Everyone speaks of mergers and acquisitions when it has not been
possible in South Africa for two companies to "merge", in
the true sense of that term.
If you consider the structure of the deal activity more closely,
you will see that merger transactions have involved a sale, either
in the form of a sale of shares or a sale of business. Transactions
of this nature are arranged because our company laws do not provide
for the combination of two companies into one. Under our Companies
Act both the acquiring company and the target company continue to
exist separately, perhaps with the acquiring company becoming the
shareholder of the target company.
A number of changes and potential changes to our company laws
will have an impact on deal structures. In terms of the Corporate
Laws Amendment Act, 2006 which became law at the end of last year,
sections 228 and 38 of the Companies Act have been amended.
Section 228 deals with the shareholder consent required where
the directors of a company enter into an agreement for the disposal
of the whole or most of the company's undertaking or its
assets, in other words a sale of its business. Previously, section
228 provided that the directors of a company could not, without the
approval of at least 50% of the shareholders, enter into such a
disposal agreement. Due to the recent amendments, the directors
will now need 75% shareholder approval by special resolution for
transactions of this type. It has yet to be seen whether this
amendment may cause parties to a proposed transaction to rather
structure their deals differently.
In regard to BEE driven transactions, the old section 38 of the
Companies Act often inhibited such transactions and led to
dealmakers concocting complex structures to avoid the requirements
of this section. This was because section 38 prevented companies
from providing financial assistance to BEE partners to enable them
to take up shares in the company. However a company is now
permitted to provide financial assistance to take up shares in
itself, provided that 75% of the shareholders of the company
approve. The extent to which this amendment will result in more BEE
activity remains to be seen, as the new section also requires the
directors to confirm that the company will remain solvent and
liquid for the "entire duration of the
transaction". This is an onerous statement for the
directors to make particularly if the financing is to endure over a
long period of time.
Even more interesting, the latest draft of the new Companies
Bill makes provision for the amalgamation or merger of two
companies, pursuant to which a single, new company will come into
existence. This concept is similar to what is provided for by the
laws of the USA regarding mergers. According to the Bill, the
shares of the disappearing company will have to be cancelled and
the Commissioner (similar to the Registrar of Companies) will issue
a certificate of incorporation to the newly merged company, and
de-register each of the amalgamating companies. It therefore
appears that our laws may at long last provide for authentic
mergers of companies.
Given the recent amendments to the Companies Act and the
proposed introduction of genuine mergers in South Africa in terms
of the draft Bill, it will be interesting to see the ingenious
structures used in future commercial transactions – BEE
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