1 June 2009

Fundamental transactions, takeovers and offers

Chapter 5 of the new Act contains provisions under the heading "Fundamental Transactions, Takeovers and Offers", which introduces a new dispensation for transactions that fundamentally alter a company. A high level summary of these transactions is as follows:

Disposal of all or the greater part of assets or undertaking

  • This type of transaction is dealt with in section 112 and is substantially the same as section 228 of the current Companies Act of 1973.
  • If a company wishes to dispose of all or the greater part of its assets or undertaking, the disposal has to be approved by a special resolution of its shareholders and the requirements of section 115 have to be met.
  • The notice to shareholders to consider the proposed disposal must include a written summary of the precise terms of the transaction and comply with section 164, which gives a dissenting shareholder appraisal rights that include the right to be paid the fair value of the shares by the company.

Amalgamation or merger of two or more profit companies

  • Section 113 is a completely new innovation and requires that two or more companies proposing to amalgamate or merge must enter into a written agreement setting out the terms and means of effecting the transaction, meeting fairly extensive prescribed disclosure requirements, as set out in section 113(2).
  • The matters to be disclosed include, for example, details of the proposed allocation of the assets and liabilities, subsequent management and the estimated cost of the proposed amalgamation or merger.
  • Section 113(3) provides that the transaction could include the cancellation or conversion of securities, which will make the use thereof quite flexible.
  • Section 113(4) requires that the board of each company must first consider if the proposed merger will meet the solvency and liquidity tests and if they reasonably believe so, the proposal has to be approved by special resolution as contemplated in section 115.

Schemes of arrangement

  • The procedures for schemes of arrangement have been substantially amended.
  • Section 114 is limited to a scheme between the company and holders of any class of securities and includes a reorganisation in several ways, for example a consolidation, division, expropriation, exchanging, re-acquisition (or any combination) of securities.
  • Section 114(2) requires that an independent duly qualified expert must be retained to prepare a report to the board of the proposed arrangement, containing comprehensive information as prescribed in section 114(3).

Required approval

  • Section 115(2) requires that any of the previously mentioned transactions in sections 112 to 114 must be approved by a special resolution at a meeting called for that purpose.
  • A company may (in terms of section 115(3)), however, not proceed to implement the resolution without the approval of the court, if:
    • the resolution was opposed by at least 15% of the voting rights that were exercised on that resolution, and any person who voted against it requires the company to seek court approval. In this instance the company has to make the application or treat the resolution as a nullity; or
    • the court, on application by any person who voted against the resolution, grants that person leave to apply to a court to review the transaction. The court will only grant leave if it is satisfied that the applicant is acting in good faith, appears prepared and able to sustain the proceedings and has alleged facts which would support the court to reach a decision.
  • The court may in terms of section 114(7) only set a resolution aside if there was a significant and material procedural irregularity, and if it was, for example, manifestly unfair to any class of security holders, or the vote was materially tainted by conflict of interest or if there was inadequate disclosure.

A holder of securities is further entitled to make use of the appraisal rights provisions contained in section 164, if the holder notified the company in advance of its intention to oppose a special resolution and was present at the meeting and voted against the resolution.

Any person may also in terms of section 115(9) apply to a court for an order to properly implement the amalgamation or merger.

The last step in the merger process is that of section 116, which requires a notice to be given to all known creditors. Any creditor may within 15 business days after delivery of such notice approach a court for review, if it will be materially prejudiced by the amalgamation or merger. The notice must contain specifically prescribed information and confirmations that there was compliance with required legislation and must be filed with the Commission.

The previously known Securities Regulation Panel becomes, in terms of section 196, a statutory body known as the Takeover Regulation Panel. The most important effect of this is that the Takeover Regulation Panel will in future regulate affected transactions by way of Takeover Regulations with statutory powers.

The most important changes to the current takeover provisions is the introduction of an amalgamation and merger mechanism (section 113) and the fact that court approval will only be required when there was a significant minority (at least 15%) opposed to the transaction, or if there was a procedural irregularity or a manifestly unfair result. These changes will substantially affect the takeover and merger mechanisms and will be discussed more fully in future newsletters.

Johan Coetzee
Director, Corporate and Commercial

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