South Africa: Private M&A Comparative Guide

1 Deal structure

1.1 How are private M&A transactions typically structured in your jurisdiction?

In South Africa, private M&A transactions commonly follow two main structures:

• share purchase agreements (SPAs); and
• asset purchase agreements (APA)s.

Each offers distinct advantages depending on the buyer's objectives and the characteristics of the target.

The advantages of SPAs are as follows:

• The buyer acquires the shares of the target, gaining complete ownership and control.
• An SPA is ideal for acquiring the entire entity, including intangible assets such as goodwill and intellectual property.
• An SPA is simpler to structure, but the buyer inherits all liabilities of the target.
• Due diligence on the entire target is required.

The advantages of APAs are as follows:

• The buyer acquires specific assets and liabilities of the target, allowing it to cherry-pick desired components.
• An APA is useful for acquiring specific divisions, product lines or assets.
• The buyer avoids inheriting unwanted liabilities but requires careful due diligence on specific assets.
• There may be an obligation to take on all applicable employees of the target under the same terms and conditions.
• An APA is more complex to structure, as what is included and excluded must be clearly defined.

Additional considerations include the following:

• Both structures involve agreements outlining:
• • the purchase price;
  • the payment terms;
  • warranties; and
  • conditions precedent.
• Regulatory approvals and compliance with the Companies Act are crucial.
• Escrow arrangements, indemnities or earn-outs may be used to manage risks and incentivise sellers.

1.2 What are the key differences and potential advantages and disadvantages of the various structures?

The advantages of SPAs are as follows:

• The structure is simpler.
• The entire entity is acquired, including intangible assets such as goodwill and intellectual property.
• They are faster to close.

The disadvantages of SPAs are as follows:

• The buyer inherits all liabilities of the target.
• Due diligence on the entire company is required, potentially increasing the cost and complexity.
• Flexibility in deal structuring is lost.

The advantages of APAs are as follows:

• They allow the buyer to cherry-pick desired assets and liabilities.
• The buyer avoids inheriting unwanted liabilities.
• There is more flexibility in deal structuring.

The disadvantages of APAs are as follows:

• They are more complex to structure, requiring precise definition of included/excluded assets.
• There is increased due diligence complexity for specific assets.
• All applicable employees of the target may potentially be inherited under the same terms and conditions.
• There may be tax implications to consider.

Additional considerations include the following:

• Tax: Each structure has different tax implications, requiring careful evaluation.
• Due diligence: The scope and depth of due diligence vary depending on the chosen structure.
• Regulatory approvals: Both structures might require regulatory approvals, depending on the nature of the transaction.
• Negotiation: Negotiations play a crucial role in determining the final deal structure and the allocation of risks and rewards between buyer and seller.

The optimal structure depends on individual circumstances. Factors such as the following should be considered:

• Buyer's objectives: Does the buyer require the entire company or specific assets?
• Target company characteristics: Are there potential liabilities the buyer wants to avoid?
• Negotiation leverage: Each structure offers different negotiation leverage for each party.

1.3 What factors commonly influence the choice of transaction structure?

Choosing the right structure for a South African private M&A transaction hinges the following key factors:

• Buyer's objectives:
• • Full acquisition: Seeking complete ownership and control of the target, including intangible assets, favours a SPA.
  • Targeted acquisition: Wanting specific assets or divisions pushes towards an APA, allowing strategic cherry-picking.
• Target characteristics:
• • Clean financials: If liabilities are minimal, an SPA might be simpler and faster.
  • Potential liabilities: Concerns about unknown risks or unwanted obligations make an APA attractive, shielding the buyer.
• Tax implications:
• • SPA: The buyer inherits the target's tax history, which may be beneficial or detrimental depending on specific situations.
  • APA: Offers more flexibility in structuring the deal for potential tax optimisation but requires careful planning.
• Due diligence complexity:
• • SPA: Requires comprehensive due diligence on the entire target, potentially increasing cost and time.
  • APA: Focuses on specific assets, potentially streamlining due diligence but demanding precision in defining inclusions and exclusions.
• Negotiation leverage:
• • SPA: The seller typically holds stronger leverage due to the buyer inheriting all liabilities.
  • APA: The buyer may have more leverage due to the ability to select desired assets and avoid unwanted liabilities.
• Regulatory approvals:
• • SPA: Often requires fewer approvals compared to an APA, depending on the size and industry of the target.
  • APA: Complex deals involving multiple assets may necessitate additional regulatory hurdles.

Additional considerations include the following:

• Transaction speed: SPAs generally close faster than APAs due to their simpler structures.
• Confidentiality: APAs may offer more control over confidential information disclosure due to their targeted nature.

1.4 What specific considerations should be borne in mind where the sale is structured as an auction process?

When structuring a South African private M&A transaction as an auction, both SPAs and APAs become more complex and require additional considerations. Key points to remember include the following:

• Structure clarity:
• • SPA auctions: Clearly define which liabilities fall under the auction and which remain with the seller. This can impact buyer interest and bids.
  • APA auctions: Precisely detail the assets and liabilities included/excluded. Ambiguity can lead to post-auction disputes.
• Due diligence:
• • Limited access: Buyers may have limited access to detailed due diligence information due to competitive pressure. Consider structuring a phased approach with information releases based on bid stages.
  • Confidentiality: Implement robust confidentiality agreements to protect sensitive information while allowing potential buyers to conduct sufficient due diligence.
• Bidding process:
• • Indicative bids: Use non-binding bids to gauge initial interest and establish a pricing baseline before moving to binding offers.
  • Multiple rounds: Consider multiple bidding rounds, allowing refinement of offers and potential adjustments to the structure to optimise value for the seller.
• Deal certainty:
• • Break fees: Implement appropriate break fees to discourage frivolous bids and incentivise serious participation.
  • Escrow arrangements: Utilise escrow arrangements to hold funds or assets until closing conditions are met, mitigating post-auction risks.
• Regulatory concerns:
• • Antitrust compliance: Ensure fair competition throughout the auction process and consider the potential competition implications of eliminating specific bidders.
  • Industry-specific regulations: Be mindful of any industry-specific regulations that might impact the auction structure or buyer eligibility.
• Communication and transparency:
• • Clear communication: Clearly communicate the auction process, timelines and expectations to all participants throughout the entire process.
  • Transparency: Maintain a level playing field while ensuring the confidentiality of sensitive information, potentially through independent advisers.

Successful auction-based M&As in South Africa require:

• careful planning;
• meticulous attention to detail; and
• a focus on creating a fair, transparent and competitive process.

2 Initial steps

2.1 What agreements are typically entered into during the initial preparatory stage of a private M&A transaction?

The initial preparatory stage of a South African private M&A transaction involves several crucial agreements to lay the groundwork for a smooth and successful process. Key documents to consider include the following:

• Confidentiality agreement:
• • Essential for protecting sensitive information shared during discussions and due diligence.
  • Defines what information is considered confidential, permissible uses and potential consequences of breaches.
• Non-binding letter of intent:
• • Outlines the basic terms of the potential transaction, including the price range, structure and key conditions.
  • Non-binding but signals serious interest and establishes a framework for further negotiations.
• Exclusivity agreement (optional):
• • Grants the buyer exclusive rights to negotiate with the seller for a defined period.
  • Can be advantageous for focused negotiations but restricts the seller's ability to explore other offers.
• Break fee agreement (optional):
• • Protects the seller if the buyer walks away after the exclusivity period or due diligence.
  • Compensates the seller for wasted time and resources, incentivising serious buyer engagement.
• Due diligence access agreement:
• • Outlines the scope of due diligence activities, information access procedures and confidentiality obligations.
  • Protects both parties by clearly defining permitted access and information handling protocols.
• Standstill agreement (optional):
• • Restricts both parties from taking certain actions, such as soliciting other offers or making significant changes to the business, during negotiations.
  • Maintains the status quo and facilitates smooth negotiations.
• Financing commitment letter (optional):
• • Obtained by the buyer from a lender, showcasing its ability to secure financing for the transaction.
  • Can strengthen the buyer's negotiating position and provide comfort to the seller.
• Additional agreements:
• • Depending on the transaction complexity, additional agreements such as intellectual property licences, employment agreements or non-compete agreements might be necessary.

2.2 Which advisers and stakeholders are typically involved in the initial preparatory stage of a private M&A transaction?

The initial preparatory stage of a South African private M&A transaction involves a carefully orchestrated process between various advisers and stakeholders. Key players include the following:

• Advisers:
• • Legal counsel: Both buyer and seller require legal representation to guide them through the legal complexities, draft essential agreements and ensure compliance with regulations.
  • Financial advisers: Buyers often engage investment bankers to advise on valuations, financing strategies and negotiation tactics. Sellers may also leverage bankers for fairness opinions and deal structuring.
  • Tax advisers: Both sides engage tax specialists to advise on the potential tax implications of different deal structures and optimise their tax position.
  • Due diligence providers: Specialised firms or internal teams can be employed to conduct comprehensive due diligence on the target's financials, operations, legal standing and potential risks.
• Stakeholders:
• • Boards of directors: Both companies' boards play crucial roles in approving the transaction, overseeing negotiations and protecting shareholder interests.
  • Management teams: Chief executive officers, chief operating officers and other key managers provide essential information during due diligence and play a vital role in integrating operations post-merger.
  • Investors: Involving private equity firms, venture capitalists or other investors often requires their approval and negotiation of specific terms.
  • Regulators: Depending on the industry and transaction size, regulatory bodies such as the Competition Commission or financial regulators may need to approve the deal.
• Additional players:
• • Accounting firms: Assist with financial reporting, audits and tax preparation related to the transaction.
  • Public relations consultants: Manage communication with stakeholders, media and employees during the process.
  • IT consultants: Facilitate data migration and system integration in preparation for post-merger operations.

2.3 Can the seller pay adviser costs or is this limited by rules against financial assistance or similar?

In South Africa, the Companies Act and regulations concerning financial assistance can restrict a seller's ability to directly pay buyer-side adviser costs. These rules aim to protect creditors and minority shareholders from unfair practices.

However, there are ways to navigate these restrictions:

• Contingent fees: Seller can agree to pay advisers a success fee contingent on a successful transaction closing.
• Third-party guarantees: A financially sound third party, such as a shareholder or another company, can guarantee the adviser fees.
• Buyer reimbursement: The buyer can agree to reimburse the seller for adviser costs after the transaction closes, subject to certain conditions.
• Structuring as transaction costs: Certain adviser fees might be deemed legitimate transaction costs covered by the buyer, but legal advice is crucial to navigate this carefully.

Key considerations include the following:

• The chosen method should comply with all relevant regulations and protect the seller's interests.
• Transparency and clear communication with all stakeholders are vital.
• Seeking legal advice to ensure compliance and structure the arrangement appropriately is highly recommended.

The specific circumstances of the transaction will determine the feasibility and legality of the seller paying adviser costs.

3 Due diligence

3.1 What due diligence is typically conducted in private M&A transactions in your jurisdiction and how is it typically conducted?

Due diligence plays a crucial role in South African private M&A transactions, providing buyers with comprehensive insights into the target's health, risks and potential. Here is an overview of the typical scope and conduct:

• Scope of due diligence:
• • Financial due diligence: Evaluating historical financial statements, forecasts, tax compliance and potential liabilities.
  • Legal due diligence: Reviewing contracts, regulatory compliance, IP ownership and potential legal claims.
  • Commercial due diligence: Assessing market position, customer base, competitor analysis and operational efficiency.
  • Tax due diligence: Analysing tax liabilities, potential tax risks and optimising the transaction structure for tax efficiency.
  • Environmental due diligence: Identifying environmental risks and liabilities associated with the target's operations.
• Conducting due diligence:
• • Data room: Sellers typically establish a virtual or physical data room containing relevant documents for buyers to access.
  • Site visits: Depending on the target's operations, physical visits to facilities or meetings with key personnel might occur.
  • Management interviews: Interviews with target management provide further insights into operations, strategy and potential challenges.
  • Expert assistance: Depending on the transaction complexity, additional specialists such as environmental consultants or IP lawyers may be involved.

Key considerations include the following:

• The scope and depth of due diligence vary depending on:
• • the specific transaction;
  • the size of the companies; and
  • potential risks identified.
• Confidentiality agreements are crucial to protect sensitive information shared during the process.
• The engagement of experienced legal and financial advisers is recommended to:
• • guide the due diligence process;
  • interpret findings; and
  • identify potential deal breakers.

