Business Law & Tax (BD, May 2022)

BUSINESS LAW &TAX

MAY 2022 WWW.BUSINESSLIVE.CO.ZA

A REVIEW OF DEVELOPMENTS IN CORPORATE AND TAX LAW

Peppa Pig just one victim of Russia’s IP backlash

BUILDING A CASE

Moscow has detailed measures that •willWar-hungry affect intellectual property rights of critics Gaelyn Scott ENSafrica

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or the past few weeks, we’ve all been transfixed and horrified by events in Ukraine.

Intellectual property (IP) is obviously not the major issue in this war, yet the conflict has had serious IP ramifications.

Several major international law firms have left Russia as a result of the war — among them Linklaters, Norton Rose Fulbright and Squire Patton Boggs.

IP-rich companies pulled out of Russia quickly. Among them were Adidas, Apple, Coca-Cola, Disney, Heineken, Hermes, Ikea, Levi’s, L’Oreal, McDonald’s, Nike and Starbucks. Some companies,

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such as Burger King and Marks & Spencer, have found leaving difficult, however, because of the complex franchising arrangements they have with Russian firms.

Some Russian companies have responded to the withdrawal by filing trademark applications to register logos that look similar to the logos of those who have left.

RUSSIA CO-OPERATION

The European Intellectual Property Office (Euipo) cut ties with Russia because of the war, whereas the US Patent & Trademark Office (Uspto) announced it would terminate its Global Patent Prosecution Highway agreement with the Russian IP office, Rospatent.

China’s IP Office, however, took a different

approach, announcing an extension of the Eurasian Patent Organisation’s Patent Prosecution Highway (PPH).

DOMAIN NAMES

The Ukrainian registry, which is in charge of the .ua domain names, moved its servers to the EU early on. It also asked the Internet Corporation for Assigned Names and Numbers (ICANN) to disconnect the Russian ccTLDs including .ru and .su, but ICANN

IP-RICH COMPANIES PULLED OUT OF RUSSIA QUICKLY. AMONG THEM WERE ADIDAS, APPLE, COCA-COLA, DISNEY AND NIKE

/123RF — ADIRUCH refused, saying it does not have the power to do this.

There have been a number of developments and, frankly, they’re quite confusing, but this is our understanding: ● There’s a document in Russia entitled “Priority action plan for ensuring the development of the Russian economy in the conditions of external sanctions pressure”.

The document sets out measures that will affect the IP rights of those who act against Russia’s interests.

This document talks of “cancellation of liability for the use of software unlicensed in the Russian Federation, owned by a copyright holder from countries that have supported sanctions”.

The document also proposes compulsory licensing

mechanisms for computer programs and databases, giving the government “rights to an invention, utility models, industrial design in relation to computer programs, databases, topologies of integrated circuits”. ● There’s a draft law that gives the government the power to temporarily annul the protection of IP rights. ● There’s also a law that allows Russian authorities to exclude specific goods from IP protection, thus allowing for parallel imports and IP infringement.

PEPPA PIG CASE

This has been much in the news. A company called Entertainment One (part of the Hasbro group) owns the trademark rights to a character called Peppa Pig. When

Hasbro sued a Russian company in a Russian court for infringement of its trademark, the judge ruled against it, making it quite clear that “the unfriendly actions of the US and affiliated foreign countries” had influenced his decision.

The judge said this: “In view of the restrictive measures imposed on the Russian Federation (sanctions) and the plaintiff’s status (a foreign company), the court considers the plaintiff’s actions to be an abuse of right, which is an independent ground for refusing the claim.”

Clearly, damages awards are not high in Russia — apparently, Hasbro would have been awarded the CONTINUED ON PAGE 2

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BusinessDay www.businessday.co.za May 2022

BUSINESS LAW & TAX Peppa Pig a victim of IP backlash CONTINUED FROM PAGE 1 equivalent of about £400 in damages if its claim had succeeded. Though, as one report points out, the damages award would in fact have been worth no more than £230 given the dramatic devaluation of the rouble.

DAILY MAIL WADES IN

Some readers will be aware that the Peppa Pig character is held in high esteem in the UK. The Daily Mail had this to say about the case: “Russia has made the astonishing decision to sanction beloved cartoon character Peppa Pig and Daddy Pig as the crisis deepens over Vladimir Putin’s war in Ukraine.”

The paper went on to issue this grave warning: “The ruling by Judge Andrei Slavinsky in a provincial arbitration court in Kirov could pave the way for the mass abuse of Western trademarks and copyrights — allowing Russia to flout copyright laws by refusing infringement claims.”

Followed by this: “The ruling could trigger more widespread abuse of trademarks as was common in Russia in the years after the fall of the Soviet Union in 1991.”

Let’s end with something light — the words of Boris Johnson. The Daily Mail could not let this matter go without reminding readers that the prime minister of the UK is a serious fan of Peppa Pig. According to the paper, the “Russians could have been aware of Boris Johnson’s admiration for Peppa Pig after his bizarre November speech to the Confederation of British Industry”.

This was the speech where the prime minister said this: “Yesterday I went, as we all must, to Peppa Pig World … I loved it. Peppa Pig is very much my kind of place … who would have believed that a pig that looks like a hairdryer or possibly a Picasso-like hairdryer, a pig that was rejected by the BBC, would now be exported to 180 countries.”

LATERAL THINKING

SA may gain from tool to fight profit-shifting Intent seems more to level the •playing fields between emerging markets and tax havens

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n October 2021, the Organisation for Economic Co-operation & Development (OECD)/Group of 20 Inclusive Framework on Base Erosion and Profit Shifting was agreed to as a two-pillar solution for the tax challenges arising from the digitalisation of the economy.

One outcome is that while quite complex, it may actually benefit an economy like SA’s, which has been making positive strides to implement rules that keep pace with global developments.

A global minimum corporate tax rate of at least 15% under pillar two was one of the recommendations, but other more important changes will simplify, update and make the entire global tax system more transparent and equal. All said and done, it is a gargantuan task. But it should be worth it.

At a minimum it should have a neutral effect — as the intent seems more to level the playing fields between emerging markets and tax havens, and those that have tended to toe the line. The recent cut in corporate tax from 28% to 27% may, in fact, just start to sway the scale a little into SA’s favour as a favourable nation for investors seeking upside.

Some of the provisions are still being ironed out but as it stands, in-scope companies are the multinational enterprises (MNEs) with global turnover above €20bn and profitability above 10% (profit before tax/revenue) calculated using an averaging mechanism.

The turnover threshold would be reduced to €10bn if implementation is successful, including of tax certainty on “Amount A”, with the relevant review beginning seven years after the agreement comes into force, and the review being completed in no more than a year. No doubt lawyers and tax accountants will need to fire up their calculators to work a lot of this out. But essentially they would need to determine who is covered — as said, these will be highly profitable businesses — and then begin working out Amount A of pillar one. This is essentially the

basis for all the provisions, which in turn introduce a new taxing right over a portion of the profit of large and highly profitable enterprises.

It will be necessary to use consolidated group financial accounts as the starting point for computing the Amount A tax base.

Model rules are also being developed to provide a template that jurisdictions could use as the basis to give effect to the new taxing rights over

THE RECENT CUT IN CORPORATE TAX FROM 28% TO 27% MAY, IN FACT, JUST START TO SWAY THE SCALE A LITTLE INTO SA’S FAVOUR Amount A in their domestic legislation. Even more commentary on these rules can be expected before they are made law in member countries, including SA. However, SA will be free to adapt these model rules to reflect its own constitutional law, legal systems and domestic considerations and practices for structure and wording of legislation as required, while ensuring implementation is consistent in substance with the agreed technical provisions governing the application of the new taxing rights.

According to recent updates, a provision that may benefit emerging market economies is included in pillar one as a new special purpose nexus rule permitting allocation of Amount A to a market jurisdiction when the

/123RF — TEGUHJATIPRAS in-scope MNE derives at least €1m in revenue from that jurisdiction. For smaller jurisdictions with GDP lower than €40bn, the nexus will be set at €250,000.

While benefiting other jurisdictions, another important aspect of these changes is to provide more tax certainty for the companies themselves. In-scope MNEs will benefit from dispute prevention and resolution mechanisms, which will avoid double taxation for Amount A, including all issues related to Amount A (such as transfer pricing or business profits disputes), in a mandatory and binding manner.

For in-scope MNEs, 25% of residual profit defined as profit in excess of 10% of revenue will be allocated to market jurisdictions with nexus using a revenue-based allocation key.

Revenue will be sourced to the end market jurisdictions where goods or services are used or consumed.

To facilitate the application of this principle, detailed source rules for specific categories of transactions will be developed. In applying the source-

ing rules, an in-scope MNE must use a reliable method based on the MNE’s specific facts and circumstances.

