Joint ventures in South Africa: overview

A Q&A guide to joint ventures law in South Africa.

The Q&A gives a high level overview of joint ventures law, including regulation of joint ventures, types of joint ventures permitted in the jurisdiction, whether corporate joint ventures are subject to the corporate law, formalities for formation and registration of joint ventures, statutory limits on duration, anti-trust rules, termination, rules relating to joint ventures with foreign members, and incentives.

This Q&A is part of the Joint Ventures Law Global Guide.

Contents

Domestic company joint ventures (JVs)

Regulation

1. Are JVs expressly regulated?

JVs are not expressly regulated.

Unincorporated JVs are regulated by contract law and incorporated JVs are regulated by both the Companies Act 2008 (Companies Act) and contract law.

Types

2. Which types of JV are allowed?

The JV is a legal relationship to which the law of contract applies. It can be created by conduct, orally, or in any number of documents, but the key terms and conditions of the JV relationship must be set out in a written agreement.

There are two types of JV available in South Africa:

  • Incorporated JV (corporate JV).

  • Unincorporated JV (contractual JV).

 
3. Are corporate JVs subject to the corporate law?

A corporate JV involves the formation of a company and is governed by the Companies Act, its constitutional documents (memorandum of incorporation) and contract law in relation to the agreement entered into between the parties.

Both corporate JVs and contractual JVs are subject to industry specific laws and regulations, for example:

  • Banks Act 1990.

  • Financial Advisory and Intermediary Services Act 2002.

  • Applicable tax laws and exchange control regulations.

Formation and registration

4. Is the use of foreign language in a JV's founding documents (both corporate and contractual) restricted?

In the South African corporate context, agreements are most commonly written in English but parties are free to enter into an agreement in any language they agree on. A memorandum of incorporation must be in or be translated into one of the official languages of South Africa (English is the most common). Words of Roman Dutch legal origin with a particular legal meaning will often be included in South African agreements.

Any documents to be used as evidence must also be translated into an official language.

 
5. Are public officers (for example, public notaries) involved in a JV's formation procedure?

Public notaries are not involved in the formation of a JV.

A "public officer" has a particular meaning and role in South Africa, and is responsible for all undertakings, duties and acts that the company must comply with under the relevant tax laws. The public officer will be subject to penalties if the company defaults.

A public officer must be appointed for every company that is carrying on business or has an office in South Africa, for example a corporate JV. The public officer has a very important role in ensuring that the company complies with all its tax obligations and its roles and responsibilities are governed by section 246 of the Tax Administration Act 2011.

 
6. Are JVs registered with any local registries? Are public sector bodies' authorisations required for a JV's establishment?

Local registries

The Companies and Intellectual Property Commission (CIPC) is the statutory body that incorporates and regulates South African companies. A corporate JV will be required to submit its memorandum of incorporation (MoI), any amendments to, or replacement of its MoI and other various documents on an ongoing basis (for example to effect a change of directors, change of registered address and to submit its annual returns).

Public sector bodies

The formation of a JV (corporate or contractual) can trigger South African competition and anti-trust legislation in terms of the Competition Act 1998 (Competition Act). The Competition Act stipulates that the Competition Commission (Commission) must be notified of all mergers and acquisitions, where the transactions exceed certain thresholds. A merger is defined as a direct or an indirect acquisition or establishment of control over the whole or part of the business of another firm. The most common types of merger transactions include the sale or acquisition of assets or shares in a firm and the amalgamation of two or more firms. If applicable, members must notify the Commission at any time before the implementation of the transaction.

In its analysis of merger transactions the Commission will evaluate the competitive impact (whether the transaction substantially prevents or lessens competition in the market), efficiency gains and public interest issues that arise from the merger. The Commission takes the following public interest issues into consideration:

  • Particular industrial sectors or regions.

  • Employment.

  • The ability of small and black business to become competitive.

  • The ability of national industries to compete internationally.

JVs can also be subject to and governed by specific industry regulatory bodies, for example the Financial Services Board. A corporate JV will also be subject to the South African Revenue Service. Individual entities forming a corporate JV can also be subject to South African tax jurisdiction.

