Takeovers and mergers
Takeovers and mergers are governed by the Companies Act and the Securities Regulation Code on Takeovers and Mergers (“the SRC”), a code compiled in 1991 by a statutory body known as the Securities Regulation Panel (“the SRP”). The aim of the SRC is to ensure fair treatment to security holders involved with an affected transaction.
An affected transaction is one in which control of a company, being the right to exercise 35% or more of its voting rights, is changed, either as a result of a single purchase, a series of purchases or by subscription. The SRC defines a company as all public companies, both listed and unlisted, and statutory corporations and private companies which have more than ten shareholders and in which the value of the shareholders' interests and loans exceed R5 million. The concept of parties acting in concert for the purposes of determining who exercises control, is also defined.
When a change in control occurs, or when persons having the right to vote at least 35% but less than 50% of the equity of the target company acquire more than a further 5% of the votes in any twelve month period, a compulsory offer to all other shareholders on comparable terms must be made in the manner prescribed by and in accordance with the provisions of the SRC.
Should a takeover situation occur directors are urged to seek professional advice, as their duties under the SRC are numerous. The more important duties found in the General Principles of the SRC are designed to ensure that:
- takeover offers will not be frustrated by the board of the offeree unless authorised to do so by the shareholders of the offeree in a general meeting [SRC C2(7)]
- information to shareholders is prepared with the highest standards of care and accuracy and is made available to all shareholders timeously and equally to prevent the creation of a false market [SRC C2(5)]
- directors of both the offeror and offeree should not base their decisions on personal shareholdings when advising shareholders generally [SRC C2(9)]
- holders of relevant securities must be given sufficient information and advice to enable them to reach a properly informed decision and should have sufficient time to do so. No relevant information must be withheld from them [SRC C2(4)]
The more important duties as they relate to directors are set out briefly below:
Mandatory offer
When directors sell securities owned or controlled by them to an identifiable purchaser as a result of which the purchaser is required to make an offer under SRC, these directors must stipulate as a condition of the sale that the purchaser undertakes to make the mandatory offer. Unless the SRP agrees, these directors may not resign from the board until the first closing date of the offer or the date upon which the offer becomes or is declared unconditional. [SRC Rule 8.5]
The offer
A written offer must be put to the board of the offeree company. [SRC Rule 2.3.1]
Disclosure of offeror
The final offeror must be disclosed to the board. The board is entitled to seek satisfaction that on reasonable grounds the offeror is in a position to implement the offer. [SRC Rule 2.3.2]
Independent advice
The board must obtain competent independent advice on the offer and convey this to the holders of the securities affected. [SRC Rule 3.1]
Confidentiality
Until the announcement is required from anyone involved with an offer, parties must guard against an accidental leak of information. [SRC Rule 2.1]
Announcement of a firm intention to make an offer
This press announcement is made when the board of the offeree company has been notified in writing of a firm intention to make an offer from a serious source, irrespective of the attitude of the board to the offer; or immediately on acquisition which gives rise to an obligation to make a mandatory offer.
[SRC Rule 2.3.1] The announcement must contain [SRC Rule 2.3.2]:
- the terms of the offer
- the identity of the offeror
- details of any existing holding of securities in the offeree company
- all material conditions to which the offer is subject
- details of any arrangement that exists with any offeror, with the offeree company or with any person acting in concert with the offeror or with the offeree company in relation to relevant securities, whether or not any dealings have taken place
Responsibility for making the offer
The offeree company is responsible for making the announcement if it has been notified in writing of the intention. The offeror company is responsible for making the announcement if sufficient shares have been acquired to result in a mandatory offer. [SRC Rule 2.4.1]
Offer document
The offer document must contain, inter alia [SRC Rule 21.1-4]:
- the reasons for the offer
- the intentions regarding the continuation of the business of the offeree company and the continuation in office of the directors of the offeree company
- certain financial and other information on the offeror and on the offeree company
- the holdings of securities by the offeree company
- the holdings of securities in the offeror (in the case of a securities exchange offer only) and in the offeree company in which each director of the offeror is directly or indirectly interested
- whether and in what manner the emoluments of the offeree company’s directors will be affected by the acquisition of the offeree company or by any other associated transaction (unless the SRP grants an exemption to the publication of this information). If there will be no effect, this must be stated
Offeree board circulars
Offeree board circulars must contain, inter alia [Rules 22.1-4]:
- the views of the board, including any alternative offers
- information for the holders of securities in the offeree company outlining the advice given to it by its external advisors
- comments on the statements in the offer document regarding the offeror’s intentions in respect of the offeree company and its directors
- details of the shareholdings of the offeree company in the offeror
- the offeree directors’ holdings in the offeror and offeree companies
- whether the directors of the offeree company intend, in respect of their own beneficial holdings, to accept or reject the offer
- details of directors' dealings. Parties who are required to disclose their shareholdings in terms of this rule need to also disclose whether they have dealt in these shares in the past six months
- the material particulars of all service contracts of any director or proposed director of the offeree company with the company or any of its subsidiaries. If there are none, this shall be stated. If any contracts have been entered into or amended in the last six months, particulars are required in respect of the earlier contracts. If there are no current or earlier contracts this must be stated.
Frustrating actions
During the course of an offer (or before the date of the offer if the board of the offeree company has reason to believe that a bona fide offer might be imminent) the board shall not, without the approval of the holders of relevant securities in general meeting [SRC Rule 19]:
- issue any authorised but unissued securities
- issue or grant options in respect of any unissued securities
- create or issue securities carrying rights of conversion into or subscription for other securities
- sell, dispose of or acquire, or agree to sell, dispose of or acquire, assets of material value
- enter into contracts other than in the ordinary course of business
- pay any dividend that is abnormal as to timing and amount
Non-compliance gives rise to potential penalties under the Act and the risk of personal liability with respect to third parties for any loss or damage suffered by them as a result of a contravention of the SRC.
Key questions:
- If my company is involved in a takeover or merger, am I aware of and will I be able to ensure compliance with the SRC requirements?
- Do I require professional legal or financial advice?
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