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Company Law B > Fundamental Transactions > Flashcards

Fundamental Transactions Flashcards

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1
Q

What is a fundamental transaction?

A

Corporate actions that fundamentally alter a company by affecting the structure or ownership of a company and typically require a higher level of shareholder approval than ordinary business decisions.

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2
Q

What are examples of fundamental transactions?

A
  1. Merger
  2. Disposals of all or the greater part of the assets
  3. Scheme of arrangement
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3
Q

What is a statutory merger?

A

A merger governed by section 113 which involves a legal process where two or more companies combine into one, with the merging companies ceasing to exist as separate entities, and the resultant company assuming all the assets and liabilities of the merging companies.

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4
Q

What is the definition of a merger ito section 1?

A

A transaction, or series of transactions, pursuant to an agreement between two or more companies, resulting in:
1. The formation of one or more new companies
2. The survival of at least one of the merging companies

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5
Q

What are the factors that will determine the choice between the two structures of a merger?

A
  1. The desire to portray the transaction as a true merger of equals
  2. The need to preserve the goodwill or the identity of one of the constituent companies
  3. Material provisions of the MOI of the constituent companies
  4. The change-of-control provisions in material contracts between a constituent company and third parties.
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6
Q

What is the effect of a merger once a merger agreement has been implemented?

A
  1. The property of each constituent merging company becomes the property of the surviving merged company [s166(7)(a)]
  2. The surviving company is liable for all the obligations of every constituent company [s116(7)(b)]
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7
Q

What are the advantages of a statutory merger?

A
  1. Vesting of the assets and liabilities in the surviving company occurs by operation of law
  2. No need to formally wind up the disappearing company
  3. Acquiring company obtains full control of the target company
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8
Q

What is the statutory merger procedure?

A
  1. Merger agreement [s113(2)]
  2. Solvency and liquidity test [s4(1)]
  3. Requisite approvals of the merger [s115]
  4. Notice to creditors
  5. Implementation of the merger
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9
Q

To whom does the statutory merger procedure apply?

A

Between profit companies.

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10
Q

To what companies does the statutory merger provisions not apply?

A
  1. Foreign or external companies that are engaged in statutory mergers with a South African company
  2. Where a company is placed under business rescue and a merger transaction is pursuant or contemplated in its business rescue plan
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11
Q

What is a merger agreement?

A

A written agreement that sets out the terms and manner of effecting the merger with reference to section 113(2).

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12
Q

What happens if the solvency and liquidity test is satisfied in a merger?

A
  1. Merger agreement is submitted for consideration at the shareholders meeting of that merging company
  2. Notice of the shareholders meeting including copy/summary of merger agreement and provisions of ss 115 and 164, is delivered to each shareholder of each respective merging company
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13
Q

What are the approvals required for fundamental transactions?

A
  1. A proposed fundamental transaction must be approved by a special resolution, at a meeting called for that purpose.
  2. Where the disposing company is a subsidiary of either a SA company or external company and the disposal by the subsidiary will constitute a disposal of all or the greater part of the assets or undertaking of the holding company , the transaction requires a similar special resolution by the shareholders of the holding company
  3. Court approval, to the extent required in the circumstances and the manner contemplated in the Act
  4. To the extent that Part B and C of Chapter 5 and the Takeover Regulations apply to a company, the company may not implement a fundamental transaction unless the TRP has issued a compliance certificate in respect of the transaction or has exempted the transaction
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14
Q

What is the step of notice to creditors?

A

Once each merging company has obtained the requisite shareholder approval of the merger, a notice of the merger must be given, in the prescribed manner and form, to all known creditors of the merging companies.

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15
Q

What is the remedy for objecting creditors?

A

A creditor may, within 15 business days after delivery of the notice of the merger, seek leave to apply to a court for a review of the merger, only on the grounds that the creditor will be materially prejudiced by the merger.

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16
Q

When will a court grant leave to a creditor to apply for a review of the merger?

A

Only if it is satisfied:
1. That the applicant is acting in good faith
2. That the merger, if implemented, would materially prejudice the creditor
3. There are no other remedies available to the creditor.

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17
Q

What is the step of implementation of the merger?

