Equity capital markets in South Africa: regulatory overview

A Q&A guide to equity capital markets law in South Africa.

The Q&A gives an overview of main equity markets/exchanges, regulators and legislation, listing requirements, offering structures, advisers, prospectus/offer document, marketing, bookbuilding, underwriting, timetables, stabilisation, tax, continuing obligations and de-listing.

To compare answers across multiple jurisdictions visit the Equity capital markets country Q&A tool.

This Q&A is part of the PLC multi-jurisdictional guide to capital markets law. For a full list of jurisdictional Q&As visit www.practicallaw.com/capitalmarkets-mjg.

Jacqueline King and Johan Latsky, Cliffe Dekker Hofmeyr Inc
Contents

Main equity markets/exchanges

1. What are the main equity markets/exchanges in your jurisdiction? Outline the main market activity and deals in the past year.

Main equity markets/exchanges

The JSE Limited (JSE) (www.jse.co.za) is the only licensed stock exchange in South Africa. The separate sub-markets of the JSE on which equity securities can be listed are:

  • Main Board.

  • Venture Capital Market (VCM).

  • Development Capital Market (DCM).

  • AltX (which is a market for small and medium-sized companies that are in a growth phase).

This article focuses on the Main Board and the AltX.

Market activity and deals

It is expected that the JSE will publish the 2012/2013 market activity report but this was not yet available at the time of writing.

The information provided below is extracted from the most recent publicly available Annual Economic Report 2012 issued by the South African Reserve Bank.

The total value of equity capital raised in the domestic and international primary share markets by companies listed on the JSE amounted to ZAR88 billion in 2011. Equity funding contracted from ZAR38 billion in the first quarter of 2011 to ZAR14 billion in the first quarter of 2012 before improving somewhat to ZAR29 billion in the second quarter.

Companies with primary listings on the JSE accounted for 71% of the total capital raising activity in 2011 and continued to dominate activity at 62% in the six months to June 2012. In 2012 the resources sector was responsible for the bulk of the equity funding at 46% of the total capital raised.

The total number of listed companies on all boards of the JSE increased from 405 in January 2011 to 411 in August, and then receded to 401 in June 2012 as only seven new listings (against 17 de-listings) occurred in the ten months to June 2012.

The prolonged upward trend of share prices contributed to a progressive increase in the monthly average turnover in the secondary share market from ZAR249 billion per month in 2010 to ZAR274 billion in 2011 and ZAR291 billion per month in the first half of 2012.

The total market capitalisation of the JSE also benefited from elevated share prices as it reached an all-time high of ZAR7.5 trillion in April 2012. Subsequently, the market capitalisation declined by 2% to ZAR7.4 trillion in June.

Net sales of local shares by non-residents amounted to a cumulative ZAR0.9 billion during the first half of 2012, despite the recent surge in domestic share prices. However, non-residents' participation rate in the share market remained around 15% in both 2011 and 2012.

 
2. What are the main regulators and legislation that applies to the equity markets/exchanges in your jurisdiction?

Regulatory bodies

The JSE is licensed and regulated under the Financial Markets Act 2012 (Financial Markets Act). The regulators of the JSE are the Registrar referred to in the Financial Markets Act and the Financial Services Board (an independent body that regulates the South African non-banking financial services industry).

The JSE is the body which approves the pre-listings statement, prospectus or circular (placing document) and the listing of equity securities on its exchange.

Legislative framework

The following regulatory framework applies:

  • Banks Act, 1990 (Banks Act).

  • Companies Act, 2008 (Companies Act).

  • Competition Act, 1998.

  • Exchange Control Regulations, 1961 promulgated under the Currency and Exchanges Act, 1933 (Exchange Control Regulations).

  • Financial Markets Act.

  • Financial Services Board Act, 1990.

  • The JSE's Equities Rules and the JSE Listings Requirements (together, the Equity Listings Requirements).

  • Income Tax Act, 1962 (Income Tax Act).

  • Securities Transfer Tax Act, 2007 (Securities Transfer Tax Act).

 

Equity offerings

3. What are the main requirements for a primary listing on the main markets/exchanges?

Main requirements

Conditions applicable to all markets. The company (including a foreign company) must:

  • Be duly incorporated under the law of the country of its incorporation.

  • Be operating in conformity with its Memorandum of Incorporation (MOI) or other constitutive documents (which require the JSE's approval), and the laws of its country of incorporation or establishment.

