Structures and applicable lawTypes of transaction
How may publicly listed businesses combine?
Businesses may combine by:
- acquiring a majority shareholding in a target business off the exchange, which gives effective control of the target business;
- a tender offer for the acquisition of all the shares of the target;
- an exchange offer;
- a scheme of arrangement;
- acquiring a minority shareholding;
- the acquisition of the assets of a target business, which is then wound up; or
- the establishment of a joint venture by two or more firms with products that overlap.
The transactions described above may, if the thresholds prescribed in the Competition and Consumer Protection Act, No. 24 of 2010 (the Competition Act) are met, require the prior approval of the Competition and Consumer Protection Commission (the CCPC).
In terms of the Competition Act, a merger occurs where an enterprise, directly or indirectly, acquires or establishes direct or indirect control over the whole or part of the business of another enterprise. In addition, a transaction will also be deemed to be a merger when two or more enterprises mutually agree to adopt arrangements for common ownership or control over the whole or part of their respective businesses. Essentially, there are no restrictions on the type of mergers that may occur. However, conglomerate and non-conglomerate mergers may be prohibited if they have the effect of preventing, distorting or restricting competition in the market. The CCPC generally intervenes in the marketplace in all matters that can be characterised as anticompetitive trade practices, abuse of market power by monopolies and dominant firms, and any business conduct that has a negative net effect on the welfare of consumers.Statutes and regulations
What are the main laws and regulations governing business combinations and acquisitions of publicly listed companies?
The principal legislation governing business combinations in Zambia is the Competition Act and the regulations issued pursuant to this legislation.
Under the Competition and Consumer Protection (General) Regulations 2011 (the Regulations), a merger transaction will require authorisation by the CCPC where the combined turnover or assets (whichever is higher) in Zambia of the merging parties exceeds an amount of approximately US$1.24 million. The CCPC has the power to review and authorise mergers and acquisitions that meet this threshold.
However, the CCPC may review a merger transaction that does not meet the prescribed threshold if it has reasonable grounds to believe that:
- it will create a position of dominance in a localised product or geographical market;
- it will contribute to the creation of a dominant position through a series of acquisitions that are not individually subject to prior notification;
- it will substantially prevent or lessen competition;
- it is concluded outside Zambia and has consequences in Zambia that require further consideration; or
- there are, or are likely to be, competition and public interest factors that require consideration as a result of the merger.
Any party to a merger or takeover that requires clarification as to whether such proposed merger requires CCPC authorisation or review may alternatively apply for negative clearance. Negative clearance is not absolute and can be revoked by the CCPC on the discovery of new information indicating that the transaction does amount to a merger.
Public M&A transactions are regulated by the Securities Act and the Securities (Takeovers and Mergers) Rules (the Takeovers Rules). Such transactions are also required to be approved by the Securities and Exchange Commission (the SEC). The Companies Act, No. 10 of 2017 (the Companies Act) also has minority squeeze-out provisions that outline the power to acquire the shares of a minority shareholder and the sell-out rights of a minority shareholder in a takeover. It also contains provisions that permit two or more companies to amalgamate and continue as one of the companies in the amalgamation or as an entity incorporated thereunder. Additionally, the Corporate Insolvency Act, No. 9 of 2017 (the Insolvency Act) contains provisions that parties can use to reorganise a company’s share capital through a scheme of arrangement. Under these provisions, arrangements could be between a company and its creditors or its members. It is permissible for an arrangement to result in the amalgamation of any two or more companies or the reconstruction of any company or companies once the court makes the appropriate orders. In practice and to our knowledge, these provisions of the Insolvency Act are rarely used to effect a merger because the process is court-driven.
