Joselowitz statement on evolution of Cytech

@ coRpcAprrAL
[nuestmcnts
STATEMENT
of
Kevin Wayne Joselowitz
(IdentityNo. 6612045091 085)
1.
Introduction
l.l.
I am an adultmal'enon-practisingattomeycurrentlyemployedas an executivedirector
of JavaCapital(Pry)Limited.
1 . 2 . Atallmaterialtimesandmoreparticularlybetween
I October1999to3l March2003I
was employedas an executivewithin the CorporateFinanceDivision of Corpcapital
Investments(Pty) Limited ("Corpcapital Investments").I joined the Corpcapital
Limited group(the "Corpcapitalgroup") on 1 October1999to establish(togetherwith
certainother colleagues)the CorporateFinanceDivision of CorpcapitalInvestrnents
("corpcapital corporate Finance").prior to joining the corpcapital group I was a
commercialparbrerof law firm EdwardNathan& Friedlandlnc, a firm I hadjoined in
1990asan articledclerk.
1.3.
In my capacityas an executivewithin the CorpcapitalCorporateFinancedivision, I
was, to the best of my knowledge,involved in all post october 1999 corporate
restructuringprocessespertainingto CorpcapitalInvestments'interestin Netainment
N.v., registered in the Netherlands Antilles @egistration No. 240lal.v.)
('Netainment").
t.4.
Set out in the statementbelow is the backgroundand detail pertainingto both the
restructuringof:
t.4.1.
group'sinterestin Netainment;
Coqpcapital
t.4.2.
Netainment's
interestin the onlinecasinobusiness
which until 1 october
2001 had been owned by and operatedby Netainmentand thereafter,
pursuantto a saleby Netainmentof its online gamingbusinessto cytech
Limited, incorporated
in Belize (Registration
No. ZZ00)(,,Cytech"),by
Cvtech.
7
Restructure of Netainment
2.1.
At the time that I commencedemploymentby the Corpcapital group, the Corpcapital
group had alreadyacquiredand held a 47.5o/ointerestin Netainment(being the vehicle
which housedthe online casinointerestsof the Netainmentgroup). The 47,5o/o
interest
was owned by Mikado Group Holdings Inc ("Mikado") a British Virgin Islands
company, a wholly owned subsidiary of Corpcapital Investments,which itself was a
wholly owned subsidiaryof Corpcapital.
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2.2.
In or about July 2000 I becameinvolved (in my capacity as an adviser to Netainment)
in a prospectivetransactionto mergeNetainment'sonline casino interestswith thoseof
a Canadian controlled onlinc casino group, English Harbour EntertainmentLimited,
incorporatedin Antigua ("English Harbour").
2.3.
The proposedmerger methodologywas that the businessesof Netainmentand English
Harbour would be merged in a new corporateentity to be incorporatedin a jurisdiction
to be mutually agreed to befween Netainment and English Harbour. The proposed
merger of Netainment and English Harbour is hereafter referred to as the "Amalco
merger" and the proposed entity through which the merger was to be effected being
referred to herein as "Amalco".
2.4.
Intensive negotiationstook place betweenJuly 2000 and December 2000. Netainment
was representedby Corpcapital Corporate Finance. English Harbour was represented
by the canadian law firm Fasken Martineau Du Moulin LLp, Toronto. The
negotiations culminated in the conclusion of a series of agreementspursuant to which
Netainment and English Harbour would merge their businessesinto a new company,
3AM Entertainment Limited ("Amalco") and the relationship between Netainment and
English Harbour as shareholdersin Amalco was to be regulated for in terms of a joint
venfure agreement. The series of formal agreements were (to the best of my
knowledge)duly executed.Copiesoithe agreementsare readily availableif required.
2.5.
The Amalco merger was ultimately not implemented by reason of the fact that one of
the conditions precedent to the Amalco merger, namely, the securing of the approval of
Microgaming Systems Limited ("Microgaming") to the Amalco merger was not
secured.Microgaming was the owner of the software platform used in the operation of
the online casinos operated at the time by both Netainment and English Harbour. For
legal and commercial reasons,the merger could not be implemented without securing
the requisite consent of Microgaming.
2.6.
In anticipation of the Amalco merger and in parallel with the process to negotiate and
document the Amalco merger agreements,for the reasons more fully dealt with in
paragraph2.8 below, the Corpcapital group's interest in Netainment was restructured
by way of the interposition of an investmentholding company, namely, Blue Eagle
InternationalInvestmentsLimited ("Blue Eagle"), a British Virgin Islandscompany as
betweenMikado and Netainment.Blue Eaglewas incorporatedand constituted(and, to
my knowledge,still constitutes)a wholly-ownedsubsidiaryof Mikado.
2.7.
The restructuring was effected in terms of a written sale agreement concluded between
Mikado and Blue Eagle concludedon 15 December2000, a copy of which is attached
marked Annexure KJI (the "Mikado/Blue Eagle agreement").The salienttermsof the
Mikado/Blue Eagle agreementwere as follgws:
2 . 7. t .
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Mikado (as seller) sold to Blue Eagle (as purchaser) with effect from
3l December2000 ("the effectivedate"):
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2 . 7. 1 . t .
2 850 bearer shares in the share capital of Netailment,
constituting 47.5% of the entire issued share capital of
Notainment:
2.7.1-2.
all claimsof whatsoever
natureand from whatsoever
cause
arising which Mikado had against Netainmenton the
effectivedate;
the subjectsharesand claimsof the salebeing referredto hereinas the
"sold equity");
2'7.2.
thepurchase
priceof thesoldequitywasstipulatedas$95,000,000.
The purchaseprice in the sum of.$95,000,000
was determined,
not with
referenceto the applicationof any valuationmethodologyto the value of
the Netainmentbusinessas such,but ratheras a consequence
of the fact
that English Harbour required (for tax and fiscal reasonswithin the
jurisdictions to which EnglishHarbour was subject)to value its
online
casino interestin the sum of $200,000,000.Given that the envisaged
Amalco mergerwould haveresultedin eachof Netainmentand English
Harbourholding a 50%interestin Amalco and the needfor consistency
in the underlying transaction,it was appropriatethat each of the
Netainmentbusinessand the EnglishHarbourbusinessbe transferredto
Amalco at equalvalues.As English Harbourrequiredthe transferof its
businessto be effectedat a valuationof $200,000,000the Netainment
businesswas to be kansferredto Amalco at the same value. The
$200,000,000
valuationwasusedasthe basisfor allocating(solelyfor the
purposes of the Mikado/Blue Eagle agreement)Mikado,s 47j%
shareholding
in Netainment
at $95,000,000
:
(i.e. $200,000,000
x 47.5o/o
$95,000,000).
Giventhat the Netainment/Mikado
agreement
constituted
an internalrestructuringalrangementin termsof which the entireissued
sharecapital in and all claimson loan accountagainstBlue Eagle (the
acquiringentity)would be heldby Mikado (thesellingentiry)andthat rhe
purchase price was not to be discharged or funded by any
non-Corpcapitalgroup entity, Corpcapitalaccededto English Harbour,s
request to accommodateEnglish Harbour's transaction pricine
requirements.
2.8.
The principal commercialreasonsfor the Mikado/BlueEagle restructurewere the
following:
2.8.1.
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one of the principles requiredby the parties to the Amalco shareholders
agreement(which agreementwas to come into effect on implementation
of the Amalco merger) was the "grand-fathering" up of rights of
pre-emption such that each of the Netainment shareholdersand the
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.
English Harbour shareholderswould enjoy pre-emptive rights not only
over the other group's direct shareholdingin Amalco but also in regardto
the shareholdingof the other's group companieswhere.the sole assetof
suchgroup companywas a direct or indirect interestin Amalco.
It would have been inappropriatefor rights of pre-emption to have been
granted by Corpcapital Investments over its shares in Mikado for,
amongstothers,the following reasons:
2.8.1-1-
Mikado constituted the offshore holding company of the
Corpcapital group of companies' offshore interest;
2-8'1.2-
in addition to Mikado's 50% shareholding in Netainment,
Mikado also held (and still, to my knowledge,holds):
.
a 50% investment in Cyber Finance Investmenrs
Limited, incorporated in the British Virgin Islands
(RegistrationNo. 293486) (..CFI");
.
l00o/o investment in Corpcapital Investments BM (the
offshore advisory subsidiary of the Corpcapital Group).
It was necessaryto put Blue Eagle in place so as to allow for rights of
pre-emption to extend above the level of Netainment but without
rendering Corpcapital's other offshore commercial interests (held through
Mikado) subject to rights of pre-emption. The most appropriate way of
ensuring this was to interpose a company (Blue Eagle) between Mikado
and Netainment and afford the English Harbour group rights of
pre-emption over Blue Eagle without extending those rights of
pre-emption to a more senior level. The restructure to interpose Blue
Eagle as between Mikado and Netainment was effected with the
knowledge of English Harbour that the restructure was necessarv to
accommodatethe " grand-fathering" requirement.
2.8.2.
The decision not to reverseout of Mikado its interest in CFI and its
anticipatedinvestment in Corpcapital Investments BVI (thus allowing for
rights of pre-emption to be granted by Corpcapital Investments to the
English Harbour Group over Corpcapital Investments' Mikado shares)
was motivatedby, mainly, the following reasons:
2.8.2.L
Mikado had historically been earmarked as the offshore
holding company of Corpcapital's non-South African
investmentsl
2.8.2.2.
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CFI was embroiled in litigation with Mini Vegas, a
customer, relating to alleged unlawful gaming activities
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undertakenby Mini Vegas, the proceeds of which were
allegedly under the control of CFI and the subject of
attachment and investigations by the Swiss and
Luxembourg authorities. Mini Vegas' activities had cast
suspicion on CFI's complicity and CFI had made
representationsto the authorities regarding its beneficial
owners and their credibility, in responseto enquiries. An
immediately subsequent change of ownership would
foreseeably have impaired CFI,s credibility with the
relevant authorities, for example, by implying that Mikado
was seeking to distance itself and its principal assets (the
interestin Netainment)from CFI's activities.
2.8.3.
