CONTINUED FROM PAGE

which to set up structures which may allow for the externalisation of South African-owned IP, the next issue that requires close focus is the ongoing management of such nonresident IP holding companies Some important aspects to keep in mind in this regard include:

● The effective management and control of the foreign company (focusing on where the key management and commercial decisions that are necessary for the business are, in substance, made)

If the effective management of the foreign company is deemed to be in SA, the SA Revenue Service has the right to tax the worldwide income of any such foreign company

● Whether such a foreign company constitutes a socalled controlled foreign company (CFC) (A foreign company will constitute a CFC if more than 50% of the participation rights in any such foreign company are held by South African residents) Where the foreign company constitutes a CFC, the profits of the foreign company may, in certain circumstances, be attributed to the resident shareholders and taxed in their hands; and

● Transfer pricing From a transfer pricing perspective, the legal and economic ownership of the IP must be aligned to ensure the legal owner is entitled to the benefits flowing from the exploitation of the IP The alignment of legal and economic ownership is analysed with a focus on the performance of the socalled DEMPE functions, which refers to the Development, Enhancement, Maintenance, Protection and Exploitation of the IP A functional analysis is required to be undertaken in this regard

A functional analysis is factual in nature and takes place against the background of which a role player acts as the central entrepreneur in the business, carries the financial and legal risk associated with the IP and is ultimately responsible for the value creation

There are, in conclusion, several complex tax, IP law and exchange control considerations to be kept in mind when considering the structuring of IP assets

Is the end of a fixed-term contract retrenchment?

• The CCMA and labour courts are building up a clear and consistent body of case law that supports the use of valid fixed-term contracts

Bradley Workman-Davies & Tasreeq Ferreira Werksmans

In terms of the Labour Relations Act 66 of 1995 (LRA), employers and employees can enter into fixed-term contracts of employment, which are accepted as valid employment agreements, subject to certain conditions

Generally, there must be a justifiable reason to enter into the employment relationship on a fixed-term basis, rather than entering into a permanent employment contract

Usually, the reason for using a fixed-term contract relates to employment enduring until the occurrence of a specified event or the completion of a specified task or project, or a fixed date, other than an employee’ s normal or agreed retirement age

Due to historical misuse of fixed-term contracts to avoid the consequences of entering into permanent relationships, labour law has developed to ensure that the reasons are regulated for entering into a fixed-term contract

In particular, section 198B of the LRA provides that the conclusion of a fixed-term contract will be justified if the employee is, for example, replacing another employee who is temporarily absent from work; is employed on account of a temporary increase in the volume of work; is a student or recent graduate who is employed for the purpose of being trained or gaining work experience; is employed to work exclusively on a specific project that has a limited or defined duration, or has reached the normal or agreed retirement age applicable in the employer s business

It should also be noted that these sections do not apply to employee earning in excess of R241,110 59 in term of section 6(3) of the Basic Conditions of Employment Act 75 of 1997 (BCEA)

Generally, an employee s fixed-term contract may terminate in the circumstances contemplated in section 198B, and this is not regarded as a dismissal but is simply seen as the termination of an employment contract by effluxion of time

It is important to understand this termination of employment does not constitute the retrenchment of the employee

This principle was recently confirmed by the Commission for Conciliation, Mediation and Arbitration (CCMA) in the case of Financial Sector Allied Workers Union of South Africa obo Members v Bidvest Prestige Cleaning Services (Pty) Ltd [2023], in which certain employees of Bidvest Prestige were employed in terms of fixedterm contracts as provided for by section 198B of the LRA

These contracts were terminated by Bidvest Prestige when a service contract between Bidvest Prestige and its client was awarded to another company by the client The employees alleged their termination by Bidvest Prestige was a dismissal for operational requirements and that they were entitled to be paid severance pay

However, section 41(2) of the BCEA makes provision for the payment of severance pay and it provides that “ an employer must pay an employee who is dismissed for reasons based on the employer’ s operational requirements or whose contract of employment terminates or is terminated in

THERE MUST BE A JUSTIFIABLE REASON TO ENTER INTO THE EMPLOYMENT RELATIONSHIP ON A FIXED-TERM BASIS

terms of section 38 of the Insolvency Act, 1936 (Act No 24 of 1936), severance pay equal to at least one week s remuneration for each completed year of continuous service with that employer, calculated in accordance with section 35

The CCMA in the Bidvest Prestige case stated that in terms of the aforementioned section of the BCEA, severance pay is only for those employees who are dismissed for reason of the employer s operational requirement or insolvency

The CCMA was tasked to determine whether the employees were dismissed for operational requirements as contemplated by section 189 of the LRA and, accordingly, whether the employees were entitled to severance

pay In addressing the first question, the CCMA referred to the definition of a fixedterm contract as per section 198B of the LRA and compared it to the wording in the employees contracts of employment

The clause provided inter alia that this contract is a fixed eventuality contract for a definite period which terminates automatically upon the employer s client terminating the contract or part of the contract pertaining to the employee which exists between the employer and its client

The contracts of employment also provided expressly that the employee s contract of employment will terminate at any time as and when an event [of termination] occurs, in such event this contract will automatically terminate Such termination will not be construed as being termination for operational reasons

The CCMA held that the employees were employed in accordance with section 198B of the LRA and that their contracts made it clear the termination of their employment would not constitute a

dismissal for operational requirements in terms of section 189 of the LRA

The CCMA further held that the employees were not entitled to severance pay and buttressed that severance pay is only for those employees who are dismissed for reason of the employer s operational requirement or insolvency

their employment terminates when the fixed-term period ends

SEVERANCE PAY IS ONLY FOR THOSE EMPLOYEES WHO ARE DISMISSED FOR REASON OF THE EMPLOYER’S OPERATIONAL REQUIREMENT OR INSOLVENCY

It is, therefore, pivotal for employers and employees to be mindful that if employees are employed in terms of section 198B of the LRA and if their contracts of employment were not terminated for operational requirements, they are not entitled to severance pay as provided for in section 41(2) of the BCEA if

However, section 198B(10)(a) of the LRA states that an employer who employs an employee in terms of a fixed-term contract for a reason contemplated in subsection (4)(d) for a period exceeding 24 months must, subject to the terms of any applicable collective agreement, pay the employee on expiry of the contract one week s remuneration for each completed year of the contract calculated in accordance with section 35 of the [BCEA] This provision should not be misconstrued as severance pay in terms of section 41(2) of the BCEA It is merely calculated in a similar manner as section 41(2) of the BCEA

Employers should be aware that the CCMA and labour courts are building up a clear and consistent body of case law which supports the use of valid fixed-term contracts Wherever their usage can be justified, an employer should consider engaging employees on a fixed-term basis to simplify their labour environment

Nxesi identifies equity targets

• Vexed question: is this target just a quota with another name?

Imraan Mahomed & JJ van der Walt Cliffe Dekker Hofmeyr

On May 12 2023, Thulas

Nxesi, the employment & and labour minister, published the notice identifying proposed national economic sectors and employment equity numerical targets under the Employment Equity Act (EEA)

Companies had 30 days to provide comment The introduction of targets is a significant move because there has to this point been no numerical targets in SA underpinning affirmative action

This article explores the vexed question of whether targets are quotas but just with another name

The EEA defines “sector” widely as “ an industry or service or part of any industry or service” and requires the minister to identify national economic sectors with reference to any code contained in the Standard Industrial Classification of all Economic Activities published by Statistics South Africa

Eighteen economic sectors have been identified The sectors include agriculture, forestry, and fishing; mining; manufacturing; construction; financial and insurance activities; transportation and storage; information and communication; water supply, sewerage, waste management, and remediation activities; electricity, gas steam, and air conditioning supply

Nxesi proposes five-year

sector targets in terms of population groups and gender for the four upper occupational levels (such as top management, senior management, professionally qualified and skilled) and for employees with disabilities

The proposed numerical targets for the various population groups (African, coloured, Indian and white) and gender must, where applicable, be proportional to the demographics of the Economically Active Populations (EAP), whether national or provincial

This has in the past given rise to contention which has received audience before the Constitutional Court The

THE PRIMARY DISTINCTION BETWEEN NUMERICAL GOALS/TARGETS AND QUOTAS LIES IN THE FLEXIBILITY OF THE STANDARD

notice determines demographics as follows:

● The “National EAP” applies to employers “conducting their business/operations nationally” ;

● The “Provincial EAP” applies to employers “ conducting their business/operations in a particular province” ;

● Employers cannot use the national and provincial demographics (EAP) at the same time; and

BY THE NUMBERS

nothing else Once it is rigidly applied, it can hardly be said to be a measure that is being used as one designed to achieve or promote the achievement of equality which is the ultimate objective of affirmative action measures

● Designated employers must choose one demographic (either national or provincial) and utilise the chosen demographics for the duration of the employment equity plan (EE plan) that is in line with the five-year sector targets