Other pieces of legislation regulating M&A activity in Zambia include the Property Transfer Tax Act, the Value Added Tax Act (which is set to be replaced with a sales tax regime in 2019) and sector-specific legislation such as the Banking and Financial Services Act (the BFSA), the Energy Regulation Act, the Insurance Act, the Pension Scheme Regulation Act, the Information and Communication Technologies Act and the Mines and Minerals Development Act (the Mines Act). English common law is also a source of law in Zambia, and due regard is given to the common-law position when structuring mergers and acquisitions and allocating risk under the contractual provisions of the documents.Cross-border transactions
How are cross-border transactions structured? Do specific laws and regulations apply to cross-border transactions?
The Common Market for Eastern and Southern Africa (COMESA) Competition Commission (CCC) administers the COMESA Competition Regulations (the Regulations). The Regulations require notification to the CCC, at a fee, of all mergers and acquisition transactions that may have an impact within the COMESA region.
The Regulations apply to all economic activity whether conducted by public or private persons, within or having effect within COMESA and require companies from the 20 member states of COMESA (of which Zambia is a member) to notify the CCC of any proposed mergers and acquisition transactions that may have a regional impact.
According to the COMESA Merger Assessment Guidelines, an enterprise is only considered to operate in a member state if its annual turnover or value of assets in that member state exceeds US$5 million. Therefore, notification will only be required where:
- the target has annual turnover or value of assets exceeding US$5 million in at least one COMESA member state; and
- one of the merging parties (which could be the target) has an annual turnover or value of assets exceeding US$5 million in at least two COMESA member states.
However, the CCC is unlikely to exert jurisdiction where the market share of the merged entity is below 15 per cent (in horizontal mergers) or below 30 per cent (in non-horizontal mergers) and, in either case where that of the top three firms combined is less than 70 per cent.
Zambian law requires an international instrument to be ratified and domesticated by the Zambian parliament in order for it to have the force of law. The Regulations have not been domesticated and the Competition Act is yet to be amended to incorporate the Regulations, but it is understood that the process for domestication of the Regulations has commenced. Legally, the approved process under the Regulations exists in parallel to that under the Competition Act and does not have an overriding effect.
This entails that if a transaction is notifiable in Zambia, separate notifications must be filed to the CCPC and the CCC. This notwithstanding, the CCC and the CCPC have in place an administrative understanding whereby, dual notification will not be required where regulation by both entities is triggered. Therefore if a notification is made to the CCC alone, a letter is issued by the CCPC confirming that notification should not be made to the CCPC once the CCC is notified. It is worth noting that this arrangement is merely administrative and is not recognised under the law.Sector-specific rules
Are companies in specific industries subject to additional regulations and statutes?
Other industry-specific legislation, such as in the mining, banking, insurance, energy and telecommunications sectors, prescribes certain regulatory approvals that must be obtained prior to the consummation of a transaction. The legislation does not, however, specify the time frame within which such regulatory approval will be granted. An exception to this is the transfer of a licence issued under the ICT Act where ZICTA may approve an application within 30 days.Transaction agreements
Are transaction agreements typically concluded when publicly listed companies are acquired? What law typically governs the agreements?
A sale and purchase agreement is usually concluded where a party is acquiring a majority stake off the exchange. However, in the case where a publicly listed company is being acquired through a takeover offer, the principal document will be the offer document circulated to the shareholders and the circular to the shareholders issued by the target board. The contents of both documents and level of disclosure is prescribed by the Takeovers Rules.
Parties are at liberty to choose the governing law of their agreements, and there is no legal restriction pertaining to the choice of law by contracting parties. In practice, non-Zambian citizens tend to choose foreign law and the most common choice of law is English law and submission to the jurisdiction of English courts owing to the development and predictability of the English legal system.
Filings and disclosureFilings and fees
Which government or stock exchange filings are necessary in connection with a business combination or acquisition of a public company? Are there stamp taxes or other government fees in connection with completing these transactions?
The key fillings and fees are the authorisation fees payable to the SEC, the filing fees payable to the CCPC (or the COMESA Competition Commission where the transaction has a multi-jurisdiction dimension), and property transfer tax applicable on the transfer of shares in a private company or upon a transfer of land and value added tax where a business (or part of it) is not sold as a going concern.Information to be disclosed
What information needs to be made public in a business combination or an acquisition of a public company? Does this depend on what type of structure is used?
