Duty of Care When Selling a Business in South Africa

Foreign business owners who decide to sell their enterprisein South Africa must consider three factors before entering a sale agreement.

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  • Duty of Care When Selling a Business in South Africa
    Manish Khanna Image Manish Khanna

    Duty of Care When Selling a Business in South Africa

    • Tuesday 2nd of September 2014
    • Selling

    Foreign business owners who decide to sell their enterprisein South Africa must consider three factors before entering a sale agreement.

    First, they should be clear about their purpose for engaging in such transaction. Examples of common reasons for selling a business include wanting to gain profit and set up a new trade in the country or elsewhere; failing to make the business move forward to the point that it needs new owners and directors; and leaving the industry to retire.

    Second, they should be clear about the nature of their business and in what category their private enterprise will fall under. In South Africa, the two main classifications of companies are ‘not for profit’ and ‘for profit’. In terms of ownership, businesses are categorized as personal liability companies, state-owned companies, public companies and private companies. Many small businesses that are being sold are usually privately owned.

    Third, they should understand the rules and regulations concerning duty of care. Business rules and regulations vary per country, which is why potential sellers should understand business laws in South Africa before engaging in any form of sale.

    Characteristics of Business Entities in South Africa

    Successful business sellers understand the importance of assessing a sale from the perspective of the buyer. In South Africa, investors (or those who will buy the business) will consider a range of available investment vehicles. Some of their considerations in choosing an investment vehicle include tax-related issues and limited liability. Selling a business in South Africa requires a thorough understanding of the country’s Companies Act No. 71 of 2008 Act, which replaced the Companies Act No. 61 of 1973. The Companies Act describes different types of business entities according to nature of the enterprise and type of ownership; however, the two most ideal for selling and buying are profit limited liability companies and private companies.

    • Profit Limited Liability Companies

    Profit limited liability companies, which include private companies, are considered the most appropriate investment vehicle. Such companies can be described as having distinct bodies for legal personality and limited liability. Profit liability are not required to assign an auditor (except in certain circumstances), but they can opt to do so. Chapter 3 of the Companies Act discusses accounting requirements. Such companies are also not required to have a board of directors or local shareholders. The memorandum of incorporation of profit limited liability companies should limit the right to transfer shares as well as limit offers to let the public acquire shares. In terms of voting rights in meetings, the Companies Act states that “a quorum at meetings of shareholders where there is more than two shareholders is three shareholders with voting rights.” Meanwhile, the right to vote in a private company may be uneven. Private companies under profit limited liability companies go through the following steps upon incorporation, which can take 30 to 60 days:

    • They reserve a company name.
    • They fill out the company’s memorandum of incorporation. This is a company’s constitution.
    • They obtain a written consent of auditors to act for the company, if the company has any auditors.
    • They give notice of the registered office.
    • They submit a register of directors.

    • Private Companies

    According to the Companies Act, private companies face fewer requirements in disclosure and transparency. Their names should end with the terms “Proprietary Limited” or “(Pty) Ltd.” In terms of shares, private companies are not permitted to let the public access its shares. Private companies are allowed to have over 50 shareholders; however, share transfers are limited. They should have at least one director on their board of directors, and every incorporator serves as the company’s initial director. As with any law, there are exceptions. In this case, there are exceptions for private companies wherein people who are related to one another own all the shares (this leads to a reduced need to protect a smaller fraction of shareholders), or all the shareholders are directors (this leads to a reduced need to obtain shareholder approval for particular actions of the board).

    Understanding Duty of Care in South Africa

    All enterprises should act responsibly and reasonably when doing business with individuals or groups. This is known as “duty of care,” which meanscompanies should make sure that their actions will not cause any form of harm, injuryor unreasonable loss to the people or groups transacting with them. All companies are legally responsible to supply all the necessary information that will avoid causing preventable harm to whoever they are dealing with.

    In a comprehensivepublication about doing business in South Africa, legal experts fromENSAfrica explain general corporate information for foreigners who intend to sell, buy or engage in any business in the country.It explains that the duties of directors are classified as “fiduciary duties and the duty of care, skill and diligence,” whichfunction along with “existing common law duties.” The duties are partially codified in the Companies Act, which states that directors should know their rights and the expectations that come with their designation. Directors are answerable to common law that is applied in court judgments and rulings.

    In Section 76 of the Companies Act, directors are obliged “to act in good faith”and “for a proper purpose in the best interests of the company.”They should also perform their functions with the level of “care, skill and diligence” that is reasonably expected of someone who holdssuch position. All directors should be transparent about any personal financial interests they may have. They are also not permitted to exploit their position, or the information they acquired from holding such position, to gain advantage or to inflict damage to the company.

    When it comes to duty of care, directors are subject to abusiness judgment test. This test aims to assess if directors have abided by their fiduciary duties and the duty of care, skill and diligence. Specifically, the business judgment test looks into whether the director took sensibly meticulous measures to be informed about the matter at hand; is free from any personal financial interest in the matter or has expressed such interest, if any; and reasonably believed that “the decision was in the best interest of the company.”

    More information about selling a business in South Africa can be obtained from the following websites:

  • Author Info Manish Khanna

    Manish Khanna is a serial entrepreneur, philanthropist and genuine Australian success story. In a decade he has built an online empire unlike any other. He is currently the Managing Director of more than 10 individual companies. These include the flagship Business2Sell which operates internationally in 6 countries. The others include CommercialProperty2Sell, Million Dollar Mansions, Netvision, BCIC Pty Ltd and Better Franchise Group, to name a few.

    With more than 21 years’ experience developing web applications plus very successfully creating, managing and growing start-ups, he is forging ahead to turn more of his innovative ideas into future success stories.