21 April 2021 by and Corporate & Commercial Alert

Package deals and pre-emptive rights in respect of shares

Pre-emptive rights in respect of shares in private companies are a notoriously thorny matter and often give rise to contentious issues and disputes between shareholders. One such issue is the legality and effect of combining or stapling (Stapling) assets to shares that are subject to a right of pre-emption. This is often referred to as a “Package Deal”.

Pre-emptive rights in respect of shares in a private company are either:

  • rights of pre-emption that restrict the transferability of issued shares (Share Transfer Pre-emptive Rights); or
  • rights of pre-emption that confer on a shareholder the right to be offered a percentage of any new shares that a company proposes to issue, before those shares are offered to persons that are not shareholders of that company.

We will only focus on Share Transfer Pre-emptive Rights for the purposes of this discussion.

Section 8(2)(b) of the Companies Act 71 of 2008 requires that the transferability of shares in a private company must be restricted but does not prescribe any substantive or procedural requirements. Companies often address this requirement by including Share Transfer Pre-emptive Rights in their memoranda of incorporation (MOI). 

The content of Share Transfer Pre-emptive Rights is contractual in nature and will be the product of negotiations between shareholders. The flexibility afforded to shareholders and companies allow for the incorporation of various commercial considerations in Share Transfer Pre-emptive Rights provisions. For example, the parties can provide for and regulate matters such as offer triggers, the offer process, valuation methodologies, pricing, the Stapling of assets, and so on.

As a point of departure, shareholders should not allow their co-shareholders wide and unfettered discretion to Staple unrelated assets to shares that are subject to a right of pre-emption (Affected Shares). There are, however, circumstances in which shareholders would be well advised to consider - if an offeror shareholder (Offeror) should be allowed (or forced) - to Staple assets to Affected Shares in a pre-emptive right offer process (Offer).

The first example relates to the Stapling of shareholder loans to Affected Shares. The shares and shareholder loans held by a person in and against a company are collectively referred to as equity. In the context of private companies, it is not unusual for shareholders to contribute a significant part their equity in the form of shareholder loans. Therefore, should an Offeror wish to exit its investment in a company, such Offeror would no doubt wish to dispose of its equity as a Package Deal.

The Stapling of shareholder loans to Affected Shares is generally not controversial, and one will often find that MOIs are drafted to prohibit a shareholder from selling shares in a company unless in one and the same transaction, that shareholder disposes of a proportionate part of its shareholder loans. It must, however, be cautioned that it is not uncommon for shareholder disputes to arise in instances where the MOI does not expressly allow for, or require, a shareholder to Staple shareholder loans to Affected Shares. The latter can be a material impediment to shareholders wanting a clean exit or to realise maximum value on an investment.

The second example relates to scenarios where a shareholder holds securities (such as shares, preference shares, debentures, etc.) and loans in and against the subsidiaries, the holding company and/or related persons of a company. There may be situations in which an Offeror may wish to get a clean break from a group of companies and to Staple its securities and loans in and against the group companies to Affected Shares. Similarly, a third-party purchaser may also wish to offer and/or proceed with a Package Deal to maximise its investment in a group.

Although example two is less common, there may be circumstances in which it may be advisable to afford shareholders limited discretion as to whether or not to Staple securities and loans held in and against group companies to Affected Shares.

The judgment by the Western Cape Division of the High Court in the matter Plattekloof RMS Boerdery (Pty) Ltd v Dahlia Investment Holdings (Pty) Ltd and Another (7836/2020) [2021] ZAWCHC is the most recent South African authority on the effect of Package Deals on the position of a holder of pre-emptive rights. The judgment provides valuable insights into the considerations that our courts may deem relevant in relation to disputes on the subject matter.

In the Plattekloof case, the court was confronted with a dispute in which the owner of a farm comprising eight registered portions wished to dispose of all eight portions as one indivisible transaction to a third-party purchaser. The applicant in the matter leased two of the eight portions from the owner, and in terms of a lease agreement between the parties, the applicant was granted a pre-emptive right in respect of the two leased portions. The primary question in this case was the determination of the applicant’s position in terms of the pre-emptive rights clause when the pre-emptive property became the subject of an offer to purchase or a contract of sale as an integral part of a larger package.

Without going into the facts and ratio decidendi of the Plattekloof case, we have highlighted a few key principles of general application, which may be of assistance in the context of Share Transfer Pre-emptive Rights: 

The effect of a Package Deal on the position of the holder of pre-emptive rights, and the remedies available to such person, will ultimately depend on the wording and construction of the particular pre-emptive right provisions.

A critical question is whether the pre-emptive right provisions impose negative or positive obligations on an Offeror in favour of the holder of the pre-emptive rights?

For example, the court indicated that a negative obligation on an Offeror may take the form of an obligation not to conclude an agreement of sale with a third-party offeror without first offering the pre-emptive property to the holder of the pre-emptive right on the same terms and conditions as the third-party offer. In such a case it is arguable that the holder of the pre-emptive right must consider the entire Package Deal and it may not be justifiable to carve out the pre-emption property from the Package Deal.

An example of a positive obligation would be an obligation on the Offeror to first offer the specific pre-emptive property to the holder of the pre-emptive rights on the terms that the Offeror proposed to dispose of it. In this scenario the holder of the pre-emptive rights will not be bound to consider the entire Package Deal.

The South African jurisprudence relating to the effect of Package Deals on the position of a holder of pre-emptive rights is limited and unlikely to be of meaningful assistance in a dispute with a nuanced factual matrix.

In summary, the decision whether to allow for the Stapling of assets to Affected Shares is a commercial matter that shareholders must decide on. In order to minimise the risk of disputes in respect of Package Deals, shareholders are advised to carefully provide for circumstances in which Package Deals are allowed and the manner in which Offers must be presented to holders of pre-emptive rights.

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