The Takeovers and Merger Rules require that an announcement be made to the public when a firm intention to make an offer for a merger or takeover is notified to the directors of the offeree company. Further, where there has been a substantial acquisition or disposal of shares carrying voting rights in a listed company (ie, an acquisition of 15 per cent or more of the voting rights of the company) or rights over such shares, a person must disclose such an acquisition or disposal and his or her total holding to the company not later than 9am on the dealing day following the date of the acquisition or disposal.
All persons concerned with takeovers and mergers are required to make full and prompt disclosure of all relevant information and take every precaution to avoid the creation or continuance of an uninformed market. Parties involved in offers must ensure that statements issued do not mislead shareholders or the stock market. The Takeovers and Merger Rules require that when a firm intention to make an offer is announced, the announcement must contain the following information:
- the terms of the offer;
- the identity of the ultimate offeror or the ultimate controlling shareholder;
- details of any existing holding of voting rights in the offeree company;
- all conditions (including normal conditions relating to acceptance, listing and increase of capital) to which the offer or the posting of it is subject; and
- details of any arrangement (whether by way of option, indemnity or otherwise) in relation to shares of the offeror or the offeree and that might be material to the offer.
What are the disclosure requirements for owners of large shareholdings in a public company? Are the requirements affected if the company is a party to a business combination?
In the case of quoted or listed companies, the Securities Act requires that disclosures be made to the company in respect of any acquisition of the voting rights of the company representing 15 per cent or more but less than 35 per cent of the voting rights. Where two or more parties act in agreement to acquire voting rights commensurate with the stipulated threshold, such an acquisition is treated as an aggregate in which case the disclosure obligation would apply. However, there is no requirement for the disclosure of the ultimate beneficiary of the shares.
Directors’ and shareholders’ duties and rightsDuties of directors and controlling shareholders
What duties do the directors or managers of a publicly traded company owe to the company’s shareholders, creditors and other stakeholders in connection with a business combination or sale? Do controlling shareholders have similar duties?
The directors of a company have a primary duty to act in good faith in the best interests of the company. In addition, the directors of a company must not put themselves in a position where their interests and duties conflict with those they owe to the company. Directors have a common-law duty to exercise their powers for a proper purpose. Most of the common-law duties of directors have been codified under the Companies Act and the BFSA. The Takeovers Rules, which apply to public companies, further impose an obligation on the directors who receive an offer to seek competent independent advice in the interests of their shareholders. Directors are obliged to have regard to the interests of the shareholders as a whole and not their own interests, or those derived from personal and family relationships. The directors’ rights of control must be exercised in good faith and the oppression of minority or non-controlling shareholders is unacceptable. Further, the Securities Act proscribes the disclosure of price-sensitive information until such information is publicly disclosed. The prohibition of insider dealing attracts criminal liability discharged through payment of a fine, imprisonment or both upon conviction.Approval and appraisal rights
What approval rights do shareholders have over business combinations or sales of a public company? Do shareholders have appraisal or similar rights in these transactions?
The Companies Act sets out certain transactions in respect of which shareholder approval must be sought. The following transactions (which may affect business combinations depending on how the transaction is structured) cannot be conducted without the approval of the shareholders by way of an ordinary resolution:
- the sale, lease or otherwise disposal of the whole or substantial part of the undertaking or of the assets of the company;
- the issuance of any new or unissued shares in the company;
- the creation or granting of any rights or options entitling the holders thereof to acquire shares of any class in the company; or
- the entry into a transaction that has or is likely to have the effect of the company acquiring rights or interests or incurring obligations or liabilities, including contingent liabilities, the value of which is the value of the company’s assets before the transaction.
In addition to the above transactions, LuSE Listing Requirements require the directors of public listed companies to obtain the prior approval of the shareholders before entering into a transaction where the consideration to market capitalisation ratio is at least 25 per cent or the transaction is with a related party.