Demographics are defined, with reference to the national or provincial EAP and the meaning of designated groups (limited to race, sex and disability)

Employers must also implement the five-year numerical goals and annual targets set out for semiskilled and unskilled levels in the EE plans, which are not covered by the sector targets, by utilising the same demographics of the EAP that they have chosen, whether national or provincial, difficult decisions to be made which cast a shadow for five years in the life of an enterprise

Against this setup, we consider the impact on the difference between numerical goals and quotas

The implementation of amendment to the EEA raises

the distinction between numerical targets and quotas sharply and employers need to be alive to these distinctions because the former is lawful while the latter is unlawful

Our law provides that an EE plan may provide for preferential treatment and numerical goals, but not quotas The Constitutional Court has already made it clear that an EE plan must be properly formulated (and not simply a tick box exercise) and it must be applied in a lawful manner by an employer

The primary distinction between numerical goals/ targets and quotas lies in the flexibility of the standard Quotas amount to prohibited job reservation and this was jettisoned with apartheid Numerical targets, however, are intended to serve as flexible employment guidelines

The Constitutional Court has already stated that the Constitution does not take issue with EE plans that rigidly allocate positions along the lines of race and gender, provided that the EE plan pro-

vides for certain specific deviations or exclusions So, an EE plan may be deviated where a candidate has scarce skills or based on the operational requirements of the employer A designated employer need only provide for limited flexibility; that is a deviation from its general application

The Constitutional Court also made it plain that an EE plan can be validly adopted but unlawfully implemented This often occurs in the real world If the EE plan is “rigidly” implemented, the implementation of the EE plan can render a validly formulated numerical target a prohibited quota

This means that an employer can be challenged on the basis that the target became a quota which as we know is unlawful

The minimum standard that must be applied when determining whether the implementation of numerical targets is valid is based on whether it is rational The EE plan can only be implemented for its lawful purpose and

An employer accordingly cannot blindly follow numerical targets without due regard for the purpose of the achievement of equality This is done by inflexibly appointing applicants in “dogmatic compliance” with the numerical targets of the EE plan This would render the targets quotas We anticipate that this will become contested terrain in affirmative action law in years to come

There has already been an indication that the numerical targets will face constitutional challenge The notice, on occasion, determines a numerical target of 0%

In the agriculture, forestry and fishing sector in Limpopo for instance, the numerical target for both coloured males and females is 0% A target of 0% can neither “target” nor be designed to protect or advance anyone in our view It is meaningless The notice is also silent on the meaning of “conducting their business/operations nationally” and seems to be plagued in part by irrationality by limiting a designated employer that conducts its business/operations nationally to only the national EAP

This aside employers now need to be alive to the reality that the targets have been proposed and that what has been mooted by the employment & labour department for a number of years is on the horizon to soon becoming real in the near future

Talks over four-day working week are far from over

By Employment experts at CDH

Before the Covid-19 pandemic, many were shocked at discussions around the fourth industrial revolution, the digitisation of work and the creation of gig platforms, citing these changes to the labour environment as radical

A few moments thereafter, the world was rapidly plunged into a new normal, first with the performance of fully remote work and, now, a hybrid model between inperson and remote functions

In this new era, much debate has been sparked around the reduction of working hours, and the implementation of a four-day working week This concept, however, is not novel

At the 46th International Labour Convention on June 26 1962, the International Labour Organisation adopted the Reduction of Hours of Work Recommendation (No 116), which notably sought to indicate practical measures for the progressive reduction of hours of work, taking into

account the different economic and social conditions in different countries and the variety of national practices for the regulation of hours and other work conditions

Article I(4) of the recommendation says normal hours of work should be progressively reduced, when

appropriate, without any reduction in the wages of the workers as at the time hours of work are reduced The social standard indicated in the preamble of the recommendation is that of a 40hour working week

At its inception, it was widely accepted that such a model would only be suitable for certain industries in SA, as the majority of working South Africans form part of industries such as mining, agriculture and manufacturing, and these sectors working hours are highly regulated main collective agreements and sectoral determinations

In many of those sectors, salaries are directly linked to hours worked

However, responding in a parliamentary question and

answer session, the department of employment & labour has advised that there is room to conduct further research on working hours in SA, as the last investigation was conducted by the Employment Conditions Commission in 2014 It said: There might be a need to conduct more research to track the progress that has been made in the reduction of the working hours since the last report, and also to establish the feasibility of reducing hours of work and the unintended consequences thereof

According to the department, particular focus needs to be placed on sectors earning minimum wages In addition, the reduction of working hours already forms part of

the proposals under discussion at the National Economic Development and Labour Council s labour law reform task team, with the Congress of SA Trade Unions having tabled a 40-hour working week for discussion as early as March 3 2021

The challenge of such a model largely lies in its implementation, and potential amendments to wage legislation, more so in highly unionised environments where negotiations on basic conditions of employment are particularly complex

Nevertheless, the topic of reduced hours of work without loss of pay may easily find its way to the tables of collective bargaining, which may radically alter the labour space for a time

/123RF KUPREVICH

BUSINESS LAW & TAX

Wise up to crypto asset rules

BUILDING BLOCKS

Lerato Lamola-Oguntoye & Analisa Ndebele Webber Wentzel

Around the world, governments are moving ahead to regulate crypto assets

The SA Reserve Bank (the Bank) at first merely warned the public about the volatility of the crypto asset market, but South African regulators have now defined crypto as a financial asset under the Financial Advisory and Intermediary Services (Fais) Act

The Financial Intelligence Centre Act (Fica) also applies

The Fais Act, and in some respects other pieces of financial services legislation, were not built for the digital environment, so they are not a clean fit

It is a learning process, which will eventually result in more comprehensive regulation under the Conduct of Financial Institutions Bill

FAIS REQUIREMENTS

The Fais Act requires individuals providing a financial service to hold a financial services provider (FSP) licence, and crypto asset service providers (Casps) are also under this obligation

The Fais Act defines a crypto asset as a digital representation of value that is not issued by a central bank, but

can be traded, transferred or stored for utility, applies cryptographic techniques, and uses distributed ledger technology (blockchain) This definition is intentionally wide and technology-neutral The term is “crypto assets” , not “cryptocurrency” , because crypto assets are not legal tender in SA

Financial services include providing advice in relation to financial products, ie investment advice, and an interme-

assets as a financial product

Although certain activity would qualify under this definition, the FSCA does not at this stage require players to apply for a licence They are:

● Miners and node operators, who support what happens on the blockchain, but are not facing the consumer

● Those providing services in relation to nonfungible tokens (NFTs) NFTs are unique, based on the code that creates them Although NFTs can be traded, the regulator considers they present a lesser risk than fungible tokens Some people have argued that NFTs are the same as crypto assets, so in the next iteration of the Fais Act, they may be required to have a licence

diary financial service, which is defined quite widely

A person who assists other individuals to buy, sell, manage, administer or service a crypto asset is providing a financial service and must hold an FSP licence An individual trading crypto for their own account would not be an FSP

Guidance from the regulator of the Fais Act, the Financial Services Conduct Authority (FSCA), is that certain activity is not covered by the declaration of crypto

● Those providing financial services in relation to crypto asset derivatives, which are defined as securities under the Financial Markets Act (FMA) These players should already be licensed under Fais or be complying with the FMA

There is a prescribed application process for an FSP licence The applicant has to show that they meet the fit and proper requirements, which relate to, among other things, competence, good standing, operational ability and financial soundness They should nominate a key individual and where applicable repre-

sentatives The quantum of the application fee payable at the time the application is submitted depends on how many key individuals and representatives are nominated and the category of FSP licence We are currently in an exemption period under the Fais Act Casps who are currently providing financial services in relation to crypto assets are exempt from the Fais Act, as long as they apply during the application period of June 1 to November 30 2023 This exemption continues until there is a formal response to their application (granted or not)

FICA AND FAIS

Schedule 1 of Fica defines Casps as accountable institu-

CONSUMER BILLS

tions, which means they have to register with the FIC and fulfil ongoing compliance obligations

The Fica definitions of entities that qualify as accountable institutions are similar, but not identical, to those in Fais Casps should consider carefully whether they are performing any of the services listed under item 22 of Schedule 1

Fica does not have transitional provisions from December 19 2022 the requirement on Casps to register as accountable institutions commenced, qualifying entities must register as accountable institutions

The FSCA is not the regulator for Fica, but when an application for an FSP licence is submitted, the FSCA is

empowered to ask if the applicant is registered as an accountable institution

We would advise individuals and entities to assess firstly whether it is necessary to register under Fica, and then whether it is necessary to register as an FSP under Fais Now is the time to do this analysis and ask these questions

