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
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
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
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.
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