LAES 2021 - LU 11 Chp 10 (1) PDF

LU 11 LO1: Differentiate between the different types of fundamental transactions. LO2: Explain the meanings of “affected transaction” and “regulated company”. LO3: Explain the concept of a mandatory offer as a type of affected transaction and when a mandatory offer is triggered LO4: Briefly explain...

LU 11 LO1: Differentiate between the different types of fundamental transactions. LO2: Explain the meanings of “affected transaction” and “regulated company”. LO3: Explain the concept of a mandatory offer as a type of affected transaction and when a mandatory offer is triggered LO4: Briefly explain the concept of a “squeeze out” transaction as a type of affected transaction. LO5: Explain the role and function of the Takeover Regulation Panel in affected transactions LO6: Fully explain the appraisal remedy and the procedural steps that a shareholder must follow to successfully rely on this remedy PM: Chapter 10 para 10.3, 10.5 S112-116 of the Companies Act, 2008 PM: Chapters 10 and 14 para 10.4 S164 of the Companies Act, 2008  Fundamental Transactions Defining Concepts 1. Fundamental/Affected Transaction – those transactions that will attract additional regulation a) Alter a company b) Process for approval is set out in the Companies Act 3 kinds of fundamental transactions: 1. disposal of the majority of a company's assets/undertaking 2. Mergers / amalgamations 3. Schemes of arrangement Disposal of the majority of a Mergers / amalgamations Schemes of arrangement company's assets/undertaking Sale by a company of all or The assets and liabilities of This agreement is proposed most of its assets if is more one company are by the board and entered than 50% of the value of the amalgamated/merged with between the company and company at fair market another thus merging their the holders of any class of value corporate identities securities So, if the assets are over This happens in an This includes a 50% of market value or are agreement between 2/more reorganization of the share responsible for more than companies and the survival capital which means 50% of the profits made by of 1/more of the merging a) Consolidation of securities the company S112 companies OR the of different classes requirements apply read formation of 1/more new b) Division of securities into with s115 subject to companies different classes exceptions in s12(1) The new/surviving c) Expropriation of securities S12(1) is when disposal is company/ies hold all the from holders part of a business assets and liabilities d) Exchanging of its securities rescue/involves transfers previously held by the for other securities within the same group of merging/amalgamating e) Re-acquisition by the companies company company of its securities S112 if a company disposes Since 2/more companies f) A combination of the above of its assets in this way 2 combine their assets and requirements are met liabilities now held by the a) Must be approved by a surviving/new company all special resolution other merging companies b) Comply with procedure cease to exist when the transaction is completed  REGULATION OF FUNDAMENTAL TRANSACTIONS REGULATION OF DISPOSALS If a company proposes this a number of requirements need to be complied with under the 2008 Act a) A special resolution of shareholders must approve the transaction – to protect minority shareholders b) Section 112(5) prevents a special resolution from being broadly drafted to cover a wide category of generic business disposals c) Fair market value is required for disposal of assets d) Section 115(4) requires voting rights held by the acquiring party must be deducted from the quorum and excluded from the vote, this minimizes conflict e) If a business disposal involves a regulated company, it is subject to the Takeover regulations in the 2008 Act f) S 115(2) (b) a disposal will also require the approval of shareholders of the selling company’s holding company if the disposal is of all or the greater part of the assets of that holding company  REGULATION OF MERGERS OR AMALGAMATIONS 3 key stages of the amalgamation or merger procedure are: 1. The merger agreement 2 The shareholder approval process 3 Implementation of the merger Sec 113(2)- Merger agreement Final step before companies must concluded the BOD of implementing the enter into a merger each merging company merger is to notify agreement has to submit the every creditor of Particulars include: proposed transaction to each of the merging 1) MOI of the new their shareholders for companies company approval Where a creditor 2) Proposed directors BOD must be satisfied the believes they will 3) Extent of the shares liquidity and solvency test be materially to be converted is passed prejudiced they 4) Shareholder Notice of meeting can apply to considerations includes copy of merger court within 15 5) Assets and liabilities agreement business days 6) Estimated costs Quorum of 25% of voting after being 7) Details of the rights for a special notified arrangement resolution to be approved Notice must also  Defining Concepts Applicable to all companies private/public If the fundamental transaction also fits the description of an affected transaction the Takeover Regulation Panel has jurisdiction over such transaction The company must be a regulated company for the above to apply Regulated Company: a) Is a public company b) State-owned enterprise except if