The indecision surrounding the implementation date of the new Companies Act, No 71 of 2008, has created uncertainty when undertaking mergers and acquisitions (M&A) transactions in South Africa, says Bowman Gilfillan Attorneys director Rudolph du Plessis, who maintains some companies are likely to hold off on M&A deals until their legal requirements, in terms of the new Act, have been finalised.
The implementation of the Act is scheduled for April 1; however, it was previously expected on September 1, 2010. Du Plessis notes that, as of March 9, regulations had yet to be finalised, regulatory agencies, such as the new Companies Office and the Takeover Regulation Panel, had yet to be put in place, and the amended bill had not yet been passed by Parliament.
“Because of the indecision concerning the implementation date, some companies are not entirely confident that the new Act will be implemented on April 1 and might find it unnecessary to delay M&A transactions. However, companies should take the new Act into consideration,” says Du Plessis.
He explains that if an M&A deal is undertaken before the promulgation of the new Act, but is implemented after the Act has come into effect, it is uncertain whether it will be subject to the changes in the new Act, such as the appraisal right afforded to minority shareholders.
“The uncertainty puts companies in a difficult position because they are unsure about which laws they must comply with,” says Du Plessis.
As a result, he suggests that companies ensure that M&A transactions comply with regulations under both the existing and the new Act.
Du Plessis adds that there are trans-itional provisions in the current Act; however, in some instances the pro- visions are unclear and may create room for error.
He says the transitional provisions do assist the regulation of M&A deals during the transitional period, but only become operational once the new Act comes into effect. As a result, the transitional provisions do not provide companies with procedures to follow before the new Act comes into effect.
Du Plessis explains that the main changes to the Act, which affect M&A transactions, are positive, as they bring South Africa in line with international best practice.
These changes involve provisions that relate to schemes of arrangement, takeover offers and the buying of company assets.
Du Plessis believes that most of the changes in the new Act will help make M&A transactions easier to achieve, as they will simplify the procedures involved in M&A deals.
Under the old Act, a scheme of arrangement is a complicated process involving going to court twice to convene and sanction the scheme, which costs companies money and time. Under the new Act, Du Plessis says these cumbersome court approvals will fall away as a much simpler process will be put into effect.
Another change is the introduction of the appraisal right, which is an additional minority protection mecha- nism that is available in a number of overseas jurisdictions. It provides minority shareholders with the power to force companies to buy them out.
Under the old Act, companies are able to provide consideration in the form of shares; however, the new Act will require companies to pay out share- holders in cash should a shareholder exercise the appraisal right. In future, companies will have to take the appraisal right into account and ensure that they have the funds available should a shareholder need to be paid out.
Further, Du Plessis says there are concerns that the appraisal right gives minority shareholders, who are not prejudiced by the transaction, the ability to delay the finalising of an M&A deal.
However, legal advisers from juris- dictions that already practise the appraisal right say the mechanism is not often exercised, as the price that companies offer shareholders often has a premium built into it to ensure the cooperation of shareholders.
“The appraisal right may also be a hindrance to companies because it needs to be included in any circulars sent to shareholders, and a record of the people who object to the transaction and who vote against the resolution needs to be kept. If more than 15% of people vote against the resolution, the company is required to make an offer to buy out those who object,” he explains.
Meanwhile, the new Act streamlines takeovers by introducing simpler regulations concerning amalgamations and mergers.
“The process is simplified as the new Act allows companies to be combined more effectively, without the added burden of liquidation, as this process and the transfer of assets between the businesses that are being combined will happen by operation of law, in terms of the merger agreement,” explains Du Plessis.
This eliminates cumbersome pro- cedures under the current Act, which involve the sale of one business to another, possibly in exchange for shares.
Under the current Act, once the acquired company’s assets are registered under the acquiring company, the acquired company is required to undergo a formal liquidation or deregistration process. However, if the acquired company was paid for in cash, this means that, before it can be liquidated, it will have to distribute the cash to its shareholders.
Under the new Act, companies can be combined without too many formalities. The process is simplified as the relevant stakeholders can determine whether only one of the companies survives, or whether neither of the companies survives and a new company is formed.
“Further, when dealing with the transfer of contracts with a specific company to another company, consent is currently needed from the other contracting parties. Under the new Act, it is likely that companies will not need this permission, as the transfer of contracts will take place by operation of law,” explains Du Plessis.
Generally, when transferring assets from one company to another in an M&A transaction, tax is payable unless it is brought within the reorganisation provisions under the Income Tax Act, No 58 of 1962.
However, under the new Act, there are many exceptions where tax payment is not required. For example, if there is immovable property involved in the sale, the payment of a transfer duty is not required when combining those assets, concludes Du Plessis.