Key Amendments to South Africa’s Companies Act: Impact on Takeovers and Mergers

The Companies Amendment Act, 2024, (“Amended Act”) that was recently signed into law has introduced some very instructive changes to the South African corporate law landscape.

This note discusses briefly only two of these new amendments that will have a direct impact on the regulation of takeover and mergers in South Africa; These amendments can be found under new section 118(1)(c) and Section 48(8) of the Amended Act.

It is important to commence with a brief historical background and explanation of these two provisions and in conclusion to discuss the impact they will have on the regulation of Takeovers and Mergers in South Africa.

A brief discussion on Section 118 (1) (c) and Section 48(8)

Takeover and Mergers in South Africa are regulated in terms of the Companies Act, 2008 (“Act”) and Chapter 5 of this Act sets out all the applicable provisions regulating Takeovers and Mergers, and these includes the responsibilities and powers of the Takeover Regulation Panel (TRP), a regulatory body overseeing public takeovers and mergers in South Africa.

The TRP is only responsible for regulating so-called “Affected Transactions” conducted by regulated companies.

Regulated companies consist mainly of public profit companies whether listed on a stock exchange in South Africa or not. In addition, state (for profit) companies and certain private companies as stipulated in the Act.

Section 118(1) (c) Amendment

Prior to the introduction of the Amendment Act, a private company qualified as a regulated company under Section 118(1)(c) if:

“The percentage of the issued securities of that company that have been transferred, other than by transfer between or among related or interrelated persons, within the period of 24 months immediately before the date of a particular affected transaction or offer, exceeds the percentage prescribed in terms of subsection (2))”

With the new amendments, a private company qualifies as a regulated company if the following apply: 

“it has 10 or more shareholders with a direct or indirect shareholding in the company and meets or exceeds the financial threshold of annual turnover or asset value determined in terms of subsection (2):”

The Minister, in consultation with the Panel, must determine the financial thresholds based on the annual turnover or asset value of the company in the Republic.

The Department of Trade and Industry and Competition (DTIC) are still in process of publishing the applicable regulations in this regard.

The following principles flow from this amendment:

1. Private companies are required to comply with the takeovers and mergers provisions only if they meet the following requirements:
2. The company has 10 or more shareholders with a direct or indirect shareholding that exceeds a specified annual turnover or asset value of the company.
3. The TRP must still be approached for an exemption application in terms of Section 119(6).

Section 48(8) Amendment

Section 48 of the Act is an extensive provision regulating the circumstances under which a company can re-purchase its own shares and the requirements that must be met by the board in its approval of such decisions.

Under Section 48(8) of the Act, a share repurchase that involves a director or prescribed officer of a company requires a special resolution to be passed by shareholders and in addition the company under the old Section 48(8) was required to comply with the provisions of Section 114 and Section 115 of the Act.

These are extensive provisions in that the transaction involved in these circumstances was viewed as scheme of arrangement that required the company to prepare an independent expert report on the fairness of the share repurchase transaction and if the company is regulated the requirement for the TRP to regulate and grant approval for the transaction before it can be implemented.

The new Section 48(8) has removed the requirements for compliance with Section 114 and Section 115 and provides simply that:

‘‘(8) A decision by the board of a company, contemplated in subsection (2)(a), must be approved by a special resolution of the shareholders of the company—

(a) if any shares are to be acquired by the company from— (i) a director of the company; (ii) a prescribed officer of the company; or (iii) a person related to a director of the company or a prescribed officer; or

(b) if it entails the acquisition of shares in the company, other than shares acquired as a result of— (i) a pro rata offer made by the company to all shareholders of the company or a particular class of shareholders of the company, notwithstanding that the pro rata offer made to all shareholders may also include shareholders who are one or more of the persons referred to in paragraph (a); or

The following principles flow from the amendment of: Section 48(8)

1. the new Section 48(8) has done away with arduous requirements under Section 114 and Section 115 of the Act.
2. this means therefore that the strict requirements on schemes of arrangement and additional requirements around Section 115 relating to the passing of the special resolutions have been removed.

Implications of the amendments on takeovers

There are two primary implications to the regulation of takeovers that these amendments have introduced, and these are:

• Private companies remain regulated however the focus now is on so-called “large private companies” with a prescribed number of shareholders and having a prescribed annual turnover or asset value.

• What is important to note though is that the TRP can still be approached to grant an exemption if the company can satisfy the requirements of section 119(6) of the Act.

• This new amendment will provide some breathing space for a great number of smaller companies that were inadvertently caught as regulated companies in the past merely based on a transfer of shares that satisfied the thresholds.

• At the same time the amendment will ensure that there is enhanced compliance and targeted protection of the minority shareholders in these “larger” private companies.

• The biggest implication with respect to Section 48(8) is that it has finally removed the uncertainty on whether such transactions are regarded as schemes of arrangements which in turn required extensive compliance with additional requirements in the Act including possible TRP compliance if the company is also regulated.

Conclusion

Companies Act, 2008 has as its main rationale, to promote and encourage the efficient management of companies and at the same time to provide for a predictable and effective environment for the regulation of companies[1].

On the other hand, the rationale for the regulation of takeovers and mergers as set out under Section 119(1) is effectively, to protect the rights of minority shareholders and at the same to ensure the integrity of the financial marketplace.

Applying the two rationales together one can deduce that the amendments and the way they are designed is to ensure that there is a balance between encouraging efficiency and predictability in both the management and regulation of companies and at the same time ensuring that the rights of vulnerable stakeholders such as minority shareholders always remain protected.

Spencer West (South Africa) Inc. with its extensive experience and expertise in all areas of Company law including Takeover Law is available to assist clients looking to expand their businesses or international investors looking to acquire business and companies in South Africa.

[1] The Dti notebook on the Companies Act, 2008 https://www.thedtic.gov.za/wp-content/uploads/Companies_Act_Notebook.pdf