Purpose-driven companies

Legal recognition and certification

What legal forms or statuses are used in your jurisdiction to establish purpose-driven companies?

There are two types of company that may be incorporated in South Africa: a profit company and a non-profit company. A profit company (which may be a private, personal liability, public or state-owned company) is incorporated for the purpose of financial gain for its shareholders. A non-profit company is a company incorporated to pursue a public benefit or an object relating to one of more cultural or social activities, or communal or group interests. (There is no specific legal form or company status similar to the ‘benefit corporation’ established in some states in the United States.)

There is no specific public certification for companies that pursue social or environmental purposes. In the context of taxation, a non-profit company or ‘public benefit organisation’ (PBO) may apply for tax exempt status under the Income Tax Act if it pursues one or more statutorily prescribed public benefit activities (PBAs). In the non-profit space, a company may register and be certified as a non-profit organisation under the Non-profit Organisations Act.

Section 12J of the Income Tax Act  allows investors to deduct the full amount invested in a Section 12J venture capital company from their taxable income while still enjoying the return on the full investment. Venture capital companies are specifically designed to concentrate investment expertise in favour of local small to medium enterprises.

Insofar as private certifications are concerned, it is possible for a company to pursue a ‘triple bottom line’ purpose to enable it to become a certified B Corporation. To date, there are nine certified B Corporations in South Africa. 

It is possible for a foreign purpose-driven company to register in South Africa as an external company. 

Purpose and mission

What rules and standard practices govern the establishment of companies’ social or environmental purposes and mission?

The Companies Act and a company’s constitutional document, the Memorandum of Incorporation (MOI), govern the establishment of a company’s social or environmental purposes. 

As a first step, the incorporators must determine whether to incorporate a profit company with the purpose of generating financial gain for shareholders, or a non-profit company with some public benefit or other object. Once incorporated, a company is a juristic person that has all the legal powers and capacity of an individual, except to the extent that it is incapable of exercising any such power (eg, to vote) or having any such capacity, or the MOI provides otherwise. 

The purposes of a company may be described in more or less detail, and may be expressly restricted, in the MOI. While some companies will publish mission statements, there is no statutory obligation to do so.

The MOI is legally binding: 

  • between the company and each shareholder; 
  • between or among the shareholders of the company; and 
  • between the company and each director, prescribed officer, or member of a board committee, in each case in the exercise of their respective functions within the company.

 

The MOI may be amended by a special resolution of the shareholders (generally 75 per cent approval), or in compliance with a court order. Unless the MOI provides otherwise, the board of directors may amend a MOI to vary authorised but unissued shares, or to determine the rights, limitations and other terms attaching to such shares. 

The MOI of a non-profit company without members may be amended by its board of directors. 

Companies may pursue social or environmental purposes even if they are not a direct source of profit. Under the Companies Act a profit company is one that has been incorporated for the purpose of generating financial gains for shareholders. However, that purpose (to generate profits) does not exclude a company from pursuing social or environmental purposes. 

There are no restrictions applicable to certain business sectors regarding the establishment of social or environmental purposes by a company.

Profit distribution, winding up and remuneration

What rules and restrictions govern profit distributions for purpose-driven companies in your jurisdiction?

Profit companies

The ordinary rules and restrictions that govern profit distributions would apply to a purpose-driven profit company. A company must not make any proposed distribution unless three requirements are met. First, the distribution must be pursuant to an existing legal obligation of the company or a court order, or the board must have authorised the distribution by resolution. Second, it must reasonably appear that the company will satisfy the solvency and liquidity test, set out in section 4 of the Companies Act, immediately after completing the proposed distribution. Third, the board of the company must have, by resolution, acknowledged that it has applied the solvency and liquidity test, and concluded that the company will satisfy that test immediately after completing the proposed distribution (the S&L Resolution). 

Once a distribution has been approved by the board, a company must carry it out fully, subject to certain provisos. If the distribution has not been completed within 120 business days of the S&L Resolution, the board must reconsider the solvency and liquidity test with respect to the distribution to be made, and the company must not proceed with such distribution unless the board has adopted a further S&L Resolution.

