Four tips to keep “control” under control

The concepts of “control” and “related persons” are among the most important and pervasive in the Companies Act, No 71 of 2008 (Companies Act), and their ambit may not be as clear-cut as it often seems. Briefly, entities are related to one another if one controls the other, or they have a common controller. Being related brings about the applicability of a number of important provisions of the Companies Act dealing with, for instance, financial assistance, the issuance of shares and the regulation of group companies. Here are a few factors to bear in mind when dealing with control and related parties.

17 Apr 2019 4 min read Corporate & Commercial Alert Article

1.    The enquiry does not end at majoritarian control

Section 2 of the Companies Act contains the definition of “control”. The definition set out in s2(2)(a)(ii), relates to companies and is based on the basic principle of a majority vote at either shareholder or board level.

However, the enquiry goes further and introduces a catch-all “material influence” aspect in s2(2)(d) which states that a juristic person has the ability to control another juristic person or its business if that person has the ability to materially influence the policy of the juristic person in a manner comparable to a person who, in ordinary commercial practice, would be able to exercise an element of control referred to in s2(2)(a) to s2(2)(c). Section 2(2)(d) thus takes “control” beyond the parameters of ordinary corporate law principles of voting control and indicates that is possible for a person to control a juristic person despite not having de jure control or the majority of voting rights in the company.

Whether a person has control under s2(2)(d) is factual and may well be decisively influenced by the specific terms of a company’s memorandum of incorporation or shareholders’ agreement.

2.    You have to aggregate shareholdings to determine it

In a scenario where, for instance, shareholders A, B and C each hold a third of the issued shares of company X, prima facie neither of those shareholders has majoritarian control in respect of company X. However, one needs to “go behind” the immediate shareholding structure and further assess the position of the shareholders as amongst themselves: are perhaps any of A, B or C related to each other – do they have a common controller or does one control the other? And if they are natural persons, bear in mind that relatedness turns on whether they are family members within certain degrees of consanguinity or affinity. If for instance A and B happen to be related to each other, then each of A and B is related to X, because A and B in aggerate control a majority of the shares in X. Thus if A or B is a company and it provides financial assistance to X, s45 of the Companies Act applies. Section 2(2)(a)(ii) of the Companies Act provides for the aggregation of shareholdings of related or interrelated juristic persons in order to determine control. Notably, this aggregation applies only to juristic persons that are companies, not for instance trusts or close corporations.

3.    A group of companies

Do not blur the concepts of “related companies” and “group companies”. Whilst these concepts overlap most of the time, the latter is essentially a subset of the former. Certain provisions of the Companies Act apply only to the narrower concept of company groups, whilst others apply to the wider concept of related companies. The definition of “group of companies” in terms of s1 of the Companies Act refers to a holding company and all of its subsidiaries. A subsidiary can by definition only be a company for Companies Act purposes, more specifically a South African incorporated company – thus a foreign subsidiary, or a controlled trust, are technically not “subsidiaries” but would still qualify as “related” juristic persons. Further, only majoritarian control suffices to establish a holding - subsidiary company relationship; the catch-all in s2(2)(d) does not apply. Examples of provisions that apply exclusively in respect of a “group of companies” are the definition of “distribution” (in essence a transfer of wealth to the shareholders of a company or of a group company) and the rules around the disclosure of directors’ and prescribed officers’ remuneration in the annual financial statements of certain companies in terms of s30(5) of the Companies Act.

4.    Different context = different meaning

The definition of “control” and “related party” have different meanings based on the context in which each is used in different regulatory regimes:

  • For the purposes of merger control, s12 of the Competition Act sets out the definition of “control” which is similar to that in the Companies Act. The Competition Appeal Court has, however, given the term a particularly wide meaning in order to give competition authorities the ability to examine a wide range of transactions that could affect market structures, thus there are arguably different policy considerations to be borne in mind when interpreting the term under the respective statutory regimes.

  • In the listed environment it will sometimes be important to determine whether an issuer is entering into a “related party transaction” as contemplated in the listings requirements of the relevant stock exchange. For example, whilst there is a degree of overlap, the JSE Listings Requirements’ ambit of related parties is substantially different to the Companies Act’s. The JSE Listings Requirements mainly look only “upwards” from the issuer’s perspective to assess which parties are in a position of control or significant influence in respect of the issuer, such as its material shareholders, directors and their respective associates. Thus, for example, subsidiaries of an issuer are not related parties for JSE purposes whereas they certainly would be for Companies Act purposes. On the other hand, an issuer’s co-subsidiary would be a related party of the issuer for both JSE purposes (as it is an associate of a material shareholder of the issuer) and Companies Act purposes (as the issuer and its co-subsidiary have a common controller).

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