  • Be duly authorised to create and/or issue the equity securities in terms of its MOI, other constitutive documents and the laws of its country of incorporation.

The company must contractually undertake to the JSE, by completing Schedule 7 of the Equity Listings Requirements (which sets out the form of the company's application to the JSE for the approval of the placing document and the issue of equity securities), that from the date of admission to listing of any of its equity securities, the company will comply fully with all the Equity Listings Requirements, irrespective of the jurisdiction in which the company is incorporated.

The contents of the placing document must comply with the applicable provisions of the Equity Listings Requirements. Where the company or the placing document does not (or cannot) comply with any of the Equity Listings Requirements, the JSE has a discretion to dispense with the relevant requirement.

Companies which have a specialised function (such as investment companies, mineral rights companies and property companies) are subject to requirements under the Equity Listings Requirements in addition to those that apply to listings generally.

AltX. The principal AltX requirements under the Equity Listings Requirements are (in addition to the other general listings requirements set out in this article below):

  • The company must appoint a "designated adviser" on the terms specified in the Equity Listing Requirements.

  • The directors of the company must have completed the AltX "Directors' Induction Programme" or have made arrangements for it to be completed.

  • The company must appoint an executive financial director and the audit committee must be satisfied (and confirm in writing to the JSE) that the executive financial director has the appropriate expertise and experience to fill the role.

  • Unless it provides historical financial information for three prior years, or is governed by different requirements of alternative Listings Requirements acceptable to the JSE, the company must produce profit forecasts for the remainder of the financial year in which it lists and the following financial year.

  • At least three directors, or 25% of the total number of directors (whichever is the greater) must be non-executive.

  • The company must, subject to exceptions, have control of the majority of its assets.

Minimum size requirements

Main Board. The company must have a subscribed capital, including reserves, of at least ZAR25 million (excluding minority interests and, unless recently and independently valuated, intangible assets). It must also have at least 25 million equity securities in issue.

AltX. The company must have a subscribed capital, including reserves, of at least ZAR2 million (excluding minority interests and, unless recently and independently valued, intangible assets).

Trading record and accounts

Main Board. The company must have a satisfactory audited profit history for the preceding three financial years, the last of which reports pre-tax profit of at least ZAR8 million. The JSE may, at its discretion, list the equity securities of a company which is in its development stage (other than a mineral company) and which does not have the required profit history. In this event, the company must have, prior to the listing, subscribed capital of at least ZAR500 million and must have been in existence for at least 12 months.

Minimum shares in public hands

Main Board. The public must hold a minimum of 20% of each class of equity securities in the company. The number of public shareholders in respect of listed equity securities must be at least:

  • 300 for equity securities.

  • 50 for preference shares.

  • 25 for debentures.

AltX. The public must hold a minimum of 10% of each class of equity securities in the company and the number of public shareholders must be at least 100.

 
4. What are the main requirements for a secondary listing on the main markets/exchanges?

Main requirements

See Question 3, Main requirements: Conditions applicable to all markets. The company must comply with the specified conditions for listing set out in the Equity Listings Requirements, and those conditions must be read with regard being had to the jurisdiction in which the company is incorporated.

The particular requirements under the Equity Listings Requirements for a secondary listing of equity securities on the JSE are:

  • The company must confirm that it has a primary listing on another exchange and that either:

    • the exchange is a member of the World Federation of Exchanges (WFE); or

    • the company has subscribed capital of at least ZAR500 million.

  • The company must confirm that the primary listing is at least on an equivalent board/exchange to that for which application is being made on the JSE. The JSE will not grant a secondary listing on the Main Board where the company has a primary listing on the junior/secondary market of an exchange.

  • The company must not have traded in its equity securities on the JSE in respect of which a secondary listing is sought of more than 50% of both the total volume and value traded in those equity securities on all markets in which it is listed over 12 months.

The company must either:

  • In the case of, as applicable, a Main Board or AltX secondary listing, have the applicable required spread (see Question 3, Minimum shares in public hands) on the South African share register.

  • Make arrangements, to the satisfaction of the JSE's clearing and settlement division, to ensure that sufficient scrip is available on the South African share register.

The JSE will not grant a secondary listing of equity securities which are not listed in the country of incorporation of the company or in the country of primary listing, unless the company can demonstrate that the absence of such a listing is not due to any negative or problematic circumstances, events or regulatory issues.