exempted in terms of s 9 c) Private company only if : 1) a percentage of the securities of the company was transferred within 24 Months immediately before the date of the transaction or the offer exceeds the prescribed percentage, not less than 10% OR 2) the MOI provides that the company and its securities are subject to Part B and C of Chapter 5 of the Companies Act 2008 and Takeover regulations  REGULATION OF SCHEMES OF ARRANGEMENT Regulations are covered in s 114 read with s 115 and s 164 Can include share for share exchange or share repurchase The company must employ the services of a qualified, independent expert to prepare the report about the proposed arrangement for the board The report must be distributed to all holders of securities It must be approved by a special resolution – 25% of voting rights entitled to vote ted Transaction t 117(1) (c) the Act 2008 ansaction/series thereof amounting to a disposal of all/most of the assets/under egulated co rger/amalgamation if its to do with at least one regulated company eme of arrangement between a regulated co and its shareholders Further to this it can also arise through: Acquisition/announced intention to acquire an interest in voting securities of the regulated Company amounting to a multiple of 5 eg 10% an announced intention to acquire a beneficial interest in the remaining securities not held by A person/persons acting together Mandatory offer compulsory acquisition Affected transaction divided into 2 broad categories: 1. All fundamental transactions are affected transactions if a regulated company is involved 2. Acquisition of prescribed percentages in voting securities covers the jurisdiction of the TRP. 3. Common type of 2nd category transactions – mandatory and compulsory/squeeze-out transactions (majority s/holder 90% of share/voting right acquire remaining shares/voting rights compulsorily allowing minority s/holders to exit by selling shares to majority s/holder These transactions are divided into 2 categories; 1. fundamental transactions are affected transactions if a regulated company is involved 2. acquiring prescribed % of voting securities involves the Takeover Regulation Panel. Most Common of these transactions are mandatory offers, compulsory acquisitions ( squeeze-out Transactions) A transaction that does not involve a regulated company will not fit the definition of affected transaction.  Identifying Fundamental Transactions Refers to: Disposal of all/greater part of the assets or undertaking More than 50% of the company's assets at fair market value irrespective of liabilities Assets of co over 50% of market value/ responsible for over 50% of the generated profit, Sect 112 together with s 115 will apply unless subject to exceptions in s 12(1) The exceptions ensure that the section does not apply if the Disposals is part of a business rescue plan/ transfers within the same group of companies The section 112 provides that: No company can dispose of its assets in this manner unless: 1) approved by special shareholders resolution 2) the company has to satisfy procedural requirements typical to that disposal Amalgamation/merger The assets and liabilities of one company are amalgamated/merged with another Occurs in an agreement between 2/more companies Result is 1/more of the merging companies surviving/forming a new company Surviving/new co together hold all the assets and liabilities held previously by the Merging/amalgamating company All the other merging/amalgamating company cease to exist once the transaction in completed “merger”, “amalgamation” not individually defined in the Act, provides a composite definition covering two broad categories ie 1) Each of the merging companies is dissolved and the assets/liabilities of the merging co Are transferred to a newly formed company/ies 2) At least one of the merging companies survive and the assets/liabilities of the non-Surviving co are transferred to the surviving company/newly formed company  Schemes of arrangement 3rd type of fundamental transaction Refers to any arrangement proposed by the Bod and entered between the company and holders of any class of securities include a reorganisation of the share capital of the company by, A consolidation of securities of different classes A division of securities into different classes Expropriation of securities from the holders Exchanging of securities Re-acquisition by the company of its securities Combination of above -often used as a compulsory takeover mechanism see TB for an e.g.  Opposition to fundamental transactions : Dissenting shareholders New concept – s 115 of the Act where dissenting shareholders approach the courts to set a side the shareholders resolution in favor of the fundamental transaction Even where the resolution is passed by a majority, this section allows that if 15% of the voting rights that were exercised on that resolution opposed to any person who voted against it can require the company to seek court approval for the transaction and the resolution cannot be implemented until this approval is obtained Even if less that 15% of the shareholders voted against the resolution any person can approach the court for leave to apply to the court for a review of the transaction Leave to apply will only be granted if the court is satisfied that the applicant is acting in good faith and has a prima facie case A company cannot implement a