Sanchia Temkin
4 November 2008
Johannesburg — A NEW law will open the way for black shareholders to acquire shares in consideration of future services and benefits.
However, tax analysts have warned that any arrangements made under the Companies Bill will have to be implemented with a watchful eye on the black economic empowerment codes and the income tax laws.
Wouter Scholtz, a director at Mazars Moores Rowland, said at the weekend that interactions between the Companies Bill and the empowerment codes and the tax regime were "awkward".
"It should be appreciated that unless concessions are made under the tax regime, the 'sweat equity' provision of the Companies Bill may have little practical use."
The Companies Bill provides for the issuing of shares in consideration of an agreement for future services, benefits or payment. It also authorises an issue of shares when the agreement is entered into, in effect doing away with the requirement that shares can be issued only when fully paid up.
Shares issued against an undertaking to render future services, or provide future benefits, are issued to a third party and are held in escrow (on trust) for later transfer according to the conditions of the agreement.
Voting rights cannot be exercised until the shares are released from the trust agreement.
Scholtz said that in other jurisdictions, payment for shares by way of future services was sometimes called "sweat equity".
He said that the term was usually coined in partnership agreements where one or more of the partners paid no money into the partnership. In return they would receive share options for working for below-market salaries or no salary at all.
He said that by using the provisions of the Companies Bill, "sweat equity" might become a significant component of share subscription prices in empowerment transactions.
However, the subscribing shareholder who had tendered "sweat equity" against an issue of shares would be subject to income tax, not on the issue of the shares, but only when the shares were released from escrow .
"It takes little forethought to appreciate that in many cases the black shareholders may have only one way to meet their tax liabilities, namely a sale of at least part of their shares."
The shareholders' agreement may preclude a sale of its shares by virtue of " lock-in" clauses, which specify that the black shareholders will not be able to sell their shares for a specified number of years.
Scholtz said that if the "sweat equity" arrangements were to be practicable, the income tax regime would have to be "harmonised" with the Companies Bill.
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