No guar­an­tee of a good out­come

High-speed evo­lu­tion as ap­plied to law can leave some gaps in le­gal DNA

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - DAVID PIN­NOCK

ONE of the many stresses at­ten­dant on the life of an at­tor­ney, right along­side billing time and can­di­date at­tor­neys, is that the rules can be changed at any time. Hard won knowl­edge can be ren­dered re­dun­dant at the stroke of a pen held by a judge or leg­is­la­tor. Our law is mu­ta­ble and adap­tive — like high­speed evo­lu­tion.

In this metaphor, the Com­pa­nies Act, 2008 is to stodgy cor­po­rate lawyers what a well-placed me­teor is to a race of di­nosaurs. The en­vi­ron­ment has changed: adapt or die. More eru­dite com­men­ta­tors than I have pointed out the de­press­ing man­ner in which vast swathes of our com­mon law have be­come of purely aca­demic in­ter­est (see for ex­am­ple, Michael Ku­per “An­other Look at the Com­pa­nies Act: Rolls Royce or Ford Ed­sel”, The Cor­po­rate Report, Vol 2 Is­sue 2, Au­gust 2012). Nat­u­rally, the Com­pa­nies Act, 1973 had its own dif­fi­cul­ties, in­clud­ing prob­lems re­lat­ing to clumsy draft­ing, but decades of le­gal prece­dent and writ­ing had man­aged to fill in the gaps, pa­per over the cracks and ren­der it a work­ing piece of leg­is­la­tion.

Of course, if you sub­scribe to the be­lief that the clumsy hap­haz­ard man­ner in which the ju­rispru­dence of prece­dent deals with le­gal prob­lems is not the most ef­fi­cient way of op­er­at­ing, you will have no pa­tience with this whin­ing. A new broom is re­quired now and then, this ar­gu­ment runs, and it is bet­ter to start again rather than to keep amend­ing bits and pieces of an in­creas­ingly dated piece of leg­is­la­tion, or wait­ing for the crap shoot of lit­i­ga­tion to place the right ques­tion into the hands of the right bench.

This start afresh ap­proach ac­tu­ally has much to rec­om­mend it, and the 2008 act is full of use­ful con­cepts and good ideas. How­ever, it is hard to es­cape the feel­ing that it burned through our at­mos­phere a few drafts too early. The drafters do not seem to have been given the op­por­tu­nity of print­ing the doc­u­ment and read­ing it qui­etly in a cor­ner. If you doubt this, have a read of the Com­pa­nies Amend­ment Act (No 3 of 2011), which, if it had been writ­ten by a teacher by way of mark­ing an as­sign­ment, would have been mostly red ink, ir­ri­tated ex­cla­ma­tion points and re­marks like “must try harder”.

This leads to sub­stan­tive dif­fi­cul­ties, or op­por­tu­ni­ties, de­pend­ing on your point of view, which can be il­lus­trated with a sim­ple case study. A pub­lic com­pany, listed on the JSE, has a wholly owned sub­sidiary which holds all of the as­sets and busi­ness of the group. The sub­sidiary is a pri­vate com­pany, which has been a wholly owned sub­sidiary for sev­eral years. The pub­lic com­pany now de­cides to ac­cept an of­fer to ac­quire the en­tire busi­ness.

You will ap­pre­ci­ate that the seller of the busi­ness is the sub­sidiary. The sub­sidiary is re­quired to get ap­proval for the sale of the busi­ness by way of a spe­cial res­o­lu­tion in terms of sec­tion 112 — eas­ily done in this in­stance as it has one share­holder.

The listed com­pany is re­quired to get the ap­proval of its share­hold­ers by spe­cial res­o­lu­tion un­der sec­tion 115(2)(b) on the ba­sis that the sale will re­sult in the greater part of its busi­ness and as­sets be­ing dis­posed of when mea­sured on a con­sol­i­dated ba­sis.

A trans­ac­tion gov­erned by the takeover pro­vi­sions of the act (Parts B and C of Chap­ter 5 of the act, from sec­tion 117 on­wards) and the as­so­ci­ated reg­u­la­tions (the takeover pro­vi­sions of the act and the as­so­ci­ated reg­u­la­tions are re­ferred to col­lec­tively be­low as the takeover reg­u­la­tions) is also sub­ject to a host of reg­u­la­tory re­quire­ments which are in­tended to en­sure that the trans­ac­tion process is con­ducted in a man­ner fair to all share­hold­ers.

The takeover reg­u­la­tions re­quire that a com­pany en­ter­ing into a reg­u­lated trans­ac­tion must nom­i­nate in­de­pen­dent direc­tors to sit as an in­de­pen­dent board to over­see the trans­ac­tion and must ap­point an in­de­pen­dent ex­pert to pro­vide an opin­ion re­gard­ing whether the trans­ac­tion is fair and rea­son­able and pro­vide that opin­ion to share­hold­ers. It must gov­ern the con­tent of the cir­cu­lar to be sent to share­hold­ers and re­quire that the

The 2008 act is full of use­ful con­cepts and good ideas. How­ever, it is hard to es­cape the feel­ing that it burned through our at­mos­phere a few drafts too early

Takeover Reg­u­la­tion Panel over­sees and ul­ti­mately cer­ti­fies that the trans­ac­tion has been con­ducted in com­pli­ance with the takeover reg­u­la­tions.

Which is as it should be. If a listed com­pany is dis­pos­ing of its en­tire busi­ness, how­ever struc­tured, that is pre­cisely the kind of thing that the takeover reg­u­la­tions and the Takeover Reg­u­la­tion Panel are ex­pected to reg­u­late.

Ex­cept they won’t, be­cause they don’t (as Dr Seuss might have said).

The sub­sidiary, the seller, is not a reg­u­lated com­pany (in terms of sec­tion 117(1)(i) read with sec­tion 118(1)(c)), as it is a pri­vate com­pany which has not had more than 10% of its se­cu­ri­ties trans­ferred in the past two years and has not elected in its mem­o­ran­dum of in­cor­po­ra­tion to be so reg­u­lated. An af­fected trans­ac­tion only arises where a reg­u­lated com­pany is in­volved, and only af­fected trans­ac­tions are gov­erned by the takeover reg­u­la­tions. The listed com­pany is a reg­u­lated com­pany, but it is not en­ter­ing into an af­fected trans- ac­tion, as the ap­proval which the listed com­pany must ob­tain from its share­hold­ers is in terms of sec­tion 115(2)(b), not sec­tion 112, and for a sale of busi­ness to be an af­fected trans­ac­tion it needs to be a trans­ac­tion con­tem­plated in sec­tion 112.

But it feels as though this trans­ac­tion should be gov­erned by the takeover reg­u­la­tions. Ev­ery in­tu­ition that an M&A lawyer has points to the fact that this is a trans­ac­tion which is reg­u­lated. Fol­low­ing the logic above, the listed com­pany, with many a hes­i­tant glance over its shoul­der at its lawyers, can now go ahead with the trans­ac­tion with­out com­ply­ing with the takeover reg­u­la­tions. In a sit­u­a­tion where share­hold­ers are hos­tile to the trans­ac­tion, this feels like the equiv­a­lent of be­ing in­volved in a bar brawl and stand­ing with your legs apart, invit­ing the kick.

Many listed com­pa­nies are struc­tured with an un­der­ly­ing op­er­at­ing sub­sidiary. Or they can be if you give them the in­cen­tive.



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