It was at the time contemplated that it may be appropriate for certain
outside third parties (and, in particular, executives employed by the
corpcapital group and who were responsible for the corpcapital group's
investment in Netainment) to be incentivised by affording such persons
an "interest" in the performance of the Netainment business (if the
Amalco merger was not successfully implemented) or in Amalco (if the
Amalco merger was implemented but for whatever reason it was not
possible to incentivise or appropriately incentivise such persons through a
direct "interest" in Amalco). such incentivisationwould not be capableof
being achieved through Netainment as Netainment had outside minority
shareholders (being The Big Blue Trust (Z3,Soh), the Gandolf Trust
(23'5%) and Dawson Inc (5%)) some or all of which would probabry not
have consentedto such an incentivisation strategy through the vehicle of
Netainment. It would also have been inappropriate for the incentivisation
strategyto be implementedat Mikado level given Mikado's other existing
and anticipated future commercial interests (which are not related to the
casino business conducted by Netainment). The Blue Eagle vehicle
(which had as its sole underlying commercial assetits attributable interest
in
the
then
existing Netainment business and, following the
implementation of the Netainment/English Harbour merger, its
attributable interest in Amalco) would have been the appropriate level to
implement such incentivisation strategy. As it transpired, to my
knowledge, no such incentivisation scheme has ever been implemented
and no third parry holds, whether directly or indirectly, any sharesor has
any rights or options to shares in Blue Eagle, which constitutes a
wholly-owned subsidiaryof Mikado.
2.9.
Prior to the implementationof the Mikado/Blue Eagle agreement,advice was sought
and secured from Eddie Broomberg S.C. and his South African associate
E.J.P.Lai-King on the tax consequences
of the proposedtransactionand, in particular:
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2.9.1.
whether the disposal by Mikado of its 47.5% interest in Netainment
would give rise to any South African tax consequences
to the corpcapital
group;
2.9.2.
whether the disposalby Netainmentof its businessto Amalco (pursuant
to the envisagedNetainmenvEnglishHarbour merger) would give rise to
any South African tax implications for the Corpcapital group;
2.9.3.
whether the credit loan account created on the transfer by Mikado of its
47.5% interestin Netainmentto Blue Eagle ought to have bear interestor
whether such loan ought to have been capitalised;
2.9.4.
various other tax consequenceswhich could potentially arise in regard to
any future restructuring by the'corpcapital group of its interest in
Netainment, in particular, if Blue Eagle wourd thereafter unbundle its
interest in Netainment to Mikado.
The tax advicereceivedby Corpcapitalwas favourableand to the effect that should
Netainmentin pursuanceof its objectiveto mergeits businesswith EnglishHarbour,
disposeof its businessto Amalco for a sum of US$200,000,000,
no adverseSouth
African tax consequences
shouldarisefrom thetransaction.
2.10. Attached marked AnnexureKJ2 is a copy of written opinion fumished by
E.B.BroombergSC and E.P. Lai King dated 28 March 2001. Anachedmarked
Annexure KJ3 is a memorandum
preparedby myself (in my capacityas an executive
of Corpcapital CorporateFinance) setting out the commercial rationale for the
restructureand an executivesummaryof tax consequences
of the disposalby Mikado
of its Netainment
interestto BlueEagle.
2.I1.
A combinationof the commercialimperatives
to restructure
Mikado'sshareholding
in
Netainmentfor the reasonsset out in paragraph2.8 and the favourabletax advise
resultedin the consummation
in December2000on the MikadolBlueEagleagreement
and the consequential
implementationof the restructurepursuantto which Mikado's
47.5%interestin Netainment
wastransferred
to BlueEagle.
2.12. Postthe implementation
of the MikadolBlueEagleagreement,
the corporatestructure
of the Corpcapitalgroup's interestin Netainmentwas (and to the best of mv
knowledgeremainsto date)asfollows:
2.t2.t.
corpcapital Limited (RegistrationNo. 1983/0il3g4/06) constirutesthe
ultimate holding companyof the group;
2 .t2 .2 .
Corpcapital Investments constitutes a wholly-owned subsidiarv of
CorpcapitalLimited;
2 .1 2 .3 .
Mikado
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constitutes a
Investments;
wholly-owned
subsidiary of
Corpcapital
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3.
2.t2.4.
Blue Eagle constitutesa wholly-owned subsidiaryof Mikado;
2.t2.5.
Blue Eagle's sole assetconstitutesits 475% interestin Netainment.
Disposalby Netainment of its businessto Cytech
3.1.
In terms of an agreemententeredinto on or about 8 May 2002 Netainment sold its
business(for the reasonsmore fully dealt with below) to Cytech. The only contracr,
asset or liability excluded from this sale was the license agreement between
Netainment and Microgaming SystemsAnstalt (the licensor of the software platform
previously utilised by Netainment) dated 10 December 1998 (the "MGS licence
agreement"). A copy of the Netainment business disposal agreement is attached
markedAnnexure KJ4 (the "Netainmentbusinessdisposalagreement").
3.2.
The salientterms of the Netainmentbusinessdisposalagreementwere as follows:
3.2.r.
with effectfrom I october2001Netainmentsoldas an indivisiblewhole
andasa goingconcernits businesscomprising:
3.2-r.1.
all right, title and interestof Netainmentin and to the full
benefit of all contractsconcludedwith customersof the
businessin the ordinarycourseof business(excludingonly
theMGS liceirceagreement);
3.2.1.2.
all intellectualpropertyrights owned by Netainmentand
usedin the conductof the businessincluding its databaseof
customers,tade marks,tradenames,websitesand (subject
to restrictionscontainedin the MGS licenceagreement),all
domainnamesusedin connection
with thebusiness;
3.2.1.3.
all systems,softwareand know-how used exclusivelyin
connectionwith the business (other than the software
licence to Netainmentin terms of the MGS licence
agreement);
3.2.1.4.
cash and credit balancesat banks of the businessas at the
effective date:
3.2.1.5.
the goodwill attachingto the business,
including any liabilities (whetheractual or contingent)to creditorsof the
businessbut excluding only rights or obligations arising out of or in
connectionwith the MGS licenceagreement;
3.2.2.
the considerationfor the businesswas dischargedby way of the allotment
and issue of 100 shares in the issued share capital of Cytech to
Netainment.
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The effect of the Netainment businessdisposalagreementwas that whereasprior to
1 October 2002, Netainmentowned and operatedthe online gaming business,post this
date Netainment maintainedits 100% interestin the business(now owned by Cytechr
through its holding of the entire issuedsharecapitalof Cytech.
3.3.
The sale by Netainmentof its businessto Cytechwas effectedon advice of Corpcapital
Corporate Finance (acting as corporatefinance advisors to Netainment). The advice
was that this was the optimal method for terminatingthe MGS licence agreementin a
manner which would causeleast prejudiceto the continued operation of the business
conductedby Netainment.
J.+.
Netainment had taken a business decision to migrate off the Microgaming software
platform onto a new software platform. The principal reasonsfor this decision were, to
my knowledge, the fact that:
3.4.t.
the Microgaming software was e;",tremelyexpensive and required the
payment of a royalty fee equal to 25o/oto the gross win of the Netainment
operated casinos (whereas a competitive product could be sourced at
approximately 50%oof the aforesaidroyalty);
3.4.2.
over a sustained period of time there had been a breakdown in the
businessrelationshipbetweenMicrogaming and Netainment,
3.4.3.
Microgaming was a notoriously difficult business counter party. Other
online casinos which operated off the Microgaming software platform
(most notably English Harbour) had for substantially similar reasons to
those of Netainment successfullymigrated off the Microgaming software
platform onto a competitive softwareplatform.
3.5.
The decisionfor Netainmentto disposeof its businessto Cytech was influencedby the
terms of the MGS licence agreement.In terms of the MGS licence agreement
(clause 29), Netainment was prohibited from operating a parallel software platform to
that of Microgaming. Accordingly, it was not available to Netainment to migrate to a
new software platform at the same time as Netainment operated off the Microgaming
software platform. In terms of clause22 of the MGS licence agreement,if Netainment
terminated the MGS licence agreement,Microgaming would have been entitled to
continueduse of the client databasebelongingto Netainment.
3.6.
Given that Microgaming had online remote access to the servers off which the
Netainmentbusinesswas conducted,the Netainmentmanagementwere adamantgiven
their knowledgeof the manner in which Microgaming operatedand having regardto a
breakdownin the businessrelationshipbetweenMicrogaming and Netainment,that the
entire Netainmentbusinesswould have beenplaced in jeopardy if Netainmentwere to
have terminatedthe MGS licenceagreementon noticeto Microgaming.
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3.7.
The advise which was furnished to Netainment was that the client databaseof any
businessbelongs,in the absenceof any explicit provision to the contrary,to the owner
of that business.As there was no provision, explicit or otherwise,in the MGS licence
agreementwhich would indicatea departurefrom this principle, CorpcapitalCorporate
Finance concluded and advised Netainment that the client databasewas owned by
Netainment and that Netainment was entitled to do whatever it wished with the
databaseincluding, without limitation, the transfer of the databasewith or without
value to any third party.
3.8.
The aforesaid factors were the commercial and legal motivation for the restructuring of
the Netainment businessby way of the disposal by Netainment of its businessto
Cytech without Netainment terminating the MGS licence agreement.The MGS licence
agreementhas subsequentlybeen cancelled.
3.9.
To the best of my knowledge,the currentposition is that the online casinobusinessrs
operated exclusively by Cytech. Cytech constitutes a wholly owned subsidiary of
Netainment. The Corpcapital group's sole interest in the online gaming business
(operatedby Cytech) is held via the 47,sYoshareholding interest registered in the name
of Mikado (a wholly owned subsidiaryof the Corpcapital group).
4.
Conclusion
Whilst through both the restnicture of Netainment (as described in paragraph2 above) and the
disposal by Netainment of its businessto Cytech (as described in paragraph3 above) certain
technical internal restructurings took place for legal, commercial and strategic reasons, the
restructurings did not change the Corpcapital group's real commercial ownership in the online
casino (currently operatedby Cytech).
Kevin WayneJoselowitz
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t0
TABLE OF CONTENTS
CLAUSE NO.
DESCRIPTION
PAGE
1.
)
:
J.
i
5.
;
,7
&
9.
10.
11.
12.
