A le­gal mine­field

Well-in­tended law makes em­pow­er­ment deals tough to un­der­stand

Finweek English Edition - - Openers - BRUCE WHIT­FIELD

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.

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