Something is missing: Pricing and mandatory offers triggered through share repurchases

Section 123 of the Companies Act No 71 of 2008 (Companies Act) triggers the requirement to make a mandatory offer to purchase the remaining securities in a regulated company in specific circumstances. In terms of section 118(1) of the Companies Act read with regulation 91 of the Companies Regulations, 2011 (Regulations), a “regulated company” is any public company or state-owned company, as well as private companies where more than 10% of the securities in that company were transferred in the past 24 months amongst unrelated persons.

4 Dec 2019 3 min read Corporate & Commercial Alert Article

In terms of section 123(2) of the Companies Act, a circumstance under which the obligation to make a mandatory offer will be triggered is where a regulated company repurchases any of its voting securities as contemplated in section 48 of the Companies Act, and as a result of the repurchase, a shareholder who held less than 35% of the issued shares in the company prior to the repurchase ends up holding 35% or more of the issued shares in that company (for present purpose the “35% Party”). In these circumstances, the 35% Party will be required to offer to acquire any remaining shares of the same class from the shareholders of the company on terms determined in accordance with the Companies Act and the Regulations. This note addresses the price to be paid pursuant to a mandatory offer that is triggered through a repurchase.

The Regulations set out the price to be paid under a mandatory offer where the 35% Party, or any party acting in concert with the 35% Party, acquired shares in the regulated company within six months prior to the commencement of the offer period. In these circumstances, in terms of regulation 111(2) of the Regulations, the price to be offered per share must be identical to, or where appropriate, similar to, the highest price paid by the 35% Party (excluding commission, tax and duty) for the acquisition of such shares.

However, neither the Companies Act nor the Regulations prescribe the price to be paid under a mandatory offer in circumstances where the 35% Party has not acquired shares in the regulated company within six months prior to the commencement of the offer period. This scenario seems to be a lacuna and has created a level of uncertainty. It seems illogical and unfair, for instance, that the 35% Party ought to be bound by the price that the company paid to the selling shareholder under the repurchase, as that transaction does not concern the 35% Party and it was not a party thereto. In practice, although one could take the view that the 35% Party should make the mandatory offer at “fair value” as determined by an independent expert, we recommend that parties first look to the Takeover Regulation Panel for guidance on how a mandatory offer should be priced in these circumstances.

There is an argument to be made that where the repurchase of shares by a regulated company requires shareholder approval by way of a special resolution pursuant to section 48(8) of the Companies Act (for example where it involves the acquisition by the company of more than 5% of the issued shares of any particular class of the company’s shares), and the 35% Party (in its capacity as a shareholder) votes in favour of the special resolution, by approving the repurchase of shares the 35% Party is to be regarded as having acted “in concert” with the repurchasing company. As such, the provisions of regulation 111(2) of the Regulations could be applicable in determining the price of the resultant mandatory offer, regardless of whether the 35% Party itself acquired shares in the regulated company within six months prior to the commencement of the offer period or not. As pointed out above, regulation 111(2) of the Regulations takes into account not only acquisitions of shares in the past six months by the 35% Party but also by its concert parties. As the regulated company could, in this scenario, plausibly be considered a concert party, the consideration paid by the company per share pursuant to the repurchase transaction may well be applied in determining the price of the 35% Party’s subsequent mandatory offer – this could of course come as a very unpleasant surprise to the 35% Party if the price under the repurchase was high.

The draft Companies Amendment Bill was last published for comment over a year ago, and a new version of the bill is presumably in the pipeline. Whilst that draft did not address the mandatory offer pricing issue discussed herein, it is hoped that clarity will be provided in future versions.

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