3.2 What key concerns and considerations should participants in private M&A transactions bear in mind in relation to due diligence?

Due diligence serves as the cornerstone of informed decision-making in South African private M&A transactions. The process entails several key concerns and considerations for both buyers and sellers:

• Buyers:
• • Scope and depth: Carefully define the scope of due diligence to ensure optimal coverage of financial, legal, commercial, tax and environmental aspects. This balances thoroughness with cost efficiency.
  • Data room quality: Accessing a well-organised and comprehensive data room containing relevant and up-to-date information is crucial for efficient due diligence.
  • Management cooperation: Unwillingness or delays from target management in providing information or facilitating interviews can raise red flags and impact deal certainty.
• Sellers:
• • Confidentiality risks: Implement robust confidentiality agreements to protect sensitive information disclosed during due diligence and carefully manage access to data rooms.
  • Potential dealbreakers: Proactively address any known areas of potential concern (eg, environmental liabilities, legal disputes) before due diligence commences to mitigate negotiations delays or deal collapse.
  • Internal resources: Allocate sufficient internal resources to support due diligence requests in a timely and efficient manner to avoid disruptions to ongoing operations.
• General:
• • Regulation and compliance: Be mindful of regulatory due diligence requirements in specific sectors or for larger transactions, ensuring compliance with relevant legislation.
  • Independent experts: Engaging independent experts (eg, environmental consultants, tax advisers) can provide valuable insights and mitigate reliance solely on internal assessments.
  • Professional guidance: Seek legal and financial counsel throughout the due diligence process to ensure adherence to best practices, interpret findings and manage potential risks effectively.

A well-structured and collaborative due diligence process with clear communication and mutual respect between participants ultimately fosters trust, expedites transactions and increases the likelihood of a successful outcome for all parties involved.

3.3 What kind of scope in relation to environmental, social and governance matters is typical in private M&A transactions?

Environmental, social and governance (ESG) considerations are increasingly playing a critical role in South African private M&A transactions. While the specific scope varies depending on the transaction's nature and industry, a general overview is as follows:

• Typical ESG due diligence focus:
• • Environmental: Assessing potential liabilities associated with pollution, hazardous materials, waste management, resource usage and compliance with environmental regulations.
  • Social: Evaluating labour practices, human rights implications, community engagement, health and safety standards and potential social conflicts.
  • Governance: Investigating corporate governance structures, anti-bribery and corruption measures, stakeholder engagement and compliance with relevant legislation.
• Factors influencing scope:
• • Industry: Transactions in environmentally sensitive sectors (eg, mining, chemicals) tend to require more comprehensive ESG due diligence.
  • Transaction size: Larger deals often warrant deeper ESG scrutiny due to heightened potential impact and investor attention.
  • Buyer's priorities: Some buyers are driven by sustainability objectives, requiring more extensive ESG analysis aligned with their own ESG commitments.
• Approaches to ESG due diligence:
• • Desktop review: Initial assessment of available documentation, public records and news reports for potential red flags.
  • Site visits: Physical inspections of facilities to evaluate environmental practices, working conditions and community engagement.
  • Stakeholder engagement: Consultations with employees, local communities, non-governmental organisations and industry experts to gather broader perspectives.
  • Expert consultation: Engaging ESG specialists for deeper analysis and risk assessment.
• Importance of ESG:
• • Mitigating risks: Comprehensive ESG due diligence helps to identify and manage potential environmental, social and reputational risks that could impact the transaction's value or post-acquisition challenges.
  • Investment considerations: Growing investor focus on ESG performance necessitates proactive assessment and integration into investment decisions.
  • Sustainable value creation: Understanding the target's ESG strengths and weaknesses paves the way for future value creation through improved sustainability practices.

Due diligence is an iterative process, so initial findings may trigger further investigation into specific areas of concern.

4 Corporate and regulatory approvals

4.1 What kinds of corporate and regulatory approvals must be obtained for a private M&A transaction in your jurisdiction?

While private M&A transactions in South Africa offer flexibility, securing essential corporate and regulatory approvals remains crucial for a smooth and successful deal. Here is an overview of common approvals that may be required:

• Corporate approvals:
• • Shareholder approval: If the transaction involves shares exceeding a prescribed threshold or alters voting rights, shareholder approval via a general meeting is mandatory.
  • Board of directors approval: Transaction approval typically rests with the board, often requiring a formal resolution and adherence to fiduciary duties.
  • Creditor consents: Depending on the transaction structure, obtaining consent from certain creditors might be necessary to protect their interests.
• Regulatory approvals:
• • Competition Commission: Transactions exceeding specific thresholds require notification and potential approval from the Competition Commission to ensure fair competition.
  • Takeover Regulation Panel: If the target is considered a 'regulated company', the Takeover Regulation Panel must be notified and may impose specific requirements.
  • Industry-specific approvals: Certain industries (eg, mining, financial services) have additional regulatory bodies requiring approvals based on their specific mandates.
• Other statutory approvals: Depending on the transaction's nature, approvals from other regulatory bodies such as the Reserve Bank or environmental authorities might be required.

Additional considerations include the following:

• Timeframes: Obtaining approvals can take time, so factoring this into the transaction timeline is crucial. Legal and regulatory advice is essential to anticipate potential delays and navigate relevant processes efficiently.
• Transaction structure: The chosen structure (share purchase versus asset purchase) can influence the types and complexity of approvals needed.
• Confidentiality: Navigating approvals often involves disclosing sensitive information. Implementing robust confidentiality agreements with all parties involved is vital.

The specific approvals required will depend on the unique circumstances of the transaction. Consulting with experienced legal and regulatory advisers early in the process is highly recommended to:

• identify relevant approvals;
• ensure compliance; and
• minimise potential roadblocks to a successful outcome.

4.2 Do any foreign ownership restrictions apply in your jurisdiction?

While South Africa welcomes foreign investment, there are certain sectors and situations where ownership restrictions for foreign entities do exist, such as the following:

• General principles:
• • No blanket restrictions: South Africa generally adopts a non-discriminatory approach towards foreign ownership, promoting investment across various sectors.
  • Emphasis on competition and public interest: Restrictions mainly aim to preserve fair competition and safeguard national security or the public interest.
• Restricted sectors:
• • Private security: Foreign ownership is capped at 49% to ensure that national security concerns are addressed.
  • Broadcasting: Foreign ownership is limited to 20% in commercial broadcasting licences to promote local content and cultural diversity.
  • Coastal shipping: Foreign ownership is limited to 49% for vessels exceeding 24 metres, with exceptions for specific categories.
  • Agriculture: While unrestricted, foreign land ownership regulations and limitations on water rights can impact investment strategies.

Other considerations include the following:

• Competition Commission: This approves mergers and acquisitions, considering potential anti-competitive implications and potential restrictions on foreign control.
• Public-private partnerships (PPPs): Specific requirements and limitations for foreign participation might apply depending on the nature of the PPP project.
• Sector-specific restrictions: Certain industries, such as mining and financial services, may have additional regulations impacting foreign ownership.
• Broad-based Black economic empowerment regulations may require a particular company to have a minimum Black-owned ownership requirement to be able to participate successfully in state-run procurement contracts or other corporate engagements.

This list is not exhaustive and specific circumstances determine applicable restrictions. The South African government actively reviews and updates regulations, so staying informed of changes is crucial.

Overall, while there are some limitations, South Africa offers a generally open and welcoming environment for foreign investors.

4.3 What other key concerns and considerations should participants in private M&A transactions bear in mind in relation to consents and approvals?

Securing necessary consents and approvals is crucial for a smooth South African private M&A transaction. Key concerns and considerations include the following:

• Accuracy and completeness: Ensure that accurate and complete information is submitted to avoid delays or rejections.
• Timeframes: Factor in potential wait times for approvals, especially from competition authorities or industry-specific regulators.
• Confidentiality: Balance transparency requirements with protecting sensitive information through non-disclosure agreements with involved parties.
• Conditional approvals: Be prepared for conditional approvals requiring specific actions before final clearance.
• Financial implications: Anticipate potential fees associated with regulatory filings and approvals.
• Expertise: Consider seeking legal and regulatory expertise to navigate complex approval processes and maximise efficiency.

Additional concerns include the following:

• Competition Commission clearances: Transactions exceeding certain thresholds require detailed justifications to demonstrate adherence to competition principles.
• Takeover Regulation Panel: For 'regulated companies', expect potential public announcements, offer documents and potential intervention to protect minority shareholders.
• Industry-specific requirements: Be mindful of additional approvals needed from relevant industry regulators (eg, mining, financial services).

5 Transaction documents

5.1 What documents are typically prepared for a private M&A transaction and who generally drafts them?

South African private M&A transactions involve a diverse set of documents, which generally include the following:

• Pre-negotiation stage:
• • Confidentiality agreement: Protects sensitive information shared during initial discussions. Drafted by legal counsel for both buyer and seller.
  • Non-binding letter of intent: Outlines basic terms and framework for negotiations. Usually drafted by the seller's legal counsel with input from the buyer's legal counsel.
  • Exclusivity agreement (optional): Grants exclusive negotiation rights to the buyer for a defined period. Drafted by the seller's legal counsel and negotiated by both parties.
• Negotiation and due diligence stage:
• • Share purchase agreement (SPA) or asset purchase agreement (APA): Defines the legal framework for the transaction. Drafted by the buyer's legal counsel with feedback from the seller's legal counsel.
  • Due diligence access agreement: Outlines the procedures for accessing information during due diligence. Drafted by the buyer's legal counsel and negotiated by both parties.
  • Financing commitment letter (optional): Confirms the buyer's ability to secure financing. Provided by the buyer's bank following negotiation with the buyer's legal counsel.
• Closing and post-closing stage:
• • Closing documents: Transfer documents, escrow agreements and various closing certificates. Drafted by legal counsel for both parties and relevant third-party service providers.
  • Tax clearance certificates: Required by the South African Revenue Service. Obtained by the seller with assistance from its tax adviser.

The specific documents involved and their drafters may vary depending on:

• the complexity of the transaction;
• the transaction structure; and
• industry-specific requirements.

5.2 What key matters are covered in these documents?

Specific documents and drafters may vary depending on the transaction's complexity and the industry. In general, these documents will cover the following:

• Purchase price and payment terms: Defines the price, the payment schedule and any potential adjustments.
• Representations and warranties: Seller makes statements about the target's condition and assumes certain liabilities.
• Covenants and conditions: Obligations and actions required before, during and after closing.
• Indemnification provisions: Allocate responsibility for potential losses arising from breaches of warranties or misrepresentations.
• Regulatory approvals: Outline conditions surrounding regulatory clearances needed for the transaction to proceed.

5.3 On what basis is it decided which law will govern the relevant transaction documents?

Transaction documents are typically governed by the law chosen by the parties, although South African law usually applies by default. Factors influencing the choice include:

• the familiarity of legal counsel with the chosen law;
• the enforcement mechanisms available in the chosen jurisdiction;
• specific requirements of financing arrangements; and
• potential tax implications.

6 Representations and warranties

6.1 What representations and warranties are typically included in the transaction documents and what do they typically cover?

In South Africa, M&A transaction documents commonly include both representations and warranties, providing buyers with protection against potential misstatements or undisclosed issues. Here is a breakdown of what they typically cover:

• Representations:
• • Statements of fact: The seller asserts the accuracy and completeness of information provided about the target, its financial statements, legal compliance and ownership of assets.
  • Existence of certain agreements or licences: Confirming the existence and validity of key contracts, permits and IP rights crucial for the business operations.
  • No material breaches of laws or regulations: Assuring compliance with relevant laws and regulations that could impact the business or transaction.
  • No ongoing disputes or litigation: Disclosing any pending legal challenges that could affect the target or its assets.
• Warranties:
• • Financial condition: Guaranteeing the accuracy of financial statements and adherence to accounting standards.
  • Tax compliance: Ensuring that there are no outstanding tax liabilities or potential tax disputes.
  • Title to assets: Asserting clear and unencumbered ownership of all assets being sold.
  • No material adverse changes: Protecting the buyer from significant negative developments since the signing of the agreement.

The specific scope of representations and warranties will depend on:

• the transaction size;
• the industry; and
• the potential risks involved.

Tailoring them to the specific circumstances is crucial.

