With a highly developed economic infrastructure and strong legal system, South Africa has traditionally been an attractive jurisdiction for securities and merger and acquisition (M&A) activity. In 2007, M&A transaction values peaked at an aggregate of over US$200 billion. Recently, South African mining and financial entities have contributed the bulk of South African M&A activity, following the recovery in commodity markets.
South Africa does not have a single regulatory body equivalent to the provincial securities commissions in Canada or the United States Securities and Exchange Commission that, for example, reviews and clears prospectuses for public offerings. This function is carried out by various combinations (depending on the circumstances) of the Johannesburg Stock Exchange (JSE), the South African Registrar of Companies (CIPRO) and the other entities referred to below involved with regulating insider trading/ market abuse and take-overs and mergers in South Africa.
Securities in South Africa are traded on the JSE, a modern and fully electronic exchange estimated to be the largest bourse in Africa and the eighteenth largest globally. The JSE trades shares for a wide variety of industries on two separate markets, the “Main Board” and the less stringent “AltX” (which is similar to Canada’s TSX-V and the United Kingdom’s AIM market). In 2009 the JSE had a market capitalisation of US$776.7 billion with more than 400 listed entities (of which approximately 75 comprised dual listed entities such as Anglo American plc and British American Tobacco plc).
Main Board Listing Criteria
Applicants for listing on the Main Board must have a subscribed capital of at least ZAR25 million (approximately US$3,370,000) and not less than 25 million equity shares in issue. Applicants must also show an audited profit over the preceding three financial years (with an audited profit of at least ZAR8 million (approximately US$1 million), before tax, in the latest such year). Shareholder spread requirements are that 20% of each class of equity securities must be held by the public and that the minimum number of public shareholders is 300 for equity shares, 50 for preference shares (if any) and 25 for debentures (if any).
Notwithstanding the capital requirements referred to above, the JSE retains the discretion to relax these requirements in relation to, for example, applicants that conduct, as their main business, activities involving immovable property and mining and/or prospecting. That said, it should also be noted that these entities need to comply with additional JSE reporting requirements, such as “Competent Persons Reports” (similar to NI43-101 reports in Canada), in the case of mining/ prospecting entities and valuation reports prepared by a registered valuer, in the case of property entities.
AltX Listing Criteria
As is the case with secondary markets in other jurisdictions, the AltX listing requirements are less stringent than those of the Main Board. For example, applicants are not required to show a profit history (but must have a share capital of ZAR2 million (approximately US$270,500)), only 10% of each class of the applicant’s equity securities must be held by the public and the minimum number of public shareholders is 100. However, since its launch in 2003, the AltX appears not to have been very attractive to non-South African entities as, in 2009, the AltX only had four dual listed entities (the most notable of which is African Eagle Resources, a LSE listed, UK-incorporated mineral exploration and development company operating in Zambia, Tanzania and Mozambique).
South African corporate governance principles are encapsulated in the King Report on Corporate Governance. The latest version of this report (King III) applies to all South African companies, including private companies, and places significant emphasis on the role of the board in the integrity of financial reporting and operational, financial and market risks.
King III applies a framework of ‘apply or explain’ (which is in line with recent trends in corporate governance standards in various other jurisdictions). Accordingly, where a company’s board believes that it would be in the best interest of the company, it can adopt practices that differ from the recommendations in King III, but must explain its reasons for doing so. As such, King III does not follow a ‘one size fits all’ approach, which allows companies to avoid some of the pitfalls initially seen in the United States during the time that such a ‘one size fits all’ approach was adopted.
Although King III largely relies on self-regulation and is not enforceable in any court, the listings requirements of the JSE provide that all listed companies are contractually bound to adopt King III (i.e., apply or explain) and any failure to do so would amount to a breach of these listing requirements.
M & A
Takeovers and mergers in South Africa are governed by the Securities Regulation Panel (SRP), whose rules are based primarily on the United Kingdom’s Takeover Code. The SRP regulates transactions involving a change of control of public entities (generally, the right to exercise 35% or more of the voting rights of the applicable entity) so as to ensure the fair treatment of shareholders (particularly minority shareholders). The acquisition of 35% or more of such an entity’s voting rights triggers a mandatory offer to minority shareholders.
Following a change in control certain creep provisions apply; where a controlling shareholder acquires, in aggregate, more than 5% of the voting rights in an entity within any twelve month period an additional mandatory offer may be triggered, unless the SRP rules otherwise.
