November 03 2010
South African company law is in the process of being revamped. The new Companies Act introduces a number of important new concepts into South African law which will be relevant for M&A practitioners.
Unfortunately, there have been delays in the implementation of the new act, and although it was promulgated in 2008 (Companies Act (71/2008)), it has not yet taken effect. According to the latest notice of the Department of Trade and Industry, the act will come into force on April 1 2011. These delays are causing difficulties for businesses in South Africa, which are having to operate in an uncertain environment. There has been a lot of criticism of the process and of the reasons why it has taken so long for such an important piece of legislation to be finalised and to take effect.
Nevertheless, when the new act takes effect it will introduce mergers and amalgamations into South African law, making it easier for companies to implement business combinations.
The new act curiously defines an 'amalgamation or merger' together and does not deal with amalgamations and mergers separately. This means that within the act there is no real distinction between an amalgamation and a merger – the concept is treated as one, in contrast to the position in most other jurisdictions. In earlier drafts of the act, these concepts were separately defined and treated.
The new act defines an 'amalgamation or merger' as a transaction, or series of transactions, pursuant to an agreement between two or more companies that results in:
Therefore, the main difference between the two categories of amalgamations or mergers seems to be that in the one category there will be a surviving entity and in the other category there will be no surviving entity and all amalgamated or merged companies will be new.
An 'amalgamated or merged company' is a company that either:
The amalgamating or merging company is defined as a company that is a party to an amalgamation or merger agreement.
Section 113 of the act deals with amalgamations or mergers. The section provides that two or more profit companies, including holding and subsidiary companies, may amalgamate or merge if, upon implementation of the amalgamation or merger, each amalgamated or merged company would satisfy the solvency and liquidity test.
The procedure for the amalgamation or merger is to enter into a written agreement setting out the terms and means of effecting the amalgamation or merger. It must set out, among other things:
The section continues that if the securities of one of the amalgamating or merging companies are held by (or on behalf of) another of the amalgamating or merging companies, the merger agreement must provide for the cancellation of those securities when the amalgamation or merger becomes effective, without any repayment of capital in respect thereof. No provision may be made in the agreement for the conversion of those securities into securities of an amalgamated or merged company.
In regard to the solvency and liquidity test, the board of each amalgamating or merging company must consider whether, upon implementation of the agreement, each proposed amalgamated or merged company will satisfy the solvency and liquidity test. In addition, if the board reasonably believes that each proposed amalgamated or merged company will satisfy the solvency and liquidity test, it can submit the agreement for consideration at a shareholders' meeting of that amalgamating or merging company in accordance with the new procedure set out in Section 115 of the act.
A notice of a shareholders' meeting to consider an amalgamation or merger must be delivered to each shareholder of each of the respective amalgamating or merging companies and must include, or be accompanied by, a copy or summary of the amalgamation or merger agreement. It must also make reference to Section 115 (the meeting procedure) and Section 164 (which deals with the new appraisal right given to minority shareholders in certain instances, including amalgamations or mergers).
Section 116 of the act deals with the implementation of amalgamations or mergers. It provides that after a resolution approving an amalgamation or merger has been adopted by each company that is a party to the agreement, each of the amalgamating or merging companies must cause a notice of the amalgamation or merger to be given, in a prescribed manner and form, to every known creditor of the company. The creditors may seek leave to apply to a court for a review of the amalgamation or merger only on the grounds that they will be materially prejudiced by the amalgamation or merger.
The act also describes the effects of an amalgamation or merger. It provides that an amalgamation or merger:
The section also provides that the property of each amalgamating or merging company becomes property of the newly amalgamated or surviving merged company (or companies). Each newly amalgamated or surviving merged company is liable for all of the obligations of every amalgamating or merging company in accordance with the conditions of the amalgamation or merger agreement.
The section also provides that when, as a consequence of an amalgamation or merger, any property that is registered (in terms of any public regulation) is to be transferred from an amalgamating or merging company to an amalgamated or merged company, a copy of the amalgamation or merger agreement together with a copy of the notice of amalgamation or merger constitutes sufficient evidence for the keeper of the relevant registered property to effect a transfer of the registration of that property.
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