With the new Companies Act No 71, of 2008, which will change the way in which mergers and acquisitions (M&A) are dealt with in South Africa, coming into effect soon, Bowman Gilfillan Attorneys corporate law department director Carl Stein says that companies wanting to merge should prepare themselves for possible class-action lawsuits.
He says that the Act gives both employees and trade unions considerably greater rights than previously.
“It is a possibility that the unions that objected to the unbundling of shares by telecommunications provider Telkom in cellular network provider Vodacom in about 2009, and took them to court on a number of occasions without success, could have been successful in stopping the deal or possibly postponing it for a considerable time, if the new Act had been law at that time,” says Stein.
In future, he says, M&A transactions will not be as simple to implement from start to finish as transactions have been up until now, because of the vested interest of other stakeholders.
Although Stein does not agree with various aspects of the Act, he says that, when it comes to M&A procedure, the Act does introduce far simpler procedures for M&A transactions. A common procedure has been introduced for most types of M&A transactions. Provision has also been made for a new amalgamation and merger procedure that allows large groups of companies, which have many subsidiaries, to either merge, amalgamate or restructure these different companies under the umbrella of one procedure.
“In terms of procedure, M&A deals will be much simpler. However, in practical terms, given the vested rights of various stakeholders, I believe the Act will prolong the merger process.”
Stein also believes that South Africa will see more lawyers specialising in class-action lawsuits as he predicts the number of suits filed against merging com-panies will increase, because of these new rights. He advises companies to become acquainted with the new law and set aside funds for legal fees to fight future battles, once the Act is in effect.
However, he says that the Act is probably the most important innovation in the South African M&A arena in the past 20 years.
“It is going to create a new playing field. The President is awaiting the finalisation of the regulations and certain changes to the Companies Act, after which it will come into oper- ation. The Department of Trade and Industry, which is tasked with the implementation of the Act, believes that the Act will come into effect on September 1,” says Stein.
He says that the Act is a complete substitution of the country’s current Companies Act, of 1973, which is based on the English Companies Act, of the 1920s. It introduces new concepts, alters procedures and introduces new rules for the Securities Regulation Panel, the body that oversees affected transactions in mainly public and JSE-listed companies.
Stein describes South Africa’s current Act as hopelessly out- dated, archaic legislation. How-ever, the new Act should bring South Africa into line with Western countries and contains M&A laws similar to those of the UK and the US. The current Act does not recognise electronic communication, whereas the new Act has made extensive provision to permit technology advancements, such as elec- tronic copies of documents and electronic signatures.
Stein explains that the Act is intended to harmonise South Africa’s business law to a great extent, and will accommodate radical changes that have been made in business over the past few years, such as the ease of global travel, the transporting of goods and the telecommunications revolution.
He says that the Act will also curb the powers given to directors.
“The power of multinational corporations has increased exponentially through the privatisation of industries that were significantly dominated by the State, such as power, communications, water and mining. The multi- national has become an extremely powerful entity of modern business practices. Unfortunately, as a result, there has been tremendous abuse of that power.”
The problem first reared its head in 2001 with the bankruptcy of American energy company Enron.
“The board of directors effectively ‘raped’ the company and cost hundreds of thousands of people billions of dollars. Regulators reacted to that abuse by imposing far more stringent requirements on directors and demanded more transparency and proper corporate governance, particularly from boards of directors,” says Stein.
Unfortunately, he says that international banks were not taken to account when this happened and that is partly why, over the past three to four years, some of the world’s major banks were able to bring the world’s economies to their knees through negligence and greed, and an absolute breach of their duties to the companies they were supposed to serve.
The new Act, however, contains extensive provisions governing the manner in which directors do their jobs and imposes severe financial sanctions on directors who do not.
The other change to M&A, which will have a material affect on how such deals are conducted, is the greater protection afforded minority shareholders, through the introduction of some important new remedies, which they can claim if they have been mistreated or abused as a minority shareholder.
Where there is a change of control in a public company, the minority shareholders are, in certain circumstances, given the right to require the company to buy back their shares for cash. The Act will provide minority shareholders with a way to cash in on their investment, if the funda-mental basis on which they invested in the company changes.
“This all revolves around the change in philosophy of the role of a company in society. The current global trend is that a company does not exist for the benefit of its shareholders only. Therefore, the aim of a company is no longer to solely make as much money as it can for its shareholders. However, a company is still required to make a profit for its shareholders but, in so doing, it is obliged to consider the interest of its other stakeholders, namely its employees and the community, as well as social and environ- mental factors,” says Stein.