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 and all.
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.