What challenges have arisen after the General Laws Amendment Act enactment?

February 1st, 2024

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The General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act 22 of 2022 (General Laws Amendment Act) was fast tracked through Parliament and has the effect of amending five pieces of legislation. Part of the General Laws Amendment Act requires the disclosure of information relating to beneficial ownership and beneficial interest. In the following pages, in relation to beneficial ownership and beneficial interest, I will identify amendments made by the General Laws Amendment Act followed by a discussion on the challenge of interpretation of beneficial ownership and beneficial interest.

To strengthen South Africa’s (SA’s) anti-money laundering and combating the financing of terrorism (AML/CFT) measures, the President has assented to the General Laws Amendment Act. This amendment is to assist SA in meeting AML/CFT international standards (Department of National Treasury ‘Media statement: Enactment of Key Anti-Money Laundering and Combatting of Terror Financing Laws’ (www.gov.za, accessed 7-6-2023)).

The legislative amendments, of the General Laws Amendment Act, were ushered in by the publishing of the Financial Action Task Force (FATF) report. The FATF report analyses the level of effectiveness of SA’s AML/CFT systems and provides recommendations to strengthen it (FATF ‘Anti-money laundering and counter-terrorist financing measures: South Africa  Mutual Evaluation Report, October 2021’ (www.fatf-gafi.org, accessed 7-6-2023)). Some of the key findings mentioned in the FATF’s report, relating to beneficial ownership and beneficial interest, include:

  • There is insufficient beneficial ownership transparency which is an acute vulnerability as companies and trusts are often misused for money laundering or to carry out predicate crimes.
  • That South African authorities’ ability to identify and detect proliferation financing related assets is challenged by limited access to beneficial ownership information.
  • A recommendation that companies are required to record changes in the identity of each person with a beneficial interest in the securities register held under subs 56(4)(a) and 56(7)(a) of the Companies Act 71 of 2008.

In response to the abovementioned key findings the General Laws Amendment Act includes the following legislative amendments to the Companies Regulations, 2011:

  • After sub-regulation 30(1) an insertion was made that an affected company must, in the prescribed manner, provide a copy of its register detailing the disclosure of beneficial interests. Affected companies will include all companies, which were previously required to file their annual return in terms of s 56(7)(a) of the Companies Act.
  • Regulation 32 was amended with an insertion of sub-regulation 32A(1)(a). Sub-regulation 32A(1)(a) sets out additional information of what beneficial ownership entails. This includes a confirmation as to the scope of participation in and the extent of ownership, or effective control of, the affected company.
  • Sub-regulation 32A(1)(a) states an affected company is required to ‘establish and maintain a register of persons who hold beneficial interest equal to or in excess of 5% of the total number of securities of that class of securities issued by the company’.

Furthermore, the definition of a beneficial owner has been amended in terms of the Financial Intelligence Centre Act 38 of 2001, to include a natural person who directly or indirectly, owns or exercises effective control over the company in question. These amendments are indicative of the emphasis of the importance of the terms ‘beneficial ownership’ and ‘beneficial interest’ and the interpretation thereof.

The interpretation of beneficial ownership and beneficial interest will impact the extent of disclosures to be made by affected institutions. However, disclosure of beneficial ownership and beneficial interest information may highlight conflicts of interests as illustrated in the recent Constitutional Court case of Independent Community Pharmacy Association v Clicks Group Limited and Others 2023 (6) BCLR 617 (CC).

The Clicks case dealt with the interpretation of s 22A of the Pharmacy Act 53 of 1974 and regulation 6(d) of the Regulations Relating to the Ownership and Licencing of Pharmacies, GN R553 GG24770/25-4-2003. Section 22A details who the Minister may prescribe to own a pharmacy and conditions relating thereto. Regulation 6(d) states an owner of a community pharmacy, whether a person or body corporate, may not be the ‘owner or the holder of any direct or indirect beneficial interest in a manufacturing pharmacy.’

As the applicant, the Independent Community Pharmacy Association, submitted that one of the subsidiary companies of the respondent (Clicks) manufactures medication and has an interest, whether it be direct or indirect, in the retailers’ sector. As a result of this submission the court inquired into the meaning of the expression ‘beneficial interest’.

The inquiry into the meaning of beneficial ownership stems from the minority judgment stating, beneficial interest is akin to beneficial ownership and further holding beneficial ownership means a legal right or entitlement to the benefits of ownership. This definition of beneficial ownership was not accepted by the majority judgment. In illustrating this deviation, the majority judgment defines the meaning of beneficial ownership as well.

The court held that beneficial ownership and beneficial interest are not a ‘legal term of art’ in South Africa as these concepts were borrowed from English law (‘term of art’ refers to ‘a word or phrase used in a precise sense in a particular subject or field’ Oxford English Dictionary ‘Term of art’ (www.oed.com, accessed 5-12-2023)). To indicate this, the court referred to The Princess Estate and Gold Mining Co Ltd v The Registrar of Mining Titles 1911 TPD 1066 at 1078, which holds that borrowing the expression ‘beneficial interest’ from English law where it has a technical meaning, was unfortunate. Thus, South African courts have not yet developed the meaning of these concepts as to how they apply to affected institutions contemplated in s 56(7)(a) of the Companies Act.