With regard to appraisal rights, Zambian legislation does not specifically provide for them. However, this does not entail a lack of protection for the minority shareholders as the Companies Act does provide for the protection of minority shareholders from oppression where they suffer unfair prejudice.
Completing the transactionHostile transactions
What are the special considerations for unsolicited transactions for public companies?
There are no specific considerations for hostile takeovers or mergers. The Takeovers Rules require all offers to be put forward to the board of the offeree company (or its advisers) in the first instance and before an announcement is made the target board, or an independent committee thereof, is critical in the offer process relating to public companies. This is mainly because the offer must first be disclosed to and evaluated by the board (with the assistance of an independent financial adviser). The assessment of the offer by the board is often what the shareholders rely on to determine whether they should accept the offer or not.Break-up fees – frustration of additional bidders
Which types of break-up and reverse break-up fees are allowed? What are the limitations on a public company’s ability to protect deals from third-party bidders?
There are no laws that regulate the imposition of break fees in Zambia. This effectively means that the matter is subject to agreement between the parties.Government influence
Other than through relevant competition regulations, or in specific industries in which business combinations or acquisitions are regulated, may government agencies influence or restrict the completion of such transactions, including for reasons of national security?
The legal system in Zambia allows parties to enter into any type of agreement as long as the nature of that agreement is not contrary to the laws of Zambia or public policy principles and therefore the government’s influence is limited unless the government or another parastatal organisation is a party to the transaction. As long as these principles are upheld, mergers and acquisitions may be expected to be completed without influence or restrictions from government agencies.
The government may, however, still intervene in the merger through its power of eminent domain by exercising compulsory acquisition over any of the shares in the proposed merger. The Constitution of the Republic of Zambia (the Constitution) provides protection of any owner by limiting the powers of compulsory acquisition. The Constitution states that property of any description shall not be compulsorily taken possession of, and interest in or rights over property of any description shall not be compulsorily acquired, unless by or under the authority of an Act of Parliament which provides for payment of adequate compensation for the property or interest or right to be taken possession of or acquired. The Constitution as amended now expressly prohibits the government from compulsorily acquiring an ‘investment’ (which is not defined), except under customary international law or subject to article 16. Article 16 is found under Part III of the Constitution (containing the Bill of Rights), which has not yet been amended. In respect of major state assets, the Constitution requires such assets to be sold, transferred or otherwise disposed of only if the National Assembly, by a vote of at least two-thirds of the members of Parliament, approves such sale, transfer or disposition. A major state asset is defined to include a parastatal and equity held by the Zambian government.Conditional offers
What conditions to a tender offer, exchange offer, mergers, plans or schemes of arrangements or other form of business combination are allowed? In a cash transaction, may the financing be conditional? Can the commencement of a tender offer or exchange offer for a public company be subject to conditions?
Unless the consent of the SEC has been obtained, all offers (other than partial offers), whether voluntary or mandatory, are conditional upon the offeror having received acceptances in respect of shares which, together with shares acquired or agreed to be acquired before or during the offer, will result in the offeror and persons acting in concert with it holding more than 50 per cent of the voting rights of the offeree company.
The Securities (Takeover and Merger) Rules prohibit the imposition of subjective conditions that depend on the judgments of the offeror or whose fulfilment depends on the offeror. All offers are generally conditional upon the offeror having received acceptances that meet a specific threshold.
The Rules require that the offeror must satisfy the board of the target company that the offeror will be able to implement the offer in full. This does not necessarily have to be conditional.Financing
If a buyer needs to obtain financing for a transaction involving a public company, how is this dealt with in the transaction documents? What are the typical obligations of the seller to assist in the buyer’s financing?
This is normally a contractual issue between the parties as there is no legislation regarding how it should be treated. In most contracts, if the transaction is contingent on the buyer obtaining financing for the transaction in question, then completion will be conditional on the buyer obtaining such financing. The aspect of the buyer obtaining financing for the transaction is normally treated as a condition precedent to the transaction and the transaction documents will reflect this position.
