South Africa: Heating up

Author: | Published: 1 Apr 2012
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The total value of M&A deals in South Africa has, according to the author's calculations, decreased approximately 34% from approximately R18.7 million ($2.47 million), for the period March 1 2010 to February 28 2011, to approximately R12.3 million, for the period March 1 2011 to the beginning of February 2012. The number of deals has decreased approximately 14.71%, from 78 to 68.

Most of the M&A activity took place in the mining sector and 2011 saw the acquisition by Chinese company Jinchuan of all of the shares in Metorex, a Johannesburg-based copper, antimony and cobalt mining company, through a scheme of arrangement; as well as Swiss-based commodities trader Glencore International's acquisition of shares in Optimum Coal Holdings, a provider of coal mining services, and Umcebo Mining, a South Africa-based mining company.

In the biggest-yet property sale, Growthpoint Properties and the Public Investment Corporation acquired the V&A Waterfront from UK-based London & Regional Properties and Dubai World.

Japanese coatings manufacturer Kansai Paint's unsolicited offer for the remaining shares in Freeworld Coatings (following its initial purchase of a stake of 27.5%) was approved by the competition authorities in 2011 and Freeworld Coatings has subsequently delisted from the Johannesburg Stock Exchange. Another large transaction, Walmart's acquisition of a controlling stake in Massmart, despite much resistance from trade unions and other interested parties, closed in 2011 after competition approvals were obtained.

Legislative framework

The South African M&A legislative framework consists primarily of the Companies Act 71 of 2008, the Listings Requirements of the JSE, the Competition Act 1998 and the Exchange Control Regulations, which are enforced by the Foreign Surveillance Department of the South African Reserve Bank.

The new Companies Act came into force on May 1 2011 and replaced the Companies Act, 61 of 1973 in its entirety. In the M&A context, the Act gives rise to much-needed modernisation of South Africa's corporate law framework. Among other things, the Act introduces the concept of a "fundamental transaction" which is used to describe: (i) a scheme of arrangement; (ii) the new statutory merger or amalgamation procedure; and (iii) the disposal of all or a greater part of the assets or undertaking of a company. The Act has also widened the scope for minority protections and has introduced dissenting shareholder appraisal rights.

The takeover regime is contained in sections 117 to 127 of the Act and the Takeover Regulations, which have replaced both the Securities Regulation Code on Takeovers and Mergers and the Rules of the SRP. The Takeover Regulation Panel, a body established in terms of the Act, has replaced the Securities Regulation Panel. The takeover provisions apply to "regulated companies" (which are all public companies and to private companies in certain instances) whose securities are the subject of an "affected transaction" or an offer.

The primary methods of obtaining control of a public company in South Africa are by means of a fundamental transaction and a takeover offer.

Fundamental transactions

A scheme of arrangement is governed by section 114 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 with the holders of any class of its securities by way of, for example, a consolidation of securities of different classes, a division of securities into different classes, an expropriation of securities from the holders, exchanging any of its securities for other securities, a re-acquisition by the company of its securities or a combination of the above.

A company can effectively bring about almost any kind of internal reorganisation, merger or de-merger using a scheme of arrangement. A scheme can only be proposed between a company and its shareholders (and not also with its creditors – creditors are now dealt with separately in section 155), a company proposing to implement a scheme must retain an independent expert to compile a report for the board and the holders of the company's securities concerning certain information as set out in the Act and a scheme only needs to be sanctioned by the court in limited

circumstances. Therefore, once the scheme has been approved by shareholders, all shares subject to the scheme are compulsorily acquired by the offeror.

Amalgamations or mergers, otherwise referred to as a "statutory merger" or "business combination", are governed by sections 113 and 116. An amalgamation or merger is a new statutory procedure and was introduced to facilitate flexibility with regard to business combinations and restructurings. An amalgamation or merger is essentially a transaction in terms of which two or more companies merge to form one company which holds all assets and liabilities of the merging or amalgamating companies – it is not possible to cherry pick assets and liabilities when using amalgamation or merger proceedings; all assets and liabilities of the merging or amalgamating companies must transfer to the new/merged company.