&
,t
@o*^
& W
i
V
ra- +/ |r
F*J I
c i 58/0001C/KJ/DSP/20001218/I
AGREEMENT
to be enteredinto between
Mikado Group Iloldings Inc
(a comFany incorporatedin the British Virgin Isiands)
and
Blue Eagle International InvestmentsLimited
(a compaly incorporatedin the British Virgin Islands)
cs} / 002rc tKJ/DSP/2000
I 008a
WI{EREBY IT IS AGREED AS FOLLOWS :
1.
Interpretation and preliminary
The headings of the clauses in this agreementare
for the purpose of convenience and
reference only and shail not be used in the interpretatio'
of nor modi$z nor ampii$r the
tenns of this agreement nor any clause hereof.
Unless a contrary intention clearlv
appears
1.1.
r.2.
words importing -
1.1.1.
any one genderincludethe other two genders;
I.I.2.
the singularinciudethe plural and.vice versa: and
1.1.3.
natural
persons incrude created entities
unincorporate) and the state andt ice versa:
(corporate or
the following terms shall have the meanings assigned.
to them hereunder and
cognateexpressionsshail have correspondilg meanings,
namery :
"company"
r.2.1.
meansNetainmentNv, a companyincorporatedin
the
NetherlandsAntillesl
1.2.2.
"effective
l '2'3'
"purchaser"
date" means31 December2000:
meansBlue EagleInternationalInvestmentsLimited
c 158/0001C/KJ,DSP/200
01218
lr
2.
1 1 A
"seller"
| ./\
"sold claims"
means alr clai'rs of whatsoever nature and
for
whatsoevercausearising,if any, wiricrr the
serlermay have against
the company on the effective date;
1.2.6.
"sold
equity" means collectively the sold shares
and the sold
claims.
1 .2 .7 .
"sold
meansMikado Group Holdings Inc;
shares" means2 950 bearer sharesin the share
capital of
company, constituting47.5% of the entire
issued share capital of
the cornpany;
1.3.
if any provision in a definition is a substantiveprovision
conferring rights or
imposing obligations on any parfy, notwithstanding
that it is only in the
definition clause, effect shall be given to it as if it
were a substantiveprovision
in the body of the agreement;
r'4'
when any number of days is prescribedin this agreement,
same shail be
reckonedexclusivelyof the first andinclusivelyof the
last day unlessthe last
day fails on a Saturday,Sundayor public holiday, in which
casethe last day
shall be the next succeedingday whicrr is not a Saturday,
Sundayor public
holiday.
Sale of the sold equit-v
2.1.
Tire seller sells to the purchaser,whicir purchasesas
the sold sharesand the sold claims.
2.2.
one indivisible transaction
V,L
Notwithstanding the date upon which tiris agreement
is signed and the date /) ^
upon which the sold equity is deiiveredto the purchaser,
the sold equity is sold /-%
with effect on and as from the effectivedate,fi'om
which date all risi t" *d4
.^
/ffi\ H,' fibi
W / ' U
c 158/0001c lKl lDSP/200012ftn
benefits attaching to the sold equi8 shall be deemed to
have passed to the
purchaser.
3.
Purchaseprice
a
A
T.
5.
l
J.1.
The purchaseprice of the sold equity is $95,000,000(ninety
five million US
Dollars).
3.2.
of the purchaseprice, so much as doesnot exceedthe face value
of the sold
claims shall be allocated in respect of the sold claims and the
baiance shall be
allocatedin respectof the soid shares.
Payment of the purchase price
4.1.
The purchase price shall be dischargedby way of the purchaser crediting
the
seller's loan accountin the books of the purchaserin the sum of
$95,000,000
(ninety five million US Dollars).
A a
The loan accountreferredto in clause4.1 shall be payableby the purchaser
to
the seller on demand.
Closing
On the effective date (or such at such other date as ageed to by the parties),
the seller
shall deliver to the purchaser-
5'1.
the sharecertificatesor other documentsof title reflecting that the
sold shares
will, with effect from the effectivedate,be held for the beneficial
ownershipof
tire purchaser;
rm
vlh .
4
$v,
c 158/0001c lKI DSP/200012 I 8/I
6.
5.2.
a written cessionof the sold claims;
5.3.
such other certificates or documentsas may be required to effect
a transfer of
the sold equity i'to the nameof trrepurchaseror (if required
by the purchaser)
to be held for the benefit of the purchaser.
Warranties and representations
The seller wa:rants in favour of the purchaserthat:
6.1.
it is the beneficial owner of the sold equity;
6.2.
it is able to pass free and unencumberedtitle in and to the sold
equify to the
purchaser;
6.3.
no third party has any claim in and to the sold equiw.
Save as aforesaid,the sold equify is sold free of any warranties or
representationsof
any nafure whatsoever.
7.
Further Assurances
The parties shall with reasonablediligence do ali such things and provide
all such
reasonableassurancesas may be required to consun'Lnatetire transaction
contemplated
hereby, and each parly hereto shall provide such furlher documents
or instruments
required by the other party as may be reasonablynecessaryor desirable
to effect the
purposes of this agreementand cany out its provisiols whether
before or after the
effective date.
c 158/0001CIKJIDSP/2000
I 2 I 8/r
8.
Governing law
This agreement shall be interpreted in accordancewitil English law
which shall be the
goveming law of this agr-eement.
9.
Notices
9.r.
All notices under this agreement,whether in respect of court process
or other
documents or communications of whatsoever nature, shall
be given to the
parties at the followine addresses:
9 . 1i .
purchaser:
c/o SchindlersCorporateManagement(LlK) Limited
21 Cork Street
London, W1X 1I{B
Attention: Alex Goodman/IvlandyFeldman
Telefax: +44 20 7287 4243
9.r.2.
seller:
c/o SchindlersCorporateManagement(IK) Limited
21 Cork Steet
London, WlX 1I{B
Aftention: Alex Goodman/lvlandyFeldman
Telefax: +44 20 7287 4243
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of this
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competentto give noticeby telefax.
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Either parfy may by notice to any otirer party change the physical
address to
another physical addresswherepostal delivery occurs or its postal
addressor
its telefax number, provided that the changeshall become effective
vis-d-vis
that addresseeon the 3rd businessday from the receipt of the notice
bv the
addressee.
b
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Any notlce to a partv:
9.4.1.
sent by prepaid registeredpost (by ainna'
if appropriate) in a
correctly addressedenvelope to it at its designated
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sent by telefax to its chosen telefax number
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clause9.1, shall be deemedto have been received
despatch(unlessthe contrary is proved).
9'5'
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Notwithstanding anything to the contrary herein
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if either party breaches any material provision or
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in the circumstances) then the
aggrieved parry shall be entitled without notice,
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arrived, in either event without prejudice to the
aggrieved parry,s right to craim
damases.
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Costs
Each parfy shall be liable for all
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Counterparts
IJ.I.
This agreement may be executed
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13.2. Each counterpart, when executed,
shall
together constifute the samedocument.
be an original, but all the countemarts
SIGNED by the parties and witnessed
on the folrowing dates and at the
following places
respectively:
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12 18/I
WITNESS
'W
I
i\
I
lSfzlffi
[-oh,hiJ
,
SIGNATTIRE
For' Mikado Group Holdings Inc
n
As SoleDirector
For
December15, 2000 Willems
2. RosaH
ernandes-Correia
BIue Eagle International
Investments Limited
KJz
EL}</DW/CORPCAPITAL
15.01.2001
Ex Parte: CORPCAPITAL
L|M|TED
Consultant
ln re:
PROPOSED
RESTRUCTURE
OFTHENETAINMENT
NV INTEREST
OPINION
Introduction
1.
consultant's47,5o/o
interestin NetainmentN.V. (Netco)is heldvia
Corpcapitallnvestments(Pty)Limited("Corpinvest"),
a company
registeredin SouthAfrica. Corpinvest
whollyowns a BritishVirginlsles'
company,MikadoGroupHoldingslnc ("Mikado")
which in tum holdstwo
invesimenis,a 47,570interestin Netco,a NeihedandsAntillescompany,
and a 50% interestin CyberFinanceInvestmentsLimited(CFl),a
companyregisteredin the BritishVirginlsles.
Non-residents
holdthe remaining52,5o/o
issuedshare capitalof CFI and
Netco.
The cunent corporatestructureis set out underAnnexure1.
Netcoand an independent
tnirdparty,EnglishHarbourEntertainment
Limited('EnglishHarbour''),concludednegotiationsin December2000,to
mergetheirbusinessesintoa newcompany,AmalcoLimited("Amalco"),
a
companyincorporated
in the lsleof Man.
Precedingthe aforementioned
mergerintoAmalco,Mikadodisposedof its
47,50Ashareholding
in Netcoto BlueEaglernternational
lnvestments
Limited('Blue Eagle'),a BritishVirginlslescompanyand a whollyowned
subsidiary
of Mikado,for a sum of US$9s milrion.
Mikadoflnancedthe
saleon a non-interestbearinginter-company
loan account.Thereafterand
priorto 31 December2000, Netcosoldits businessto Amalco,for
US$200 million,retuminga distributable
profitof approximately
the same
amount.
In consideration
for the acquisition
of the aforementioned
businesses,
Amalcoissuedordinarysharesin equalproportionsto Netcoand English
Harbourwiththe balanceof the purchaseconsidemtioncreditedto loan
accountsin favourof the lattercompanies.
A diagramof the re-structured
groupis set out underAnnexure2.
4.
Netcoas a consequenceof the disposalis now a dormantinvestment
holdingcompany,rich with approximately
US$ 200 millionin distributable
reservesand shouldNetco,on or after1 January2001,distributethese
reserves,as a dividendto its shareholders,
the followingSouthAfrican
incometax consequenceswouldarise:
4.1
Section9E of the SouthAfricanlncomeTax Act, No. 58 of 1962
(theAct), as amendedby the RevenueLaws AmendmentAct (Act
59-2000)definesa "foreigndMidend"as'any dividendreceivedby
or which accrued to anv personfrom anv companv which rs .... a
foreignentityas definedin secticngD ........."(underlining
added)
J
4 .2
4.3
A "foreignentity"is definedas: "....any person(otherthan
a natural
person or a trust)wltichis not a resident. . ... ....,,
A "resident"is definedin section1 of the Act as;
" ...a n y(a) natural personwho is
(b) person(otherthan a naturarpercon)which is incorporated,
establishedor formedin the Republicor which has rfs place
of
effectivemanagement
in the Repubtic
..........,,
4.4
4.5
4.6
4.7
It is obviousthat Netcois a Toreignentitr and Blue Eagle
would
receivea 'foreign dividend",
from Netcoof approximatery
us$ gs
millioni.e. its 47,Syoaliquotshareof the reserves.
