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 global guide to capital markets law. For a full list of jurisdictional Q&As visit www.practicallaw.com/capitalmarkets-guide.

Lionel Shawe, Allen & Overy (South Africa) LLP
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) is the only licenced exchange for the listing of equity (and debt) securities in South Africa.

The JSE has two boards for listing equity securities:

  • The Main Board.

  • The Alternative Exchange (AltX) for small and medium-sized companies.

Each board has its own listing criteria (see Question 3).

Market activity and deals

According to the JSE market update for the six months ending 30 June 2015:

  • ZAR113,564 billion of capital was raised in the domestic and international primary and secondary equity market by companies listed on the Main Board and the AltX during the first half of 2015.

  • The total market capitalisation increased by 0.09% from ZAR11.91 trillion in June 2014 to ZAR11.92 trillion in June 2015.

  • There was a 65% increase in equity capital raised for 2014 and the JSE saw 14% more capital raised as compared to 2013. In 2014, the financial industry (that is, banks, insurance and real estate investment companies) accounted for 35% of the total capital raised. In the first six months of 2015, the consumer goods industry (that is, food and beverage, leisure good, automobile and part companies) accounted for 53% of the total capital raised, with the financials industry contributing 26%.

  • For the six months ended 30 June 2015, there have been nine new companies listed on the JSE (compared to ten new listings in the first half of 2014) and five de-listings. Currently, there are 395 companies listed on the JSE.

  • New listings on the Main Board include South32 Limited (also listed on the Australian Stock Exchange and London Stock Exchange) and Choppies Enterprises Limited (also listed on the Botswana Stock Exchange).

  • New listings on the AltX include New Frontier Properties Limited (also listed on the Stock Exchange of Mauritius) and Renergen Limited.

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

Regulatory bodies

The JSE Limited (JSE), as the only licenced exchange in South Africa, is licenced and regulated under the Financial Markets Act 2012. The Financial Services Board oversees and supervises the JSE in its performance of its regulatory duties.

The JSE (as exchange and market regulator) is governed by the Financial Markets Act 2012, the JSE Rules and Directives and the Financial Intelligence Centre Act 2001.

Legislative framework

The key legislation governing securities offerings are:

  • Auditing Profession Act 2005.

  • Banks Act 1990.

  • Broad Based Black Economic Act 2003 (BEE Act), together with the Broad Based Black Economic Empowerment Codes of Good Practice gazetted from time to time in terms of the BEE Act.

  • Companies Act 2008.

  • Currency and Exchanges Act 1933.

  • Financial Markets Act 2012.

  • Financial Services Board Act 1990.

  • Income Tax Act 1962.

  • Securities Transfer Tax Act 2007.

 

Equity offerings

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

Main requirements

In general, a company seeking a primary listing on the JSE Limited (JSE) must:

  • Meet certain requirements relating to minimum size, minimum percentage of shares in public hands and trading records and accounts.

  • Comply with the Listings Requirements (these differ based on whether the company seeks a listing on the Main Board or the Alternative Exchange (AltX)).

  • Pay the required listing fee.

An application for listing must be submitted to the JSE through a sponsor (see Question 9).

The JSE has an overriding discretion in all instances to approve or refuse an application for listing by a company on the grounds that the approval or refusal is in the interest of the investing public.

Investment entities, mineral companies and property companies that are listed on the Main Board of the JSE have certain modified criteria for listing.

Main Board

A company seeking a listing on the Main Board of the JSE must satisfy the following requirements.

Minimum size. A subscribed capital of at least ZAR50 million, including reserves but excluding minority interests and revaluation of assets and intangible assets not supported by an independent professional expert acceptable to the JSE prepared within the last six months. At least 25 million equity shares in issue.

Trading record and accounts. A satisfactory audited profit history for the preceding three financial years, the last of which reported an audited profit of at least ZAR15 million before tax and after taking account of the headline earnings adjustment on a pre-tax basis.

The JSE can in its discretion list equity securities of a company (other than a mineral company) that is in its development stage and that does not have the required audited profit history if that company has a subscribed capital of ZAR500 million and has been in existence for at least twelve months prior to the date of application for listing.

