15 January 2020 by Corporate & Commercial Alert

Should regulated companies approach the TRP for share buy-backs of more than 5%?

There is often debate as to whether share repurchases of more than 5% by a regulated company fall within the jurisdiction of the Takeover Regulation Panel (TRP).

Briefly put, the TRP regulates “affected transactions” that involve regulated companies and must provide its approval before implementation of such transactions. Section 117(1)(c) of the Companies Act 71 of 2008 (Companies Act) lists seven “affected transactions” and one of the affected transactions is a scheme of arrangement between a regulated company and its shareholders as contemplated in section 114 (section 117(1)(c)(iii)). Section 115 sets out the procedural requirements applicable to fundamental transactions, including a section 114 scheme of arrangement.

In terms of section 48(8)(b) of the Companies Act, if a company repurchases more than 5% of a class of its shares in a single transaction or an integrated series of transactions, such repurchase is “subject to the requirements of sections 114 and 115”. Since a section 114 scheme of arrangement undertaken by a regulated company constitutes an “affected transaction” within the TRP’s jurisdiction and section 115 deals with the required approvals, the question that arises is whether, by subjecting a share buy back of more than 5% to the requirements of sections 114 and 115, a section 48(8)(b) buy-back by a regulated company must be treated as an “affected transaction” where the TRP is required to provide its prior approval under section 121 of the Companies Act. In other words, does section 48(8)(b) introduce an eighth “affected transaction” which falls within the TRP’s jurisdiction?

In our view, the correct interpretation is that a share buy-back in terms of section 48(8)(b) should not become a scheme of arrangement by virtue of the section imposing the requirements of sections 114 and 115 onto a company that repurchases more than 5% of its shares. It is submitted that a company repurchasing its shares by means of a scheme of arrangement as envisioned by section 114(1)(e) is fundamentally different from a share repurchase in terms of section 48(8)(b).

Under section 114 of the Companies Act, the board of the company can propose a scheme of arrangement between the company and its shareholders (or any of them) for the repurchase of their shareholding (or a specified portion). In this instance, if the requisite 75% approval is obtained and other statutory requirements have been complied with, the scheme of arrangement is binding on the shareholders who are parties to such arrangement by operation of law, irrespective of whether or not such shareholders voted in favour of the arrangement. Where the scheme of arrangement being proposed, for example, involves a compulsory repurchase of a specified percentage of all shareholders’ shareholding in the company at a stated repurchase price, all shareholders will, if the scheme becomes operative, have the relevant portions of their shareholdings expropriated.

Where a company proposed to repurchase more than 5% of any class of its shares by mutual agreement, shareholders are not bound by the terms of any arrangement to sell their shares, and receive a specified repurchase consideration, unless they agree to doing so – no majority vote legally binds the minority. A repurchase by agreement therefore does not have the same characteristics nor legal effect as a repurchase by way of a scheme of arrangement.

It is argued that a regulated company can choose to implement a share repurchase in terms of section 48(8)(b) or by means of a section 114 scheme of arrangement. If a regulated company uses a scheme of arrangement to give effect to a share repurchase, such acquisition will constitute an “affected transaction”, for which the TRP’s sign off must be obtained.

Where a company repurchases more than 5% of any class of its shares by agreement with one or more selling shareholders, our opinion is that the correct interpretation is that such repurchases do not amount to a scheme of arrangement, and the regulated company should only have to comply with the procedural requirements of sections 114 and 115. Past practices of the TRP have however shown that the TRP’s view is that section 48(8)(b) share buy backs do fall within the TRP’s jurisdiction and that the TRP does require regulated companies to comply with the Takeover Regulations, and obtain the TRP’s approval, prior to implementation of such repurchases.

From a legal perspective it is not clear whether or not the TRP has jurisdiction over share buy-backs of more than 5% undertaken by regulated companies. In fact, former Executive Director of the TRP, Madimetja A L Phakeng concedes to this legal uncertainty in respect of section 48(8)(b) in his dissertation of April 2019 where he states that –

“The Companies Act of 2008 however, is not specific whether or not such a repurchase ‘…now becomes an arrangement as contemplated in section 114.’ The legislature must make it clear that these transactions are not affected transactions. This is important particularly when one considers the numerous and cumbersome obligations relating to the concept of an affected transaction.”

Despite this legal uncertainty, regulated companies should be aware of the TRP’s past practices of regulating section 48(8)(b) share buy-backs. There is therefore no guarantee that a regulated company repurchasing more than 5% of its shares will be in the clear with the TRP if it only complies with the requirements of sections 114 and 115. There is a risk that the TRP requires section 48(8)(b) buy-backs to be approved or exempted by the TRP, even though the legal basis upon which the TRP has such jurisdiction is admittedly unclear.

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