If the JV will involve the transfer of funds to and from South Africa, approval will be required from the South African Reserve Bank (SARB). This will include any transfers from or to the JV members and any transfers between third parties, for example customers and service providers based outside of South Africa. Approval will involve the submission of an exchange control application to an Authorised Dealer (commercial banks that have been appointed to act as agents of SARB) or the Financial Surveillance Department of SARB, depending on the extent of the approval required.

 
7. What other formal requirements must be complied with to validly constitute a JV?

Corporate JV

To form a corporate JV, the members of the JV must create a company (the JV company) and become shareholders in the JV. This can be achieved by incorporating a new company or being a shareholder in an existing company.

All South African companies are governed by the Companies Act 2008 (Companies Act). The JV company must comply with the provisions of the Companies Act and have a memorandum of incorporation (MoI) in place.

The Companies Act allows certain statutory provisions to be altered by a company's MoI. However, only certain provisions can be amended, other provisions are fixed. Therefore, if a provision of a company's MoI is inconsistent with a fixed provision of the Companies Act, the provision in the MoI is void.

The members set out the terms of the JV and their relationship in a JV agreement. The agreement can take a number of forms including an agreement expressly referred to as a "joint venture agreement" (JV agreement) but most commonly will take the form of a shareholders' agreement. The JV agreement records the intention of the members in forming the JV company and will provide information about the JV, including the:

  • Name.

  • Location.

  • Role of the members.

  • Shareholdings.

  • Capitalisation of the company.

  • Scope of the business to be conducted.

  • Fundamental principles of how the JV will be managed.

If there is an inconsistency between a company's MoI and its shareholders' agreement, the provisions of the MoI will prevail, and inconsistent provisions in the shareholders' agreement will be void. The non-conflicting provisions remain valid. This is because the Companies Act can only be amended by a MoI and cannot be amended by a shareholders' agreement. The effect of this is that rights and obligations granted under the shareholders' agreement will be invalid if they do not align with the MoI and Companies Act provisions. Therefore, when a JV agreement is prepared, a MoI must be prepared simultaneously to ensure that the two documents are aligned and there are no inconsistencies that render provisions in the shareholders' agreement void. If the company has an existing MoI, it will need to be amended so that it is aligned with the shareholders' agreement.

The members can also enter into a number of ancillary agreements including:

  • Shareholder loan agreements (providing loans to the company for the purposes of funding its working capital).

  • Service agreements (providing particular services, including management to the JV).

The members can also enter into a memorandum of understanding or letter of intent agreeing to the terms of the JV prior to creating the JV company and entering into the shareholders' agreement and adopting an MoI.

Contractual JV

The members must enter into an agreement to conduct a specific activity in common, in order to form a contractual JV. There can be several agreements in more complex JV arrangements. A company is not created or used as a vehicle for the contractual JV (unlike a corporate JV) the members agree to enter into a contractual arrangement. The JV agreement sets out the intention of the members, the functions and operations of the JV, the role of each of the members, profit and cost sharing and termination provisions.

The members can also enter into a separate management agreement to appoint a manager (who will conduct the operation of the JV) and where the manager's rights, duties and remuneration will be set out.

In addition, the members can enter into a sales agency agreement under which an agent is appointed to sell the output of the JV and account for it to the members in accordance with their respective shares.

Permitted markets

8. Can the JV instrument be used in every market? Are there any restrictions to be considered and carefully assessed before investing?

A JV can be used in every market subject to any particular industry/sector specific requirements that may apply to a company (for example, in the mining, insurance and banking sectors).

Purpose

9. Can a JV be established with any purpose?

A contractual or a corporate JV can be established for any purpose provided that it is operating within the laws of South Africa.

Share capital and participation

10. What possible forms of participation are there in a JV's share capital? How can a JV member contribute and are there statutory limits on the possibility to make contributions in kind?

Forms of participation

Contractual JV. A member can contribute in any way as agreed by the members of the JV.

Corporate JV. A member participates as a shareholder in the JV company.

Contributions

Contractual JV. A member can contribute in any way agreed by the members of the JV, for example through the provision of money, goods, assets, skills and expertise. The member's contribution must be provided in the JV agreement to avoid ambiguity and to clearly define the roles of the members.