In the context of fundamental transactions, a company that is the subject of an offer is subject to restrictions on ‘frustrating action’ – action that could effectively result in an offer being frustrated or shareholders being denied an opportunity to decide on its merits – which preclude the making of a distribution that is abnormal as to timing and amount. 

A company’s MOI may include additional rules and restrictions governing profit distributions. 

 

Non-profit companies

As a general rule, the income and property of non-profit companies is not distributable to its incorporators, directors, members (if any), officers or persons related to them.

What rules and restrictions govern the winding up of purpose-driven companies?

Profit companies

There are no specific rules and restrictions governing the winding up of purpose-driven profit companies. There are three methods by which a profit company may be wound up, each with its own rules and requirements. First, de-registration if a company is no longer carrying on business or is not in operation. Second, a voluntary winding up by way of a special resolution (ordinarily 75 per cent approval) at the instance of the shareholders, either in terms of a solvent (members’) winding up, or an insolvent (creditors’) winding up. Third, a compulsory winding up by means of an application to court by the company itself, the shareholders, the creditors, or any combination thereof.

 

Non-profit companies

Upon the winding up or dissolution of a non-profit company: 

  • no past or present member or director of that company, or person appointing a director of that company, is entitled to any part of the net value of the company after its obligations and liabilities have been satisfied; and 
  • the entire net value of the company must be distributed to one or more non-profit companies, registered external non-profit companies carrying on activities within South Africa, voluntary associations or non-profit trusts. 

 

The distribution must be to an entity or entities that have objects similar to the main object of the non-profit that is being wound up or dissolved, as determined: in terms of the company’s MOI; by its members (if any) or its directors, at or immediately before the time of its dissolution; or by the court, if the MOI, or the members or directors fail to make such a determination.

What rules and restrictions govern the remuneration of directors, officers, employees and third parties?

Profit companies

Except to the extent that the MOI of a company provides otherwise, a company may pay remuneration to its directors for their service as directors, subject to subsection, but only in accordance with a special resolution (generally 75 per cent approval) approved by the shareholders within the previous two years.

 

Non-profit companies

A non-profit company must not pay any portion of its income or transfer any of its assets to any incorporator, member, director, or person appointing a director, of the company, except as reasonable remuneration for goods delivered or services rendered to or at the direction of the company.

The remuneration of officers, employees and third parties is generally determined by contractual agreement (employment, consultancy or supply agreement). 

 

Measurement, benchmarking and reporting

Are purpose-driven companies legally required to measure, benchmark and report the social and environmental impact of their business?

There is no generally applicable legal requirement for purpose-driven companies to measure, benchmark and report the social or environmental impact of their businesses. The MOI of a company may include provisions that require the measurement, benchmarking or reporting of social or environmental impacts of that company’s businesses. Additionally, similar requirements may apply in terms of contractual agreements concluded by the company. 

In the context of broad-based black economic empowerment (B-BBEE), Johannesburg Stock Exchange (JSE)-listed companies, public entities and organs of state are required to submit annual B-BBEE compliance reports to the B-BBEE Commission within 30 days of the approval of the entity’s audited financial statements or within 90 days of the end of the relevant financial year, and to publish such reports on their websites.

Institutional investors are increasingly demanding the measurement and reporting of ESG and other non-financial factors by companies in which they are invested. For example, pension funds and insurers are required to consider ESG factors in their investment decision-making. Additionally, the Code for Responsible Investing in South Africa recommends that ‘an institutional investor should incorporate sustainability considerations, including environmental, social and governance, into its investment analysis and investment activities as part of the delivery of superior risk-adjusted returns to the ultimate beneficiaries’.

What statutory and voluntary standards, guidelines and best practices are followed by purpose-driven companies in your jurisdiction with regard to the measurement and reporting of ESG and other non-financial factors?

Generally speaking, the measurement and reporting of ESG and other non-financial factors is unregulated and voluntary in South Africa at present. As such, there are many different approaches that may be used by purpose-driven companies to measure and report on such factors: principles, ratings, performance indicators and targets, narratives, valuation and evaluation methodologies. 

