No guarantee of a good outcome
High-speed evolution as applied to law can leave some gaps in legal DNA
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.
ADAPTING TO A CHANGED ENVIRONMENT