February 2000

It is seldom that a case concerning the interpretation of the Securities Regulation Code on Takeovers and Mergers ("the Code") comes before the courts. For this reason, the judgment in Haslam v Sefalana Employee Benefits Organisation [1997] 4 All SA 269 (W) is noteworthy. The plaintiffs in that case were minority shareholders in a company ("T Co"). The defendant had concluded an agreement with C for the sale of C's shares in T Co. The agreement was subject to conditions which were, in due course, fulfilled. The defendant, however, subsequently repudiated the agreement and C, accepting the repudiation, cancelled the agreement. Consequently, no share certificates were delivered to the defendant, nor was the defendant's name registered in T Co's register of members. An issue was: whether the agreement triggered the duty to make a mandatory offer under rule 8.1 of the Code.

Rule 8.1 sets out circumstances in which a mandatory offer must be made to shareholders of a company by a person who acquires securities in that company. In terms of rule 8.1, when "any person holding less than the specified percentage acquires, whether by a series of transactions over a period of time or otherwise, securities which (taken together with securities already held by such person or held or acquired by persons acting in concert with him) carry the specified percentage or more of the voting rights of a company" such person is obliged "unless the [Securities Regulation] Panel rules otherwise", to "extend offers to the holders of any class of equity capital, whether voting or non-voting, and also to the holders of any class of voting non-equity capital of which such person or persons acting in concert with him are holders, to acquire all of their securities or such portion of their securities as the Panel on application may determine". The shares sold to the defendant in terms of the agreement constituted more than the "specified percentage" referred to in rule 8.1. The plaintiffs contended that the defendant was, in terms of rule 8.1, obliged to make a mandatory offer to them. The defendant, by contrast, contended that the mandatory offer would have become incumbent only if the shares had actually been transferred to it. The crucial question which fell to be determined was, therefore, whether, the defendant had, as contemplated by rule 8.1, "acquired securities" by virtue of its agreement with C.

Although the court accepted that "the ordinary and legal meaning of 'acquire' implies that the acquirer becomes owner'" the word may, the court said, "be used in a wider sense so to as to (sic) include the acquisition, not of ownership itself, but of a right to obtain it" (at 276). In an attempt to ascertain the correct meaning, the court examined the statutory definitions of "acquisition" and "securities".

Section 440A(1) of the Companies Act provides that:

"'acquisition', in relation to any securities of any company, means the acquisition of securities in such company by any means whatsoever, including purchase or subscription,"

The court pointed out that the statutory definition of "acquisition" incorporates "security" and that "securities" is, in turn, "extremely widely defined" to mean, unless the context otherwise indicates, "not only shares, but also any rights or interests 'in or in respect of any such shares'" (at 276). This led the court to conclude that it was "intended to import into the application of the Code the wider, less common, meaning of 'acquire'" (at 276). On an application of that meaning to the facts of the case, the court found that, even if the defendant had not become owner of the T shares, it was obliged to make a mandatory offer to the plaintiffs. This was because, even if the shares had not been transferred to the defendant, the defendant had been "entitled specifically to enforce its purchase of the [T] shares" and, through its agreement with C, the defendant "acquired rights and interests in the controlling shareholding in [T Co]" (at 277).

The court held that rule 8 of the Code:

"gives effect to the principle that informs the Code as a whole, namely that minority shareholders should, when an affected transaction takes place, receive equal treatment. The principles enjoin 'fair and equal treatment of all holders of relevant securities in relation to affected transactions'." (at 278c-d)

This entailed, the court said, "that the concluded contract, regardless of its further fate, obliged [the defendant] to deal likewise with [T's] minority shareholders" (at 278). It should be noted that the Standing Advisory Committee on Company Law is currently viability of the mandatory offer to minorities embodied in rule 8 of the Code.


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