The recent amendments to the Companies Act, signed into law by President Cyril Ramaphosa on 26 July 2024, introduce noteworthy changes to the regulatory landscape for certain private companies in South Africa undergoing transactions. These changes, introduced through the Companies Amendment Bill and Companies Second Amendment Bill, aim to refine the criteria for what constitutes a "regulated company" and revise the applicability of the Takeover Regulations, striking a balance between safeguarding shareholders' rights and reducing the administrative burden for private companies.

On 28 August 2023, the Minister of Trade, Industry, and Competition (the Minister) published proposed amendments to the Companies Amendment Bill and Companies Second Amendment Bill (collectively the Bills) to the Companies Act No. 71 of 2008 (the Companies Act). On 26 July 2024, President Cyril Ramaphosa assented and signed the Bills into law (collectively the Amendment Acts). 

The Amendment Acts introduce a number of welcome changes to the Companies Act, including amendments to the application of Part B and Part C of the Companies Act and the Takeover Regulations ("Takeover Provisions") to Private Companies. The Takeover Provisions do not apply to all companies, but rather only to "regulated companies". Private companies which fall within the category of a "regulated company" would have to comply with additional requirements in the Takeover Provisions before implementing an "affected transaction". "Affected transactions" are primarily transactions by a regulated company concerning (a) its acquisition or change in control (control being measured at 35%), (b) a sale of all or a greater part of its assets or undertaking, (c) a scheme of arrangement with its shareholders, or (d) an amalgamation or merger.

While the amendments were gazetted on 30 July 2024, their commencement date is yet to be determined by the President and there is no clarity as to their anticipated commencement date. However, once in effect, these changes will significantly impact large private companies intending to undertake affected transactions, whilst easing the administrative burden of complying with the Takeover Provisions for all other private companies previously caught under the "regulated company" definition.

Understanding the Takeover Provisions and their purpose

The Takeover Provisions, regulated by the Takeover Regulation Panel (TRP), aim to protect shareholders' rights, particularly minority shareholders, during affected transactions. These provisions ensure that all shareholders are treated equitably and fairly and have access to the same information when exercising their rights.

Currently, the Takeover Provisions and therefore the jurisdiction of the TRP, apply only to private companies if 10% or more of that company's shares have been transferred within the preceding 24 months, or where the memorandum of incorporation expressly provides for such application. The rationale behind linking the applicability of the Takeover Provisions to historic share transfers is unclear. However, it is generally believed that the intention was to capture private companies that frequently traded shares, because this was indicative of a characteristic more akin to a public company.

Key changes

The amendments now stipulate that, unless exempted by the TRP in terms of section 119(6), the Takeover Provisions will only apply to private companies (a) with 10 or more shareholders with a direct or indirect shareholding in the company and (b) that meet the thresholds determined  by the Minister (Thresholds). These Thresholds will be set based on the company's annual turnover or asset value in South Africa, either generally or for specific industries.

The inclusion of indirect shareholding in the amendments also broadens the scope of application of the Takeover Provisions, considering not just immediate shareholders of relevant private company but also its ultimate beneficial owners (UBOs). We assume that each holding company in the chain up to the UBO will not count as a "shareholder" for purposes of calculating the number of shareholders. This raises questions about the appropriateness of extending the definition to indirect shareholding, given the TRP's mandate and the jurisdictional and enforcement challenges with indirect shareholders outside South Africa. Therefore, including indirect shareholding in the determination of whether a private company qualifies as a regulated company under the Takeover Provisions appears to be a stretch, especially since the TRP focuses primarily on the interests of direct shareholders, unless the Takeover Provisions stipulate otherwise and where necessary, contain protections for an indirect expropriation of assets. 

As of now, no Thresholds have been set. The Minister has the discretion to establish Thresholds that will apply to all private companies or different thresholds for specific industries. In our view, it's unlikely that industry-specific thresholds will be set by the Minister immediately, given that stakeholder input will be required.

The TRP may, wholly or partially, and with or without conditions, exempt a private company from compliance with the Takeover Provisions if (a) there is no reasonable potential of the affected transaction prejudicing existing shareholders' interests, (b) if the cost of compliance is disproportionate relative to the value of the affected transaction or (c) if it is otherwise reasonable and justifiable in the circumstances having regard to the principles and purposes of the Takeover Provisions. 

Previously, it was relatively easy for private companies to obtain exemptions given the seemingly arbitrary test which applied to private companies, but the current amendments targeting larger private companies with a broader shareholder base, may make it more challenging to prove grounds for exemption.

Impact on private companies in South Africa

For certain larger private companies, these changes imply a new level of scrutiny and compliance when undergoing an affected transaction. As such, the changes represent a shift in the regulatory framework for private companies in South Africa. By refining the criteria for what constitutes a regulated company and revising the applicability of the Takeover Regulations, the amendments seek to balance safeguarding shareholders' rights with the administrative burden of compliance. Introducing Thresholds and applying the test to companies with multiple shareholders aims to limit the Takeover Provisions' applicability to larger private companies, ensuring adequate protections for shareholders during affected transactions. While these amendments are welcome, questions remain about their implementation, which will hopefully be clarified with the promulgation of regulations by the Minister. 

Written by Verushca Pillay, Partner, Tanya Seitz, Director Designate, and Kamogelo Mashigo, Candidate Attorney – Baker McKenzie