Among the newcomer exchanges that have become attractive platforms for listing is the Cape Town Stock Exchange (CTSE) (previously the 4AX).

Of the many pertinent factors to be considered when determining the most appropriate platform for a prospective listing, the listings requirements of the applicable exchange, and in particular the continuing obligations imposed on listed issuers, is a factor often not considered in detail prior to listing.

In terms of the listings requirements of the CTSE (CTSE LR), where a transaction between an issuer or its subsidiary and a counterparty falls within the ambit of the definition of a “Related Party Transaction”, certain regulatory obligations are imposed, including the obligation to announce the transaction, obtain shareholder approval, and in certain instances provide a valuation report and written confirmation that the terms of the proposed transaction are fair and reasonable.

Before assessing whether a transaction qualifies as a “Related Party Transaction” it is necessary to establish if the counterparty to the transaction with an issuer or its subsidiary is a “Related Party” as defined in the CTSE LR, and a fundamental aspect of this enquiry is determining whether either party to the transaction controls the other.

In terms of section 1 of the CTSE LR, “Related Party” is defined as:

“Related Party” shall have the meaning ascribed in IFRS and in relation to any Issuer, shall include any entity or Person who:

1. a) Controls or exerts Significant Influence over the Issuer which shall include Directors of the Issuer; or
2. b) the Issuer Controls or exerts Significant Influence over,

and, includes the Immediate Family of such Person;

As is evident from the definition of “Related Party” set out above, one would essentially need to establish whether any of the following circumstances between the issuer or its subsidiary and the counterparty exists:

     a related party relationship in terms of IFRS;

     “Control”; or

     the exertion of “Significant Influence”.

IFRS control and “Control”

In terms of IFRS (IAS 24), control is one of the circumstances that would constitute a related party relationship with a reporting entity. The principle of control is dealt with in IFRS 10 where control of an investee is defined as:

“An investor controls an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.”

The three elements of IFRS control are (i) power over the investee; (ii) exposure, or rights to variable returns from involvement with the investee; and (iii) the ability to use power over the investee to affect the amount of those returns.

An investor has power over an investee when the investor has existing rights that give it the current ability to direct the relevant activities, i.e. the activities that significantly affect the investee’s return.

In comparison, the term “Control” as used in the definition of “Related Party” at paragraph (a) (Paragraph A) is not expressly defined in the CTSE LR. Notably, reference to control having the meaning given thereto in the Companies Act 71 of 2008 (Companies Act) is found elsewhere in section 1 of the CTSE LR:

• the term “Controlling Shareholder” is defined as any person who controls a company as contemplated in terms of section 2(2) of the Companies Act; and
• under the definition of “Subsidiary”, the meaning given to control is the meaning in section 2(2) of the Companies Act.

Turning to section 2(2) of the Companies Act, control of a company or its business may essentially come about where (i) one has the ability to exercise or control the majority of the voting rights associated with its securities; or (ii) one has the right to appoint or elect, or control the appointment or election of, directors who control the majority of the votes at the meeting of the board; or (iii) one has the ability to materially influence the policy of the company in a manner comparable to a person who, in ordinary commercial practice, would be able to exercise an element of control referred to in (i) or (ii).

Having regard to the relevant provisions set out above, the IFRS concept of control appears to be wider than the concept of control in terms of section 2(2) of the Companies Act. Presuming the forementioned, and that the meaning ascribed to “Control” under Paragraph A is the meaning given in section 2(2) of the Companies Act, raises the possibility that a relationship between an issuer or its subsidiary and a counterparty which does not amount to control under section 2(2) of the Companies Act, thereby ruling out “Control” under Paragraph A, may still amount to control under IFRS, resulting in a related party relationship under IFRS and consequently a “Related Party” relationship.

IFRS significant influence and “Significant Influence”

In terms of IFRS (IAS 24), significant influence is also one of the circumstances that would constitute a related party relationship with a reporting entity. The principle of significant influence is dealt with in IFRS (IAS 28) where significant influence is defined as:

“the power to participate in the financial and operating policy decisions of the investee but is not control or joint control of those policies.”

In comparison, the term “Significant Influence” is expressly defined in section 1 of the CTSE LR as:

 “Significant Influence” has the meaning ascribed to such term in IFRS. Notwithstanding the definition contained in IFRS, Significant Influence shall exclude Control but shall include the power:

1. a) to participate in the financial and operating policies of an entity, and/or
2. b) exercisable by any shareholder holding in excess of 10% (ten percent) of the issued share capital of an Issuer or Subsidiary;

Having regard to the relevant provisions set out above, the concept of significant influence in terms of section 1 of the CTSE LR appears to be wider than the IFRS concept of significant influence. Presuming the forementioned, and that the meaning ascribed to “Significant Influence” under Paragraph A is the meaning given in section 1 of the CTSE LR, raises the possibility that a relationship between an issuer or its subsidiary and a counterparty which does not amount to significant influence under IFRS, thereby ruling out a related party relationship under IFRS, may still amount to “Significant Influence” under Paragraph A, resulting in a “Related Party” relationship.