Corporate JV. A member participates as a shareholder and can contribute through the provision of money, assets or services in return for shares in the company. Shares must be fully paid up and after the initial contribution of the shareholders, any further cash injections will need to be in the form of equity by way of a subscription for further shares and/or in the form of debt by way of a shareholder loan (to be repaid on terms agreed between the shareholders).

Any transfers of funds to and from South Africa by members are subject to South African exchange control regulations.

 
11. Can a corporate JV's share capital be indicated by making reference to a foreign currency?

A corporate JV's share capital can be indicated by making reference to a foreign currency. The Companies Act has removed the concept of par value shares and stated share capital and as a result the:

  • Shares of a company that are issued to shareholders have no par value.

  • Consideration payable for subscription is considered by the company's directors to be adequate consideration at the time of the issue of shares.

Annual financial statements for a corporate JV must be in South African Rand (ZAR).

Duration and limits on membership

12. Are there statutory limits on a JV's duration?

There are no statutory limits on a JV's duration. The only minimum or maximum periods for a JV are those set out in the JV agreement.

 
13. Are there statutory limits on the number of members participating in a JV?

There are no statutory limits on the number of members that can participate in a JV. The only minimum or maximum numbers of members in a JV are provided in the JV agreement.

Public sector bodies

14. Can a public sector body enter into a JV agreement? Subject to what conditions? In particular, do public private partnerships (PPP) laws and regulations apply?

Public sector bodies can enter into JV agreements but are required to comply with the Public Finance Management Act 1998 and any applicable enabling legislation. In addition, public private partnerships (PPP) are also required to comply with the Preferential Procurement Policy Framework Act 2000 and, where applicable, the Municipal Finance Management Act 2003.

Non-competition and anti-trust clauses

15. Are there statutory constraints on the use of non-competition or anti-trust clauses in a JV agreement?

During period of effectiveness

Members can agree to and include non-competition clauses in their JV agreement subject to the Competition Act.

The Competition Act prohibits any agreement between members that substantially prevents or lessens competition (unless the agreement can be justified based on technology, efficiency or other pro-competitive gains). If the JV has a substantial negative effect on a particular industry or sector, the members must show that the agreement is for the benefit of the consumer and the economy in general.

The Competition Act further prohibits any agreement or practice between competitors that results in:

  • Direct or indirect price fixing.

  • Allocation of markets between competitors.

  • Collusive tendering.

  • Setting or maintaining minimum resale prices.

Some agreements or practices have been completely prohibited, without the possibility to justify on economic grounds. Members must apply for an exemption to continue with these practices.

Following termination

The members can agree to non-competition practices following the termination of the JV agreement provided that it does not contravene the Competition Act (see above).

De facto company/partnership

16. Must the contractual JV satisfy any conditions to avoid falling within the definition of de facto company/partnership?

There is no distinction in South African law between a contractual JV and a partnership. However, the JV agreement can state that the arrangement:

  • Does not constitute a partnership.

  • Is only a limited partnership (that is, for the purpose of a limited, defined JV) and is not a universal partnership.

Limiting member liability

17. Can a JV agreement provide that a JV member can participate without incurring any risk, loss or reward?

A corporate JV is a separate legal entity and has limited liability.

A contractual JV is treated as a partnership and the members are jointly and severally liable. The members can agree to protect each other through of cross indemnity agreements, but remain jointly and severally liable to third parties.

Anti-trust

18. Do any anti-trust rules, guidelines or policies apply to a JV agreement?

The formation of a JV (corporate or contractual) can trigger South African competition and anti-trust legislation in terms of the Competition Act 1998 (Competition Act) (see, Question 15). The Competition Act provides that the Competition Commission (Commission) must be notified of all mergers and acquisitions, where the transactions exceed certain thresholds.

In addition, the Competition Act prohibits any agreement between members that substantially prevents or lessens competition unless the agreement can be justified based on technology, efficiency or other pro-competitive gains. If the JV has a substantial negative effect on a particular industry or sector, the members must demonstrate that the agreement is for the benefit of the consumer and the economy in general. The Competition Act also prohibits any agreement or practice between competitors that results in:

  • Direct or indirect price fixing.