If an entity should register, but does not, they are liable to incur penalties Under Fais, it is an offence not to register, which may attract a penalty of a fine of up to R10m and possible imprisonment up to 10 years

Under Fica, not registering is an act of noncompliance, not an offence, which could incur administrative sanctions, such as a caution or reprimand and a fine of up to R10m For the first 18 months from December 19 2022, the FIC will not issue monetary fines for a failure to register, but other administrative sanctions could apply

EXCHANGE CONTROL

Individuals may use their single discretionary allowance and their foreign capital allowance to purchase crypto assets from abroad A local authorised dealer will be able to assist individuals with these allowances However, there are some blanks in exchange control regulation when it comes to repatriating the proceeds from a sale of crypto assets to SA We expect this will be addressed in the near future

New lawyer recruits need to bring their robots

In 2018 I wrote the following opening paragraph for this column:

“It is common to refer to fastmoving developments in any field as disruptive and law is no exception But you are only disrupted if you do not bend with the electronic storm It is not long since it was asserted that artificial intelligence (AI) was incapable of the core to human development, namely deductive reasoning With AI beating people at their own game in many spheres that is no longer believed and law practice is wide open to its influence

Now ChatGPT, for example, can justifiably claim that although deep-learning systems are less capable than humans in many realworld scenarios, they exhibit human-level performance on various professional and academic benchmarks

PAT R I C K B R AC H E R

It would be a mistake for lawyers to think that many legal services cannot be provided by AI just because machines cannot imitate what lawyers do Current models need to be rethought In the world of disputes we have to think about dispute avoidance, not dispute resolution When a dispute arises each party could load their version of the facts into a deep-learning system which would apply the law and come out with a prediction as to how the dispute is likely to be resolved by the courts after

five years of expensive litigation The parties can either agree in advance to accept that predicted outcome or to decide whether or not to accept the outcome

Either way, time and costs can be saved and greater access to justice will be available to everyone

One of the early skills of deep-learning AI is its ability to turn difficult language into ordinary language and ordinary language into complex legal drafting Lawyers have never universally embraced plain, ordinary language with enthusiasm but AI will overtake that reluctance

I edit a law blog where my challenge is to reduce a court judgment which may be 400 paragraphs long to an accessible 600 words composed in a specific fashion described in a

document I call How to write a blog I could load those rules into ChatGPT together with the judgment and it will probably do in minutes what I do in an hour or two The same can be done to solve many legal problems if data is properly put into the system and there is oversight regarding the end product

Although the gladiatorial way in which major trials are resolved with eloquent advocates on each side will probably persist for some time, the preliminary skirmishes in court proceedings can easily be dealt with by AI If you want to decide whether a summons properly describes the legal basis for a cause of action, or whether someone should get condonation for failing to keep to time limits, AI can do this more quickly, better and at less cost than

the current court-based process

Take another obvious example I have been writing for years about how commerce in general, and financial services in particular, are overregulated with executives spending too much time on compliance and too little time on entrepreneurial endeavours

If you load the megabytes of compliance requirements into an intelligent electronic system it will not miss an obscure regulation, will tell you whether what you are doing is right or wrong, and will fill in most of all those

forms that regulators require An entire compliance industry could be decimated (or probably a worse fraction) within the near future

Cut-and-paste lawyers will be easily replaced There is no end to the examples once you start thinking about outcomes and not processes

Busy lawyers like me need to start recruiting young lawyers passionate about the use of deep-learning systems I ended my article in 2018 saying that AI was not a threat but an opportunity Five years later that is no longer the case AI is now a threat if we don t embrace it and use it The last sentence of my 2018 article is still true: Let s rather control the process before robots open their own law firms

● Patrick Bracher (@PBracher1) is a director at Norton Rose Fulbright

LAWYERS HAVE NEVER UNIVERSALLY EMBRACED PLAIN, ORDINARY LANGUAGE WITH ENTHUSIASM

• The Fais Act, and other pieces of financial services legislation, were not built for the digital environment

THE TERM IS ‘CRYPTO ASSETS’ , NOT ‘CRYPTOCURRENCY’ , BECAUSE CRYPTO ASSETS ARE NOT LEGAL TENDER IN SA

/123RF FAIZALRAMLI

Fewer nations want crypto as legal tender

Ashlin Perumall Baker McKenzie

About a year ago, the Central African Republic (CAR) parliament adopted bitcoin as legal tender, making CAR the second country in the world to do so

The CAR government noted at the time that the intention was to “improve the conditions of Central African citizens ” The move was hailed as a “decisive step toward opening up new opportunities for [CAR]”

There were indeed potential benefits, such as jurisdictional attractiveness for crypto investors for foreign direct investment and the possibility of reaching more unbanked citizens For example, the CAR government

revealed plans to develop various crypto tourism and citizenship incentives, and the establishment of a “crypto island” under the government-supported programmed dubbed the “Sango Project” Add to this a possible local intention to create distance from the CFA franc, a regional euro-linked currency used by 14 African nations, which has remained a source of discontent within many of the nations which still use the currency However, with about only 10%-11% with access to internet services and only a quarter of the country with electricity, adoption in a real sense was severely hampered

Just a year later, in March 2023, CAR walked back on legislation giving effect to bitcoin as legal tender (including the acceptance of tax pay-

ments in cryptocurrency), although local merchants could still accept it if they chose It also repealed laws whereby the state had previously guaranteed convertibility into CFA franc At its core, the adoption of an instrument as legal tender means that it must be accepted as legal settlement for any debts

Many have criticised the volatility of crypto assets as making them a bad source for payments within an economy at scale Whereas fiat

itself does fluctuate relative to foreign currencies, cryptocurrencies such as bitcoin can see much wilder variances This was experienced in El Salvador when its treasury at the time of just over $100m worth of bitcoin was almost halved in a market crash

The use of bitcoin as legal tender also has a tenuous relationship with international financial bodies, which regard it as high risk, not just due to volatility but as it could enable sanction avoidance

When El Salvador adopted bitcoin as legal tender, it came under immense pressure from the International Monetary Fund, whose board has generally seen consensus that crypto should not ever be made legal tender to safe-

TAXING MATTERS

guard monetary sovereignty and stability In the case of CAR, such international regional pressure will have played a role in its turnaround on bitcoin

As CAR is part of a monetary union around the CFA franc, it is subject to regional money union treaties and a common central bank, with some suggesting that its move could have seen CAR’ s expulsion from these economic zones and the CFA franc The March 2023 amendment could therefore be an attempt to reassure these monetary communities of CAR’ s intention to remain committed to these international obligations

The CAR scenario speaks directly to how cryptocurrencies have struggled to find

their place as legal tender in any sovereign nation With the recent collapse of several large crypto exchanges globally, many international bodies are doubling down on their opposition to cryptocurrencies as a growing threat to the stability and sovereignty of local monetary frameworks, and the global monetary system at large Whereas it remains to be seen what place cryptocurrency will have in local economies, it seems the appetite and global financial tolerance for adoption as tender, such as in El Salvador and CAR, is dwindling Such sweeping regulatory changes will be even less credible in an increasingly interconnected and fragile global monetary environment

Shortfalls in reportable arrangement provisions

Transactions are typically reportable to the SA Revenue Service (Sars) in three ways

First, a confirmative or negative answer to a series of questions posed in a taxpayer’ s annual income tax return For example, Sars can ask whether a taxpayer has contributed to a trust A yes or no answer to this question is regarded as reporting a transaction to Sars

Second, the group relief provisions in sections 41 to 47 of the Income Tax Act provide certain group relief returns in which transactions must be disclosed to Sars However, since the introduction of the provisions, formal regulations relating to these returns have never been formalised, and no reporting is currently required in terms of these provisions

Finally, a transaction could be specifically reportable to Sars if it meets a defined list of characteristics or has been published in the Government Gazette on reportable arrangements (dated

February 3 2016)

The typical matters relevant are who must report, qualifying characteristics to render a transaction reportable, when to report, and the consequences of a failure to report While all these matters are essential, the qualifying attributes of transactions subject to reporting often draw attention

In terms of those arrangements contained in the public notice, identifying whether a transaction is reportable is less complex The same cannot be said for those arrangements based on specific characteristics

Specifically, three arrangements in section 35(1) of the Tax Administration Act create uncertainty, and it is

not easy to understand exactly what the legislator wants reported In terms of that provision, the following transactions are reportable:

● A transaction that gives rise to an amount that is or will be disclosed by any participant in any year of assessment over the term of the lease as a deduction for income tax purposes but not as an expense for accounting purposes or revenue for accounting purposes but not gross income for income tax purposes;

● A transaction that does not result in a reasonable expectation of a pre-tax profit for any participant; and

● A transaction that results in an expectation of a pre-tax profit for any participant that is less than the value of the tax benefit to that participant if both are discounted to a present value at the end of the first year of assessment when that tax benefit is or will be derived, or is assumed to be derived, using consistent assumptions and a reasonable discount rate for that participant