While representations and warranties offer valuable protection, remember the following:

• These statements are based on the seller's knowledge and due diligence efforts.
• They are not absolute guarantees and limitations on their scope might apply.
• Negotiating clear and specific wording is essential to maximise their effectiveness.

6.2 What are the typical circumstances in which the buyer may seek a specific indemnity in the transaction documentation?

While standard warranties offer some security in South African M&A transactions, buyers often seek additional protection through specific indemnities for identified or potential risks. Here are some typical circumstances that trigger their inclusion:

• Uncertain liabilities:
• • Environmental liabilities: When assessing potential environmental contamination or clean-up costs, a specific indemnity can shift financial responsibility to the seller for known or unknown issues.
  • Tax liabilities: If potential tax disputes or unforeseen tax obligations exist, an indemnity can protect the buyer from unexpected tax burdens.
  • Contingent liabilities: For outstanding legal claims or potential lawsuits against the target, an indemnity provides a safety net against adverse future outcomes.
• Limited warranties:
• • Historical financial statements: When warranties related to historical financials are limited due to data availability or audit scope, a specific indemnity for material misstatements can offer added security.
  • IP infringement: If concerns exist about potential IP infringement claims, an indemnity can shield the buyer from future litigation costs and damages.
  • Compliance with specific laws: In regulated industries, an indemnity can address concerns about past or future non-compliance with specific regulations.

Key considerations in relation to negotiation leverage include the following:

• Deal-specific risks: When the transaction involves unique risks identified during due diligence, a specific indemnity can be negotiated to address those concerns directly.
• Strengthening bargaining position: Seeking specific indemnities can signal the buyer's seriousness and potentially influence other negotiation points.

Important caveats include the following:

• Scope negotiation: Clearly define the specific matters covered by the indemnity to avoid future disputes.
• Limitations and caps: Negotiate reasonable limitations on the indemnity amount and duration to manage financial exposure.
• Financial strength of seller: Consider the seller's ability to fulfil the indemnity obligations in case of a claim.

6.3 What remedies are available in case of breach and what is the statutory timeframe for bringing a claim? How do these timeframes differ from the market standard position in your jurisdiction?

When a breach occurs in an M&A transaction in South Africa, the aggrieved party typically has several remedies available, depending on the specific breach and contractual provisions:

• Damages: Claiming monetary compensation for losses suffered due to the breach.
• Specific performance: In limited circumstances, compelling the breaching party to fulfil its contractual obligations (eg, delivering missing documentation).
• Termination: Cancelling the agreement and seeking redress for losses, though subject to contractual termination clauses.
• Indemnity: If a specific indemnity clause exists for the breached aspect, requesting compensation as outlined in the agreement.

The statutory timeframes are as follows:

• Prescription Act: This sets the general timeframe for bringing legal action based on the type of claim. For contractual breaches, the period often starts when the aggrieved party becomes aware of the breach and typically ranges from three to eight years.
• Contractual timeframes: Agreements themselves may specify shorter timeframes for bringing claims, potentially starting from specific events such as closing or discovery of the breach.

Key considerations in the South African market include the following:

• Timeframes: South Africa's statutory timeframes are generally longer compared to those in some common law jurisdictions such as the United Kingdom and the United States, where limitation periods for breach of contract claims might be shorter.
• Contractual flexibility: However, parties in South Africa enjoy greater flexibility to contractually agree on shorter timeframes for bringing claims within the prescribed limitations period.
• Dispute resolution mechanisms: Alternative dispute resolution methods such as arbitration or mediation are increasingly used in South African M&A transactions to potentially resolve breaches more efficiently than traditional litigation.

While statutory timeframes in South Africa offer relatively broader leeway for claims, understanding contractual deadlines and exploring alternative dispute resolution methods are essential to ensure that timely and efficient remedies are available in the event of a breach.

6.4 What limitations to liability under the transaction documents (including for representations, warranties and specific indemnities) typically apply?

While warranties, representations and indemnities offer protection in South African M&A transactions, several limitations can restrict the aggrieved party's recovery in case of a breach, as follows.

• Knowledge and reliance: Warranties are typically limited to breaches known to the seller or those it should have known about with reasonable diligence. Additionally, the buyer's reliance on the representation/warranty must be reasonable.
• Caps and thresholds: Monetary compensation for breaches might be capped at a specific amount or subject to minimum thresholds to avoid disproportionate liability.
• Timeframes: Claims brought outside the agreed timeframe, which can be shorter than the statutory prescription period, might be barred.
• Exclusions: Specific matters (eg, future changes in law) can be excluded from warranties or indemnities.
• Materiality: Representations and warranties often qualify as 'material' meaning that the breach must have a significant impact on the transaction to trigger recourse.
• 'Known when signed' exceptions: Indemnities might limit liability to issues not known by both parties at signing.

The extent of these limitations is subject to negotiation, considering deal specifics, industry norms and bargaining power. Market trends in South Africa favour a balance between protecting buyers and ensuring manageable risk for sellers. Excessive limitations undermining the purpose of warranties might be deemed unreasonable by the courts.

Additional considerations include the following:

• Multiple indemnities: Overlapping indemnities can result in confusion and potential disputes. Clear drafting and hierarchy of indemnification clauses are crucial.
• Statutory limitations: South African law provides certain minimum protections regardless of contractual limitations – for example, for fraudulent misrepresentation.

6.5 What are the trends observed in respect of buyers seeking to obtain warranty and indemnity insurance in your jurisdiction?

In South African M&A transactions, the use of warranty and indemnity (W&I) insurance to mitigate post-acquisition risks is becoming increasingly popular, albeit with its own unique trends, as follows:

• Rising demand:
• • Buyer comfort: W&I insurance provides additional protection beyond traditional warranties, addressing concerns about potential breaches and litigation costs.
  • Heightened deal complexity: Increasing transaction size and complexity drive demand for risk mitigation tools such as W&I insurance.
  • Seller acceptance: Sellers are becoming more open to W&I insurance, recognising its benefits in facilitating smoother deals and attracting wider buyer pools.
• Evolving market:
• • Specialisation: More insurers are entering the South African market, offering specialised M&A insurance solutions and competitive pricing.
  • Emerging focus: There is growing interest in targeted coverage for specific risks such as tax liabilities or environmental issues.
  • Adoption by small and medium-sized enterprises (SMEs): W&I insurance is expanding beyond large deals, with SME transactions increasingly utilising its benefits.
• Unique South African landscape:
• • Limited W&I expertise: Compared to mature markets, South Africa has a smaller pool of specialised W&I brokers and legal advisers, necessitating careful selection.
  • Differing coverage scope: Standard W&I policies in South Africa might differ from international norms, requiring thorough review and potential customisation.
  • Regulatory scrutiny: The Financial Services Conduct Authority plays a role in regulating W&I insurance, influencing policy terms and market practices.
• Outlook:
• • Continued growth: The South African W&I market is expected to see sustained growth, driven by increasing deal activity and risk awareness.
  • Innovation and customisation: Expect evolving coverage options and tailored solutions cater to specific transaction needs and industry risks.
  • Greater transparency and standardisation: Continued market development should lead to clearer policy terms and potentially harmonised practices.

While still evolving, W&I insurance is becoming a valuable tool for M&A transactions in South Africa.

6.6 What is the usual approach taken in your jurisdiction to ensure that a seller has sufficient substance to meet any claims by a buyer?

Ensuring a seller's ability to fulfil potential claims in South African M&A transactions is crucial for buyers. Here is an overview of typical approaches:

• Due diligence:
• • Financial analysis: Scrutinising the seller's financial statements, cash flow and solvency to assess its claim fulfilment capacity.
  • Asset verification: Investigating the existence and ownership of key assets that could serve as security for potential claims.
  • Litigation history: Reviewing the seller's past legal disputes and judgments to gauge its potential willingness and ability to defend claims.
• Contractual safeguards:
• • Representations and warranties: Negotiating robust warranties regarding the seller's financial health, compliance and accuracy of information, backed by potential indemnification clauses.
  • Security mechanisms: Structuring the transaction to include escrow accounts, security over assets, or parent company guarantees to secure potential claims.
  • Dispute resolution clauses: Choosing efficient mechanisms such as arbitration or mediation to resolve disputes quickly and avoid protracted litigation.
• Additional considerations:
• • Seller's reputation: Investigating the seller's business reputation and past dealings to assess their commitment to honouring obligations.
  • Third-party guarantees: Involving creditworthy third parties such as parent companies or financial institutions to guarantee the seller's liabilities.
  • W&I insurance: Exploring W&I insurance for added protection against potential claims, subject to policy terms and limitations.
• Market practices:
• • The specific approach typically involves a combination of these methods, tailored to the transaction size, industry and perceived risks.
  • Seeking legal and financial advice is crucial to navigate complex financial assessments, draft effective contractual provisions and explore suitable security mechanisms.

While these methods aim to mitigate risk, there is no fool-proof guarantee. Understanding the seller's financial health, negotiating comprehensive warranties and implementing appropriate security measures can significantly enhance the ability to recover potential claims in a South African M&A transaction.

6.7 Do sellers in your jurisdiction often include restrictive covenants in the transaction documents? What timeframes are generally thought to be enforceable?

Restrictive covenants imposed on sellers in South African M&A transactions are fairly common, aimed at protecting the buyer's interests post-acquisition. However, their scope and enforceability are subject to careful consideration.

Typical covenants include the following:

• Non-compete: Restricting the seller from competing with the target for a defined period and in a defined geographic area.
• Non-solicitation: Prohibiting the seller from soliciting employees or customers of the target.
• Confidentiality: Maintaining the confidentiality of sensitive information obtained during the transaction.
• Transition assistance: Cooperating with the buyer to ensure a smooth handover of operations and information.

Key enforceability considerations include the following:

• Reasonableness: Covenants must be reasonable in scope, duration and geographic extent to be enforceable. Unreasonably restrictive terms might be deemed invalid by the courts.
• Public interest: The courts will consider the potential impact on competition and broader public interest when assessing enforceability.
• South African law: Restrictive covenants are subject to various legal principles such as good faith, unconscionability and public policy considerations.

The following timeframe trends should be borne in mind:

• Non-competes: Generally range from 12 to 24 months, depending on:
• • the industry;
  • the seniority of the restricted individuals; and
  • the geographic scope.
• Non-solicitation: Often shorter than non-competes, typically lasting six to 12 months.
• Confidentiality: May be perpetual for certain sensitive information or trade secrets.
• Transition assistance: Defined by the specific needs of the transaction and integration process.

Negotiations play a crucial role in determining the specific terms and duration of covenants. It is further crucial to seek legal advice to ensure that covenants are both commercially valuable and legally enforceable within South Africa's legal framework.

While restrictive covenants offer valuable protection, their enforceability relies on reasonableness, consideration of public interest and adherence to legal principles. Striking a balance between buyer protection and seller fairness is key to crafting effective and enforceable covenants in a private M&A transaction.

6.8 Where there is a gap between signing and closing, is it common to include conditions to closing, such as no material adverse change (MAC) and bring-down of warranties?

When a gap exists between signing and closing in South African M&A deals, conditions precedent play a crucial role in protecting both parties' interests. Here is a breakdown of two common conditions:

• No MAC:
• • Purpose: Protects the buyer from significant negative developments within the target or its operating environment between signing and closing.
  • Definition: Defining 'material' is crucial, often based on a quantitative threshold or qualitative impact on the business.
  • Negotiation: Scope and exceptions (eg, industry-wide changes) are subject to negotiation.
  • Enforcement: Determining a MAC can be subjective, potentially leading to disputes.
• Bring-down of warranties:
• • Purpose: Ensures that the representations and warranties made by the seller remain true as of closing.
  • Mechanics: The seller typically updates representations and warranties closer to closing to reflect any changes.
  • Negotiation: The scope of information updated and the timing of the bring-down are key negotiation points.
  • Benefit: Provides the buyer with a final opportunity to assess the company's condition before closing.

While MAC clauses are common in larger deals, their complexity and potential for disputes lead some to avoid them. The bring-down of warranties is nearly universal due to their importance in ensuring accurate information upon closing.

Other common conditions precedent include:

• regulatory approvals;
• financing arrangements; and
• third-party consents.

It is important to carefully define conditions to avoid ambiguity and potential disagreements.

