25 August 2021 by and Corporate & Commercial Alert

Private companies as regulated companies: The “forget-me-not” hurdle that may trip you up

Even before a client has fully explained their brief to an M&A lawyer, the cogs are already grinding away as we consider (amongst other things) the transaction structure and the possible conditions that the transaction needs to be subject to.

The most common conditions usually relate to the corporate action required and the regulatory approvals that may need to be obtained. In any event, conditions to a transaction can largely be grouped into (i) conditions negotiated between clients or mutually agreed conditions (e.g. sign-off on the due diligence); and (ii) conditions required by law (e.g. competition approval).

Lurking behind the apparent lies the often forgotten and far-from-straightforward concept of private companies being deemed regulated companies – as well as the consequences thereof. This concept is dealt with in section 118 of the Companies Act 71 of 2008 (Companies Act) as read with section 91 of the Companies Regulations 2011, promulgated in terms of section 223 of the Companies Act (Companies Regulations).

Qualifying criteria

In terms of section 118(1)(c), a private company will be deemed to be a regulated company if it meets either one of two criteria.

Firstly, the percentage of the issued securities of a company that have been transferred, other than by transfer between or among related or inter-related persons, within a period of 24 months, immediately before the date of a particular affected transaction or offer that exceeds the prescribed percentage of 10% of the issued securities of that company (in terms of Regulation 91(1)) (Deeming Provisions).

Secondly, whether the Memorandum of Incorporation of the company expressly provides that the company and its securities are required to comply with sections 117 to 127 and the takeover regulations contained in Chapter 5 of the Companies Regulations (Takeover Regulations).

It is worth noting that the analysis set out above may fall away as the Companies Amendment Bill, 2018 (which is not binding law at this stage) proposes that section 118(1)(c)(i) is replaced by the test contained in section 84(1)(c) (relating to whether or not a private company is required by the Companies Act or Companies Regulations to have its annual financial statements audited every year).

Calculating the prescribed percentage

As a word of caution, in performing an analysis to determine whether a private company is a regulated company in terms of the Deeming Provisions, particular attention should be paid to Regulation 91(2)(a). The legislature appears to have employed terms relating to how the prescribed percentage of 10% is calculated that are incongruent with the apparent intention of such provisions – a purposive interpretation may need to be employed.

Additionally, one should also exercise particular caution when a transaction comprises a series of many indivisible, or individual, steps and transfers, where if each one is not properly accounted for and marked against the share transfer history of the company as evidenced in its share register, it could inadvertently cause a particular step to confer “regulated company” status and require compliance (outlined below) where the need for such compliance could have been avoided.

From a transactional perspective, in addition to the transaction-specific requirements that a regulated company is subject to, the primary over-arching provisions that apply to a regulated company are found in:

  • section 119, which effectively mandates the panel to regulate any affected transaction or offer in accordance with Parts B and C of Chapter 5 of the Companies Act as well as the Takeover Regulations (without regard to the commercial advantages or disadvantages of any transaction or proposed transaction); and
  • section 121 which requires an offeror to:
  • comply with all reporting or approval requirements set out in in Part C of Chapter 5 of the Companies Act (unless exempted by the panel); and
  • not give effect to an affected transaction unless the panel has either issued a compliance certificate with respect to such transaction or granted an exemption for such transaction.

Practically, in order to avoid unnecessary costs, complications and delays, parties usually apply for an exemption in terms of section 121(1)(b) read with section 119(6). This exemption application is made by writing to the panel and sets out the facts of the transaction and the grounds on which such exemption should be granted (enumerated in section 119(6)). If exemption is unlikely (considering section 119(6)), compliance with the relevant provisions must take place and a compliance certificate sought from the panel.

As touched on above, it is this granting of an exemption or compliance certificate (as the case may be) that would be a condition to which the affected transaction would be subject. A failure to include this suspensive condition may result in a scenario where an affected transaction would become unconditional and effective without first complying with section 121, leading to a possible contravention of the Companies Act with its concomitant penalties and sanctions.

Accordingly, given the ramifications of non-compliance, section 118 should be front of mind when considering the suspensive conditions to a transaction. A proper analysis in terms of the Deeming Provisions should be undertaken in the context of the transaction to avoid any adverse unintended consequences.

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