By Amy Farish (Associate at Themis Law Chambers)
MERGERS AND ACQUISITIONS: THE APPLICATION OF THE TAKEOVER REGULATIONS
Company A enters into a sale of shares agreement with Company B where by Company A purchases 40% of the shareholding in Company C. The sale of shares agreement is prepared and all of the conditions precedent are fulfilled, upon which time the company secretary is instructed to attend to the transfer of the 40% shareholding to Company A.
The transaction outlined above, and further transactions that will be discussed herein, are some of the most common transactions a commercial attorney is instructed to attend to on behalf of a client. It is therefore of utmost importance to ensure that the provisions provided for in part B of Chapter 5 of the Companies Act, 71 of 2008 (“the Companies Act”) and the Takeover Regulations issued in terms of the such provisions (“the Takeover Provisions”) are scrutinised to avoid your client incurring a fine of up to 10% of its annual turnover or being charged with a criminal offence which could result in imprisonment for a period not exceeding twelve months.
Application of the Takeover Provisions and Regulations
In order for the Takeover Provisions to apply, two requirements need to be met, namely –
1. The company, being Company C in the example above, needs to be a “regulated company”; and
2. The transaction being entered into needs to be an “affected transaction”.
If Company C is a public company, state owned company or a private company in which 10% of its issued securities have been transferred over the last 24 months, it is classified as a regulated company in terms of section 118 of the Companies Act. In the case of private companies, their status as a regulated company is established by examining the share transfer register. Company C will be a regulated company if one or more transfers took place within the 2 years immediately preceding the effective date of the present transaction which resulted in 10% of the issued shares of the company being transferred. For the purposes of this section, a subscription of shares or a repurchase of shares does not amount to a transfer and will therefore not be taken into account. Furthermore, transfers between related and interrelated persons do not amount to transfers for the purposes of this section.
The second hurdle is establishing whether the transaction is an “affected transaction”. The list of affected transaction is found in section 117 of the Companies Act. Of particular relevance are the affected transactions that fall under the radar of clients and commercial attorneys the like, being the acquisition of or announced intention to acquire a beneficial interest in the voting securities of a regulated company and a mandatory offer in terms of section 123.
In our example above, Company A is acquiring a number of shares which constitutes a multiple of 5% of the total issued shares of the Company (i.e. 40%). In terms of section 122 of the Companies Act, this means that Company A is acquiring a beneficial interest in Company C. A beneficial interest is any multiple of 5% and as such it can be as little as 5% and as much as 95%. A beneficial interest can also be acquired where a party is already a shareholder in the Company. In our scenario, lets imagine that Company A was previously a shareholder in Company C holding 22% of the shares. If company A purchases 3% of the shares from Company B, Company A now holds a beneficial interest (i.e. 25%) and the Takeover Provisions are triggered. Section 122 further states that if a party disposes of shares such that following the disposal it no longer holds a beneficial interest, the transaction will be an affected transaction i.e. if Company B held 25% of the shares and sold 2%, it no longer holds the beneficial interest.
In the circumstances above, the person acquiring the beneficial interest has to notify the regulated company (Company C in our example) within 3 business days of the effective date and the regulated company must file a copy of the notification, along with a copy of the sale agreement with the Takeover Regulation Panel and report the information to the remaining shareholders (unless the disposition was in respect of less than 1% of the company’s securities).
Company A in our example above holds less than 35% of the total shareholding prior to the implementation of the sale of shares agreement and holds more than 35% of the shareholding following implementation. As such, the provisions of section 123 of the Companies Act are applicable which relate to mandatory offers. This section states that in such circumstances as aforesaid i.e. where a transaction results in a shareholder who previously held less than 35% of the shareholding now holds more than 35% of the total shareholding, the acquiring party (Company A) must notify the remaining holders of securities and offer to purchase the securities from the holders thereof. Many purchasers are not in a financial position to make such an offer and as such, as in a majority of cases, companies apply for an exemption from the application of this section and the Takeover Regulations in the prescribed manner and form.
The exemption application is accompanied by a waiver of the remaining holders of the securities who waive their rights to enforce the provisions of section 123. The application is submitted to the Takeover Regulation Panel for consideration, the prescribed fee is paid against receipt of a tax invoice (currently the prescribed fee is R3000 excluding VAT) and the Takeover Regulation Panel determines if the transaction may be exempt.
The Takeover Provisions are often overlooked by parties entering into a transaction involving the transfer of shares and commercial attorneys neglect to ensure whether the Takeover Provisions are or are not applicable. Many question the reason as to why the Takeover provisions have been included in the Companies Act and the rationale therefore but regardless of such opinions, the consequences of non-compliance are severe and as such it is of utmost importance that the Takeover Provisions are not ignored. All of the applicable provisions are not discussed herein and as such it is necessary to obtain legal advice when concluding transactions of this nature.