In this alert, we discuss the provisions of the TKLA authorising and empowering councils to contract in their own names on behalf of their traditional communities and what we have observed when such councils choose to contract through corporatised structures.

Councils contracting in their own name

The TKLA provides for the recognition of traditional and Khoi-San communities. It further authories and empowers councils to enter into partnerships and agreements with each other, municipalities, government departments and any other person, body or institution on behalf of their traditional communities.

Any agreement that a council wishes to enter into needs to comply with the approval, ratification and general compliance provisions set out in the TKLA. In general, agreements that a council wishes to enter into must be beneficial to the traditional community represented by that council. Such agreements are further subject to, among other things, prior consultation and approval from the members of the traditional community represented by the council, and ratification from the Premier of the province in which the relevant council is situated.

Accordingly, agreements entered into by councils may need to contain the appropriate suspensive conditions requiring these approvals and ratifications to be obtained, to the extent to which the approvals are not obtained upfront.

The approvals and ratifications referred to above move away from the position in the Traditional Leadership and Governance Framework Act 41 of 2003, which was repealed by the TKLA, which authorised and empowered traditional councils to enter into certain agreements on behalf of their traditional communities without consulting with or obtaining approval to contract from their traditional communities. Accordingly, while such approvals and ratifications may delay the implementation of an agreement entered into by a council, the mechanisms contained in the TKLA provide important protections of the resources of the traditional communities represented by such councils.

Councils corporatising their contracting structure

For a number of reasons, councils may prefer not to contract in their own names but rather through a corporatised structure. The corporatisation of the contracting structure of councils sparks notable interplays between the provisions of the TKLA and the Companies Act 71 of 2008 (Companies Act).

A corporatised contracting structure of a traditional community can be created in a number of ways. For the purposes of this alert, we consider a contracting structure created by a council interposing one or more companies that operate between the council (and ultimately the traditional community) and the traditional community’s resources and business operations.

A corporatised structure created in this manner would always require initial approval and ratification from the traditional community and the relevant Premier. Moving forward, however, the resources and the business operations of the traditional community would be managed by the interposed companies and not the councils. This is because, in terms of the Companies Act, the business and affairs of a company must be managed by or under the direction of the board of directors of a company, which has the authority to exercise all of the powers and perform any of the functions of the company.

A structure of this nature would generally lend itself to contracting certainty and the speedier conclusion and implementation of agreements. This is because the entering into and implementation of agreements would ordinarily only need to be authorised and approved by the directors of the interposed companies without further approval from the council, traditional community or Premier concerned. The contracting certainty and speed of concluding agreements through such structures may ultimately be for the benefit of the traditional communities concerned.

Considerations for councils contracting through corporatised structures

Consideration should always be given by councils (whose members may not always serve as, or constitute the majority of, the directors of the interposed companies) as to how they provide the necessary oversight on such corporatised structures. This can be achieved by, for example, the constitutional documents of such interposed companies containing necessary reserved matters requiring the council, in its capacity as the ultimate shareholder of the interposed companies, to approve certain agreements and transactions to be entered into by the interposed companies. This will assist in ensuring that the business and affairs of the interposed companies are always managed to the benefit of the traditional community.

When evaluating corporatised structures, councils must balance the potential benefits against the principles of the TKLA. These structures should align with the underlying intent behind provisions that empower councils to contract directly, while ensuring protection of traditional communities from risks that could undermine their interests.

In our next alert, we will unpack the conflicting interests arising from directors discharging their duties and obligations to the interposed companies in terms of the Companies Act against the obligations of councils to their traditional communities in terms of the TKLA.