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It is exciting for black partners to be taken into a business,
but how will that invitation be funded? Empowerment transactions
can, like any transaction, be financed by either looking to the
company itself for cash or by sourcing finance from third party
financiers or banks.
As far as finance by the company itself is concerned, our
existing Companies Act provides that a company may provide funds to
a purchaser to take up shares in the company provided that the
directors of the company are satisfied that, subsequent to the
transaction, the assets of the company will exceed its liabilities,
and the company will be in a position to pay its debts as they
become due in the ordinary course of business for the duration of
the transaction. At least 75% of the shareholders are also required
to pass a special resolution approving the terms upon which the
assistance is to be given. These provisions have been used in
recent transactions, such as the Italtile and Rainbow Chicken
deals, both of which deals were structured on that basis. Cash
flush companies are therefore able to use their own funds to
restructure without looking to financial institutions for
assistance.
If the company does not have the funds to provide finance
itself, black partners will approach other finance houses for
assistance. However, this is no easy task. As a result of the
difficult economic climate, BEE deal activity has of late been
confined to situations in which companies introduce black partners
due to legal requirements. For example, entities requiring licences
from government to continue their operations or instances in which
private companies are contracting with government have resulted in
parties concluding these transactions.
The new Companies Act of 2008 will allow financial assistance to
be provided to individuals who wish to take up shares in a company.
Section 44 of this Act states that such assistance may be provided
pursuant to a special resolution. In addition, the board will need
to be satisfied that immediately after providing the financial
assistance, the company will satisfy the solvency and liquidity
test and that the terms on which the financial assistance is
proposed to be given are fair and reasonable to the company. It
will also be the duty of the board of directors of the company to
ensure that any specific conditions or restrictions contained in
the company's constitution dealing with financial assistance
have been met.
A notable difference between the provisions of section 38 of the
present Companies Act and those of section 44 of the new Companies
Act, relates to the requirement of special resolutions and, in
particular, the requirements that need to be satisfied to pass a
special resolution. At present, for a special resolution to be
approved it must be supported by at least 75% of the shareholders
of the company. However, in terms of the new Act, a company's
constitution may permit a lower percentage of voting rights to
approve any special resolution, provided that a margin of at least
10% between the requirements for the approval of an ordinary
resolution and a special resolution is retained. It follows that,
depending on the terms of the company's constitution, it may
not be necessary for 75% of the shareholders to approve such
financial assistance in future. Interestingly, the new law also
provides that even if the company's constitution prohibits the
granting of financial assistance, the board can authorise financial
assistance for an employee share scheme and can allow such
assistance if backed by a special resolution of shareholders passed
during the previous two years. In both these instances, the
solvency and liquidity tests will need to be met.
Dealmakers will need to take these principles into account once
the new Act comes into effect, which is likely to happen in
2010.
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