It is worth noting that pillar two refers to a few interlocking rules. These include an income inclusion rule (IIR), which imposes top-up tax on a parent entity in respect of the low taxed income of a constituent entity; and an

THE OECD IS MOVING FAST AND FURTHER REQUESTS FOR INPUT FROM STAKEHOLDERS ARE GOING TO BE MADE SOON undertaxed payment rule (UTPR), which denies deductions or requires an equivalent adjustment to the extent that the low tax income of a constituent entity is not subject to tax under an IIR; and a treaty-based rule the subject to tax rule (STTR)) that allows source jurisdictions to impose limited source taxation on certain related party

payments subject to tax below a minimum rate.

While it is still early days, the OECD is moving fast and further requests for input from stakeholders are going to be made soon. These include the amounts involved, and the administration of and compliance with pillar two.

Companies also need to watch other moves to regulate the digitised world, with the OECD recently releasing a public consultation document concerning a new global tax transparency framework to provide for the reporting and exchange of information with respect to crypto-assets, as well as proposed amendments to the common reporting standard (CRS) for the automatic exchange of financial account information between countries. The purpose of the consultation is to inform policy maker decisions about the possible adoption of any such framework and its related design components.

There is certainly a lot of movement on the global tax front and companies need to stay in touch, or be left behind.

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BusinessDay www.businessday.co.za May 2022

BUSINESS LAW & TAX

Nuts and bolts of fuel levy cut

of how the principle of retrospectivity •canAnbeexample used to relieve pressure — not add to it Louis Botha CDH

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he rate of petrol, diesel and the concomitant fuel levies, which are included in the price paid by consumers of petrol and diesel, has been the subject of much debate and scrutiny in the past year, especially with ongoing increases.

Following the recent spike in the international oil price, the concern was raised that the (already) high price of petrol and diesel paid by consumers could increase even more, and a R2 per litre hike was predicted for the beginning of April.

Fortunately for consumers, it was announced the fuel levy would be reduced temporarily and the National Treasury issued a media statement on April 1 confirming the announcement made by the finance minister and the mineral resources & energy minister on March 31, regarding a temporary reduction in the general fuel levy.

The media statement notes that the temporary reduction will be funded by a liquidation of a portion of SA’s strategic crude oil reserves. It specifically states that “the general fuel levy for petrol and diesel will be reduced by R1.50 per litre between April 6 2022, and May 31 2022.”

Understandably, most consumers are concerned about how the fuel levy reduction affects their pockets at the end of the day.

However, the process of amending the legislation that makes this temporary reduction possible is equally important, as without this legislation there can be no temporary reduction. We look at the legislation briefly in this article.

The media statement notes that the 2022 draft Rates Bill that was published with the budget in February this year includes the tax rate and threshold adjustments that were announced in the 2022 budget, and includes changes to the personal income tax brackets and rebates, the employment tax incentive and excise duties on alcohol and tobacco.

It then explains the revised version of the 2022 draft Rates Bill published on April 1 2022 includes the temporary reduction in the general fuel levy and consequential amendments to the levy on biodiesel, which will

MOST CONSUMERS ARE CONCERNED ABOUT HOW THE FUEL LEVY REDUCTION AFFECTS THEIR POCKETS

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temporarily decrease to R1.10 per litre over the two-month period between April 6 and May 31 2022. This is alongside similar reductions in the value of diesel refunds for farming, mining and other eligible activities.

Rates bills, like the 2022 draft Rates Bill, are passed on an annual basis to give effect to changes announced in tax rates, personal income tax brackets and the fuel levy, among other things.

CONSTITUTION

The 2022 draft Rates Bill, which constitutes a money bill in terms of section 77 of the constitution, must be dealt with in terms of the process in section 75 of the constitution. The process in section 75 requires, in summary, that the bill be passed by the National Assembly and the National Council of Provinces following which it must be submitted to the president for assent.

In recent years, rates bills and other tax amendment bills (such as the Taxation Laws Amendment Bill), which are published annually, are passed and come into effect only towards the end of the calendar year in which they are published or at the beginning of the following calendar year.

This then raises the question: how does the temporary reduction in the general fuel levy come into effect before

/123RF — NEZEZON the 2022 draft Rates Bill comes into effect?

The only way to impact an amendment of a tax rate or the fuel levy for a period preceding the legislation being passed by parliament is through the principle of retrospectivity. This is also the same principle that applies to effect the temporary reduction in the general fuel levy.

Under the Customs and Excise Act 91 of 1964 (C&E Act), it is possible for a duty specified in part 2, 3, 4, 5A or 5B of schedule No 1 to the C&E Act to be amended with retrospective effect. (There are similar provisions in other pieces of tax legislation, but they are not discussed here.)

The general fuel levy is stated in part 5B of schedule No 1 to the C&E Act. In the current instance, the revised 2022 draft Rates Bill ensures

that retrospective amendment of the temporary R1.50 reduction in the general fuel levy for petrol takes place by stating in section 5(5) that from April 6 to May 31 2022, the general fuel levy will be 235c a litre, as stated in schedule II part IV(a) to the 2022 draft Rates Bill, thereby amending part 5B of schedule No 1 to the C&E Act. It then states in section 5(6) that from June 1 2022, the general fuel levy will be 385c/l, as stated in schedule II part IV(b) to the 2022 draft Rates Bill, thereby amending part 5B of schedule No 1 to the C&E Act. In recent years, it has happened that the finance minister announced a change in tax rates, such as dividends tax and capital gains tax, with effect from the day that he gave the budget speech for

that year and made the announcement.

These announcements were understandably not welcomed as they sprung a surprise and resulted in the tax payable in terms of a particular transaction suddenly increasing, through no fault of the taxpayers. These changes were justified by the government in terms of the principle of retrospectivity, which was considered in the Pienaar Brothers decision and discussed in our Tax and Exchange Control Alert of June 9 2017.

Considering that the temporary reduction of the general fuel levy, which affects virtually all consumers, is made possible by the principle of retrospectivity, there is at least one example showing that the power to change tax rates retrospectively is not only a bad thing.

Beware: Competition Act back in full force Sphesihle Nxumalo & Jarryd Hartley Baker McKenzie In 2020, then government declared a national state of disaster in terms of the National Disaster Management Act, due to the outbreak of Covid-19.

This declaration was followed by several interventions from the government to maintain business viability and mitigate the worst of the pandemic’s effects on the economy. Among these interventions were various “block exemptions” issued by the trade, industry & competition minister to aid government programmes designed to fight Covid-19.

Importantly, these block exemptions applied for as long as the declaration of the Covid-19 pandemic as a national disaster subsisted, or until withdrawn by the min-

ister (whichever came earlier).

On April 4 2022 President Cyril Ramaphosa announced that the national state of disaster in response to the Covid-19 pandemic would be terminated, effective midnight on April 5 2022. As such, regulations and directions that were made in terms of the Disaster Management Act following the declaration of the national state of disaster are effectively repealed (with the exception of a few transitional measures).

The 2020 block exemptions exempted agreements which were undertaken at the request of, or in coordination with, the relevant government department, for the sole purpose of responding to the Covid-19 national disaster, from the application of sections 4 and 5 of the Competition Act (excluding

communications or agreements in respect of pricing [meaning price-fixing] unless specifically authorised by the relevant minister). Parties in the relevant industries that participated in any agreements or practices falling within the scope of the block exemptions were also required to keep minutes of meetings held, and written records of such agreements or practices.

Specifically, these block exemptions comprised: ● Block exemption for the health-care sector, effective March 19 2020 and expanded April 8 2020. This exemption allowed players in the health-care sector to cooperate to ensure there was adequate capacity and stock at health-care facilities, as well as to mitigate the effects of the disaster and ensure access to health care, reduction of prices and prevention

of exploitation of patients. The exemption applied to a range of health-care service providers and suppliers. ● Block exemption for the banking sector, effective March 23 2020. Commercial banks were granted exemption from the provisions of the Competition Act to allow them to develop common approaches to debt relief to mitigate the negative effect on consumers, and manage banking infrastructure and payment systems during the national disaster. ● Block exemption for the

BANKS WERE GRANTED EXEMPTION … TO ALLOW THEM TO DEVELOP COMMON APPROACHES TO DEBT RELIEF

retail property sector, effective March 24 2020. This exemption was aimed at ensuring the survival and continuity, particularly of designated retail tenants, including small and independent retailers. The exemption enabled concerted conduct in the retail sector to minimise the negative impact on the ability of designated retail tenants, including small independent retailers, to manage their finances during the national disaster and be in a position to continue normal operations beyond the national disaster. ● Block exemptions for the hotel industry, effective March 7 2020. This exemption was aimed at exempting parties in the hotel industry from the act, to promote concerted conduct aimed at alleviating, containing and minimising the effects of the national disaster, and

enabling the hotel industry to collectively engage with the departments of health and tourism respectively to identify and provide appropriate facilities for individuals placed under quarantine, as determined by the department of health.

