Black economic-empowerment (BEE) players still recuperating from the effects of the recession may face another blow when the new Companies Act, No 71 of 2008, becomes law, as it could affect mergers and acquisitions (M&A) activity involving BEE deals.
The new Act extends the restrictions on financial assistance for the acquisition of company shares, say banking and finance law experts at Werksmans Attorneys.
This could place further pressure on M&A activity involving BEE deals, which previously drove M&A activity in South Africa.
South African corporate finance journal DealMakers says the total value of BEE deals decreased from R73-billion in 2008 to R27-billion in 2010.
“When the new Act was first debated, everyone thought it would either lift the prohibition on funding assistance for the acquisition of shares or would modernise it in line with modern company law concepts,” says Werksmans director and banking and finance department head Wildu du Plessis.
But, he says, if you look carefully at the wording of the Act, you will see that it does not do away with the prohibition at all and that it is still very much an issue.
“The Act inadvertently broadens the prohibition, which could have serious consequences for some BEE transactions – not only future deals, but also some of those concluded in the past,” explains Werksmans director Amelia Heeger.
Du Plessis and Heeger, who believe the change may have been an unintentional error when the Act was written, say the implications of the broadening of the prohibition are not yet widely known or understood.
“When it filters through, it is likely to cause consternation among both lenders and borrowers,” says Heeger.
Du Plessis adds: “Firstly, where, in the past, the prohibition was always focused downwards, meaning the prohibition applied to a company and its subsidiaries, it will now apply to the entire group – upwards, downwards and sideways.”
This means that shareholder approval will have to be sought by any entity in the borrowing group wishing to provide financial assistance for the subscription or acquisition of its own shares.
“But potentially even more worrying is that the new financial assistance requirements will apply both prospectively and retrospectively,” says Heeger.
She says the new Act requires that financial assistance provided before its implementation will (even if properly approved under the old Act) be subject to the approval process and provisions set out in the new Act.
“BEE transactions, in parti- cular, are rarely short-term transactions but tend to be ongoing over a long period of time – say, five to ten years.
“So, where a special resolution may not have been necessary five years ago when a BEE deal was concluded, it might become necessary now. Suddenly, because of the new rules on financial assistance, a company may have to go back to its shareholders for approval,” says Heeger.
However, she adds that shareholders may not be as receptive today as they were in past years when many BEE equity deals were concluded at a point when share prices were at a high.
This could make it difficult to get into a compliant position, says Heeger. “The shareholders may have gladly voted for the transaction five years ago when share prices were growing, but if that hasn’t happened, some shareholders may see things differently today.”
Failing to seek retrospective shareholder approval could be just as damaging, she continues “Noncompliance represents an opportunity for disgruntled shareholders to cast doubt over the legality of a transaction, which is the last thing that any company or stakeholder would want.”
At worst, an unapproved transaction could be unenforceable, and the company directors who fail to ensure compliance could be personally liable, adds Du Plessis.
“Companies that have undertaken equity transactions would be well advised to audit them for compliance with the provisions of the new Act. It’s important to check whether or not it will be necessary to obtain approval again. As for future deals, companies must also think carefully about which entities in the group they will be taking security from. Again, this raises compliance and director liability issues,” he concludes.