6.9 What other conditions precedent are typically included in the transaction documents?

Beyond the typical conditions precedent mentioned in question 6.8, several additional types might be included in South African M&A transaction documents, tailored to the specific deal and potential risks:

• Industry-specific conditions precedent:
• • Mining: Obtaining environmental permits, resolving surface rights issues and ensuring compliance with mineral royalty regulations.
  • Financial services: Regulatory approvals from the South African Reserve Bank, completion of capital adequacy assessments and data security clearances.
  • Healthcare: Securing licences from the Health Professions Council of South Africa and addressing patient data privacy concerns.
• Tax-related conditions precedent:
• • Obtaining tax clearances from the South African Revenue Service, confirming no outstanding tax liabilities or potential disputes.
  • Completion of tax structuring, including transfer pricing arrangements and potential tax indemnities.
• Real estate-specific conditions precedent:
• • Obtaining title deeds and ensuring that there are no zoning restrictions or environmental encumbrances on the property.
  • Completion of required surveys and environmental assessments.
• Other potential conditions precedent:
• • Execution of ancillary agreements: Completion of side agreements with key stakeholders such as suppliers or distributors.
  • Resolution of outstanding litigation: Settling pre-existing legal disputes affecting the target.
  • Key employee retention: Ensuring that key personnel remain with the company post-acquisition for a specified period.
  • Completion of specific restructuring: Negotiating conditions precedent linked to restructuring plans within the target before closing.

7 Financing

7.1 What types of consideration are typically offered in private M&A transactions in your jurisdiction?

Private M&A transactions in South Africa offer a variety of consideration options, catering to different seller preferences and deal dynamics. Here is a breakdown of typical approaches:

• Cash:
• • Most common: Offers simplicity and immediate value realisation for sellers.
  • Tax implications: Consider potential tax liabilities for both buyer and seller regarding capital gains or dividend distributions.
• Shares:
• • Strategic: Allows sellers to retain an interest in the combined entity, potentially benefiting from future growth.
  • Valuation: Careful consideration of share price and potential dilution for existing shareholders is crucial.
  • Lock-up periods: Restricting seller share disposal for a defined period can protect buyer interests.
• Earn-outs:
• • Performance-based: Payment contingent on achieving specific financial or operational targets post-acquisition.
  • Alignment of interests: Motivates sellers to actively contribute to the combined entity's success.
  • Complexity: Requires clear definition of performance metrics and dispute resolution mechanisms.
• Combination:
• • Flexible: Combining cash, shares and/or earn-outs can cater to diverse seller preferences and risk profiles.
  • Tailored solutions: Structuring the mix depends on deal specifics, valuation challenges and overall transaction goals.

Additional considerations include the following:

• Escrow: Holding part of the consideration in escrow until specific conditions are met can mitigate potential risks for both parties.
• Debt financing: Buyer-funded debt secured by the target's assets can be part of the consideration package.
• Vendor loan notes: Sellers accepting promissory notes from the buyer can offer financing flexibility and tax benefits.

The following market trends should be borne in mind:

• Cash-heavy: While cash remains dominant, the use of shares and earn-outs is increasing, driven by strategic considerations and evolving market practices.
• Seller-friendly terms: Growing competition among buyers can lead to more attractive consideration packages for sellers, including higher valuations and flexible payment structures.

The choice of consideration depends on various factors such as:

• deal size;
• industry;
• seller motivation; and
• tax implications.

7.2 What are the key differences and potential advantages and disadvantages of the various types of consideration?

Choosing the right consideration type in a South African M&A transaction requires understanding the key differences and their potential advantages and disadvantages:

• Cash:
• • Advantages:
  • • Simple and transparent for both parties.
    • Offers immediate value realisation for sellers.
    • Less prone to valuation disputes.
  • Disadvantages:
  • • May not align with sellers seeking longer-term upside potential.
    • Can attract higher tax liabilities depending on the structure.
    • Limits buyer's access to seller expertise post-acquisition.
• Shares:
• • Advantages:
  • • Align seller interests with long-term success of the combined entity.
    • Can offer tax benefits for sellers in specific scenarios.
    • Provide sellers with potential future appreciation from share value growth.
  • Disadvantages:
  • • Subject to valuation uncertainties and potential dilution for existing shareholders.
    • Can lock sellers into the combined entity for an extended period.
    • Risk of future share price fluctuations impacting realised value.
• Earn-outs:
• • Advantages:
  • • Motivate sellers to contribute to post-acquisition performance.
    • Can attract sellers valuing future potential over upfront value.
    • Align compensation with the achievement of specific goals.
  • Disadvantages:
  • • Complex to structure and administer, requiring clear performance metrics.
    • Potential disputes over achievement of earn-out targets.
    • Uncertainty about final payout amount for both parties.
• Combination:
• • Advantages:
  • • Offers flexibility to cater to diverse seller preferences and risk profiles.
    • Can balance immediate value realisation with potential future upside.
    • Allows for creative structuring tailored to specific transaction goals.
  • Disadvantages:
  • • Requires careful design and negotiation to avoid complexity and potential conflicts.
    • Administrative burden of managing multiple payment components.
    • Tax implications might be more complex due to combined structures.

7.3 What factors commonly influence the choice of consideration?

The choice of consideration in a South African M&A transaction is influenced by a complex interplay of several factors, both internal and external to the deal itself. Here are some key aspects to consider:

• Seller motivations:
• • Liquidity needs: Sellers seeking immediate access to cash might prioritise cash or debt financing as part of the consideration.
  • Long-term value potential: Sellers aiming for potential future gain might prefer shares or earn-outs linked to the combined entity's performance.
  • Tax implications: The tax treatment of different consideration types for both buyer and seller plays a significant role in influencing the choice.
  • Exit strategy: Sellers with a clear exit timeline might prefer upfront cash payment over options such as earn-outs with extended lock-in periods.
• Buyer considerations:
• • Financial capacity: The buyer's available cash reserves and access to debt financing influence its ability to offer cash-heavy consideration packages.
  • Strategic goals: If long-term collaboration with the seller is desired, offering shares or performance-based earn-outs can incentivise its continued involvement.
  • Valuation challenges: Uncertainties in valuing the target might make earn-outs or a combination approach more attractive to manage potential risks.
  • Tax optimisation: Buyers also consider tax implications when structuring the consideration package to minimise their own tax liabilities.
• Market dynamics:
• • Competition among buyers: In a seller-friendly market with multiple interested buyers, sellers might have more negotiating power to secure more favourable consideration terms.
  • Industry norms: Different industries often have established practices regarding typical consideration forms – some favour cash while others utilise shares or earn-outs more frequently.
  • Regulatory environment: Specific regulations affecting M&A transactions, such as takeover rules or antitrust concerns, can influence the choice of consideration and its structure.
• Transaction specifics:
• • Deal size and complexity: Larger, more complex transactions might necessitate a combination approach to cater to varying stakeholder interests and manage risks.
  • Target's financial health: The target's profitability and future growth potential can influence the attractiveness of performance-based earn-outs.
  • Presence of intangible assets: Earn-outs or share-based consideration can be relevant when a significant portion of the target's value lies in intangible assets such as intellectual property.

7.4 How is the price mechanism typically agreed between the seller and the buyer? Is a locked-box structure or completion accounts structure more common?

In South African M&A transactions, determining the purchase price requires agreement between the seller and buyer. Two common mechanisms exist, each with its own advantages and disadvantages:

• Locked box:
• • Definition: The purchase price is fixed based on the target's financial position at a specific historical date (valuation date).
  • Pros:
  • • Provides certainty for both parties regarding the final price.
    • Reduces post-valuation adjustments and disputes.
    • Often preferred by sellers as it shields them from any post-valuation decline in company value.
  • Cons:
  • • Requires accurate financial records and adjustments for post-valuation date events.
    • Increases due diligence complexity to ensure pre-valuation financial health.
    • May disadvantage buyers if target performance deteriorates before closing.
• Completion accounts:
• • Definition: The purchase price is adjusted based on the target's financial performance between the valuation date and closing.
  • Pros:
  • • Protects buyers from adverse changes in the target's financial position before closing.
    • Can incentivise sellers to maintain performance during the interim period.
    • Reduces due diligence burden as historical financials are less critical.
  • Cons:
  • • Introduces uncertainty into the final price, creating post-closing negotiation potential.
    • Requires complex mechanisms to define adjustments and potential disputes over interpretation.
    • May disincentivise sellers from strategic investments before closing.

The following market trends should be borne in mind:

• The locked-box remains the more common approach in South Africa, especially for larger transactions.
• Completion accounts are gaining traction, particularly in deals with longer closing timelines or potential performance volatility.
• Combination approaches utilising elements of both structures are also increasingly being used.

The optimal price mechanism depends on several factors:

• Deal size and complexity: Larger deals usually favour the locked-box mechanism for price certainty.
• Closing timeline: Longer timelines might necessitate completion accounts for performance protection.
• Industry and target profile: Volatile industries or companies might benefit from completion accounts.
• Negotiation power and risk tolerance: Each party's leverage and risk appetite influence their preference.

7.5 Is the price typically paid in full on closing or are deferred payment arrangements common?

While the purchase price in South African M&A transactions is typically paid in full on closing, deferred payment arrangements are not uncommon and can be utilised under certain circumstances. Here is a breakdown of the typical scenario and when delayed payments might occur:

• Full payment on closing: This is the most common approach, offering simplicity and certainty for both parties. The buyer receives full ownership of the target upon payment of the agreed-upon price. This aligns with the basic principle of exchanging value for ownership.
• Deferred payment arrangements: These involve splitting the purchase price into instalments paid over time. The reasons for utilising them can include the following:
• • Seller financing: When the seller seeks to retain a stake in the business or spread out capital gains tax implications.
  • Buyer liquidity constraints: If the buyer lacks sufficient upfront cash to pay the full price.
  • Performance-based earn-outs: When part of the price is contingent on achieving specific post-acquisition performance targets.
  • Regulatory approvals: If closing is delayed due to obtaining necessary regulatory clearances, instalments might be used to compensate the seller for the interim period.

Key considerations include the following:

• Security mechanisms: In deferred payment scenarios, robust security mechanisms such as escrow accounts or guarantees become crucial to protect the buyer's interests in case of non-payment.
• Interest payments: The seller often receives interest on the outstanding balance during the deferral period.
• Negotiation complexity: Structuring and negotiating deferred payment arrangements require careful attention to detail and legal expertise.

The following market trends should be borne in mind:

• Although full payment on closing remains the norm, deferred payments are becoming increasingly common in specific situations, particularly for larger deals or involving strategic seller involvement.
• Earn-outs are gaining traction as a performance-linked payment option, aligning incentives for both parties.

7.6 Where a deferred payment/earn-out payment is used, what typical protections are sought by sellers (eg, post-completion veto rights)?

In South African M&A deals involving deferred payments or earn-outs, sellers understandably seek various protections to mitigate risk and ensure they receive their full due. Here are some typical safeguards they might request:

• Financial protections:
• • Security mechanisms: Escrow accounts holding a portion of the purchase price or guarantees from the buyer or third parties offer financial security in case of non-payment.
  • Financial covenants: Clauses dictating minimum financial ratios or restrictions on buyer activities that could negatively impact the target's performance and ability to generate earn-out payments.
  • Independent audits: Periodic audits by mutually agreed-upon auditors to verify financial information used for calculating earn-outs.
• Operational protections:
• • Non-compete clauses: Restricting the buyer from competing with the target for a defined period, protecting its market share and future earning potential.
  • Key employee retention agreements: Incentives or contractual obligations for key personnel to remain with the company, ensuring continuity and maintaining performance levels crucial for earn-outs.
  • Limitation on changes to business model: Preventing drastic changes to the target's core business or operations that could jeopardise its ability to achieve earn-out targets.
• Information and transparency:
• • Regular reporting: Stipulating regular reporting requirements from the buyer on the target's financial performance and progress towards earn-out metrics.
  • Access to information: Granting the seller access to relevant financial and operational data to verify performance and ensure accurate earn-out calculations.
  • Dispute resolution mechanisms: Defining clear procedures for resolving disagreements regarding earn-out calculations or potential breaches of other protective clauses.
• Additional protections:
• • Post-completion veto rights: In rare cases, sellers might negotiate veto rights over specific buyer actions that could negatively impact the target's performance or future value, though these can be complex and require careful drafting.
  • Change-in-control provisions: Triggering additional payments or early payouts under certain circumstances such as a change in the buyer's ownership or control structure.

