Fundamental Transactions, Take-Overs and Offers
Session 1 - 21/08
Introduction
‘Fundamental transactions’ = specific set of transactions that are dealt with under
Ch5 of the Companies Act.
The thing that sets these transactions apart is that they require shareholder
approval, rather than simply the Board.
Purpose:
The nature of these transactions are so significant that they should require a
higher threshold.
In essence, they are transactions that change the nature of the
business of the company or which change the nature of what the
shareholders own.
The problem, however, is that the remedies that shareholders have are very
limited.
Three areas we will deal with:
Sec 112 - 115: Disposal of assets or undertaking and the approval process
Sec 113 - 114: Mergers, amalgamations and schemes of arrangement
Introduced in the new Companies Act
There are ways in which you can combine different businesses
together
Statutory mechanisms,
Schemes of arrangement are where you can shift companies around;
combine different parts of businesses.
Sec : Appraisal rights
statutory right of a corporation's minority shareholders to have a
judicial proceeding or independent valuator determine a fair stock
price and oblige the acquiring corporation to repurchase shares at
that price
The takeover regulations
In your MOI, you would expect to find the basic governance principles of a
company
In your shareholders’ agreement, you can go into a level of further detail.
Practical examples include funding; restraint of trade.
You would also ‘reserve’ certain transactions which would ordinarily fall
within the Board’s discretion to do without shareholder approval
When someone says they want to 'sell their business' — you need to understand
what is meant by that - what is actually being sold?
As a lawyer overseeing this kind of transaction, you need to navigate all the
different legal issues and stakeholders of a company.
Session 2 - 21/08
,Transaction Structures
Share Sale
The main essence of a sale of shares is the change of ownership.
The legal entity remains exactly the same
And therefore, by default, the legal relations hips are also intact.
But — ownership can impact on legal relationships if it is provided for in the
MOI.
From a commercial perspective, if we look at a transaction in terms of change of
ownership, what we look at is how to achieve this legally.
But from a practical perspective, the new owners would also want to know
what exactly they are buying into.
They will want to know what legal relationships are held by the company and
whether it is a profitable business.
This would entail a due diligence exercise — this is intended to help
determine the ‘legal health’ of the company.
The sale transaction structure is very cut-and-dry, even between different
companies.
From this perspective, it’s the simplest option.
But what are the pitfalls?
If you buy into a company that has a history of operations, this means
that it has accumulated a whole lot of legal relationships already
established.
If the company has liabilities that you do not know about, the asset
that I am buying is worth less and you face a risk.
There may be reputation issues with the business too.
This is not regulated by Ch 5 of the Act.
Because the sale of shares is a contract where consent is extremely
important.
Exception: you may find under shareholders’ agreements, the rights
for certain shareholders to sell their shares and force minority
shareholders to sell too.
Subscription for Shares
This is similar to a sale of shares, but the money goes directly into the company as
opposed to the shareholders which you purchase from.
Typical in situations where companies need working capital or are expanding.
Typical for Angel investors
Also typical for Private Equity investors — typically take a significant minority stake
in the company, because they do not want to disturb the management of the
company
They want to improve through their shareholding and strategic input in
meetings the company’s returns etc.
, But typically their investment is short-term.
Sale of Business
What this looks like from a practical perspective is that Company 1 with its own
management and shareholding, purchases the underlying assets and liabilities of
Company 2.
Company 1 can pay Company 2 in cash or provide them with a claim
against Company 1 for the purchase price.
Why would you purchase a business or undertaking instead of buying shares?
Circumvent the pitfalls of share sales / subscription.
Operational reasons
Integration purposes - especially regarding management.
Another reason could be that a buyer is interested in particular assets of a
business.
This has a whole other set of implications from a legal perspective.
In practical terms, if you are going to buy a distribution business from the
current distributor, this does not mean that you have to go to the parent
company and simply check that they’re fine with the new owner (‘Change of
Control’). It means you need to actually move the contract from their
business to yours (‘Assignment’).
It also means that you may have to renegotiate the contract, and it can be
complex because while rights are easy to assign, assigning obligations are
more difficult.
Also consider the legal implications that will have to be navigated in
Employment Law (Sec 197 Labour Relations Act - transfer of a going
concern)
In simplistic terms, the Board of the company controls the assets and the
undertaking and therefore the Board is able to sign the contract on behalf of the
company which sell the business.
Ch 5 changes this position - yes, they may have that power, but with
shareholder approval for greater protection of their interests.
Shareholders can take these transactions to court with appraisal remedies.
From now, we will start looking at what the requirements are in terms of the Act for
these transactions.
26/08
Sale of shares and sale of business are the two most common transactions in
commercial law.
, SALE OF BUSINESS SALE OF SHARES
PARTIES PARTIES
Purchaser and company Purchaser and shareholders
SALE ASSET SALE ASSET
Assets / Going concern (e.g: fixed Shares as a bundle of rights
assets, trading, trading sock, (Rights to distribution, rights to liquidation,
goodwill, contracts, IP) voting rights etc.)
EMPLOYEES EMPLOYEES
Transferred in terms of Sec 197 LRA No transfer required
LIABILITIES LIABILITIES
Negotiable Non-negotiable, forms part of the sale.
(Due diligence required to ring fence
liabilities)
WARRANTIES WARRANTIES
Less risky than sale of shares (tax, Higher risk, more comprehensive especially
less comprehensive) around tax.
ADVANTAGES ADVANTAGES
Can cherry-pick your assets and No provisions in Companies Act, dictated
tailor-make your contract to exclude entirely by contract. (Sec 112 dictates the
liabilities. procedures and conditions on selling the
greater part of your assets; in the sale of
shares there is no sale of ‘assets’ - in most
cases would not apply)
DISADVANTAGES DISADVANTAGES
Adherence to Sec 112 and 115 Higher risk, lack the stock and barrel (all
Adherence to Sec 179 LRA liabilities seen and unseen)
Adherence to Sec 11 of VAT Act
Adherence to Sec 24 of Insolvency
Act
Administration regarding the transfer
of contracts, licenses etc particularly
when cession is prohibited (as in
many contracts).
TAX TAX
Asset by asset assessment of Capital CGT can be reduced by careful structuring
Gains Tax (CGT) implications under certain circumstances.
Lawyers designed the structure as follows:
The company would repurchase the shares
for what the buyer would have bought them,
and then simultaneously the buyer would
subscribe for the shares.
