The Introduction of the Statutory Merger in South African Corporate Law: Majority Rule Offset by the Appraisal Right (Part 1)
| Jurisdiction | South Africa |
| Published date | 25 May 2019 |
| Citation | (2008) 20 SA Merc LJ 1 |
| Pages | 1-32 |
| Date | 25 May 2019 |
| Author | Maleka Femida Cassim |
Articles
The Introduction of the Statutory Merger in
South African Corporate Law: Majority Rule
Offset by theAppraisal Right (Part 1)
MALEKA FEMIDA CASSIM*
University of the Witwatersrand
‘[T]he amalgamating companies continue without subtraction in the amalgamated corporation,
with all their strengths and weaknesses, their perfections and imperfections and their sins, if
sinners they be.’
1
‘At one moment two corporations exist; at the next, the acquiring corporation has enveloped
the target, like an amoeba engulfing its prey, and has succeeded to all of its properties, rights
and other attributes.’
2
1 Introduction
A fundamental and radically new concept of the statutory merger, borrowed
from the United States of America, is to be introduced into South African law
by the new draft Companies Bill, 2007
3
. The statutory merger, in essence, is a
simple, uncomplicated and effective procedure by which two or more
companies may merge by agreement, with the approval of the prescribed
majority of their shareholders, and without the need for any court approval.
Instead of recourse to a court, dissenting shareholders have the right to opt
out, by withdrawing the fair value of their shares in cash. This they do by
exercising their appraisal rights.
The statutory merger represents a significant liberalisation of policy on the
part of the Legislature between the conflicting values of, on the one hand,
facilitating the restructuring of businesses in the interests of economic growth
and, on the other hand, the interests of shareholders in retaining their
investments in companies together with the protection of minority sharehold-
ers from discrimination at the hands of the majority. This dramatic shift in
policy follows a similar trend in America, a trend also adopted in Canada and
New Zealand.
4
* MBBCh LLB LLM (Witwatersrand). Lecturer, Faculty of Law, University of the Witwatersrand.
Attorney of the High Court South Africa.
1
2
Ronald J Gilson The Law and Finance of Corporate Acquisitions (1986) at 505.
3
See GN 166 of 2007 in GG 29630 of 12 Feb 2007.
4
See Wayne D Gray TheAnnotated Canada Business Corporations Act 1995 (1994) at 361; William
T Allen & Reinier Kraakman Commentaries and Cases on the Law of Business Organizations(2003) at
1
(2008) 20 SA Merc LJ 1
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This article first addresses the concept of the statutory merger in general in
par 2. The definition and the juridical nature of the statutory merger is
discussed in par 2.1, followed by an analysis of the merger procedure in par
2.2 and the inherent protective measures for shareholders and creditors in par
3. Next follows in par 4 a discussion of the underlying policy issues that led to
the introduction of the statutory-merger procedure in South African law.
In pars 5-10 significant merger structures are adumbrated and analysed,
with a specific focus on the triangular and reverse triangular merger, the
freeze-out merger and the short-form merger.
The appraisal right is critically addressed in pars 11-14. The discussion of
the appraisal right encompasses both a critical analysis of the procedure for
perfecting and exercising the appraisal right, as well as the valuation of shares
in appraisal proceedings. Paragraph 15 considers more fully further the
exceptional requirement of court approval of mergers and, where relevant,
addresses the interplay between court approval and the appraisal right.
2 The Statutory Merger
2.1 Definition and Effect of a Merger
The Companies Bill makes provision for both mergers and amalgamations.
A merger is defined as
‘a transaction, or series of transactions, involving two or more companies, resulting in one or
more of those companies together holding all of the assets and liabilities previously held by
the several merging companies’
while an amalgamation is defined as
‘a transaction, or series of transactions, involving two or more companies, resulting in the
formation of one or more new companies, which together hold all of the assets and liabilities
previously held by the several amalgamating companies’.
5
Accordingly, a merger may be described as the fusion of two or more
companies – referred to as the ‘constituent companies’ or the ‘merging
companies’ – into one of the constituent companies, resulting in the survival
or continuing existence of that constituent company, termed the ‘merged
company’
6
, which holds all the assets and liabilities that were previously held
by the several merging or constituent companies.
