What are the Takeover Regulations?
Since the Companies Act No. 71 of 2008 (as amended) (“the Companies Act“) came into effect on 1 May 2011, there has been a paradigm shift in the regulation of South African mergers and acquisitions (also known as “fundamental transactions”). It is understood that the changes introduced into the Companies Act were intended to afford greater protection to minority shareholders in companies where certain transactions are concluded by such companies. However, these new provisions have also brought with them some trepidation as for many small or medium-sized private companies, the administrative duties associated with the regulation of those transactions are fairly onerous and costly.
If a company intends concluding any transaction contemplated in Chapter 5 of the Companies Act, it is important to ascertain whether the Takeover Regulations apply to that transaction. If so, various disclosures, approvals and reporting requirements will then need to be met or sought from the Takeover Regulation Panel (“TRP“). The TRP is the regulatory body that was established under the Companies Act to regulate certain transactions.
Non-compliance with the Takeover Regulations
If there is non-compliance with these laws by a company, a complaint may be filed by an interested party with the TRP, who may investigate such complaint and, if deemed necessary, the TRP may issue a compliance notice to the infringing company. If this compliance notice is not complied with, a court may impose an administrative fine on the infringing company that may not exceed the greater of 10% of its turnover for the period of non-compliance, or R1 million.
It is therefore vital to consider whether these laws are applicable in order to comply and avoid any penalties for infringements. However, if the transaction has already taken place and the non-compliance has already happened, it is possible to apply for exemptions or condonations for late filing.
Who is subject to the Takeover Regulations?
The Takeover Regulations apply to a regulated company with respect to an affected transaction or an offer, but there are some exceptions.
In considering the applicability, it is first necessary to ascertain whether the company is a regulated company. According to the Companies Act (sections 117(1)(i), 118(1) and (2) and Takeover Regulation 91), this is either:
- a public company; or
- a state-owned company (with some exemptions, see section 9); or
- a private company:
- that expressly elects to be regarded as a regulated company in its memorandum of incorporation, or
- if more than 10% of its issued securities have been transferred within the previous 24 months (other than by transfer between related or inter related persons).
It is important to note that when using a shelf company and transferring the shares from the incorporator to a new shareholder/s, the initial transfer will not be subject to the Takeover Regulations, however the shelf company will be categorised as a regulated company for the following 24 months.
If a transaction involves a regulated company, the next step is to consider whether the transaction in question is an affected transaction as defined in section 117(1)(c) as follows:
- a transaction (or series of transactions) amounting to the disposal of all or the greater part of the assets or undertaking of a regulated company (sections 112 and 118(3));
- an amalgamation or merger involving at least one regulated company (sections 113 and 118(3));
- a scheme of arrangement between a regulated company and its shareholders (sections 114 and 118(3);
- the acquisition of, or announced intention to acquire, a beneficial interest in any voting securities of a regulated company (section 122(1);
- the announced intention to acquire a beneficial interest in the remaining voting securities of a regulated company not already held by a person or persons acting together;
- a mandatory offer (section 123); or
- a compulsory acquisition (section 124).
According to section 117(1)(f), an offer means a proposal of any sort, including a partial offer, which, if accepted, will result in an affected transaction (except for a transaction which is exempt in terms of clause 118(3)).
However, the Takeover Regulations do not apply if:
- an approved business rescue plan requires or contemplates the fundamental transaction;
- the transfer of more than 10% of the issued securities is due to a company buy-back; or
- the transfer is between related or inter-related persons (sections 118(3) and 121(b)(ii) and Takeover Regulations 91 (2)(b) and 83).
Exemption from the application of the Takeover Regulations
It is possible to apply to the TRP for an exemption and such application must include:
- an explanation of the transactions involved;
- a justification as to why the TRP has jurisdiction;
- the argument as to why the applicant should be entitled to exemption (section 119(6); and
- consent of all shareholders in the form of waivers of their rights pursuant to the takeover regulations.
The TRP is entitled to grant an exemption if:
- there is no reasonable potential of the affected transaction prejudicing the interests of any existing securities holder of a regulated company;
- the cost of compliance is disproportionate to the relative value of the affected transaction; or
- doing so is otherwise reasonable and justifiable in the circumstances.
The TRP is not supposed to or required to consider the commercial advantages or disadvantages of any transaction or proposed transaction, but rather to ensure the integrity of the marketplace and fairness to the holders of the securities of regulated companies. In addition, the TRP must prevent actions by a regulated company designed to impede, frustrate or defeat an offer or the making of a fair and informed decision by the holders of that company’s securities.
This area of law is not always straightforward and easy to navigate, but the TRP is an approachable organisation if help is needed in understanding the applicability of the Takeover Regulations to certain transactions. Our commercial teams have been involved in many transactions involving the Takeover Regulations and the TRP and are available to assist with any queries.