Minimum shares in public hands. At least 20% of each class of equity securities must be held by the public to ensure reasonable liquidity.

Main business activity and control of assets. The company must carry on as its main activity (either by itself or through one or more of its subsidiaries) an independent business supported by its historic revenue earning history and either:

  • Which gives it control (at least 50% plus one of the voting shares) over the majority of its assets and must have done so for the preceding three financial years.

  • It must have a reasonable spread of direct interest in the majority of its assets and the right to actively participate in the management of such assets, whether by voting or through other rights that give it influence in the decisions relating to the assets for the preceding three financial years.

AltX

In addition to the conditions applicable to listing on the Main Board, a company seeking a listing on the AltX must:

  • Appoint a designated adviser.

  • Have completed the AltX Directors Induction Programme or must make arrangements to the satisfaction of the JSE to complete it.

  • Appoint an executive financial director and the audit committee of the company must be satisfied (and submit written confirmation to the JSE to this effect) that the financial director has the appropriate expertise and experience to fulfil his role

  • Present a comprehensive business plan to the AltX Advisory Committee. The JSE considers whether or not to grant a listing following written confirmation from the AltX Advisory Committee as to the eligibility of the company.

Minimum size requirements. A subscribed capital of at least ZAR2 million, including reserves but excluding minority interests and revaluations of assets and excluding intangible assets that are not supported by a valuation by an independent professional expert acceptable to the JSE prepared within the last six months.

Trading record and accounts. Unless a company provides historical financial information for three preceding years prepared in accordance with International Financial Reporting Standards (IFRS) or is governed by listing requirements acceptable to the JSE and those requirements do not require forecast financial information be presented, the company must provide a profit forecast for the remainder of the financial year that it will list in and for one full financial year after the date of its listing.

Minimum shares in public hands. At least 10% of each class of equity securities must be held by the public to ensure reasonable liquidity.

In addition, the company's auditors or attorneys must hold 50% of the shareholding of each director and designated adviser in the company in trust from the date of listing, and a certificate by company's auditors or attorneys confirming the holding must be lodged with the JSE.

Control of assets. The company must have control (at least 50% plus one of the voting shares) over the majority of its assets or at least a reasonable spread of direct interest in the majority of its assets and the right to actively participate in the management of such assets, whether by voting or through other rights that give it influence in the decisions relating to the assets for the preceding three financial years. This requirement does not apply to an investment company.

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

Main requirements

A company seeking a secondary listing on the JSE Limited (JSE) must comply with the same requirements as for a primary listing unless otherwise stated in the Listings Requirements or agreed to by the JSE. In addition, the company must confirm that:

  • It has a primary listing on another exchange and that exchange is a member of the World Federation of Exchanges or the company has subscribed capital of at least ZAR500 million.

  • The primary listing is on an equivalent board or exchange to that for which application is made on the JSE. The JSE will not grant a listing on the Main Board if the company has a primary listing on a junior or secondary market of an exchange.

  • It has not traded its 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 securities on all markets in which it is listed over 12 months.

  • It is in full compliance with the requirements of the exchange or competent authority on which it has a primary listing. The JSE can request that this confirmation be supported by a letter from the relevant exchange or competent authority.

Secondary listing status means that once a company is listed, it will only be required to comply with the listings requirements of the exchange where it has its primary listing, except as otherwise specifically stated in the JSE Listing Requirements.

The JSE Listing Requirements were recently amended to introduce a fast-track secondary listing procedure for companies with a primary listing on accredited exchanges wishing to list on the Main Board or on the Alternative Exchange (AltX). Companies with a primary listing on the Australian Stock Exchange (ASX), the London Stock Exchange (LSE), the Toronto Stock Exchange (TSX) or the NYSE and NYSE Euronext qualify for the fast-track procedure. A qualifying company must have been listed on the accredited exchange for at least 18 months. In terms of the fast-track listing procedure, a qualifying company is not required to produce a pre-listing statement. Instead, the company must submit a pre-listing announcement disclosing among other things:

  • The company's prospects.

  • Market capitalisation.

  • Number and class of securities in respect of the listing sought.

Where a company has not listed its securities in its country of incorporation or country of primary listing, the JSE will not grant a secondary listing or list securities 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.

Minimum size requirements

See Question 3.