A

Filing a notice of merger with the CIPC which must include the MOI of any newly formed company and confirmation that the merger has satisfied the requirements of ss 113 and 115; it has been approved ito the Competition Act etc.

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18
Q

When can the merger be implemented?

A

Once the transaction has satisfied all the applicable approval requirements set out in s115 and if no objecting creditors apply to court within the specified 15-day period and if they do once the application has been disposed

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19
Q

When does a fundamental transaction become an affected transaction?

A

When it involves a regulated company

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20
Q

What is an affected transaction?

A

Specific transactions that may result in a change of control of significant shifts in the ownership of a regulated company.

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21
Q

What is a regulated company?

A
  1. Public company
  2. SOE
  3. Private company if
    -More than 10% of its issued securities have been transferred within 24-month period, excluding transfers between related persons; and
    - Company’s MOI expressly states that it is subject to the takeover regulations
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22
Q

Which provision describes an affected transaction?

A

Section 117(1)(c).

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23
Q

What are the types of affected transactions?

A
  1. A transaction or series of transactions amounting to the disposal of all or the greater part of the assets or undertaking of a regulated company
  2. Merger that involves at least one regulated company
  3. Scheme of arrangement between a regulated company and its shareholders
  4. The acquisition or announced intention to acquire a beneficial interest in any voting securities of a regulated company amounting to 5, 10, 15% or any further whole multiple of 5%
  5. The announced intention to acquire a beneficial interest in any voting securities of a regulated company not already held by a person or persons acting in concert
  6. Mandatory offer
  7. Compulsory acquisition
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24
Q

What are the two broad categories of affected transactions?

A
  1. All fundamental transactions that involved a regulated company
  2. The acquisition of prescribed percentages in voting securities.
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25
Q

What is section 112?

A

Proposals to dispose of all or greater part of assets or undertaking.

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26
Q

What is disposal of all or greater part of company’s assets or undertaking

A

Sale by company of more than 50% of gross assets at fair market value, irrespective of liabilities or more than 50% of the value of its entire undertaking at fair market value.

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27
Q

When else does section 112 apply?

A

If the assets are more than 50% of the market value of assets or if the assets are responsible for more than 50% of profits generated.

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28
Q

Which provisions lists the exceptions to the proposals to dispose of all or greater part of assets or undertaking?

A

Section 112(1).

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29
Q

What are the exceptions to disposals?

A
  1. Business rescue plan
  2. Between a wholly-owned subsidiary and its holding company
  3. Between or among (same group of companies)
    - Two or more wholly-owned subsidiaries of the same holding company
    - A wholly-owned subsidiary of a holding company and its holding company and one or more wholly-owned subsidiaries of that holding company
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30
Q

Which provision lists the requirements for a disposal?

A

Section 112(2).

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31
Q

What are the requirements for a disposal?

A
  1. Approval by special resolution in accordance with section 115
  2. Compliance with other requirements in section 115 to the extent that it is applicable
32
Q

What is section 112(3)?

A

The notice to shareholder requirement.

33
Q

What is section 115?

A

Required approval for transactions contemplated in Part

34
Q

What does section 115(1) hold?

A

Fundamental transactions cannot go ahead unless it has been approved in terms of the section or pursuant to an approved business rescue plan.

35
Q

What does section 115(2) hold?

A

A fundamental transaction must be approved by
1. Special resolution adopted by persons entitled to exercise voting rights on such a matter, at a meeting called for that purpose and at which sufficient persons are present to exercise, in aggregate, at least 25% of all the voting rights that are entitled to be exercised on that matter
2. Special resolution, also adopted in the manner required by paragraph (a), by the shareholders of the company’s holding company if any
3. By the court, to the extent required in the circumstances and manner contemplated in ss (3)-(6) voting rights issues.

36
Q

What is section 116?

A

Implementation of merger

37
Q

What is section 116(1)?

A

The procedure for implementing a merger.

38
Q

What are sections 116(6) and 116(7)?

A

The effect of a merger.

39
Q

What does section 116(6) hold?

A
  1. Merger takes effect in accordance with and subject to any conditions set out in the merger agreement
  2. Merger does not affect any
    -existing liability of the parties to the agreement or directors thereof, to be prosecuted ito any applicable law
    -civil, criminal or administrative action pending by or against the merging company and any such proceeding may continue to be prosecuted by or against any of the merged company
    -conviction, ruling, order or judgment in favour of or against a merging company and any such ruling etc may be enforced by or against any of the merged company
40
Q

What does section 116(7) hold?