From a plain reading of

the text, it is clear that so many words and phrases are subject to interpretation that taxpayers have no certainty on when a transaction will meet these criteria, even before just understanding what is written While the legislation clarifies phrases such as financial benefit and pre-tax profit , testing the transaction against these characteristics remains challenging

Moreover, the purpose of the provisions often leads to absurdity For example, any transaction that was concluded in respect of venture capital companies (VCCs), where the public at large qualified for deductions in respect of investments made to VCCs, was potentially reportable based on the characteristics mentioned above This is so since an investment into a VCC would have ranked as a deduction for purposes of income tax but not as an expense for accounting purposes That transaction meets the reportable arrangement criteria, but one cannot see

that the legislator intends that these transactions should have been reported If it were the case, any venture capital investments over the last years would be subject to significant fines for failing to report Anecdotal evidence also suggests that the only transactions in which reporting occurs are those specifically listed in the Government Gazette One can only assume this since those criteria are much simpler to test a transaction against So, for example, would a transaction be reportable where a person acquires a controlling interest in a company with a balance of assessed loss exceeding R50m Clearly, it is easier to see that a

HAVING SUCH A

SET OF

NOT EVEN A DEDICATED SCHOLAR CAN UNDERSTAND MISSES

transaction would be reportable under those criteria than the provisions referred to above

Having such a complex set of criteria that not even a dedicated scholar can understand and test transactions against misses the point with reportable arrangements, which is for Sars to gather information and interrogate transactions

Suppose taxpayers do not understand the provisions and cannot test their transactions against those In that case, they will be inclined to ignore the provisions, rendering them utterly useless for the identifiable object

One hopes that Sars and the legislator identify that the current reportable arrangement regime contains deficiencies simply because it is too complex and act accordingly

● Pieter Janse van Rensburg is a director at AJM Tax He also serves as a nonexecutive director on the board of the SA Institute of Taxation

• As several crypto exchanges collapse, many global bodies are strongly opposing cryptocurrencies

THE USE OF BITCOIN AS LEGAL TENDER ALSO HAS A TENUOUS RELATIONSHIP WITH INTERNATIONAL FINANCIAL BODIES

BOTH SIDES OF THE COIN

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Sars provides clarity on PBO exemptions

activities

Mmangaliso Nzimande and Lerato Rankhumise ENsafrica

It is recognised in the SA Revenue Services’ (Sars)

Tax Exemption Guide for Public Benefit Organisations in South Africa (PBO guide) that nonprofit organisations play a significant role in society by undertaking shared responsibility for the social and developmental needs of the country This relieves the financial burden that would otherwise fall on the state

It is on this basis that public benefit organisations (PBOs) are granted preferential tax treatment PBOs can either carry out public benefit activities (PBAs) or provide funds to other PBOs that carry out PBAs outlined in the ninth schedule of the Income Tax Act,1962

Section 30(1) of the act particularly section 30(1)(c)(i) of the act requires each activity carried on by a PBO to be for the benefit of, or to be widely accessible to, the public at large, including any sector thereof (other than small and exclusive groups)

In terms of paragraph 1(p) of Part 1 of the ninth schedule of the act, PBOs are empowered to engage with the com-

munity development for poor and needy persons and antipoverty initiatives, including, inter alia, the promotion of community-based projects relating to self-help, empowerment, capacity building, skills development and of provision of training, support or assistance to emerging micro-enterprises to improve capacity to start and manage businesses However, it was not clear which community-based projects would meet the requirements of section

PBOS ARE EMPOWERED TO ENGAGE WITH THE COMMUNITY DEVELOPMENT FOR POOR AND NEEDY PERSONS

30(1)(c)(i) and there was uncertainty on this issue for PBOs

In May 2022, Sars issued Binding Private Ruling (BPR) 371 where it determined whether the proposed operating model of a PBO was in line with the provisions of section 30(1)(c)(i) of the act It should, of course, be noted

that any BPR has a binding effect only between Sars and the applicant

In BPR 371, the applicant [a PBO trust] was required, by agreement with a third-party donor, to make quarterly contributions to socioeconomic and enterprise development initiatives in neighbouring communities The PBO proposed an operating model where the general public would submit proposals through established community forums and undergo a certain evaluation process Initiatives aligned with the applicant’ s objectives and PBAs would then be granted funding

The proposed transaction in this case involved the funding of four projects:

● A bakery;

● Vegetable tunnels;

● A poultry project; and

● A small manufacturing concern

The applicant sustained the view that the projects were to benefit the local community as contributions awarded will result in the creation of employment, skills development and the enhancement of local enterprise Sars affirmed the applicant s position and held that the applicant s initiatives being limited to a specific

geographical region was consistent with the requirement that a PBO’ s PBA be carried on for the benefit of, or be widely accessible to, the general public at large, including any sector thereof (other than small and exclusive groups)

On face value, these projects that received funding in BPR 371 do not appear to perform any qualifying altruistic function accessible to members of the general public as required by section 30(1)(c)(i)

However, Sars’ confirmation reveals that, in certain instances, Sars may adopt a purposive approach to the interpretation of section 30(1)(b)(i) giving recognition to the importance of socioeconomic development

BPR 371 solidified the position that projects, unlike previously, can now be afforded donations/grants by carrying out activities which are in line with that of the PBO The BPR also shines a light on the fact that there is a route through which PBOs

can be utilised to fund nonPBO initiatives as long as there is a PBA, recognised under the ninth schedule, which is being carried out and the requirements of section 30(1) are adhered to by the PBO

Although the issuing of donations/grants to projects has been clarified, there remains uncertainty concerning provision of loans to projects and/or micro-enterprises In terms of paragraph 1(p)(iii), PBOs have been empowered to offer support to micro-enterprises; however, the required guidance to carry out this PBA is yet to be provided

The minister’ s guidance

THE MINISTER’S GUIDANCE ON THE PROVISION OF LOANS … HAS THE POTENTIAL TO CHANGE THE ECONOMIC FABRIC OF THE COUNTRY

on the provision of loans to micro-enterprises by PBOs has the potential to change the economic fabric of the country, as the core struggle of emerging micro-enterprises is resources The guidance is crucial at this stage on the basis that paragraph 1(p) serves as an adequate pathway for supporting persons and/or enterprises that can contribute towards the creation of employment, skills development and the enhancement of local enterprise in the long run

BPR 371 is of significant importance because it highlights how projects can be used as vehicles through which PBOs can perform the PBAs It should encourage other PBOs to adopt progressive methods of executing their objects

As the realm of funding of projects has been clarified, we hope to see progress in terms of loans being issued to micro-enterprises with the potential to bear positive societal effects that mirror PBAs

Embracing Africa’ s youth as the agents of change

Lerisha Naidu Baker McKenzie

Progress is impossible without change The words articulated by the renowned playwright George Bernard Shaw are fairly intuitive And through a high-level review of history, it is trite that the youth have been indispensable agents of and for change

Thirty-seven years ago in Soweto, members of the South African youth courageously protested against oppressive laws that propagated an entrenched system of unequal and inaccessible education And indeed, youth activism has been a crucial feature of civil rights movements throughout the world

from anti-war protests to vocalising strong criticism of human rights violations; from championing issues relating to climate change to advocating passionately for gender equality The list is extensive Nelson Mandela, in

demonstrating an unconditional support for SA s youth, expressed the view that the the youth of today are the leaders of tomorrow One almost wholeheartedly embraces this sentiment But given the track record in our

global history books, is there merit in advocating more strongly for a world in which the youth of today can also be today s leaders? Put differently, rather than positioning the youth as the hope for tomorrow, is there more scope for inclusion in the business of the day?

A recent UN World Youth Report recorded an estimate of 1 2-billion youth in the world, accounting for 16% of the global population According to the World Economic Forum, more than 60% of Africa s population is under the age of 25 By 2030, young Africans are expected to constitute 42% of global youth

The African continent cannot afford to relegate

these demographic trends to an impending eventuality

The reality is that there exists potential to deploy Africa s youth, in the spirit of Bernard Shaw s sentiments, as purveyors of progress and agents of change, not just in the future, but today

To achieve this, it is important to create space, encourage authenticity, empower leadership, invest in and nurture talent, celebrate diversity and foster inclusion, harness innovation and harvest its fruits, accelerate skills transfer, take leaps of faith, confront unconscious age-bias and ensure adequate access to resources, infrastructure and opportunities

On Youth Day in SA, we

celebrate those youth activists and advocates for justice, those young leaders in entrepreneurship and innovation, those who live by example and demonstrate true leadership in deed rather than through title We salute the hard workers who have their sights on their dreams and the passionate and courageous voices that dare to challenge prevailing norms We acknowledge the dynamism and the bright eyes, which often signal a willingness to participate in the co-creation of a brighter future

On June 16, we pause to embrace Africa s youth as purveyors of progress and agents of change

• Ruling 371 highlights how projects can be used as vehicles through which PBOs can perform

RELIEVING THE BURDEN

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How to manage ‘talking back’

• Not all insolent behaviour by employees warrants dismissal

Jonathan Goldberg and Grant Wilkinson Global Business Solutions

The scene of an employee speaking out against the boss in a company meeting, them being chastised by the powers-that-be and then their making the lofty statement “I quit” is common to a lot of movies and TV shows

While this type of scenario is all very good and well for Hollywood, the situation in real life is not as dramatic

While the situation that we describe often leads to the employee being shown the door, carrying a paper box of their possessions, under South African labour law you need to unpack the nature of the “talking back” and then, based on the facts of the matter at hand, you can decide on

YOU SAID WHAT?

