This country-specific Q&A provides an overview to M&A laws and regulations that may occur in South Africa.
This Q&A is part of the global guide to Mergers & Acquisitions. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/mergers-acquisitions-3rd-edition/
What are the key rules/laws relevant to M&A and who are the key regulatory authorities?
The Companies Act No 71 of 2008 (Companies Act) has regulated all takeover and public M&A activity in South Africa since 1 May 2011. The Companies Act and the regulations thereto contain provisions regulating takeovers and mergers. These are collectively known as the Takeover Regulations and will apply to all public companies, but only certain private companies. Takeovers are regulated by the Takeover Regulation Panel (TRP) established under the Companies Act.
The Financial Markets Act No 19 of 2012 (FMA) is also a key statute and, among other things, contains the South African Insider Trading and Market Abuse Legislation. Alongside the FMA, the recently enacted Financial Sector Regulation Act No 9 of 2017 (FSRA) aims at restructuring the financial regulatory system in South Africa whilst increasing and reinforcing stability in the financial sector. This statute should be considered when implementing a M&A transaction in the financial services sector. The the Prudential Authority and Financial Sector Conduct Authority (along with the JSE (as defined below) where applicable) are the regulatory authorities designated to enforce the aforementioned legislation.
The Listing Requirements of the Johannesburg stock exchange, operated by the JSE Limited (JSE), apply if:
1.1. The bidder’s or target’s shares are listed on the JSE. Under the Listing Requirements, the bidder’s shareholders must approve an acquisition if the offer consideration (and/ or dilutionary effect) is larger than 25% of the market capitalisation of the bidder.
1.2. Any new shares being offered as part of the bid consideration are to be listed on the JSE.
Competition law (anti-trust law) in South Africa is somewhat unique as, unlike in other jurisdictions, the Competition Act No 89 of 1998 (Competition Act) requires, in addition to a substantial impact on competition, that the competition authority review public interest objectives as part of the assessment of competition issues in relation to a merger. Pre-implementation approval under the Competition Act is mandatory for all transactions categorised as “intermediate” and “large” mergers. A merger is defined in detail in the Competition Act and is given further meaning through case law, but entails, in essence, the acquisition of control by one firm over another. A particular merger will require notification to the South African Competition Authorities in the prescribed manner and form where the requisite jurisdiction is present (that is, the transaction constitutes economic activity in or having an effect within South Africa), and that the applicable monetary thresholds are satisfied (based on the turnover and asset values attributable to the transaction parties).
What is the current state of the market?
The market in South Africa follows the trend of the global economy and as such, has been and is currently, depressed. Commodity prices have been low. In addition, companies have been holding onto cash. M&A activity has therefore been relatively low but we have recently see an increase. Further increases are expected after the national elections in May 2019 which should create domestic political certainty.
Which market sectors have been particularly active recently?
The decline in the market has led to the retail, property and commodity sectors being depressed. This has given rise to significant restructuring work being undertaken in these sectors.
What do you believe will be the three most significant factors influencing M&A activity over the next 2 years?
Firstly as is to be expected, M&A activity in South Africa is directly linked to the political and economic environment, both domestically and internationally. Secondly, South Africa being a commodity producer, M&A activity has a strong correlation with commodity prices. Thirdly, a significant restructuring of state owned enterprises, particularly in the energy sector, should have a material favourable impact on the economy. Linked to this, is an expectation that there will be significant expenditure on infrastructure enhancement.
What are the key means of effecting the acquisition of a publicly traded company?
This involves an individual offer to every shareholder (no meeting takes place to approve the offer). Where the offer is accepted by shareholders holding at least 90% of the shares which are subject to the offer, the bidder is entitled, and may be obliged, to acquire the remaining shareholder class. This is known as a “squeeze-out”. Partial offers are also permitted where control is acquired but the amount is less than 100%. A key advantage of a general offer is that it does not trigger an appraisal right for dissenting shareholders (which is particularly useful when all or part of the consideration is not cash).