English property law differs from that of South African property law. As a result, the majority in the Clicks case were silent on the point of beneficial ownership with regard to English law. This begs the question as to how the legislated terms beneficial ownership and beneficial interest may differ in how they are interpreted in different jurisdictions to that of SA. Harmonising SA’s legislation with the FAFT report, as briefly detailed above, will assist against SA’s grey listing. However, the interpretation of concepts like beneficial ownership and beneficial interest at an international level will differ from SA’s interpretation based on SA’s jurisprudence.

Notwithstanding, that both beneficial ownership and beneficial interest are not legal terms in SA the court moves towards interpreting beneficial ownership. Beneficial ownership connotes the person who is the owner of the business in terms of law. The only place beneficial ownership comes up in South African law is in the case of shares registered in the name of a nominee for the benefit of a third party.

Furthermore, the court notes, in SA, the expression ‘beneficial ownership’ arises in the cases where the law requires a thing to be registered in the name of a person. Sometimes registration has no effect on ownership unless with reference to land. One might be referred to as a beneficial ownership but not the owner in law. The beneficial owner has contractual rights against the registered owner oppose to ownership of the right. Thus, within this instance, beneficial ownership does not equate being a species of ownership.

The variance in beneficial ownership and species of ownership is clear in the case of shares as mentioned by the court. Although shares are subject to a statutory system of registration this does not determine ownership. Shares are a bundle of incorporeal personal rights against the company, which cannot be owned but, like personal rights, transferred by cession.

Additionally, in the case of trusts, the court notes the owners of the assets are the trustees. The beneficiaries are not considered the owners of the trust assets. Although, the beneficiaries of a trust are described as the ‘beneficial owners’ of the trust asset in law they are not the owners of the assets.

The expression beneficial ownership is imprecise in South African law. Enjoyment of the legal rights by the beneficial owner depends on the circumstances. Unless a party is the owner in terms of law, to call a person a beneficial owner merely illustrates that they have a personal right against the actual owner and enforcement of the right would have to take place through the registered owner, thus illustrating control by the registered owner. This is further evident in amendment of the Financial Intelligence Centre Act and the Companies Regulations, 2011 which defines beneficial ownership as consisting of the exercising effective control.

The amendment to the Financial Intelligence Centre Act, furthermore, refers to beneficial ownership as either direct or indirect. Whereas, in the Clicks case, it is held that the words direct or indirect cannot be applied to beneficial ownership. Counsel for Clicks argued that an indirect beneficial ownership could apply ‘where X holds a pharmacy business as a nominee for Y who holds the business as a nominee for Z as beneficial owner’. Thus, holding Z would be an indirect beneficial owner.

In doubting that the Minister envisioned such an arrangement, the court held that there is still only one beneficial owner. Those who are referred to as a nominee are agents who will hold the asset as such. In the aforementioned example, the real right of ownership vests with Z as the only beneficial owner. The words indirect and direct can, however, be used with regard to beneficial interest.

Unlike beneficial ownership, shares are considered beneficial interest. The majority judgment defines a beneficial interest as a relationship which causes a person’s fortune to be affected by the fortune of the business. The interests in shareholding include ‘financial’, ‘pecuniary’ and ‘beneficial’. Where the shareholding is large enough there may be an additional benefit, namely control.

A large enough shareholding can be determined by a quantitative limit as mentioned by the majority judgment. Whether there is a beneficial interest is dependent on the number of shares held. Not having a quantitative limit would be unfair for owners of a retail pharmacy to be penalised for the conduct of their shareholders unless these shareholders exercise some sort of control over the operating company as illustrated by the court.

The court noted the impact of a large shareholding was that shareholders determine who the holding companies’ director was, thus shareholders exert influence over how subsidiaries conduct their business. In the Clicks case control took the form of performance-based contracts. The applicant alleged that performance-based contracts incentivised Clicks to stock specific products manufactured under the Clicks group structure.

The quantitative limit for beneficial ownership is similarly evident in the Companies and Intellectual Property Commission step-by-step guides (see www.cipc.co.za). The Commission clarifies what is beneficial ownership, holding that the Companies Act provides for 5% as a beneficial interest in securities, which will amount to beneficial ownership.

Thus, the Commission indicates, a beneficial interest can become a beneficial ownership, whereas according to the Clicks case that is not self-evident. However, the Commission does provide non-binding advice to the public in terms of the Copyright Act 98 of 1978.

The mischief rule of statutory interpretation is the backdrop behind which the court interpreted the terms beneficial ownership and beneficial interest, namely, to avoid a conflict of interests. The court made a finding against the respondent, holding that the respondent violated regulation 6(d). Furthermore, when interpreting beneficial ownership and beneficial interest, the court held: ‘If the context in which a word appears is a technical legal one and the word is a legal term of art or has acquired a technical meaning in legal nomenclature, it should be accorded that meaning.’

Therefore, the terms beneficial ownership and beneficial interest are imprecise in South African law. Notwithstanding, the imprecise nature of these terms, amendments by the General Laws Amendment Act incorporates these terms. Beneficial ownership and beneficial interest are not legal terms of art in SA, thus resulting in a challenge of interpretation of beneficial ownership and beneficial interest.

Marciano L van der Merwe BA (Industrial Psychology and History) LLB (Wits) is a legal advisor (corporate counsel) in Johannesburg. Mr Van der Merwe writes in his personal capacity.

This article was first published in De Rebus in 2024 (Jan/Feb) DR 8.

De Rebus