The draft Companies Bill contemplates the introduction of a new concept into the South African law of mergers and acquisitions, namely amalgamations. Although one has always spoken about mergers and acquisitions, the reality is that South African law did not ever permit a merger in the true sense of the word but rather dealt only in acquisitions. The word merger connotes a merging of identities, the idea of two becoming one. An acquisition on the other hand suggests a deal between two distinct parties, an acquirer and a target, in terms of which shares or assets are transferred to the acquirer. Thus, for example, the acquirer may purchase the shares of the target and acquire control over the target; or the acquirer may purchase all or some of the assets of the target which would then have to be transferred to the acquirer. To the extent that an acquirer is to assume any liabilities of the target, this would have be done by way of appropriate contractual arrangements and would, in the absence of a court-sanctioned compromise, require the consent of all the creditors concerned. In other words, the process always involved a transfer of ownership of shares or assets from one entity to another entity with the entities in question remaining separate and distinct from one another and usually with a purchase price going to the seller in consideration for the assets disposed of.
An amalgamation introduces for the first time into our law the concept of a merger in terms of which, by operation of law, the shares, assets and liabilities of companies can be amalgamated or merged. The Bill is still in draft form and the mechanics for the process remain to be finalised but it is unlikely that the concept of amalgamations will be lost in future drafts of the Bill as it has been generally welcomed as a useful addition to South African law.
The draft Bill provides that two or more companies may amalgamate or merge. A merger is defined as a transaction or series of transactions which results in one or more companies holding all the assets and liabilities previously held by the several merging companies. Amalgamation is similarly defined. The distinction between an amalgamation and a merger is that an amalgamation contemplates the formation of one or more new companies which hold all of the assets and liabilities previously held by the several amalgamating companies, whereas a merger does not require the formation of newly incorporated companies but contemplates a merger between existing companies.
Before an amalgamation or a merger may take place, the board of each amalgamating or merging company must be satisfied that the resultant amalgamated or merged company will satisfy the tests of solvency and liquidity, that is, that it will be able to meet its liabilities as they fall due and that its assets will exceed its liabilities. Furthermore, the proposed amalgamation or merger must be approved by the shareholders of the company in general meeting and will of course be subject to the normal regulatory approvals such as competition approval. The deal must furthermore comply with the requirements of the Takeover Code if it is applicable. It is also contemplated that notice will need to be given to creditors of the affected companies and that they will not have any substantive objections to the proposals.
Once all of these formalities have been successfully completed, a notice of amalgamation or merger may be filed with the Companies and Intellectual Property Commission. Upon the merger or amalgamation taking effect, the property of each amalgamating or merging company will become the property of the newly amalgamated, or surviving merged, company and each newly amalgamated, or surviving merged, company shall be liable for all the obligations of every amalgamating or merging company. The effect of this is that the businesses of the amalgamating or merging companies are effectively combined by operation of law. The proposed legislation does not go as far as certain foreign legislation, such as the Canadian legislation, which actually combines the corporate identity or juristic personality of the merging entities into one. Possibly this additional concept will be considered in future drafts of the Bill. Nevertheless, the introduction of the concept of an amalgamation or merger is an important innovation in South Africa and will open up significant new opportunities for structuring transactions. The amalgamation and merger provisions in the Bill are deliberately designed to permit great flexibility in the way in which such transactions are structured and this flexibility will permit greater innovation and new opportunities in the structuring of transactions.
Amalgamation and merger, being new concepts, are not currently catered for in fiscal legislation and it will be necessary for the tax authorities to give consideration to the consequences flowing from the introduction of these concepts. The current group restructuring rules contained in the Income Tax Act are not designed for situations such as this and it will be necessary for appropriate tax legislation to be put in place before the new amalgamation and merger sections can become operative.
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