In a recent funding transaction, where one of the lenders was also an existing shareholder of the borrower, we had to consider whether the takeover provisions of the Companies Act, No. 71 of 2008 (Companies Act) would potentially impact on the future enforcement of the cession of shares in the borrower and the general and special notarial bonds provided as security to the lenders (Security Documents).

Although the borrower, a private company, was not a 'regulated company' under the takeover provisions at the time of the conclusion of the Security Documents, there was a concern that the borrower may, at some stage in the future, become a regulated company if more than the prescribed percentage (10%) of its voting securities were to be transferred between persons who are not related or inter-related, for example, as a consequence of the enforcement of the cession of shares. In terms of the Security Documents it was envisaged that the borrower would mortgage its movable assets and its shareholders would pledge and cede their shares in the borrower as security in favour of the lenders. Designation as a regulated company would mean that for a period of 24 months after the borrower becomes a regulated company, transactions involving the securities of the borrower, including the enforcement of any of the Security Documents, could potentially be 'affected transactions' under, for example, s117(1)(c)(i) (disposal of all or greater part of the assets or undertaking of a regulated company) or 117(1)(c)(v) (intention to acquire all remaining voting securities in a regulated company). This would mean that such transactions could only be implemented after compliance with the takeover provisions and the issue of a compliance certificate or the granting of an exemption by the Takeover Regulation Panel (TRP).

It was our view that the execution, enforcement and/or foreclosure under the Security Documents would not constitute 'affected transactions'. However, because the takeover provisions in the Companies Act are wider in scope than was the position in the 1973 Companies Act, and having regard to the nature and magnitude of the finance involved, a decision was nevertheless made, as a matter of prudence, to apply to the TRP for an exemption from the takeover provisions. Such application was made on the basis that the exemption would apply if, at any stage in the future:

• the borrower becomes a regulated company and
• the lender seeks enforcement and/or foreclosure of the Security Documents while the borrower is so 'regulated'.

The application for exemption was premised on, among other things, the following grounds:

• there would be no 'offer' or 'offeror' in respect of the shares or assets of the borrower (were it to become a regulated company) pursuant to which the 'affected transactions' could possibly arise, because any acquisition arising out of the Security Documents would be the result of an enforcement or foreclosure pursuant to pre-existing security agreements and
• an exemption would be reasonable and justifiable in light of the principles and purposes of the takeover provisions.

In responding to the exemption application, the TRP concluded that the exemption could not be granted because the borrower was not a regulated company at the time of the application and it does not have the power to issue general or prospective exemptions. In addition and importantly, the TRP determined that the prospective cession of shares as security did not qualify as an 'affected transaction'.

It can accordingly be concluded, on the strength of the TRP's response, that the cession of securities as security in favour of a lender in a finance transaction does not constitute an 'affected transaction' and therefore the takeover provisions do not apply. A further relevant point is that the TRP only regulates specific transactions and one cannot apply to the TRP for an advance ruling in respect of prospective transactions or hypothetical scenarios which may or may not materialise in the future.

By Izak Lessing, Director,  and Pride Jani, Associate, Finance and Banking practice, Cliffe Dekker Hofmeyr