  • Allocation of markets between competitors.

  • Collusive tendering.

  • Setting or maintaining minimum resale prices.

Governance and limits on directors

19. Can the participants to a JV freely regulate the JV or are they subject to certain restrictions?

The members of a JV can freely regulate their rights and obligations between each other within the JV, subject to certain restrictions, such as, in the case of a corporate JV, compliance with the Companies Act.

 
20. Are there limits or restrictions on the eligibility of an individual as a member of the board of directors/statutory auditor?

In a corporate JV, the directors of the company are responsible for the management of the company. The Companies Act provides that 50% of a company's directors (including alternative directors) must be elected by the shareholders. However, in a shareholders agreement, it is common for members to agree to vote in favour of each shareholder's nominees.

A person that is ineligible or disqualified cannot be elected, act or continue to act as a director of a company. A person can be "ineligible" or "disqualified" if he is:

  • Prohibited from being director of a company under a public regulation.

  • Removed from an office of trust, on the grounds of misconduct involving dishonesty.

  • Convicted and imprisoned without the option of a fine, or fined more than the prescribed amount, for theft, fraud, forgery, perjury or an offence involving fraud, misrepresentation or dishonesty.

A disqualification last for five years.

In addition, a company can set out additional eligibility criteria in its memorandum of incorporation.

There is no age limit for a director and a director can serve for an indefinite time.

A director is not required to be South African.

 
21. What legal regime applies to a JV's termination? Can a JV be terminated for just cause on request of one party?

Contractual JV

A contractual JV can terminate:

  • At a time specified in the contract.

  • On the accomplishment of its purpose.

  • On the death of an active member.

  • By court order if the court declares it just and equitable.

Corporate JV

A corporate JV can also be wound up through provisions in the Companies Act 2008 (Companies Act) either voluntarily or involuntarily (that is, placed into sequestration by a creditor). In addition, the corporate JV agreement can provide for the termination of the JV by specifying methods for the shareholders to exit, for example:

  • Exercising put and call options over a shareholder's shares.

  • Events that will trigger a deemed offer of a shareholder's shares for sale and pre-emptive rights.

 
22. Is the termination of a JV agreement subject to any public sector body's approval?

The termination of a JV agreement is not subject to any public sector body's approval.

Choice of law and jurisdiction

23. Are there constraints on the choice of the law and the jurisdiction applicable to a JV?

There are no constraints on the choice of the law or the jurisdiction applicable to a JV. However as a matter of practicality, it is easier for the JV to be governed by, and interpreted in accordance with South African law and subject to the South African court system.

 

JVs with foreign members

Validity and authorisation

24. What are the rules relating to validity and authorisation of JVs with foreign participants?

Validity

JVs with foreign members are allowed in South Africa. There is no discrimination against foreign members in South Africa but exchange control will be applicable.

When a company is interested in entering into a foreign licensing agreement to manufacture a product in South Africa, the South African licencee must submit an application to the Department of Trade and Industry (DTI). The DTI will subsequently make a recommendation to the South African Reserve Bank (SARB).

Government regulations stipulate that the SARB's exchange control section must approve the payment of royalties. When a licensing agreement does not involve manufacturing, the request for exchange control approval is sent directly to SARB by the South African licensee.

The calculations of discretionary funds (for example, royalties and fees) that can be set by the members of the JV are subject to foreign exchange controls set by the SARB.

Contractual conditions involving obligatory purchasing and pricing agreements or requiring the licencee to solely source articles from the licensor are prohibited under competition laws.

Limits

There is no minimum or maximum number of members of a JV that must be South African. However, investors must consider the South African Government's Black Economic Empowerment (BEE) policies in terms of the Black Economic Empowerment Act 2003 and also sector specific legislation, for example, the Mineral and Petroleum Resources Development Act 2002. In terms of BEE, there can be commercial incentives and requirements to consider when forming a JV and the need to obtain various permits or allow trading in particular sectors.