Blue Eaglein tum, alsoa "foreignentity"is furthermorea
"controlled
foreignentity"of corpinvest,as definedin sectiongD,
namely "... any foreignentityin whichany residentor residents
of
the Republic, whetherindividualtyorjoinily, andwhether dire,cily
or
indirectly,hold more than s0 per centof the pafticipation ights,
or
are entitled to exercisemore than s0 per cent of the votes or
control of such entity";
section gD deemscertainincomeof a .controlledforeignentity"
to
accrueto south Africanresidentsand subsectiongD(2)provides
as
follows: "There shaltbe includedin the income for theyear
of
assessmentof any residentcontemplated
in the definitionof
"controlled
foreignentity"..., dfi amount equalto the proportional
amountof the net incomeof suchenttty....... which bearcto
the
total net income of suchentw ..... the same ratioas the percentage
of the participation ights of such residentin relation to suchentity
bearc to the totalparticipationights in relationto suchentitv:
.. ......,,
(underlining
added).
subsection9D(2A)defines"net income'forthe purposesof gD(2)
as "...an amountequatto the taxableincomeof suchentity
determinedin accordancewith this Actas if such controlled
foreiqn
4
entityhad beena resident:..."(underlining
added).
It is clearthat any incomereceivedby BrueEagreis to be examined
in terms of the provisionsof the south AfricanIncomeTax Act, as if
the companywas a residentof SouthAfrica,and anv taxable
incomeincludedin its "net income'.
4.8
corpinvest,a 'resident"as definedwouldthen be taxed on this "net
income"in proportionto the "participation
rights"it holdsin Blue
Eagle.
"......where
Subsection9E(3)of the Act provides:.
duing any year
of assessmentany foreigndividendis receivedby or accruesto
any resident. the amount to be includec in the gross income of such
resident.. ...shall(a) if such resident-
0 .. . .
ii) in the case of a company,togetherwith any other company in
a group of companr'esof which such company forms part, hold
for their own benefit,
at least 10 per cent of the equ$ share capitatin the company
declaing the dividend,be the propottionateamount of the profit
from which the dividendis distibuted....."(underlining
added).
4.9
A summaryat this pointis appropriate.
subsection9D(2A)requires
Blue Eagle'staxableincometo be quantifiedas if the companywas
a "resident'of SouthAfricaand thattaxableincomeis to be
includedin its "netincome'
subsection9E(3)providesthat any "foreigndividend"receivedby a
"resident"
is to be includedin that'resident's'gross
income.
Accordinglythe dividendreceivedby BlueEagrefrom Netcowill be
includedin BlueEagle's"netincome'andas BrueEagredoes not
qualifyfor any concessions
providedby subsectiongD(g),
subsection9D(2) willcausecorpinvestto be taxedon that "foreign
dividend"includedin the "netincome"of BlueEaole.
5
4.1O The conclusionanivedat aftera rathertortuoustourof sections1,
gD and 9E, is that the "foreigndividend"receivedby Blue Eagle
from Netcowouldfallforinclusion
in Corpinvest's
taxableincome,
undersubsection9D(2)of theAct.
5.
Two proposalsare underconsideration
as an alternativeto a future
dividenddeclarationby Netcoand the accompanying"foreigndividend"
complications
of section9E.
Proposal1 - Preferenceshareissue.
6.
In placeof a dividenddeclaration
by Netco,a retum of capitaltothe
shareholders,
for the sameamount,couldbe structuredon the followino
basis:6-1
An independentoffshorefinancialinstitutionsubscribesin cashfor
preferencesharesin Netco,with a parvalue of say us$ 1000,for
US$ 198 million(US$200 millionlessa discountof say 1%),
resultingin the companyraisingpreferenceshare capitalof
US$ 1000and a sharepremiumof US$197,99million.The holder
of the preferenceshareswillbe entitledto preferencedividends
and a repaymentof the nominalvalueof the preferenceshareson
redemption.
6.2
The entiredistributable
reservesof Netco,approximatelyUS$ 200
million,would be distributed
to Divco,as a preferencedividend
leavingthe capilalstructure
of Netcocomprisingof nominal
ordinaryshare capital,nominalpreferenceshare capitaland a large
sharepremium.The conesponding
asseton the balancesheet
wouldbe the Amalcoinvestment.
6.3
After a periodof 18-24monthsNetcowould be unbundledand the
effective23,75yoholdingin Amalcodistributedto Blue Eagleas a
repayment
of sharepremium,
sansany adversetax consequences
o
undersectionsgD or gE to the Group.
A repaymentof sharepremiumis excludedfrom the definitionof a
"dividend";
referexclusion
(f)tothedefinition,
in section1 of theAct
and thereforeoutsideof the 'foreigndividend"provisionsin section
9E.
No incomeis receivedby BlueEagle,on the repaymentof share
premium,and no amountfallsfor inctusioninto 'net income'.
AccordinglyCorpinvestis unaffectedby the provisionsof section
9D.
Proposal 2 - Netco ,,A" and ,,8',share issue.
7-
Netco'ssharecapitalis dividedinto'A" shares,issuedto Blue Eagle,and
"8"
shares,issuedto the non-resident
sharehorders.
on a
47.5% :52.5% ratio.The rightsattachedto the "A" and ,,8"sharesrank
pari passu in all respects.
8.
A dividendis declaredto the "B" shareholders
and setiledby the
'B'
distributionof a dividendin specieof the
shareholders'aliquoiportion
of the Amalcoshares.The end resultis that Netco'sdistributable
reserves
"B"
and its investmentin Amalcoreducesby 52.5%and the
shareholders
acquiretheir52.5%stake in Amalcoas a directholdinq.
L
The 'B" shareholderswillforfeit,in favourof the ,A" shareholders,any
futureparticipation
in profitsarisingfromthe remaining47,Soh
Amalco
investmentheld by Netco.
The 'B" shareholdersretaintheirvotingrightsbut the "A' shareholdersare
conferreda calloptionon the ,,8"shares.
Advice Required
10.
An opinionis requiredon the followingissues:
7
10.'1 Willthe disposalof the Netcointerestby Mikadoto BlueEaglegive
riseto any south Africantax consequencesfor the Group?
10'2 Will the disposalof the Netainmentbusinessfrom Netcoto Amalco
give riseto any south Africantax implications
for the Group?
10'3 Will the unbundlingalternatives
of the Amalcointerestfrom Netco,
refer proposal1 and proposal2, give riseto any SouthAfricantax
implicationsfor the Group?
10.4 should the loanfrom Mikadoto BlueEagle,arisingfrom the
disposalof the Netainmentinterest,bearinterestor couldthe loan
be capitalised?
10.5 What are the SouthAfricantax implications
shouldBlue Eagle,
after an unbundlingof Netcoin linewith proposal1, referpoint6
supra,disposeof its interestin Amalco?
10.6 could section 103 of the Act be successfullyappliedto the
proposed restructure?
10.7 What are the SouthAfricantax implications
for the Groupif Netco
does not unbundleits investmentin Amalco,but disposesof the
investmentat a pricein excessof the carryingamountof
US$ 95 million?
Disposalof the Netco interest by Mikado to Blue Eagle.
11.
Mikado,priorto 31 December2000,is not a south African'resident'as
definedin section1 of the Act, referpoint4.3 supra,beinga company
incorporatedin the BritishVirginrsleswith its place of effective
managementoutsideof the Republic.
The amendedsubsection9D(2),referpoint 4.6 supra,whichseeks to
determinethe'net income"of Mikadoas if it were a .resident"is only
operativefrom 1 January2001,and onlyappliesin respectof years of
assessmentcommencingon or afterthat date.The relevanceof this lies in
Mikadc'sfinancialyearendingon 31 August,whichresultsin the new
6
subsection9D(2) onlyapplyingto Mikadofrom 1 september 2oo1
onwards.
12.
subsection9D (2) of the Act, priorto the amendmentsenactedby the
RevenueLaws AmendmentAct (Acts9-2000)providedas follows:
" There
shallbe inctudedin the incomeof any residentcontemplatedin
the definitionof "controiledforeignentity' in subsection(1), a proportional
amountof any investmentincomereceivedby or accruedto suchentity,
which bearsto the total investmentincomereceivedby or accruedto such
entV, the same ratio as the percentageof the participationights of such
resident in relation to such entity bears to the totalparticipation ights in
relationto suchentity:....,
13.
lnvestmentincome is definedas 'investmentincome as definedin section
"
9C (1) and
(underlining
added).
Secfbn 9C(1) defined "investmentincome, as:
' any income
in the form of any annuity, interest,rental incomeor royatty
or any income of a similarnatute."
14.
Mikadoremainsa "controlled
foreignentity"as definedin section
9D but the, pre I January2001,profiton disposalof its Netco sharesto
Blue Eagleshouldbe immunefromthe provisionsof the Act, providedthat
it does not fallwithinthe deemingprovisions
of sectionsgD or gE and in
particularthe definitionsof "investment
income"and "foreigndividend".
The profitretumedon the sale of the Netcosharesobviouslydo not fall
underthe descriptionof an annuity,interest,rentalincomeor royalty
incomebut the proceedsfromthe saleof the Netcoshares do fall within
paragraph(b) of the definitionof a "foreigndividend'in sectiongE which
reads:
" any
amountderivedby any personfrom the disposa!by such personof
any shareor interestin .....a company,to the extent that suchcompany
or
any subsidiaryof such con'pany hasany undistibutedprofitswhich
were
deived from a source outsidethe Repubticwhich are not deemed
to be
from a source withinthe Republic,orfrom profitsdeemedto
be from a
sourcewithin the Republicwhichhave not been subjectto tax
in the
Republic,which were directtyor indirectty availablefor distibution
tosuch
"
person:.....(underlining
added).
