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Companies Act sets framework for public offers

28th September 2009

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Last time we looked at the conceptual framework typically applicable to public share offers. In this column, we look specifically at the conceptual framework used in the 2008 Companies Act to regulate public offers.

Before delving into the detail of the 2008 act, what is a regulator's interest in regulating public offers? Efficient markets depend on timeous and equal information being made available to market participants.

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Regulators achieve this objective by requiring that if a company makes a public offer for the subscription of its shares, certain information in a document known as a prospectus must be made available to all those approached. Regulators, of course, also achieve this objective, among other things, by prohibiting insider trading.

Regulators also require that if someone other than the company in question makes an offer for the sale of the company's shares to the public, that person must also make certain information available to those approached.

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The form in which such information is to be made available is usually referred to as a statement with reference to the section in the underlying enabling legislation. For example, in the 1973 act, such statements are referred to as section 141 statements inasmuch as section 141 of the 1973 act deals with these types of public offers.

Once the 2008 act comes into force, such statements will, in all likelihood, become known as section 101 statements since section 101 of the new act deals with public offers made by persons other than the company in question.

A prospectus contains more detailed information than a statement for the obvious reason that a company possesses more information about itself than sellers of its shares. Though it would be nice if persons other than companies were also required to issue a prospectus, it would not be practical as firms are not obliged to make available to others the information that is required to prepare a prospectus.

One can dissect the conceptual framework applicable to public offers in a number of different ways. It is arguably best to start with the definitions relevant to public offers contained in section 95 of the 2008 act.

An offer itself is defined (in relation to securities) as an offer made by any person with respect to the acquisition of any securities in a company. The operative word in the definition is the word "acquisition". It includes within its ambit both subscriptions for and sales of securities. The former is an offer by the company; the latter is an offer by persons other than the company whose securities are the subject matter of the offer.

The next is to consider the definition of an offer to the public. It is defined as: including an offer of securities to be issued by a company to any section of the public, whether selected among other things from the holders of the company's securities or clients of the company; and excluding those offers listed in section 96 of the 2008 act.

Excluded are secondary offers (see further down) effected through an exchange, in our case the JSE. In essence, the meaning of "the public" will carry its ordinary grammatical meaning. This definition and section 96 should be read with section 99 (6). The former excludes an underwriting agreement from being a public offer. The latter simply provides that an offer which is not an offer to the public is not a public offer. Here the operative words are "the public". This is not defined so it is just the ordinary grammatical meaning.

The conceptual starting point of the 2008 act is to draw a distinction between initial public offerings (IPOs) and those that are not. 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.

Conceptually, the starting point (a point left unsaid in the previous column) in any discussion concerning offers to the public is to say that one distinguishes between offers to the public and those which are not; see the earlier reference to section 99.

This is a question of fact. If an offer is not an offer to the public, this is the end of the matter for the purposes of the applicable legislation. The aim of legislation of this nature, including the 2008 act, is to only regulate offers to the public. Whether an offer is an offer to the public is a question of fact. If the offer in question does not fall within the meaning of the public, this will be the end of the matter in so far as it concerns the 2008 act.

Of course, if the offer in question falls within the meaning of the public, the 2008 act shall apply. Last, one then determines whether any of the exemptions in section 96 applies. If not, the offer will be an offer subject to the 2008 act. The next conceptual distinction is the one drawn in the 2008 act between a primary offer and a secondary offer.

The former is an offer by the company (or on behalf of itself) of securities to be issued by the company; in other words, for a subscription of shares. The latter is an offer by someone (or on behalf of that person) other than the company in question for the sale of shares in the company in question. It will be noted that IPOs can include primary and secondary offers. The last two building blocks in the 2008 act constructing a public offer framework are the new definition of a rights offer, and the new distinction drawn between listed and unlisted shares. A rights offer is an offer, with or without the right to renounce, made to the holders of a company's securities for the subscription of further securities in that company. One would not expect a rights offer to require a prospectus inasmuch as the company is soliciting funds from existing shareholders.

However, the definition of an offer to the public offers includes holders of a company's securities. It follows that rights offers fall within the ambit of public offers and hence require a prospectus. However, non-renounceable rights offers of unlisted shares and rights offers applicable to listed shares are then exempted in terms of section 96 if made only to holders of the company's securities.

The prime interest of regulators is to force disclosure, whether in terms of enabling legislation such as the 2008 act or the rules of the exchange on which the shares in question may be listed. Hence, these exemptions make sense inasmuch as a non-renounceable rights offer of unlisted shares will only be made to existing shareholders who are presumably familiar with the affairs of the company.

Likewise, a renounceable rights offer of a listed share will be caught within the disclosure net of the relevant exchange.

Having dissected the conceptual framework employed in the 2008 act dealing with public offers, in the next column on this topic we'll take a closer look at the substantive provisions contained in the 2008 act that deals with public offers.

Written by: Etienne Swanepoel of Webber Wentzel
This article first appeared in the Business Report.

 

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