A public company is prohibited from providing financial assistance to a person for purposes of purchasing the company’s shares. Further, the whitewash procedure is not available for public companies.
The obligations of the seller to assist in the buyer’s financing are matters of contract to be agreed between the parties. Typically, the seller’s involvement will be limited to providing a best endeavour undertaking to assist a potential financier in any due diligence process with respect to the financing.Minority squeeze-out
May minority stockholders of a public company be squeezed out? If so, what steps must be taken and what is the time frame for the process?
A majority shareholder may compulsorily acquire the shares of the minority shareholders by making an offer to all the shareholders on the same terms and upon the fulfilment of certain statutory conditions. The right to compulsorily acquire the shares of any dissenting shareholders is triggered if the offeror acquires at least 90 per cent of the shares of the target company within four months of making an offer to all the shareholders. Where all the statutory conditions have been satisfied, the offeror must, within two months, issue a notice to the dissenting shareholders that the offeror will compulsorily acquire the shares.
The dissenting shareholders have the right to challenge the compulsory acquisition as soon as the offer is made but before the expiration of three months following the satisfaction of the statutory conditions. If there are no objections to the compulsory acquisition pending before the court and there are dissenting shareholders who have not accepted the offer within a period of three months following the satisfaction of the statutory conditions, the offeror can proceed to compulsorily acquire the shares of the dissenting shareholders.Waiting or notification periods
Other than as set forth in the competition laws, what are the relevant waiting or notification periods for completing business combinations or acquisitions involving public companies?
The Securities (Takeover and Merger) Rules set out detailed notification periods and time frames to be followed in takeovers and mergers that relate to public companies. The offer document must be posted within 21 days of announcing the terms of the offer and such offer must be kept open for 21 days. Where a conditional offer becomes unconditional, however, it must remain open for no less than 14 days thereafter.
Under the COMESA Regulations, parties to a merger must notify the CCC ‘as soon as it is practicable but in no event later than 30 days of the parties’ decision to merge’.
Other considerationsTax issues
What are the basic tax issues involved in business combinations or acquisitions involving public companies?
If the business combination involves the sale of shares, transfer of land and mining rights, property transfer tax is payable by the shareholder selling its property in the target company. The rate of the tax is 10 per cent in respect to mining rights and 5 per cent in respect of land and shares of the realised value of the property. However, property transfer tax is not payable in respect of shares of a company listed on the Lusaka Stock Exchange.
This means that the Zambia Revenue Authority has the legal mandate and may be called upon to determine the value of the shares, land or mining rights for the purposes of calculating the property transfer tax payable.
If the business combination is structured as an asset sale between the companies, value added tax may be charged on such transfers, unless the assets are being transferred as a going concern in which case, the Commissioner-General of the ZRA must be notified within 30 days of the transfer taking effect.
A business combination that involves the transfer of shares through the declaration of a dividend in specie will attract withholding tax at the rate of 15 per cent. Zambia at present has no capital gains tax regime in place.Labour and employee benefits
What is the basic regulatory framework governing labour and employee benefits in a business combination or acquisition involving a public company?
The basic regulatory framework will depend upon, first, whether the respective employment contracts are in writing or are oral; and secondly, whether there is a collective agreement in place between the employer and employees. Generally, the applicable statutes are the Employment Act, Chapter 268 of the Laws of Zambia (as amended), the Industrial and Labour Relations Act, Chapter 269, and the Minimum Wages and Conditions of Employment Act, Chapter 276.
Where the business combination only involves a share transfer, the employer technically remains the same and no transfer or redundancy provisions under the law will be triggered. On the other hand, where the business itself is transferred, there is a risk of triggering the redundancy provisions under the Employment Act if the employment contracts are oral, and any appropriate redundancy term (if any) if the contracts are in writing or a collective agreement is in place.