A

When a merger has been implemented
1. The property of each merging company becomes property of the newly amalgamated or surviving merged, company
2. Each newly amalgamated or surviving merged company is liable for all of the obligations of every merging company

41
Q

What is the exception to the effect of section 116(7)?

A

Section 116(8), property registered ito public regulation Transfer must be registered with DR, must include copy of merger agreement, copy of filed notice of merger.

42
Q

What is a schemes of arrangement?

A

Any arrangement or agreement between company and holders of any class of securities including the re-organisation of share capital by way of:
1. A consolidation of securities of different classes
2. Division of securities into different classes
3. Expropriation of securities from the holders
4. Exchanging any of its securities for other securities
5. A reacquisition by the company of its securities
6. A combination of the above methods.

43
Q

Which provision deals with schemes of arrangement?

A

Section 114.

44
Q

What is the approval process for a scheme of arrangement?

A
  1. Board proposal and approval of the scheme
  2. Independent expert report
  3. Special resolution
  4. Court approval
45
Q

In what situations do schemes of arrangement apply?

A
  1. M&A
  2. Corporate restructuring
  3. Debt restructuring.
46
Q

What are the requirements for a special resolution of the SH in substantial disposals?

A
  1. Resolution must be drafted specific to that transaction
  2. Votes from parties with conflicts of interest in sale must be discounted and excluded from the vote.
47
Q

What are the requirements for a substantial disposal?

A
  1. A special resolution of the SH is required
  2. Assets must be disposed of for fair market value
48
Q

What is fair market value?

A

What the price would be between interested buyers and sellers in an open market.

49
Q

What are the stages of a merger?

A
  1. Merger agreement
  2. SH approval process
  3. Implementation of the merger
50
Q

What does a merger agreement contain?

A
  1. MOI of new company to be formed
  2. Proposed directors of the new entity
  3. Plan for the conversion of shares from the merging entities to the new one
  4. Plan for how SH whose shares will not survive will be compensated
  5. How assets and liabilities will be allocated to the merged entity
  6. Details for the strategy to complete the transaction and for management of the merged entity
  7. Estimated cost of the transaction
51
Q

What is the SH approval process in a merger?

A
  1. Boards of each merging company must be satisfied that the merged entities will meet the S&L test
  2. Send agreement to SH to consider before a SH meeting together with explanation of appraisal rights and right to approach courts
  3. Quorum is 25% of voting rights and a special resolution must be passed
52
Q

What is the process for schemes of arrangement?

A
  1. Company must employ a qualified, impartial, independent expert to prepare a report on the proposed arrangement for the board
  2. Report must be distributed to all holders of the company’s securities
  3. Scheme must be approved by a special resolution of the SHs at a meeting where at least 25% of the voting rights are present
53
Q

In which provisions are the fundamental transactions contained?

A

Section 112, 113 or 114.

53
Q

What are dissenting SH?

A

Shareholders who do not agree with certain fundamental decisions taken by a company, particularly those that affect their rights or the nature of the company.

54
Q

What is section 115?

A

Required approval for contemplated fundamental transactions/right to review the transaction by a court.

55
Q

What does section 115(3) hold?

A

A special resolution adopted in favour of a fundamental transaction may not be implemented without the approval of a court if:
(a) the resolution was opposed by at least 15% of the voting rights that were exercised on that resolution, and any person who voted against the resolution requires the company to seek court approval; or
(b) the court, on an application by a dissenting shareholder
grants that person leave, in terms of subsection (6), to apply to a court for a review of the transaction in accordance with subsection (7).

56
Q

What does section 115(6) hold?

A

On application for court approval, leave may be granted if the court is satisfied that the applicant:
(a) is acting in good faith
(b) appears prepared and able to sustain the proceedings; and
(c) has alleged facts which, if proved, would support an order in terms of subsection (7)

57
Q

What does section115(7) hold?

A

A court may set aside the resolution if
(a) the resolution is manifestly unfair to any class of holders of the company’s securities; or
(b) the vote was materially tainted by conflict of interest, inadequate disclosure,
failure to comply with the Act, the MOI or any applicable rules of the company, or other significant and material procedural irregularity.