Once the JSE has approved the secondary listing of the company's equity securities on the JSE, the company will, in principle, only be required to comply with the applicable listings requirements of the exchange on which it has its primary listing.

 
5. What are the main ways of structuring an IPO?

An initial public offering (IPO) can be effected by any of the methods described below, the most common method being a general offer to the public for the subscription of new equity securities.

Companies which do not have equity securities that are listed on the JSE (JSE-listed equity securities) may use (among others) the following methods and procedures to obtain a new listing of equity securities:

  • An introduction.

  • An offer for sale (including a placing).

  • An offer for subscription (including a placing).

  • An issue with participating or conversion rights.

  • A renounceable offer.

 
6. What are the main ways of structuring a subsequent equity offering?

Companies which already have JSE-listed equity securities may use (among others) the following methods and procedures to obtain a listing of additional equity securities:

  • An offer for sale (including a placing).

  • An offer for subscription (including a placing).

  • An issue with participating or conversion rights.

  • A renounceable offer.

  • A rights offer.

  • A claw-back offer.

  • A capitalisation issue.

  • An issue for cash.

  • An acquisition or amalgamation/merger issue.

  • A vendor consideration placing.

 
7. What are the advantages and disadvantages of rights issues/other types of follow on equity offerings?

The method and structure of listing adopted will depend on the particular factual circumstances of the company and the proposed listing of its equity securities (see Questions 5 and 6). Where a rights offer is available to the company, the main advantages of a rights offer over, for example, an IPO, are that the rights offer may be excluded from being an offer to "the public", which means that the company's placing document will not need to be registered as a "prospectus" under the Companies Act (see Questions 10 and 11). A claw-back offer is a particular kind of rights offer suitable to accelerated capital raising. There are also other advantages or disadvantages to the various methods and structures of listing that are beyond the scope of this article.

 
8. What are the main steps for a company applying for a primary listing of its shares? Is the procedure different for a foreign company and is a foreign company likely to seek a listing for shares or depositary receipts?

Procedure for a primary listing

The main steps for a domestic or foreign company applying for a primary listing of its equity securities on the JSE will depend on the method and structure of listing adopted (see Questions 5 and 6), for example, where the listing is structured as an offer of equity securities to "the public" (public offer) or a placing of equity securities (placing), and the size and complexity of the listing.

The main steps for a public offer and a placing are included in the timetable set out in Question 18.

Procedure for a foreign company

A foreign company may seek a listing of equity securities or depository receipts on the JSE. The Equity Listings Requirements set out the procedure for listing depository receipts.

Inwardly listed South African depository receipts have been listed on the JSE since the 1980s under the general requirements for inward listings, but special rules for newly listed depository receipt listings were only adopted in 2011. Foreign companies may elect to list depository receipts rather than the underlying shares for a variety of substantive or technical reasons. Among the technical reasons are the listing of fractional depository receipts in relatively smaller ZAR denominations on the JSE.

The procedure for listing the equity securities of a foreign company is the same as that for a domestic company, subject to the additional requirements set out below.

Companies Act. Although the JSE requires that a foreign company must first register as an "external company" for an inward listing, this is not a Companies Act requirement and the JSE can dispense with this requirement. If a foreign company makes an offer to the public in South Africa, the prescribed information must be filed with the Companies and Intellectual Property Commission (CIPC) at least 90 days before the offer of its equity securities is made. Naturally, all the other South African public offer requirements will also apply to the offeror.

Exchange Control Regulations. In principle, the issue by foreign companies of equity securities which are to be subscribed for by investors in South Africa requires the prior written approval of the Financial Surveillance Department of the South African Reserve Bank (Exchange Control Authorities) under the Exchange Control Regulations.

Exchange Control Directive H (entitled "Inward Listings by Foreign Entities on South African Exchanges" (31/2010)) (Inward Listings Directive) allows a foreign company to issue approved "inward listed" equity securities to investors in South Africa, subject to the conditions set out in the Inward Listings Directive. One of these conditions stipulates that "inward listed" equity securities must be listed on the JSE. The issue of the "inward listed" equity securities must also be approved by the Exchange Control Authorities.

The placing document of a foreign company, and the issue of the "inward listed" equity securities, must therefore comply with both the Equity Listings Requirements and the Inward Listings Directive.

