In the previous two columns we considered the conceptual frameworks applicable to the public offer of securities. In the first column, we looked at the conceptual framework typically applicable to public offers. In the second, we considered the framework applicable to public offers as contained in the 2008 Companies Act, which is expected to come into force next July. Section 99 in the 2008 act is the pivotal substantive section dealing with public offers. Section 99(2) provides that a person must not make an initial public offer (IPO) unless it is accompanied by a registered prospectus.
Readers may recall that an IPO is an offer to the public of any securities of a company if no securities of that company have previously been the subject of an offer to the public, or if all securities which had been the subject of a prior offer to the public have been re-acquired by the company. Both primary offers (subscriptions) and secondary offers (sales) are subject to the IPO rule.
Section 99(3) regulates primary offers and secondary offers. It provides that except with respect to securities that are the subject of an IPO, a person may not make a primary or a secondary offer unless there is compliance with section 99(3)(a) or (b).
Section 99(3)(a) applies to primary offers. It distinguishes between listed and unlisted shares. In the case of the former, it provides that a person may not make an offer to the public other than in accordance with the requirements of the relevant exchange. In the latter, such offers must be accompanied by a registered prospectus.
Prospectuses are governed by section 100. Section 100(1) provides that section 100 does not, except in the case of an IPO, apply to listed securities.
Section 99(3) (b) applies to secondary offers, and requires that these offers must satisfy the requirements of section 101. Section 101(1) in essence provides that the provisions of section 101 do not apply in respect of listed securities.
The definitions employed in section 95 of the 2008 act in constructing the conceptual framework applicable to public offers only once referred to listed securities. The references to listed securities are therefore to be found in the substantive provisions dealing with public offers.
The functionality of the references to listed securities can best be understood as follows: the objective of regulating public offers is to ensure fair and equal disclosure of relevant information to market participants.
This is achieved by requiring issuers or sellers of securities (in regard only to public offers, of course) to make such disclosures in a document. The document is known as a prospectus in the case of subscriptions, and as a statement in the case of the sale of securities.
On the other hand, where one deals with listed securities, inasmuch as stock exchanges require regular disclosure of a host of information, it would be expensive, discourage the raising of capital, and frankly serve little purpose to make public offers subject to the issue of a prospectus or statement, as the case may be.
As such, conceptual frameworks applicable to public offers take a practical view: as disclosure of relevant information will be achieved by the rules of the exchange in question, in our case the JSE, offers which amount to public offers in regard to listed securities can safely be exempted from the disclosure requirements in the underlying enabling legislation.
There is, of course, one exception to this approach: section 99(2) requires that a first time offer to the public of a company's securities - an IPO - must be accompanied by a prospectus, whether the offer is made by the company or someone else. This is consistent with sections 100(1) and 101(1).
Section 101(2) provides that a person making a secondary offer must ensure that the offer is accompanied by either the registered prospectus that accompanied the primary offering of those securities, or a written statement that satisfies the requirements of section 101(4) to (6).
Sections 99(8) to (11), read with section 107, distinguish between the filing, registration and issue of a prospectus. Section 107 specifically provides that a company that has offered securities to the public must not allot any of those securities more than four months after the filing of the prospectus for that offer. In other words, the prospectus becomes stale after four months.
It is not immediately clear why section 101(2)(a) draws a distinction between the giving of a prospectus or the furnishing of a statement. It seems that the legislature has simply taken a practical view. If a person, other than the company, offers the company's securities for sale, for disclosure purposes, the seller can rely on the prospectus in question if the prospectus is not yet stale for purposes of section 107. There does not seem to be another interpretation of section 101(2)(a).
In the first article in this series on public offers, it was noted that the conceptual framework applicable to public offers typically deems certain types of offers by persons other than the company in question to be subscriptions.
The functionality of doing so is to draw such an offer for sale into the net of providing a prospectus as opposed to only providing a statement. The deeming takes place insofar as certain types of offers for sale are either closely connected to the company in question or are subscriptions in substance. Not to require a prospectus in such circumstances would encourage disclosure arbitrage. This would be grossly unfair to market participants and offend the equal information principle alluded to earlier.
An example is section 146(1) of the 1973 act. It provides that no person shall make any offer to the public for the sale of any shares, which have been agreed to be allotted by the company with a view to such shares being offered to the public, unless it is accompanied by a prospectus. Section 146(2) further provides that if the initial allotment and the subsequent offer for sale take place within 18 months of each other, it shall be evidence that the company made the initial allotment with a view that the shares would be offered for sale to the public.
There does not seem to be an equivalent to section 146 in the 2008 act. At best, section 101(2)(a) provides some of the functionality but then really as an exception to the seller of the shares inasmuch as the seller will not be required to provide a statement if the four-month rule under section 107 applies. Alternatively, it is arguable that the functionality of section 101(2) and section 146 are the same except that the applicable period is now four months, not 18 months. A primary offer (and also a secondary offer) is defined as any offer to the public by the company in question or on its behalf. As such, it is arguable that these definitions by themselves are of such wide application by virtue of the employment of the phrase "on its behalf" that the functionality of section 146 has been absorbed into these definitions. But then it is also arguable that this phrase will in any event be interpreted as forming part of the relevant provisions in the 1973 act in order to prevent disclosure arbitrage.
In the next and last article in this series, we will further examine the provisions in the 2008 act applicable to public offers.
Written by: Etienne Swanepoel of Webber Wentzel
Published in the Business Report on 7 October 2009