7.7 Do any rules on financial assistance apply in your jurisdiction, and what are their implications for private M&A transactions?

In South Africa, financial assistance provided by a company to acquire its own securities is subject to regulation under Section 45 of the Companies Act (71/2008). These rules have significant implications for private M&A transactions involving the target providing assistance for its acquisition.

The key provisions of Section 45 include the following:

• Prohibition: A company generally cannot provide financial assistance directly or indirectly for the acquisition of its own securities, including shares, debentures or voting rights.
• Exemptions: Certain exemptions exist, but they have specific conditions and limitations. Relevant exemptions in M&A context include the following:
• • Employee share scheme: Financial assistance is allowed for specific employee share ownership plans.
  • Special resolution: Shareholders can approve assistance through a special resolution (requiring at least 75% voting majority), provided that specific solvency and fairness tests are met.
  • Court sanction: In limited circumstances, courts can sanction financial assistance upon application demonstrating exceptional circumstances.

Implications for M&A include the following:

• Seller financing: If the target intends to contribute financially to its own acquisition, it must comply with Section 45.
• Debt financing: Buyer-secured debt utilising target assets might raise financial assistance concerns, requiring careful structuring and potential shareholder approval.
• Vendor loan notes: While less common, the seller accepting promissory notes from the buyer could fall under financial assistance rules, depending on their structure.

Key considerations include the following:

• Early due diligence: Identifying potential financial assistance issues early in the M&A process is crucial.
• Legal expertise: Seek guidance from M&A and commercial law specialists who are well versed in these regulations to assess compliance and potential exemptions.
• Shareholder approval: If necessary, prepare to obtain shareholder approval through a special resolution, ensuring transparency and adherence to legal requirements.
• Alternative structures: Explore alternative financing structures that comply with Section 45, such as third-party financing or buyer-funded debt secured by other assets.

7.8 What other key concerns and considerations should participants in private M&A transactions bear in mind from a financing perspective?

Beyond the complexities of Section 45, here are some additional financing aspects crucial for participants in South African M&A deals:

• Due diligence and risk assessment:
• • Target financials: Thoroughly assess the target's financial health, debt profile and potential liabilities impacting financing feasibility.
  • Market conditions: Stay informed about prevailing interest rates, credit availability and potential economic shifts affecting financing options.
  • Regulatory environment: Consider regulations influencing specific industries, foreign exchange controls and potential impact on financing structures.
• Financing structure and alternatives:
• • Debt versus equity: Evaluate the optimal mix of debt and equity financing considering risk tolerance, tax implications and impact on ownership dilution.
  • Syndicated loans: Explore multi-bank financing arrangements for large deals, requiring careful coordination and potential legal complexities.
  • Mezzanine financing: Consider hybrid debt-equity instruments bridging the gap between traditional debt and equity, though these can be higher risk.
• Tax implications:
• • Structuring for tax efficiency: Seek tax advice to optimise the financing structure, considering different tax treatments for debt, equity and various financing instruments.
  • Transfer pricing: Address potential transfer pricing implications, particularly for intercompany financing arrangements.
  • Withholding taxes: Understand and comply with withholding tax requirements applicable to cross-border financing transactions.
• Due diligence on lenders:
• • Financial strength and reputation: Assess the financial stability and track record of potential lenders, especially for complex financing arrangements.
  • Terms and conditions: Carefully review loan covenants, interest rates and other terms to ensure alignment with business goals and risk tolerance.
  • Exit strategy: Plan for potential refinancing or repayment options at deal exit, considering available liquidity and market conditions.
• Integration and post-closing considerations:
• • Financing covenants: Clearly define and monitor compliance with financial covenants imposed by lenders to avoid potential defaults and disruptions.
  • Information sharing: Maintain open communication with lenders, providing accurate and timely financial information as per agreed-upon reporting requirements.
  • Flexibility and contingency planning: Prepare for potential unforeseen circumstances by building flexibility into the financing structure and having contingency plans in place.

8 Deal process

8.1 How does the deal process typically unfold? What are the key milestones?

The M&A process in South Africa follows a typical workflow with key milestones, although specific timelines and activities can vary depending on the deal size, complexity and involved parties. Here is a general overview:

• Pre-negotiation:
• • Identification and targeting: Identifying potential targets and assessing their strategic fit and suitability.
  • Non-disclosure agreement (NDA): Signing an NDA to share confidential information during due diligence.
  • High-level discussions: Exploring opportunities and interests through initial discussions with the target.
• Due diligence:
• • Comprehensive examination: Reviewing the target's financial, legal, operational and compliance status to assess risks and value drivers.
  • Management meetings: In-depth discussions with target management to gain insights into operations and future plans.
  • Data room access: Examining detailed financial records, contracts and other relevant documents in a secure data room.
• Valuation and negotiation:
• • Independent valuation: Obtaining independent valuations of the target to inform offer price discussions.
  • Term sheet: Negotiating key deal terms such as price, structure, payment methods and closing conditions in a non-binding document.
  • Heads of agreement: Signing a legally binding heads of agreement outlining the main deal terms and timeline for further negotiations.
• Definitive agreements and approvals:
• • Share purchase agreement (SPA): Drafting and finalising the legally binding document outlining all deal terms and conditions.
  • Regulatory approvals: Obtaining necessary approvals from the Competition Commission, the Takeover Regulation Panel or other relevant authorities.
  • Financing arrangements: Finalising financing agreements with lenders and ensuring funds are secured.
• Closing and integration:
• • Closing: Exchanging signed documents, fulfilling closing conditions and transferring ownership of the target.
  • Integration planning: Developing a clear plan for integrating the target into the buyer's operations.
• Post-closing activities: Addressing legal formalities, communication with stakeholders and implementing integration plans.
• Key milestones:
• • Signing of the NDA: Opens the due diligence process.
  • Term sheet agreement: Indicates a strong intent to proceed and move towards definitive agreements.
  • Signing of the heads of agreement: Sets the stage for finalising the SPA and securing necessary approvals.
  • Signing of the SPA: Legally binds both parties to complete the transaction.
  • Closing: Successful completion of the M&A transaction.

8.2 What documents are typically signed on closing? How does this typically take place?

In South African M&A transactions, closing typically involves exchanging a specific set of documents marking the formal transfer of ownership and finalisation of the deal. Here is a breakdown of the typical documents and closing process:

• Key documents:
• • SPA: This comprehensive document, already signed by both parties earlier, serves as the primary legal basis for the transaction and outlines all key terms and conditions.
  • Stock transfer forms: These forms facilitate the official transfer of ownership of the target's shares from the seller to the buyer.
  • Closing certificates: These documents confirm that all closing conditions stipulated in the SPA have been met. Examples include regulatory approvals, completion of due diligence and the absence of outstanding litigation.
  • Payment instructions: If not already completed, final payment instructions for the purchase price or remaining instalments are provided at closing.
  • Ancillary agreements: Any side agreements related to specific deal aspects – such as IP transfers, employment contracts or non-compete clauses – are also finalised and exchanged.
• Closing process:
• • Location: Closing usually takes place at a mutually agreed-upon location, often a law firm's office, with representatives from both parties and their legal counsel present.
  • Simultaneous exchange: Documents are exchanged simultaneously to ensure fairness and prevent any last-minute changes.
  • Signatures and counterparts: Authorised representatives from both parties sign all necessary documents and their counterparts.
  • Escrow and payment: If utilising an escrow account for part of the payment, it is released upon satisfaction of all closing conditions.
  • Post-closing actions: After signing, administrative tasks such as filing ownership changes with relevant authorities and notifying stakeholders might commence.

Additional considerations include the following:

• The specific set of documents may vary depending on the transaction complexity and specific agreements.
• Legal counsel play a crucial role in reviewing documents, ensuring compliance and addressing any potential issues before signing.
• A closing agenda outlining the expected procedures and documents ensures a smooth and efficient process.
• Communication and transparency throughout the closing process are key to building trust and fostering a positive outcome for both parties.

8.3 In case of a share deal, what is the process for transferring title to shares to the buyer?

A South African share deal, where ownership of the target is transferred through a share acquisition, involves several key steps:

• Pre-transfer preparations:
• • Stock transfer forms: Prepare and complete the relevant stock transfer forms, which vary depending on the type of shares being transferred (eg, ordinary, preference) and the issuing company's specific requirements.
  • Closing certificates: Ensure that all closing conditions outlined in the SPA have been fulfilled and obtain signed closing certificates confirming this.
  • Tax clearance certificate: If applicable, obtain a tax clearance certificate from the South African Revenue Service for the seller.
  • Share certificates: Locate and gather the physical share certificates or electronic records representing the shares being transferred.
• Transfer mechanics:
• • Simultaneous exchange: At closing, the seller delivers the completed stock transfer forms, share certificates and any other required documents to the buyer's representative.
  • Signature and counterparts: Both parties sign their respective counterparts of the stock transfer forms.
  • Registration with issuing company: The buyer submits the signed stock transfer forms to the target's share transfer office for registration.
  • Share register update: The share register is updated to reflect the new ownership structure, with the buyer now officially listed as the shareholder.
  • Delivery of new share certificates: The buyer may receive new share certificates reflecting their ownership; or if electronic shareholding systems are used, their ownership will be electronically recorded.

Additional considerations include the following:

• Escrow arrangements: In some cases, shares might be held in escrow until specific conditions are met, requiring additional procedures upon their release.
• Tax implications: The tax implications of the share transfer need careful consideration and compliance with relevant regulations. Seek professional tax advice to ensure adherence to all legal requirements.
• Bulk sale provisions: If the transaction involves a significant portion of the target's shares, the bulk sale provisions of the Companies Act (71/2008) might apply, requiring additional notifications and procedures.

8.4 Post-closing, can the seller and/or its advisers be held liable for misleading statements, misrepresentation, omissions or similar?

In South African M&A transactions, post-closing liability for misleading statements, misrepresentation or omissions is a potential risk for sellers and their advisers. Several legal avenues can hold them accountable depending on the nature of the misconduct and the specific circumstances of the deal.

Key areas of potential liability include the following:

• Breach of warranty: The SPA typically includes warranties and representations made by the seller about the target's financial status, operations, legal compliance and so on. If these warranties prove false due to misleading statements or omissions, the buyer might seek damages for breach of warranty.
• Delictual liability: South African law recognises delictual liability for negligent or fraudulent misrepresentation. If the seller's misleading statements were negligent or intended to deceive the buyer, it could be liable for financial losses suffered by the buyer.
• Securities regulation: If the transaction involved public companies or listed securities, regulations such as the Companies Act and Johannesburg Stock Exchange Listings Requirements might provide avenues for legal action against the seller for misleading statements.

Important considerations include the following:

• Due diligence: The buyer's thorough due diligence plays a crucial role in uncovering potential misrepresentations or omissions. However, it is not a complete defence against seller liability.
• Reliance and causation: The buyer must demonstrate that it relied on the misleading statements and suffered financial losses as a direct result.
• Limitations and exclusions: SPAs often have limitations or exclusions of liability clauses that can restrict the seller's post-closing exposure. However, these clauses are subject to interpretation and might not always shield the seller entirely.
• Seller's advisers: In some cases, the seller's legal or financial advisers can also be held liable if they knew of or knowingly facilitated the misleading statements.

Mitigation strategies for sellers include the following:

• Accurate representations and warranties: Ensure that all representations and warranties in the SPA are accurate and complete to the best of your knowledge.
• Disclosure: Disclose any known potential issues or uncertainties upfront to avoid accusations of omission.
• Legal and financial advisers: Seek advice from qualified professionals to ensure compliance with legal requirements and best practices.
• Negotiate limitations and exclusions: Negotiate clear and reasonable limitations and exclusions of liability in the SPA; but remember that these do not offer absolute protection.

8.5 What are the typical post-closing steps that need to be taken into consideration?

While the specific post-closing steps in a South African M&A transaction vary depending on the deal specifics, some typical considerations are as follows:

• Immediate actions:
• • Filing and registration: File necessary documents with relevant authorities, such as the Companies Commission for share transfers or the Competition Commission for merger notifications.
  • Payment and escrow release: Transfer remaining purchase price payments or release funds held in escrow upon satisfaction of the closing conditions.
  • Key stakeholder communication: Inform employees, customers, investors and other key stakeholders about the transaction and any changes in leadership or operations.
  • Transition planning and integration: Initiate integration planning teams and begin activities to merge operations, cultures and systems.
• Ongoing actions:
• • Financial reporting and tax compliance: Ensure continued compliance with financial reporting and tax obligations under new ownership.
  • Contractual obligations: Manage existing contracts, renegotiate as needed and address potential third-party claims arising from the transaction.
  • Employee matters: Address employee contracts, compensation, benefits and potential employee concerns related to the merger or acquisition.
  • Legal and regulatory compliance: Monitor and meet ongoing legal and regulatory requirements under the new corporate structure.
  • Dispute resolution: Address any post-closing disputes arising from the SPA or related agreements using agreed-upon resolution mechanisms.