CCMA

if the issue warrants dismissal

The fine line between insolence, insubordination and gross insubordination

When faced with a matter of an employee challenging a statement made by an employer or that employee’ s line manager, there are three classifications that this behaviour could fall under:

● Insolence;

● Insubordination; and

● Gross Insubordination “Insolence” is characterised as behaviour that is rude and cheeky It can be written or verbal This type of disrespectful behaviour is indeed seen in a serious light; however, to justify dismissal it needs to be wilful and serious with the result that the employment relationship breaks down irretrievably In terms of “insubordination” , an employee refuses to

accept the authority of the employer or a person who has authority over them, such as a line manager Dismissal for a single act of insubordination is only justifiable in certain instances where the circumstances surrounding the incident are sufficiently serious Normally this conduct warrants a warning

Regarding “gross insubor-

dination” , this is a wilful and intentional act that is unprofessional and unethical This would normally destroy the trust relationship between employer and employee If the employee had stood up and said “I will not flipping follow your instructions Go to hell” that would be gross insubordination Avoid landing up at the

LEGAL SCOOP

As an employer, if you find yourself wanting to dismiss an employee based on gross insubordination, make sure you are sure this is indeed a case of gross insubordination as, if it’ s not, you could find yourself facing a hefty award at the CCMA

This was the case in Independent Risk Distributors SA Ltd v CCMA and others

Heard in the Labour Court (LC), this case was an application to review an arbitration award where the commissioner found that the dismissal of the employee for gross insubordination was unfair as she was merely asking for clarification during a staff meeting and not wilfully disobeying any instruction

FACTS OF THE CASE

The company ’ s CEO scheduled a meeting with the sales team (which included the employee) to discuss their team’ s underperformance It was said that during the

meeting the CEO instructed the sales employees to go home and reflect on their poor performance

In a challenging manner, the employee stood up asking why they were being issued with this instruction As a result of this act, the employee was charged with gross insubordination, was found guilty and dismissed At arbitration, the commission found the dismissal to be unfair as the employee had not given adequate reasons to substantiate the gross insubordination charge

The employer took the case to the LC It applied the reasonable person test when coming to its finding It asked whether another reasonable commissioner would have come to the finding the first commissioner did The court concluded any reasonable commissioner would have concluded what the primary commissioner had come to The LC upheld the arbitration award

Know your AI when using it for decision-making

In the May edition we discussed the feasibility of companies in SA amending their constitutional documents to provide for compulsory reliance on artificial intelligence (AI) in corporate decision making AI has several notable advantages over the human mind, especially when it comes to the ability to retain and recall vast quantities of information and to make decisions and give advice unaffected by biases and emotions

An analysis of the relevant sections of the Companies Act led us to conclude in that article that, as the law stands, there is nothing to prevent a company from legislating, in its memorandum of incorporation or a shareholders agreement, that an AI system must be consulted before a final decision is made by the board However, the directors cannot abrogate their duty to become fully informed about corporate affairs, apply their own minds and exercise their discretion in the best interests of the company

Given the nature of AI, this issue must also be addressed if a company requires the directors to rely on AI in making decisions

In terms of section 77(2) of the Companies Act 71 of 2008, a director of a company may be held liable in accordance with the

principles of the common law relating to delict for any loss, damages or costs sustained by the company as a consequence of any breach by the director of the duty imposed by section 76(3)(c), which requires a director to carry out his or her duties with the degree of care, skill and diligence that may reasonably be expected of a person:

● Carrying out the same functions in relation to the company as those carried out by that director; and

● Having the general knowledge, skill and experience of that director

Since well before the advent of the latest generation of AI, company boards have been relying on information collected, stored and processed electronically when making decisions With advances in technology of all kinds, it might well be said that company directors who did not take advantage of the latest tools to assist them in coming to accurate decisions quickly were not in fact carrying out their duties with the degree of care, skill and

diligence expected of them

But as AI has been developed to replicate the way in which human minds think and learn, a new issue has arisen, which affects the legal implications of using AI in corporate decisionmaking as much as it is not possible to “read” the thought processes by which a human being reaches decisions unless they explain it, we do not always understand the processes by which AI reaches decisions This may make it difficult for a company s board to show that they have exercised the degree of care, skill and diligence required by section 77(2) of the Companies Act

The answer to this problem, it is suggested, is for a company to make sure proper governance rules are in place, regulating the company s use of AI and ensuring there is a chain of record-keeping and accountability, by which processes are documented and explained The EU s Ethics Guidelines for Trustworthy Artificial Intelligence, published in April 2019, provide some useful guidance as to the considerations that should be catered for The guidelines propose that, for AI used in companies to be trustworthy, it must be lawful, ethical and robust This in turn requires that the following considerations must be taken into account:

● Transparency there should be visibility into all elements of the AI system and it should be possible to decipher and explain the decision-making process;

● Data privacy and security AI systems should maintain the privacy rights of any person whose data they process, as well as the privacy of the processing models and supporting systems Any processing of personal information by the system must be carried out in accordance with relevant data protection laws (in SA, the Protection of Personal Information Act and the Promotion of Access to Information Act)

Processing includes the collection, receipt, storage, updating or modification, use, dissemination, erasure or destruction of information If an AI system is capable of initiating data processing of its own accord, it must also include safeguards to ensure the relevant laws are complied with;

● Focus on human agency and oversight the AI system must not undermine human autonomy or cause other adverse effects The less oversight a human can exercise over an AI system, the more extensive testing and stricter governance of the system is required Oversight mechanisms can be required in varying degrees to support other safety and control measures,

depending on the AI system’ s application area and potential risk The system may allow for human intervention and oversight:

At every stage where a decision is required, (which in many cases is neither possible nor desirable);

During the design cycle of the system and monitoring of the system s operation; and

In the overall activity of the AI system (including its broader economic, societal, legal and ethical impact) and the ability to decide when and how to use the system, or not to use it, in any particular situation

● Technical robustness and safety technical robustness requires that AI systems be developed with a preventative approach to risks and in a manner such that they behave reliably as intended while minimising unintentional and unexpected harm, and preventing unacceptable harm

This includes incorporating a safe failover mechanism; in other words, a backup operational mode that automatically switches to a standby database, server

SYSTEMS SHOULD MAINTAIN THE

RIGHTS OF ANY PERSON WHOSE DATA THEY

or network if the primary system fails, or is shut down for servicing; and

● Accountability mechanisms must be put in place to ensure responsibility and accountability for AI systems and their outcomes, both before and after their development, deployment and use Even though the system may be capable of working autonomously, it should be under the supervision of a human being There must be an established path of responsibility and accountability for the behaviour and operation of the system

In terms of the Companies Act, the directors can never abrogate their responsibility and must be able to show they have exercised the requisite degree of skill and care in carrying out their duties As we are navigating uncharted waters, the courts have not yet had occasion to pronounce on what would be sufficient compliance when using AI to aid corporate decision- making

But we suggest if directors can show that, in introducing and using AI, they implemented these guidelines, it ought to go a long way towards showing they have complied with their obligations

●

Ian Jacobsberg is a Director at Fluxmans

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When the SCA backs down on jurisdiction

• Appeal court sets out the circumstances in which it cannot interfere with an order issued by high court

Aslam Moosajee & Fathima Omar ENSafrica

In the Special Investigating Unit v Phomella Property Investments (Pty) Ltd and another, the Supreme Court of Appeal (SCA) dismissed with costs an appeal from a judgment of the Gauteng division of the high court, Pretoria

This case relates to a lease agreement that was entered into between the department of public works (DPW) and Phomella Property Investments in respect of a building in Pretoria to accommodate the justice & correctional services department (DOJ) The building and lease were then transferred to Rebosis Property Fund Limited The lease was concluded on September 22 2009 for a period of nine years and 11 months

The lease was concluded by using the procedure for a negotiated lease as opposed to an open bidding process

