Prospective investors wishing to buy the assets of a company lock, stock and barrel could buy all of the shares from the seller and there would, ordinarily, be no difficulty in arranging such a transaction. The assets of the company are valued by the owner of the shares and the purchaser, and the shares are bought for the valuation arrived at. The purchaser who can pay cash for the shares simply pays the purchase price and the shares are transferred which avoids any expenses of having immovable property registered in the name of the company transferred to the purchaser. But, what if the purchaser does not have cash on hand to finance the purchase, which is more often the case. Would it be possible, for example, to secure payment of the purchase price by passing a bond over the assets of the company or to look to the company for some other form of finance?
Traditionally, purchasers had to persuade banks or some other financier to finance a purchase of shares in South African companies. The ways in which one could finance deals was, until recently, restricted by our company laws which generally prohibited a company from providing loans, guarantees and other forms of security for the purchase of its own shares. The thinking behind this restriction was that the resources of a company should not be used to the detriment of minority shareholders and creditors of the company.
However, in recent years, this prohibition also had the effect of hampering black economic empowerment in South Africa in that empowerment partners could not look to the company for financial assistance to take up shares in the company. It also became questionable whether other tactics could be used in order to protect creditors and minority shareholders.
At the end of last year, our Companies Act was at long last amended to provide that a company may now provide finance to a purchaser to take up shares in the company provided that the directors of the company are satisfied that following the transaction, the assets of the company will exceed its liabilities (the solvency test), and the company will be in a position to pay its debts as they become due in the ordinary course of business both subsequent to, and for the duration of, the transaction (the liquidity test). The shareholders must also pass a special resolution approving the terms upon which the assistance is to be given. It may now be possible for our purchaser mentioned in the example above to secure payment of the purchase price by approaching the company for financial assistance. The method is, however, more likely to be used to purchase only some of a company's shares.
The amendment certainly expands investors' options when looking for finance and tends to facilitate shareholder diversification. But it is yet to be seen to what extent it will have an impact on BEE deal activity in the market as the new section requires the directors of the company to confirm that the company will remain liquid for the "duration of the transaction". This is an onerous statement for directors to make, particularly if the funding is to endure over a long period. Nevertheless, early indications are positive. JSE-listed ceramic tiles retailer Italtile concluded a BEE transaction in terms of which it was proposed that 10.7% of its share capital was to be placed in the hands of black-owned entities and Rainbow Chickens concluded a similar deal in terms of which 15% of its equity was sold to a broad based consortium and company employees for R915,6 million. Both the Italtile and Rainbow BEE transactions were structured on the basis of the amendment to the Companies Act.
Our law now facilitates the financing of deals by the company itself whilst, at the same time, creditors are protected by means of the solvency and liquidity tests and shareholders views are taken into account by requiring a special resolution. Cash flush companies may now be able to use their own funds to restructure without looking to financial institutions for such assistance. Obviously, appropriate advice should always be sought because a financing structure which contravenes our company law may be unenforceable and the directors of the company concerned will expose themselves to personal liability and criminal charges.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.