The requirements for an amalgamation or merger are that: (i) the parties to the proposed amalgamation or merger must enter into a written agreement setting out certain statutory information concerning the proposed amalgamation or merger; (ii) the amalgamation or merger must be approved by the shareholders of each amalgamating or merging company; and (iii) before the amalgamation or merger can be implemented, the board of each company involved in the amalgamation or merger must be satisfied that the solvency and liquidity test will be met.

The disposal of all or a greater part of the assets or undertaking of a company is governed by section 112. 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.

Approvals for fundamental transactions

In terms of section 115, a company may not enter into or implement a fundamental transaction unless that transaction has been approved by a special resolution adopted by persons entitled to exercise voting rights on such a matter (excluding voting rights controlled by an acquiring party or a person related to an acquiring party or a person acting in concert) at a meeting at which the requisite quorum is present. The Act sets 25% of all voting rights entitled to be exercised on a matter as the requisite quorum, however, the quorum may be changed in the company's constitutional document (the memorandum of incorporation) (MOI).

In addition to obtaining shareholder approval, if a regulated company proposes to enter into a fundamental transaction, then that company may not enter into or implement that transaction unless the Panel has issued a compliance certificate in respect of the transaction, in terms of section 119(4)(b), or exempted the transaction in terms of section 119(6) (the Panel will grant an exemption if there is no reasonable potential of the fundamental transaction prejudicing the interests of existing securities holders, the cost of compliance is disproportionate relative to the value of the fundamental transaction or granting the exemption is otherwise reasonable and justifiable in the circumstances having regard the principles set out in sections 117 to 127 and the Takeover Regulations).

Minority protections and dissenting shareholder appraisal rights

A company may not implement a resolution which approves a fundamental transaction if (i) that resolution was opposed by at least 15% of the shareholders and any person who voted against the resolution requires the company to seek court approval for implementation of the resolution; or (ii) if any person who voted against the resolution is granted leave by the court to have the transaction reviewed. The court may grant a person who voted against the resolution leave to have the transaction reviewed if the applicant is acting in good faith and appears to be able to sustain the proceedings.

On reviewing such a resolution, the court may set aside the resolution if the resolution is manifestly unfair to any class of the company's securities or if it can be proved that the vote is materially tainted by conflict of interest, inadequate disclosure, the failure to comply with the Act and the memorandum of incorporation or other significant and material procedural irregularity.

In addition, if a shareholder notified the company in advance of the intention to oppose a special resolution to approve a fundamental transaction and was present at the meeting and voted against that special resolution, if the transaction goes ahead, that shareholder may exercise its appraisal rights by demanding that the company pay that shareholder, in cash, the fair value for all of the shares held by that person.

Takeover regime

As mentioned above, takeovers are governed by sections 117 to 127 of the Act and the Takeover Regulations. A takeover offer 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.

The takeover provisions apply where a regulated company proposes to enter into an "affected transaction" or where an offer is made with respect to a regulated company. An "affected transaction" includes:

  • a fundamental transaction;
  • the acquisition or disposal of, or announced intention to acquire or dispose of, a beneficial interest in securities amounting to 5%, 10%, 15%, or any further whole multiple of 5%, of the issued securities of a particular class of securities;
  • the announced intention to acquire 100% of the securities of the company;
    a mandatory offer; and
  • a compulsory acquisition (which includes the acquisition of securities in any manner and a buy-back by a company of its securities).

An offer means a proposal of any sort, including a partial offer, which, if accepted, would result in an affected transaction. There are four categories of offers under the Act: mandatory offers, comparable offers, partial offers and general offers.

The announced intention to acquire 100% of a company's securities, otherwise known as a squeeze out or compulsory acquisition, is governed by section 124 and provides that where an offer for all of the securities of a regulated company is accepted by the holders of at least 90% of those securities (excluding securities held by related or inter-related persons or parties acting in concert), the offeror can compulsorily purchase the shares of the non-accepting shareholders on the same terms as applied to securities holders who accepted the initial offer. 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.

