Historically, our company laws prohibited a company from
providing financial assistance for the purchase of its own
shares. This restriction was aimed at preserving the
company's capital and protecting the minority
shareholders and creditors of the company. However, in recent
years, it also had the effect of hampering the implementation
of 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.
At the end of last year, our Companies Act was amended to
provide that a company may now provide finance to a purchaser,
for instance a potential BEE partner, to take up shares in the
company provided that the directors of the company are
subsequent to the transaction, the assets of the company
will exceed its liabilities (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
In addition, the shareholders must pass a special resolution
(75% in favour) approving the terms upon which the assistance
is to be given.
Whilst the amendment tends to facilitate shareholder
diversification, it is yet to be seen to what extent it will
have an impact on BEE deal activity in the market. 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
In our view, the amendments are welcome as the law now
facilitates the financing of BEE 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. The options regarding the financing of
company-related transactions have been expanded in real
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general guide to the subject matter. Specialist advice should
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The Act has brought about fundamental changes in the manner in which shareholder resolutions are passed.
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