 

Advisers: equity offering

9. Outline the role of advisers used and main documents produced in an equity offering. Does it differ for an IPO?

Sponsor

A company that wishes to issue equity securities to be listed on the Main Board of the JSE must appoint a sponsor. A sponsor must be approved by the JSE. Equivalent and additional provisions apply to Designated Advisers appointed to AltX companies.

The sponsor has several obligations under the Equity Listings Requirements and must, among other things, ensure that:

  • The company is guided and advised on the application of the Equity Listings Requirements.

  • The directors of the company are advised on the nature of their responsibility and obligations as directors of a listed company.

Corporate adviser

The corporate adviser's primary responsibilities include:

  • Advising the company on the method of bringing its equity securities to a listing on the JSE (listing) and the size and terms of the offer of those equity securities (offer).

  • Co-ordinating the timing and pricing of the offer.

  • Advising on market conditions and the potential demand for the equity securities.

  • Co-ordinating the listing process.

  • Drafting the placing document and other listing documentation together with the company, the company's legal advisors and the reporting accountant.

  • Ascertaining the demand for the equity securities in the market.

  • Arranging the placing (where applicable) or the underwriting (where applicable) of the equity securities.

Legal adviser

The legal adviser's main responsibilities include:

  • Ensuring that the company's MOI complies with the applicable provisions of the Equity Listings Requirements.

  • Drafting or reviewing the placing document and other listings documentation.

  • Together with the sponsor, procuring the approval of the placing document with the JSE.

  • Where required, procuring the registration of the placing document with CIPC.

  • Increasingly, as they are required to "hold the pen" on circulars in major transactions (the "hold the pen" requirement is a relatively new requirement for law firms in South Africa), and as they are required to provide domestic and international customary opinions in line with international best practice, in domestic and international placings of South African equity securities, the top tier law firms are insisting upon a shift, in the roles and responsibilities, as between sponsors, corporate advisers and attorneys.

Reporting auditor

An independent registered auditor must report in the placing document on, among other things, the company's profits and financial position over the past three financial years.

Technical advisers

Where a mining or mineral company is seeking a listing of its equity securities, a "competent person" must be appointed as a technical adviser to provide a report on the viability and mineral holdings of the company.

Main documents

The main documents produced when issuing and listing equity securities on the JSE (in addition to the documentation prescribed by the JSE, Central Depository and, where applicable, the CIPC) are as follows:

  • Placing document.

  • Notices to shareholders (where required).

  • Related documents such as the form of instruction and the letters of allotment (in the case of a rights issue/rights offer).

  • Related agreements such as the subscription or placing agreement and underwriting agreement, where applicable.

The required documentation does not, subject to Question 10, differ in principle for an IPO.

 

Equity prospectus/main offering document

10. When is a prospectus (or other main offering document) required? What are the main publication, regulatory filing or delivery requirements?

A placing document is always required under the Equity Listings Requirements.

However, where the relevant equity securities are to be offered to "the public" as contemplated in the Companies Act, then (unless that offer is exempt under section 96 of the Companies Act (see Question 11)) the placing document must be registered as, and comply with the requirements of, a "prospectus" under the Companies Act.

The requirements that a placing document which is a "prospectus" must comply with are set out in sections 102 to 111 (inclusive) of the Companies Act. These requirements are extensive, detailed and onerous.

Chapter 4 of the Companies Act regulates public offerings (both primary and secondary market offerings) of "securities" (including equity securities) and applies to both local and foreign companies.

An "offer" is defined in the Companies Act as "an offer made in any way by any person with respect to the acquisition, for consideration, of any securities in a company" and an "offer to the public" is defined to include "an offer of securities to be issued by a company to any section of the public".

Ultimately, the question of whether the relevant equity securities are offered to "the public" in South Africa is a question of fact, and the answer will depend on the particular factual circumstances of the offer.

 
11. What are the main exemptions from the requirements for publication or delivery of a prospectus (or other main offering document)?

Section 96 of the Companies Act sets out the type of "offers" that are not "offers to public". Under section 96, the following (among others) are not offers to "the public":

  • The offer is made only to certain specified entities or "persons whose ordinary business, or part of whose ordinary business, is to deal in securities, whether as principals or agents".

  • An offer where the total contemplated acquisition cost of the securities, for any single addressee acting as principal, is equal to or greater than the prescribed amount (currently ZAR1 million).