The requisite authority to conclude the lease was subject to the condition that, prior to signing of the lease an assessment of the space required by the DOJ was to be conducted However, the lease was signed without the needs assessment being completed

In February 2017, the Special Investigating Unit (SIU) launched a high court application The initial relief sought was to review and set aside the lease as void ab initio But by the time the matter came

before the high court, the lease had run its course

Accordingly, the SIU did not persist in that relief but rather sought the following relief:

● An order declaring the lease to be unlawful; and

● An order that Phomella and Rebosis jointly and severally pay the public works minister the amount of R103,880,357 65 It was alleged that this amount represented wasteful expendi-

THE LEASE WAS CONCLUDED BY USING THE PROCEDURE FOR A NEGOTIATED LEASE AS OPPOSED TO AN OPEN BIDDING PROCESS

ture incurred during the lease The SIU contended that an area greater than what was needed by the DOJ had been leased The figure represented the SIU’ s calculation of the rental which had been paid for that excess area

The declaration of unlawfulness was sought in terms of section 172(1)(a) of the Constitution where two bases were relied on for this relief first, that the DPW had failed to follow an open bidding process in concluding the lease; and second, if it was found that a negotiated lease was competent, the prior requirement of a needs assess-

ment of the space required by the DOJ had not been met

The order for payment of R103,880,357 65 was sought under the provisions of section 172(1)(b) of the constitution The high court declared the lease unlawful but dismissed the relief sought by the SIU under section 172(1)(b) of the constitution

The SIU appealed against the high court’ s refusal to make this order

The SCA rejected the argument that where the lease was held to be unlawful, it was necessary to set it aside and declare it to have been void ab initio on the basis that the enquiries under section 172(1)(a) and section 172(1)(b) are distinct and not to be conflated

The SCA held that the peremptory requirement of section 172(1)(a) is to declare conduct invalid Therefore, any additional order such as setting aside a contract fell within the ambit of section 172(1)(b) The SCA referred to the State Information Technology Agency SOC Ltd v Gijima Holdings (Pty) Ltd, where the Constitutional Court described the nature of the remedial power afforded to a court by section 172(1)(b) of the constitution as follows:

[U]nder s 172(1)(b) of the constitution, a court deciding a constitutional matter has a wide remedial power It is empowered to make any order that is just and equitable So wide is that power that it is bounded only by

TERMS AND CONDITIONS

social development and others (Freedom Under Law Intervening), granted an order further suspending the order of invalidity for a period of 12 months and requiring Cash Paymaster to continue its services for that period

considerations of justice and equity ”

The SCA in Phomella held that an example of the exercise of that power would be setting the lease aside or declaring the lease to have been void ab initio, provided that the order made was just and equitable in the particular circumstances

The SCA held that such an order involves the exercise of a true discretion Accordingly, an appeal court can interfere with it only if it is not exercised “judicially, or that it had been influenced by wrong principles or a misdirection on the facts, or that it had reached a decision which in the result could not reasonably have been made by a court properly directing itself to all the relevant facts and principles” In other words, the SCA cannot interfere with the high court’ s jurisdiction simply on the basis that it would have reached a different conclusion

The SCA also relied on Constitutional Court s judgment in the case of Allpay Consolidated Investment Holdings (Pty) Ltd and others v chief executive officer SA Social Security Agency and others (AllPay 2), and explained that the important principle is the following: It is true that any invalidation of the existing contract as a result of the invalid tender should not result in any loss

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to Cash Paymaster “The converse, however, is also true It has no right to benefit from an unlawful contract And any benefit it may derive should not be beyond public scrutiny ”

The SCA held that a contextual reading of the dictum in AllPay 2 demonstrates that:

● The Constitutional Court did not require Cash Paymaster Services to repay amounts paid to it under what was found to be an unlawful contract;

● In the exercise of its discretion, the Constitutional Court ordered the issuing of a new tender, but that if the tender is not awarded the declaration of invalidity of the contract would be suspended until completion of the fiveyear period for which the contract was initially awarded; and

In the light of the above, the SCA in Phomella held that a contextual reading of AllPay 2 shows that the Constitutional Court did not hold that a party could not derive any benefit from an unlawful contract and that the SCA’ s approach in AllPay 2 of allowing a party to retain payments, and thus to benefit under an unlawful contract has been echoed in several matters including the Constitutional Court case of Buffalo City Metropolitan Municipality v Asla Construction (Pty) Limited, where it was held that: “I therefore make an order declaring the Reeston contract invalid, but not setting it aside so as to preserve the rights to that the respondent might have been entitled It should be noted that such an award preserves rights which have already accrued but does not permit a party to obtain further rights under the invalid agreement ”

The SCA in Phomella held that the discretion under section 172(1)(b) should be exercised on a case-by-case basis The SCA considered the grounds the SIU relied on, and held that none of the high court findings could be faulted and that the exercise of the high court’ s true discretion was not subject to interference by an appeal court The SCA therefore agreed with the high court regarding the ruling not to order Phomella and Rebosis to pay the almost R104m Consequently, the appeal was dismissed with costs, including those of two counsel

● When the tender had not been awarded within the five-year period, the Constitutional Court in the case of Black Sash Trust v Minister of

So it is clear from Phomella that a claim for repayment of monies paid under a contract is not an automatic consequence of a contract being declared unlawful The SIU has filed an application for leave to appeal to the Constitutional Court It will be interesting to see whether the Constitutional Court agrees with the SCA s reading of the dictum of AllPay 2

Review of design legislation by EU shows the way for SA

Marco Vatta

Spoor & Fisher

The EU is undertaking a review of its design laws, with the aim of making design law protection more relevant as the world transitions into digital services

The proposed revision to the legislation introduces several key changes to expand the protection afforded by design law and to make it simpler, faster and more cost effective to protect and enforce design rights in the EU

Notably, the proposal will see the definition of a design being broadened to encompass designs that include movement, transitions and animations, and to extend protection to digital products

Similarly, as with registered trademarks and copyrighted works, that are commonly identified by the symbols ® and ©, registered designs will be identified in a similar way with the letter d shown inside a circle

It is expected that the revision to the legislation will also

allow for the possibility to combine multiple designs in one application, thereby doing away with the requirement that the designs within an application must belong to the same class of goods

The draft revisions to the legislation also introduce measures to crack down on

unauthorised 3D printing, whereby only a right holder can consent to the creating, downloading, copying and sharing or distributing to others [in] any medium or software recording the design for the purpose of enabling a product

The EU s efforts to modernise its design laws are commendable and offer valuable lessons for SA s own design laws In an increasingly digital world, it is imperative that SA also updates its legislation to keep up with

advances in technology and to ensure our designers are protected both locally and abroad

Some changes to the Designs Act that will go a long way in achieving this could include broadening the definition of a design to include digital products, removing the restriction on the enforceability of a design beyond the class in which it is registered and allowing for the protection of multiple designs in a single registration It may also be the oppor-

tune time to abolish the distinction between aesthetic and functional designs in SA to align our design laws with those of the EU and other major markets

The EU s efforts to modernise its design laws should serve as a valuable example for SA in reviewing and updating our own legislation Keeping up with technology is critical to ensure our designers and creators are protected, and that SA remains a desirable destination in the global economy

IT WAS ALLEGED THAT THIS AMOUNT REPRESENTED WASTEFUL EXPENDITURE INCURRED DURING THE LEASE

THE PROPOSAL WILL SEE THE DEFINITION OF A DESIGN BEING BROADENED

BUSINESS LAW & TAX

Don’t ignore signs that you might default

Vijay Jainundh Paragon Debt Advisory

Businesses which may be teetering on the edge of meeting their monthly financial obligations, particularly their debt repayments, should not rest on their laurels

Don’t put your head in the sand; act quickly if you come into financial difficulty

Defaulting affects your credit rating negatively, which makes securing funding in the future more difficult

Businesses close to going into the red need to be proactive and contact their funders

Being proactive and proving what you are doing to improve business cash flow and debt repayments counts in your favour Acting as soon as possible to get your house in order and engaging with creditors is the best course of

action Here are some steps to take first:

● Remain calm

It’ s natural to panic when you are on the brink of defaulting but keeping a cool head and remaining rational will hold you in good stead This will

securing credit in the future

Therefore, it would also be best to avoid taking on new debt until you have remedied your current financial position

● Prepare for negotiations

constraints it’ s not just the funder who will receive delayed repayments This shows commitment to remedying the situation and maintaining funder trust and confidence

solution instead

allow you to sensibly assess your current position and any means to improve liquidity to pay as much as you can towards your debt When you default, it effects your credit rating negatively, which can make current creditor relationships difficult, or it can have a negative effect on

Before reaching out to funders, preparation for the discussion will ease the negotiations and way forward Businesses should record in writing a detailed and clear explanation of why they are expecting to experience cash flow difficulties They then need to set out a proposed plan to navigate out of their expected distressed position and what concessions they require from funders and, importantly, how they intend to make up any shortfall payments or moratoriums