Trading record and accounts

See Question 3.

Minimum shares in public hands

The percentages set out in Question 3 apply equally to securities held by the public of the South African register of the company. The company must otherwise make arrangements, to the satisfaction of the JSE's clearing and settlement division, to ensure that sufficient scrip is available on the South African register.

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

An IPO is most commonly structured as a public offer, either in the form of an offer for subscription for securities or an offer for sale of securities. In an offer for subscription, members of the public are invited to subscribe for unissued securities and the proceeds accrue to the company. In an offer for sale, existing shareholders invite subscribers to purchase their securities. Here, the proceeds of the sale accrue to the shareholders.

A public offer, whether by way of an offer for subscription for securities or an offer for sale of securities, requires the production of a prospectus unless the offer falls into one of the exempted categories for offers to the public. See Question 9and 10 for more information on the prospectus.

There are two other main ways for a company that does not have any equity securities listed on the JSE to obtain a listing:

  • An introduction.

  • A private placing.

An introduction is the quickest and cheapest means of listing, as there is no offer to the public and minimum formalities are required. This method is suitable where the company does not need to raise capital and has sufficiently wide public spread of shareholding.

A private placing is the most common method of obtaining a listing. Securities in the company are placed or offered to prospective shareholders through private negotiation. It does not involve an offer to the public or to existing holders of the company's securities generally. A private placing is usually done through a sponsor or corporate adviser that is a merchant bank.

A company can also obtain a listing by way of an issue with participating or conversion rights or a renounceable offer.

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

A company that already has equity securities listed on the JSE Limited (JSE) can list additional equity securities by means of:

  • Any method listed in Question 5 (other than an introduction).

  • A rights offer.

  • A claw-back offer.

  • A capitalisation issue.

  • An issue for cash.

  • An acquisition or amalgamation or merger issue.

  • A vendor consideration placing.

  • An exercise of options to subscribe for securities (including options in terms of executive and staff schemes).

  • A conversion of securities of one class into securities of another class.

  • Such other methods as may be approved by the JSE, either generally or in any particular case.

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

Advantages

The advantages of a rights issue (defined in the Listings Requirements as a rights offer) include:

  • Where the offer is limited to existing shareholders (or those related to existing shareholders) and is non-renounceable, it can be excluded from being an "offer to the public" under the Companies Act 2008. This means that the company does not need to prepare and register a prospectus in terms of the Companies Act 2008, which is an onerous exercise. See Question 9and 10 for more information on the prospectus.

  • It provides shareholders with the ability to prevent a dilution of their shareholding as the new shares issued are offered only to the existing shareholders (or related persons).

  • No prospectus is required for a rights offer. A circular or a more detailed pre-listing statement where the dilution will exceed 25% is required to be sent to existing shareholders in terms of the Listings Requirements.

A rights offer is usually priced at a discount to the current share price so as to incentivise shareholders to take up the new issue and to allow for possible fluctuations in the share price between the announcement of the rights offer and the listing of the new shares. Although the discount will result in a dilution of future earnings, shareholders are not truly disadvantaged since they themselves can either take up the new shares at the discounted value or sell their shares and entitlement to the new issue on the market at fair value.

Disadvantages

The main disadvantage of a rights offer is the value of the shares of those shareholders who do not participate in the rights issue are diluted by the increased number of shares issued.

 
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

A primary listing is subject to the Listings Requirements and approval by the JSE Limited (JSE). A company applying for a primary listing must appoint a sponsor who is responsible for all dealings between the company and the JSE, including filing all relevant documents. The JSE provides informal comment and once its feedback has been adequately addressed in the documents, informal approval. The pre-listing statement, offering circular or prospectus, as the case may be, is then submitted to the JSE for formal approval. This procedure typically takes between ten to 12 weeks from the date of submission of the relevant documents.

Procedure for a foreign company

The procedure for a foreign company seeking to inward list equity securities on the JSE is subject to the same requirements as those applicable to a domestic company. A foreign company can list its shares or depository receipts. The listing of specialist securities such as depository receipts is allowed (section 19, Listings Requirements). These requirements are very stringent and the majority of companies prefer listing equity securities for ease of listing.

