South Africa: Fundamental Transactions And Their Regulation By The Companies Act No. 71 Of 2008

Last Updated: 9 August 2011
Article by Gareth Driver and Huneiza Goolam

One of the highlights of the new Companies Act No. 71 of 2008 (the Act) is its innovation in the area of "fundamental transactions" by which mergers and acquisitions are effected and the fact that the Act regulates fundamental transactions more stringently than the Companies Act No. 61 of 1973 (the old Act) did.

Categories of fundamental transactions

The Act contains distinct requirements for each of the four categories of fundamental transactions identified in the Act, which may be described as follows:

  • disposals of all or the greater part of a company's assets or undertaking;
  • mergers and amalgamations; 1
  • schemes of arrangement; and
  • takeovers.2

The Takeover Regulation Panel

The Act establishes the Takeover Regulation Panel (Panel) as a replacement for the old Securities Regulation Panel. The Panel governs fundamental transactions undertaken by regulated companies (being public companies, state-owned companies and certain private companies) and will prescribe additional rules for those transactions.

Every regulated company will need to obtain a compliance certificate from the Panel before it may implement a fundamental transaction, and this applies to all fundamental transactions, not only takeovers.

Disposals of assets

A disposal only needs to comply with the Act where a company is disposing of all or the greater part of its assets or undertaking. Where the company disposes of only a part of its assets or undertaking, the determination of whether the part being disposed of constitutes the greater part of its assets or undertaking is based on the fair market value of the company's assets or undertaking.

The requirements for a disposal by a company of all or the greater part of its assets or undertaking are that:

  • such disposal shall have been approved by special resolution of the shareholders of that company;
  • in certain circumstances, the general rules applicable to fundamental transactions (which are set out below) may require the approval of the shareholders of a holding company of the company making the disposal and of a court; and
  • if the company making the disposal is a regulated company, the Panel shall have issued a compliance certificate in respect of that disposal.

However, these requirements do not apply to a disposal:

  • which is effected pursuant to a business rescue plan; or
  • between a wholly-owned subsidiary on the one hand and any one or more of its holding company and any other wholly-owned subsidiary/ies of that holding company on the other hand.

Mergers

For the first time in South African law, the Act enables companies to effect a merger per se, where a company may transfer its liabilities (as well as its assets) to another company without the consent of its creditors.

Under the enabling provision of the Act, any two or more companies (including holding and subsidiary companies) may, subject to satisfying the solvency and liquidity test, merge by entering into a transaction which results in either:

  • the formation of one or more new companies which together hold all of the assets and liabilities that were previously held by the merging companies immediately prior to the implementation of the merger, and the dissolution of each of the merging companies; or
  • the survival of one or more merging company/ies, with or without the formation of one or more new companies, which acquire all of the assets and liabilities previously held by the merging companies immediately prior to the implementation of the merger.

The requirements for a merger by a company with any other company are that:

  • the terms and means of effecting the merger, and certain other prescribed matters, must be set out in a written agreement (merger agreement) between the merging companies;
  • the board of directors of each merging company must reasonably believe that each merged entity will satisfy the solvency and liquidity test upon implementation of the merger;
  • the merger shall have been approved by special resolution of the shareholders of each merging company;
  • in certain circumstances, the general rules applicable to fundamental transactions (which are set out below) may require the approval of the shareholders of a holding company of the merging company and the approval of a court;
  • every known creditor of the merging companies must have been notified of the merger. Any creditor of a merging company may challenge the merger in court if the court is satisfied that the creditors are:

i) acting in good faith;

ii) will be materially prejudiced by the merger; and

iii) have no other remedies; and

  • if any merging company is a regulated company, the Panel shall have issued a compliance certificate in respect of that merger.

However, these requirements do not apply to a merger which is effected pursuant to a business rescue plan.

Although there are procedural safeguards for creditors in the merger process, creditors may still feel at risk as a result of the possibility that their debtors could transfer their liabilities to other companies in terms of a merger. This is likely to open a new issue of contention between creditors and their debtors, as creditors are likely to seek advance contractual protection against the possibility of a merger without their consent.

