The value of M&A transactions in South Africa in 2009 increased according to reported figures in 2008 by almost R20 billion to R420 billion ($56 billion), although this figure still represented a 70% decrease in South African M&A activity by value from 2007. The apparent improvement in M&A activity in 2009 can, in large part, be attributed to the inclusion of the proposed R220 billion transaction between Bharti Airtel Limited and the MTN Group, which, to date, is the largest announced M&A transaction in South African history and would have been the third largest M&A transaction in the world in 2009. Discussions regarding this proposed transaction were terminated by mutual agreement between the parties in September 2009.
As was the case for most of the last decade, black economic empowerment (BEE) transactions again played an important role in M&A activity in South Africa in 2009, with SABMiller plc's R7.3 billion BEE transaction (implemented in South Africa by The South African Breweries Limited) being recognised as the South African DealMakers deal of the year. In the context of the global economic downturn, SABMiller's BEE transaction is considered to be highly innovative, in that the costs associated with funding the transaction will be financed by SABMiller itself through a notional funding structure, without recourse to third-party financing.
Current M&A
The South African M&A legislative framework consists primarily of the Companies Act 1973 (the existing Act), the Listings Requirements of the JSE Limited, the Securities Regulation Code on Takeovers and Mergers and the Rules of the Securities Regulation Panel, the Competition Act 1998 and the Exchange Control Regulations, which are enforced by the Exchange Control Department of the South African Reserve Bank.
The existing Act is, in a number of instances, outdated and out of line with international trends. In this regard, a new Companies Act 2008 (the new Act) has been signed into law by the President and it is anticipated that this new Act will become operative in the third quarter of 2010. The new Act effectively overhauls company law in South Africa and – in the M&A context – gives rise to much-needed modernisation of South Africa's corporate law framework. In particular, the new Act introduces statutory mergers and amalgamations into South African law.
The primary methods of obtaining control of a public company in South Africa are through a scheme of arrangement, a take-over offer or the sale of a business as a going concern (all of which are retained in the new Act).
A scheme of arrangement is governed by section 311 of the existing Act and is the most commonly used method of obtaining control of a company in a recommended offer. A scheme of arrangement is a statutory procedure whereby a company makes an arrangement or compromise with its creditors or shareholders (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 (i) a majority in number (representing 75% in value) of the creditors (or class of creditors) or (ii) shareholders holding shares which represent 75% of the votes exercisable by the shareholders (or class of shareholders), as the case may be, who were present in person or represented by proxy at the meeting convened to consider the scheme. In addition to proper creditor or shareholder approval, a scheme of arrangement under section 311 requires court approval.
A takeover offer is governed by sections 440A to 440N of the existing Act. This method is most commonly used where the offer is not recommended (that is, in a hostile bid situation), although hostile bids in a South African context are not common. In order to acquire all the shares of a target company, the offer must be accepted by shareholders holding at least 90% of the shares which are the subject of the offer. Where this is the case, the offeror can compulsorily purchase the shares of the non-accepting shareholders. The offer document must state whether or not the offeror intends to invoke the compulsory acquisition provisions of the existing Act.
A non-accepting shareholder can apply to court for an order prohibiting the compulsory acquisition or, alternatively, making the compulsory acquisition subject to certain conditions. The compulsory acquisition may be prohibited if the objecting shareholder is able to convince the court that the offer is unfair or that there are special conditions requiring the court to make such an order.
Where a compulsory acquisition is not invoked by the offeror, a shareholder who did not accept the offer can require the offeror to acquire its minority interest in the target company.
In the context of a scheme of arrangement, once the scheme has been sanctioned by a court, all of the shares (including the shares of those shareholders who voted against the scheme at the meeting convened to consider that scheme) are compulsorily acquired by the offeror.
The acquisition of the assets or entire business undertaking of a company is governed by section 228 of the existing Act. This is where control of a company is obtained by the offeror, or a vehicle set up for that purpose, by purchasing the whole or greater part of the business or assets of the target. A disposal of this nature has to be approved by 75% of the shareholders entitled to vote, present in person or represented by proxy at a meeting at which the disposal is considered.
Regulatory environment
Takeovers and mergers in South Africa are governed by the Securities Regulation Panel (SRP) under the Securities Regulation Code on Takeovers and Mergers and the Rules of the SRP (Code).
The Code applies to all transactions:
- which result in a change of control of a company, where 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;
- where one shareholder (or group acting together) increases its holdings to 100%;
- by public companies and by private companies where the shareholders' interest in the company exceeds R5 million and where there are more than ten 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 Code requires a mandatory offer to be made for the remaining shares in a target if a bidder's holding of shares (or its combined holding with any concert party) increases:
- to the extent that the bidder (or the bidder together with any concert party) is entitled to exercise or cause to be exercised 35% or more of the voting rights in the target company;
- by that number of shares which carry 5% or more of the voting rights in the target company in any 12 month period when the bidder or any concert party (or both) already have control of shares entitled those parties to exercise or cause to be exercised between 35% and 50% of the voting rights in the target.