15'
Proviso(iii)to the above definitionhoweverexcludesanydisposal
of any
shareor other interestin the fixedcapitalin a companywhere:
"...
suchperson retainsthe sameeffective inferesfin theequrty sharc
capital'...of the company as priorfo dr.sposa
l: Provided that the provisions
of thissubparagraphshattnotapptyif oneof the main purposes
of such
disposalia the avoidancd, postponement
or reductionof liabitity.for any
t a x....."(u n d e rl i n i nagd d ed) .
16.
It is manifestthat Mikadoretainedthesameeffectiveinterestin the equlty
of Netcoafterthe disposalto BlueEagle,as priorto thedisposal,
thereby
allowing
Mikadoto relyon the aforementioned
exemption,
providedof
coursethatthe disposalwasmotivated
by soundcommercial
reasons
ratherthana tax avoidance
purpose.
17.
Themergerof the NetcoandEnglishHarbourbusinesses
intoAmalco,
required
thatthe shareholders
of NetcoandEnglishHarbour
enjoyedpre_
emptiverightsovertheirdirectandindirect
interests
in Amalco.
Dueto Mikadohousingotherinterests
besidesthe Netcoinvestment,
viz.
a 47,5%interestin cFl, it wasinappropriate
for pre-emptive
rightsto have
beengrantedby Corpinvest
at theMikadolevel.
18.
It wasnecessary
to incorporate
BlueEagleandtransferthe Netcointerest
therein,as the soleassetof BlueEagle,to facilitate
thegrantingof a pre_
10
:ffi""
*:il'.[ffe
Easre
rever,
such
thatcorpinvest,s
other
requirementsof
ergh;;";H.""'ced'
19.
while satisfvinsrhe
pre-emprive
A furtherreason
for refo,
;?:,:Y.':1fi
[TF'::J::::,:,::,n*;::iil
-"q'vo ur tne
Amafcooperation
by takingup share
Eagb.
optronsin Bfue
20.
Notwithstanding
the fact
Netcofiay hal'e
reservesavairabre
distribution,the
for
disporr, ,tn"t
Mikadoto BfueEagb
shoutdnot constitute
deemedgE foreign
a
oivioe] and accordingfy
"investrnent
wiil not constitute
income"
-:"ffH:|;r:"n::,;"
beimmune
rromrhedeemins
provisions
or
berore
therast
day
or,,,,;""":,=:H:::id:ffiJ; ,n";" onor
21.
Shouldthe profit
accrueto Mikado
after31 Auc
woufdbe quite
3ust 2001,the position
different.The
to section9D' which
the definit.
ton of "investmen,:::*,:1nt
replaced
ffiInTr,;
ffffrffi* **tH:;:]#$*:;:il:
wouldfail to be incruded
account,that profit
in the deo",l]^"^"'"1"::ru
"net
of
income",and corpinvest
woutdbe subject
to south^r;::i:-ion
tcantaxon thatprofit
amendedsectiongD.
in termsof the
22'
I am advisedthat
Mikado's
tradinghistory
wourdinhibita convincing
argument
thatthe proceeds
coufdbe on capftal
ar
shourdthe proceeds
In anyevent
be on capitaraccount,
gD(2A)provides
,n" "r]ro'nt' subsection
"net
thatMikado,s
income,,nr,,rn"n.ed
)e an amountequar
itstaxabreincome,
to
determined
in accordance
withourAct,as if
Mikado
11
was a resident.
The recen'y released
draftsof the Eighth
schedure,dealing
capitarGainsTax (cGf,
with our new
to be introduced
with
effectfrom 1 'ctober
2001'appriesto the
worrdwide
assetsof residents.prima
facie,a capitar
1octob
er2001bv
Mikado,
adeemed
:JH,1nTfl[::,:-er
fffT.ietincome",,",,,,,,[T:t:Ji:j?,r',",::,
of coursethe cGT
bgisration
is stiffin draftform
andthe positionmay
changeas the legislation
develops
to finality.
23.
Section9E(7)(e)exempts
fromtax _
ordeemed
b havebeendec,ared
by
,_,y:::::i"',;:"::"::::!:d
'" ctrv vAt€r|r
distibuted -'
""'
the dividendis
*
i) relateto anv amount
of incon which
hasor wittbe included
incomeof thesharehotde,
in thq
orr"
on,*,o,*un,ii,iu'J"J;
; :i::";: ;X : :r:: : ::: : ; or
:: rsf
iii) have othenryise
beeninctudedin
the taxabreincome
of theshareharder
(a)orthe
"roreign
derinition
or
dividend.
,r#f,fr Zn::i^'h
fn the event thi
ca
pta,
g,nu.jl:::H::J"ffiil: ;ffi,J:[::::
"
:,T:Jil;.,"
outof thatcap*afprofir
wirffa, for
;:,T]j"t
exemption
undersecrion
Consideringthat
only 50%of a corTlp€rr.r!,s
cor
taxablecapitalgains
inctudedin its taxrr,,";:::^
are
incomeit appears,
prima
facie,that an overall
economic"Ou"n*"b,e
tagewoufdbe gained,
vis_a_vis
the positionshould
the
12
profithavebeen on revenueaccountand fullyincludedin taxableincome.
Disposal of the Netainmentbusiness from Netco to Amalco.
24'
ShouldNetcoin pursuanceof its objectiveto mergeits businesswith that
of EnglishHarbour,disposeof its businessto Amalcofor a sum of
US$200million,no adverseSouthAfricantax consequencesshouldarise
fromthat transaction.Netcois not a "controlledforeignentity",for the
purposesof SectiongD, providedthat the remaintng52,5o/o
shareholding
"residents"
is not heldby
as definedin the Act. A Netherlands
Antillestax
liabilitymay arisefrom the transactionbut I do not commentthereon.
Thereis a potentialSouthAfricantax implication
for the Groupshould
BlueEagledisposeof Netcoor shouldNetcodistributedividendsto Blue
Eaglebutthe disposalofthe Netcobusinessto Amalco,shouldnot in
itself,causeany adverseSouthAfricantax implications
for the Group,
whetherthe disposalis concludedbeforeor after31 December2000.
Unbundling of the Amalco interestfuom Netco - south African tax
implications.
Proposal 1 - issue of preferenceshares
25.
lf Netcois unbundledper point6 supra,an ordinarydividendwouldnever
be declaredand a potentialSouthAfricantax liabilityfor the Groupw1l be
indefinitely
avoided.
The unbundling
may be summarised
as follows:
25.1 An independentoffshorefinancialinstitution,
Divcosubscribesfor
preferencesharesin Netcoat a premium;
25.2 The issuepricewouldapproximate
the profitof US$200million
aftertax, less an appropriate
discountto Divco.
4 ^
25.3 The rightsattachingto the preferenceshareswouldbe limitedto
preferencedividendsand a repaymentof the nominalvalue
of the
preferenceshares,on redemption.
25'4 A preferencedividendis declaredto Divcoreducingall distributable
reservesof Netcoto nil,leavingthe companywithordinaryshare
capital,preferencesharecapitarand share prernium.
The preferencesharesare redeemedat par and Netco after ig_24
monthsis wound up, allowingit to transferits investmentin Amalco
to Blue Eagleas a repaymentof share premium.
25.5 Netco is in turn,woundup aftera suitabletime intervalof say
2_3
years.
zo.
The accountingand tax resultwouldbe:
26.1 Blue Eagleobtainsthe Amalcoinvestmentfor US$gS million;
26-2 The Amalcoinvestmentis distributedby Netcoto Blue Eagleas a
repayrnentof sharepremiumwhichwill not fall for inclusionintothe
lattercompany's'net income'asdefinedin sectiongD, nor will
such repayrment
fall intothe definitionof a "dividend"in section1 of
the Act obviatingthe receiptof a "foreigndividend'byBlue Eagle;
26.3 Netco is disposedof withouta sectiongE deemeddividend
implicationas the companyhas no undistributed
profitsavailable
for distribution,
at the timeof its disoosal.
27.
The tax and accountingresultappearsoptimalbut an obviousconcem is
whethersection103 couldbe successfully
appliedto the proposed
restructuring.
considerationmustfirsflybe givenas to whichof the
followingaspectsof the restructure
couldbe exposedto a section 103
enquiry:
27.1 The transferof NetcosharesfromMikadoto BlueEagle?
27.2 The disposalof the NetcobusinessintoAmalco?
14
27-3 The unbundlingtransactionsat the Netcolevel,resultingin the
transferof the Amalcosharesto Blue Eagle?
27.4 All of the abovetransactionsas they shouldbe viewedas
componentsof one integrated
scheme.
28.
ln the case of Hicklin v secrefa for tnland Revenue,41 sATc
ry
ITg,
the secretaryfor lnlandRevenueunsuccessfully
attemptedto apply
section103 to what it regardedas a 'dividendstrip"scheme.The facts
of
the case were as follows:
28.1 The taxpayerand two otherswerethe sole shareholdersand
directorsof a privatecompanyR, whosemainactivitywas the
managementof anotherprivatecompanyA. From its incorporation
R's profitswere ahnrays
retained,no dividendswere declaredor
paid out. In 1971the businessesof R and A were sold to
a new
companyNA and R deriveda capitalaccrualof R150 000 fromthe
sale that it afiocatedto a nondistributabre
reserve.
28.2 companiesR and A, now dormant,continuedin existence
and R
from time to time,bonowedmoneyfromA and advanced
interest-free
unsecuredroansto its sharehorders.
29.
A resolution
at R's annuargeneral
meetingon 30 July 1973,resolvedto
pay a dividendof R30 000 out of distributable
profitswhich was
subsequentlynot implementedas the shareholders
abandonedthe idea
due to the resultanttax liability.
30.
In 1975the Appellantfortuitouslymet a managerof RN corporation
Limited,a companyinterestedin the acquisitionof dormantcompanies
havingdistributable
profits.RN madea written,non-negotiable
offerto
purchasethe sharesin R from the shareholders.
16
36'4 Beforesection103(1),
as it thenwas,canfindsuccessful
application,
thefollowing
fourrequirements
allhadto be present:
36.4.2Atransaction,
operation
or scheme;
36.4.3Thetransaction
musthavethe effectof avoidingor
postponing
liability
fortax on incomeor reducing
the amount
of the tax;
36.4.4Thetransaction
mustbe enteredintoor caniedout by
meansor in a mannerwhichwourdnotnormaily
be
emproyed
in theentering
intoor carrying
outof a transaction,
of the natureof thetransaction
in question
or musthave
createdrightsor obrigations
whichwourdnotnormaily
be
createdbetween
personsdearing
at arm,s_rength
undersuch
a transaction;
and
36.4.srhe avoidance,
postponement
or reduction
mustbe the sore
or mainpurpose
of thetransaction.