  • Certain types of non-renounceable offers.

  • Certain types of rights offers.

  • Subject to certain exceptions, the offer is made only to a director or prescribed officer of the company.

  • The offer pertains to an employee share scheme.

Foreign companies may utilise any of the exemptions set out in section 96 of the Companies Act. A foreign company may offer the relevant equity securities to its employees in South Africa and, provided the relevant employee share scheme qualifies as such under the applicable provisions of the Companies Act, that offer will not constitute an offer to "the public".

 
12. What are the main content or disclosure requirements for a prospectus (or other main offering document)? What main categories of information are included?

The principal aim of the Equity Listings Requirements is to ensure sufficient disclosure in the public interest of all information relevant to potential investors in the relevant equity securities that are to be listed on the JSE, and that all investors are treated equally in terms of the information they receive, or have access to, as regards the relevant company.

The Equity Listings Requirements set out the content/disclosure requirements with which the relevant company and the placing document must comply. These requirements are extensive. The particular requirements will depend on the nature and circumstances of the particular offer. Subject to this, the placing document must contain information that covers the following:

  • Description of the company and its capital.

  • Directors, managers and advisers.

  • Equity securities for which application for a listing is being made.

  • Group activities.

  • The prescribed financial information (see Question 3).

  • General information.

  • Documents and consents to be available for inspection.

  • Vendors.

Where a placing document includes a report purporting to be made by an expert, the placing document must include a statement that the expert has given and has not withdrawn its written consent to the issue of the placing document.

The Equity Listings Requirements provide for extensive disclosure of financial information relating to the relevant company. The prescribed financial information must, in principle, be prepared in accordance with International Financial Reporting Standards (IFRS).

The placing document must contain (among other things) all information (including financial information) that an investor may reasonably require to assess the assets and liabilities, financial position, profits and losses, cash flow and prospects of the company. The financial information that must be included in the placing document includes:

  • Where applicable, a report on the historic performance of the relevant company.

  • Pro-forma financial information.

  • Where applicable, unadjusted information.

  • Profit forecasts and estimates.

  • An auditors' report.

 
13. How is the prospectus (or other main offering document) prepared? Who is responsible and/or may be liable for its contents?

Under the Equity Listings Requirements, the sponsor is responsible for ensuring (among other things) that the company is guided and advised on the application of the Equity Listings Requirements in relation to (among other things) the placing document. The placing document is prepared by the board of the company, in conjunction with the sponsor, the corporate adviser, the legal advisers, the reporting auditor and, where applicable, the relevant technical experts.

The company is ultimately responsible for the placing document and must, in the placing document, accept full responsibility for the accuracy of the information contained in the placing document.

The Equity Listings Requirements do not provide for any statutory liability of the company to the JSE or holders of equity securities.

Subject to common law requirements for delictual liability, the company may be liable to holders of equity securities in delict on the basis of negligent misrepresentation and/or misstatement (in the placing document and/or related offering documentation) and/or on the basis of a failure to comply with its statutory obligations under the Equity Listings Requirements.

Disclaimers in the relevant documentation may offer a measure of protection against such a claim. Additionally, a due diligence investigation of the company and its business(es) may serve to rebut the required element of negligence that must be established for a claim in delict to succeed.

Where a placing document is a "prospectus" under the Companies Act (see Question 10), the Companies Act provides (among other things) that:

  • Certain persons (including a director and a promoter) may be liable to compensate any person who acquired the relevant equity securities "on the face of the prospectus" for any loss or damage that such person may have sustained as a result of, among other things, any untrue statement in the prospectus, or in any report or memorandum which appears to have been issued with the prospectus.

  • Liability is extended to experts and other persons who have consented to use their names in reports issued with the prospectus.

In addition to the statutory offences under the Companies Act, and the civil claims which arise from investor loss, a criminal charge of fraud may be brought against the responsible persons.

 

Marketing equity offerings

14. How are offered equity securities marketed?

The mere fact that an offering, whether public or otherwise, of equity securities is planned may constitute inside information and insider trading laws may apply during the pre-placement period. Advertisements relating to offers of equity securities to "the public" are regulated by section 98 of the Companies Act. The services of a public relations firm may be retained to raise the profile of, and interest in, the relevant equity securities. Equity securities may also be offered by way of a bookbuilding exercise.

