GETTING THE DEAL THROUGH – PRIVATE EQUITY 2014
Types of private equity transactions
What different types of private equity transactions occur in your jurisdiction? What structures are commonly used in private equity investments and acquisitions?
Private equity transactions in South Africa are as varied as they are in other jurisdictions. Generally, they can be classified into three categories: venture capital, development capital and buyouts. Typically, partnerships (usually en commandite or limited liability), trusts and companies are the most common legal structures used as vehicles for private equity investments. In addition, captive funds of financial services players, such as insurers, play an important role in the country’s private equity industry. Certain investors (for example, pension funds) are entitled to specific and often beneficial tax treatment, in which event the fund vehicle is structured so that gains ‘flow’ through to the investor, that is to say, the fund entity is ‘tax-transparent’.
Private equity transactions are usually funded by equity or debt or a combination of both. Sources of funding generally include other private equity funds, collective investment schemes, wealthy individuals, banks, government or development funding institutions and institutional investors, including pension funds and insurance companies. Investors in private equity funds will generally derive a return in the form of dividends, interest and proceeds from the sale of shares, initial public offering or recapitalisation.
The majority of transactions concluded by the private equity industry in South Africa have a significant black economic empowerment (BEE) component, and indications are that this will continue to be the case in the future. BEE is a statutory policy designed to facilitate greater economic participation for black, historically disadvantaged individuals through the acquisition of equity ownership or management of an investee company (or both). BEE is an important factor to consider when structuring private equity transactions. In addition, BEE transactions themselves represent a significant class of private equity transactions.
Corporate governance rules
What are the implications of corporate governance rules for private equity transactions? Are there any advantages to going private in leveraged buyout or similar transactions? What are the effects of corporate governance rules on companies that, following a private equity transaction, remain or become public companies?
There are a number of legislative and regulatory rules that govern private equity activities. In addition to the BEE policy framework, private equity transactions must take cognisance of the Companies Act, 2008, as amended (the New Companies Act), which came into force on 1 May 2011 and replaced the Companies Act, 1973 (the Old Companies Act) except for Chapter XIV of the Old Companies Act, which will be repealed by future bankruptcy and insolvency legislation; the King Report on Governance for South Africa (2009) and the King Code of Governance Principles (King III); the new Takeover Regulations, read with sections 117 to 127 of the New Companies Act (the Takeover Regime); the JSE Listings Requirements (the Listings Requirements), the Financial Advisory and Intermediary Services Act, 2002 (FAIS), and the Collective Investment Schemes Control Act, 2002 (CISCA), as well as legislation regulating exchange controls, competition and antitrust activity.
The provisions of the CISCA and its subordinate legislation (including regulations) apply to collective investment schemes while the provisions of the New Companies Act and its subordinate legislation apply to funds structured as companies. In either case the rendering of financial advice or the performance of financial intermediary services to South African clients in relation to funds (whether foreign or domestic) will be governed by the FAIS and its subordinate legislation.
New Companies Act The New Companies Act is not applicable to limited liability partnerships (en commandite partnerships) or trusts established in South Africa, nor does it apply to foreign companies wishing to solicit investments from South African potential investors. The New Companies Act is relevant with respect to fund managers who are incorporated in South Africa, or with respect to offers to the public. We provide an overview of the relevant sections in the New Companies Act below.
The New Companies Act addresses various aspects including incorporation, registration, organisation and management of various kinds of companies, as well as providing for more equitable and efficient amalgamation, mergers and company takeovers. Corporate governance is affected by changes introduced by the New Companies Act, in addition to King III. The New Companies Act partially codifies directors’ fiduciary duties, which were previously governed by common law, and seeks to promote transparency and higher levels of corporate governance and accountability.
The New Companies Act retains amendments to the Old Companies Act, including the ability of companies to provide financial assistance as part of private equity transactions. This is particularly common in BEE transactions, if such company’s board is satisfied that, subsequent to the transaction, the consolidated assets of the company fairly valued will exceed its consolidated liabilities, and that subsequent to providing financial assistance, and for the duration of the transaction, the company will be able to pay its debts as they become due in the ordinary course of business. The terms upon which the financial assistance is to be given must also be sanctioned by a special resolution of the shareholders of the company.
The New Companies Act further allows a company to provide financial assistance in connection with the subscription for any securities to be issued by the company or a related or interrelated company, or for the purchase of any securities of the company or a related or inter-related company if the company’s board is satisfied that, subsequent to the transaction, the solvency and liquidity tests will be satisfied and the terms under which the financial assistance is © Law Business Research Ltd 2014 South Africa Bowman Gilfillan 276 Getting the Deal Through – Private Equity 2014 Transac tions to be provided are fair and reasonable to the company. The allowance of financial assistance under the New Companies Act has thus far been, and will continue to be, subject to compliance with shareholder and board approvals, and facilitated BEE transactions, especially where third-party funding was expensive.Read further