PENALITIES

The termination of the national state of disaster means that any agreements or concerted practices between parties in all these industries, which may contravene sections 4 and 5 of the Competition Act, will no longer be exempted from those provisions of the Competition Act, and may now attract investigation and/or penalties from the competition authorities. Parties in these industries should thus be careful not to engage in conduct which may contravene the Competition Act.

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BusinessDay www.businessday.co.za May 2022

BUSINESS LAW & TAX

Firms must factor in ESG when lending

CORPORATE CARE

could be held liable if money doled •outCompanies is used for projects that harm the environment Mihlali Sitefane & Dalit Anstey ENSafrica

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istorically, lenders have been mainly concerned with the borrower’s ability to service its debt and the indirect environmental risks, relating to existing liabilities and noncompliance of the borrower.

However, recent developments in environmental law and finance have seen a growing emphasis on the potential liability of a lender for environmental harm caused by the borrower.

The rise of environmental, social and governance (ESG) makes it essential for lenders to be aware of lender liability in the context of environmental law.

The concept of “lender liability”, namely the idea that a lender is held liable for the actions or conduct of a borrower that results in environmental harm, exists only as a theoretical possibility in SA environmental law.

While there is no specific provision for lender liability in SA environmental law, section 28 of the National Environmental Management Act, 1998 (Nema) provides for a wide statutory duty of care in respect of the environ-

ment.

In terms of section 28 of Nema, any person who causes significant pollution or degradation of the environment and fails to take reasonable measures to prevent such pollution or degradation from occurring could be held liable for resultant harm.

The authorities are entitled to recover the costs from persons in control of the land/premises where the harm occurred; persons responsible for or who directly/indirectly contri-

THERE IS A GROWING BODY OF PRECEDENTS WHERE COURTS HAVE BEEN PREPARED TO PIERCE THE CORPORATE VEIL buted to the pollution; or any person who negligently failed to prevent the pollution. In certain circumstances, the authorities may pursue a lender for the recovery of costs.

The risk of exposure is determined by the lender’s degree of control over the borrower. Control could be demonstrated in a number of ways, including through con-

tractual terms and structuring in financing agreements, majority shareholding, a power to appoint and control a board, ownership of property (as security) or the use of property. The duty of care is not limited by the corporate veil, which may be pierced to attribute liability.

There is a growing body of international precedents where the courts have been prepared to pierce the corporate veil to attribute liability to a lender or a parent company (the latter of which can be considered an indirect form of lender liability as the parent company operating in another jurisdiction from the subsidiary is held liable for the subsidiary’s actions, which resulted in environmental harm).

A highly topical and precedent-setting case in the area of lender liability is the case of Budha Ismail Jam, et al v IFC. In Jam v IFC, fishing communities and farmers in Gujarat, India, challenged the International Finance Corporation (IFC) for its role in funding and enabling the Tata Mundra Ultra Mega coal-fired power plant.

The construction and operation of a 4,150MW power plant along the Gujarat coast was alleged to have destroyed critical natural resources relied on by gener-

/123RF — STOCKWERKFOTODESIGN ations of local families for fishing and farming.

The plaintiffs sued the IFC in Washington DC for the environmental harm that resulted.

However, the IFC claimed it had “absolute” immunity from suit. Historically, the principle has shielded the IFC from claims against it in respect of the projects it has funded in the developing world.

On February 27 2019, the supreme court ruled that in principle, the IFC could be sued (that is, that it could not rely on a blanket shield of immunity to defend itself against claims brought against it). As with the parent liability cases in the UK and EU, this decision was decided purely on a procedural basis and the case had to return to the trial court for further litigation.

The IFC filed a motion to dismiss, arguing that the exceptions to immunity did not apply, and in February 2020, this motion was granted. The district judge

found the IFC was immune under the facts of the case because the relevant acts occurred in India and immunity applied unless the lawsuit was based on commercial activity in the US. The plaintiffs tried to show that all relevant actions, including the approval of the loan, took place in Washington, but this argument was dismissed by the court. The plaintiffs unsuccessfully appealed the decision to the DC circuit court of appeals and appealed to the US supreme court in January 2022.

Though the courts have been sceptical about the strength of the plaintiffs’ claim against the IFC, the

LENDERS SHOULD CONDUCT IN-DEPTH ESG DUE DILIGENCE AND … INCLUDE APPROPRIATE CLAUSES IN CONTRACTS

finding that the IFC, as a lender, does not have absolute immunity may result in the opening of floodgates for similar claims in future.

The theoretical possibility of liability may result in the IFC being more willing to settle with claimants to avoid risk and to take the recommendations of internal IFC accountability mechanisms seriously.

This case challenges the notion that lenders stand at a distance from borrowers’ activities. Given these developments, lenders should conduct in-depth ESG due diligence at the transaction screening phase and include appropriate clauses in contracts with borrowers to restrict and mitigate environmental liability risks.

But this is unlikely to be enough: lenders will need to monitor and assess the performance of the borrower throughout the project life cycle to demonstrate they acted responsibly and reasonably, and to discharge their duty of care.

The new, new normal for your workplace Jonathan Goldberg & John Botha Global Business Solutions Although the state of disaster has been lifted, this does not mean workplaces can go back to the way that they were in the pre-Covid 19 era.

The virus is here to stay and employers need to have a sustainable workplace plan so they are able to ensure (as far as reasonably possible) the health and safety of their employees.

The first step in developing such a plan is that you need to be familiar with the Code of Practice on Managing Covid-19 at the Workplace.

This code states that if you employ more than 20 employees you need to conduct a risk assessment.

Things you would look at are, for example, how many employees have comorbidities, how many employees are full vaccinated and does your workplace have a propensity for risk of infection or transmission of Covid-19?

The next step is developing a risk mitigation plan so you can — to the best of your ability — minimise the risks faced by your employees and third parties on your premises in terms of contracting Covid-19 at the workplace.

So, for instance, if your workplace isn’t big enough to allow for social distancing among your employees, you could divide your employees into teams and each team would come to the office on alternate days.

CONSULT

What’s important to remember is that before you implement your risk mitigation plan you need consult with your occupational health and safety committees and — if your environment is unionised — you need to consult with the unions who are sufficiently represented in your workplace.

In addition you need to integrate the hazardous biological agents regulations into your plan.

The number one risk mitigation strategy against Covid19 is for all employees to be fully vaccinated. This means that either they will have had one Johnson & Johnson vaccination and two boosters or two Pfizer vaccination and one booster.

However, there have been cases where employees refuse to vaccinate. These employees can be divided into two groups: 1. Those who refuse on the grounds of legitimate medical reasons; and

2. Those who refuse based on other reasons.

For the first group, if they produce a legitimate medical certificate, which states the reasons why they cannot be vaccinated, they may be accommodated in a position which does not require them to be vaccinated.

In terms of the second group, you need to counsel the employee about the merits of being vaccinated and, if the employee chooses, allow them to consult with a health and safety representative or trade union official. If they still refuse to be vaccinated you need to take reasonable steps to accommodate them in a

position where they don’t need to be vaccinated.

There are substantial record-keeping obligations placed on the employer as you need to keep all Covidrelated documentation for 40 years.

In addition, if you don’t follow any of the proper procedures in relation to the management of Covid-19 in the workplace you could face a fine or imprisonment. This means it is important you implement solid processes and procedure first and, if you’re unsure about anything, you consult with a professional who will be able to assist you.

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BusinessDay www.businessday.co.za May 2022

BUSINESS LAW & TAX

Essential food prices are still a top concern

COUNTING THE COST

in consumer goods and retail sector •areCompanies being scrutinised by competition authorities /123RF — VIPERAGP Lerisha Naidu, Sphesihle Nxumalo & Jarryd Hartley Baker McKenzie

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he Competition Commission in SA has made it clear it is closely watching the price volatility of essential food items in SA. The justification of price hikes for food items will continue to be a focus for the competition authority, despite legal interventions intended to guard against this happening during the pandemic recently being repealed by the end of the national state of disaster.

Across the continent, competition authorities are increasingly acknowledging their role as guardians of fair practice and consumer protection, and they have expressed their intention to enforce these principles going forward. At the same time, businesses that operate in the consumer goods and retail (CG&R) sector are having to contend with serious supply chain disruption caused by geopolitical and environmental challenges, made worse by the pandemic, but also affected by a lack of infrastructure.

In early 2020, the trade, industry & competition minister issued various regula-

tions in response to the declaration of Covid-19 as a national disaster in SA. Such regulations were intended to mitigate the impact of the pandemic on the economy.

One such regulation was directed at the CG&R sector in SA: the Consumer and Customer Protection and National Disaster Management Regulations and Directions, which came into effect on March 19 2020. On April 6 2022 the national state of disaster was lifted in SA and with that most regulations and directions made in terms of the Disaster Management Act were repealed, including the consumer protection regulations.