36'5 Revenuecounselhadenedin submitting
thattheconductof the
sharehorders,
incruding
theircontinuar
bonowing
fromR, the
retentionof R, arthough
dormant,
the abandoning
of the intention
of
declaringdividends
andtheurtimate
transaction
withRN,
constituted
a wider"schemel
envisaged
undersection
103(1).
The
onfytransaction,
operation
or schemein issuewasthe agreement
with RN.
36.6 The RN agreement
didhavetheeffectof avoiding
riabirity
for
incometax andtherewaslitfledoubtthatwhilethe
avoidance
was
nottheirsolepurpose,
it wasoneof the mainpurposes.
36.7 In relationto the normarity
requirement
it wasimportant
to
determine
'at
whetherthetransaction
was concluded arm,s_length,,.
when considering
thenormarig
of the rightsor obrigations
so
createdor of the meansor mannerso emproyed,
dueregardhasto
paid
be
to the surrounding
circumstances.
Theproblem
of normality
or abnormarity
is mainry
a factuarone.
In entering
intothe RN
I I
agreementbothsidesmanifestlydealtwith each otherat
arm's-length.NeitherR nor its shareholders,
as directorsor
otherwise,wereassociatedwith or interestedin RN. lt was partof
RN's businessto purchasethe sharesof companieswith capital
and distributable
reseryesand this offer was made in the ordinary
courseof that business.Therewas thus nothingabnormalabout
that undertaking.
36.8 The Courtfoundin favourof the taxpayer,concludingthat although
the otherrequirements
of section103(1)were present,crucialty,
(c) in Section103(1Xi)and (ii),viz. an absenceof
requirement
normality,
was not fulfilled.
37
Applyingthe principles
enunciatedin the Hicklincaseto the instant
proposal,earlierdiscussions
with Consultantindicatethat sound
commercialreasonsexist,otherthanthe obtainingof a tax benefit,for
transactions28.1 and 28.2.The presenceof cogentcommercialreasons
as the main purposefor the transactions,irrespectiveof the fact that tax
avoidancehas resultedor was one of the considerations
in carryingout the
transaction,shouldbe sufficientto successfullyresistthe applicationof
section103(1)referCIRvs Conhage,61 SATC 391 (SCA).
ln briefthe court,in the Conhagecase,heldthat where a taxpayerentered
intoa transaction,
operationor schemein orderto achievea commercial
objective,in that caseto raisefinance,and did so in a mannerthat avoided
tax, it was not even relevantto examinewhetherthe rightsand obligations
createdwere abnormal.Sincethe mainpurposeof the transactionwas to
raisefinanceand not to avoidtax, inespectiveof the fact that tax was a
consideration,
section103(1)couldnot be successfully
applied.
38
Returningto the questionraisedin point27, it is transaction27.3,the
Netcounbundling
thatwouldbearthe bruntof a section103(1)enquiry
18
39
Section103(1)as it is currenilyworded,provides:
" Wheneverthe
Commissionertssaf.sfed that any transaction,operation
or scheme (whetherenteredinto or canied out beforeor after
the
commencementof thisAct, and inctudinga transaction,operation
or
scheme involving the atienationof property)_
(a)
has beenentered intoor caniedout which has the effect
of
avoiding or postponingtiabitityforthe payment of any tax, duty
or
levy imposedby this Actor any previous rncomeTax Act,
or of
reducing the amount thereot and
(b)
having regard to the circumstances
underwhich the transaction.
opention or schemewas enteredinto or canied out0
was enteredinto or canied out_
(aa)
in the caseof a transaction,operationor schemein
the contextof business,in a manner which woutd not
normallybe employedfor bona fde busrness
pu@oses,other than the obtainingof a tax benefit:
and
(bb)
in the caseof any other transaction,operationor
scheme,beinga transaction,operationor scheme not
fallingwithinthe provisionsof item (aa),by meansor
in a manner which woutd notnormaily be employed in
the enteing into or carryingout of a transaction,
operationor schemeof the nature of the transaction,
operctionor schemein question;or
(ii)
has created ights or obligationswhich would notnormally
be createdbetweenpersonsdeatingat arm'stength under a
trcnsaction,operationor schemeof the natureof the
transaction,operationor schemein question;and
(c)
was enteredinto or caniedout solelyor mainly for the purposes
of
.
obtaining a tax benefit.
20
offshoredividendstrip.Howevershouldthe dividendstripbe integrated
intoa transactionmotivatedby genuinecogentcommercialobjectives,the
possibilityof a successfuloutcomewouldbe enhanced.
44
A possiblescenariocourdbe the approachby an independentpartyto
purchaseAmalcofromthe Group,in whichcase the disposalmay be
transactedon the basisof the instantproposalexceptthat the Amalco
shareholdingcouldbe distributed
to the purchaseras a dividendin specie,
and the significantsharepremiumraisedwouldbe availableto immunise
any distributions
to shareholders
againstsections9D and gE, to the extent
that distributions
are madeout sharepremium.
Undersuch a scenariothe main purposeof the transactionwould not be
tax relatedbut motivatedby a commercialpurposeto sellthe Amalco
investmentto a willingbuyerand a defenceagainstsection103 would be
basedalongthe principres
enunciated
in crR vs conhage.
Proposal 2 - Netco ,,A,,and ,,8" share issue
45
The issueof "B" sharesto the sz5% outsideshareholders
and a
distributionof theiraliquotshareof the Amalcoinvestment,as a divid6ndin
specie,effectsan unbundling
of 52,5o/o
of the Amalcoinvestmentto the "8"
shareholders.
The SouthAfricanincometax implications
requirecarefulexamination,
assumingthatafterthe unbundling,
46.1 Netco'sremainingreserves,availablefor distribution.
total
US$ 1 miilion,
46.2 The 'B" shareholders
forfeitany futurerightsto any income
eamed by Netcofromthe residual47,so/o
Amalcoinvestment
46.3 The'A'shareholders
are awardeda calloptionon the "B'shares.
21
46
The "B" sharehorders
are non southAfricanresidentsand the issueof ,,8,,
sharesand dividenddistribution
to themwillnot causeany south African
tax consequences
in theirhands.
47
What requiresexaminationis whetherNetco
continuesto remainoutside
the provisionsof section9D. Netcowilrbe
a cFE if any residentor
residentsof south Africa,individuaily
or joinfly,direcflyor indirecly,hord
morethan 50 per cent of the participation
rightsor votesof the company.
48
corpinvestvia the "A" sharehorder,
BlueEagle,holds 47.s%of Netco.
BlueEaglemay, at its discretion,
calrfor the .B,,shares,at which time it wirl
becomethe sole shareholderof Netco.Until
that timethe "B' shareholders
retaintheirfull votingrightsand the"A"
and "8" sharescontinueto rank
paripassuin all respects.
49
The "8" shareholdersforfeittheirrightsto
any futureincomeeamed by
Netcofrom its Amalco investment
and in effectto any furtherparticipation
in the capitaland profrtsof Netcoapartfrom
theirs2.5% share in the
"pre-unbundling,
issuedsharecapitaland the
US$ lmillionreseryes.
As both class of sharesrankparipassu,until
such time as the reservesin
Netcoare sufficientto ailowthe 'A' sharehorders
to receivean equarising
dividend,proportionate
to the arnountalreadydistributedto the .B'
shareholders,
in practicethe '8" sharehorders
wourdhave no craimon the
"pre-unbundling'
reserves.To illustrate,
shourdNetcobe wound up
"unbundling"
immediately
after the
the remainingUS $ lmillionwould be
uA"
distributed
to
on thatbasis,immediatery
afterthe'unbundring',
the "A,,sharehordei.
BlueEagle,wourdenjoy 1oo%participation
rightsin Netco,renderingit a
urt.
22
50
Movingfonarard
on thatbasis,afterthe unbundring
of the pro-ratainterest
in Amalcoto the'B'sharehorders,
,,net
thefuture
income"
of Netco,
including
section9E dividends
fromAmarcowiilfailto be taxedin
Corpinvest's
handsundersection
9D.
51
Theadvantage
of thesharespritappearsto riein theflexibirity
affordedto
'8"
the sharehorders
shourd
theywishto paddretheirowncanoein
respect
of theirportionof theAmalcoinvestment.
The subsequent
classification
of
Netcoas a cFE wourdonryaffect"net
income'eamed
afterthe E2,so/o
Amalcounbundring
andshourd
the Netcoreserves,
avairabre
for
distribution,
accumurated
upto thatdate,nevei-bedistributed,
therewourd
be no adversetaxconsequences
for Corpinvest.
Loan from Mikado to Blue Eagle.
52
c2
54
lt is advisabrethat everyaspectof the proposed
restructuring,
referpoints
5'1 to 5'3, complywiththe requirements
.normality",
of commercial
in the
event that the separatepartsof the restructuring
are viewedby sARS as
an entireintegratedschemefallingwithin
the ambitof section103.
The loanfrom Mikadoto BrueEagre,
to financethe purchaseof the Netco
shares' should thereforebear interest
at a market-relatedrate and every
aspectof the roanshourdbearthe hailmarks
of an arm,s_rength
transaction.
Furthermore
ln theeventthata marketrelatedinterest
rateis not charged,
the provisions
of section31 couldimputeinterestincome
intothe handsof
Mikadowhichin tumwourdreadto a sectiongD
tax riabirity
for corpinvest.
In conclusion,
to obviatean exposure
to
section103andsectiongD read
withsection31 it is recommended
thatthe roanis capitarised
to share
capital.
After unbundring Netco,
and the acquisitionof Amarco,
BrueEagre
disposes of Amalco.
55
56
57
The disposalby Blue Eagle
wouldtriggerthe receiptof
a deemedsection
9E dividendin the hands
of BlueEagle,to the extent
thatAmalcohad
undistributedprofitsdirectly
or indirecilyavailablefor distribution,
at tne
time of disposar.The deemed
dividendwourdbe incruded
in BrueEagre,s
"net
income'for the purposes
of sectiongD and corpinvest
wouldbe taxed
underthe provisionsof that
section.
