For most of 2008 the mergers and acquisitions market in South Africa was tapering off. This was the case in both the domestic M&A market and foreign transactions in South Africa. The effect of this slowdown has been mainly on the size of the deals. Although there is still a fair amount of M&A activity, the bulk of these deals are smaller, mid-market deals.
M&A transaction values in 2008, compared to 2007, were lower by about R145 billion ($17.1 billion), although the numbers in 2007 were skewed because of a number of large transactions, some of which failed. The 2008 M&A numbers were just under R400 billion, with foreign transactions in South Africa around R69 billion, compared to over R1.1 trillion in 2007.
In the last few years black economic empowerment (Bee) transactions played a significant role in M&A activity in South Africa. There were also a smaller number of Bee deals in 2008. There was also a significant increase in failed deals, most notably the failed R21 billion deal involving Mvelaphanda, Northam Platinum and Impala. In addition to the fall-off in Bee deals there has been significant concern over earlier Bee transactions that, because of the fact that these deals are linked to the value of the underlying shares, are now underwater. This has raised speculation that many Bee deals may have to be restructured.
In the general M&A market, there was also an increase in the number of failed deals, including the attempt by Xstrata to buy out Lonmin minorities for around R27 billion. The international trend of lower volumes in global private equity transactions also meant that private equity transactions in South Africa tapered off during 2008, mainly because of the higher cost of debt. In light of the global economic situation it seems fair to predict that the above trends will continue in at least the first half of 2009.
Legislative framework
The current South African M&A legislative framework consists mainly of the Companies Act, 1973 (the Companies Act). The Companies Act has been in existence since 1973 and is, in a number of instances, outdated and out of line with international trends. The Companies Bill has now been passed through the legislative process and will in all probability become law in early 2010. The Companies Bill constitutes a complete overhaul of company law in South Africa and in the M&A context will bring welcome innovation and modernisation.
Before discussing the new M&A provisions of the Companies Bill we discuss the three main ways of obtaining control of a public company under the current Companies Act.
The first way of obtaining control of a public company is through a scheme of arrangement. A scheme of arrangement is governed by section 311 of the Companies Act and is the most commonly used method of obtaining control in a recommended offer. A scheme of arrangement is a statutory procedure whereby a company makes an arrangement or compromise with its members or creditors (or any class of them). The arrangement can be about anything on which the company and its creditors or members can properly agree. A company can bring about almost any kind of internal reorganisation, merger or de-merger using a scheme of arrangement, provided that the necessary approvals have been obtained. A scheme of arrangement requires the consent of shareholders holding at least 75% of the shares of a company were present at the meeting convened to consider the scheme and requires court approval.
The second method is a takeover offer that is governed by sections 440A to 440N of the Companies Act. This method is most commonly used where the offer is not recommended (that is, in a hostile bid situation). In order to acquire all the shares for which the offer is made, shareholders holding at least 90% of the shares that are the subject of the offer must accept.
The third method is a sale of the assets or the entire business undertaking of the company. This is governed by section 228 of the Companies Act. This is where control of a public company is obtained by the bidder, or a vehicle set up for that purpose, by purchasing the whole or greater part of the business or assets of the target. This type of transaction has to be approved by way of a special resolution. A special resolution must be passed by 75% of the shareholders entitled to vote, present in person or represented by proxy. In addition a special resolution must be registered with the office of the Registrar of Companies.
Other key pieces of legislation include the Securities Services Act 2004, which among other things regulates South African insider trading and market manipulation, and the Competition Act 1998. Any M&A transactions involving companies listed on South Africa's securities exchange would also be subject to the Listings Requirements of the JSE.
For many years, South Africa has had a system of exchange controls in place aimed at regulating the flow of capital in and out of the country. These controls, which are set out in the Exchange Control Regulations 1961, have often played an important role in the manner in which M&A transactions in South Africa, particularly cross border transactions, are structured. Recently, these exchange controls have been gradually relaxed with the intention that they will ultimately be abolished.
Company law reform
The Companies Bill introduces far-reaching changes to company law in South Africa. The Companies Bill is intended to bring South Africa in line with international best practice. The Companies Bill will also, for the first time, regulate all companies, from the biggest to the smallest, in one single enactment.
Apart from reform in relation to things such as simplifying the formation procedures of companies, introducing only one constitutional document that governs the affairs of a company and simplifying the regulatory system applicable to companies, the Companies Bill introduces a number of new ways in which to achieve takeovers, mergers, offers and other fundamental transactions. The Bill also introduces a number of new remedies given to minority shareholders in the context of M&A.