 

Measurement

2018 study carried out by Genesis Analytics and Impact Amplifier found very little use by investors, intermediaries and investees of formal impact measurement techniques in South Africa, with the UN Sustainable Development Goals, Impact Reporting and Investment Standards, Donor Committee for Enterprise Development standards, and ESG criteria (eg, MSCI ESG metrics) being the most commonly used. The majority of respondents cited the use of in-house metrics. 

Initiatives such as the Impact Management Project, a forum for building global consensus on how to measure and manage impacts, will influence the evolution and adoption of impact measurement approaches in South Africa.

 

Reporting

The King IV Code of Corporate Governance, which focuses on value creation in a sustainable manner, promotes ‘integrated reporting’, based on the Integrated International Reporting Council definition: it contemplates ‘a concise communication about how an organisation’s strategy, governance, performance and prospects, in the context of the external environment, lead to the creation of value in the short, medium and long term’. 

The Global Reporting Initiative standards and recommendations have been influential in the reporting of ESG and other non-financial factors in South Africa.

Director liability and private enforcement

What rules govern the liability of directors of purpose-driven companies for compliance with social and environmental standards and principles? In addition to shareholders, are stakeholders entitled to hold directors accountable through private enforcement action?

The ordinary company law rules under the Companies Act and at common law primarily govern the liability of directors of companies and would apply to directors of purpose-driven companies. 

The board of directors has primary responsibility for managing and directing the business and affairs of a company. Directors owe fiduciary duties to the company under the Companies Act and the common law, all of which flow from the overarching duty to act in good faith in the best interests of the company. Directors also have a duty to act with the degree of care, skill and diligence that may reasonably be expected of a person carrying out the same functions as that director, and having the general knowledge, skill and experience of that director. The Companies Act includes a business judgement rule that affords some protection to directors in carrying out their duties. 

Under the Companies Act, directors are held liable in accordance with the principles of common law for any damages, loss or costs suffered by the company as a result of: 

  • a breach of a fiduciary duty as a consequence of a breach of their duties to disclose personal financial interests, to avoid a conflict of interest, to communicate information to the company, to act in good faith for a proper purpose or to act in the best interests of the company; and 
  • delict or tort law as a consequence of a breach of their duties of care, skill and diligence, or a breach of any provision of the Act or any provision of the company’s MOI.

 

Under the Companies Act, certain stakeholders are entitled to hold directors accountable through private enforcement action: 

  • shareholders have a statutory right to apply to court for an appropriate order to rectify harm done to the securities holder by any of the company’s directors, to the extent that they may be held liable; 
  • shareholders, directors or trade unions representing employees may apply to court to interdict a company from doing anything inconsistent with the Companies Act (the provisions of which may be referred to or incorporated by reference into a company’s MOI);
  • a company, shareholders, directors, company secretary, a trade union or employees’ representative may apply to court for an order to declare a director delinquent or under probation in certain circumstances; and 
  • a statutory derivative action permits shareholders, directors, company secretaries, trade unions representing employees, or a person who has been granted leave by a court where the court is satisfied that leave is necessary to protect a right, to demand that the company bring or continue proceedings, or take related steps, to protect the legal interests of the company. 
State supervision

Is there any form of state supervision of purpose-driven companies in relation to their social and environmental purposes?

There is no specific state supervision of purpose-driven companies in relation to their social and environmental purposes. Companies incorporated in South Africa are generally subject to regulatory oversight by the Companies and Intellectual Property Commission, which has a mandate to, among other things, monitor proper compliance with the Companies Act. 

Certain companies may be subject to regulatory supervision and oversight by one or more regulators insofar as their business activities, products or services are concerned. The Financial Sector Regulation Act 2017 established two new regulators: the Prudential Authority, within the South African Reserve Bank, tasked with prudential regulation; and the Financial Sector Conduct Authority (FSCA), tasked with market conduct regulation. The Prudential Authority is, among other things, responsible for the prudential regulation of insurers. The FSCA’s functions include regulating and supervising the conduct of various financial institutions (particularly in relation to the provision of financial services), including pension funds, insurers and collective investment schemes, in accordance with applicable financial sector laws. 