Additional considerations include the following:

• Intellectual property: Secure IP rights and ensure their proper transfer or licensing as agreed upon in the deal.
• Environmental liabilities: Conduct environmental audits and manage any identified liabilities as specified in the SPA.
• Data privacy and security: Ensure compliance with data privacy laws and secure sensitive data during the integration process.
• Post-merger integration (PMI): Implement agreed-upon PMI plans, monitor progress and address any integration challenges that arise.

9 Competition

9.1 What competition rules apply to private M&A transactions in your jurisdiction?

In South Africa, competition rules governing private M&A transactions primarily fall under the Competition Act (89/1998). While private deals involving only individual firms are not explicitly prohibited, specific thresholds and criteria trigger mandatory notification to the Competition Commission for assessment.

Key provisions include the following:

• Prohibited practices: The act prohibits agreements, mergers or acquisitions that:
• • substantially prevent or lessen competition (horizontal or vertical agreements); or
  • abuse a dominant position.
• Mandatory notification: Transactions exceeding stipulated thresholds for asset value, turnover or market share must be notified to the commission for approval.
• Merger review process: The commission evaluates notified transactions based on potential competition concerns and their impact on various factors such as:
• • market dynamics;
  • consumer welfare; and
  • potential job losses.
• Remedies and conditions: If the commission identifies concerns, it may impose remedies such as divestitures, behavioural restrictions or structural changes to mitigate anti-competitive effects before approving the transaction.

The thresholds for mandatory notification are as follows:

• Combined asset value: Exceeding R5 billion.
• Combined turnover: Exceeding R10 billion.
• Market share: Combined market share exceeding 40% in any relevant market.

The factors considered by the commission are as follows:

• market definition and concentration levels;
• potential barriers to entry for new competitors;
• whether the transaction creates or strengthens a dominant position;
• the likely impact on consumer welfare, prices and innovation; and
• employment implications and potential job losses.

The following exemptions apply:

• Intra-group transactions: Mergers or acquisitions within the same corporate group are generally exempt, but specific conditions apply.
• De minimis transactions: Transactions falling below stipulated thresholds are exempt from notification.

The consequences of non-compliance are as follows:

• Failure to notify a notifiable transaction can lead to significant fines and potential invalidation of the deal.
• Engaging in prohibited practices can result in:
• • fines;
  • divestiture orders; or
  • other penalties.

9.2 What key concerns and considerations should participants in private M&A transactions bear in mind from a competition perspective?

Beyond the basic framework of notification thresholds and prohibited practices, participants in South African private M&A transactions should consider several key concerns and considerations from a competition perspective:

• Market definition and analysis:
• • Accurately define relevant markets: Precisely defining the markets impacted by the transaction is crucial for the Competition Commission's assessment and identification of potential concerns.
  • Analyse market power and dynamics: Carefully evaluate the pre- and post-merger competitive landscape, including market concentration, potential dominance and the impact on smaller players.
  • Consider geographic scope: Understand whether the relevant market operates locally, regionally or nationally, as this impacts competition analysis and notification requirements.
• Horizontal and vertical effects:
• • Horizontal concerns: Assess whether the transaction eliminates or reduces competition between previously independent firms in the same market, leading to potential price increases or reduced product choice.
  • Vertical concerns: Analyse whether the transaction creates or strengthens a dominant position in one market that could be leveraged to harm competitors in other related markets.
  • Potential efficiencies: Clearly articulate and demonstrate any efficiencies resulting from the transaction that might outweigh potential anti-competitive effects.
• Deal structuring and remedies:
• • Structuring for competition compliance: Consider structuring the transaction in a way that minimises competition concerns, such as through divestitures of specific assets or businesses.
  • Addressing Competition Commission concerns: Be prepared to negotiate with the commission and propose appropriate remedies, such as structural changes or behavioural commitments, to address its concerns and secure approval.
  • Seek expert advice: Competition law specialists can guide you through the process, navigate potential red flags and suggest remedies to increase the likelihood of approval.
• Information gathering and transparency:
• • Prepare a comprehensive notification: Assemble a well-structured notification containing detailed market analysis, financial information and clear explanations of the transaction's rationale and potential effects.
  • Engage openly with the Competition Commission: Maintain open communication and provide additional information promptly upon request to facilitate the review process and avoid delays.
  • Anticipate questions and concerns: Be prepared to address potential competition concerns that the commission might raise during its assessment.
• Long-term compliance:
• • Ongoing adherence: Remember that competition compliance doesn't end with approval. Monitor developments in the relevant market and ensure your business practices continue to comply with competition regulations.
  • Compliance programme: Consider implementing a competition compliance programme within your organisation to proactively identify and address potential concerns.

10 Employment

10.1 What employee consultation rules apply to private M&A transactions in your jurisdiction?

In South Africa, several legal frameworks and ethical considerations influence employee consultation during private M&A transactions. Here is a breakdown of the key aspects:

• Formal requirements:
• • Section 197 of the Labour Relations Act (LRA): This section applies when a business is transferred as a going concern. It mandates consultation with representatives of registered trade unions regarding the potential transfer and its implications for employees.
  • Schedule 8 of the Companies Act (71/2008): This applies to schemes of arrangement involving significant changes to company structure, potentially triggering consultation requirements with all employees, regardless of union membership.
• Key consultation practices:
• • Early and meaningful engagement: Consultation should start early in the transaction process, allowing sufficient time for genuine dialogue and addressing employee concerns.
  • Clear information sharing: Provide employees with clear and accessible information about the transaction, its potential impact on their employment and any planned changes in working conditions.
  • Two-way communication: Establish channels for open communication and facilitate feedback from employees throughout the consultation process.
  • Employee representatives: Depending on the circumstances, engage with unions, elected employee representatives or both, ensuring transparency and inclusivity.
  • Process fairness and good faith: Conduct the consultation process in a fair and transparent manner, demonstrating good faith to build trust and cooperation.
• Beyond legal requirements:
• • Ethical considerations: Even beyond legal mandates, ethical business practices encourage consultation with all employees, acknowledging their concerns and potential anxieties during transitions.
  • Building trust and transparency: Open communication and a genuine commitment to addressing employee concerns foster trust and understanding, contributing to a smoother integration process.
  • Potential impact on deal success: Engaging employees effectively can mitigate risks of industrial action, legal challenges and reputational damage, ultimately supporting the success of the transaction.

Additional considerations include the following:

• Specific transaction details: The nature and size of the transaction, the potential impact on employees and existing labour agreements can influence the required consultation scope and process.
• Seek professional guidance: Involving experienced labour law and employee relations specialists is crucial to navigate the legal requirements, best practices and effective communication strategies for successful employee consultation.

10.2 What transfer rules apply to private M&A transactions in your jurisdiction?

In the context of private M&A transactions in South Africa, the 'transfer rules' can refer to different aspects, depending on what type of assets or rights are being transferred. Here is a breakdown of the key transfer rules to consider:

• Share transfers:
• • Share purchase agreement (SPA): This is the primary legal document governing the transfer of ownership in a share deal. It outlines the transfer process, warranties, indemnities and other relevant terms.
  • Stock transfer forms: These forms, specific to the type of shares being transferred, facilitate the official registration of ownership change with the target.
  • Tax clearance certificate: This may be required from the South African Revenue Service for the seller, ensuring that no outstanding tax liabilities will hinder the transfer.
  • Share certificates: Physical certificates or electronic records representing the shares are delivered to the buyer upon transfer completion.
• Business/asset transfers:
• • Sale of business agreement: This outlines the specific assets, liabilities and contracts being transferred, along with warranties and other related terms.
  • Transfer of assets: Depending on the specific asset type (eg, intellectual property, real estate), specific registration requirements and procedures might apply.
  • Consents and approvals: Certain assets such as licences or permits might require third-party consents or regulatory approvals for transfer.
  • Employee contracts: The transfer of employees requires consideration of labour laws and potential negotiation of new contracts or transfer agreements.
• IP transfers:
• • IP assignments: Specific agreements for each type of intellectual property (patents, trademarks, copyrights) might be required to formally transfer ownership rights.
  • Registration with the relevant authorities: IP rights often require registration with specific government agencies to ensure enforceable transfer.
  • Confidentiality and non-compete agreements: Agreements may be needed to ensure the continued protection of confidential information and respect non-compete clauses related to transferred IP.

Additional considerations include the following:

• Bulk sale provisions: If the transaction involves a significant portion of the target's assets, the bulk sale provisions of the Companies Act might apply, requiring additional notifications and procedures.
• Competition Commission approval: Depending on the size and nature of the transaction, notification or approval from the Competition Commission might be necessary.
• Tax implications: Carefully consider the tax implications of the transfer for both buyer and seller, seeking professional advice to ensure compliance with relevant tax regulations.

10.3 What other protections do employees enjoy in the case of a private M&A transaction in your jurisdiction?

Beyond the consultation requirements discussed earlier, South African employees enjoy several other key protections during private M&A transactions:

• Automatic transfer: Under Section 197 of the LRA, when a business as a going concern is transferred, all employees automatically transfer to the new owner on the same terms and conditions of employment. This protects their existing salaries, benefits and other established employment terms.
• Transfer notice: The transferring employer must notify employees in writing at least two months before the transfer date, providing details about:
• • the transaction;
  • the new employer; and
  • the potential consequences for their employment.
• Unfair dismissal: If the transfer results in any dismissals that are not due to operational requirements, they are automatically deemed unfair under the LRA. This gives employees the right to challenge the dismissal through:
• • the Commission for Conciliation, Mediation and Arbitration; or
  • the Labour Court.
• Severance pay: If dismissal due to operational requirements becomes necessary, the new employer must offer employees severance pay according to specific formulas outlined in the LRA. The amount depends on the employee's age, duration of service and salary.
• Trade union agreements: Existing collective bargaining agreements with trade unions remain valid and binding on the new employer for the specified duration of the agreement.
• Negotiation right: Employees (whether unionised or not) have the right to negotiate with the new employer regarding any changes to their terms and conditions of employment arising from the transfer.

Additional protections include the following:

• Pension funds: The transfer of employees to a new pension fund requires specific procedures and communication with employees to ensure that their rights are protected.
• Medical aid schemes: Similar regulations govern the transfer of employees to different medical aid schemes, ensuring continuity of coverage.
• Skills development levies: The new employer is responsible for any outstanding skills development levies incurred by the transferred employees.

10.4 What is the impact of a private M&A transaction on any pension scheme of the seller?

The impact of a private M&A transaction on the seller's pension scheme depends on several factors, including:

• the type of transaction;
• the type of pension scheme; and
• the specific regulations governing the scheme.

Here is a breakdown of the key considerations:

• Types of impact:
• • Funding issues: If the seller is underfunded, the transaction might exacerbate the situation and raise concerns about its ability to meet future pension obligations. This could trigger regulatory intervention or impact the purchase price.
  • Transfer of liabilities: Depending on the scheme type and legal structure, pension liabilities might transfer to the buyer, requiring careful due diligence and negotiation to ensure future security for beneficiaries.
  • Investment strategy: Changes in the buyer's investment strategy could affect the performance of the pension fund assets, influencing future benefits for employees.
  • Governance and administration: Merging or integrating the seller's pension scheme with the buyer's might require adjustments to governance structures and administrative processes, impacting efficiency and potential cost changes.
  • Employee communication and morale: Clear and transparent communication with scheme members throughout the process is crucial to maintain trust and address anxieties about potential changes to their benefits or security.
• Regulatory considerations:
• • Pension Funds Act (35/1956): This act governs occupational pension funds in South Africa, outlining specific transfer requirements and procedures to ensure the protection of members' benefits.
  • Financial Services Conduct Authority (FSCA): The FSCA oversees pension funds and requires adherence to regulations during any mergers or transfers.
  • Tax implications: The tax implications of transferring scheme assets or liabilities require careful consideration and compliance with relevant tax laws.
• Mitigation strategies:
• • Thorough due diligence: Conduct comprehensive due diligence on the pension scheme's funding status, investment strategy, liabilities and regulatory compliance.
  • Expert advice: Seek advice from pension law specialists and actuaries to navigate legal and financial complexities and devise sound transfer strategies.
  • Clear communication: Communicate transparently with scheme members throughout the process, explaining potential impacts and addressing their concerns.
  • Negotiation and agreements: Carefully negotiate transfer agreements with the buyer, outlining responsibilities, liabilities and future governance of the scheme.
  • Regulatory compliance: Ensure adherence to all relevant regulations and approvals from the FSCA and other authorities.