The Companies Bill deals with all takeovers, offers and fundamental transactions in one chapter, which fundamentally reforms the law in this area by introducing the concepts of merger and amalgamation as part of South African company law. The Companies Bill also dramatically reduces the role that can be played by the courts in takeovers, offers and fundamental transactions.
The Companies Bill introduces the concept of an amalgamation or merger. This refers to a transaction, or series of transactions, involving two or more companies, resulting in the survival of one or more of the merging or amalgamating companies or the formation of one or more new companies, which together hold all of the assets and liabilities previously held by the several merging or amalgamating companies. The new statutory amalgamation or merger is essentially a simple procedure in terms of which two or more companies may merge by agreement, with the approval of the prescribed majority of their shareholders. There is no need for a court to approve the merger. Dissenting shareholders who do not approve of the merger or amalgamation do not have recourse to a court to prevent or frustrate the merger. Instead, dissenting shareholders are to be given the right to opt out of the merger by withdrawing the fair value of their shares in cash from the company through exercise of their appraisal rights.
The effect of the new statutory amalgamation or merger is that all property of the constituent companies simply becomes the property of the surviving company or the new company as the case may be. In addition, the surviving company is liable for all the obligations of the constituent companies. The vesting of these assets and liabilities in the surviving company occurs automatically by operation of law. This means that there is no need for compliance with the legal formalities associated with the transfer.
In addition to the new amalgamation or merger concepts, the Companies Bill retains the disposal or sale of all or the greater part of the assets or undertaking of a company, schemes of arrangement and takeover offers as methods of achieving a takeover but fundamentally simplifies the procedure in implementing these transactions.
Basically all M&A transactions (other than a takeover offer) would now require a special resolution. Notwithstanding such special resolution a company may not proceed to implement any such fundamental transaction without the approval of a court if:
(i) the resolution was opposed by at least 15% of the voting rights that were exercised on that resolution and any person who voted against the resolution requires the company to seek court approval; or
(ii) the court sets aside the resolution where it finds that the resolution is manifestly unfair to any class of holders of the company securities or the vote is materially tainted by conflict of interest, inadequate disclosure, failure to comply with the Companies Bill, the memorandum of incorporation or any applicable rules of the company or any other significant and material procedural irregularity.
Furthermore the holder of any voting rights in a company is entitled to seek an appraisal remedy if that person notified the company in advance of its intention to oppose the special resolution contemplated in the section and was present at the meeting and voted against the special resolution. In brief, an appraisal remedy refers to the remedy available to a shareholder who voted against the fundamental transaction to have his shares independently valued and bought back by the company at a fair price.
Public takeover regulation
Takeovers and mergers in South Africa are governed by the Securities Regulation Panel (the Panel) under the Securities Regulation Code on Takeovers and Mergers and the Rules of the Panel (the Code).
The Code applies to all transactions:
(i) that result in a change of control of a company. Control is deemed to be acquired when a person or a group of persons acting together holds shares entitling the holder to exercise 35% of the voting rights of the company; and
(ii) where one shareholder or group acting together increases its holdings to 100%;
(iii) by public companies and private companies where the shareholders' interest in the company exceeds R5 million and where there are more than 10 beneficial shareholders.
The Code is largely based on the UK City Code on Takeovers and Mergers. However, unlike the UK City Code, the Code is statutory and is enforced by the courts rather than through self-regulation.
The Panel will be replaced in the terms of the Companies Bill with the Takeover Regulation Panel. The Takeover Regulation Panel is a regulatory agency established in the terms of the Companies Bill and its main purpose is to regulate affected transactions in the manner required by Chapter 5 of the Bill and the takeover regulations that will be introduced in terms of the Bill.
The purposes of the Takeover Regulation Panel's new regulations are to (i) ensure the integrity of the market place and the fairness to the holders of the securities of regulated companies; (ii) to ensure the provision of necessary information to holders of securities of regulated companies to the extent required to facilitate the making of fair and informed decisions; (iii) to ensure the provision of adequate time for regulated companies and holders of their securities to obtain: and (iiii) to provide advice with respect to offers and prevent actions by a regulated company designed to impede, frustrate or defeat an offer, or the making of fair and informed decisions by the holders of the company's securities.
The Takeover Regulation Panel will be given additional powers under the Companies Bill including the power to issue compliance orders or notices to prohibit or require any action by a person or order a person to divest of an acquired asset or account for profits.
