Structure and process, legal regulation and consentsStructure
How are acquisitions and disposals of privately owned companies, businesses or assets structured in your jurisdiction? What might a typical transaction process involve and how long does it usually take?
In South Africa, acquisitions and disposals of privately owned companies are more often structured as share sale transactions (unless the buyer wants to select which assets it acquires and which liabilities it assumes).
Acquisitions and disposals of privately owned companies have also historically been structured as an issue of shares in the target company coupled with a share repurchase whereby the target company issues new shares to the ‘buyer’ and repurchases shares held by the ‘seller’ (ie, the existing shareholder or shareholders). However, given that this transaction structure is the subject of increased and ongoing scrutiny by the South African Revenue Service, it has become less popular.
Another way to structure an acquisition or disposal is by way of a statutory merger or amalgamation pursuant to the Companies Act, 2008 (the Companies Act), which allows for the merger of one entity into another or the amalgamation of two entities into a new entity. Implementing an acquisition of a company by way of a statutory merger or amalgamation will result in the combination of all of the assets and liabilities of the merging entities into a single company. The parties are not at liberty to select which assets and liabilities form part of the resultant merged entity.
Where a buyer would like to avoid acquiring a target company in its entirety, with all of its disclosed and undisclosed liabilities, the buyer may opt for an acquisition of the business or assets of the target company. The parties will typically enter into a sale of assets or sale of business agreement in terms of which the buyer agrees to acquire the assets of the target company it wishes to acquire and assume the liabilities of the target company that it wishes to assume, in each case on the terms and subject to the conditions, as set out in the sale of assets or business agreement. This transaction structure is more complex than a share sale transaction by virtue of the fact that the acquisition agreement will have to deal with each type of asset that is being acquired and each type of liability that is being assumed by the buyer. The parties would also need to take into account relevant labour law provisions. On the other hand, it offers the advantage of allowing the buyer to select the assets and liabilities that will be transferred, instead of acquiring the entire company with all of its assets and liabilities, as would be the case in a share sale transaction or a statutory merger or amalgamation.
The transaction process and the length of time will depend on a number of factors, including:
- which of the above methods is used to effect the transaction;
- the number of parties involved;
- the extent to which the transaction is negotiated; and
- whether any governmental approvals are required for the transaction (eg, competition or antitrust approvals, exchange control approvals or industry-specific approvals and depending on the nature of the transaction (eg, whether there is a change of control)).
Which laws regulate private acquisitions and disposals in your jurisdiction? Must the acquisition of shares in a company, a business or assets be governed by local law?
The Companies Act (read with the regulations thereto) is the key piece of legislation regulating acquisitions and disposals of South African companies and their assets or businesses. There are a number of other statutes and regulations that may be relevant to private M&A, including:
- the Exchange Control Regulations, which are enforced by the Financial Surveillance Department of the South African Reserve Bank;
- the Labour Relations Act, 1995 (the Labour Relations Act), which provides, among other things, that the buyer is required to employ the transferring employees on terms and conditions that are on the whole no less favourable than what they enjoyed with the seller;
- the Competition Act, 1998 (the Competition Act), which requires M&A transactions of a certain size to be approved by the relevant competition authorities prior to lawful implementation; and
- certain industry-specific laws and regulations, for example, in the banking, mining and communications sectors.
Transaction agreements are typically governed by South African law. However, subject to compliance with the above laws and regulations, parties are generally free to choose the laws of any other jurisdiction as the governing law of the transaction agreements.Legal title
What legal title to shares in a company, a business or assets does a buyer acquire? Is this legal title prescribed by law or can the level of assurance be negotiated by a buyer? Does legal title to shares in a company, a business or assets transfer automatically by operation of law? Is there a difference between legal and beneficial title?
Under South African law, there is a distinction made between the beneficial owners of shares and the registered holders of shares (otherwise known as nominees). A registered holder of shares is the person whose name appears on the company’s securities register, while a beneficial owner is the person entitled to exercise the rights attached to a share (the right to receive dividends, or the right to exercise, or cause to be exercised, the voting rights in relation to the share).
The Companies Act defines a ‘shareholder’ as the person whose name appears on the company’s securities register (ie, the registered holder of the shares) and so the general rule is that the right to vote at shareholders meetings and the right to receive dividends resides with the registered holder and not the beneficial owner. This is subject to two caveats: first, the registered holder is required to exercise those rights in accordance with the instructions of the beneficial owner; and second, the beneficial owner may vote at a shareholders meeting if its beneficial interest includes the right to vote and the beneficial owner’s name appears as the holder of a beneficial interest on the company’s register of disclosures, which is a separate register to the securities register.
