Stock Exchange Listings

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The Listings RequirementsThe Listings Requirements are divided into two parts: the General Principles (a very short list of points) and the Main Body ( a very thick book of rules).The General Principles are designed to inform the interpretation and application of the main body of rules, and to cover situations not covered by the main body.The key theme is investor protection.

General Principles(i)to ensure the existence of a market for the raising of primary capital, an efficient mechanism for the trading of securities in the secondary market, and to protect investors;(ii)to ensure that securities will be admitted to the List only if the JSE is satisfied that it is appropriate for those securities to be listed;(iii)to ensure that full, equal and timeous public disclosure is made to all holders of securities and the general public at large regarding the activities of an issuer that are price sensitive;(iv)to ensure that holders of relevant securities are given full information and are afforded adequate opportunity to consider in advance and vote upon any of the following:(1)substantial changes in an issuers business operations; and (2)other matters affecting a listed companys constitution or the rights of holders of securities;

General Principles(v)to ensure that all parties involved in the dissemination of information into the market place, whether directly to holders of relevant securities or to the public, observe the highest standards of care in doing so;(vi)to ensure that all holders of the same class of securities of an issuer are accorded fair and equal treatment in respect of their securities; and(vii)to ensure that the Listings Requirements, and in particular the continuing obligations, promote investor confidence in standards of disclosure and corporate governance in the conduct of applicant issuers affairs and in the market as a whole.

The Listing Process

Appointment of professional advisorsHaving taken a decision to list its shares on the JSE, the first thing a company must do is appoint professional advisors, some of which are mandatorily required in terms of the Listings Requirements, and some of which are not mandatory but are needed in order to ensure that the process runs smoothly.

Professional advisorsThe Sponsor: is mandatory for a listing on the main board of the JSE.will invariably be a large merchant bank.has the primary responsibility to advise the company on its application for listing, and to guide the company through the listing process.has a duty to the JSE to ensure that the company meets all the requirements set out in the Listings Requirements.

Professional advisorsliaises between the JSE and the company during the listing process.submits all documentation to the JSE on the companys behalf.Interestingly, the major sponsors of companies listing on the JSE are all SA subsidiaries of foreign banks: JP Morgan, Merrill Lynch, Deutsche Securities and UBS.

Professional advisorsThe Corporate Advisor:usually appointed, but not mandatory.often, this role is filled by the same bank that acts as sponsor.advises the listing company on the timing, size and pricing of its share offer.works together with the legal advisors in drafting the listing documentation.markets the share offer to the investment community (book building).

Professional advisorsif the shares are to be introduced to the market via a placing, arranges the placing.if the shares are to be introduced via a public offer, the corporate advisor will either underwrite the offer itself, or arrange for one or more other banks to underwrite it.

Professional advisorsThe Legal Advisor:not always mandatory, but always appointed in practice.has primary responsibility for drafting all the listing documentation (eg. prospectus), which must comply with the Listings Requirements.drafts all the ancillary contracts, for example between the company and the underwriter.will usually have a large number of other contracts and agreements to draft, eg. share option schemes for the directors / employees.

Professional advisorsNote that although it is not always mandatory to have a legal advisor to advise the firm on the listing process, it is mandatory for the firm to have an attorney. Section 7.B.13 requires the firm to disclose the name and address of its attorney, which implies that an attorney must be appointed.

Professional advisorsWhere the listing is taking place in such a way that a prospectus has to be issued (bear in mind that a prospectus is not always obligatory see Section 6 of the Listings Requirements) then a legal advisor must be appointed, as the advisor must issue a certificate confirming that the prospectus complies with the Listing Requirements (see s.16.10(d)).

Professional advisorsAccountant:it is mandatory for the company to appoint a registered accountant and auditor to report on the financial position of the company over the past three years, and the financial data which is included in the prospectus.

Professional advisorsTransfer Secretaries:the company must appoint a firm of transfer secretaries to set up and manage the share register, issue share certificates, and mail out company circulars and reports.Computershare is the largest international firm of transfer secretaries, and has a dominant position in the SA market.