Mandatory offers made in terms of the Code must be for the same consideration as was operative in the transaction which triggered such an offer and, where applicable, shall be accompanied by a cash alternative at the highest price paid for the relevant shares in the three months preceding the offer. The SRP can waive the requirement on a bidder to make a mandatory offer if the holders of a majority of the independent shares of the target (i.e. excluding shares held by the bidder and its concert parties) agree to such a waiver.
Antitrust and exchange control regulation
The parties to large and intermediate mergers must obtain prior merger approval from the South African competition authorities before the transaction can be implemented. Small mergers are those which fall below the prescribed thresholds and do not usually require competition authority approval. However, in certain circumstances (usually where the authorities consider that a small merger might substantially prevent or lessen competition), the competition authorities can investigate a small merger within six months of implementation of that merger.
If the parties to a merger have combined assets or annual turnover of R560 million and if the target firm has assets or turnover of R80 million the transaction must be notified as an intermediate merger. If the parties to a merger have combined assets or annual turnover of R6,6 billion and the target firm has assets or turnover of R190 million the transaction must be notified as a large merger.
A filing fee of R100 000 is payable in respect of intermediate mergers and a filing fee of R350 000 is payable in respect of large mergers.
For many years, South Africa has had a system of exchange controls in place aimed at regulating the flow of capital into and out of the country. These controls, which are set out in the Exchange Control Regulations 1961, have often played a significant 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.
Reform
The new Act introduces far reaching changes to company law in South Africa. Amongst other objectives, the new Act is intended to bring South Africa in line with international best practice. The new Act will also, for the first time, regulate all companies, from the biggest to the smallest, in one single enactment.
Apart from reform with respect to matters such as simplifying the formation procedures of companies, introducing only one constitutional document that governs the affairs of a company (the Memorandum of Incorporation) and simplifying the regulatory system applicable to companies, the new Act introduces a number of new ways in which to achieve takeovers, mergers, offers and other fundamental transactions. The new Act also introduces a number of new remedies available to minority shareholders in the context of M&A transactions. In this regard, the new Act also reduces the role of the courts in takeovers, offers and fundamental transactions.
The provisions of the new Act which deal with statutory mergers and amalgamations refer to transactions, or a 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 given the right to opt out of the merger by withdrawing the fair value of their shares in cash from the company through the exercise of newly legislated 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. 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, which 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 new Act retains provisions dealing with 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 procedures involved in implementing these transactions.
In terms of the new Act, all M&A transactions (other than a takeover offer) now require a special resolution. Notwithstanding the adoption of such a special resolution a company may not proceed to implement any fundamental transaction without the approval of a court if:
- the special resolution was opposed by shareholders holding shares which carry at least 15% of the voting rights that were exercised in respect of that special resolution and any shareholder who voted against the special resolution requires the company to seek court approval; or
- the court, on an application by any person who voted against the transaction, grants that person leave to apply to a court for a review of the transaction. In such circumstances, a court may only set aside the special resolution where it finds that the special resolution is manifestly unfair to any class of holders of the company's shares or the vote is materially tainted by any conflict of interest, inadequate disclosure, failure to comply with the new Act, the Memorandum of Incorporation or any applicable rules of the company or any other significant and material procedural irregularity.
Furthermore, section 164 of the new Act allows the holder of any voting rights in a company to seek an appraisal remedy if that person notified the company in advance of its objection to the proposed special resolution contemplated in that section and was present at the meeting convened to consider the proposed transaction and voted against the special resolution. 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.
The SRP will, in terms of the new Act, be replaced with the Takeover Regulation Panel (TRP). The TRP is a regulatory agency established in terms of the new Act and its main purpose is to regulate affected transactions in the manner required by the new Act and the takeover regulations that will be introduced in terms of the new Act. The purposes of the TRP's regulations are to ensure the integrity of the market place and the fairness to the holders of the securities of regulated companies, 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, to ensure the provision of adequate time for regulated companies and holders of their securities to obtain and provide advice with respect to offers and to prevent actions by a regulated company designed to either impede, frustrate or defeat an offer or the making of fair and informed decisions by the holders of the company's securities. The TRP is given additional powers under the new Act (including the power to issue compliance orders or notices), which the TRP may issue to prohibit or require any action by a person or order a person to divest of an acquired asset or account for profits.