Mandatory offers are governed by section 123 and the Act requires a mandatory offer to be made for the remaining shares in a target if a bidder's holding of securities (together with that of its related or inter-related parties and any concert party) increases to 35% or more. Under the Act, a further mandatory offer is not triggered by the acquisition of further securities at the 40%, 45% or 49.5% level and so the Act abolishes the so-called creep provisions under the Code.

The Act introduces as an affected transaction the acquisition of or disposal of 5%, or any multiple of 5%, of a beneficial interest in securities of a regulated company and requires that any such acquisition and disposal must be disclosed to that regulated company. This disclosure obligation applies whether or not the acquisition or disposal results in a mandatory offer or other type of affected transaction.

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. In certain circumstances, however (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 its implementation.

If the parties to a merger have combined assets or annual turnover in into or from South Africa of at least R560 million and if the target firm has assets or turnover of at least R80 million, the transaction must be notified as an intermediate merger. If the parties to a merger have combined assets or annual turnover of at least R6.6 billion and the target firm has assets or turnover of at least R190 million, the transaction must be notified as a large merger.

A filing fee of R100,000 is payable in respect of intermediate mergers. The filing fee for large mergers is R350,000.

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. In recent times, these exchange controls have been gradually relaxed with the intention that they will ultimately be abolished.

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. 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. These principles include (among 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 advisers;
  • 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.
Julie Oppenheim
  Julie Oppenheim is a senior associate in Bowman Gilfillan’s corporate department. Julie specialises in mergers and acquisitions and general corporate and commercial law. In October 2008, Julie went on secondment to Herbert Smith in London for six months. Recent transactions in which Julie has been involved include:
  • the disposal by Metorex of its Cons Murch division;
  • Metorex’s $170 million project finance facility for phase II of its Ruashi copper and cobalt mining operations in the DRC and its recent project finance debt restructure for Ruashi in January 2010;
  • SABMiller’s R7.3 billion broad-based black economic empowerment transaction in South Africa for its subsidiary, the South African Breweries Limited (DealMakers deal of the year 2009);
  • the merger of Thyssenkrupp Engineering’s Uhde and Materials Handling divisions with the industrial projects business of PDNA Consulting Engineers;
  • Coal of Africa’s cash placing of approximately £59.6 million;
  • PPC’s R2.7 bilion black economic empowerment transaction in 2007.

Bowman Gilfillan
165 West Street

T: +27 (0)11 669 9000
F: +27 (0)11 669 9001

Charles Douglas
  Charles Douglas specialises in mergers and acquisitions and capital markets, with a particular focus on energy and mining transactions, and extensive experience of broad-based black economic empowerment transactions. Charles has been a partner of Bowman Gilfillan since the beginning of 2007 and 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 Kansai Paint Co., which is listed on the Tokyo Stock Exchange, in relation to its takeover bid for the remaining shares of JSE-listed Freeworld Coatings, which was successfully completed in April 2011 and valued at R2.4 billion. The transaction was recognised by The M&A Advisor in New York as both M&A Deal of the Year and Corporate / Strategic Acquisition of the Year (for transactions of $100-500 million) at the 3rd International M&A Summit & Awards Gala in New York on October 11 2011;
  • advising Du Pont subsidiary, Pioneer Hi-Bred in relation to its proposed acquisition of a majority stake in Pannar Seed;
  • advising ThyssenKrupp Engineering in relation to R400 million merger of its Uhde and materials handling businesses with the industrial projects business of PDNA Consulting Engineers, signed in March 2010;
  • advising Denham Capital, a US private equity firm, in respect of its investment in BioTherm Energy, a South African developer, owner and operator of renewable and clean energy generation projects.

Bowman Gilfillan
165 West Street

T: +27 (0)11 669 9000
F: +27 (0)11 669 9001