Where the employees are under oral contracts, the company will need to notify the labour commissioner of any intended redundancy at least two months before the redundancy exercise is given effect. Conversely, where the employees are employed under written contracts or collective agreements, notification to the labour commissioner will only be necessary if expressly required by the terms of employment. Notwithstanding that the contract of employment is oral, in writing or a collective agreement, the affected employees must be notified at least one month before any redundancies take place.
It is common for agreements of business combinations to include the transfer of employees from one party to the agreement to the other. In such cases, if there is no agreement failure with the concerned employees on whether accrued benefits (including retirement benefits) will also be transferred to the new employer entails that the benefits must be paid by the transferring employer.
Additionally, transfer of written contracts requires the labour commissioner to endorse the terms of the transfer on the contracts prior to the transfer being given effect. The labour commissioner is also required to ascertain that the concerned employees have given their free and informed consent to the transfer. Transfer of employees using oral contracts of employment, on the other hand, does not require involvement of the labour commissioner. Notwithstanding the fact that the contract is oral, in writing or a collective agreement, the affected employees must consent to the transfer before it is given effect.Restructuring, bankruptcy or receivership
What are the special considerations for business combinations or acquisitions involving a target company that is in bankruptcy or receivership or engaged in a similar restructuring?
There are no specific issues to be taken into consideration where the target company is in bankruptcy or receivership. However, there are certain issues that must be taken into account as a matter of business prudence. In the case of a company under receivership, regard must be had to whether the debt of the target company will have to be adopted. Further, when dealing with a company undergoing winding-up proceedings, regard must be had to the type of winding-up, that is, whether it is a voluntary or compulsory winding-up.
In the case of a compulsory winding-up, it is important to ascertain at whose instance the winding-up was commenced. A winding-up commenced by a creditor of the company might entail the need to engage such creditor for purposes of stalling the winding-up process. It must also be noted that once winding-up has been commenced, the shares of the target company cannot be transferred or disposed of unless with the sanction of a court order.
The Insolvency Act, which recently became operational, provides for business rescue proceedings that refer to the process of facilitating the rehabilitation of a company that is financially distressed by providing for:
- the temporary supervision of the company and management of its affairs, business and property;
- a temporary moratorium on the rights of claimants against the company or in respect of property in its possession; or
- the development and implementation, if approved in accordance with the Insolvency Act, of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities and equity in a manner that maximises the likelihood of the company continuing in existence on a solvent basis or, if it is not possible for the company to so continue in existence, results in a better return for the company’s creditors or shareholders than would result if the company were to be liquidated.
What are the anti-corruption, anti-bribery and economic sanctions considerations in connection with business combinations with, or acquisitions of, a public company?
The Anti Corruption Act, No. 3 of 2012, makes it an offence for any person who, by himself, or by or in conjunction with any other person, corruptly gives solicits, accepts or obtains, or agrees to accept or attempts to receive or obtain, from any person for oneself or for any other person, any gratification as an inducement or reward for doing or forbearing to do, or for having done or forborne to do, anything in relation to any matter or transaction actual or proposed, with which any private body is or may be concerned, shall be guilty of an offence.
The Act provides for various penalties for different corruption offences. A first offender under the Act may be liable upon conviction to imprisonment for a term not exceeding 14 years and, upon a second or subsequent conviction, to imprisonment for a term of no less than five years but not exceeding 14 years. In addition to any other penalty imposed under the Act, an offender will be required to forfeit to the state any pecuniary resource, property, advantage, profit or gratification received in the commission of the offence. It is worth noting that in addition to these penalties, a court may require the convicted person to pay to the rightful owner the amount or value as determined by it of any gratification received by the offender, such order to be deemed to form part of the sentence. If the rightful owner cannot be traced or ascertained, such monies are to be paid to the state.
Update and trendsKey Developments
What are the current trends in public mergers and acquisitions in your jurisdiction? What can we expect in the near future? Are there current proposals to change the regulatory or statutory framework governing M&A or the financial sector in a way that could affect business combinations with, or acquisitions of, a public company?No updates at this time.