Since the inception of the Companies Act 71 of 2008 in 2011, all mergers and acquisitions have been subject to the laws laid out by it under a set of regulations known as the Takeover Regulations. This works in conjunction with other statutes such as The Financial Markets Act 19 of 2012, the Financial Sector Regulation Act 9 of 2017, the B-BBEE Act 53 of 2003, and more importantly The Competition Act 89 of 1998.
But what is a merger and acquisition? It is when companies become consolidated into one, whether this one company buying out another or two companies becoming one joint enterprise. Either way, it always involves two companies somehow becoming intertwined. Naturally, such activities must be highly regulated to prevent collusion or large scale negative effects on the economy and that is why there is so much legislation covering the topic.
Therefore under the Competition Act, when companies are considering a merger and acquisition, they must first seek approval or pre-implementation approval if the transaction is deemed intermediate to large. So, for example, should company A and company B seek to join forces, they will have to make that known to the South African Competition Authorities who will have to investigate and subsequently grant their approval on the matter.
Factors that are considered for the approval of a merger and acquisition include:
- Whether it will prevent or lessen competition
- The effect it may have on the industries involved
- The effect it may have on employment
- Whether it will hinder smaller business owned by previously disadvantaged individuals
If the merger and acquisition is considered a takeover, it will be regulated by the Takeover Regulation Panel as established in the Companies Act, and interestingly on occasion, even the JSE might have an influence on the process.
When we talk about the Takeover Regulations, it is imperative to note that it only applies to those companies that are deemed as “regulated companies” including public companies, state-owned companies and in some cases private companies provided certain regulations are met.
One of the ways control over a company may be gained is through the transfer of shares and luckily this is also quite regulated in South Africa. For example, under exchange control legislation, the transfer of shares to a non-resident may only be if the SARB approves thereof. But, when it comes to residents of the country, the rules are a bit more relaxed and there are no exchange controls for this.
As South Africa is a developing economy with many past disadvantages to correct, it would only make sense that there are B-BBEE regulations in place when it comes to mergers and acquisitions. Under the B-BBEE Act, No 53 of 2003, the primary initiative as it applies to mergers and acquisitions is to ensure more black ownership of companies, as well as more management positions and board participation. This is why companies are given a score, and should a merger and acquisition negatively affect that score, it may be turned down unless provision is made to be compliant.
In order to move ahead with a merger and acquisition, both parties need to come to the table with their legal and financial advisers, and of course, auditors may also be appointed to check that all is above regarding financial statements and profit reports. And for a public company, the approval of shareholders is key, as they may not proceed without this.
Therefore if you are considering a merger and acquisition, why not reach out to us and we can refer you to a financial lawyer who specialises in these matters.
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