transaction subject to a pending legal action The court can set aside the resolution of satisfied : a) the resolution is unfair to a class of shareholder b) The vote was materially tainted by a conflict of interest, inadequate disclosure, failure to comply with the Act, MOI or applicable rule or procedural irregularity In addition, shareholder's also have access to an appraisal right in terms of s164 Appraisal Remedy A new concept introduced by the Companies Act 2008 Grants shareholders the right to tender/present their shares to the company If the shareholders disagree with certain transactions, they are entitled to require the company to acquire their shares at fair value Appraisal rights amount to a put option by minority shareholders against the company on certain events that may occur, including the passing of a resolution to approve a fundamental Transaction Applies to mergers, schemes of arrangement, disposal of assets, changes to the MOI that may have material effects to shareholders S164 allows shareholders with a means of exit Appraisal remedy- s 164- allows shareholders to challenge the amount they are offered for shares Procedural requirements for shareholder in exercising their appraisal rights: 1) Send a written notice of objection to the resolution proposing the merger prior to the shareholders meeting 2) Shareholder votes against the resolution at the meeting If resolution is passed, dissenting shareholders is advised by the company that they have 20 Days to demand that the company pays them fair value for their shares Once demand is made, dissenting shareholder no other right than the right to receive fair value for shares 3) Company required to make an offer to dissenting s/h to acquire their shares at what the board deems is fair value. If the s/h accepts they tender their shares which are acquired by the company 4) Company fails to make an offer/makes an inadequate offer to the mind of the s/h, affected s/h can apply to the court for determination of fair value 5) Fair value is determined immediately before the resolution is adopted Court decides and makes an order it considers fair. 6) Court further required to order dissenting s/h to either withdraw respective demands, the s/h is then reinstated to their full Rights as s/h or to comply and tender their shares to the company for which the company will pay fair value as ordered by the court 7) Important safeguard for minority s/h Takeover regulation Panel Takeover Regulation Panel has jurisdiction over an affected transaction Only an affected transaction if the Company is a regulated Company Takeover Regulation Panel – regulatory institution ito. s196(1) of the Companies Act 2008 Regulates affected transactions and issued by the Minister of Trade and Industry after consultation by the Takeover Regulation Panel Takeover Regulation Panel ensures: 1) Integrity of the marketplace, fairness to security holders 2) Provision of information to security holders to allow them to make fair and informed decisions 3) Ensure adequate time for regulated Companys and holders to obtain and provide advice 4) Prevent actions by a regulated company designed to frustrate and offer and make fair decisions In carrying out its mandate the Takeover Regulation Panel may: Require filing for approval documents iro. affected transaction/offer Issue clearance notices Initiate/receive complaints, do investigations, issue compliance notices A compliance order may: 1. prohibit/require any action by a person/ 2. Order a person to: a) Divest of an acquired asset b) Account for profits READ THE DIFFERENCE BETWEEN A MANDATORY OFFER AND SQUEEZE-OUT TRANSACTION Mandatory offer – an affected transaction where a regulated company buys back its own securities OR where one or more person's who are related /inter-related /acting in concert attain a prescribed percentage of all the voting securities in the company. The company or such persons is then required to make an offer to acquire the remaining securities on prescribed terms Squeeze out – affected transaction occurs when a person or offeror attains 90% of any class of securities in a company, the offeror notifies the holders of the remaining securities that he desires to acquire all the remaining securities of that class and the offeror is entitled and bound to acquire the securities on the same terms that applied to holder's that accepted the original offer , A holder of remaining securities can apply to court for relief  Questions What are the three kinds of fundamental transactions? In order for section 112 of the Companies Act 71 of 2008 to apply, what percentage of assets must be disposed of? When are the requirements for disposal as set in section 112 not mandatory? According to section 117(1)(c) of the Companies Act 2008, what qualifies as an affected transaction? How does a company become a regulated company? How is an amalgamation defined How are assets in an amalgamation treated differently to assets when they are disposed? What is the appraisal remedy?Who does the appraisal remedy protect? What are the steps a shareholder must follow in order to enforce the appraisal remedy? Why is the appraisal rights remedy important in the context of fundamental transactions? What is the Takeover Regulation Panel? What purpose does this panel serve? Why are the Takeover Regulations necessary? What powers are vested in the Takeover Regulation Panel?