Scheme of arrangement
The board of the target company proposes a scheme of arrangement and it is voted on by a special resolution of the target company. The Companies Act prescribes the documentation and information which the target company must provide to shareholders, in order for the shareholders to have the requisite information to vote on the scheme of arrangement.
Despite the special resolution having been passed by the target company, a company may not proceed to implement the special resolution without court approval if dissenting shareholders successfully petition a court in accordance with their rights as prescribed under the Companies Act.
In this regard, a company may not proceed to implement the resolution without the approval of a court if the resolution was opposed by at least 15% of the voting rights that were exercised on that resolution; or the court, on application within the prescribed time periods by any person who voted against the resolution, grants that person leave to apply to a court for a review of the transaction.
An acquirer may also make an offer for the greater part of the assets or undertaking (i.e. business) of the target company, the disposal of which would require a special resolution of shareholders adopted in a similar manner to the resolution required for the scheme of arrangement as set out above.
An Amalgamation or Merger
An amalgamation or merger is a transaction which results in the formation of one or more new companies which together hold the assets and liabilities that were held by the amalgamating or merging companies before implementation of the transaction.
What information relating to a target company will be publicly available and to what extent is a target company obliged to disclose diligence related information to a potential acquirer?
A target company is not obliged to give a bidder the right to conduct a due diligence exercise. However, if a target company does allow a potential offeror the right to conduct a due diligence exercise and provides information to the potential offeror, in terms of the Takeover Regulations, the target company must, on request, give the same information equally and as promptly to a less welcome, but bona fide, offeror or potential offeror. Where no information is given by the target company and no information can be obtained from the target company in terms of the equality of information provisions, only information available to the general public concerning the target will be obtainable. This includes:
6.1. The target company’s memorandum of incorporation.
6.2. The target company’s share register (including details of the company’s share capital and shareholders).
6.3. Directors’ details.
6.4. Any prospectus or circular previously published by the company.
6.5. The target company’s annual financial statements and interim report.
To what level of detail is due diligence customarily undertaken?
This depends on whether the target company allows a potential offeror to conduct a due diligence investigation and the extent to which the acquirers know and understand the business and liabilities of the target.
What are the key decision-making organs of a target company and what approval rights do shareholders have?
The board of directors are the key decision makers of all companies in South Africa, however approval rights are directly linked to the means of the acquisition.
A scheme of arrangement as explained in question 5 above will require the approval of the board of directors and the independent board under the Takeover Regulations. However, in a general offer, the offer is made directly to the shareholders. Similarly, in a mandatory offer no board approval is required.
What are the duties of the directors and controlling shareholders of a target company?
If a potential offeror and the directors of a target company are negotiating on a consensual basis, an offer in good faith must be regarded as being imminent. If the offer is imminent or is reasonably expected, the board of directors of the target company is bound by the restrictions on frustrating actions, namely the board must not, without the approval of the TRP and shareholders (unless in terms of a pre-existing obligation or an agreement entered into beforehand), take any action in relation to the affairs of the company that could effectively result in:
9.1. A bona fide offer being frustrated.
9.2. The holders of relevant securities being denied an opportunity to decide on the merits of the general offer.
9.3. The issue of any authorised but unissued securities.
9.4. The issue or granting of options in respect of any unissued securities.
9.5. Authorising or issuing, or permitting the authorisation or issue of, any securities carrying rights of conversion into or subscribing for other securities.
9.6. The sale, disposal or acquisition of assets of a material amount except in the ordinary course of business.
9.7. Entering into of contracts otherwise than in the ordinary course of business.
9.8. The making of a distributions that are abnormal considering the timing and amount.
Shareholders of a target company do not have any express duties in the context of a merger or amalgamation.
Do employees/other stakeholders have any specific approval, consultation or other rights?
In terms of the Takeover Regulations, there is no requirement to obtain approvals from employees or stakeholders. However, registered trade unions may bring a derivative action to protect the legal interests of the company under the laws applicable to derivative actions in the Companies Act.
To what degree is conditionality an accepted market feature on acquisitions?