Corporate governance
Corporate governance measures in South Africa generally consist of largely non-binding codes of governance referred to as the King Codes. The first two of these, King I and King II, were published some years ago. King III was published in September 2009 and came into operation on March 1 2010. A Practice Note to King III which deals with fundamental and affected transactions has been published in order to ensure that directors are aware of their responsibilities and duties in respect of mergers, acquisitions and amalgamations (Practice Note). For the first time in the context of the King reports, the Practice Note sets out certain generally accepted principles of good governance which are intended to supplement the takeover regulations that will be promulgated in terms of the new Act. These principles include (amongst others) that:
- directors must disclose any conflict or potential conflict of interest in relation to any contemplated affected transaction and that, in an affected transaction, an offeree company board must consist only of independent directors, whether executive or non-executive;
- during affected transactions the application of the directors fiduciary duties must be extended to include the general body of the company's relevant shareholders;
- the independent board must have the requisite knowledge to ensure that a fully informed opinion regarding the affected transaction (specifically including an opinion as to the offeree company's value) is provided to the relevant shareholders;
- the independent board should do all things necessary to satisfy themselves that an offeror is able to perform in terms of an affected transaction and in recommending an affected transaction, must give consideration to and state that they have exhausted all reasonable endeavours to satisfy themselves that the consideration offered could not be bettered by pursuing an alternative viable deal;
- offeree companies must appoint independent competent advisors;
- negotiations should be kept confidential and if confidentiality is breached relevant information should be disclosed;
- shareholders of different classes, types and rights to share should be treated comparably; and
- non-conflicted directors should drive the process from both the offeror and the offeree company's perspective.
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About the author
Charles Douglas is a partner in Bowman Gilfillan's corporate department, specialising in mergers and acquisitions, capital markets, general corporate and commercial and regulatory advice.
Charles commenced training at Bowman Gilfillan in 2000 and was with the firm for five and a half years before undertaking an 18 month secondment to the Sydney office of Allen Arthur Robinson during 2005 and 2006. Charles has been a partner of Bowman Gilfillan since the beginning of 2007.
Charles is also admitted as a lawyer of the Supreme Court of New South Wales in Australia.
Recent M&A transactions that Charles advised on include:
- advising SABMiller in respect of its R7.3 billion black economic empowerment transaction being implemented in South Africa by The South African Breweries Limited;
- advising ThyssenKrupp Engineering in relation to the R400 million merger of its Uhde and materials handling businesses with the industrial projects business of PDNA Consulting Engineers, signed in March 2010;
- advising Coal of Africa Limited in respect of its cash placing of approximately £59.6 million and its acquisition of NuCoal Mining for R650 million, which transaction was closed in January 2010;
- advising PPC in respect of its R2.7 billion black economic empowerment transaction, which closed in December 2008, and its unbundling from Barloworld in 2007;
Charles' capital markets experience includes the following:
- advising Metorex in respect of its claw back offer intended to raise a minimum of $100 million through the issue of 250 million new Metorex ordinary shares, to be implemented in the first half of 2010, as well as Metorex's 2005 capital raising exercise for that company's Ruashi project in the DRC;
- advising BHP Billiton in respect of its 2006 share buy-back program.
On the project finance front, Charles has advised Metorex in respect of its 2010 Ruashi project finance debt restructure, its R3 billion capital and debt restructuring program in the last quarter of 2008 and its $170 million project finance facility for phase II of its Ruashi copper and cobalt mining operations in the DRC.
In the regulatory area, Charles has been involved in advising the liquor industry in relation to new national and provincial liquor legislation and various multinational and local pharmaceutical companies, in relation to corporate, M&A and regulatory matters. |
Contact information
Charles Douglas
Bowman Gilfillan
165 West Street Sandton Johannesburg PO Box 785812 Sandton 2146 South Africa
Tel: +27 (0)11 669 9426
Fax: +27 (0)11 669 9001
c.douglas@bowman.co.za
Web:www.bowman.co.za |
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About the author
Chris Green graduated from Wits University with an LLB (cum laude) in 2005. He served his articles at Bowman Gilfillan and was appointed as an Associate in the firm's Corporate Department in February 2008 and as a Senior Associate in March 2010. He is a member of the firm's Competition and Trade Law practice area and specialises in mergers and acquisitions and regulatory advice.
Chris' mergers and acquisitions experience includes involvement in the following matters:
- currently advising SABMiller in respect of its proposed black economic empowerment transaction to be implemented in South Africa by The South African Breweries Limited (R7.3 billion)
- advising Coal of Africa Limited in respect of its acquisition of NuCoal Mining, which transaction was closed in January 2010 (R650 million)
- advising PPC in respect of its unbundling from Barloworld in 2007 and its black economic empowerment transaction in 2008 (R2.7 billion)
In the regulatory area, Chris has been involved in advising various participants in the South African liquor industry in respect of new national and provincial liquor legislation as well as other regulatory issues at both a national and provincial level and has advised a large global client of the firm in respect of its interaction with the South African Government regarding its various licences and registrations.
In the area of capital markets and securities law, Chris has been involved in advising a leading global investment bank in respect of various trades conducted on the Johannesburg Stock Exchange.
Chris was seconded to Shell South Africa Energy for a period of two months during 2008 and during that time advised Shell on a range of commercial and competition law-related issues. |
Contact information
Chris Green
Bowman Gilfillan
165 West Street Sandton Johannesburg PO Box 785812 Sandton 2146 South Africa
Tel: +27 (0)11 669 9460
Fax: +27 (0)11 669 9001
c.green@bowman.co.za
Web:www.bowman.co.za |