We have often come across the scenario where non-resident shareholders of a South African company have failed to endorse their shares. What is usually a simple and inexpensive process then becomes complex and costly, depending on the time that has passed since the shares were acquired.
Some believe that an endorsement is simply an administrative process and tend to overlook it, but the fact is that Regulation 14(1) of the Exchange Control Regulations, 1961 (Regulations) provides that inter alia no person may, without permission granted by the South African Reserve Bank (“SARB”) or a person authorised by it, and in accordance with such conditions imposed, acquire or dispose of, in any way, any share in a South African company. Regulation 14(2) provides that non-resident shareholders must ensure that the share certificates issued by the South African company are endorsed ‘non-resident’ within 30 days of becoming the owner of the shares. In simple terms, the failure to have the shares endorsed is a breach of the Regulations and may be subject to penalties and/or imprisonment. In practice though, the SARB is generally amenable to endorsing shares without imposing either – although it must not be assumed that they will be so lenient.
Without the endorsement, the local company cannot, for example, distribute any dividends (whether in the ordinary course or as part of liquidation/deregistration) to a non-resident shareholder. The dividends can be declared and the failure to have the endorsement in place will not affect the validity of the dividend declaration, but it will affect the enforcement thereof, as the cash cannot flow to the non-resident shareholder without those shares having been endorsed. Failure to secure the endorsement will also affect the ability of a local purchaser to pay for the shares held by a non-resident shareholder in a South African company. One can easily see how a simple ‘administrative process’ can have a significantly adverse impact on the cash flow of the non-resident shareholder. There is therefore no reason why the endorsement should not be done as soon as possible after acquisition. If it was not done, then it should be rectified soonest.
The process of endorsing shares is simple and merely involves an application to an Authorized Dealer, except where it is has been more than 12 months since the acquisition of the relevant shares – in this instance SARB approval is required. The Authorized Dealer is generally the local commercial bank of the South African company in which the shares are held by non-residents. Certain pertinent information is required by the Authorized Dealer and the process can be completed in a week or two, depending on the circumstances.