 
15. Outline any potential liability for publishing research reports by participating brokers/dealers and ways used to avoid such liability.

The response under Question 13 applies mutatis mutandis. There are no specific provisions relating to financial promotion.

 

Bookbuilding

16. Is the bookbuilding procedure used and in what circumstances? How is any related retail offer dealt with? How are orders confirmed?

The bookbuilding procedure is frequently used in IPOs, placements and general offers to "the public". The bookbuild and related offer usually form part of the same offer process. Offers which are accepted are confirmed through the bookbuilding process itself and the relevant equity securities are issued to the successful subscribers under the mechanism detailed in the placing document.

 

Underwriting: equity offering

17. How is the underwriting for an equity offering typically structured? What are the key terms of the underwriting agreement and what is a typical underwriting fee and/or commission?

An offer for sale or subscription of equity securities need not be underwritten. However, in the case of an IPO, if an offer for subscription of equity securities is not underwritten, the offer must be conditional upon the minimum subscription being received. This condition must be clearly stated, in bold, in the placing document.

A rights offer by companies with existing listed equity securities that are not underwritten may not be made on a basis that is conditional upon a minimum subscription being received.

There is no typical manner of structuring an underwriting of equity securities. The underwriting can be structured as a "hard" or "soft" underwrite. The Equity Listings Requirements set out certain formalities in respect of the underwriting of certain offers of equity securities, and the circumstances in which an underwriting agreement must be submitted to the JSE for approval.

There are no typical underwriting fees. However, the Equity Listings Requirements provide that the underwriting commission should not be greater than the current market rate payable to an independent underwriter.

The key terms of an underwriting agreement cover the following:

  • Obligation of the underwriter in respect of the "hard" or "soft" underwrite.

  • Price of the relevant equity securities.

  • Mechanism of acquisition of the relevant equity securities.

  • Representations and warranties commonly provided in respect of the acquisition of equity securities.

 

Timetable: equity offerings

18. What is the timetable for a typical equity offering? Does it differ for an IPO?

The timeframe for a domestic or foreign company applying for a primary listing of its equity securities on the JSE will depend on the method and structure of listing adopted, for example, where the listing is structured as an offer or a placing, and the size and complexity of the listing. Generally, it takes between 11 to 15 weeks for a company to obtain a primary listing of its equity securities (see Question 8).

The timetable for a typical equity offering is as follows:

  • Week 1. Appoint advisers and meet to consider legal, financial and tax implications and method of listing; prepare timetable for listing; start preparing accountant's report; start drafting documents.

  • Weeks 2 and 3. Meetings to finalise placing document and other prescribed documents; finalise accountant's report.

  • Week 4. Submit placing document to the JSE for informal comment; submit placing document to CIPC if a public offer.

  • Weeks 5 to 8. JSE formal approval of the placing document obtained; registration of the placing document with CIPC obtained if a public offer.

  • Week 9. Listing of the equity securities commences (or public offer or placing commences).

  • Week 11. Placing closes.

  • Week 12. Listing of the equity securities commences if a placing; public offer closes.

  • Week 13. Listing of the equity securities starts if a public offer.

 

Stabilisation

19. Are there rules on price stabilisation and market manipulation in connection with an equity offering?

The Equity Listings Requirements define the circumstances and manner in which price stabilisation will be permitted by the JSE, in accordance with the provisions of the Financial Markets Act, and as a defence against the offences of manipulative, false or improper trading practices (see Question 24).

Price stabilisation may be effected through an over-allotment, with or without a greenshoe. Over-allotment is a pre-cursor to a price stabilisation mechanism, aimed at supporting and maintaining the price of newly listed equity securities or equity securities the subject of a substantial offer, for a limited period after the listing or offer. The main purpose is to establish an orderly market for the equity securities in the immediate secondary market after an offer.

Price stabilisation can only be effected in respect of an offer of equity securities, and must comply with the following criteria:

  • The offer must be an offering or issue of equity securities for cash, made at a specified price.

  • The offer must be for equity securities which are already listed or are to be listed.

  • The offer must be of sufficient size to satisfy the JSE that price stabilisation is warranted (the size is determined in consultation with the JSE).

The stabilising manager, subject to compliance with certain conditions, may undertake to:

  • Purchase any of the relevant equity securities with the aim of stabilising the market price of the relevant equity securities.