At the beginning of the pandemic in March 2020, concerns by the government and consumers that firms could seek to charge higher prices for certain goods due to supply shortages caused

by Covid-19 prompted the minister to promulgate regu-

FIRMS IN THE CG&R SECTOR SHOULD ENSURE PRICE INCREASES OF ESSENTIAL FOOD ITEMS CAN BE JUSTIFIED

lations that prohibited “excessive pricing” by dominant firms in the sector. The Competition Act prohibits a dominant firm from charging excessive prices to the detriment of consumers or customers.

Under these regulations, the authorities scrutinised material price increases for certain goods or services, where the increase did not correspond to, or was not equivalent to, the increase in the cost of providing that good or service; or where the increase inflated the net margin or mark-up on that good or service above the average margin or mark-up of that good or service in the three months before March 1 2020.

The regulations applied to a number of goods and services, including medical and household cleaning equipment. Notably, essential foods items were also included on the list: cooking oils, wheat flour, rice, maize meal, pasta, sugar, long-life milk, canned and frozen vegetables, canned, frozen and fresh meat, chicken or fish and bottled water.

After the promulgation of these regulations, there was a flurry of reports regarding excessive price increases, including for basic foods. The Competition Commission

investigated more than 1,199 reports, which eventually led to the successful prosecution of two firms for excessive pricing of surgical masks.

While the courts held that these cases were to be prosecuted under the act (due to the regulations not applying retrospectively), the test set out in the regulations was used to establish that the price increases bore no reasonable relation to increased input costs and therefore the excessiveness of the prices.

Despite the fact these regulations are now repealed, firms in the CG&R sector should continue to take the utmost care to ensure price increases of essential food items can be justified, especially during supply or demand shocks. The authorities have not needed to rely on these regulations to investigate or prosecute such conduct, and these prosecutions have not been limited to firms that are dominant under normal market conditions.

The issue of price volatility with regard to essential food items was also addressed in the Competition Commission’s latest Essential Food Pricing Monitoring report, where certain fruits, meat and cooking oil were listed as items that have been subject

to recent volatile price increases. It was noted that such price increases had the most detrimental impact on poorer communities.

Not all essential food price increases have been due to the pandemic, however.

Changing weather conditions (from drought to heavy rain), oil price fluctuations, serious supply chain blockages and huge geopolitical challenges have all led to a decrease in supply and a subsequent increase in prices.

The commission noted that the decreasing supply of essential food products has been mostly driven by local events. It stated it would be keeping a close watch on the price of essential foods items, including on imported food items, to ensure anticompetitive conduct does not occur and the increase in prices of essential food items can be justified.

The price volatility of essential food items is an increasing concern across the continent. With the growth of economies across Africa, competition law has remained one of the key drivers for effective market participation, consumer protection and fair business practices. The pandemic introduced new challenges

for competition authorities in Africa and abroad, with each enforcer pursuing the most optimal enforcement method for its national or regional jurisdiction.

These efforts were aimed at curbing the persistence of unjustified price hikes, anticompetitive co-operation between competitors and other harmful business practices that sought to undermine competition. In addition to the urgent responses to the unprecedented impacts of the global Covid-19 crisis, competition authorities in countries and regions across Africa continued to introduce laws and amend existing legislation as a sign of the rapidly increasing prioritisation of competition law enforcement on the continent.

While contending with serious supply chain concerns, suppliers and retailers in the CG&R essential food items sector should carefully consider any price increases and ensure they are able to be justified.

Due to current geopolitical, economic and environmental challenges, the focus on the pricing of essential food items is expected to remain an area of core focus for competition authorities across the continent.

Green finance taxonomy could help SA turn green to gold Zaeem Soofie & Khatija Kapdi Dentons After a two-year consultation and development process, SA’s first national green finance taxonomy was launched on April 1 by the taxonomy working group as part of SA’s Sustainable Finance Initiative.

The group, chaired by the National Treasury and hosted by the Banking Association SA, included representatives from national government, financial sector regulators and the financial services sector.

The taxonomy is designed for investors, issuers, lenders and other financial sector

participants to track, monitor and demonstrate the credentials of their green activities.

The taxonomy serves as an official classification of a minimum set of assets, projects, and sectors eligible to be defined as “green” or environmentally friendly.

While the emphasis is on the environment, it incorporates criteria aimed at ensuring implementation of SA’s labour laws and policies.

Taken together, the taxonomy supports national policy and voluntary private sector initiatives promoting sustainable finance by reducing costs and uncertainty in classifying a core set of green activities. It aims to unlock a number of benefits:

● Provides clarity and certainty in selecting green investments in line with international best practices and national priorities and standards; ● Helps unlock large-scale capital for climate-friendly and green investment in SA by increasing the credibility and transparency of green activities; ● Reduces financial risks through enhanced management of environmental and social performance; ● Reduces the costs associated with labelling and issuing green financial instruments; and ● Supports regulatory and supervision oversight of the financial sector.

For each of the activities identified in the taxonomy, technical screening criteria have been developed that include both principles, as well as metrics and thresholds. The principles inform the underlying rationale for how, and whether, an activity will result in a substantial contribution or avoidance of significant harm to the environmental objective.

This is then further developed by the methods in which environmental performance of the economic activity will be measured. This produces a guideline to determining whether a certain economic investment or activity is indeed green and in support of SA’s sustainable

policies and priorities.

Not only does the taxonomy support national priorities, it is aligned with international trends and the model adopted by the EU. Support for the taxonomy’s development was also provided by the IFC in partnership with the Swiss state secretariat for economic affairs and the Swedish International Development Cooperation Agency.

All of this bodes well for foreign investment in SA, including in the muchneeded renewable energy sector, government’s Renewable Energy IPP Procurement Programme (REIPPPP). The timing could not be better, with bid window 6 having opened on April 6, aimed at

bringing another 2,600MW of wind and solar PV power to the grid as a further step in implementing the Integrated Resource Plan and reducing SA’s dependency on coal and oil at a time when the petroleum industry is facing record crude prices and a greater dependency on imports following the war in Ukraine and declines in local refining and production at major SA’s refineries.

A copy of the taxonomy can be found at https: //sustainablefinanceinitiative. org. za/taxonomy/ ● Zaeem Soofie is the SA CEO of Dentons. Katija Kapdi is a candidate legal practitioner at Dentons

7

BusinessDay www.businessday.co.za May 2022

BUSINESS LAW & TAX

Dark side of moonlighting

might not take kindly to you working a •sideEmployers hustle — particularly if it is a conflict of interest Kerrie-Lee Olivier ENSafrica

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oonlighting has become more common for those looking to make extra money, but do employees need to disclose their side businesses to their employers, especially when a conflict of interest is possible?

In the case of Bakenrug meat (PTY) Ltd t/a Joostenberg Meat v CCMA and others this question was considered by the court.

The employer’s business in this matter was the production and sale of a range of meat products. The employee was a sales representative at the business. However, the employee also operated a business of her own in which she marketed biltong (a meat product).

When the employer became aware of this, she was dismissed after she was found guilty of the charge “that she took up employment while working in another capacity”.

Aggrieved by this, the employee then referred the matter to the Commission for Conciliation, Mediation and Arbitration (CCMA) alleging that her dismissal was substantively unfair.

The commissioner found that the dismissal was sub-

stantively fair because the employee independently operated a formal business that marketed a meat product while the employer was also in the business of producing and selling meat products in which she was the salesperson.

As a result, the employer should have been made aware of the employee’s activities for it to decide whether there was a conflict of interest.

The failure to inform the employer amounted to dishonesty and it was insignifi-

DAVIS JA HELD THAT THERE WAS CLEAR EVIDENCE THE EMPLOYEE DID NOT DISCLOSE AN ESSENTIAL AND MATERIAL FACT cant that the employee did not market identical meat products in comparison to the employer.

LABOUR COURT

Aggrieved by the findings, the employee launched a review application in the labour court.

Cele J found that the dismissal was substantively unfair. He gave two main reasons for this finding.

First, he accepted that there is no duty on the part of an employee to inform his or her employer about a potential conflict of interest. An employee is only required to inform an employer of a potential conflict where there is competition of some sort.

Second, on an assessment of the evidence, Cele J found that the employee operated her business on the weekends. Accordingly, there was no “nexus” that her “sideline” business negatively affected/impacted on the performance of her duties towards the employer during the week.

Cele J then found the evidence failed to establish that the employee was guilty of the charge that she “took on employment while also working in another capacity”.

The learned judge concluded the commissioner’s decision that the dismissal was substantively fair would not have been reached by a reasonable decision maker, and he set aside the award.

LABOUR APPEAL COURT

On appeal, the labour appeal court (LAC) overturned the labour court’s decision. Davis JA held that there was clear evidence the employee did not disclose an essential and material fact that she was independently operating a business in marketing meat products, even if the meat

LABOUR RELATIONS

/123RF — IQONCEPT products were not identical to those of the employer.

The fact that operating her business did not affect her performance was insignificant. What was important is she was employed as a sales representative in a business of marketing meat products; while she was also involved in the marketing of meat products.