A bid can be made subject to a number of pre-conditions; however, caution must be taken to ensure that the bid is not construed as a firm intention to make an offer. This is usually done by the offeror informing the target company that it intends to make a bid after a number of conditions (usually a due diligence) have been fulfilled. The bid is usually confidential at this stage.
There are no mandatory conditions that are required to be attached to a bid. All bids are subject to the Takeover Regulations and must comply with those regulations, and a breach may be subject to action by an interested party or by the TRP, but there are no mandatory conditions which arise. Bids are often subject to regulatory approval, which is particular to the relevant sector and occasionally subject to certain other commercial conditions, such as a material adverse change (MAC) condition, though MAC conditions in particular are viewed cautiously by the TRP to ensure that they do not create subjective optionality in favour of the offeror. All conditions must be objective and not within the control of the offeror.
What steps can an acquirer of a target company take to secure deal exclusivity?
It is permissible to grant potential offerors exclusivity. The prevailing view in the local market (although this has not been tested by a South African court) is that:
12.1. “No shops” are probably enforceable.
12.2. Directors’ fiduciary duties would require them to deal with and entertain an unsolicited bid even if they have signed an exclusivity with a prior bidder.
In order for a preferred bidder to succeed with the transaction, it is not unusual for it to seek irrevocable undertakings from major shareholders of the target company. In these circumstances, bidders need to be careful that the irrevocable undertakings do not extend beyond mere voting support as there is otherwise a risk that the parties could be seen to be acting in concert (that is, the supporting shareholder could be seen to become part of the offeror).
What other deal protection and costs coverage mechanisms are most frequently used by acquirers?
The payment of break fees is not uncommon in large transactions. The TRP will generally permit a break fee, provided that it does not exceed an amount equal to 1% of the value of the transaction.
Which forms of consideration are most commonly used?
Consideration can take the form of cash or securities. However, if the offer is made and the offeror has acquired securities in the target company within a six-month period before the commencement of the offer period, the offer consideration per security to the target shareholders of the same class must be:
14.1. Identical to or, where appropriate, similar to the highest consideration paid for those acquisitions.
14.2. Accompanied by a cash consideration of not less than the highest cash consideration paid per security, if securities that carry 5% or more of the voting rights were acquired for cash.
There are additional disclosure requirements if the offer consideration takes the form of payment in securities of the offeror.
At what ownership levels by an acquiror is public disclosure required (whether acquiring a target company as a whole or a minority stake)?
Once a bidder has acquired 35% of the voting rights of the shares in a target company, the bidder is obliged to give notice to shareholders, this is also dealt with in question 25 below.
At what stage of negotiation is public disclosure required or customary?
This area is regulated by the FMA, the JSE Listings Requirements and the Takeover Regulations. In short, all negotiations between an independent board and the offeror must be kept confidential. Confidentiality must be observed before a cautionary announcement or firm intention announcement containing “price-sensitive information” is made. Price-sensitive information may be provided to selected persons on a confidential basis. If there is a leak of such information or a reasonable suspicion that such a leak has occurred, the information must immediately be disclosed in a cautionary announcement.
A firm intention announcement is an announcement that must be made when a mandatory offer is required or when an offeror has communicated a firm intention to make an offer and is ready, able and willing to proceed with the offer. A firm intention announcement must be made immediately when the board of a target company has received a formal written offer, or an offeror is obliged to make a formal offer having triggered the requirements of a mandatory offer. Mandatory offers are dealt with in greater detail in question 25.
Is there any maximum time period for negotiations or due diligence?
There are no legislated time limits for negotiations or due diligence prior to the publication of a firm intention announcement. Subsequent to the publication of a firm intention announcement there is a strictly regulated timetable which may be relaxed by agreement in the case of friendly takeovers.
Are there any circumstances where a minimum price may be set for the shares in a target company?
There are no regulatory requirements other than in the case of a mandatory offer, in which case the offeror is obliged to pay the same price as equals the highest price paid for the shares during the period of 6 (six) months preceding the making of the mandatory offer.