In the context of taxation, the South African Revenue Service Tax Exemption Unit may monitor the activities of a non-profit company or PBO that has been granted tax exempt status under the Income Tax Act 58 of 1962. 

To the extent that the broad-based black economic empowerment framework applies, the B-BBEE Commission has a mandate to oversee, supervise and promote adherence to Broad-Based Black Economic Empowerment Act 53 of 2003.

Incentives and benefits

Are any fiscal incentives or other benefits available for purpose-driven companies in your jurisdiction? What is the scope of these benefits and what requirements apply?

There are limited South African tax incentives or other benefits available for purpose-driven companies. 

PBOs that conduct prescribed PBAs, and small business funding entities that provide funding for small, medium or micro-sized enterprises, on a non-profit basis and with an altruistic or philanthropic intent, qualify for an income tax exemption.

Taxpayers may also claim limited tax deductions for donations made to PBOs carrying on a more limited set of PBAs, including the funding of other qualifying PBOs.

There are also limited tax deductions and allowances available for, among other things, certain expenditure related to the production of renewable energy, energy efficiency savings, environmental rehabilitation and conservation. 

Special economic zones (SEZs) also enjoy certain tax incentives, including a preferential 15 per cent corporate tax rate. Certain SEZs are, for example, intended to incentivise cooperation between the manufacturing and renewable energy sectors, as part of the South African government’s Renewable Energy Independent Power Producers Programme.

While the Department of Trade and Industry offers a number of incentives, none of these expressly focuses on ESG criteria. However, a number of these incentives, such as the Black Industrialists Scheme, includes ESG-type criteria such as job creation and green technology.

Public procurement

Do the public procurement rules and policies in your jurisdiction confer any advantages on companies for pursuing social or environmental purposes? If so, what conditions apply?

The public procurement rules and policies in South Africa have no specific set aside contracts for companies that pursue social or environmental purposes. These factors may be an advantage if they are specified as such or as qualification criteria for a specific contract. This is because in terms of section 217 of the Constitution, an organ of state is required to procure goods and services in a fair, transparent, competitive and equitable manner. Section 217(2) of the Constitution permits the government to implement a procurement policy that provides for categories of preference in the allocation of contracts, and for the protection or advancement of persons, or categories of persons, disadvantaged by unfair discrimination. The Preferential Procurement Policy Framework Act 2000 (PPPFA) and the regulations published under it in 2017 (the PPPFA Regulations) are the framework within which preferential procurement policies must be implemented. In addition to this regulatory framework, the BEE Act, which aims to address inequities resulting from the systematic exclusion of black people from meaningful participation in the South African economy, plays an important role in the award of government contracts. The BEE Act provides a legislative framework for the promotion of black economic empowerment and contains formulations to calculate a broad-based black economic empowerment (BEE) score, which is a level of empowerment used by organs of state when evaluating tenders or bids in accordance with the PPPFA. 

In this regard, under the preferential procurement points system, bidders are given a score out of 100 points, of which 80 or 90 are based on price competitiveness, and 20 or 10 on the bidder’s BEE status level or preference (depending on whether the contract is for 30,000 rand to 50 million rand, or above 50 million rand).

A bidder’s BEE score will therefore influence its preferential procurement score for PPPFA purposes. Where two tenders have equal scores, the one with the highest BEE rating must be awarded the contract; where the BEE ratings are also equal, the one with the highest functionality points must be awarded the contract (unless there are objective criteria that justify the award to another bidder).

Economic sustainability and market competition

How would you describe the level of economic sustainability and market competition of purpose-driven companies?

There is insufficient data to assess the level of economic sustainability and market competition of purpose-driven companies in South Africa. That said, there is evidence suggesting that companies (purpose-driven or not) that perform well on ESG factors outperform and are more likely to survive over time. Additionally, the competitive landscape appears to be changing in a direction such that companies without a purpose may find themselves at a competitive disadvantage in the medium to long term.