Professional advisorsTechnical Advisor:mining and mineral companies are required to appoint a technical advisor to report on the companys exploration and/or mining activities. The report must be included in the prospectus. (Section 12 of the Listings Requirements deals specifically with mineral / mining companies).

BEE Codes of Good Practice

General principles of interpretationContained in schedule 1 to the Codes:In the event of uncertainty, give preference to a reasonable interpretation consistent with the objectives of the Act.Words referring to persons should be interpreted widely to include individuals, partnerships, companies, trusts, government agencies, etc.Schedules and annexes are integral parts of the Codes.

Important definitionsEntity: a natural or juristic person conducting a business, trade or profession in South Africa.Measured entity: an entity or an organ of state, which is subject to measurement under the Codes.Qualifying small enterprise (QSE): an entity with a turnover of between R5m and R35m per annum (future: R10-50m).

Important definitionsExempted micro-enterprise (EME): an entity with a turnover of less than R5m per annum (future: R10m).Black people: Note that the current definitions in the Act and the Codes are different. The Act defines black people as African, Indian or Coloured people. The Codes define black people as African, Indian or Coloured South Africans.

Future definitions (s.1 of Act)black people means Africans, Coloureds, and Indians(a) who are citizens of the Republic of South Africa by birth or descent; or(b) who became citizens of the Republic of South Africa by naturalisation(i) before 27 April 1994; or(ii) on or after 27 April 1994 and who would have been entitled to acquire citizenship by naturalisation prior to that date but were precluded from doing so by Apartheid policies.

Code 000Code 000 sets out the general framework for measuring BEE, the eligibility criteria for qualifying as an EME or a QSE and the generic scorecard for measuring BEE.

Exempted micro-enterprisesEMEs are businesses with annual turnover of R5m or less (in future R10m or less).EMEs automatically have a BEE status of level four contributors and procurement recognition of 100%.If the EME is more than 50% owned by black people (ie. black South Africans) it is a level three contributor with procurement recognition of 110%.

Qualifying small enterprisesQSEs are businesses with annual turnover of R5m R35m (in future R10m - 50m).A QSE may select any 4 of the 7 elements of the BEE scorecard for purposes of measuring its compliance in terms of the QSE scorecard contained in Code 800.

The generic scorecardThe objective is for any business to be able to determine its BEE contributor status by working out a score out of 100, based on the seven elements of BEE, each of which has a different weighting in the scorecard.The weightings are:Ownership: 20%Management control: 10%Employment equity: 15%

The generic scorecardSkills development: 15%Preferential procurement: 20%Enterprise development: 15%Socio-economic development: 5%Depending upon the number of points the business scores, it is then assigned a contributor status which is in turn linked to a procurement recognition level.

Adjusted generic scorecardNote that statement 004 of Code 000 contains an adjusted scorecard which applies to entities which do not fit within the normal definition of a business, eg. universities and non-profit organisations. QSEs have their own scorecard, which is set out in Code 800.

The FutureThe draft future Codes reduce the number of elements from 7 to 5, by merging Management Control and Employment Equity into a single element (to be known just as Management Control) and by merging Preferential Procurement and Enterprise Development into a single element (to be known as Enterprise and Supplier Development).

The FutureThe proposed future weightings are:Ownership: 25%Management control: 15%Skills development: 20%Enterprise and supplier development: 40%Socio-economic development: 5%

(Note that these total 105%)

Future priority categoriesIt is proposed that there will be 3 priority elements: ownership; skills development; enterprise and supplier development.Large companies will have to meet at least 40% of their target in each element (QSEs must meet 40% ownership plus one of the other 2), or face a downgrade of 2 levels for large companies and 1 level for QSEs.Ownership is problematic for foreign multinationals doing business in SA.

BEE Contributor Status100 points: Level 1 contributor, 135% procurement recognition.85-99 points: Level 2 contributor, 125% procurement recognition.75-84 points: Level 3 contributor, 110% procurement recognition.65-74 points: Level 4 contributor, 100% procurement recognition.