58
Q

What is the section 164 appraisal remedy?

A

A remedy that effectively grants dissatisfied SHs who disagree with certain transactions being undertaken by the company with the right to present their shares to company, which must acquire them at a fair value.

59
Q

When is an appraisal remedy applicable?

A

Merger, scheme of arrangement, disposal or any change to the MOI that might materially affect the rights of the relevant SH.

60
Q

Which provision defines an affected transaction?

A

Section 117(1)(c).

61
Q

What is a mandatory offer in terms of section 123?

A

When a regulated company reacquires its own voting securities or a person (or related persons acting in concert) acquires a beneficial interest in any voting securities that enables them to exercise at least 35% of all voting rights of the company.

62
Q

What is beneficial interest?

A

The rights of a person (known as the beneficial owner) to receive some or all of the benefits associated with shares, even if that person is not the registered owner of those shares.

63
Q

When is a mandatory offer triggered?

A

A mandatory offer is triggered when a person (or a group acting in concert) acquires beneficial ownership of 35% or more of the voting securities of a regulated company, once there is a trigger then they will have to make an offer to the remaining SH to acquire the remaining securities.

64
Q

What are the key features of a mandatory offer?

A
  1. Trigger event
  2. Obligation to make an offer
  3. Fair and equal treatment
  4. Application to regulated companies
  5. TRP
65
Q

What is the purpose of a mandatory offer?

A

The purpose of the mandatory offer is to protect minority shareholders from being unfairly prejudiced when control of a company changes hands. By requiring the acquirer to make an offer to all shareholders, the law ensures that the acquirer does not obtain control at a favourable price without providing the same opportunity to other shareholders.

66
Q

What is the process for mandatory offers?

A
  1. Within one day of the prescribed percentage being reached, holders of the prescribed percentage must give notice to the SH which include:
    - statement that they have the prescribed percentages of all voting rights in the company
    - offer to acquire any remaining such securities on terms determined in accordance with the Companies Act and the TR
  2. Within one month of giving notice, a written mandatory offer in compliance with the Regulations must be delivered to the holders of the remaining securities to acquire them.
67
Q

Which provision prohibits frustation of the offer?

A

Section 126.

68
Q

What is a compulsory acquisition?

A

The process whereby a shareholder obtains 90% of any class of security in a company and can force the minority shareholders to sell their shares, following certain conditions being met

69
Q

Which provision regulates compulsory acquisitions?

A

Section 124.

70
Q

What is the process for a compulsory acquisition?

A
  1. Offeror has 4 months from the date of the original offer to notify the remaining SH in that class that:
    -offer has been accepted to that extent
    -offeror desires to acquire all remaining securities of that class
  2. After the notice, offeror is entitled and bound to acquire the remaining securities from the holders on the same terms as the original offer
  3. Holders have 30 business days from receipt of the notice to apply to court to have different conditions imposed or to have the acquisition set aside.
71
Q

What are the options of minority SHs in the case of a compulsory acquisition?

A
  1. Accept offer on same terms
  2. Apply to a court within a prescribed period (usually within 30 days) if they believe the terms of the acquisition are unfair or unreasonable.
72
Q

What is the purpose of a compulsory acquisition?

A

The compulsory acquisition mechanism ensures that once an acquirer has obtained overwhelming control of a company (90% or more), the remaining minority shareholders cannot block the acquirer from gaining full ownership.

This is important in facilitating corporate takeovers and restructuring by avoiding a situation where a small group of shareholders holds up the transaction.

73
Q

What is the TRP?

A

A regulatory institution established by section 196(1) of the Act that regulated affected transactions in manner required by Chapter 5 of the Act and the TR.

74
Q

What are the TR?

A

Rules regulating affected transactions.

75
Q

What happens if a fundamental transaction is also an affected one?

A

TRP has jurisdiction.

76
Q

What are the duties of the TRP?

A
  1. Require the filing and approval of any document related to the transaction
  2. Issue clearance notices if satisfied the transaction complies with the requirements
  3. Initiate or receive complaints, conduct investigations, issue compliance notices with respect to any affected transaction or offer.

Company Law B (7 decks)

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