By contrast, in an amalgamation, both (or all) of the constituent
amalgamating companies are dissolved and a new company is created, termed
the ‘amalgamated company’,
7
which holds all the assets and liabilities
427-9; Ross B Grantham & Charles EF Rickett Company and Securities Law Commentary and
Materials (2003) at 39.
5
Clause 1 of the Bill.
6
Ibid.
7
In terms of cl 1 of the Bill, the ‘amalgamated company’ in an amalgamation is the ‘company that –
(a) was incorporated in terms of an amalgamation agreement; (b) holds all or part of the assets and
liabilities of any of the amalgamating companies; and (c) has applied for, or been issued a certificate of
incorporation in terms of section 120’.
(2008) 20 SA Merc LJ
2
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previously held by the several constituent or amalgamating companies.
8
The
vesting of such assets and liabilities in the amalgamated company or the
merged company takes place automatically upon effectuation of the merger,
simply by the operation of law.
9
Thus, the technical difference between a merger and an amalgamation is
that in a merger of an acquiring company, Company A, and a target company,
Company T, Company A survives and continues in existence while Company
T is the disappearing company and is dissolved or deregistered. In an
amalgamation between Company A and CompanyT, both Companies A and T
are dissolved and a new company, Company N, is created. Accordingly, a
merger results in the fusion of one constituent company into the other, but an
amalgamation results in the fusion of all the constituent companies into a new
company. The new company is incorporated in terms of the amalgamation
agreement itself. A Memorandum of Incorporation of the newly amalgamated
company is filed with the Commissioner (together with the filing of the Notice
of Amalgamation), and upon receipt of the filing the Commissioner issues a
certificate of incorporation for the new company.
10
In practice, the choice between a merger and an amalgamation would be
determined by a number of factors, such as the desire to portray the
transaction as a true merger of equals, in which case an amalgamation may be
preferred; the need to preserve the goodwill or the identity of one of the
constituent companies, necessitating the use of a merger into the relevant
company; the material provisions of the Memorandum of Incorporation of the
constituent companies, which may determine whether the relevant company
must survive or disappear under the transaction; and the change-of-control
provisions in material contracts between a constituent company and third
parties.
11
Apart from the above differences between mergers and amalgam-
ations, the two procedures are substantially similar in all other respects.
8
The differing and confusing terminology used in various jurisdictions is noteworthy.In Canada the
term ‘merger’ is not a term of art but is used to describe every form of business combination (see FH
Buckley, Mark Gillen & RobertYalden Corporations Principles and Policies 3 ed (1995) at 991), while
the term ‘amalgamation’ is used in Canadian law for the procedure equivalent to a ‘merger’ under the
Bill (see s 181 of the Canada Business Corporations Act, 1985 (RSC 1985 c C-44). A ‘merger’ in
Delaware is equivalent to a ‘merger’ under the Bill, but the Delaware equivalent of an ‘amalgamation’in
terms of the Bill is a ‘consolidation’ (see s 251(a) of the Delaware General Corporation Law, 2001). In
New Zealand the term ‘amalgamation’ is used to describe both the equivalent of a ‘merger’as well as an
‘amalgamation’ as those terms are defined in the Bill (see s 219 of the New Zealand CompaniesAct 105
of 1993).
9
See the wording of cl 120(5) of the Bill; see also Stephen Kenyon-Slade Mergers and Takeoversin
the US and UK Law and Practice (2003) at 29 in respect of the equivalent provision in s 259(a)of
Delaware General Corporation Law, 2001; see also Stephen M Bainbridge Corporation Law and
Economics (2002) at 628 on the equivalent provision in s 11.07 of the American Revised Model
Business Corporation Act of 1984, as amended.
10
See cl 120(1) and (3) of the Bill.
11
See Arthur R Pinto & Douglas M Branson Understanding Corporate Law (1999) at 122;
Kenyon-Slade op cit note 9 at 7.
STATUTORYMERGER: MAJORITY RULE AND APPRAISAL RIGHT 3
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