Monday, March 17, 2008

It is quite common in commercial practice in South Africa for businessmen to dispose of their entire business undertakings.  Disposing of an entire business undertaking implies disposing of the business as a going concern and would include all of the assets and liabilities of the seller.  In addition to assets and liabilities the disposal of the entire business undertaking normally also includes the transfer of employees, customers and other business arrangements from the seller to the buyer.
People, however, often sell or buy a business without understanding the legal consequences of such a transaction. There are various legal issues to consider apart from just the money and the business changing hands. The seller should also consider the impact of disclosure his business’ confidential information if the sale does not go through. The buyer would be more interested on the business’ sustainability and whether it has no hidden risks or liabilities.
It would be wise for the seller to demand that the buyer gives confidentiality undertakings that he will not disclose any confidential information received by him relating to the business and will not use the confidential information for any purpose other than in connection with the proposed transaction.
To alleviate its concerns the buyer may conduct a due diligence investigation into the affairs of the business or insist on the seller giving warranties. Warranties are assurances relating to the affairs of the business. A warranty is however as good as a person giving it and should not be used as a substitute for a proper due diligence.
A disposal of a business as a going concern must be done in terms of a written sale of business agreement that must be signed by or on behalf of the seller and the buyer.  Under normal circumstances a sale of assets and liabilities would attract value added tax at the normal rate (14%).  If, however, the sale is of a business as a going concern and certain formal requirements are met and are included in the sale of business agreement, the sale of the business would be zero rated for value added tax purposes which means that no value added tax will be payable. It is thus important that the agreement be prepared or at least looked at by a person with legal knowledge.
To protect both the purchaser and the seller from negative consequences that may arise as a result of the insolvency of the parties to the transaction it is important that the transaction must be done at a proper value.  The Insolvency Act also requires the parties to a sale of business agreement to publish a notice of the sale in the Government Gazette and in newspapers not less than thirty days and not more than sixty days before the date of the transfer.  If such advertisement does not take place the transfer is void as against creditors of the seller in the event that the seller becomes insolvent within six months after the transfer.  By so advertising the parties are protected against the contract being void in the case of insolvency and it is advisable for the parties to advertise the transaction.
The Labour Relations Act provides that when a seller transfers his business as a going concern the employment contracts of all employees employed in that business will transfer automatically and the buyer will assume all the obligations of the old seller towards the employees unless agreed otherwise by the parties in accordance with the provisions of that Act.
Before you sign on the dotted line be sure that you have thoroughly considered the consequences and you can live with them.
Rudolph is a director and Luvo an associate in the Corporate Department of law firm Bowman Gilfillan.