Authorisation

Exchange control approval are required to the extent that funds flow in and out of South Africa. In addition, industry specific rules may apply.

Effect of foreign membership

25. Are any of the rules relating to domestic company JVs (see Questions 1 to 23) different for JVs with members incorporated under, or governed by, the laws of a foreign country?

The rules relating to a JV are the same whether the members are incorporated in or outside of South Africa. However, South African incorporated members must comply with the Companies Act 2008 (Companies Act) and foreign incorporated members must comply with their local company's legislation and other applicable requirements. A foreign incorporated company can also register as an external company or "branch" in South Africa and if so, will need to apply with the provisions of the Companies Act that relate to external companies.

Economic or financial incentives

26. Are there economic or financial incentives for foreign direct investments in a JV?

The Department of Trade and Industry (DTI) provides financial assistance to qualifying companies in various sectors, including foreign direct investment.

Minimum investments/contributions

27. Are there mandatory minimum equity investments or contributions in kind thresholds for a foreign JV member?

There are no mandatory minimum equity investments or contributions in kind thresholds for a foreign JV member. However, any transfers from shareholders based outside of South Africa will require exchange control approval. In addition, in terms of South African thin capitalisation provisions, to the extent that foreign shareholders of a South African company (that is, a corporate JV) are "connected persons" (determined by reference to the percentage of shares the shareholder holds) there is a general debt to equity ratio of 3:1.

 

The regulatory authorities

Companies and Intellectual Property Commission

Main activities. Registering companies and intellectual property rights and maintaining the registers.

W www.cipc.co.za

Competition Commission South Africa

Main activities. Investigating, controlling and evaluating restrictive business practices, abuse of dominant positions and mergers in order to achieve equity and efficiency in the South African economy.

W www.compcom.co.za

South African Reserve Bank

Main activities. The central bank of South Africa.

W www.sarb.co.za

South African Revenue Service

Main activities. South Africa's tax collecting authority, responsible for administering the South African tax system and customs service.

W www.sars.gov.za



Contributor profiles

Charles Ancer, Director

Norton Rose Fulbright South Africa Inc

T +27 11 685 8946
F +27 11 301 3294
E charles.ancer@nortonrosefulbright.com
W www.nortonrosefulbright.com

Professional qualifications. Attorney, South Africa

Areas of practice. Corporate; mergers and acquisitions; mining.

Non-professional qualifications. BA LL.B, University of Witwatersrand; Mining Law Certificate, University of Witwatersrand; IT Law Certificate, University of Witwatersrand

Recent transactions

  • Advising a leading European housewares company on the formation of its corporate joint venture with a South African housewares business.

  • Advising the acquirers of a network of KFC stores in the Eastern Cape Province.

  • Advising on the licencing and franchise structure for Fastjet plc looking to enter the South African airline market.

  • Assisting in a team that advised Minor International on its proposed acquisition of a portfolio of assets from Sun International.

  • Assisting in a team that advised Goldman Sachs on ZAR5.482 billion rights offer.

  • Assisting in a team that advised Barclays on a combination of Barclays' African operations with Absa Group.

Professional associations/memberships. Law Society of the Northern Provinces

Languages. English

Emma Forbes, Solicitor

Norton Rose Fulbright South Africa Inc

T +27 11 301 3455
F +27 11 301 3294
E emma.forbes@nortonrosefulbright.com

Professional qualifications. Solicitor, Australia

Areas of practice. Corporate; mergers and acquisitions; equity capital markets.

Non-professional qualifications. BA LL.B (Hons), University of Queensland,

Graduate Diploma of Legal Practice, Skills and Ethics, Griffith University

Recent transactions

  • Advising a leading European housewares company on the formation of its corporate joint venture with a South African housewares business.

  • Assisting Exxaro Resources Limited with their proposed acquisition of the entire share capital of Total Coal South Africa.

  • Advising BP Plc on the disposal by BP Southern Africa of its liquid petroleum gas business in South Africa.

  • Advising Minor International on its proposed acquisition of a portfolio of assets from Sun International.

  • Advising Keaton Energy Holdings on its acquisition of the entire issued share capital of Xceed Resources.

Languages. English


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