A foreign company must satisfy the following additional requirements in relation to an inward listing of its securities (or depository receipts):

  • It must file its constitutional (governing) document and board composition with the Companies and Intellectual Property Commission at least 90 business days before the offer to the public is made.

  • It must obtain the prior approval of the Financial Surveillance Department of the South African Reserve Bank (FSD) and must comply with the specific reporting requirements prior to this approval being granted.

  • It must open a special bank account in South Africa for the duration of the listing for purposes of receiving and recording the capital raised. The capital raised must be used as soon as possible but no later than one month after being raised and recorded in the special bank account.

 

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 that are to be listed on the Main Board of the JSE Limited (JSE) must appoint a sponsor approved by the JSE (equivalent and additional provisions apply to a designated adviser appointed to Alternative Exchange (AltX) companies). The sponsor's main responsibilities include:

  • Advising the company as to the application of the listing requirements and the directors of the company as to the nature of their responsibilities and obligations as directors of a listed company.

  • Satisfying itself that the criteria for listing are met and that the company is suitable to list.

  • Submitting the listing documentation to the JSE.

  • Acting as an intermediary between the JSE and the company.

Corporate adviser

It is advisable for a company to also appoint a corporate advisor. The main responsibilities of a corporate advisor include:

  • Advising on the method of listing, the marketing, the size and terms of the offer and timing and pricing of the offer.

  • Advising on market conditions and the potential demand for the company's securities.

  • Co-ordinating the listing process.

  • Drafting the listings documents with the assistance of the company and the company's other professional advisors.

  • Approaching the investment community with a view to generating a demand for the company’s securities.

  • If the method of listing to be adopted is a placing, arranging that placing.

  • If the method of listing to be adopted is a public offer that is to be underwritten, underwriting or arranging the underwriting of the offer.

There is often an overlap between the functions of the corporate advisor and the sponsor. Corporate advisors are usually the corporate finance divisions of stockbrokers, merchant banks or auditing firms. Where a merchant bank or stockbroker provides both corporate finance and sponsor services, the roles are frequently combined.

Legal adviser

The legal adviser's main responsibilities include:

  • Advising on compliance with the Listings Requirements.

  • Assisting with the drafting of the listing documentation to ensure all legal requirements are complied with.

  • If there is an underwriting or a placing, drafting the necessary agreements.

  • Preparing share option schemes for the company.

Reporting accountant/auditor

The JSE requires an accredited independent accountant (a registered accountant and auditor) to report on (among other things) the profits and financial position of the company over the previous three years in the prospectus or pre-listing statement.

Technical advisers

In respect of mining or mineral companies, the JSE requires the prospectus or pre-listing statement contains a competent person (technical adviser) report on the company and its exploration or mining activities.

Main documents

A company must submit a number of documents required in terms of the Listings Requirements to the JSE for review. The company must prepare and distribute a comprehensive pre-listing statement or in certain circumstances a circular. A circular has less comprehensive disclosure requirements than a pre-listing statement. If the offer is an "offer to the public" within the meaning of the Companies Act 2008, the company must prepare and register a prospectus satisfying the requirements of the JSE Listings Requirements and the Companies Act 2008. In practice, if a prospectus is required it will be the same document as the pre-listing statement or circular that satisfies the requirements relating to a registered prospectus under the Companies Act 2008. An announcement containing an abridged pre-listing statement must also be published.

Any reference here to a pre-listing statement includes reference to a circular.

 

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 for the listing of securities on the JSE Limited (JSE). The placing document must comply with the Listings Requirements and must be submitted to the JSE for approval prior to the issue of any securities.

The placing document can take the form of a pre-listing statement or where the offering constitutes an "offer to the public" in terms of Chapter 4 of the Companies Act 2008, a prospectus. A prospectus must also be filed with the Commission. Whether the relevant securities offer is an offer to the public within the meaning set out in the Companies Act 2008 is a question of fact.

The placing document must be in English and must be submitted to the JSE for approval prior to the listing of equity securities. It must be published in full or in abridged form in compliance with the Listings Requirements and the full pre-listing statement or prospectus, as applicable, must be distributed to all shareholders. Provision must be made for the translation of a pre-listing statement or prospectus, as applicable, into any official language of South Africa where deemed necessary by the company or the JSE.