This plan should include what austerity measures are being taken to share in the pain as well as to free up cash flow For example, salary cuts would prove the business is being effected by cash flow

● Proactively engage with your funder Funders do not like it when businesses avoid contact and rather turn to business rescue practitioners to be “saved” This is considered a hiding mechanism and naturally constrains the powers of the funder, placing full control of the situation in the hands of the practitioner A funder would certainly strive to work with a business to find a

VIEWPOINT AFRICA

To proactively avoid a default is always best A lender may look to the courts to seek repayments otherwise, which can become an expensive exercise to recoup legal fees on top of the outstanding loan Lenders, however, are not quick to resort to this option as it’ s a lengthy process and working with a client to come to a resolution outside of involving the courts is almost always preferred

There are options if you act fast, and there may be alternative funding solutions that can help to futureproof your business

● Seek third-party advice

This can become a daunting process for business owners who are already highly stressed by their current financial situation Seeking assistance from an independent adviser to assist in management discussions and negotiations with funders on behalf of the business can

alleviate unnecessary stress, shorten the resolution period and secure you the best way forward

Funders will also feel more confident when an independent adviser is in the middle managing the interests of both parties and ensuring the plans are realistic and will be executed An independent adviser acting for both parties can generally secure more flexibility around altering payment plans, waiving of covenants, debt restructuring or refinancing and any other process that needs to follow to improve the solvency of the business

● Keep to your promise

Once a solution has been agreed on between the business and funders, it’ s important for the business to commit to successfully executing the plan and keeping funders updated on their progress This will ensure funder relationships are strengthened for future funding needs

Ghanaians get more access to petroleum sector

Since the discovery of oil in commercial quantities in 2007, Ghana’ s petroleum industry has witnessed remarkable growth

In an effort to foster the development of the indigenous market, the ministry of energy introduced policies to take advantage of this growth

However, the actual participation of local companies, particularly in the upstream petroleum sector, has remained limited

To develop the indigenous market, the ministry of energy enacted a local content and local participation policy in 2013 to give preferential treatment to Ghanaian petroleum businesses to:

● Maximise local employment;

● Develop local capacities through education, skills transfer and expertise development; and

● Promote domestic

manufacturing Local content refers to the use of Ghanaian expertise, goods and services, people, businesses and financing; while local participation refers to the level of Ghanaian equity or ownership in businesses

However, only a few local companies have a stake in the oil and gas market, especially in the upstream petroleum sector which is characterised by activities involving the exploration and production of petroleum

In 2022, the Petroleum (Local Content and Local Participation) (Amendment)

Regulations, 2021 (LI 2435)

came into force to expand the avenues through which

an indigenous Ghanaian company (IGC) can partner with non-IGCs to provide services in the petroleum industry value chain The effect of LI 2435 is likely to be an increase in Ghanaian participation

Under LI 2435, the threshold for a company to be classified as an IGC has been raised from 51% to 100% Ghanaian ownership Thus now, an IGC is defined as a company that is:

● Incorporated under the Companies Act, 2019;

● Fully-owned fully owned by a Ghanaian citizen;

● Has Ghanaian citizens holding a minimum of 80% of executive and senior management positions; and

● Has Ghanaian citizens holding 100% of the nonmanagerial and other positions

Where doing so may deepen local content and local participation and maximise technology transfer, the Petroleum

Commission (regulator of the upstream petroleum sector), may recommend a channel partnership or strategic alliance between the IGC and a non-IGC

A channel partnership is an arrangement between an IGC and a non-IGC including a distributor, a vendor, a retailer or a consultant to market and sell the products and services or technologies of the IGC in Ghana

A strategic alliance is an arrangement between a nonIGC and an IGC by which the responsibilities are clearly defined and partners agree to share resources to undertake a specific mutually beneficial project While a new entity is set up through a channel partnership, the IGC and non-IGC maintain their separate corporate identities under a strategic alliance

The original regulations, LI 2204, introduced benchmarks for Ghanaian participation in the provision of certain goods and services

integral to petroleum activities to be met by target dates For example, the supply of certain products was required to meet 100% Ghanaian participation or almost 100% within 10 years

However, LI 2435 favours Ghanaian companies by requiring that the level of Ghanaian participation in the supply of some products has to be 100% from the start of supply This is the case for:

● Low-voltage and highvoltage cables;

● Freight forwarding;

● Logistics and customs clearance;

● Dredging services; and

● Network installation and support services

Last, the supply of certain commodity chemicals such as methanol (alternate fuel for internal combustion and other engines) and acrylic acid (one of the main chemicals used in polymer and rubber production) are reserved for indigenous Ghanaian companies

The amendments will create an opportunity for foreign investors to be involved in the industry value chain in Ghana through the introduction of the channel partnership and strategic alliances

Clear guidelines and effective implementation will be key to ensuring the successful realisation of these objectives, ultimately contributing to the industry s sustainable growth and the economic development of the country

THE AMENDMENTS WILL CREATE AN OPPORTUNITY FOR FOREIGN INVESTORS TO BE INVOLVED IN THE INDUSTRY VALUE

• Businesses that are close to going into the red need to be proactive and contact their funders

IT WOULD BE BEST TO AVOID TAKING ON NEW DEBT UNTIL YOU HAVE REMEDIED YOUR CURRENT FINANCIAL POSITION

THERE MAY BE ALTERNATIVE FUNDING SOLUTIONS THAT CAN HELP TO FUTUREPROOF YOUR BUSINESS

No easy road for entrants to ECS market

• Hurdles to satellite communications players in SA include obtaining a licence and BBBEE requirements

Wilmari Strachan and Naledi Ramoabi ENSafrica

Gone are the days when satellite communication was limited to those brick phones with long antennas

Satellite communications services are gaining traction globally as they offer alternative ways of connecting end users to the internet and other related communications services

However, as electronic communications services (ECS) via satellites become more popular and accessible, service providers are met with regulatory challenges

In the SA context, ECS are subject to the Electronic Communications Act (ECA) According to the act, ECS are any service which consists wholly or mainly of the conveyance, by any means, of electronic communications over an electronic communications network, regardless of whether such services are provided on a wholesale basis or to end-user sub-

scribers Satellite communications services are therefore considered to be electronic communications services under the ECA

An electronic communications network refers to a broad definition that encompasses any system of electronic communications facilities, and this includes a satellite system

Therefore, a person who makes available a satellite system to provide ECS will

MORE REMOTE AREAS COULD GET ACCESS TO RELIABLE INTERNET CONNECTIVITY AND MORE COMPETITION COULD DRIVE DOWN THE COST OF DATA

be a provider of electronic communications network services (ECNS) as defined in the ECA

To offer ECS and/or ECNS in SA, a person must hold the relevant licences issued by the communications regula-

tor, the Independent Communications Authority of SA (Icasa) Persons wanting to offer satellite communications services would have to hold individual ECS and ECNS licences, which allow a licensee to provide ECS and ECNS across SA

The first challenge faced by persons wanting to enter the SA communications market is that it is not yet possible to apply for these licences

New individual ECS/ ECNS licences can be applied for from Icasa only if the communications & digital technologies minister issues an invitation to apply

The only way to obtain individual ECS/ECNS licences at present is to find an existing licensee willing to sell its licences and then apply to Icasa to transfer the licences The transfer application process is complex and timeconsuming

Another hurdle to acquiring individual licences is adhering to the requirement that an individual licensee must have a minimum of 30% of its ownership equity held by historically disadvantaged groups, as required in

terms of the ECA As such, any person who wishes to offer satellite communications services in SA must: (i) be an SA citizen, or otherwise a juristic person (company) registered in SA; (ii) hold individual ECS/ECNS licences; and (iii) prove that 30% of the equity ownership in the prospective licensee is held by historically disadvantaged groups if it wishes to acquire such licences

For multinational corporations in particular, complying with the equity ownership requirement can be a major obstacle to obtaining individual licences in SA

According to the Codes of Good Practice on BroadBased Black Economic Empowerment (BBBEE), all businesses participating in the SA economy must contribute to the goals of equity ownership The codes recognise some multinational corporations may have international business practices that prevent them from adhering to the equity ownership requirement

To remedy this, the codes have introduced another way in which multinational cor-

porations can contribute to the BBBEE objectives instead of equity shareholding, which is referred to as equity equivalent contributions measurement The communications & digital technologies minister and/or Icasa has unfortunately not yet adopted this measurement

FOSTER COMPETITION

The equity equivalent contributions measurement is a framework the minister could adopt for multinational corporations wanting to enter the communications sector while ensuring the promotion of BBBEE within the sector

