A microscopic analysis of the new merger and amalgamation provision in the Companies Act 71 of 2008

• Jurisdiction: South Africa
• Published date: 15 August 2019
• Author: Ezra Davids
• Date: 15 August 2019
• Citation: 2010 Acta Juridica 337
• Pages: 337-371

A microscopic analysis of the new merger

and amalgamation provision in the

Companies Act 71 of 2008*

EZRA DAVIDS,† TREVOR NORWITZ‡AND DAVIDYUILL§

This article argues that the drafters of the Companies Act, 2008 largely

succeeded in their stated objective of providing for ‘equitable and

eff‌icient amalgamations, mergers and takeovers of companies’. The

authors do, however, point out a few drafting idiosyncrasies and ambigu-

ities which may require further judicial ref‌inement in order for those

provisions to be effective as intended. While retaining the basic structure

of pre-existing South African takeover law, the new Act includes some

new innovations in company law (largely drawn from foreign experience

but tailored for the specif‌ic South African situation), which should

enhance the objective of balancing the encouragement of economic

activity and prudent risk-taking with appropriate protections for the

interests of all company stakeholders. These new provisions include a new

statutory merger procedure, an appraisal rights remedy for shareholders

who dissent from corporate control transactions, and an ‘early-warning’

disclosure requirement for signif‌icant acquisitions of public company

shares. This article concentrates in particular on the f‌irst two of these new

additions – the merger procedure and the appraisal rights remedy – and

conducts a detailed analysis of the relevant provisions of the new Act.

Among other things, this article considers the extent to which the new

statutory merger procedure is likely to become practitioners’ M&A

vehicle of choice, given its greater f‌lexibility and versatility vis-à-vis the

existing procedures available under the current Act. It also considers the

safeguards which are provided for minority shareholders and creditors,

which are more protective than in other jurisdictions and, in some cases,

in the view of the authors, may undermine some of the benef‌its sought to

be achieved by the new law.

I INTRODUCTION

Merger and acquisition activity plays a vital role in the eff‌icient allocation

of society’s resources. The many benef‌its of mergers and acquisitions

* The authors are honoured to dedicate this paper to Mike Larkin, a wonderful lawyer,

teacher and human being.

† Partner, Bowman Gilf‌illan Inc, Johannesburg, BALLB (UCT), H Dip Tax (Wits).

‡ Partner, Wachtell, Lipton, Rosen & Katz, New York, B Bus Sc (UCT), BAin Jurispru-

dence (Oxford), LLM (Columbia).

§ Partner, Bowman Gilf‌illan Inc, Johannesburg, BALLB (Stellenbosch), BCL (Oxford).

337

2010 Acta Juridica 337

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(M&A in the practitioner’s vernacular) are well established and elucidat-

ing them is beyond the scope of this article. It is also clear however that

M&A transactions among important companies will often have broad

societal impact and involve matters of public interest and policy. More-

over, M&Aactivities almost invariably involve signif‌icant risk-taking and,

where public companies are involved, these risky decisions are often

made in the f‌irst instance not by the ‘owners’ of the businesses involved –

the shareholders of the participating companies – but by directors acting

as f‌iduciaries for the shareholders’ benef‌it. For all these reasons, proper

regulation of M&A activity is critically important. Regulation should

strike a balance between encouraging economic activity and prudent

risk-taking while appropriately protecting the interests of the many

stakeholders in the companies involved, the economy and society at large.

The fundamental importance of M&A activity and the need to strike this

balance was clearly in the minds of the drafters of the Companies Act 71 of

2008 (the new Act): the preface to the Bill declared that one of its

purposes was ‘to provide for equitable and eff‌icient amalgamations,

mergers and takeovers of companies’ (although curiously this imperative

did not make it into the ‘Purposes’ specif‌ied in s 7 of the new Act, a

regrettable oversight). Chapter 5 of the new Act, which is the subject of

this article, is devoted to ‘Fundamental Transactions, Takeovers and

Offers’.

In preparing what has become the new Act, the Department of Trade

and Industry decided to enlist at an early stage the assistance of academics

and practitioners in other jurisdictions as well as from South Africa. The

purpose of this approach, which was not uncontroversial at the time, was

to benef‌it from a comparative analysis, hearing how issues in the gover-

nance of companies, including in M&A, are addressed in various jurisdic-

tions, before deciding on an approach that is uniquely designed to address

South Africa’s environment and policy needs. The authors, who are

practitioners in the M&A area in South Africa and the United States,

respectively, participated in this process at points in the drafting process, as

did other experts from the United States, the UK, Australia, Canada and,

to a lesser degree, some other jurisdictions.

The resulting legislation adheres generally to the overall structure of

pre-existing South African law, which is largely based on English com-

pany law, but it does add a number of innovations drawn from the

experience of other jurisdictions. In the M&A area in particular, there are

a number of such ‘improvements’, including the addition of a statutory

merger procedure, an appraisal remedy and a disclosure requirement for

signif‌icant acquisitions of public company shares. The new ‘Business

Rescue’ regime, which is addressed in Chapter 6 of the new Act and is

beyond the scope of this article, is also the benef‌iciary of a signif‌icant

338 MODERN COMPANY LAW FOR A COMPETITIVE SOUTH AFRICAN ECONOMY

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amount of foreign input. In each case, however, these enhancements

were not adopted wholesale but have been tailored to the unique South

African context and policy goals. In most cases this has meant making

them more protective than, for example, their American equivalents, of

minority shareholders and other constituencies and of society in general.

One of the roles assumed by the foreign reference group working with

the drafters of the new legislation, in keeping with the stated objective of

simplicity and reduction of unnecessary ‘red tape’, was to take an Occam’s

Razor to many of the existing corporate formalities, challenging

ingrained assumptions and asking whether they are really necessary and

promote the public interest. The fact that a particular formality taken for

granted in one jurisdiction is not considered necessary in other jurisdic-

tions is a useful data point for legislators seeking to create a simpler, more

accessible and more effective corporate law. In the area of corporate

formation, this process was very successful, and we believe that the new

streamlined system should greatly facilitate company formation and the

availability of the corporate form to entrepreneurs. In the M&A area, the

streamlining effort was more mixed, and it is clear that the legislators were

unwilling to part with some formalities that do not exist in certain other

jurisdictions, as we will detail in the discussion below. Again, this is not

necessarily a negative, but ref‌lects policy preferences and choices consid-

ered appropriate in the South African context.

One particular example of this phenomenon in the M&A area, which

we do not address much in the discussion of the new provisions of the

new Act below, is the approach taken towards hostile takeovers. In some

jurisdictions, notably in the US, the board of directors of a target company

is given a signif‌icant amount of latitude in responding to a hostile takeover

bid, including adopting reasonable defensive measures if the directors

consider that appropriate to protect the shareholders. In this sense,

American law can be said to be more board-centric. The relative roles and

rights of the board and the shareholders in corporate governance were

much debated in the early stages of preparing the new legislation, and

legislators chose to retain in the South African corporate context a

shareholder-centric, rather than a board-centric, approach to corporate

governance. Thus, for example, the board is prohibited under s 126 of the

new Act from taking any action to impede a takeover bid. This is

consistent with the current anti-frustration provisions in Rule 19 of the

Securities Regulation Panel Code on Takeovers and Mergers and the

Rules of the Securities Regulation Panel (the Code). In addition and even

more fundamentally, the newAct retains the notion that directors serve at

the will of the shareholders they represent and can be removed by them at

any time by an ordinary resolution. This provision – which is consistent

with English law – makes South African companies more vulnerable to

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THE NEW MERGER AND AMALGAMATION PROVISION

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