The capitargains
tax provisions
wourdnotbe appricabre
to the above
disposar
due to paragraph
25(2)oftheEighthschedure(first
draft),which
providesthatthe proceeds
identified
in quantifying
a capitar
gain,maynot
includeany amounttakeninto
accountwhendetermining
the taxabre
incomeof thetaxpayer,
beforetheincrusion
of anycapitar
gain.
of courseshoufda dividend
bedecrared
by BrueEagre,fromprofits
previousry
subjected
to taxas setoutabove,theprovisions
of sectiongE
wourdnot appryi.e.if BrueEagre
is deemedto havereceived
a sectiongE
dividendtotatingUs$ t00
mirion,on whichcorpinvest
in tumwas taxed
undersectiongD thesubsequent
receiptof thatUS$ t00 miflion
as an
actuardividend
fromBrueEagre,
wourdnotbe taxedagainas
a foreign
dividendreceiptin the hands
of Corpinvest.
Netcodoes not unbundre
its Amafcoinvestmentbut
disposesof Amarco
for a profit
58
Netcois not a "controlled
foreignentity"as definedin
sectiongD. and a
profitarisingfromthedisposar
of itsAmalcoinvestment
wourdnot in itserf
triggera southAfricantax
riabirity
for the Group.The disposar
wourd
theoreticarfy
iat intothedefinition
*foreign
of a
dividend,,
butas Netcois
24
of sectiorrgD(2)
provisions
no'ra "ccnirolled
the chargirrg
foreignentity'=,
w ou l db e i n o p e ra ti r:e .
59
A SouthAfricantax evenlwouldonlyariseon:
43 1
T h esa i ao i N e tcob r yBlueEagls,in thefcr mof a deem edsection
by ;BiueEagle,to ihe extentthatNetcohad
9 E d i vi o e n d
i -e ce i pt
prcflt,s
vvithsectiongD
undistributed
available
for distrioution,
co n se q u e n cefos r Cor pinvest
or
43.2 A declaraiion
of the profitderrve
d by Netcoto BlueEagle,which
vlouldbe a section9E "foreigndividend"
receiptin Blus Eagle's
hands,againgrvingriseto a SouthAfricansection9D tax lrabiiity
fo i C o rp i n ve st.
tactrA
-<)e
E3. Br oom ber gS.C,
/onr,J,
March 2001
? 9/ l / a ,
KJs
Memorandum
tn
vo'
Structure of the NetainmentN.V. interest
lntroduction
1.
Prior to the restructure contemplatedin paragraph
3 below (,.the resfucture,,),
corpcapitalLimited's ("corpcapital")interestin Netainment
N.v. (,.I.{etainment,,)
was
held through a whoily owned subsidiaryof Corpcapital
Inveshrents (pty) Limited
("Corplnvest"),namelyMikado GroupHoldingsLrc ("Mikado")
a British Virgrn Isies
company.
Thepre-restructuring
corporatestruchyeis setout in part I
of Annexure A.
2.
During 2000, Netainment and an independent third parry,
English Harbour
Entertainment Limited ("English Harbour") concluded
an agreement (the
implementationof which wassubjectto the fulfihnent of certain
outstandingconditions
precedent)to mergetheir businesses
into a new company,3AM Entertainment
Limited
("Amalco").
3.
During December2000 (in anticipationof but preceding
the implementationof the
aforementioned
mergerinto Amalco),Mikado disposedof its 47,5%shareholding
in
Netainmentto Biue EagleIntemationalInvestrnentsLimited ("Blue
Eagie,,),a British
Vogio Islands (*BVI") companyand a wholly owned
subsidiaryof Mikado. The
consideration
paid by Blue Eagieto Mikado for Mikado's 47,5yo
shareholdingin
Netainmentwas us$95m (equatingto 47,5%o
of the US$200mconsideration
payable
by Amalco to Netainmentfor the Netaiment business).
whilst, for the purposeof
facilitating the transaction,Mikado financedthe sale on
inter-companyinterestfree
loanaccount,Mikado'sloanaccountintoBlueEagleis to
be capitalised.
A
T.
If the English Harboura{etainmentmerger (the .,Amalco
merger,,) becomes
unconditional
and is implemented
then,asa consequence
of the disposalof its business
to Amalco, Netainmentwill be constitutedas a dormant
investmentcompanywhich
will haveUS$200min distributabie
reserves.
on the assumption
that theAmaicomergeris implemented
thenthe post-restructuring
corporatestructureis setoutin partII of AnnexureA.
28.DOCitsLANI(8nJ
{c I 58/DP65
I
1704?.001
3
5'
Executive Summary of tax consequencesof the disposal by Mikado
of its
Netainmentinterest to Blue Eagle
In summary, the US$95m considerationpaid by Blue Eagle to Mikado will
not be
taxablein eitherMikado's handsor in Corplnvest'shandsfor the followine reasons:
5'i'
Mikado (which is a BVI company)is not subjectto either income tax or capital
gains tax;
5 . 2 . as the incomeearnedby Mikadowas eamedin respectof yearsof assessment
commencingbefore 1 January2001 and the nafure of the incomedid not
constituteinvestmentincome(asthendefinedin the SouthAfrican IncomeTax
Act), the gain madeby Mikado on the disposalof its interestin Blue€aele is
not be subjectto SouthAfrican incomerax.
fuj^;*f,,
A description of the commercial motivation for the restructure and a
more detaited
analysisof the south African tax consequences
is set out below.
6.
Commercial rationale for restructure
6 . 1 . Theprincipalcommercialreasonsfor therestructurewerethe followins:
6.1.1.
one of the principlesrequiredby the parties to the Amalco
shareholdersagreement(consequentupon the merger of the
Netainmentbusinessandthe EnglishHarbourbusinessthroughthe
vehicle of Amalco) was the "grand-fathering,'up of rights of
pre-emptionsuchthat eachof the Netainmentshareholders
and the
Engiish Harbourshareholders
would enjoy pre-emptiverights not
only over the othergroup'sdirectshareholdingin Amalcobut also
in regardto the shareholding
of the other,sgroup companieswhere
the sole assetof such group companywas a direct or indirect
interestin Amalco.
It would havebeeninappropriatefor rights of pre-emptionto have
beengrantedby Corplnvestover its sharesin Mikado for. amonsst
others,the following reasons:
-
{CI 58/DP6528.DOC/BLANI(sn(J
I
l 704100
I
Mikado constitutes(and is intended to constitute) the offshore
holding company of the Corpcapital group of companies,
offshore interest'
4
-
in addition to Mikado's 500%sharehoid.ingin Netainmenr,
Mikado alsohoids:
a 50% investment in Cyber Finance Investments Inc
("cFI");
100%investmentin CorpcapitalInvestmentsBVI (the
offshoreadvisorysubsidiary
of the Corpcapitai
Group).
It wasnecessary
to put BrueEagiein placeso asto ailow for
rights of pre-emptionto extendabovethe levei of Netairunent
but withoutrenderiugCorpcapital'sotheroffshorecommercial
interests (held through Mikado) subject to rights of
pre-emption.Themostappropriateway of ensuringthis was to
interposeBlue Eagle betweenMikado and Netainmentand
afford the EngrishHarbow group rights of pre-emptionover
Blue Eaglewithout extendingthoserights of pre-emptionto a
moreseniorlevei).
6'1'2'
Thedecisionnot to reverseout of Mikadoits interestin CFI andits
anticipated investment in corpcapital lnvestrnentsBVI (thus
allowing for rights of pre-emptionto be grantedby corplnvest to
the EnglishHarbourGroupover corplnvest,sMikad.oshares)was
motivatedby, amongstothers,thefollowingreasons:
-
Mikado had historically been earmarkedas the offshore
holding company of Corpcapital,s non_South African
investnents;
-
cFI was embroiledin litigation with Mini vegas, a custome
,
relating to allegedunlawful gaming activitiesundertakenby
Mini vegas, the proceedsof which were aflegedlyunder the
conffol of cFI andthe subjectof attachmentandinvestisations
by the SwissandLuxembourgauthorities.
Mini vegas' activitieshad castsuspicionon cFI's complicityand
cFI had made representations
to the authoritiesregardingits
beneficialownersandtheircredibility,in response
to enquiries.An
immediatelysubsequent
changeof ownershipwourd foreseeabiy
have impairedcFI's credibilifywith the relevantauthorities,for
exarnple,by implying that Mikado was seekingto distanceitserf
i c I 58/DP6528.DOC/BLANKS/I(Jl
l 704200
I
)
and its principai assets(the interest in Netainment)
from cFI,s
activities.
6.1.3.
7.
It was and is contemplatedthat certain outside
third parties (and, in
particular, current and future executives
employed by the
corpcapitai group) may be incentivised by affording
such persons
an "interest" in the Netainmentbusiness(if the
Netainment/English
Harbour merger was not successfuily impremented)
or in Amalco
(if the Netainment/EnglishHarbour
merger was implemented but
for whatever reasonit was not possibreto incentivise
or appropriate
to incentivise suchpersonsthrough a direct .,interest,,
in Amalco).
such incentivisation wourd not be capable
of being achieved
through Netainment as Netainment has
an outside minority
shareholders(beingThe Big Blue Trust (23,soh),the
Gandorfrrust
(23,5%) and Dawson Inc (s%)) some
or aIl of which would
probably not consentto suchan incentivisation
strategy through the
vehicle of Netainment. It would arso
be inappropriate for the
incentivisation strategy to be implemented
at Mikado lever given
Mikado's other existing and anticipated,future
commercial interests
(which are not rerated to the casino
business conducted by
Netainment). The Blue Eagre vehicre (which
has as its sore
underlying commerciai assetits attributable
interest in the existing
Netainment business and" folrowing the imprementation
of the
Netainment/English Harbour merger, its
attributable interest in
Amalco) would be the appropriate level
at which such
incentivisation sf ategy would be imp lemented
.
Tax Analysis
7.r.
Mikado is not a SouthAfrican "resident,,as defined
in sr of the I:rcomeTax
Act No 58 of 1962("the Act"), beinga company
incorporatedin the BVI with
its placeof effectivemanagement
outsideof the Republic.
7.2.