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

A pre-listing statement is not required for issues of equity securities by a company whose securities are already listed and which fall into any of the following categories:

  • Securities issued for cash or as a result of the conversion of convertible securities.

  • Securities issued as a result of the exercise of rights under options.

  • Securities issued in place of securities already listed.

  • Securities issued or allotted to employees, if securities of the same class are already listed.

  • Securities issued relating to the extension of a business contemplated by, and previously described in, a pre-listing statement.

  • Securities issued as a result of a capitalisation or bonus issue.

  • Securities issued as a result of a rights offer.

  • An issue of securities that, together with any securities or the same class issued in the previous three months, would increase the securities issued by less than 50%. For this purpose, the following will be aggregated and deemed to be a single issue for purposes of measurement against the 50% level:

    • a series of issues in connection with a single transaction;

    • a series of issues in connection with a single transaction; or

    • series of transactions that is regarded by the JSE as a single transaction.

The JSE Limited (JSE) can require the company provide further information to investors that the JSE considers reasonably necessary to enable investors to make an informed assessment of the prospects of the company and the listing.

Section 96 of the Companies Act sets out the types of offers that are not "offers to the public". An offer is not an offer to the public, and does not require compliance with the provisions of Chapter 4 relating to a prospectus, if:

  • It 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".

  • 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).

  • It is non-renounceable in favour of existing shareholders or persons related to existing shareholders.

  • It is a rights offer satisfying the prescribed requirements and in respect of which an exchange has granted approval for listing.

  • It is made to a director or prescribed officer of a company unless it is renounceable in favour of a person that is not a director or prescribed officer of the company or a person related to a director or prescribed officer.

  • It relates to an employee share scheme that satisfies the requirements of the Companies Act 2008.

A foreign company can use any of the exemptions mentioned above.

 
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 particular requirements for a pre-listing statement (or prospectus, if applicable) depend on the nature and circumstances of the particular offer. The principle disclosure requirements for a pre-listing statement in terms of the Listings Requirements include:

  • General information regarding the company and its capital.

  • Information regarding the directors and management of the company and the company's advisers.

  • Information regarding the securities to be listed.

  • Information on the activities of the company or the group.

  • Information on the financial position and profits and losses of the company, including:

    • an accountant's report on the company or, if applicable, asset that is the subject matter of the transaction;

    • a report of historical financial information;

    • a statement as to working capital;

    • profits forecasts;

    • a description of any material change in the financial or trading position of the company and its subsidiaries; and

    • pro-forma statements prepared for all post balance sheet events.

    The financial information must be prepared in accordance with International Financial Reporting Standards (IFRS) and the South African Institute of Chartered Accountants Financial Reporting Guides.

A prospectus must comply with the necessary disclosure requirements for a pre-listing statement under the Listings Requirements as set out above and the requirements for a prospectus under the Companies Act 2008. The requirements for a prospectus are set out in Chapter 4 of the Companies Act 2008. These requirements are extensive and onerous. Essentially, a prospectus must contain all information that an investor can reasonably require to assess:

  • The assets and liabilities, financial position, profits and losses, cash flows and prospects of the company in which the right or interest is to be acquired.

  • The securities being offered and the rights attached to them.

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

The pre-listing statement (or prospectus, as the case may be) is prepared by the board of directors of the company in conjunction with the:

  • Sponsor.

  • Corporate adviser.

  • Legal advisers.

  • Reporting auditor.

  • Where applicable, the relevant technical experts.

Although the pre-listing statement (or prospectus, as the case may be) is largely drafted by the advisers of the company, the directors of the company accept full responsibility for the accuracy of its content and must provide for a responsibility statement in the placing document. The placing document must be signed by every director of the company.

The Companies Act 2008 imposes liability for untrue statements in a prospectus, or in any report or memorandum appearing on the face of, issued with, or incorporated by reference in, the prospectus on certain groups of people (including directors, promoters and other persons responsible for the prospectus). These people are liable to pay compensation to all persons that acquired securities on the faith of the prospectus for any loss or damage they may have sustained by reason of any untrue statement (whether fraudulent or not). An expert that has consented to the use of his name in the prospectus can be liable for any untrue statement purported to be made by him as expert.