Her failure to inform the employer of these martial activities amounted to dishonesty and a violation of her duty of good faith towards the

employer. Davis JA therefore found that based on the evidence, the commissioner arrived at a reasonable decision that the dismissal was substantively fair and set

HER FAILURE TO INFORM THE EMPLOYER OF THESE MARTIAL ACTIVITIES AMOUNTED TO DISHONESTY

aside the judgment of the court a quo.

CONCLUSION

The importance of this case is that it illustrates the extent of the “duty of good faith” that employees owe to their employer and that there can be far-reaching consequences for an employee if this duty is breached.

Reviewed by Peter le Roux, an executive consultant in ENSafrica’s employment department.

CONSUMER BILLS

State has failed victims of gender-based violence

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nyone who has heard politicians whingeing about the Constitutional Court exceeding its mandate when guiding the state’s behaviour in human rights issues must read the court’s April 2022 judgment that holds the police minister liable for the woefully inadequate search and investigation efforts made by the police to save the claimant from an extended and repeated rape.

The judgment begins by reminding us (if a reminder is needed) that this country is plagued by gender-based violence to a degree that few countries in the world can be compared to. It also reminds us that the SA Police Service (SAPS) is so named because it is a service provider and we are the consumers of their important and positive obligation to discharge their constitutional obligations.

PATRICK BRACHER The same applies to all state institutions.

What is remarkable is that the minister dragged the victim through three courts over eight years to get justice while the state relied on arguments that the court labelled, in some instances, untenable, misconceived and in flagrant disregard of relevant facts.

Something similar happened more than 20 years ago where a victim had to go to the highest court to have it laid down that it is the SAPS’s special duty to take appropriate measures to

combat gender-based violence and protect women from harm.

In the latest case, the Constitutional Court found the convictions of the community demand a victim-centred approach to policing. When the SAPS engages in victim-blaming behaviour or fails to act with empathy and compassion, this results in secondary victimisation and undermines the criminal justice system.

The police have a duty to act promptly and expeditiously and take all reasonable measures available to them in the circumstances of their investigations, especially in relation to the scourge of gender-based violence.

An attitude towards victims of gender-based violence that is apathetic, uncaring, intimidating and

suspicious contributes to the relatively high rate of attrition in respect of the successful prosecution of rape and other sexual offences cases.

The requirement that action be taken within available resources is not a shield to defend the government from the consequences of inaction.

The state’s obligations are markedly different from those of an individual. The fact that gender-based violence, and rape in particular, has been recognised from the president downwards as a

THE MINISTER DRAGGED THE VICTIM THROUGH THREE COURTS OVER EIGHT YEARS TO GET JUSTICE

scourge requires it to be treated as a scourge hardly comparable in the world, which means resources have to be made available.

I have written before that the scourge should be declared a disaster. If the disaster legislation is to be confined to short-term disasters, then the law must be changed to enable us to deal with systemic issues that the court rightly described as a horrific reality.

DISASTER LEGISLATION

The international treaties to which SA is bound regard gender-based violence as a pernicious form of discrimination against women that undermines the rights of equality and sexual autonomy of women.

If the police are under a duty to act promptly and expeditiously to deal with this scourge, they must never

be able to say they lacked the resources to do so.

In addition, a compassionate victimcentred approach does not need resources — it needs a new culture and greater accountability. Victims should not have to resort to the slow and expensive processes of the civil courts to get justice.

The Constitutional Court has laid down the rules. It is now for the legislature to pass the laws and allocate the financial resources needed to put those responsible for gender-based violence in jail.

To leave the final words to the Constitutional Court, few things can be more important to women than freedom from the threat of sexual violence. ● Patrick Bracher (@PBracher1) is a director at Norton Rose Fulbright.

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BusinessDay www.businessday.co.za May 2022

BUSINESS LAW & TAX MINING FOCUS

Boost power of exploration incentives the flow-through model used in Canada •is Adopting likely to stimulate socioeconomic benefits Andries Myburgh & Ntebaleng Sekabate ENSafrica

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he Income Tax Act provides for upfront capital allowances in respect of prospecting and development expenditure incurred by taxpayers that carry on mining activities.

In particular reference to the exploratory prospecting phase of mining, the act provides for a tax incentive in the form of a deduction from a taxpayer’s mining income of expenditure incurred on prospecting activities, including surveys, boreholes, trenches, pits and other prospecting work preliminary to the establishment of a mine. Therefore, taxpayers are incentivised in the sense that expenditure incurred on prospecting is deductible.

However, such expenditure may be deducted only from income derived from mining.

Where a taxpayer that conducts prospecting is unsuccessful in its exploratory endeavours and does not derive any income from the trade of mining, the expendi-

ture incurred would not be deductible.

Prospecting expenditure is, however, not ringfenced between different mining operations (as is the case with capital expenditure incurred on the development of a mine). If a taxpayer carries on mining at numerous sites, the prospecting expenditure may be deducted from the mining income derived from existing income-earning mining operations.

This may have the unintended consequence of making exploration the exclusive arena of established mining companies, which have the benefit of existing mining income against which prospecting expenditure may be deducted.

In considering the encouragement of greenfield exploration by way of tax incentives, the Davis Tax

MORE ESTABLISHED MINING COMPANIES MAY INVEST IN GREENFIELD EXPLORATION UNDERTAKEN BY JUNIOR MINERS

Committee considered the system of “flow-through shares”. (That system is applied in Canada, which incidentally, has four jurisdictions ranked in the top 10 in the Fraser Institute survey.)

Essentially, the flowthrough share model provides for the provision of equity funding by investors into companies that carry on prospecting and exploration activities and incur expenditure which qualifies for a tax deduction. As the exploration company would not derive any income while it carries on its exploration activities, and would accumulate deductible expenditure, which is renounced in favour of the shareholder, which may then claim the deduction against its own income. The shareholder would therefore enjoy the benefit of decreasing its tax liability as a direct result of investing in the exploration company.

The Minerals Council SA submitted a proposal to the Treasury in 2020 for the introduction of a flowthrough share incentive in the form of a stand-alone section of the Income Tax Act. In the proposal, the Minerals Coun-

/123RF — MULDERPHOTO cil outlined the potential benefits to be derived from the proposed tax incentive.

The council made reference to a survey conducted by the Prospectors & Developers Association of Canada to assess the socioeconomic impacts of flow-through shares in Canada, the results of which showed that flowthrough shares created employment for rural communities, generated business opportunities for residents of rural communities, led to discoveries that were developed into mines, and led to advanced knowledge of deposits that were ultimately developed into mines.

In assessing the potential impact of the introduction of flow-through shares in SA tax legislation, the Minerals Council outlined the potential economic benefits to include the establishment of new financial and exploration firms, increased employment opportunities, industry specialisation and increased foreign direct investment.

In addition, the proposal by the council submits that

the introduction of the incentive would effectively leave the fiscus in a tax-neutral position, because while the shareholder would be entitled to claim the deduction of the qualifying expenditure, the exploration company would be in a tax-paying position faster than would be the case where the qualifying expenditure is not transferred and claimed as a deduction upon the generation of mining income.

Though the Davis Tax Committee was unconvinced regarding the success of the flow-through shares model, it may serve as a powerful incentive for junior miners to embark on exploration activities and for both local and foreign investors with other income-generating activities, or which derive passive income such as interest and dividends from SA and incur withholding taxes, to redirect their investments to exploration companies.

Furthermore, this may result in more established mining companies that typically embark on brownfield

investment due to proximity to existing mining operations to invest in greenfield exploration undertaken by junior miners, which can then specialise in exploration activities.

Given the low exploration investment in SA and the decrease in mining exploration investment since the Davis Tax Committee report was issued, it may be the right time for Treasury, together with the department, to give serious consideration to the introduction of the flow-through share model.

While it may be true that tax incentives, or the absence of tax incentives, may not be a determining factor in investment decisions, the introduction of such tax incentives, together with the required regulatory and infrastructure reforms, may aid in investors’ decision to choose SA as a preferred investment destination.

SA should use all of the tools available in its arsenal to encourage investment, and tax incentives may be an effective tool in doing so.

Tax benefits key to luring more mining investment Andries Myburgh & Ntebaleng Sekabate ENSafrica In April, the Fraser Institute published the “Survey of Mining Companies 2021”, where investors weighed in on what mineral endowments and public policy factors, such as regulatory uncertainty and taxation, affected their decision to invest in exploration in a region.

Respondents indicated that 40% of their investment decision is determined by policy factors and 60% by the mineral potential.

Disappointingly, SA ranked in the bottom 10 jurisdictions on the investment

attractiveness index, despite having abundant mineral resources and extensive mining experience.

The same month, the department of mineral resources & energy published the “Exploration Strategy for the Mining Industry of SA”, outlining the strengths, weaknesses, opportunities and threats relating to mining exploration, and the strategic initiatives to encourage mining exploration.