BEE Contributor Status55-64 points: Level 5 contributor, 80% procurement recognition.45-54 points: Level 6 contributor, 60% procurement recognition.40-44 points: Level 7 contributor, 50% procurement recognition.30-39 points: Level 8 contributor, 10% procurement recognition.

BEE Contributor Status0-29 points: non-compliant contributor, 0% procurement recognition. Why does contributor status matter? Because the state and state-linked entities (eg. municipalities) take it into account in:Awarding tendersGranting licences and concessionsEntering into public-private partnershipsSelling state-owned entities or assets

The FutureThe draft new Codes propose raising the number of points required for each contributor level except level 1. This is the subject of on-going lobbying by businesses whose contributor levels will fall if the proposals are brought into effect.

The weight of the BEE scoreBear in mind that in, for example, awarding tenders or granting licences, the BEE score will usually carry a relatively small weighting in the overall decision-making process (10% or 20%). Other factors might include:Price (invariably the dominant factor).Functionality (track record for similar projects).Capacity to create new jobs.

Measurement of BEE status

VerificationThere is no mandatory rule which makes it compulsory for any business to have its BEE status verified. In other words, a business is entitled to work out its own BEE score, and then advertise that score to potential business partners.BUT, in practice no-one will accept any BEE status unless it is confirmed by an accredited verification agency.

VerificationThe South African National Accreditation System (SANAS) grants accreditation to verification agencies (which are private companies) which in turn audit businesses for BEE compliance, and issue BEE verification certificates.The certificate serves as conclusive evidence of a businesss compliance status.

The FutureIt is intended that in future the IRBA (the regulatory body of the auditing profession) will be the B-BBEE Verification Professional Regulator, and will regulate the BEE verification industry.

Test reminder

The test will be next Thursday (24 October) at 07h45 in the Great Hall.

OwnershipCode 100

IntroductionEach of the 7 existing (5 future) elements of the BEE scorecard is allocated a code, which sets out how that element of the companys BEE score is to be calculated. As an example, we will look at the Ownership element, which is set out in Code 100 in both the existing and the proposed future systems.

WeightingThe ownership element currently counts for 20 points out of 100 in calculating the BEE score of a large* company.In future, it is proposed that ownership will count for 25 out of 105 points.

*Note that codes 100-700 (current) and 100-500 (future) do not apply to EMEs and apply indirectly to QSEs.

Components of OwnershipThe ownership category is divided into 7 sub-categories, each of which has a maximum number of points (currently totalling 20, in future 25) and a compliance target. For example, exercisable voting rights in the enterprise in the hands of black people will count for 4 out of the 25 ownership points (currently 6 out of 20 points), with a target of 25% plus one vote.

Components of OwnershipSo if 25% plus one vote (or more) of the exercisable voting rights are in the hands of black people, the company will get 4 points. If black people have less than 25% plus one vote, the 4 points will be reduced proportionally.

The new sub-minimumOnce the scores for each of the 7 components of ownership have been calculated and added up, there will be an overall ownership score out of 25.It is proposed that in future all companies except EMEs must score at least 10 out of 25 (ie. 40%) on ownership, failing which large companies will be reduced by 2 levels, and QSEs by 1 level of BEE contributor status.

Adjusted recognition for genderNote that while, as a general principle, the proposed amendments to the Act and codes remove the adjusted recognition for gender (ie. extra points for black women) from most areas of BEE, the proposed new ownership scorecard still allocates up to 4 points specifically to voting rights (2 points) and economic interest (2 points) in the hands of black women.

The Exam

Time and PlaceFriday 1st November08h30Mullins

Format2-hour paperCounts 70% of the total mark in the course (assignment 15%, test 15%)70 marks (1,7 minutes per mark)3 questions. All must be answered.

ContentQ1: divided into (a) and (b) for 15 marks each (total 30 marks). Part (a): is a double case note in which you are asked to discuss two connected cases, and express a view on them. Part (b): is a problem-type question dealing with an aspect of the FMA.Q2: divided into (a) and (b) for 10 marks each (total 20 marks). Part (a): is on BEE. Part (b) is on takeovers.

ContentQ3: is a 20-mark question covering a range of competition law issues.