Under the common law, a company can be held liable in delict for negligent misrepresentation or misstatement in the pre-listing statement (or prospectus, as the case may be) and its directors can be convicted of a criminal charge of fraud.

 

Marketing equity offerings

14. How are offered equity securities marketed?

Equity securities can be marketed by way of a:

  • Road show.

  • Presentation to potential investors.

  • Through a bookbuilding exercise.

Advertisements relating to offers to the public are regulated by section 98 of the Companies Act 2008.

The Companies Act 2008, Collective Investment Schemes Control Act 2002 and the Financial Advisory and Intermediary Services Act 2002 prohibit the marketing of securities except for in compliance with the provisions of those Acts.

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

See Question 13 that applies equally to participating brokers or dealers. Dealers can minimise their liability by inserting disclaimers in the relevant marketing documentation. Dealers are likely to conduct a due diligence of the company and its business. It can require certain written confirmations from the company and its auditors or accountants relating to the information in the placing document before the securities are issued and listed.

 

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, placings and general offers to the public. Offers that are accepted are confirmed through the bookbuilding process and the equity securities are issued to the successful subscribers in accordance with the mechanism set out in the pre-listing statement or the prospectus, as the case may be.

 

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?

There is no requirement that an offer for sale or subscription of equity securities must be underwritten. However, in the case of an IPO, if the offer for subscription of securities is not underwritten, the offer must be conditional on the minimum subscription being received. A statement to this effect must be included in the placing document. There is no similar requirement for a follow-on offering of securities.

If an equity offering is underwritten, the underwriting can either be structured as a "soft" or "hard" underwriting arrangement. In a "hard" underwriting arrangement, the underwriter agrees before the offer is made to take up any shares not subscribed for by investors. In a "soft" underwriting arrangement, the underwriter only undertakes to take up shares applied for by investors in the bookbuild but not paid for (that is, the underwriter takes on the settlement risk).

In terms of the Listings Requirements, where equity securities are underwritten:

  • The underwriter must submit sworn affidavits by at least two of its directors confirming that it has the financial resources to meet its commitments in terms of the underwriting.

  • The placing document must include a statement by the directors of the company that they have made due and careful enquiry to confirm that the underwriter can meet its commitments in terms of the offer.

The Companies Act 2008 requires that the underwriting agreement and sworn affidavits are filed with the Commission where the offer constitutes an offer to the public within the meaning of Chapter 4.

The underwriting arrangement is typically set out in a written agreement. This agreement typically specifies the commission (or fee) payable for the underwriting obligation. The commission is usually calculated as a percentage of the issue or purchase price of the securities being underwritten. However, any underwriting commission payable must not be greater than the current market rate payable to independent underwriters. The company must present evidence to the JSE Limited proving the reasonableness of any underwriting commission payable. In terms of the Companies Act 2008, the payment of any commission must be authorised by and made in compliance with the memorandum of incorporation of the company.

 

Timetable: equity offerings

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

The timetable for a typical equity offering depends on the method and structure of securities to be listed. The JSE Limited (JSE) has efficient turnaround times for equity listings. The timetable of a typical equity offering is as follows:

  • Weeks one to two: the company must appoint and meet advisers to:

    • consider legal, financial and tax implications and method of listing;

    • prepare a timetable for listing; and

    • start drafting relevant documents (including the accountant's report).

  • Weeks three to four: the company in conjunction with its advisers must:

    • finalise the relevant placing document and other prescribed documents;

    • submit the placing document to the JSE for informal comment; and

    • if offer is an offer to the public within meaning of the Companies Act, submit prospectus to the Commission.

  • Week six: the company in conjunction with its advisers must incorporate informal comments received from the JSE and resubmit placing document to the JSE for informal approval.

  • Weeks seven to eight: the company must submit a placing document to the JSE for formal approval and if the offer is an offer to the public within meaning of the Companies Act 2008, register the prospectus with the Commission

  • Week nine: the company must commence listing or placing of securities or making of a public offer for the securities.

  • Weeks 11 to 12: placing or public offer closes.

  • Weeks 13: listing of equity securities.