Unsurprisingly, one of the strengths of SA’s mining industry identified by the department is the country’s mineral endowments as well as the range of such minerals.

Equally unsurprising, the

weaknesses identified include energy instability, road and rail infrastructure challenges, and unsatisfactory policy implementation.

These identified weaknesses appear not to have gone unnoticed by investors, as SA’s exploration budget has decreased from $400m in 2007 to less than $100m in 2018, with its share of global exploration budgets decreasing to about 1%.

To capitalise on the country’s mineral wealth, the department has outlined strategic initiatives and actions to be undertaken to encourage mining exploration. These strategic initiatives and actions include

improvements in the country’s geoscience data and information, government support for junior exploration companies and the formation of private-public partnerships with junior exploration companies, and a national investment drive.

IMPRESSIVE FEAT

The vision espoused by the strategy document is to secure a minimum of a 5% share in global exploration investment within a five-year period. This would be an impressive feat indeed, as SA would arguably be required to drastically improve its attractiveness, or perceptions of its attractiveness, as a min-

ing destination to achieve the desired 4% increase in its share of global exploration investment.

Conspicuously absent from the list of strategic initiatives and actions is the suggestion of the introduction of tax incentives for mining exploration (though this would be more appropriately handled by the Treasury).

In its report on mining, the Davis Tax Committee noted that few investments are taking place in greenfield exploration, but was unconvinced that the lack of tax incentives was to blame. The committee suggested that regulatory impediments are more likely the cause for deterring

investment, and recommended that the department conduct an in-depth examination of the regulatory framework governing greenfield investors, following which further tax incentives should be considered. The committee, however, recognised tax incentives may serve as a sweetener in the encouragement of greenfield investments.

Due to the substantial upfront investment costs at the development phase of mining, and the prolonged periods until the commencement of production, the Income Tax Act provides tax incentives to taxpayers who carry on mining activities.

9

BusinessDay www.businessday.co.za May 2022

BUSINESS LAW & TAX MINING FOCUS

JSE points the way on ESG

guide is likely to set •theDisclosure trend for all SA companies Carlyn Frittelli Davies & Dalit Anstey ENSafrica

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nvironmental, social and governance (ESG) concerns in SA may be revolutionised by the JSE’s publication of a document titled “Leading the Way for a Better Tomorrow: JSE Sustainability Disclosure Guidance” on December 9 2021. The public was invited to comment by February 28 2022.

To date, sustainability disclosures by most companies, including companies listed on the JSE, have been inconsistent. While the King 4 code discusses the concept of sustainable development, it does not provide detailed recommendations or guidance with respect to the sustainability risks, opportunities and management practices, or specific sustainability disclosures.

Additionally, ESG has developed substantially since the publication of King 4.

Many companies fail to grasp the impact of ESG on their businesses. This can negatively affect company value and performance, which has a knock-on effect on investors.

Without meaningful, accurate and integrated sustainability disclosures and reporting, it is difficult for asset managers and investors to successfully monitor and assess ESG performance of their investments and account to their clients.

As noted in the JSE publication, meaningful sustainability disclosure plays an important role in building resilient markets, helping to attract financial capital, and fostering greater accountability and improved business performance.

According to the publication, sustainability broadly focuses on recognising “the need to drive systemic change in achieving a more equitable society and economy that operates within ecological boundaries. This understanding of sustainability focuses on an organisation’s impacts on society, the environment and the economy (on ‘people, planet and prosperity’) enabling an assessment of the organisation’s contribution toward global commitments such as the UN sustainable development goals.”

Though sustainability and ESG issues are often referred

to as “nonfinancial”, they clearly contribute to financial value. Effective sustainability responses can protect value, create value and enable value creation. As sustainability becomes an increasingly more important market concern, an organisation’s ability to communicate its sustainability performance more effectively — and an investor’s ability to track this better — is increasingly affecting access to capital.

International trends suggest that financial institutions will be increasingly encouraged to invest in the “transition” space, and to do so in a rigorous manner requiring evidence of robust sustainability risk management practices.

EFFECTIVE SUSTAINABILITY RESPONSES CAN PROTECT VALUE, CREATE VALUE AND ENABLE VALUE CREATION So what, according to the JSE, is good sustainability disclosure? The concept of “materiality” is crucial. Material information is “reasonably capable of making a difference to the conclusions that reasonable stakeholders may draw when reviewing the related information.

Materiality focuses on the material information needs of the primary stakeholders for the report being issued.”

From an investor lens, this is any information that could be expected to influence an investor’s economic decision-making with respect to the object of investment. Both financial materiality and environmental and social materiality are important.

The JSE publication recommends the following: ● Describe the board’s oversight of sustainability-related impacts, risks and opportunities, and its process for integrating sustainability issues into the overall governance processes; ● Describe how an assessment of sustainability-related impacts, risks and opportunities has influenced the organisation’s strategy, and what impact this has had on the organisation’s overall performance, both positive and negative; ● Describe how sustainabili-

/123RF — YUPIRAMOS ty-related impacts, risks and opportunities have been integrated into the organisation’s management processes; and ● Describe the performance metrics and targets used by the organisation to measure, monitor and manage its sustainability impacts, risks and opportunities, and its performance against these metrics and targets.

Organisations and their boards may require external assistance in grasping their ESG impacts, risks and opportunities, and methods of ESG integration and incorporation will need to account for industry and/or sector best practices. Sustained and consistent prioritisation and capacity building are required by organisations.

MANY COMPANIES FAIL TO GRASP THE IMPACT OF ESG ON THEIR BUSINESSES. THIS CAN NEGATIVELY AFFECT COMPANY VALUE

The general rule is that ultimate responsibility for ESG accountability and oversight should sit with the board, but where should sustainability disclosures be housed? The publication also provides guidance with respect to reporting formats.

GLOBAL PRACTICE

Many companies use an annual integrated report in line with the King 3 and 4 codes. However, global practice appears to be moving towards an annual sustainability report — a standalone report dedicated to ESG impacts. Some companies choose to combine their traditional annual financial report with a more detailed sustainability/ESG performance report into a single combined report.

Finally, the use of annual financial statements, which are typically prepared in accordance with Generally Accepted Accounting Practice, is another way to capture the financial impacts of sustainability in monetary terms.

The mining industry is

well placed to grasp and implement these disclosures because ESG factors are already critical aspects of a successful mining company.

Environmental impacts require special management and compliance with the National Environmental

SUSTAINED AND CONSISTENT PRIORITISATION AND CAPACITY BUILDING ARE REQUIRED BY ORGANISATIONS Management Act, 1998, a suite of other environmental legislation and the requirement to make financial provision for rehabilitation.

With respect to sustainability, BEE has been driven in the mining industry primarily through the Mining Charter, and local development is driven through social and labour plans. Mining companies are used to

reporting on compliance with the aforesaid obligations, but the interplay between the JSE publication disclosures and existing reporting obligations may require mining companies to reconsider whether their reporting practices meet the publication’s standards.

While sustainability leadership may be more ingrained in mining companies than in other industries, with designated sustainability officers or directors being common practice in the mining industry, it may be necessary to make changes to ensure that sustainability leadership is holistically integrated into the organisation and that sustainability issues are not siloed to one person within the organisation.

While the JSE guidance applies only to listed companies, it is likely to set a trend for all companies in SA, as investors will increasingly expect to see organisations grasp the concepts of sustainability and ESG, as applicable to their organisations and to disclose and report on sustainability and ESG.

10

BusinessDay www.businessday.co.za May 2022

BUSINESS LAW & TAX

What shape is SA’s copyright legislation in?

IN GREAT SHAPE

UK court’s ruling on Ed Sheeran case provides a •guide for how this country’s courts would respond Fatima Ismail & Carla Collett Webber Wentzel

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n judging copyright infringement matters similar to that of Ed Sheeran’s Shape of You, SA’s courts are likely to reach a similar conclusion to the UK high court, based on the Copyright Act and case law.

A UK high court recently ruled in favour of Sheeran and his two co-writers by finding that the “Oh I” phrase in Sheeran’s hit single Shape of You was not copied from Sami Chokri’s Oh Why released in 2015. The ruling comes nearly four years after Sheeran and his co-writers launched proceedings in 2018, asking the high court to declare that they had not infringed the copyright in Chokri’s Oh Why. In coming to this conclusion, the court held that while there are “similarities” between the Oh Why hook and the “Oh I” phrase in Shape of You, there are also “significant differences” and that “such similarities are, however, only a starting point for a possible infringement

action”. Taking into account the musical elements of Shape of You, the writing process and the evolution of the “Oh I” phrase, the judge concluded that Sheeran had not heard Oh Why before writing Shape of You and, in any event, Sheeran did not deliberately copy the “Oh I” phrase from Oh Why.

THE RULING COMES NEARLY FOUR YEARS AFTER SHEERAN AND HIS CO-WRITERS LAUNCHED PROCEEDINGS In SA, copyright is governed by the Copyright Act 98 of 1978. For a “work” to be eligible for protection, it must be original and reduced to material form. The act entitles an author of a “work” to a bundle of rights that vest exclusively in the author.