  • Take certain ancillary action with the aim of stabilising the market price of the relevant equity securities or liquidating any positions taken as a result of the stabilising process.

If the JSE permits trading in the equity securities prior to listing, the stabilisation period will commence on the date that trading commences. Otherwise, the stabilisation period will commence on the date of the listing of the equity securities, or the date of their sale if already listed. The stabilisation period will end 30 calendar days after the relevant listing or sale date.

 

Tax: equity issues

20. What are the main tax issues when issuing and listing equity securities?

Securities Transfer Tax Act

The issue of equity securities does not attract securities transfer tax under the Securities Transfer Tax Act. Securities transfer tax is payable on the transfer and redemption of equity securities at a rate equal to 0.25% of the higher of either:

  • The closing price of the equity securities on the exchange.

  • The amount paid.

Income Tax Act

Tax on income. A South African "resident" (as defined in the Income Tax Act) will, subject to any available exemptions, be taxed on its world-wide income. A non-resident, for tax purposes, is taxed in South Africa under the Income Tax Act only on income from a source within or deemed to be within South Africa. However, if a treaty (double taxation agreement) applies, the non-resident is taxed only if the income is linked to a permanent establishment.

Dividends. Currently, any amount transferred or applied by a listed company for the benefit of any shareholder constitutes a "dividend" for tax purposes. However, dividends specifically exclude any amount so transferred or applied by the listed company to the extent that the amount so transferred or applied, among other things:

  • Results in a reduction of "contributed tax capital" (CTC).

  • Constitutes a capitalisation award.

  • Constitutes an open market purchase by the listed company of its own equity securities on the JSE.

A distribution by a listed company of share capital and share premium (that is, CTC) does not constitute a dividend for the purposes of withholding tax.

In general, dividends paid by a listed company to resident and non-resident shareholders of equity securities will be exempt from income tax under the Income Tax Act.

Disposal of equity securities. Income tax is levied on the disposal of equity securities held by a resident trader. Capital gains tax applies to any capital gain earned on the disposal, or deemed disposal, of an asset by a resident. However, if the asset is held as an investment, then subject to certain exceptions, capital gains tax will not be levied in relation to the disposal of equity securities by a non-resident unless it is linked to a permanent establishment for treaty purposes.

Withholding taxes. The Income Tax Act imposes a withholding tax (levied the rate of 15%) on dividends declared by:

  • A company which is a resident.

  • A company which is a non-resident if the equity securities in respect of which that dividend is paid are listed on the JSE, subject to any withholding tax relief provided for in any applicable double tax treaty and subject to certain exemptions (see below).

Exemptions from the withholding tax apply to, among others, onshore inter-company dividends and dividends paid to certain exempt entities (for example, pension funds).

 

Continuing obligations

21. What are the main areas of continuing obligations applicable to listed companies and the legislation that applies?

The continuing obligations of a company which has equity securities which are listed (listed company) on the Main Board of the JSE are onerous. The continuing obligations of AltX listed companies are less burdensome but still significant.

Generally, listed companies must invest in management and information systems and take a vigorous approach to compliance procedures. Additionally, all listed companies are bound by the provisions of the King Code on Corporate Governance, the latest version being the King III Code. Variation is permissible but the listed company must disclose the variation and explain the reason for departure from the King III Code.

A listed company must ensure that all necessary facilities and information are available to holders of its equity securities in order for them to be able to exercise their rights. Significant events affecting the listed company must be announced through the Stock Exchange News Service (SENS) and certain announcements must also be published in the press.

All listed companies must comply with the rules regarding disclosure and approval of subsequent transactions in accordance with the categories specified in the Equity Listings Requirements. These requirements vary according to the size of the transaction in question, from merely making an announcement in respect of the transaction to a requirement to obtain shareholder approval in a general meeting.

As regards general disclosure obligations, in general, with the exception of trading statements and unless the information is subject to a confidentiality obligation, the listed company must release an announcement providing details of "any development(s) in [the listed company's] sphere of activity that is/are not public knowledge and which may, by virtue of its/their effect(s), lead to material movement of the reference price, in [the listed company's] listed securities" (paraphrased from paragraph 3.4(a) of the Equity Listings Requirements).

A listed company is obliged to issue cautionary announcements once it has acquired knowledge of any material price sensitive information and the degree of confidentiality required either cannot be maintained or the listed company suspects that confidentiality may or has been breached.