One of the stated purposes of the ECA is to facilitate diversity and transformation in the ICT sector by promoting BBBEE The use of the Equity Equivalent Contributions measurement aligns with the aims of BBBEE in the ICT sector and would foster competition within the sector by opening up the tight list of entities that can offer communication services based on the equity ownership requirement

Apart from the licensing

requirements, other legal considerations satellite owners must be aware of include the application of public international law to satellites that are in orbit, including the question of which country has jurisdiction over the satellite when it is in orbit Satellite communications services would greatly benefit the SA economy and end users More remote areas could get access to reliable internet connectivity and more competition in the sector could drive down the cost of data

However, the hurdles service providers have to go through before they can provide ECS or ECNS in SA are restricting entry to the market

The introduction of equity equivalent contributions as an alternative to the 30% equity ownership by historically disadvantaged groups has the potential of removing one of those hurdles

But for now, only time will tell how the communications minister and Icasa will work with multinational service providers in regulating satellite communication services

You need certificates for solar, inverters

Jean-Paul Rudd

Adams & Adams

Insurance policies often contain a standard clause requiring policyholders to comply with the laws of the country where the policy is issued

The intention behind the clause is to ensure that policyholders act in a lawful manner Failure to comply may lead to policy exclusions or the denial of claims

REGULATIONS

With the energy crisis in SA, policyholders are turning to solar systems and/or inverters to alleviate the pain of load-shedding

Many solar systems and/or inverters are connected to the distribution board) box or electrical panel of a building, allowing for the integration of solar-generat-

ed electricity into the building s electrical system

Electrical installations are governed in SA by regulations published by the labour department

These regulations require every user or lessor of an

electrical installation, as the case may be, to have a valid certificate of compliance issued by a qualified electrical contractor Importantly, the regulations also require that a supplementary certificate of compliance be issued for any

addition or alternation made to an electrical installation

The importance of complying with these regulations, from an insurance perspective, is best explained by way of the hypothetical examples below

EXAMPLE A

Mr Khumalo, fed up with the continuous spate of loadshedding, recently invested in a state-of-the-art solar system for his luxurious home

Once installed, Khumalo insured the system against all risks as part of his comprehensive building insurance

The solar system was subsequently rendered useless after a flash of lighting struck the panels directly Khumalo lodged a claim with his insurer, which requested him to supply the supplementary certificate of

compliance, which, by law, had to be issued following the installation of the solar system To Khumalo s shock and horror, he realised his contractor had failed to issue him with the certificate Khumalo s insurer thereafter denied his claim due to noncompliance

EXAMPLE B

Ms Swanepoel, unable to watch her favourite soapies in the evenings after returning from work due to the high stages of load-shedding, recently installed an inverter in her townhouse

A fire subsequently broke out in her home, destroying some of her household contents On inspection of the property, the assessor appointed by Swanepoel s insurer noticed she had installed an inverter

Swanepoel was subsequently called on by her insurer to produce the supplementary certificate of compliance issued after the installation, which she was unable to do, resulting in her insurer rejecting her claim

The hypothetical examples discussed above highlight the importance of complying with the law when installing a solar system or inverter Failure to do so may result in your insurer rejecting your insurance claim, leaving you exposed to significant financial losses

Therefore, it is essential to ensure you meet all the applicable safety and performance standards that may be required from your insurer and possess a valid certificate of compliance to ensure that your insurance coverage remains valid and effective

/123RF GUIJUNPENG

Avatars have their rights too

VIRTUAL GOODS

Kayla Casillo & Priyanka Naidoo ENSafrica

Have you ever browsed one of your favourite online retail platforms and noticed an entirely new clothing collection launched by the brand for your metaverse avatar?

In February, we stumbled on Zara’ s Valentine’ s Tale range The collection comprised 22 digital assets which included necklaces, earrings, rings and bags that could be purchased for your avatar through Zepeto, which is Asia’ s largest metaverse platform

As part of the metaverse, Zara specifically designed nine avatars to be the face of the Valentine’ s Tale campaign However, the company was not the first to create an exclusive metaverse collection, with Meta being the first to collaborate with designer brands such as Prada, Gucci and Balenciaga justifying it on the basis that people express themselves through what they wear and fashion, and that you should be able to do the same through your metaverse avatar

It has been reported that high-end brands, such as Gucci, have sold fashion items for metaverse avatars for record-breaking amounts that are higher than the price tag of the physical counterpart With that in mind, what are the legal considerations that apply to those who purchase retail goods on the metaverse?

CONSUMER RIGHTS

From an SA law perspective, the Consumer Protection Act 2008 provides consumers with certain rights to return goods within a specific period after the goods have been delivered to the consumer, including a five-day coolingoff period during which a consumer may return goods for a full refund

However, the purchase of goods using an online platform is considered an electronic transaction, and therefore the Consumer Protection Act cooling-off period does not apply to the procurement of such goods, and the provisions of the Electronic Communications and Transac-

nications and Transactions Act does not include a definition for “goods” and so the ordinary dictionary meaning will apply Consumers purchasing virtual goods should be afforded the same protection as consumers purchasing tangible retail goods, and it appears that our legislation is broad enough to extend protection to consumers of digital assets

From a platform perspective, platforms such as Zepeto provide e-commerce space for third parties to sell or consume digital goods and/or services Regardless of the type of goods or services sold, platform providers generally apply similar risk models which ensure that any goods or services purchased using the platform will be subject to the terms and conditions of the third party selling the goods or services

to consumers in terms of the consumer protection and/or electronic transactions acts

ment of IP including compensation for losses suffered by the company due to such infringement, and suspension or termination of the user ’ s access to the platform

PRIVACY

tions Act 2002 will apply In terms of this act, consumers who purchase goods or services under an electronic transaction (unless otherwise excluded in terms of section 44) are provided with a seven-day cooling-off period within which to return the goods for a full refund

Unlike the Consumer Protection Act, which has a broad definition of “goods” and includes any intangible product written or encoded on any medium, or a licence to use any such intangible product, Electronic Commu-

For example, the terms and conditions of Zepeto do not make provision for the return or refund of any digital assets, and the assumption is therefore that a consumer of digital assets will need to refer to the terms and conditions of the third-party seller to determine its rights in respect of the goods or services purchased on the Zepeto platform

The onus rests on companies looking to enter the metaverse and sell digital assets through e-commerce platforms to ensure that their terms and conditions of purchase are updated to make provision for consumers ’ rights in respect of intangible products These terms and conditions should be synonymous with the rights granted

In addition, companies must ensure their terms and conditions incorporate the minimum prescribed disclosures required under the electronic transactions act and that they afford consumers an opportunity to review their transaction, correct any mistakes and withdraw from the transaction before the consumer finally places an order

IP ASSETS

The commercial value that a digital asset has to its owner and/or authorised licensors is not diminished by the asset being available for consumption on a digital platform (for instance, where a user buys a high-end fashion item for a metaverse avatar to adorn)

Intellectual property (IP) remains a key business asset in the metaverse just as it does in the “real world” It is therefore commercially pru-

dent and necessary for a company making its, or a third party’ s, goods available for purchase on a metaverse platform to protect the IP in such goods This is best achieved through robust terms and conditions that, among other things:

● Consider registered IP rights (such as trade marks, or patents where applicable);

● Reserve the IP ownership in such goods;

● Provide a limited licence to the user (for example, in the context of a digital wearable, this is often phrased as a right to use the wearables only in permitted areas of the relevant metaverse platform);

● Impose acceptable use restrictions to mitigate the key risks when it comes to misuse of a company ’ s IP, namely third-party claims for IP infringements, and damage to the company ’ s brand, reputation, and goodwill associated with such IP; and

● Provide remedies in favour of the company for infringe-

As a digital platform, the metaverse is rich with data including personal information relating to users and other third parties on the platform While there is a lot of debate around what exactly constitutes personal information in the metaverse (for example: if my avatar looks nothing like me, is it still personal information?), companies using a metaverse platform to make goods or services available to users must take meaningful steps to ensure the use of personal information obtained from interacting with users and other third parties on the platform complies with applicable privacy laws

As the metaverse continues to gain momentum and digital assets become more prevalent in online retail, it is crucial to deal with the legal considerations surrounding these transactions Ensuring consumer rights are protected, safeguarding intellectual property and complying with privacy laws are essential aspects companies must navigate in the metaverse

By implementing robust terms and conditions, incorporating “privacy by design” principles and seeking specialised legal guidance, businesses can successfully navigate the evolving metaverse landscape while protecting their interests and respecting the rights of consumers

Proactive legal measures are key to fostering a trustworthy and secure environment for transactions within the metaverse

• It appears SA’ s legislation is broad enough to extend protection to consumers of digital assets

HIGH-END BRANDS, SUCH AS GUCCI, HAVE SOLD FASHION ITEMS FOR METAVERSE AVATARS FOR RECORDBREAKING AMOUNTS

/123RF TEVARAK11