While in a sale of shares transaction, the buyer acquires the beneficial interest in those shares as a matter of law, the buyer must additionally ensure that it is also registered in the company’s register at the closing of the transaction so that it becomes both beneficial owner and registered holder of the shares.
Importantly, a sale of shares is a distinct juristic act from the transfer of beneficial ownership in those shares, which means that notwithstanding the existence of a valid sale of shares agreement, beneficial ownership will transfer only if the seller is the owner of the shares. It is therefore common for the seller to warrant and represent that it has valid title to the shares that are being sold.Multiple sellers
Specifically in relation to the acquisition or disposal of shares in a company, where there are multiple sellers, must everyone agree to sell for the buyer to acquire all shares? If not, how can minority sellers that refuse to sell be squeezed out or dragged along by a buyer?
The general rule in the case of a private company is that all shareholders must agree to sell their shares for a buyer to acquire all of the company’s shares. However, the Companies Act contains a statutory squeeze-out procedure. The statutory squeeze-out is available only if the target company (including a private company) is a ‘regulated company’ as contemplated in the Companies Act. A ‘regulated company’ is a company in which more than 10 per cent of its issued shares have been transferred in the preceding 24 months; or whose memorandum of incorporation (being its constitutional document) expressly provides that the takeover regulations of the Companies Act apply to it.
Where a private company is a ‘regulated company’, the buyer may consider a minority ‘squeeze-out’ in terms of section 124 of the Companies Act. Under section 124 of the Companies Act, if an offer for the target company has been accepted by 90 per cent of the target company’s shareholders (excluding the buyer) within four months, the buyer may, within two months, compulsorily purchase the remaining 10 per cent of the shares from the minority shareholder or shareholders who did not accept the offer.
It is not unusual for a private company’s memorandum of incorporation or shareholders’ agreement to contain a ‘drag-along’ provision pursuant to which minority shareholders are, subject to certain conditions, forced to sell their shares along with a majority shareholder. This is not a statutory provision, but is nevertheless a regular provision in private company memoranda of incorporation and shareholders’ agreements.
If the minority shareholders do not agree to sell and the company’s memorandum of incorporation or shareholders’ agreement does not contain a ‘drag-along’ provision, the transaction may be structured as a scheme of arrangement. If approved by disinterested shareholders representing at least 75 per cent of the voting rights attached to the company’s shares exercised on the transaction resolution, the scheme will be binding on all of the shareholders, including the minority shareholders. Schemes are, however, more often used in public M&A transactions and are rarely used in private M&A transactions.Exclusion of assets or liabilities
Specifically in relation to the acquisition or disposal of a business, are there any assets or liabilities that cannot be excluded from the transaction by agreement between the parties? Are there any consents commonly required to be obtained or notifications to be made in order to effect the transfer of assets or liabilities in a business transfer?
Parties to a sale of business or sale of assets are, subject to certain caveats, free to choose which assets or liabilities, or both, will be transferred to the buyer as part of the transaction.
In terms of section 197 of the Labour Relations Act, where a business is transferred as a going concern, the employees of the target company are automatically, by operation of law, transferred to the acquiring entity on the same terms and conditions of employment, and the acquiring entity is automatically substituted as their new employer. The Labour Relations Act allows for parties to contract out of this position, provided that an agreement to that effect is entered into between the buyer, the seller and the affected employees (or their representatives or trade unions). Agreements between the employer-parties only are therefore not sufficient. The affected employees must give their written consent.
In the context of a share deal, there are no consultation obligations imposed by law.
South African law also contains certain default provisions with respect to liability for environmental matters (eg, contamination and pollution) that need to be considered.Consents
Are there any legal, regulatory or governmental restrictions on the transfer of shares in a company, a business or assets in your jurisdiction? Do transactions in particular industries require consent from specific regulators or a governmental body? Are transactions commonly subject to any public or national interest considerations?