Mikado howeverconstitutesa "contolled foreign
entity,, as d.efinedin s9D of
the Act (i'e' being a foreign entity in which
any residentor residentsof the
Republicdirectiy or indirectlyhold morethan 50%
ofthe participationrights or
areentitledto exercisemorethan50%of thevotes
or controlof suchentiiy)
7.3.
Section9D of the Act deemscertainincomeof a .,controlred
foreignentify,,to
accrueto the SouthAfrican residentwhich contols
the entify. Accordingly,
certainincomereceivedby a conhoiledforeign entify
is to be examinedin
{cr 58/DP652E.DOC/BLANT(8/ru
I
I 704200
l
9
relevant class of shares. Dividends wiil only be payablefrom the
relevantclassof reservesatfributableto the variousclassesof share
capital;
7 .t3 .7 .
simuitaneouslywith the creationof the new classesof shares,Biue
Eagle, being the holder of the "A" shares.will concrudeda call
option with the holdersof the o'B" and "c" shares.Blue Eagle witl
only be entitled to exercise this call option in the event that the
entire distributable and non-distributable reserves relating to the
"B"
and "C" shareshavebeen disfibuted to the ,,8,' and ,,C" class
shareholdersin the fonn of a dividend. The call option strike price
will be the par vaiue of the underlying "B" and "c" crass shares.
The call option would also cater for a partial acquisition of the "8"
and "c" ciass shares to the extent that there is only a partial
distribution of dividends to those ciassesof shares (i.e. the call
option would be capableof being exercisedprorata to the extentto
which distributable or non-distributablereserveswere distributed to
the "B" and "C" shares).
The above structure witl allow for an "unbundling" of Netainment's
shareholdingin Amalco to the o.B" and ,.C" shareholderswithout requiring the
unbundling of Blue Eagle's attributable interest in the Amalco sharesto Blue
Eagle (which would result in such dividend being ta:rableat a Corplnvest level).
7.I4-
Even assuming that after effecting the relevant distributions to the ..8,'
sharehoidersand the "C" shareholdersBlue Eagle exercisesits call option (thus
constituting Netainment, a controlled foreign entity), provided that the reserves,
available for distibution, accumulated up to that d.ate are never in fact
dishibuted to Blue Eagie, in our view the realisation proceeds (up to the
$95 miilion valuation) will not give rise to any adverse South African tax
consequences
to Corplnvest.
U.
Summary
8 . 1 . Mikado (which is a BVI company)is not subjectto eitherincometax or capitai
gainstax on the uS$95m consideration
paid to by Blue Eaglefor the 47,soh
Netainmentinterest,
6./..
As:
528.DOC/BLANKS/KJ
ICr 58/DP6
)
I 704200
I
10
8.2.r.
the natureof the incomereceivedby Mikado for the d.isposalof its
Netainment sharesdid not fail within the definition of "invesrment
income";
8.2.2.
the disposaltook place prior to years of assessmentcommencins
before 1 January2001.
Corplnvestwill not be subjectto SouthAfrican income tax arising from the
reaiisationby its controlledforeign entity (i.e. Mikado) of its interest in
Netainmentl
8 .2 .3 .
asthe transaction
wouldhavetakenplacepre-1october2001,one
doesnot needto concemoneselfabout any South African capital
gainsimplications;
8 .2 .4 .
tbere was a comrnercial rationale to the transaction, ily
undistr-ibutedprofits within Mikado at the disposal date will not be
subject to SouthAfrican income tax.
8 . 3 . The structure contemplated in paragraph 7 .r3.5 above, wilt enable the
corpcapital Group to utilise any gains made on the realisation of the
Netainment businessor the realisationof sharesin Amalco, as the casemay be,
without requiring such funds to be decrared up to a wholly owned group
company in the form of a dividend, which would have resulted in such "foreisn
dividend" being taxable in the handsof Corplnvest.
8.4.
As the reservesin Netairment (as constitutedon or about 28 December 2001)
were utilised by Ne+'ainmentto dischargecertain fee obligations of Netainment,
such reserves will not fall to be taxed rn South Africa either in relation to
Netainment (which is not a contoiled foreign entity) or in reiation to any
corpcapital group companyby virtue of its interest in Netainment.
9
Supportingopinion
Aa opinion furnishedby E B BroombergSC and E P Lai King datedMarch 2001 in
supportof the abovetax analysisis attached
markedAnnexure B.
8.DOC,tsLANK8/IiJ
{c l 58,DP652
i
17042001
Annexure A
Pre-restructurecorporate structure
Part I
Part fl
1C I 58,DP6528.DOC/BLANI(S/IO]
r 7 0 4 2 0 0l
Annexure B
supporting opinion by E B Broombergand E p Lai King dated March 2001
{c r 58/DP6528.DOCIBLANK8AUl
| 704200l
K5+
Agreement
enteredinto between
Netainment N.V.
(a corporationincorporatedunder the laws of the NetheriandsAntilles)
("the seller")
and
Cytech Limited
(a corporationincorporatedin Beltze)
("the purchaser")
1.
SaIe of the Netainment business
The selier sells, tansfers and cedes to the purchase as an indivisible whole and as a going
concern with effect from i October 2001 (the "effective date") from which date the risk in and
benefit of the businessshall vest in the purchaser,the businesscomprisrng:
1.1.
all right, title and interest of the seller in, to and under, and the fulI benefit of. all
contracts concluded with customels of the businessin the ordinary course of business
(excludrng the licence agreementbetweenthe seller and Microgaming Systems Anstait
enteredinto on or about2 December1998(the "Microgaming agreement"));
1.2.
ail intellectual properly nghts owned by tire seller and used in the conduct of the
businessrncludins:
1. 3 .
t.2.t.
all trade names and trademarks.
1 .2 .2 .
the database of customer details (including, without limitation, names,
e-mail address,physical address.telepironenunrbers and other contact
and/or marketing information) wliether in writing or in electronic form,
and whether current and/orhistor-icin tire conduct of the business;
t.2.3.
subject to the restrictionscontainedin the Mrcrogaming agreement,ail
domain nanlesusedin comection with the business;
1.2.4.
the websites to which any of the Netainment domain names pertain
including any 'Jump site" or "promotional site" tluough which a
Netainment website is accessedand any propnetary software owned by
Netainmentrelating to suchwebsites;
all systems,software and larow-irowused exclr-rsivelyin connection with the business
(otherthan the soflware licensedto the seilerin terms of the Microgaming agreement);
I
lNl2i DP7t80.DOC/ACIr4/K.l
08052001
€/
#
l
I '4'
casltand credit balancesat banksof tlre busirress
orr lrandas at
l'5'
the goodwill of the busittess,
includiugthe exclr-rsive
right of the purchaserto represent
itselfas carryingou the businessandallriglit. title and ilterest
oflhe sellerin, to and in
respect of the tlames 'Netainment", "I(ing Solourons"
and ,,Lucliy Liner,, and
variationsthereofand all recordsand inforrlaiiorrrelatingto
customersof the business
and all peftinentfiles' catalogues
and any pron-rotional
materialsexclusivelyrelati'_9to
the bLniness;
the effectivedate;
including any liabiiities (whether actual or contingent) to
creditors of the business but
excluding any rights or obligations arising out ot.
irtusuarit to or in connection with the
Microgaming agreement.
)
3.
Consideration
2'l'
The considerationof the businessshallbe US$200000 000 to be discharged
by way of
the allotmentand issueof 100 (one hundred)shares(issuedas fully piia
up; in the
issuedsharecapital of the purchaser(constitutingthe entire issuedsha.ecapital
of the
purchaser)(the "consideration shares")
2'2.
Tlie considerationsharesshall be allotted and delivered by the purchaserto the
seller
(in negotiableform) on the effectivedate (againstdelivery of th; business
to the to the
purchaser).
Delivery
All assetscomprising tlie businessshall be delivered by the seller to tire purchaser on tire
effective date.
4.
Employees
There is no obligation on the purchaserto offer employmentto any employeesof the business.
Warranties and representations
Save that the seller warrants that it is the owner of all tlre assetsor rights comprising the
businesswhich are being disposedof by the sellerto the purchaserin terms of cl.iause
l, the
businessis sold on a"as is" basisfree of any otherwarrantiesorrepresentations
of whatsoever
llature.
6.
Licence
The purchaser, with effect from the effective date, affiords the seller a royalty-free licence to
continue utilising the intellectual properly rights, database.domain names,websites and other
systems,softwareand know-how of the business.The pLrrclraser
shall be entitled (in its sole and
absolute discretion) to terminate the aforesaidlicence (in whole or in part) at any tirne by
furnishingnoticeto the sellerto sucheffect.
7.
Breach
If any parfy breachesany materialprovision orterm of this agreementand fails to remedy such
breach within 7 (seven) days of receipt of written notice requiring it to do so (or if it is not
reasonablypossibleto remedythe breachwithin 7 (seven)days,within such further period of
time as may be reasonablein the circumstances)
theu the aggrievedparfy shall be entitled
without uotice,in additionto any other remedyavailableto it at law or under this agreepent,
including obtainingan interdict,to cancelthis agreementor to claim specificperfonnanceof
any obligationwhetheror not the due datefor perfornrauce
has arrived,in eitherevent without
prejLrdice
to the aggrievedparty'sright to clairndamages.
t$
r 80 DOC/ACR4/ti.t
iN32/DP7
l
08052002
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Y
3
8.
Whole agreement,no amendment
This agreer'ent constitutes the wliole
agreement betrvee' the parties. No
amendment or
cotrsetrsual
cancellationof this agreement
or any provisionor term thereofand
no extensionof
tit'e' waiver or relnxationor suipension
orany lrrr.,. pt""isions or terms of this
agreement
shall be binding unless tecorded^
in a written documentsigned by tlie parties.
Anv sucl'
extensiott' waiver or relaxation or
suspensio' whicrr is so given or macle
,t*i, #''J,r.i*,
construedas relating strictryto trrematter
in respectwliereof it was made or given.
SIGNED by the partiesand witnessedon
DATE
the followi'g datesand at trie followi'g places
respectively:
PLACE
MTNESS
SIGNATTIRE
For: Netainment N.V.
May 8,2002
Curagao
RosaHanstFernandes-
For: Cytech Limited
F.
3@
b r4€et2{
frnrtS,lmt
2.
I N32/DP7r 80.DOC/AGR4/li.r
i
08052002