Before negotiating a corporate transaction, even one in respect of a private company, it is important to consider the impact of regulatory requirements on the proposed transaction to ensure the deal can be completed without unintended consequences or unpleasant surprises. This article briefly highlights some of the statutory requirements that private companies must consider before a corporate transaction.
If the planned transaction is regarded in terms of the Companies Act as a so called “fundamental transaction” (sale of assets, sale of business as a going concern, a merger or a scheme of arrangement) the transaction must be approved by a special resolution adopted by the shareholders.
Dissenting shareholder’s appraisal right
Any shareholder who votes against a special resolution to approve a fundamental transaction is entitled to exercise a so called dissenting shareholder’s appraisal right if the company goes ahead and implements the resolution. In terms of the dissenting shareholder’s right the dissenting shareholder may demand that the company buys the dissenting shareholder’s shares at fair value. The company must then make an offer to the dissenting shareholder and if the latter disagrees with the price, the dissenting shareholder may approach the court to determine the fair value of the shares.
In some cases, transactions in respect of private companies can be subject to the similar provisions that apply to public companies. A private company will, irrespective of its number of shareholders, be regarded as a regulated company if 10% of a private company’s shares have exchanged hands during the preceding 24 months.
Takeover Panel notification
The first provision that becomes applicable once a private company is deemed a regulated private company is that it must notify the Takeover Regulation Panel of any proposed transaction where equity will change hands and will be required to either obtain an exemption certificate from the panel, or if that is not possible, comply with the takeover regulations. Parties may not implement a transaction unless the Panel has issued a compliance certificate or granted exemption.
In addition to the previous requirement, any shareholder of a regulated private company must notify the company each time it acquires or disposes of tranches of 5% of the company’s issued shares. The company must then file the 5% notice with the Takeover Regulation Panel and notify the other shareholders thereof.
When someone acquires more than 35% of a regulated private company’s issued shares, the acquiring shareholder must make a mandatory offer to acquire the shares of the remaining shareholders.
A shareholder who acquired more than 90% of the issued shares of a regulated private company is entitled to make an offer to acquire the remaining shares to obtain full ownership of the company. This is known as a “squeeze out”. This offer, like the mandatory offer, must take place in terms of the Takeover Regulations and in this instance the remaining shareholders can be forced to sell their shares.
As far as the South African Competition Act is concerned, companies involved in a medium merger, that is when the value of the target exceeds R80 million and the combined value after the merger exceeds R560 million, must notify the transaction to the Competition Commission. But even transactions in respect of mergers where the values are below the thresholds mentioned above could be required by the Competition Commission to be notified if the commission believes the merger could substantially lessen competition.
The Competition Tribunal may order parties to a merger to divest or it may declare the agreements void if the parties implemented the merger without having obtained the necessary approval or exemption.
Transactions with foreign parties may require exchange control approval. This may be required to remit a purchase consideration to a foreign shareholder, to make royalty payments to foreign owners of intellectual property or to transfer intellectual property out of the country.
Failure to anticipate these requirements can mean that an agreement is void or that a party is locked up in a transaction for a lengthy period.
Parties that contemplate a transaction involving a South African private company are advised to conduct in advance a review of the applicable regulatory requirements that may have a bearing on the transaction. It is also advisable to include the company’s memorandum of incorporation, shareholder agreements and share options in this review. Failure to anticipate and address these requirements may result in obligations that cannot be fulfilled, or, perhaps worse, agreements that are null and void.