As a general rule, there are no restrictions on foreign investments in South Africa. There are also no restrictions on the transfer of shares in a company or on the transfer of a company’s business or assets. However, certain specific industries (including mining, banking, insurance and broadcasting) have specific statutory or policy restrictions on the percentage of shareholding in a South African company. In addition, South Africa has exchange control regulations that require any outflow of capital or any inflow of loan funds into South Africa to be preapproved by the South African Reserve Bank. Accordingly, a South African resident cannot transfer any shares to a South African non-resident (and vice versa) without South African Reserve Bank approval, nor can a South African non-resident advance a loan into South Africa without South African Reserve Bank approval. Approval is usually given, provided that the South African Reserve Bank is satisfied that fair consideration for the shares has been received in South Africa or that the loan is on an arm’s-length basis (based on certain policy thresholds).
If a proposed transaction, irrespective of its form, constitutes a ‘merger’ under the Competition Act and meets certain prescribed monetary thresholds, the proposed transaction must be notified to and approved by the competition authorities. The competition authorities consider both public interest and competition factors, which are afforded equal weighting in terms of recent amendments to the Competition Act (see question 36). The ‘public interest’ factors that must be assessed are the effects the proposed transaction may have on:
- a particular South African industry or region;
- the ability of small and medium businesses or firms controlled or owned by historically disadvantaged individuals to become competitive - effectively enter into, participate in and expand within the market;
- the ability of national industries to compete in international markets; and
- the promotion of a greater spread of ownership, in particular to increase the levels of ownership by historically disadvantaged persons and workers in firms in the market.
Moreover, the recent amendments to the Competition Act introduce ‘National Security’ provisions (which are not yet in force), which provide for the transaction to be reviewed by an executive body to be established by the President, referred to as the ‘Committee’, in mergers involving a ‘foreign acquiring firm’. A transaction constituting a notifiable transaction in terms of the Competition Act, that involves a foreign acquiring firm and that falls within a list of national security interests must be notified to the Committee at the same time that the transaction is notified to the Commission. The Committee is required to decide whether the transaction may have an adverse effect on the national security interests of the country. There are, as at the date of writing, no further indications as to the list of national security interests, or the form or process to be followed for the submission of a notice in terms of this provision.
Notwithstanding that a proposed transaction may not meet the monetary thresholds for a mandatory notification to the competition authorities (‘small mergers’), the Competition Act empowers the Competition Commission to request (within six months of implementation of the transaction) that the parties formally notify it of the transaction.
Are any other third-party consents commonly required?
There are no general third-party consents prescribed by law in respect of a transfer of shares. However, as stated in question 6, certain specific industries have statutory restrictions that may require the consent of a regulator or government authority for a transfer of shares.
It is not uncommon for private company memoranda of incorporation or shareholders’ agreements to contain some sort of pre-emptive right or other provision requiring a selling shareholder to obtain the consent of other shareholders in the company before transferring its shares to a third party.
It is also not uncommon for agreements with third parties to require consent for a change of control in respect of a target company. Accordingly, the parties may require the prior consent of certain key lenders, lessors, suppliers and customers if the proposed transaction triggers such a change of control consent requirement.
In the context of a sale of a business or assets, while assets can generally be freely transferred to a buyer without the need for any third-party consents, liabilities can only be transferred with the prior consent of the person to whom such liability is owed. Accordingly, the consent of third-party counterparties will be required to assign a contract in its entirety. In addition, certain agreements might explicitly require consent before any rights or obligations under an agreement may be transferred to any other party.Regulatory filings
Must regulatory filings be made or registration (or other official) fees paid to acquire shares in a company, a business or assets in your jurisdiction?
Depending on the nature of the transaction, approvals may be required from one or more of the following regulatory bodies:
- the Competition Commission in respect of small and intermediate mergers, or the Competition Commission and the Competition Tribunal in respect of large mergers (a statutory filing fee is payable in respect of both intermediate and large mergers);
- the South African Takeover Regulation Panel in respect of transactions involving a ‘regulated company’ (see question 4) (a fee will be payable);
- the South African Reserve Bank, where the transaction involves a South African non-resident party and requires exchange control approval (no fee will be payable), and the National Treasury (no fee will be payable) if the transaction is not within an established exchange control policy; and
- the relevant sector-specific regulator, if applicable (a fee may be payable).
Transfer taxes, in the form of securities transfer tax (STT), are payable in respect of a disposal of shares. For shares in an unlisted South African company, STT is payable by the target company at a rate of 0.25 per cent of either the sale consideration or the market value of the shares (if the sale consideration given is less than the market value of the shares) but may be recovered by the target company from the buyer (see question 31). Certain exemptions from STT may also be available.