However, one of the more welcomed amendments to the Act introduced by the Bill is the reform of the circumstances under which a private company will be regarded as being a regulated company in the context of an affected transaction under section 118(1)(c)(i) of the Act. As section 118(1)(c)(i) of the Act currently stands, a private company will be regarded as being a regulated company if 10% or more of its issued shares have been transferred, other than by transfer between or among related or inter-related persons, within a period of 24 months immediately prior to the date of the proposed transaction. The current section 118(1)(c)(i) definition of a regulated private company has proven to be impractical and at times nonsensical as it may result in small, closely held private companies being regarded as regulated companies solely on a benign transfer of their shares between unrelated persons in the 24 months preceding the proposed affected transaction. Conversely, other high-turnover private companies with a large number of shareholders may avoid falling into the definition of a regulated company and the resultant application of takeover laws due to there being no transfer of their shares.
The amendment to section 118(1)(c)(i) of the Act that the Bill seeks to introduce is a removal of the current “10% or more share transfer in the preceding 24 months” test and a move back to a position similar to the previous takeover regime in the Companies Act 61 of 1973 and the old Securities Regulation Panel Code (SRP Code). The Bill proposes that a private company will be a regulated company if that private company:
1) has 10 or more shareholders with direct or indirect shareholding in the company; and
2) the company meets or exceeds the financial threshold of annual turnover or asset value which shall be determined by the Minister of Trade, Industry and Competition in consultation with the Takeover Regulations Panel (Panel).
Furthermore, the amendments seek to expressly grant the Panel the discretion to exempt any particular transaction affecting a private company from takeover laws in terms of section 119(6) of the Act.
These proposed amendments to section 118(1)(c)(i) of the Act differ from the amendments that were proposed by the Initial Bill. The Initial Bill’s proposed amendments also sought to bring about more certainty regarding the application of the Takeover Regulations and to do away with the impractical share transfer test. However, it proposed that a private company be “regulated” if its annual financial statements are required to be audited in accordance with section 84(1)(c) of the Act. The Panel submitted that the link to section 84(1)(c) of the Act should be removed on the basis that this section and Regulation 28 of the Companies Regulations, 2011 refer to factors that the Panel considered to be outside of its jurisdiction, such as employment and public interest scores.
The amendments to section 118(1)(c)(i) of the Act proposed by the Bill may assist in avoiding the arbitrary and unintended consequences of the section in its current form. It should be noted, however, that the proposed amendments to the section are not without issues. For example, there is no real clarity on the meaning of “indirect shareholding” in the context of the proposed amendment given that “indirect shareholding” is not a construct used in the Act. A shareholder, as defined in the Act, is someone who is registered in the share register as the holder of a share. As such, a more appropriate approach to dealing with the “indirect shareholding” position may, for instance, be replacing the “indirect shareholding” construct with the provisions of the revised section 56 of the Act (as proposed by the Bill) dealing with beneficial holders of shares. Furthermore, the Bill does not give guidance as to what the “financial threshold” will be, save that it will be determined by the Minister of Trade, Industry and Competition in consultation with the Panel. The old SRP Code prescribed a “financial threshold” of at least R5 million in subscribed share capital or loan capital. It is hoped that the financial threshold to be prescribed by the minister will be substantial (even higher than previously prescribed in the SRP Code) and a clear calculation basis as to whether a company meets such threshold will be provided as to avoid confusion and small private companies falling into the definition of a regulated company.
Interested persons are invited to submit their written comments to the Bill by 31 October 2021.