THE MERGERS & ACQUISITIONS REVIEW – FIFTH EDITION – SOUTH AFRICA
Overview of 2010/2011 M&A Activity
South Africa continued to feel the effects of a sluggish global economy, albeit on a morelimited basis as compared to the rest of the world. M&A activity started picking up inthe early part of 2010 and this trend has continued in the first quarter of 2011. Theuptick was more pronounced in cross-border deals in South Africa, inward investment into South Africa and general corporate restructurings. Many of the recent transactions(particularly in the resources sector) involved Chinese, Indian and Japanese parties.There were again relatively few black economic empowerment deals, which for a numberof years provided great impetus to the South African M&A market.
South Africa successfully hosted the 2010 FIFA World Cup, which has been asignificant boost for South Africa's reputation in general.
Mainly due to the higher cost of debt, the private equity market in South Africais still slow in both the number and value of deals. Deal flow has, however, started toincrease in 2011, nevertheless the cost of debt remains prohibitive.
It will be interesting to see how the rest of 2011 pans out, but all signs point toincreased activity in the M&A market.
General Introduction To The Legislative M&A Framework
The cornerstone of the South African M&A legislative framework is the Companies Act, 2008 ('the Companies Act'). The Companies Act was promulgated in 2008 but only took effect on 1 May 2011. This has significantly overhauled the existing company law regime and the M&A legislative framework in general.
Among other things, the Companies Act regulates fundamental transactions,which include schemes of arrangement (a statutory procedure, which has in the pastbeen the most commonly used method of implementing a recommended takeover),amalgamation and mergers (which is new to our company law but which is similar to the statutory merger and amalgamation procedure applicable in the US) and disposals of allor the greater part of the assets or undertaking of a company. Each of the fundamentaltransactions requires the approval of shareholders supported by at least 75 per cent of thevoting rights that can be exercised on the resolution. The Companies Act also regulatestender offers, which includes mandatory offers and comparable and partial offers.Takeover Regulations have been published in terms of the Companies Act and are largelybased on the UK City Code on Takeovers and Mergers. The Takeover Regulation Panelhas been established in terms of the Companies Act and is the authority responsible foroverseeing any affected transaction, which includes the three fundamental transactions described above and tender offers. The Takeover Regulations apply to public transactionsand to private transactions in certain instances.
Other key pieces of legislation include the Securities Services Act (which, interalia, regulates the South African insider trading and market manipulation legislation) andthe Competition Act. In M&A transactions involving companies listed on South Africa'ssecurities exchange, the JSE Limited, the JSE Listing Requirements are of relevance.For many years, South Africa has had a system of exchange controls in placeaimed at regulating the flow of capital in and out of the country. These controls (whichare set out in the Exchange Control Regulations, 1961) have often played a significantrole in the manner in which M&A transactions in South Africa, particularly cross-bordertransactions, are structured. Recently, these exchange controls have been graduallyrelaxed, with the intention that they will ultimately be abolished. Examples of changesthat have been made to the system include the reduction of size of the minimum equitystake that South African corporates are required to hold in their foreign investments, andallowances being made for foreign companies to use their non-South African shares asacquisition capital for M&A transactions by means of a secondary listing on the JSE.Over and above the statutory framework outlined above, the South African lawof contract also obviously plays a significant role in regulating M&A transactions. This is derived primarily from South African common law, which is not codified.
Developments in Corporate and Takeover Law and Their Impact
A new Companies Act has been promulgated, which will significantly overhaul the South African company law regime. The new Act took effect on 1 May 2011.
Key changes in the M&A sphere include:
- provision for a new statutory merger and amalgamation procedure allowing for the merger of one entity into another or the amalgamation of two entities into a new separate entity (previously, there was no provision in South African law for mergers in the true sense of the word, and mergers and acquisitions in South Africa were generally effected through the acquisition by one company of the shares in or business/assets of another company);
- the introduction of a shareholder appraisal rights regime for dissenting minority shareholders in the context of schemes of arrangement, mergers, a disposal of substantially all of the assets or business of an undertaking or material changes to the constitutive documents. This will allow dissenting minority shareholders to put their shares to the company at fair market value;
- the limitation of the role of the court in schemes of arrangement;
- the introduction of a new regulator for M&A to replace the Securities Regulation Panel with the Takeover Regulation Panel;
- a new regime for affected transactions; and
- the introduction of a new business rescue procedure.