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Private companies can be caught off guard by statutory requirements for corporate transactions

by Jos Floor on 26 August 2013


The parties to a corporate transaction do not always have the same level of legal expertise or representation, which can have the effect that unintended consequences can arise for one of the parties, such as such as an entrepreneur being forced to exit or an investor being forced to buy out the remaining shareholders. Accordingly, before negotiating a corporate transaction, even one in respect of a private company, it is imperative to consider the impact that various laws will have on the proposed transaction to ensure the deal can be completed without unintended consequences. This article briefly highlights some of these statutory requirements that private companies should consider before a corporate transaction.

Fundamental transactions

If your 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.  

Any shareholder who votes against such 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.

Regulated companies

Certain other transactions in respect of private companies can be subject to the same provisions that apply to public companies (such as listed entities and state owned enterprises).  This is the case where 10% of a private company’s shares have exchanged hands during the preceding 24 months.  In such a case the private company will, irrespective of its number of shareholders, be deemed to be a so called “regulated company”.  

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 in order to obtain full ownership of the company.  This is known as a “squeeze out”.  This offer, like the mandatory offer, has to take place in terms of the Takeover Regulations and in this instance the remaining shareholders can be forced to sell their shares.

It is therefore crucial that prospective buyers of shares in private companies enquire well in advance before they enter into the transaction how many shares were transferred during the preceding 24 months in order to determine if the private company is regarded as a regulated private company.  

Competition law

As far as the 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.

Exchange control

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 on the whole or that a party is locked up in a transaction for a lengthy period of time.

Conclusion

Failure to anticipate these issues and to draft agreements appropriately may lead to binding obligations that cannot be fulfilled, or, perhaps worse, agreements that are null and void.



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