 

Stabilisation

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

The Listings Requirements permit price stabilisation in certain circumstances. Price stabilisation can be effected through an over-allotment, with or without a "greenshoe" (an option or other right granted for a specified period, exercisable by a stabilising manager, to acquire up to a specified number of securities in addition to the initial issue number, to enable it to honour the commitments made during the stabilisation period). Over-allotment is a pre-cursor to a price stabilisation mechanism, aimed at supporting and maintaining the price of newly listed securities or securities the subject of a substantial offer, for a limited period after the listing or offer.

Price stabilisation can only be effected for an offer of securities if the offer is:

  • An offering or issue of securities for cash made at a specified price.

  • For securities which are already listed or are to be listed.

  • Of sufficient size to satisfy the JSE Limited (JSE) that price stabilisation is warranted (the size is determined in consultation with the JSE).

If the JSE permits trading in the securities prior to listing, the stabilisation period starts running on the date such trading commences. The stabilisation period otherwise starts running from the date of the listing of the securities or the date of their sale if already listed. The stabilisation period ends 30 calendar days after the relevant listing or sale date. A disclosure of the fact that stabilisation may take place must be provided in all communications issued on behalf of the company or stabilising manager to prospective investors in the securities in respect of the relevant offer.

 

Tax: equity issues

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

Securities transfer tax

The issue and listing of securities does not attract securities transfer tax under the Securities Transfer Tax Act 2007. Securities transfer tax is however payable on the transfer and redemption of equity securities at a rate of 0.25% of either:

  • The higher of the closing price of the equity securities.

  • The amount paid.

Income tax

The issue and listing of equity securities does not attract any income tax under the Income Tax Act 1962. However, any amount transferred or applied by a listed company for the benefit of a shareholder constitutes a "dividend" for tax purposes. "Foreign dividends" are either partially or fully exempt from South African income tax in certain circumstances. A foreign dividend is exempt from South African tax in circumstances such as (section 10B, Income Tax Act 1962):

  • The recipient holds at least 10% of the total equity shares (as defined in the Income Tax Act 1962) and voting rights in the company which declares the dividend.

  • The foreign dividend is received by a foreign company (as defined in the Income Tax Act) that is resident in the same country as the foreign company paying the dividend.

  • The foreign dividend is a cash dividend and is received by or accrues to a person in respect of a listed share.

Various rules apply as to when these exemptions may or may not apply. Where the foreign dividend is not fully exempt from tax, the Income Tax Act 1962 provides for partial exemption.

The Income Tax Act 1962 provides that if a share qualifies as a "hybrid equity instrument" or "third party back share", dividends that accrue in respect of that share are treated as income in the hands of the recipient and are taxable as such.

Capital gains tax

The issue and listing of equity securities does not attract any capital gains tax. Capital gains tax becomes payable by a resident on the disposal of equity securities held on capital account. However, if the equity securities are held by a resident as an investment, capital gains tax will not be levied on the disposal of the equity securities (there are exceptions applicable to this exemption).

Withholding tax

The Income Tax Act 1962 imposes a withholding tax on dividends declared by:

  • A company which is a resident of South Africa.

  • A company that is not a resident of South Africa if the share in respect of which that dividend is paid is listed on the JSE.

The issue and listing of equity securities does not attract any withholding tax. However, non-residents of South Africa are subject to the dividends tax although it is possible that in specific instances a non-resident could obtain limited relief from the dividends tax in terms of a double taxation agreement.

 

Continuing obligations

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

The Listings Requirements set out the continuing obligations applicable to a company once its securities have been admitted to listing on a board of the JSE Limited (JSE). The continuing obligations in respect of the Main Board of the JSE are more extensive than those applicable to the Alternative Exchange (AltX). However, both are significant. The main continuing obligations for the Main Board include:

  • Announcing any development in the company's sphere of activity not in the public knowledge that can lead to material movements in the reference price of the listed securities unless such information is confidential.

  • Publishing trading statements as soon as the company is reasonably satisfied that the financial results for the period reported on will differ by at least 20% from the financial results of the company for the previous corresponding period or its profit forecast provided to the market in relation to that period.

  • Publishing interim reports by no later than three months after the expiration of the first six-month period of a financial year.