The declaration of dividends, interests and similar payments (distribution payments) by a listed company must be immediately announced.

Interim reports, detailing the financial performance of a listed company within the first six months of its financial year, must be published within three months of the expiry of that period. These reports must be prepared in accordance with, and contain information required by, IAS 34: interim financial reporting as well as the AC500 standards issued by the Accounting Practices Board.

The annual financial statements of a listed company must be issued within six months of the end of each financial year and must be distributed to the listed company's shareholders (with an electronic copy to the JSE for publication on the JSE's website).

The Equity Listings Requirements provide for extensive ongoing obligations of a listed company in regard to "related party transactions". Among other things, if a listed company or any of its subsidiaries wish to enter into a "related party transaction", the listed company must make an announcement relating to that transaction containing the prescribed details.

The Equity Listings Requirements also provide for the ongoing obligations of a listed company in regard to significant transactions which, in general, are characterised by assessing the size of the transaction relative to the size of the listed company.

The announcements and other formalities required by the Equity Listings Requirements in respect of smaller transactions (category two transactions) are less onerous that those required in respect of larger transactions (category one transactions).

 
22. Do the continuing obligations apply to listed foreign companies and to issuers of depositary receipts?

The continuing obligations apply to foreign companies with a placing document which has been approved by the JSE and/or equity securities which are listed on the JSE.

The Equity Listings Requirements provide for the exchange of information relating to dual listed companies, which ensures that information provided to the exchange which hosts the primary listing is provided to the JSE expeditiously. Where a foreign company has its primary listing on a foreign exchange, the JSE will generally permit the rules of the primary exchange to take precedence.

The Equity Listings Requirements also provide for certain continuing obligations which are applicable to foreign companies which have issued depository receipts (see Question 8).

 
23. What are the penalties for breaching the continuing obligations?

With few exceptions, the JSE provides an escalating form of censure against listed companies that fail to provide the required information or that breach the Equity Listings Requirements. The penalties fall into two broad camps, primarily, the failure of a listed company to provide the required information will lead to the equity securities being annotated on the relevant board of the JSE as failing to provide financial information. If not remedied, such failure may lead to the suspension of the listing of the relevant equity securities and, in due course, the termination of the listing.

Other breaches of the Equity Listings Requirement can lead to a significant fine being imposed on the listed company. The maximum penalty is currently ZAR5 million.

The JSE may, at its sole discretion, at any time, if it believes that it is in the interests of the investing community of South Africa, terminate the listing of any equity security.

 

Market abuse and insider dealing

24. What are the restrictions on market abuse and insider dealing?

Restrictions on market abuse/insider dealing

The Financial Markets Act contains extensive prohibitions against market manipulation and insider trading.

In principle, "insider trading" is the trading in securities (including equity securities) on the basis of information that has not been made public and, if it were made public, would be likely to have a material effect on the price or value of any security listed on the JSE.

The Equity Listings Requirements provide extensive provisions that mandate disclosure of information. The conditions of disclosure are specifically designed to ensure that all investors are given equal and fair access to the market and it minimises the possibility of unfair advantage to those who already have the information.

The Financial Markets Act also regulates "market abuse" which comprises, in principle, insider trading, the publication of inside information, engaging in prohibited trading practice and misleading or deceptive statements, forecasts or promises.

Penalties for market abuse/insider dealing

The Financial Markets Act provides that a person who is found guilty of market abuse in a criminal court is liable to a fine not exceeding ZAR50 million, or to imprisonment not exceeding ten years, or both.

Cases of market abuse are generally referred to the Enforcement Committee, established under the Financial Markets Act, which has the power to impose unlimited penalties.

 

De-listing

25. When can a company be de-listed?

A listed company can be de-listed from the JSE at the request of the listed company, subject to compliance with the applicable provisions of the Equity Listings Requirements.

A listed company can also be de-listed from the JSE at the request of the JSE in accordance with the applicable provisions of the Equity Listings Requirements.

 

Reform

26. Are there any proposals for reform of equity capital markets/exchanges? Are these proposals likely to come into force and, if so, when?

The Financial Markets Act came into operation on 3 June 2013 and has replaced the Securities Service Act 2004. The Financial Markets Act contains some reforms which may be applicable to exchanges and certain aspects of the South African markets generally (including the equity capital markets).

 
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