Corporate control transactions in South Africa : chapter 4 : part two : South Africa on corporate control

• Date: 01 January 2010
• Pages: 75-96
• DOI: 10.10520/EJC74133
• Published date: 01 January 2010

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CHAPTER 4: CORPORATE CONTROL TRANSACTIONS

IN SOUTH AFRICA

4.1 Introduction

The chapter scrutinises corporate control transactions,1 in particular,

how they are used to attain control. The Securities Regulation Code

on Takeovers and Mergers (the Code)2 regulates corporate transac-

tions where exchange of control is involved. The Code was set up

by the Securities Regulation Panel (the Panel).3 It consists of rules

and regulations of the Panel to regulate affected transaction and all

proposals, which will eventually become affected transactions. The

regulation of the Code is mainly concerned with the duties of the

parties to an affected transaction.4 In other words, the Panel must

ensure that all affected transactions are fair and there is equal treat-

ment for the holders of securities in those transactions. An affected

transaction has been interpreted to include a takeover, a merger,

a compulsory acquisition, a mandatory offer or a joint venture. The

study will thus focus on the role of affected transactions as corpo-

rate control tools and accordingly the aspects of who exerts control

and the limits of that control will be analysed. If transactions of a

company involve an exchange of control, they must be regulated in

terms of the rules of the Securities Regulation Code on Takeovers

and Mergers and the Competition Act,5 where applicable.

The meaning of takeovers as an all-encompassing word for merg-

ers, acquisitions and takeover bids will be analysed. It is the conten-

tion of this chapter that all these methods are very signif‌icant tools of

corporate control. The chapter will thus fully investigate the relevant

transactions under mergers, acquisitions, takeover bids and joint

ventures to give a clear picture of how control is acquired through

these transactions. In all these methods what is conveyed is control

through an acquisition of shares or inf‌luence. Therefore, control in

this sense means a holding or aggregate holding of shares or other

securities in a company entitling the holder to exercise the speci-

1 Mergers, Acquisitions, Takeovers and Joint Ventures.

2 Companies Act 61 of 1973: chapter XVA. The South African Code on

Takeovers and Mergers is largely based on the United Kingdom’s City

Code on Takeovers and Mergers under the London Panel on Take-

overs and Mergers. Unlike the City Code, the South African Code has

the force of law and the relevant parties in an affected transaction

have to abide by it. Companies Act 61 of 1973: section 440C(1)(b),

440C(4)(e) and 440M.

3 Companies Act 61 of 1973: section 440B.

4 Companies Act 61 of 1973: section 440C.

5 89 of 1998.

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f‌ied percentage6 or more of the voting rights at company meetings.7

Furthermore, control means being able to inf‌luence the policy of a

company even though a specif‌ied percentage of the voting rights at

the meetings of a company are not exercised.

4.2 Mergers

Mergers have two broad categories. Those regulated by the Com-

panies Act8 only and those regulated in terms of both the Compa-

nies Act and the Competition Act. A merger essentially involves

the transfer of the whole undertaking of a company, property and

liabilities to another company, or their division between two or more

companies. Fundamentally, a merger occurs where two or more

companies combine to form a larger company. The shareholders

in the combined company can be all of the shareholders of the two

combined companies.9 Mergers can thus be effected in a number

of ways. A share exchange offer by one company for the shares of

another can be undertaken or a court scheme of arrangement can

be deployed to effect a merger.10 Mergers occur because of the pos-

sible eff‌iciency gains, which can be realised by ousting incompetent

managers of another company.11

4.2.1 A straightforward merger

A straightforward merger is a process where two or more companies

amalgamate their assets to form one company. On merging, a totally

new company can be formed or out of the merged companies, one

company can merge its assets with another, which retains control

over the assets of the two companies.12 In addition, a number of com-

panies can merge with each other whereby one of them will be a hold-

ing company of all the other companies but each will retain its own

separate legal identity.13 Furthermore, an absorption can be effected

where one company ‘acquires all the assets and all the liabilities of

the companies to be merged,’ the merged companies then forfeit their

separate legal identities because they are considered as dissolved.14

4.2.2 Mergers in terms of the Competition Act

In terms of the Competition Act, a merger is the direct or indirect ac-

quisition or direct or indirect establishment of control by one or more

6 The specif‌ied percentage is 35% or more of the voting shares of the

company.

7 Blackman 1996: 346. See also Du Toit 2006: 149.

8 Act 61 of 1973.

9 Stedman 1993: 9.

10 Stedman 1993: 9.

11 Hylton 2003: 313.

12 Cilliers et al 2000: 460.

13 Cilliers et al 2000: 461.

14 Cilliers et al 2000: 461.