  • Publishing provisional annual financial statements if the company has not distributed annual financial statements to all shareholders within three months of its financial year-end even if the financial information is unaudited.

  • Treating all holders of a class of securities equally, including by ensuring that the company does not issue differing voting rights for holders within the same class of securities.

  • Announcing transactions relating to the company by or on behalf of a director or company secretary of the company or major subsidiary or any associate.

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

The continuing obligations apply to every foreign company that has listed its equity securities or depository receipts on the JSE Limited (JSE). Where a foreign company has a primary listing on a foreign exchange, the JSE allows the requirements of the primary exchange to take precedence except for a few exceptions.

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

The failure to provide the required information can result in the securities being annotated on the relevant board as failing to provide the relevant information. This can lead to a suspension, and later termination, of the listing of the relevant securities.

A breach can also lead to a censure of the company or its directors jointly or individually and the JSE Limited can impose a fine or issue any other penalty it deems appropriate in the circumstances.

 

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 2012 sets out extensive prohibitions against market manipulation and insider trading.

The Listings Requirements require a company of listed securities to consistently make certain information available to the public so as to ensure that all investors have equal access to information related to the securities they hold.

Penalties for market abuse/insider dealing

Those found guilty of insider trading, prohibitive trading practices or the making of false, misleading or deceptive statements are liable to a fine not exceeding:

  • The equivalent profit that the person, any other person or insider made or the loss avoided through such dealing.

  • An amount of up to ZAR1 million, adjusted annually to reflect the CPI, plus three times the amount referred to above.

  • Interest.

  • Cost of suit, including investigation costs, on such scale as determined by the enforcement committee.

  • Any commission or consideration received for such disclosure, encouragement or discouragement.

 

De-listing

25. When can a company be de-listed?

De-listing

A company can apply for the removal of its securities and its subsequent de-listing from the JSE Limited.

Subject to the removal provisions of the Financial Markets Act 2012 and the prior suspension of the securities, the JSE can remove a company and its equity securities from the JSE if the company has failed to comply with the Listings Requirements or it is in the public interests to do so. There were five de-listings on the JSE for the six months ended 30 June 2015.

Suspensions

Subject to the removal provisions of the Financial Markets Act 2012, the JSE can suspend the listing of securities of a company if that company fails to comply with the Listings Requirements or it is in the public interests to do so. The JSE can impose any conditions it deems appropriate for lifting the suspension.

In addition, the JSE can suspend a listing at the request of a company where:

  • The company is placed under business rescue or provisional liquidation.

  • The company has adopted a special resolution for its voluntary winding up.

  • The directors of the company have made a request in writing for the suspension of the securities and it is apparent that there are two levels of information in the market and the JSE considers that this situation cannot be remedied by the immediate publication of an announcement to clarify the situation.

  • The company has ceased to do business.

  • The Commission has issued a notice to a company to cease trading for reckless trading as contemplated by section 22 of the Companies Act 2008.

  • The Commission has issued a notice to a foreign company that is carrying on business in South Africa to cease trading for failing to register as an external company in accordance with the Companies Act 2008.

  • The Commission deregisters the company.

 

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 most recent reforms to capital markets legislation were the amendments to the Listings Requirements, which came into effect in December 2013, and the Financial Markets Act 2012, which came into effect in June 2013.

The JSE Limited is consistently reforming in order to keep up with changing market demands and to remain a leading capital markets exchange, globally.

 

Online resources

Johannesburg Stock Exchange

W www.jse.co.za

Description. The website is owned and operated by the JSE Limited and is intended to provide general information regarding the JSE and its products and services. The information has a 2013 copyright and could potentially be out of date.



Contributor profile

Lionel Shawe, Partner

Allen & Overy (South Africa) LLP

T +27 10 597 9860
E Lionel.Shawe@AllenOvery.com
W www.allenovery.com

Professional qualifications. South Africa, Attorney; South Africa, Notary

Areas of practice. Mining financing; aircraft financing; acquisition and leveraged financing; structured financing; property financing; preference share funding; securitisation; capital markets; debt restructuring.

Non-professional qualifications. LLM (specialising in Tax), University of South Africa; LLB, University of Witwatersrand; B.Com (specialising in Finance and Law), University of Witwatersrand.


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