A legal minefield
Well-intended law makes empowerment deals tough to understand
COMPANIES EMBARKING ON broadbased black economic empowerment transactions are being hamstrung in their communication efforts by a piece of consumer protection legislation that prevents them from explaining their deals in plain language to the mass market. While the intention of Section 157 of South Africa’s Companies Act is designed to protect unsuspecting investors from unscrupulous share peddlers, the legislation is preventing companies with genuine offers from communicating the benefits and risks of specific transactions clearly and succinctly.
The particular section of the Act requires that any company-driven communication should contain all information published in the prospectus. “It makes any attempt to advertise unwieldy,” says Miranda Feinstein, a corporate lawyer at Edward Nathan Sonnenbergs, which advised on the Sasol Inzalo empowerment offering.
The original intention of the legislation was based on solid principles. Prior to the Act, there had been cases where companies published a detailed prospectus, registered it officially and then proceeded to run media campaigns focusing only on the hype and potential upside of a transaction. Section 157 was introduced to prevent that – but has had the unintended consequence of preventing all communication outside the prospectus.
“A strict interpretation of the Act doesn’t even allow the offer price or start date of the offer to be communicated without all the other information in the prospectus being presented,” says Feinstein.
Lawyers for Sasol and, more recently, Vodacom – which last month launched its Yebo Yethu offering – have strongly advised their clients not to provide any printed or broadcast offer-specific investor education outside the official prospectus.
Instead, prospective shareholders are forced to read reams of complex legalese and investment banking jargon in a bid to understand the terms of the offerings.
Insiders fear there’s insufficient legal and financial literacy in the target market and that many people may be investing due to the hype generated by the product offering rather than on fundamentals.
Sasol recently trumpeted the fact that 95% of the applications for shares under the Inzalo offering were made by people requesting fewer than 200 shares. That implies the offer grabbed the attention of poorer investors, but it left the group wondering whether its newest investors had been properly advised or not.
Neither the companies nor their lawyers drew any comfort from public comments by Department of Trade & Industry directorgeneral Tshediso Matona, who acknowledged the restrictions imposed by the legislation were counter-productive. Matona said the DTI wouldn’t seek to prosecute companies that communicated the offerings responsibly.
But there’s a ray of hope for companies embarking on similar transactions in future – but it won’t happen before the new Companies Bill is enacted and put in place in 2010.
“The new Companies Bill says that in interpreting the law, effect must be given to its purpose,” says Rudolph du Plessis, a partner at law firm Bowman Gilfillan. It’s a compromise on the existing reading of the section and means the spirit of the law needs to be considered in addition to the letter of the law.
Until then companies have to find novel ways of communicating with prospective participants in their offerings. Even after that, case law will need to be developed to provide guidance on how much interpretation will be allowed.