Securities transfer tax
As of July 1 2008 the Securities Transfer Tax Act and the Securities Transfer Tax Administration Act were passed into law. In terms of these acts security transfer tax (STT) is levied on the transfer of any security issued by a company in South Africa or a company incorporated, established or formed outside South Africa and listed on an exchange. The transfer of beneficial ownership of securities is subject to STT, which is levied at a rate of 0.25% on the taxable amount of the transfer of the securities.
In relation to listed securities the taxable amount is the greater of the consideration for the security declared by the transferee or the closing price of that security. In respect of unlisted securities the taxable amount is the greater of the consideration given for the security of the market value of such unlisted security. Transfer is defined broadly to include the transfer, sale, assignment, cession or disposal in any other manner of security.
Corporate governance
Corporate governance measures in South Africa generally consist of non-binding codes of governance referred to as the King Codes. The first two of these, King I and II, were published some years ago and a draft of King III was published in February 2009. Chapter 9 of King III deals with fundamental and affected transactions and for the first time sets out generally accepted principles of good governance. This is intended to supplement the takeover regulations that will be promulgated in the terms of the Companies Bill. Chapter 9 sets out a number of principles in the context of fundamental and affected transactions.
The first principle relates to the disclosure of conflict or potential conflict of interest in the context of an M&A transaction. The determination of conflict of interest is discussed in some detail in the chapter and relates mainly to directors who are members of the boards of both an offerer and an offeree company; and who are presumed to be conflicted and non-independent, but such presumption is rebuttable at the instance of the independent board.
The second principle states that directors involved with affected transactions must not be conflicted. It goes on to state that independence is the ability to make impartial decisions without fear or favour, and is a fundamental requirement to be complied with in any affected transaction. In an affected transaction an offeree board must consist only of independent directors, whether executive or non-executive. All non-independent directors must exclude themselves from all independent board meetings. An independent board must comprise a minimum of three independent directors. Where there are fewer than three independent directors, other independent persons must be appointed to the independent board.
The third principle is that during affected transactions the directors fiduciary duties must be expanded to include the general body of the company's relevant shareholders. The fourth is that the independent board must have the requisite knowledge to ensure that a fully informed opinion to the relevant shareholders concerning the affected transaction is provided. This specifically includes being properly informed of the offeree company's value.
The fifth principle stated in Chapter 9 is that the independent board should do all things necessary to satisfy themselves that an offerer is able to perform in terms of an affected transaction. The independent board should form a clear basis for the expression of an opinion to shareholders dealing with value and price compared to the consideration offered. Where the consideration offered per share exceeds either the estimated fair value per share or current trading price per share but not both, a split opinion clearly detailing the independent board's view is required, for example fair but not reasonable or reasonable but not fair.
An independent board must also form a view of a range of value based upon an accepted valuation of the offeree company's shares. The independent board should also consider factors that are difficult to quantify or are unquantifiable and must disclose them and take them into account in forming its opinion in respect of fairness. King III also continues by saying that an independent board recommending an affected transaction must give consideration and should state that it has exhausted all reasonable endeavours to satisfy itself that the consideration offered could not have been bettered by pursuing an alternative viable deal, that is, they should negotiate with any and all parties they believe to be reasonably interested to secure a more favourable result for shareholders.
The sixth principle is that offeree companies must appoint independent competent advisors. The seventh is that negotiations should be kept confidential and if confidentiality is breached relevant information should be disclosed. The eighth is that shareholders of different classes, types and rights to share should be treated comparably. Where an offerer is a company its directors are bound by their common law and statutory duties. An offerer should not announce an offer of its intent to make an offer unless it has proper grounds for believing that it can and will continue to be able to implement the offer. The ninth principle is that non-conflicted directors should drive the process from both the offerer and the offeree company's perspective.
| Author biography |
Rudolph du Plessis
Bowman Gilfillan
Rudolph du Plessis is a partner in the corporate, commercial and financial services department of Bowman Gilfillan, one of South Africa's largest corporate law firms. Rudolph has particular expertise in M&A transactions and debt and equity capital-raising transactions. Some of the transactions in which Rudolph has acted as the executing partner for our firm include advising Standard Bank on the R36.7 billion ($4.3 billion) transaction with Industrial and Commercial Bank of China, advising Standard Bank on the offer to minority shareholders of Liberty Holdings, advising on the Murray & Roberts Holdings black economic empowerment transaction, the Tongaat Hulett black economic empowerment transaction and the unbundling and listing of Hulamin. He also advised African Rainbow Minerals on its acquisition of an interest in Xstrata Coal. |