Even small mergers and acquisitions need to be addressed with the Takeover Regulation Panel (the “Panel”) in terms of the Companies Act, No. 71 of 2008 (the “Companies Act”). Along with the JSE Listings Requirements and the Competition Act, No. 89 of 1998, the Companies Act governs mergers and acquisitions in South Africa. The regulation of mergers and acquisitions is provided for in sections 117 to 127 of the Companies Act and the Takeover Regulations (together the “Takeover Provisions”). Section 196 of the Companies Act establishes the Panel which oversees affected transactions and offers involving regulated companies.
The Takeover Provisions apply to proposed affected transactions or offers involving regulated companies or their securities. ‘Affected transactions’ and ‘regulated companies’ are key concepts that one needs to understand and be able to identify in practice, when dealing with and advising on mergers and acquisitions. These concepts will be explained briefly below.
Affected transactions are defined in section 117(1)(c) of the Companies Act and include the following transactions in respect of regulated companies:
- fundamental transactions, which are discussed in more detail below and which include:
- a disposal of all or the greater part of the assets or undertaking of a company (section 112);
- an amalgamation or merger (section 113); and
- a scheme of arrangement between a company and holders of its securities (section 114);
- the acquisition of, or announced intention to acquire, a beneficial interest in securities amounting to 5%, 10%, 15%, or any further whole multiple of 5% of the issued securities (such as shares) of a particular class of securities;
- the announced intention to acquire a beneficial interest in the remaining voting securities of a regulated company not already held by a person or persons acting in concert;
- a mandatory offer in terms of section 123 of the Companies Act (which the acquirer of securities in a company must make to the remaining holders if, as a result of the acquisition, the acquirer holds 35% or more of the voting securities of the company); and
- a compulsory acquisition in terms of section 124 of the Companies Act (where an offer to acquire a company’s securities has been accepted by 90% or more of the holders of that class of securities and the offeror is entitled and bound to acquire the securities of the remaining minority shareholders on terms of the original offer).
Section 118 of the Companies Act provides that regulated companies include:
- public companies;
- state owned companies; and
- private companies when:
- the company’s memorandum of incorporation expressly provides that it is a regulated company; or
- where more than 10% of the issued securities of that private company has been transferred to parties (other than related parties) within the period of 24 months immediately before the date of a particular affected transaction or offer.
The serious consequences of the latter provision are easily over-looked. For example, if an existing shelf company is purchased by one party in anticipation of a transaction i.e. that party takes transfer of all the shares in that company whilst the transaction is being negotiated and thereafter some of those shares are sold to other parties to the transaction. From the moment of the first transfer (i.e. the purchase of the shelf company) that company becomes a regulated company for a period of 24 months and the disposal of the shares in order to give effect to the transaction will trigger the obligation to notify the Panel.
Notification and Outcomes
The Panel must be notified of all affected transactions regardless of the value of these transactions and these transactions cannot be implemented unless the Panel has granted an exemption or issued a compliance certificate. When considering a share transaction, even a very small transaction, it is therefore very important to check whether there has been any movement in the issued shares of the target company during the preceding 24 months and whether the company’s memorandum of incorporation voluntarily imposes the Takeover Provisions on the company.
In terms of section 119(4)(b) of the Companies Act the Panel may issue a compliance certificate if it is satisfied that the offer or transaction concerned complies with the Takeover Provisions. In terms of section 119(6) the Panel may wholly or partially, with or without conditions, grant an exemption if there is no reasonable potential of the affected transaction prejudicing the interests of any existing holder of the regulated company’s securities, the cost of compliance with the Takeover Provisions is disproportionate relative to the value of the fundamental transaction or the granting of an exemption is otherwise reasonable and justifiable in the circumstances having regard to the principles and purposes of the Takeover Provisions.
If the Panel does not issue a compliance certificate or exemption in respect of an affected transaction then the parties to the proposed transaction cannot implement the transaction or should they do so that transaction will be invalid. It is therefore advisable to include the approval or exemption of a transaction by the Panel as a condition precedent in any agreements governing a proposed affected transaction.
The obtaining of an exemption or approval by the Panel is only one of many requirements imposed by the Companies Act to give effect to affected transactions, which are also the fundamental transactions. Some of these additional requirements are described below. They apply to all (1) disposals of all or a greater part of assets or undertaking, (2) amalgamations or mergers and (3) scheme of arrangements, disregarding whether those will constitute the affected transactions or not.
Fundamental transactions are governed in Part A of Chapter 5 of the Companies Act. All fundamental transactions must be approved by a special resolution in terms of section 115(2). That special resolution must be passed by persons entitled to exercise voting rights at a shareholders’ meeting called for that purpose, the quorum for which is at least 25% of the voting rights that are entitled to be exercised on that matter or a higher percentage as may be required by the company’s memorandum of incorporation.
Disposing of all or the greater part of the assets or undertaking of a company
Proposals for the disposal of all or the greater part of the assets or undertaking of a company are governed by section 112 of the Companies Act. In determining whether the assets being disposed of constitute all or the greater part of the assets of a company one must consider whether they constitute more than 50% of the company’s gross assets fairly valued, irrespective of its liabilities. Likewise, regarding the undertaking, one must consider whether it constitutes more than 50% of the value of the company’s entire undertaking, fairly valued. Section 112(3)(b) provides that a written summary of the precise terms of the proposed transaction together with a written summary of the provisions of sections 115 (which section deals with the required approvals for the transaction) and 164 (which section deals with dissenting shareholders rights) of the Companies Act must be included in the notice of the shareholders meeting for the passing of the required special resolution. Section 112(4) further requires any part of the undertaking or assets of a company to be disposed to be fairly valued as at the date of the proposal.
Amalgamations and Mergers
Amalgamations and mergers are new concepts in South African company law and were introduced by the Companies Act; before that the joining of two companies could only be done by means of takeover. Amalgamations and mergers are governed by sections 113 and 116 of the Companies Act. Section 113 provides that an amalgamation or merger is in essence a transaction between two or more companies whereby those companies merge to create one or more new companies and with or without the survival of one or more of the merging companies, which companies then hold the assets and liabilities of the merging or amalgamating companies.
Schemes of arrangement are regulated by section 114 of the Companies Act and are arrangements between a company and holders of any class of its securities whereby, among other things, securities of different classes are consolidated, securities of the same class are divided into different classes, securities are expropriated from the holders thereof, securities are exchanged for other securities, the company re-acquires its securities or a combination of these arrangements. A company proposing to implement a scheme of arrangement must retain an independent expert to compile a report concerning the proposed arrangement for the board and cause it to be distributed to all holders of the company’s securities.
If a company constitutes a regulated company for purposes of the Takeover Provisions and that company is considering entering into an affected transaction, in order to give effect to that transaction the board must ensure there has been compliance with the required reporting and approval requirements set out in the Takeover Provisions and, if an affected transaction is also a fundamental transaction, with specific requirements pertaining to the fundamental transaction as set out in the Companies Act. If the Takeover Provisions are not complied with the affected transaction will be rendered unenforceable.
Written by Genevieve Wagener, Associate (Corporate & Commercial Law) with the assistance of Aleksandra Burr Dixon, Director (Corporate & Commercial Law), Knowles Husain Lindsay Inc.