This post was written by Shirley Fodor during her time as a partner at Jacobson Attorneys
One of the more novel introductions to the New Companies Act is the introduction of a chapter (chapter 5) devoted to specific types of transactions – the fundamental ones. The Old Companies Act required companies to play hide and seek with certain provisions relating to the disposal of all or the greater part of the undertaking or assets of a company (the infamous section 228), schemes of arrangement (section 311), court sanctioned amalgamations (section 313) and takeovers (section 440K read in conjunction with the Securities Regulation Panel rules). While the Old Companies Act did contain something that looked vaguely like a merger (by means of the absorption of one company into another by means of a scheme of arrangement, the concept of a merger without court sanction was conspicuously absent.
The term “Fundamental Transaction” is utilised in the New Companies Act to designate any of the following transactions:
- mergers amongst two or more companies;
- disposals of all or the greater part of an undertaking or assets; and
- schemes of arrangement.
In addition to these transactions the New Companies Act (in chapter 5) refers to “affected transactions” which will be dealt with later in this segment.
A merger is a fairly self-explanatory concept (set out in section 113 of the New Companies Act) – two or more companies combine their assets and liabilities, into one of the merging parties (with the remaining parties ceasing to exist) or into a new company with all of the merging parties ceasing to exist.
The requirements for giving effect to a merger transaction (excluding any competition considerations) is that the board of each company party to the transaction must be satisfied that the solvency and liquidity test will still be passed upon implementation of the merger. This means that the assets of the company, fairly valued, equal or exceed the value of its liabilities and the company is able to pay its debts as and when such debts fall due for payment. If so, the merger (together with the details thereof) must be submitted to the shareholders and a special resolution approving the merger passed. Where a shareholder does not vote in favour of the resolution, he will have his appraisal rights, which means that the shareholder may demand that the company pay him the fair value for all shares held by him/it in the company, where such the shares held by a particular class of shareholder (of which the particular shareholder is a member) is materially prejudicial to that class.
The disposal of all or greater part of the assets or undertaking of a company means more than 50% of the assets or undertaking must be disposed in the transaction. In order to give effect to such a transaction the following steps must be taken:
- the specific disposal must be approved by a special resolution of the shareholders prior to the transaction being entered into (or the transaction will not be binding);
- the notice of the meeting must specify the terms of the transaction and the steps involved in bringing the transaction to fuition; and
- the assets to be disposed of must in terms of the financial reporting standards, must be given their fair market value.
Section 114 deals with schemes of arrangement. A scheme of arrangement is in essence an agreement between the company and its shareholders. Such a scheme may come about in a number of ways. The company may re-arrange its share capital by, for example:
- repurchasing its shares; and/or
- exchanging shares in issue for a different class of share; and/or
- dividing its share capital into different classed or consolidating them.
Due to the complexity of such schemes, it is necessary that the nature and purpose of the scheme be dealt with by an independent professional (with the independence criterion being largely based on the King Codes) and accordingly do not intend delving further into the matter.
The court’s involvement is now restricted to the following instances:
- where at least 15% of the voting rights exercised on that matter were against the resolution and the majority still wish to proceed;
- a review application is launched by any shareholder who voted against the resolution where such resolution was patently unfair to any class of shareholder and/or the vote fell foul of the conflict of interest provisions or some other material procedural irregularity has been committed.
It should further be noted that none of section 112-115 may be utilised in circumstances where a contracting company is in financial distress.
An affected transaction is one over which the Takeover Regulation Panel (previously the Securities Regulation Panel) has jurisdiction. Affected transactions relate primarily to regulated companies (notably publicly companies, state owned enterprises (unless the specific enterprise has received an exemption) and under specific conditions only a private company). The primary difference is that the Takeover Regulation Panel rules now have force of law, but the mandate of the Takeover Regulation Panel remains essentially unchanged.
The most common types of affected transactions are: mandatory offers, compulsory offers and squeeze out. As the nature of these transactions fall outside of the ambit of this discussion, further information may be obtained on request.