Is it possible for target companies to provide financial assistance?
The Companies Act prohibits a target company from providing financial assistance, however, under sections 44 and 45 of the Companies Act financial assistance may be authorised by special resolution and subject to compliance with the other requirements of those sections which include the company being solvent and liquid after the provision of the financial assistance.
Which governing law is customarily used on acquisitions?
Where the company being acquired is a South African company that will be operated and run in South Africa, South African law will likely apply. However, the parties may agree to be bound by the international law.
What public-facing documentation must a buyer produce in connection with the acquisition of a listed company?
Shareholders typically receive two key documents; namely, the offeror circular and the offeree circular (unless they are combined). The Takeover Regulations prescribe the information that must be contained in an offeror circular. Depending on the nature of the transaction, this may also include a report by an independent expert on the fairness of the offer. Within 20 business days of the offeror circular being posted, the offeree board is required to post its circular. Likewise, the Takeover Regulations prescribe what information is required to be contained in the offeree circular.
What formalities are required in order to document a transfer of shares, including any local transfer taxes or duties?
In order to effect transfer of ownership of certificated securities, the original share certificate(s) together with a signed share transfer form will be delivered to the company. In relation to uncertificated securities, transfer of ownership is effected by a participant or the central securities depository debiting the account in the uncertificated securities register from which the transfer is effected and crediting the securities account to which the transfer is effected, on receipt of an instruction to do so. In both cases, the transfer and details thereof must be entered in the company’s securities register.
The transfer of beneficial ownership in securities is subject to securities transfer tax at a rate of 0,25% on the total amount of the transfer, or in certain circumstances the market value of the consideration for the transfer of the securities.
Are hostile acquisitions a common feature?
Hostile bids are less frequent in the South African market, although not uncommon. It should be noted that hostile bids cannot be done by way of a scheme of arrangement because a scheme is required to be proposed by the target board.
What protections do directors of a target company have against a hostile approach?
As a result of the restrictions of frustrating actions, detailed in question 9 above, there are limited avenues open to a target board to defend a hostile bid. Such bids can, however, be defended on technical grounds – that is, non-compliance with legal requirements or by using a delaying tactic in objecting to the competition authorities or industry regulators (for example, in the banking, mining and communications industries). That said, hostile bids are rare in a South African context and only a handful have been successful in recent years.
Are there circumstances where a buyer may have to make a mandatory or compulsory offer for a target company?
Once a bidder has acquired 35% of the voting rights of the shares in a target company, the bidder is obliged to give notice to shareholders stating that they are in a position to exercise 35% of the voting rights attached to the securities of the company and offering to acquire the remaining securities of all the shareholders on the terms and conditions set out in the Takeover Regulations.
If an acquirer does not obtain full control of a target company, what rights do minority shareholders enjoy?
In terms of section 164 of the Companies Act, dissenting shareholders may, in the context of a scheme of arrangement, a sale of all or the greater part of assets or undertaking of the target company or a merger, require the target company to purchase their shares at fair value, known as the appraisal right.
Certain related-party transactions in terms of the Listings Requirements, as well as certain matters in terms of the Companies Act, are required to be approved by shareholders (either in terms of an ordinary or special resolution). Accordingly, depending on the percentage of control acquired, minority shareholders may be able to stifle certain activities or proposed transactions of the target company.
Is a mechanism available to compulsorily acquire minority stakes?
The prescribed percentage in terms of the Takeover Regulations is 35% of the voting securities of a company; at which point, the offeror (and persons acting in concert with the offeror) is deemed, for the purposes of the Takeover Regulations, to have obtained control of the target company and will be required to make a mandatory offer.
In addition, in terms of section 124 of the Companies Act, if an offer for the acquisition of any class of securities of a regulated company has been accepted by the holders of at least 90% of that class of securities (other than any such securities held by the offeror before making the offer), the remaining minorities can be expropriated at the same price in terms of the compulsory acquisition and squeeze-out regulations.