Artists may rely on these rights to protect their musical work. A song like Shape of You comprises various forms of “works” contemplated in

the act: the musical work (the musical notation), the literary work (the lyrics) and the sound recording components of an original performance reduced into material form.

By virtue of the copyright in the work, the holder of the copyright is permitted to, among other things, reproduce, publish, perform and prevent others from making unauthorised reproductions of the work, or a substantial part of it.

Any act the holder of the copyright is exclusively entitled to do, and which is performed by any person other than the copyright holder, amounts to an infringement of the copyright in the “work”.

However, an alleged infringer may be able to rely on new defences under the Copyright Amendment Bill (which was passed by parliament in 2018 and subsequently sent back to parliament by the president because of constitutional concerns), which would replace the current “fair dealing” provision with an openended and general defence against copyright infringement in the form of the “fair

/123RF — YAKUB88 use” doctrine.

Whether an SA court would come to the same conclusion as the UK high court on this issue cannot be postulated with certainty, given the lack of case law relating to music-related copyright infringement.

However, in determining whether copyright infringement has occurred, our courts typically rely on a qualitative rather than a quantitative test.

First, they examine whether a causal link exists between the original work and the alleged infringing work and, second, they examine the degree of objective similarity between the two works.

To succeed on the first leg of the test, a claimant must show the alleged infringing party had access to the copyrighted work. A court will consider whether the similarities resulted from the defendant having copied the plaintiff’s work, or whether the alleged infringing work was created independently of the plaintiff's work.

The second leg of the test looks at whether a “substantial part” of the work has been copied.

This is a factual inquiry that will largely depend on the specific facts and circumstances of the case and will require the courts to make a value judgment based on the evidence.

Though it cannot be said with certainty how an SA court might have adjudicated on this matter, it is likely (given the evidence placed before the UK high court) an SA court would have come to the same conclusion in applying the two-legged test to the Shape of You facts.

As Sheeran mentioned in a TikTok video released shortly after the high court

COINCIDENCE IS BOUND TO HAPPEN IF 60,000 SONGS ARE RELEASED EVERY DAY ON SPOTIFY … AND ONLY 12 NOTES AVAILABLE

handed down its judgment: “There’s only so many notes and very few chords used in pop music. Coincidence is bound to happen if 60,000 songs are being released every day on Spotify … and there are only 12 notes available.”

This, no doubt, means our courts will have to grapple with the two-legged copyright infringement test in future music disputes.

This case makes it clear there is no “one size fits all” approach to copyright infringement claims and courts will judge each case on its own merits.

The Copyright Amendment Bill will also change the type of defences raised to copyright infringement claims in the future.

It may not be too long before we see how this test will be applied in practice as SA singer Daniel Baron is currently embroiled in a legal battle against French DJ David Guetta relating to alleged similarities between Baron’s Children of the Sun and Guetta’s Light Headed.

Something new needed from tech inquiry Ahmore Burger Smidt Werksmans Attorneys Is it with bated breath that one should await the outcome of the Online Intermediation Platforms Market Inquiry conducted by the Competition Commission or is it a foregone conclusion?

From an SA perspective, it is interesting to note the submission by the print media industry body Publisher Support Services to the market inquiry hearing.

Publisher Support Services argued specifically: ● For the protection of funding of journalism in SA; and ● That platforms such as Google and Meta should compensate publishers fairly for journalistic efforts.

But are these arguments new or have we heard them

before?

In 2020 the Australian government requested the competition regulator to develop a law that would force technology giants to pay for the news that appears on their feeds. In fact, the competition regulator in Australia is being credited for succeeding where others have failed in forcing technology giants to pay for news.

IMBALANCE

The motivation for embarking on this process is founded on the argument that there exists an imbalance between technology companies and media companies when one considers bargaining power and also that big technology companies hold market power that distorts competition. This brings about a com-

petition law problem that in itself hinders ordinary commercial negotiations within a competitive market.

The Australian Competition and Consumer Commission concluded in 2021 that US technology companies were reaping hundreds of millions of advertising dollars that once went to news companies. Also, there exists a notable imbalance of power between the technology companies and journalism businesses. Australian Competition and Consumer Commission chairman Rod Sims said that “all media companies need Facebook and Google”.

“What they have done is intermediate themselves between journalists and people who want to view the content, for their own finan-

cial advantage, obviously.”

It was further stated that “many market failures you don’t have to address. But this one is really important because it affects journalism, and therefore it affects society. Journalism is the classic public good, we all benefit from it.”

MEDIA CODE

One outcome of the Australian Competition and Consumer Commission investigation and intervention was the News Media and Digital Platforms Mandatory Bargaining Code, which was formally approved on March 2 2021. This media code wrote into law that technology platforms have to negotiate a price to pay news publishers for their content. Failing such negotiations, a process is

provided in terms of which these platforms will be forced to pay at a price to be set for them.

Subsequent to the Australian adoption of the media code, legislative interventions are being considered in a number of jurisdictions.

Canada aims to introduce similar legislation and it is expected that the framework will closely resemble the Australian media code. In the UK, authorities are developing a code that will regulate the relationship between platforms such as Google and Meta and third parties including news publishers.

The EU extended copyright protections for news publishers requiring technology platforms to pay for displaying anything beyond a basic URL.

This law was put to the test in France, where Google was fined €500m for failing to negotiate a deal with publishers in good faith. This finding is currently being appealed against.

In SA, the Competition Commission is expected to issue its findings on the Online Platforms Intermediation Market Inquiry by October 2022.

The question to ask is whether new insights could be observed in the final approach that will be adopted by the SA commission in relation to big technology companies such as Google and Meta.

Or will it, as elsewhere, reflect a paint-by-numbers outcome to a problem that has now caught the eye of competition law regulators?

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BusinessDay www.businessday.co.za May 2022

BUSINESS LAW & TAX

What carbon tax means for financial firms

SMOKESCREEN

chance to develop financial products aimed •atAincreasing investment in sustainable finance Mansoor Parker ENSafrica

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lthough the financial services industry does not emit any carbon itself, or does so in very small quantities, the introduction of the carbon tax will continue to play a role in the growth, development and governance of the financial services industry in SA. Having signed the Paris Agreement in 2016, SA has undertaken to reach a goal of net-zero carbon dioxide emissions by 2050. To this end, SA introduced the Carbon Tax Act, 2019 as its chosen carbon pricing method.

Carbon tax is a tax on greenhouse (GHG) emissions.

The Carbon Tax Act provides that those who conduct activities listed in schedule 2 (such as electricity production, coal mining or steel production) in SA and whose activities result in GHG emissions that are equal to or above a specified threshold as set out in schedule 2, will be liable for carbon tax.

A companies’ exposure to carbon emissions can be: ● Scope 1: direct — for example, through burning fuel; ● Scope 2: indirect — for example, through electricity consumption; or ● Scope 3: embodied — such as through business travel or purchased materials.

The carbon tax affects the financial services industry through its impact on an entity’s environmental, social and governance (ESG) criteria, which are a set of standards for a company’s operations that socially conscious investors use to evaluate prospective investments.

Many companies have made commitments to a netzero emissions economy, meaning that companies will seek to reduce their emissions and that any remaining emissions which are released as a result of the company’s actions are balanced by using an offset mechanism to absorb an equivalent amount from the atmosphere.

For example, where a company flies its employees overseas for business, it could compensate for this

through afforestation (planting more forests) or through the use of technological options such as direct capture (a chemical process that extracts CO2 from the air).

The “enterprise value” of a company, the measure of a company’s total value, will likely be affected by how closely the company can get to net zero, and future investors will likely seek to understand the true carbon cost of each company before investing.

of an entity’s CFO will grow since carbon tax has such a large financial aspect to it and will consequently require financial consideration.

Similarly, there is an increased need for the disclosure of information concerning the risks associated with carbon pricing. As investors continue to focus on “enterprise value”, it is expected that companies will be required to enhance disclosure so as to diversify their investor base and ensure the stability of their financing.

FUTURE INVESTORS WILL LIKELY SEEK TO UNDERSTAND THE TRUE CARBON COST OF EACH COMPANY BEFORE INVESTING

INCREASED COSTS

In a similar vein, the King 4 code regulates the corporate governance of SA companies and emphasises the importance of sustainable development in a manner that does not compromise “the ability of future generations to meet their needs”.

Furthermore, a company’s governance structure will have to be adapted as the role

Regardless of where the liability for paying the price of carbon lies, a large part of the cost will be passed on through the supply chain, making it important to consider an entity’s own liability and the exposure it has to carbon through its suppliers.

Input costs, such as electricity, paper or plastic, and logistics costs, such as flights or road travel, are likely to have increased. The impacts on cost within the supply chain, however, depend on each supplier’s ability to absorb increased expenses and remain competitive.