10.5 What considerations should be made to ensure there are no concerns over the potential misclassification of employee status for any employee, worker, director, contractor or consultant of the target?

Misclassification of employee status can pose significant risks in South African M&A transactions, leading to legal challenges, penalties and reputational damage for both the buyer and seller. Here are some key considerations to ensure proper classification of individuals associated with the target:

• Due diligence and verification:
• • Review contracts and agreements: Scrutinise all contracts with individuals working for the target, analysing their terms and conditions carefully.
  • Conduct interviews and observe work practices: Speak with individuals and observe their daily tasks to understand their level of control, integration and economic dependence.
  • Consider relevant factors: Analyse various factors such as:
  • • control over work;
    • integration into the business;
    • economic dependence; and
    • provision of tools and equipment.
  • Seek expert advice: Involve legal and labour law specialists to assess individual cases and determine the appropriate classification based on all relevant aspects.
• Addressing misclassification concerns:
• • Reclassification and back payments: If misclassification is identified, promptly reclassify the individual as an employee and ensure that he or she receives any owed back payments, including contributions to unemployment insurance, social security and taxes.
  • Negotiate with misclassified individuals: Discuss potential reclassification with the affected individuals and negotiate new employment contracts if necessary.
  • Engage with unions (if applicable): If unions represent any misclassified individuals, engage in open communication and negotiate solutions, considering their collective bargaining agreements.
  • Compliance with regulatory requirements: Ensure adherence to all relevant labour laws, tax regulations and social security contributions for reclassified employees.
• Proactive measures:
• • Establish clear classification criteria: Implement clear internal guidelines and criteria for classifying individuals as employees, contractors or consultants.
  • Regularly review classifications: Conduct periodic reviews of all individuals' classifications to ensure that they remain accurate and reflect their actual work arrangements.
  • Train managers and HR personnel: Educate managers and HR personnel on proper classification practices and the potential risks of misclassification.
  • Maintain detailed records: Keep comprehensive records of all contracts, agreements and work arrangements to facilitate accurate classification and support compliance.

Additional considerations include the following:

• Complexity in specific sectors: Certain industries, such as the gig economy or outsourced services, might present unique challenges in classification due to evolving work models. Seek expert advice and stay updated on relevant regulations in these areas.
• Reputation and ethical considerations: Beyond legal compliance, preventing misclassification demonstrates ethical treatment of workers and builds trust with employees, stakeholders and the community.

10.6 What other key concerns and considerations should participants in private M&A transactions bear in mind from an employment perspective?

Several other key concerns and considerations deserve attention from participants in private M&A transactions:

• Integration planning and change management:
• • Develop a comprehensive integration plan: Outline how the buyer's and seller's workforces will be integrated, addressing potential cultural clashes, communication strategies and employee engagement initiatives.
  • Manage change effectively: Implement effective change management strategies to help employees adapt to the new environment, minimising anxiety and fostering buy-in for the transition.
  • Address redundancy and restructuring: If redundancies or restructuring become necessary, ensure compliance with legal requirements, fair treatment of affected employees and transparent communication throughout the process.
• Post-merger integration challenges:
• • Harmonisation of employment terms and conditions: Negotiate and agree on harmonised employment terms and conditions for all employees, considering fair treatment and potential cost implications.
  • Management of employee relations: Develop strategies to manage potential labour unrest, address employee concerns and build positive relationships with unions (if applicable).
  • Performance management and talent retention: Adapt performance management systems and implement strategies to retain key talent during the transition and beyond.

Additional considerations include the following:

• Data privacy and security: Ensure compliance with data privacy regulations when transferring employee data and implement robust security measures to protect sensitive information.
• IP considerations: Address ownership and access rights to intellectual property created by employees, especially during transitions and integration.
• Environmental and social impact: Consider the potential environmental and social impact of the transaction on employees, local communities and supply chains.
• Corporate social responsibility (CSR): Demonstrate responsible workforce management practices throughout the transaction, aligning with broader CSR commitments.

11 Data protection

11.1 What key data protection rules apply to private M&A transactions in your jurisdiction?

In South Africa, several data protection rules are relevant to private M&A transactions, governing the collection, use and transfer of personal information during the process. The key regulations to consider include the following:

Protection of Personal Information Act (POPIA): This act is the primary legal framework governing data protection in South Africa. It applies to any party processing personal information within the country or using means from within the country, regardless of their nationality.

The key requirements are as follows:

• Lawful processing: Personal information must be processed lawfully and fairly, with informed consent from data subjects (ie, individuals whose information is collected).
• Purpose limitation: Information should be collected and used for specific, explicit and legitimate purposes only.
• Data security: Appropriate security measures must be implemented to protect personal information from unauthorised access, loss, damage or misuse.
• Data retention: Personal information should be retained only for as long as necessary for the stated purpose.
• Cross-border transfers: Transferring personal information outside South Africa requires additional requirements and safeguards.

Promotion of Access to Information Act (PAIA): This act grants individuals the right to access information held by public and private bodies, including information about themselves. The parties to M&A transactions might receive requests for accessing personal information during due diligence or investigations, requiring compliance with PAIA procedures.

Companies Act (71/2008): This act includes provisions related to data breaches and requires the notification of stakeholders if certain types of data breaches occur. Data breaches during an M&A transaction could trigger notification requirements depending on the nature and severity of the breach.

Electronic Communications and Transactions Act (25/2002): This act regulates electronic communications and transactions, including how electronic signatures can be used in agreements and data sharing practices. Virtual data rooms and electronic agreements used in M&A transactions must comply with this act's provisions.

Additional considerations include the following:

• Sector-specific regulations: Certain industries might have additional data protection regulations, such as the rules of the Financial Services Conduct Authority for financial institutions.
• Contractual arrangements: Data sharing agreements with due diligence providers, advisers and other parties involved in the transaction should incorporate robust data protection clauses.

11.2 What other key concerns and considerations should participants in private M&A transactions bear in mind from a data protection perspective?

There are several additional considerations during private M&A transactions from a data protection perspective:

• Due diligence and data sharing:
• • Minimise data transfer: Limit the transfer of personal information to what is absolutely necessary for due diligence purposes.
  • Implement secure data-sharing methods: Utilise secure data rooms, encryption and access controls to protect sensitive information during information sharing.
  • Data subject consent: Whenever possible, obtain informed consent from data subjects before transferring their personal information.
  • Data anonymisation and pseudonymisation: Consider anonymising or pseudonymising personal data when feasible to reduce privacy risks during due diligence.
• Data breach management:
• • Conduct data breach risk assessments: Identify potential vulnerabilities and implement measures to prevent data breaches during the transaction process.
  • Have a data breach response plan: Establish a clear and documented plan for identifying, containing and reporting data breaches if they occur.
  • Notify stakeholders promptly: If a data breach occurs, notify the relevant authorities and affected individuals according to POPIA and other applicable regulations.
• Post-merger integration:
• • Data mapping and inventory: Conduct a comprehensive data mapping exercise to identify all personal information collected and processed by both parties.
  • Data harmonisation and consolidation: Develop a plan for harmonising data management practices and consolidating systems while ensuring data protection compliance.
  • Training and awareness: Train employees who handle personal information on their data protection responsibilities and best practices.

Additional considerations include the following:

• Cross-border transfers: If personal information is transferred outside South Africa, comply with POPIA's requirements for cross-border transfers, including obtaining necessary approvals.
• Vendor management: Ensure that data processors and third-party vendors engaged in the transaction uphold appropriate data security and privacy standards.
• IP considerations: Address ownership and access rights to personal data created or collected during the transaction, aligning with IP agreements.
• Transparency and communication: Communicate openly and transparently with data subjects about how their information is being collected, used and protected throughout the M&A process.

12 Environment

12.1 Who bears liability for the clean-up of contaminated sites? How is liability apportioned as between the buyer and the seller in case of private M&A transactions?

Determining liability for cleaning up contaminated sites in private M&A transactions can be complex, involving different legal principles depending on the specific circumstances of the transaction.

The following general principles apply:

• 'Polluter pays' principle: This principle, enshrined in South African environmental law, generally holds the polluter responsible for the costs of cleaning up any pollution it caused.
• Strict liability under specific laws: The National Environmental Management Act and related regulations impose strict liability on certain parties for environmental damage, regardless of fault. These can include current owners, occupiers and even previous owners in some cases.
• Contractual agreements: The allocation of liabilities in private M&A transactions is primarily determined by the specific terms and conditions agreed upon in the share purchase agreement between the buyer and seller.

The following considerations should be borne in mind in relation to the apportionment of liability:

• Explicit provisions in the SPA: The SPA should clearly spell out how environmental liabilities will be allocated between the buyer and seller. This can involve the following:
• • Full assumption by buyer or seller: One party can agree to take full responsibility for all known and unknown environmental liabilities.
  • Proportionate allocation: Liability can be apportioned based on a specific formula or agreed-upon criteria, such as the period of ownership or level of potential contamination.
  • Specific exclusions: Certain liabilities, such as future remediation costs, might be explicitly excluded from the transfer.
• Due diligence and disclosure: Thorough due diligence by the buyer can identify potential environmental liabilities and influence the negotiation of liability allocation in the SPA.
• Historical records and knowledge: If past activities are known to have caused contamination, identifying the responsible party (eg, previous owners) can complicate the picture.

Additional considerations include the following:

• Regulatory approvals and penalties: Both parties are responsible for complying with relevant environmental regulations and potential penalties for existing or future contamination.
• Third-party claims: Both parties could face claims from third parties affected by contamination, regardless of who is ultimately responsible for the clean-up.
• Environmental insurance: Having appropriate environmental insurance can help to mitigate risks and potential financial burdens associated with clean-up costs.

12.2 What other key concerns and considerations should participants in private M&A transactions bear in mind from an environmental perspective?

There are various other environmental concerns relating to private M&A transactions in South Africa:

• Environmental due diligence:
• • Thorough assessments: Conduct comprehensive environmental due diligence to identify potential liabilities, compliance issues and risks associated with the target's operations and assets.
  • Consider regulatory compliance: Evaluate compliance with relevant environmental regulations at all levels (national, provincial, local) and potential permit requirements.
  • Assess historical liabilities: Investigate past activities on the site and potential legacy liabilities related to pollution, hazardous materials, or waste disposal.
  • Engage environmental specialists: Involve qualified environmental professionals to conduct assessments, interpret findings and advise on potential risks and mitigation strategies.
• Post-transaction integration:
• • Environmental management system (EMS) integration: If necessary, integrate the target's EMS with the buyer's system, ensuring consistent compliance and best practices.
  • Environmental risk management: Develop and implement a comprehensive environmental risk management plan to address identified liabilities and prevent future issues.
  • Employee training and awareness: Train employees involved in environmental aspects of the business on relevant regulations, procedures and their responsibilities.
  • Sustainability considerations: Integrate sustainability goals and practices into the merged entity's operations, aligning with stakeholder expectations and responsible business practices.

Additional considerations include the following:

• Climate change risks: Assess the target's exposure to climate change risks, such as water scarcity, extreme weather events or carbon emissions regulations.
• Social and community impacts: Consider the potential environmental and social impacts of the transaction on local communities and develop appropriate mitigation strategies.
• Environmental disclosures: Ensure the accurate and transparent disclosure of environmental risks and liabilities in financial statements and communications.
• Reputation management: Proactive environmental management can enhance the merged entity's reputation and attract responsible investors and partners.