Generally, South African takeovers and mergers occur by means of court sanctioned schemes of arrangement, especially in the case of hostile take-overs (due to the lower acceptance requirement of acceptance by shareholders holding 75% of the target company’s shares excluding shares held by the offeror and concert parties, as opposed to minority squeeze out provisions that apply only on acceptance by shareholders holding more than 90% of the target company’s shares excluding shares held by the offeror and concert parties).
Note that for hostile take-overs, the rules of the SRP do provide some scope for defensive tactics (such as poison pills/ shareholder rights plans), as long as these tactics are in place prior to either an offer being made or the board of the offeree having reason to believe that a bona fide (legitimate) offer may be imminent.
Insider Trading and Market Abuse
South Africa has a comprehensive legislative regime to regulate insider trading and other market abuses. For example, the Securities Services Act 2004 (SS Act) established the Directorate of Market Abuse which investigates cases of manipulative, improper, false or deceptive practices of trading (either based on findings by the Surveillance Division of the JSE or tip-offs from other sources). The SS Act also prohibits the making of false, misrepresentative or deceptive statements and forecasts and imposes substantial civil and criminal sanctions upon those convicted of insider trading and market abuse.
South Africa's competition regime is now comparable to international best practice following recent amendments to South Africa's competition legislation, the Competition Act 1998 (CA 1998). These amendments have increased the powers of the competition authorities, substantially along the lines of the European Union, United States and Canadian models. The CA 1998 provides for various prohibitions on anti-competitive conduct, restrictive practices and ‘abuses’ by ‘dominant’ firms and contains a notification and prior-approval procedure for certain mergers and acquisitions. Another notable amendment contemplates potential personal liability on the part of directors for their involvement with certain prohibited practices.
Generally, South African merger filings are required where a change in control occurs in circumstances where the following thresholds are exceeded:
annual turnover (generally gross turnover in, into or from South Africa) or asset value (generally book value of assets in South Africa) of the target firm exceeding ZAR80 million (approximately US$11 million) in the case of an intermediate merger or ZAR190 million (approximately US$26 million) in the case of a large merger; and
a combined turnover of the acquiring firm and the target firm or the combined assets of the acquiring firm and the target firm (or a combination of the turnover of the one and the assets of the other) exceeding ZAR560 million (approximately US$76 million) in the case of an intermediate merger or ZAR6.6 billion (approximately US$893 million) in the case of a large merger.
Exchange control legislation was originally introduced in South Africa to protect foreign exchange reserves and has had a significant bearing on cross border transactions involving South African resident entities and individuals. These regulations have been relaxed over recent years but are still considered a key factor in the structuring of transactions of this nature, particularly since any agreement entered into without prior exchange control approval, in circumstances where such approval was required, would be null and void (unenforceable), and because timing issues may arise from the need to obtain applicable exchange control approvals.
By way of example, loans by “non-residents” to “residents” for exchange control purposes are ordinarily approved by SARB, usually within 4 to 6 weeks. Additionally, transactions where “residents” for exchange control purposes dispose of shares in a South African entity in exchange for shares in a non-South African entity are ordinarily approved by the South African Minister of Finance, usually within a month or two. Also note that, in the latter example, the South African Minister of Finance would ordinarily (due to certain restrictions on “residents” for exchange control purposes holding shares in non-South African entities) require an inward (usually secondary) listing of such non-South African entity on the JSE, in order to allow South African “residents” for exchange control purposes to trade their shares in the non-resident entity on the local register (JSE).
In general, exchange control regulations apply only to South African “residents”, but note that South African subsidiaries and branches of foreign companies are considered to be “residents” for exchange control purposes.
South African company legislation is expected to be overhauled later this year through the implementation of new legislation (the Companies Act 2008). This new act is intended to bring existing South African company law closer in line with its western counterparts. Amongst other things, this act establishes the concept of statutory mechanisms of amalgamations and mergers (in addition to the existing concept of court approved plans of arrangement) similar to the equivalent Canadian and United States concepts, as well as business rescue provisions, inspired by equivalent provisions in United States insolvency law.
Regulatory Response to Global Recession
South Africa, like most countries, did not weather the global economic downturn unscathed, though it fared better than most, as the country’s relatively conservative banking system was not as exposed to global risk as its European and American counterparts. The country officially entered recession in May 2009, primarily due to a cutback in mining and manufacturing output. However, the South African Reserve Bank was quick to act in cutting interest rates to stimulate the economy and, in November 2009, the country emerged from the clutches of recession.
South Africa continues to maintain its position as a prominent emerging global market. Its unique combination of a highly developed economic infrastructure, strong legal system and a large market economy has given rise to a dynamic investment environment which continues to prove attractive to foreign investment. This combined with the country's sophisticated securities and M&A regime should provide comfort to entities seeking to do business in South Africa.