Schemes of arrangement

The scope of the concept of a scheme of arrangement between a company and its shareholders has been clarified in the Act, as a scheme of arrangement now expressly includes any arrangement between the company and its shareholders by way of:

  • a consolidation of securities of different classes;
  • a division of securities into different classes;
  • an expropriation of securities from the holders;
  • exchanging any of its securities for other securities;
  • a re-acquisition by the company of any of its securities; or
  • a combination of any of these methods.

In an approach which entails a few departures from the old Act's requirements, the requirements for a company to implement a scheme of arrangement under the new Act are that:

  • the scheme shall have been proposed by the board of directors of the company and shall have been approved by special resolution of the shareholders of that company;
  • the sanction of a court is not ordinarily required, but in certain circumstances, the general rules applicable to fundamental transactions (which are set out below) may require the approval of a court and the approval of the shareholders of a holding company of the company implementing the scheme;
  • the company must appoint an independent expert, who satisfies the Act's criteria on independence and expertise and that independent expert must prepare a report on the scheme to the board of directors and cause the report to be distributed to all shareholders. The independent expert's report must contain certain prescribed minimum information, including an evaluation of any material adverse effects of the proposed arrangement against the compensation that will be received by affected shareholders and against any reasonably probable beneficial and significant effects of the scheme on the business and prospects of the company; and
  • if the company implementing the scheme is a regulated company, the Panel shall have issued a compliance certificate in respect of that scheme.

However, the board of directors of a company which is in liquidation or in the course of business rescue proceedings may not propose a scheme of arrangement.

General rules applicable to fundamental transactions other than takeovers

Shareholder approval

As mentioned above, a company may not implement a disposal of assets, merger or scheme of arrangement without the approval of its shareholders, which must be given by way of a special resolution. In order for that resolution to be validly adopted:

  • a meeting of shareholders must be called to consider the resolution and notice of that meeting must be given to shareholders in the prescribed manner. That notice will have to include various items of information, including explanations of the rights of shareholders to sell their shares to the company under the appraisal rights and have a court review the transaction (both of which are explained further below);
  • ordinarily, the resolution must be supported by 75% of the votes cast on the resolution at a quorate meeting, although this percentage may be varied in the company's Memorandum of Incorporation;
  • votes controlled by an acquiring party (together with its related persons and concert parties) must be ignored when determining whether the meeting was quorate and whether the resolution received the required support.

In addition, where the transaction involves a disposal by a subsidiary company and the assets or undertaking being disposed of also constitute all or the greater part of a majority of the assets or undertaking of the holding company of that subsidiary when one has regard to the consolidated financial statements of that holding company, then the approval of the shareholders of that holding company by way of special resolution is also required.

Court review of fundamental transactions

The approval of a court for a fundamental transaction (other than a takeover) will now be essential for disposals of assets, mergers and schemes of arrangement if:

  • the special resolution approving the transaction was opposed by 15% or more of the votes cast on that resolution and any person who voted against the transaction requires the company to obtain such approval; or
  • a court grants any shareholder leave to have the transaction reviewed. The court may only grant such a review if that shareholder:

(i) is acting in good faith;

(ii) appears prepared and able to sustain the proceedings; and

(iii) has alleged facts which, if proved, would justify the court setting aside the resolution approving the transaction.

Where the court's approval is required, the court will only be able to set aside the special resolution approving the transaction if:

(i) the transaction is manifestly unfair to any class of the company's shareholders; or

(ii) the vote on the transaction was materially tainted by (a) conflict of interest; (b) inadequate disclosure; (c) failure to comply with the Act, the company's rules or Memorandum of Incorporation; or (d) other significant and material procedural irregularity.

Appraisal rights

One of the most innovative features of the Act is the fact that it grants appraisal rights to dissenting shareholders whenever the company adopts a resolution approving a fundamental transaction. (The appraisal rights are also available when a company amends its Memorandum of Incorporation so as to alter the rights attaching to any class of shares in a manner adverse to the holders of those shares.)

Shareholders who unsuccessfully oppose such transactions will thereafter be able to compel the company to repurchase all of their shares for their fair value, unless a court orders otherwise. However, apart from a situation in which the company would be plunged into illiquidity as a result of that repurchase, the grounds on which the court may order otherwise are not clear.