13 Tax

13.1 What taxes are payable on private M&A transactions in your jurisdiction? Do any exemptions apply?

Several taxes are potentially payable in private M&A transactions in South Africa, depending on the specifics of the deal and the nature of the assets being transferred. Here is a breakdown of the key taxes:

• Direct taxes:
• • Capital gains tax (CGT): This generally applies to gains realised by the seller on the disposal of shares or capital assets. Specific rates and exemptions exist based on the seller's type (individual, company, trust) and the asset type.
  • Income tax: This may apply if the transaction is structured as an asset sale instead of a share sale. The income tax implications depend on the nature of the income generated and the tax status of the parties involved.
  • Stamp duty: This is payable on the transfer of certain immovable property (land and buildings) involved in the transaction. The rate is currently 0.75% of the market value of the property.
• Indirect taxes:
• • Securities transfer tax (STT): This is charged at a rate of 0.25% on the transfer of listed shares in South African companies. Unlisted shares may also be subject to STT but with different rules and potential exemptions.
  • Value-added tax: This is generally not applicable to the sale of shares or businesses itself, but may apply to specific assets or services included in the transaction, such as intellectual property or consultancy services.

The following exemptions apply:

• Small business exemptions: Certain exemptions for CGT and STT might apply for qualifying small businesses.
• Restructuring exemptions: Specific exemptions from CGT and STT exist for certain restructuring transactions within the same group of companies.
• Double tax treaties: These can reduce or eliminate certain taxes in cross-border M&A transactions, depending on the treaty between South Africa and the other country involved.

13.2 What other strategies are available to participants in a private M&A transaction to minimise their tax exposure?

While navigating the complexities of tax implications in private M&A transactions is crucial, various strategies can help participants to minimise their tax exposure in South Africa. Here are some additional approaches to consider:

• Structuring strategies:
• • Share versus asset sale: Opting for a share sale generally avoids income tax but might trigger CGT for the seller. Conversely, an asset sale generates income tax for the seller but can offer depreciation benefits to the buyer. Carefully analysing the tax implications of each structure is critical.
  • Tax-neutral mergers: Exploring the possibility of tax-neutral mergers or reorganisations within the same group of companies might offer exemptions from certain taxes.
  • Leveraging group structures: Existing group structures can be utilised to optimise intercompany transactions and potentially reduce tax burdens.
• Exemption utilisation:
• • Small business exemptions: Qualifying small businesses can benefit from exemptions for CGT and STT, minimising their tax exposure.
  • Restructuring exemptions: Specific restructuring exemptions are available for CGT and STT within the same group of companies.
  • Double tax treaties: In the case of cross-border M&A transactions, the benefits of applicable double tax treaties can be maximised to reduce or eliminate certain taxes.
• Planning and optimisation:
• • Early tax planning: Involving experienced tax advisers early in the transaction process allows for proactive planning and identifying potential tax risks and optimisation opportunities.
  • Pre-transaction restructuring: Implementing pre-transaction restructuring strategies within legal boundaries can sometimes help to mitigate tax liabilities.
  • Post-transaction tax management: A sound post-transaction tax management plan will help to ensure compliance, optimise ongoing tax positions and manage any deferred tax consequences.

Additional considerations include the following:

• Transfer pricing: Ensure compliance with transfer pricing regulations when transferring assets or services within the transaction.
• Tax accounting methods: Choosing appropriate tax accounting methods can impact the timing and recognition of taxable income and expenses, influencing overall tax exposure.
• Disclosure and transparency: Maintaining transparent communication and timely disclosure of relevant information to tax authorities is crucial to avoid penalties and potential disputes.

13.3 Is tax consolidation of corporate groups permitted in your jurisdiction? Can group companies transfer losses between each other for tax purposes?

Unfortunately, South Africa currently does not have a formal system for tax consolidation of corporate groups in the traditional sense. This means that each company within a group files its own separate tax return and is treated as an independent tax entity for the purposes of income tax.

Consequently, companies within a group cannot directly transfer losses to each other. This can be disadvantageous for groups with subsidiaries experiencing losses, as such losses cannot be used to offset profits generated by other group companies.

However, there are a few limited mechanisms that companies can use to mitigate the effects of not having full tax consolidation:

• Group relief: This allows a profitable company within a group to surrender up to 45% of its assessed losses to other companies within the same group that have made profits. This helps to reduce the overall tax burden for the group, but it is not as efficient as full consolidation.
• Contribution model: A profitable company can make tax-deductible contributions to its sister loss-making companies. However, this approach only benefits the recipient company and does not directly reduce the tax liability of the contributing company.
• Organisationship model: This advanced model requires specific criteria and approval from the South African Revenue Service (SARS). If approved, it allows all profits and losses of the group to be attributed to the parent company, essentially achieving a form of consolidation.

The limitations of these alternative mechanisms have led to ongoing discussions and policy reviews towards potentially introducing a more comprehensive tax consolidation system in South Africa. However, no concrete developments have been announced as yet.

The position can be summarised as follows:

• Tax consolidation: Not permitted in the traditional sense.
• Transfer of losses: Not directly possible between group companies.
• Alternatives: Limited options such as group relief and contribution model exist, but they have limitations.

13.4 What other key concerns and considerations should participants in private M&A transactions bear in mind from a tax perspective?

Additional key considerations in private M&A transactions from a tax perspective include the following:

• Transfer pricing:
• • Compliance with the arm's-length principle: Ensure that all transactions between related companies within the group adhere to the arm's-length principle, reflecting market prices for goods and services to avoid potential adjustments by tax authorities.
  • Documentation and justification: Maintain comprehensive documentation supporting transfer pricing practices and be prepared to defend them if challenged by SARS.
• Post-merger integration:
• • Tax implications of integration activities: Be aware of potential tax consequences related to restructuring, integration costs and employee compensation during the post-merger integration process.
  • Harmonisation of tax reporting and compliance procedures: Develop and implement harmonised tax reporting and compliance procedures across the merged entity to ensure efficiency and accuracy.
• Anti-avoidance rules:
• • Understand and comply with relevant anti-avoidance rules: These rules aim to prevent tax abuse and might impose additional scrutiny or restrictions on certain transaction structures.
  • Seek professional advice: Ensure that your transaction structure does not trigger any anti-avoidance provisions and consult with tax advisers on potential implications.
• International tax considerations:
• • Cross-border transactions: If the transaction involves foreign entities or assets, navigate complex international tax issues and comply with relevant treaties and regulations to avoid double taxation and other international tax challenges.
  • Foreign tax credits: Maximise potential foreign tax credits to reduce the overall tax liability for the merged entity.

Additional considerations include the following:

• Reputational impact: Maintain responsible tax practices and transparency throughout the M&A transaction to uphold your reputation and stakeholder trust.
• Sustainability and ESG factors: Consider the potential tax implications of sustainable business practices and environmental, social and governance factors.
• Staying informed: Keep up to date with evolving tax laws and regulations to ensure continuous compliance and adapt your strategies accordingly.

14 Trends and predictions

14.1 How would you describe the current M&A landscape and prevailing trends in your jurisdiction? What significant deals took place in the last 12 months?

The South African M&A landscape has faced headwinds in 2023, marked by the following factors:

• Macroeconomic challenges: Global economic uncertainty, rising inflation and interest rates have dampened overall deal activity.
• Domestic factors: Load shedding, political instability and ongoing regulatory changes have created additional risks for investors.
• Geopolitical tensions: The war in Ukraine and its global ramifications have further impacted sentiment and investment decisions.

Despite these challenges, glimpses of optimism remain:

• Cash availability: Many South African companies have healthy cash reserves, potentially fuelling future deals.
• Private equity interest: Private equity players remain active, seeking opportunities in specific sectors such as infrastructure and technology.
• Focus on value creation: M&A activity is increasingly driven by strategic consolidation and value creation within sectors.

Prevailing trends include the following:

• Cross-border deals: There is increased interest in cross-border transactions, particularly within Africa, seeking new markets and growth opportunities.
• Digital transformation: M&A activity is increasingly targeting technology companies and digital transformation initiatives to enhance competitiveness.
• Focus on environmental, social and governance (ESG): ESG considerations are gaining prominence, influencing investment decisions and deal structuring.
• Restructuring and consolidation: Companies are looking to optimise their operations through mergers, acquisitions and divestitures.

Recent notable deals in the last 12 months include the following

• Naspers' spin-off of Prosus: The largest M&A transaction in South African history, valued at $74 billion, creating two separate listed entities for Naspers' international and South African assets.
• Anglo American Platinum's acquisition of Mototolo: A $2.2 billion deal for the Mototolo platinum mine, consolidating Anglo American's position in the sector.
• Discovery's acquisition of MultiChoice Group: A $2 billion deal creating a pan-African media powerhouse in satellite TV and streaming services.
• Sanlam's acquisition of Absa's wealth and investment management business: A $1.2 billion deal expanding Sanlam's financial services offerings.
• Bidvest's acquisition of Stellar Healthcare: A $637 million deal strengthening Bidvest's presence in the healthcare sector.

Looking ahead, the South African M&A landscape remains cautiously optimistic. Navigating economic uncertainties and political risks will be crucial. Factors such as private equity involvement, technology focus and cross-border opportunities could fuel M&A activity in strategic sectors.

14.2 Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

Predicting the future of any market with certainty is challenging, but here is what we can glean about potential developments in South Africa's M&A landscape for the year ahead:

• Possible developments:
• Impact of global and domestic factors: Continued international volatility, inflation and interest rates could dampen overall M&A activity. However, if the South African economy shows signs of improvement, it could stimulate domestic deals.
• Private equity involvement: Private equity firms are expected to remain active, potentially driving deal flow in sectors such as infrastructure, technology and healthcare.
• Cross-border opportunities: Increased emphasis on regional integration and collaboration within Africa could lead to more cross-border M&A activity.
• Focus on consolidation and restructuring: Companies may continue to streamline operations through mergers, acquisitions and divestitures to adapt to changing market conditions.
• Evolving regulatory landscape: Changes in regulations, particularly around competition and data protection, could impact transaction structures and timelines.
• ESG considerations: Growing importance of environmental, social and governance (ESG) factors could influence investment decisions and deal structuring, focusing on sustainable and responsible business practices.
• Specific legislative reforms:
• Competition Amendment Act: Potential amendments under discussion aimed at modernising the competition framework could potentially impact merger approvals.
• Business Names Act: Proposed amendments could streamline the process of registering business names, potentially simplifying M&A transactions.
• Data Protection Act (POPIA): Ongoing enforcement and potential amendments to POPIA could influence how data is handled and secured during M&A transactions.

These are potential developments only and the actual trajectory of the M&A landscape will depend on various factors that are difficult to predict with certainty.

15 Tips and traps

15.1 What are your top tips for the smooth closing of private M&A transactions and what potential sticking points would you highlight?

Our recommendations for a smooth closing are as follows:

Preparing for the transaction:

• Early due diligence: Conduct thorough due diligence early on to identify and address potential issues before negotiation.
• • Clear agreements: Draft agreements with clear contingencies, representations and warranties, mitigating uncertainty.
  • Organised documentation: Maintain organised records and ensure timely delivery of all necessary closing documents.
  • Open communication: Establish open communication channels between all parties to proactively address concerns and maintain trust.
• Streamlining the process:
• • Experienced team: Assemble a team of experienced professionals such as lawyers, accountants and advisers to manage the process.
  • Defined roles and responsibilities: Clearly define roles and responsibilities for each party involved to avoid confusion and delays.
  • Use of technology: Utilise technology platforms for secure document sharing and communication to expedite the process.
  • Regular status updates: Schedule regular meetings and updates to keep everyone informed and on track.
• Building trust and goodwill:
• • Fair negotiations: Focus on fair and balanced negotiations to foster trust and avoid late-stage challenges.
  • Transparency and honesty: Be transparent and honest throughout the process, building trust and goodwill.
  • Consideration of all stakeholders: Consider the interests of all stakeholders, including employees, regulators and communities.

The potential sticking points that we would highlight are as follows:

• Due diligence findings: Unforeseen issues uncovered during due diligence can necessitate renegotiations or deal restructuring.
• Financing delays: Delays in securing financing can derail the closing timeline and create uncertainty.
• Regulatory approvals: Obtaining necessary regulatory approvals can be complex and time consuming, causing delays.
• Contractual interpretations: Disagreements about contract interpretations can lead to disputes and delays.
• Third-party consents: Securing consents from third parties such as landlords or creditors can be challenging and unpredictable.
• Key employee retention: Concerns about key employee retention after the closing can create tension and complicate integration.

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.