In this regard, increased input costs may lead to product switching, and the degree

/123RF — ALEXMILLOS

/123RF — ELNUR to which carbon costs can be passed along will therefore depend on the price elasticity of the relevant product.

To this end, it is important that the governance bodies of each entity maintain an understanding of where carbon costs are most likely to be incurred, as well as the dynamics of their target market, as correct management of the entity’s financial, operational and strategic performance will enable the necessary mitigation of its carbon price exposure.

INPUT COSTS, SUCH AS ELECTRICITY, PAPER OR PLASTIC, AND LOGISTICS COSTS ARE LIKELY TO HAVE INCREASED The effects of the pricing of carbon emissions will depend on a company’s carbon footprint coupled with its negotiation power with suppliers and customers.

There are other financial and commercial aspects of the financial services industry that will be affected by carbon tax, including: ● The viability of investments to reduce carbon exposure; ● The impacts of a carbon price on decisions related to mergers & acquisitions; ● The options for carbon offsets in order to use the carbon offset allowance; ● Customer negotiations; ● Costing and pricing strategies for products and services; and ● A changing cost base.

During the 2022 budget, the future carbon tax price path was made known: “To

prepare SA for the structural transition to a climateresilient economy, government proposes to progressively increase the carbon price every year by at least $1 to reach $20 per tonne of carbon dioxide equivalent by 2026.

“For the second phase, government intends to increase the carbon price more rapidly every year, to at least $30 by 2030, accelerating to higher levels by 2035, 2040 and up to $120 beyond 2050. The basic tax-free allowances will also be gradually reduced to strengthen the price signals under the carbon tax from January 1 2026 to December 31 2030.”

In addition, emissions that exceed mandatory carbon budgets will be penalised.

CARBON BUDGET

“The mandatory carbon budgeting system comes into effect on January 1 2023, at which time the carbon budget allowance of 5% will fall away. To address concerns about double penalties for companies under the carbon tax and carbon budgets, it is proposed that a higher carbon tax rate of R640 per tonne of carbon dioxide equivalent will apply to greenhouse gas emissions exceeding the carbon budget.

These amendments will be legislated once the Climate Change Bill is enacted.”

It is clear that there will be a downscaling of high carbon emitting sectors and key new growth sectors for opportunity creation such as new mineral mining, green hydrogen and renewables will emerge.

The issue is whether business will be able to afford the steep increases in the carbon tax and at the same time mobilise the capital needed to

transition to low-carbon operations.

In March 2022 SA’s green finance taxonomy (GFT) was published. SA’s GFT was developed by the Taxonomy Working Group, as part of SA’s Sustainable Finance Initiative, chaired by the National Treasury.

NEW OPPORTUNITIES

The GFT is a classification system or catalogue that defines a minimum set of assets, projects, activities and sectors that are eligible to be defined as “green” in line with international best practice and national priorities. It can be used by investors, issuers and other financial sector participants to track, monitor and demonstrate the credentials of their green activities.

The introduction of the carbon tax provides the financial services industry with the opportunity to develop new financial products aimed at increasing investment in sustainable finance, such as bonds, stocks, derivatives and funds linked to carbon pricing.

It is evident the introduction of carbon tax in 2019 as SA’s chosen carbon-pricing mechanism has affected the financial services industry. It must carefully consider the effects of the carbon tax on a company’s competitiveness and ESG criteria and adapt to ensure a sustainable financial, operational and strategic performance.

THE EFFECTS OF THE PRICING OF CARBON EMISSIONS WILL DEPEND ON A COMPANY’S CARBON FOOTPRINT

12

BusinessDay www.businessday.co.za May 2022

BUSINESS LAW & TAX

Voting against a business rescue plan

HAVE YOUR SAY

• Creditors at risk of votes deemed inappropriate /123RF — AQUASWIM Phylicia Naidoo & Christopher Holfeld Webber Wentzel

C

reditors who vote against the adoption of a business rescue plan out of self-interest, without considering the rights of other affected parties, may risk having their votes deemed inappropriate by a court.

A creditor of a company undergoing business rescue proceedings is entitled to vote on the proposed business rescue plan. However, for some creditors, voting for the approval of the business rescue plan would not achieve their objectives.

If you decide to vote against the plan in the hope of a better business rescue plan being proposed, or the company being liquidated instead, could your vote be deemed inappropriate, and the resultant rejection of the business rescue plan be at risk of being set aside?

In terms of section 153(1)(a) of the Companies Act, if a business rescue plan is rejected, the business rescue practitioner is entitled to advise, at the meeting called for consideration of the plan, that the company will apply to court to set aside the result of the vote by the holders of

discover more

voting interests or shareholders, on the grounds that it was inappropriate. Alternatively, the business rescue practitioner may ask the holders of voting interests to vote for approval to prepare and publish a revised plan.

If the business rescue practitioner takes neither of these steps, any “affected person” in terms of section 153(1)(b)(i)(bb) who is present at the meeting may apply to a court to set aside the result of the vote by the holders of voting interests or shareholders, on the grounds that it was inappropriate. “Affected person” is defined in section 128 of the Companies Act and includes shareholders, creditors of the company, registered trade unions representing the company’s employees and individual employees or their representatives who are not represented by a registered trade union.

If an application is made to set aside the result of a vote on the grounds that it was

CREDITORS HAVE TO TAKE INTO ACCOUNT THE IMPACT ON OTHERS WHEN DETERMINING WHETHER TO VOTE

inappropriate, in terms of section 153(7) of the Companies Act, a court may grant the order if it is satisfied it is reasonable and just to do so, having regard to: ● The interests represented by the person/s who voted against the proposed business rescue plan; ● Provision, if any, made in the proposed business rescue plan with respect to the interests of that person/s; ● A fair and reasonable estimate of the return to that person/s if the company were to be liquidated.

REASONABLE

In the case of Ferrostaal GmbH and Another v Transnet SOC Ltd t/a Transnet National Ports Authority and Another (the Ferrostaal case) the Supreme Court of Appeal had to deal with whether votes were inappropriate and whether they should be set aside after a business rescue plan was rejected.

The approach taken by the court was formulated in the case of FirstRand Bank Ltd v KJ Foods CC. The court needs to determine whether it is reasonable and just to set aside the relevant vote against the business rescue plan by taking into account the factors set out above in terms of section 153(7) of the Companies Act and all

circumstances relevant to the case, including the purpose of business rescue.

The interpretation of the term “inappropriate” needs to take place within the wider context of the objects of business rescue, including the provision of the efficient rescue and recovery of financially distressed companies, in a way which balances the rights and interests of all the relevant stakeholders, including all creditors and employees. In determining whether a vote against the adoption of a business rescue plan is inappropriate or not, a court needs to consider all the facts and circumstances and make a value judgment.

In the Ferrostaal case, the appeal was instituted by Ferrostaal GmbH and Atlantis Marine Projects Pty Ltd, the shareholders of the company in business rescue, Ferromarine Africa (Pty) Ltd (FMA).

FMA did not have any employees, business or assets, aside from its lease agreement with Transnet SOC Ltd t/a Transnet National Ports Authority (Transnet), which it sublet. Transnet voted against the business rescue plan as it was commercially unviable and failed to adequately protect the interests of Transnet, the major creditor of FMA.

Transnet also reasoned that the implementation of the business rescue plan could not achieve the legislated objective of facilitating the efficient rescue and recovery of financially distressed companies in a way that balances the rights and interests of all stakeholders.

Also, it reasoned that the liquidation of FMA would be advantageous to Transnet.

SKEWED

The court did not set aside Transnet’s votes rejecting the business rescue plan. The court found the arrangement set out in the business rescue plan encroached on the ability of Transnet to exercise its contractual rights with FMA in future and was heavily skewed against Transnet.

There were no other affected persons whose interests needed to be protected. Accordingly, Transnet’s opposition to the business rescue plan could not be considered as unreasonable and its vote against the adoption of the business rescue plan was not inappropriate.

In the FirstRand Bank case, the company in business rescue, KJ Foods CC (KJF), had more than 200 employees, who would be able to continue working for KJF if the business rescue

plan was adopted. If KJF was liquidated, they would lose their employment.

If the proposed business rescue plan was approved, FirstRand Bank’s claim would be settled in full by way of payments made over a period of time. Other creditors of KJF would also benefit if the business rescue plan was approved.

Another aspect the court considered was that, if the business rescue plan was approved, concurrent creditors of KJF would receive 100c in the rand instead of the 51c in the rand they would receive upon liquidation of KJF. Taking into consideration all the facts and circumstances, the court held that FirstRand Bank’s vote to reject the business rescue plan was due to self-interest and was inappropriate.

Creditors have to take into account the impact on others when determining whether to vote against the adoption of a business rescue plan, not only how the decision will affect them or their companies directly.

It is vital to look at the bigger picture before casting a vote, or risk it being deemed inappropriate, if self-interest is the motivation and other stakeholders involved are not being considered.