Takeovers

While many of the rules governing takeovers are familiar and have been in place for many years under the Securities Regulation Code which was promulgated under the old Act, the Act does introduce some new rules and also itself sets out more of the substantive rules so that it leaves less to be prescribed by regulation. In the process, the Act has improved and clarified some of these rules. Some brief highlights from the Act's rules on takeovers are set out below.

Takeover offers

The Act obliges a person (acquirer) to make a mandatory offer to all shareholders of a company if, as a result of an acquisition by the acquirer or a share buy-back, the acquirer holds the prescribed percentage (which is expected to remain at 35%) or more of the voting shares of a company.

The Act also regulates the manner in which the acquirer must make a mandatory offer, and also regulates the manner in which partial offers and offers to acquire all of the shares in a company must be made.

Partial offers

A partial offer which would result in the offeror holding at least 35% but less than 100% of the issued shares of a company, must be conditional on the partial offer being approved by the independent holders of the company's shares.

Compulsory acquisitions and squeeze outs

Where an offer has been accepted by 90% of the offeree shareholders, the Act enables the offeror to squeeze out the remaining minority shareholders by acquiring their shares on the terms of the original offer. The Act enables a court to come to the assistance of the offeror who has not been able to achieve the 90% threshold because offeree shareholders could not be traced.

In that situation, if the consideration offered is fair and reasonable and the court is satisfied that, having regard to the number of offeree shareholders who have been traced but did not accept the offer, it is just and reasonable to do so, the court may allow the offeror to invoke the squeeze out rule.

Required disclosures on crossing thresholds

Any person who acquires or disposes of a company's shares is obliged to notify the company of that fact if the aggregate shareholding of that person reaches or drops below any whole multiple of 5% (for example, 5%, 10% 15%, etcetera) as a result of that acquisition or disposal.

Any company receiving such a notice is obliged to file a copy of the notice with the Panel and, unless the transaction involved less than 1% of the company's shares, report the contents of that notice to its shareholders.

Concert parties and related persons

The Act retains the concept of acting in concert (acting pursuant to an agreement between persons in terms of which they co-operate for the purposes of entering into or proposing a takeover) and generally aggregates the shareholdings of concert parties and related persons for the purposes of determining whether the various thresholds have been reached.

Restrictions on frustrating action

In order to prevent a board of directors of a company from taking frustrating action while the board believes that a bona fide offer is imminent or when a bona fide offer has been received, the Act restricts the board from:

  • taking any action that could result in that offer being frustrated or the shareholders of the company being denied an opportunity to decide on the merits of that offer;
  • issuing new shares or convertible securities or granting options to subscribe for new shares or convertible securities;
  • selling or disposing of or acquiring assets of a material amount, except in the ordinary course of business;
  • entering into contracts other than in the ordinary course of business;
  • making a distribution that is abnormal as to timing and amount,

without the prior written approval of the Panel and the approval of shareholders. The Act does allow companies to honour pre-existing obligations.

Favourable conditions

An offeror may not enter into arrangements with shareholders in the target company if there are favourable conditions attached which are not being extended to all of the offeree shareholders.

Conclusion

The impact of the Act on the implementation of fundamental transactions will be significant and is already being felt in relation to transactions which are commencing now but will not be implemented until after the Act has become effective.

While a number of the Act's provisions have improved the regulation of fundamental transactions, the Act has inevitably created uncertainty in the minds of transacting parties and their advisers as a result of the introduction of new concepts, new requirements, new remedies and new time periods.

The overall objective of these innovations is laudable in that the Act seeks to improve on the old Act's facilitation of transactions while offering greater protection to stakeholders. It is to be hoped that, as the Act's meaning is tested and its concepts are developed and become familiar, the manner in which the Act balances these objectives proves to be appropriate and practical.

Footnotes

1 Since there is no distinction in the Act between a merger and an amalgamation, the term "merger" may effectively be used interchangeably with the term "amalgamation".

2 The term "takeovers" loosely refers to transactions in the shares of a company which are commonly used to acquire control of a company.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions