Private mergers and acquisitions in South Africa: overview

Q&A guide to private acquisitions law in South Africa.

The Q&A gives a high level overview of key issues including corporate entities and acquisition methods, preliminary agreements, main documents, warranties and indemnities, acquisition financing, signing and closing, tax, employees, pensions, competition and environmental issues.

To compare answers across multiple jurisdictions, visit the Private mergers and acquisitions Country Q&A tool.

This Q&A is part of the global guide to private acquisitions law. For a full list of jurisdictional Q&As visit www.practicallaw.com/privateacquisitions-guide.

Andrew Parsons and Ismail Laher, Norton Rose Fulbright
Contents

Corporate entities and acquisition methods

1. What are the main corporate entities commonly involved in private acquisitions?

A private acquisition normally involves a private company and a public company.

 
2. Are there any restrictions under corporate law on the transfer of shares in a private company? Are there any restrictions on acquisitions by foreign buyers?

Restrictions on share transfer

Private companies by their nature restrict the transfer of shares. The restriction can take any form but usually involves a prohibition on transfers without board approval.

Foreign ownership restrictions

There are no foreign ownership restrictions. The foreign exchange control authorities of the South African Reserve Bank (the financial surveillance department) must approve any inflow of loan funds into South Africa. Therefore, this approval is required if a loan is advanced into South Africa to acquire shares. The share certificates in respect of shares acquired by a foreign party must be endorsed as "non-resident" by an authorised dealer.

 
3. What are the most common ways to acquire a private company? What are the main advantages and disadvantages of a share purchase (as opposed to an asset purchase)?

The most common way to acquire a private company is through a share acquisition or an issue of new shares coupled with a share buy-back of existing shares.

Share purchases: advantages/asset purchases: disadvantages

The main advantage of a share purchase as opposed to an asset purchase is that the assets of the company, both tangible and intangible, are acquired when the purchaser acquires the company, as they remain in the company itself. The tangible and intangible assets may include contractual rights and obligations, licences, permits and other regulatory approvals, and the ownership of these does not need to change or be transferred.

Under an asset purchase agreement, the ownership of these assets must be transferred from the seller to the purchaser. This transfer may require third party consents, or approvals from regulatory authorities. Those approvals may not be forthcoming or may take a considerable period of time to obtain. In addition, there may be prohibitions on continuing to conduct the applicable business without a regulatory approval in place.

Share purchases: disadvantages/asset purchases: advantages

The main disadvantage in undertaking a share purchase is that the purchaser acquires the company, with all its disclosed and undisclosed liabilities. There are potential risks in that the company acquired may have undisclosed or unknown liabilities.

The advantage of an asset purchase is that as a general rule, the liabilities of the seller do not transfer to the purchaser, and as such the purchaser can be selective as to the assets and liabilities it takes over, thereby limiting its risk of taking on unknown or unquantifiable liabilities.

 
4. Are sales of companies by auction common? Briefly outline the procedure and regulations that apply.

Sales of companies by auction are not uncommon. There is no regulated procedure as such in relation to sales of companies by auction, as opposed to the sale of a company by a different method. The same regulations apply to any sale to the extent that they are applicable.

The generally adopted procedure is to prepare an Information Memorandum or similar document. The seller identifies third parties whom it considers may be interested in acquiring the target, and makes contact with them to establish any interest. If interest is expressed, the Information Memorandum is distributed to the interested parties and they are required to provide an indicative offer by a specified date, following which the seller shortlists parties for negotiation, due diligence and firm offers. The process and order in which the steps are undertaken can vary depending on the interests of the seller, the timetable and number of interested parties.

 

Preliminary agreements

5. What preliminary agreements are commonly made between the buyer and the seller before contract?

Letters of intent

Letters of intent, heads of terms/memoranda of understanding or non-binding offer documents are very often used as preliminary agreements between the buyer and seller before a contract is entered into. The issues normally covered in these documents include:

  • The basic intended commercial terms of the agreement.

  • The procedure to be followed in undertaking or pursuing negotiations and signature of definitive agreements.

  • The intention to undertake a due diligence exercise.

  • Exclusivity arrangements.

  • Responsibility for costs and a break fee.

These documents are generally not legally binding, although certain specific provisions may be stated to be legally binding.

Exclusivity agreements

Typically, an exclusivity agreement provides that the seller will only deal with the purchaser, and no-one else, for a defined period of time, during which the parties will endeavour to conclude agreements relating to the proposed transaction.

While the agreements are legally valid and binding, enforceability is difficult in that the seller cannot be forced to enter into the proposed transaction unless and until all of the definitive terms are agreed. There is no obligation under South African law to act bona fide in agreement negotiations. Very often a break fee, a cost recovery mechanism or "deemed" damages are provided for, to be claimed by the purchaser should the seller break the exclusivity.

Non-disclosure agreements

A non-disclosure agreement is an agreement under which the parties undertake not to disclose any information which is provided to them in the course of their discussions in relation to the proposed transaction and/or a due diligence exercise. It normally extends to a prohibition on the use of that information for any other purpose other than in relation to the proposed transaction.

There are no specific formalities relevant to the enforceability of such an agreement. It is often difficult to prove damages due to a breach of a non-disclosure agreement. General legal principles applicable to a breach of contract ordinarily apply to a breach, meaning that a party seeking to claim damages must show what damages or loss it has suffered, and such damages or loss must flow naturally from the breach. Therefore, it is useful to include specific remedies, indemnities and penalties in the agreement, to cover the event of a breach of any of its terms. However, such penalties may be subject to the Conventional Penalties Act, which allows a court to reduce a party's liability for damages that are in excess of the damages or loss which it has actually suffered.

 

Asset sales

6. Are any assets or liabilities automatically transferred in an asset sale that cannot be excluded from the purchase?

As a general principle, other than certain employee and environmental liabilities, there are no assets or liabilities that are automatically transferred that cannot be excluded from the purchase. See Question 31 for details of the transfer of employee liabilities. The purchaser of immovable property under an asset sale becomes liable for environmental pollution and remediation to the immovable property, see Question 35.

 
7. Do creditors have to be notified or their consent obtained to the transfer in an asset sale?

In general, obligations cannot be transferred to a third party without the consent of the party to whom the obligation is owed. As such, the creditors' consent is generally required for the transfer of obligations owed to them to the purchaser of the business. The creditor may give such consent by way of a prior agreement, allowing the seller to transfer to a third party its obligations owed to the creditor. Unless contractually agreed otherwise, a right may be transferred by the holder of that right to a third party without consent.

 

Share sales

8. What common conditions precedent are typically included in a share sale agreement?

The conditions precedent that are typically included in a share sale agreement are:

  • The requisite shareholders and directors' approvals having been passed and copies provided. These may include the requirement for a shareholders' special resolution where the assets sold (shares or other assets) comprise the whole or a major part of the assets of the seller.

  • Competition Commission and/or Competition Tribunal approval, where such approval is required.

  • The undertaking and satisfactory completion of a due diligence investigation.

  • The Takeover Regulation Panel issuing a compliance certificate or an exemption, where the transaction in question is in respect of a regulated company.

  • The approval of the financial surveillance department of the South African Reserve Bank for the parties to perform their respective obligations in terms of the agreement, to the extent that it may be required.

  • Any other regulatory approvals, depending on the nature of the target company.

 

Seller's title and liability

9. Are there any terms implied by law as to the seller's title to the shares in a share sale? Is any specific wording necessary and do buyers normally impose a higher standard than is implied by law?

There are not, as a rule, any terms implied by law to the seller's title to the shares in a share sale. Therefore, it is usual for the seller to warrant and represent that it has title to the shares and that it can dispose of them under the agreement.

 
10. Can a seller and its advisers be liable for pre-contractual misrepresentation, misleading statements or similar matters?

Seller

It would be unusual for a claim to be made against a seller, and for it to be liable for pre-contractual misrepresentations, misleading statements or similar matters. However, depending on the circumstances, it would be legally possible for a seller to be liable, particularly in cases of fraud or wilful misrepresentation or misstatement. The claim would be made on the basis of a delictual liability and would require that the various elements of such claim be alleged and proved, including the extent of the damages or loss suffered.

Advisers

The position for advisors is the same as for sellers (see above).

 

Main documents

11. What are the main documents in an acquisition and who generally prepares the first draft?

The main documents in an acquisition are either a sale of shares agreement or a sale of business (assets) agreement.

The sale of shares agreement is often also called a share sale agreement or a share purchase agreement.

Generally, an "asset sale" is referred to as a sale of business in South Africa, where the asset being purchased is an operating business.

While there is no generally applicable rule as to who prepares the first draft, typically the purchaser prepares the first draft as its requirements are usually more extensive than the seller's, and it is useful to get those recorded in their entirely for the seller to consider. However, very often the seller insists that its advisors prepare the first draft. This is often the case where the sale is by auction, or other formal process, where the seller produces a sale agreement for comment by the purchaser.

 

Acquisition agreements

12. What are the main substantive clauses in an acquisition agreement?

Sale of shares agreement

The following clauses are typically included in a sale of shares agreement:

  • Introduction or recitals clause, which sets out the background and intention behind the transaction.

  • A definitions clause in which the various terms to be used in the agreement are defined.

  • Conditions precedent or suspensive conditions clause, which sets out the matters that must be performed or fulfilled as pre-conditions to the agreement without which the agreement will not continue.

  • Due diligence investigation clause, if the due diligence is only to be undertaken after signature of the acquisition agreement.

  • Competition Authority approvals clause, dealing with the process to be followed in applying for competition authority approval, whether such competition authorities are in or outside of South Africa.

  • Sale of shares clause, under which the shares are sold by the seller to the purchaser.

  • Purchase consideration and payment clause, under which the purchase consideration is set out or the means by which it will be determined are set out, as well as the method of payment.

  • Closing or completion clause, which sets out the closing or completion procedure under which the sale shares will be delivered to the purchaser as well as the other documents required to be delivered on closing or completion.

  • Ownership, benefit and risk clause, which records when ownership, benefit and risk in and to the sale shares passes.

  • Effective date financial statements clause, which requires the seller to provide the purchaser with audited financial statements as at the effective date.

  • Seller's warranty clause, which deals with the warranties that the seller is to give under the share sale agreement and usually refers to a separate schedule which sets out in detail the warranties given.

  • Purchaser's warranty clause, which is generally limited to warranties as to legal capacity and authority.

  • Indemnities clause, under which the seller indemnifies the purchaser against any loss or damage it may suffer due to a breach of warranty or other breach of the agreement.

  • Limitation of liability clause, which sets out the maximum levels of liability of the seller under the indemnities.

  • Restraint or non-compete clause, under which the seller and related parties undertake not to compete with the company for a defined period in the future, within a defined territory. There may also be undertakings not to solicit customers, suppliers or employees of the company for a defined period.

  • Confidentiality and publication clause, under which the parties undertake reciprocal confidentiality in relation to information obtained during the transaction and also deal with how the transaction will be made public, or restrict publication of details.

  • A force majeure clause, dealing with the effects of force majeure on the obligations of the parties.

  • Breach or default clause, which deals with the rights of the parties in the event that another party to the agreement is in breach or default of the terms of the agreement.

  • An arbitration or other dispute resolution clause may be inserted, which would require any dispute to be referred to arbitration or other dispute resolution as opposed to litigation.

  • General or miscellaneous clauses.

  • Notices and address clause, dealing with the place at which notices and legal process can be served.

  • Applicable law clause, which chooses the law applicable to the agreement.

  • Jurisdiction clause, dealing with a submission to the jurisdiction of a particular court.

  • Counterparts clause, allowing for the signature of the agreement in counterparts.

  • Costs clause, setting out the obligations of parties for the costs of negotiating and concluding the agreement and where applicable, certain taxes.

Sale of business/asset acquisition agreement

Typically, the same or similar clauses as above are set out in a sale of business or asset acquisition agreement, dealing with the same or similar concepts, save that:

  • They deal with the concepts on the basis of an asset sale rather than the sale of the shares.

  • There is a sale of business (or assets) clause (as opposed to a sale of shares clause), under which the business or assets are sold by the seller to the purchaser.

  • There is a VAT Recitals clause. Under the South African Value Added Tax Act, the transfer of the business (assets) is considered to be vatable but at zero percent. if :

    • a VAT-registered vendor sells an enterprise or part thereof as a going concern to a VAT registered purchaser;

    • all of the assets necessary to conduct the business or part thereof are transferred; and

    • the enterprise is an income earning activity on the date of transfer.

    As such, no VAT is imposed on the transaction. This needs to be specifically dealt with in the sale of business agreement, failing which a sale of a business by a VAT vendor is subject to VAT at the usual rate of 14%.

  • It is unlikely that an effective date financial statements clause will be required.

  • There will usually be a clause which deals with the transfer of the employees. See Question 31 ( www.practicallaw.com/0-597-6288) for details of the applicable law relating to the transfer of employees and employee liabilities.

 
13. Can a share purchase agreement provide for a foreign governing law? If so, are there any provisions of national law that would still automatically apply?

Foreign law can be made to apply to a South African share purchase agreement but it would be unusual to do so.

South African law continues to apply to matters and items that are governed and regulated by the Companies Act 2008. For example, if it is a Companies Act requirement that the sale requires approval by way of a special resolution, but under the foreign law it would not, the South African law requirement must still be complied with. In addition, the intrinsic legal nature of the shares sold and their manner of transfer, as well as the Company Law aspects relating to the transfer of the shares, are still governed by South African law.

 

Warranties and indemnities

14. Are seller warranties/indemnities typically included in acquisition agreements and what main areas do they cover?

Share sale agreements

Seller warranties and indemnities are typically included in acquisition agreements. Their nature and extent is usually negotiated between the parties. The main areas that they usually cover are:

  • The authorised and issued share levels.

  • Title to the shares sold.

  • The company constitutional documents (memorandum of incorporation) and share registers.

  • The company's corporate standing.

  • That the company's directors and corporate structure are as disclosed.

  • The company's annual financial statements and accounting records and management accounts.

  • Changes in the company's financial status since the last financial statements of the company.

  • The company's assets, including title and condition, debtors and computer systems.

  • Intellectual property rights.

  • The company's contracts, often focusing on the material contracts.

  • The company's business processes.

  • The legality of the company's operations and its compliance with contractual and other obligations.

  • Warranties relating to dividends and other payments by the company, generally focused at the period between completion of the due diligence and completion of the transaction.

  • The company's liabilities. These warranties focus on there being no liabilities other than those which have been disclosed or quantified in the financial statements provided to the acquiring party and that there are no off-balance sheet liabilities which have not been disclosed.

  • Product liability claims.

  • Litigation warranties that there is no litigation pending or anticipated or underway other than as disclosed.

  • Suretyships, guarantees and indemnities (that the company is not bound by any suretyship, guarantee or indemnity to third parties which have not been disclosed).

  • Subordination agreements, (that there are none by which the company is bound).

  • Insurance (that all or material assets are fully insured and that premiums have been paid).

  • Warranties relating to the effect of the sale, that the sale will not give rise to termination of material contracts or regulatory approvals, or have any other material impact on the business of the company.

  • Warranties relating to the employees and obligations owed to the employees, including in relation to pension and provident fund obligations.

  • Regulatory approvals, licences and permits.

  • Compliance with all laws.

  • Competition law warranties.

  • Taxation warranties, that all potential liabilities for tax have been disclosed and there are no transactions that have not been disclosed which may impose a tax liability on the company, and that there has not been any tax evasion.

  • Environmental, health and safety warranties.

  • Insolvency related warranties.

  • Warranties relating to full disclosure, namely that there has been full disclosure by the seller.

  • Warranties in relation to the conduct of the business between the signature date and the completion date, and that the business will continue to be conducted in the ordinary course.

Sale of business (assets) agreements

The main difference between warranties in a share sale and a sale of business is that fewer warranties are given under the sale of business. This is as a result of the sale being of specifically defined assets and an assumption of liabilities, and that all liabilities are left behind other than the defined assets and liabilities which are transferred. Therefore, there is direct focus on the assets and liabilities that are transferred to the purchaser and those warranties which are not applicable are done away with.

 
15. What are the main limitations on warranties?

Limitations on warranties

There are no legal limitations on warranties, and these are generally negotiated between the parties.

Typical contractual limitations relate to:

  • The aggregate amount (as a percentage of the purchase price) that is claimable by the purchaser due to a breach of warranty.

  • A de minimus limitation on individual claims so as to void an excess of very small claims, which may be coupled with a threshold value of claims before which warranty claims are permitted.

  • Limitations as to the time period within which a claim may be made.

There is no standard rule as the amounts of the limitations, and this tends to be negotiated in each instance. Typically, the parties agree somewhere between 12 months and a maximum of three years after the effective date as the period within which a claim may be made. South African prescription law generally allows a purchaser to make a claim at any time within three years after the cause of action in respect of which its claim arose, although this may be extended where the purchaser does not have knowledge that its cause of action has arisen. Therefore, if a purchaser only finds out about something substantially after the effective date, it generally has three years from that date within which to make a claim. However, this is normally restricted by the contractual limitations referred to above.

Qualifying warranties by disclosure

Generally, warranties are qualified by disclosure. As a general principle, parties adopt the approach that provided something is disclosed, there is no claim in relation to such disclosure (provided the disclosure is adequate in allowing the purchaser to identify and quantify the risk), as the anticipated claim should have been priced into the transaction.

 
16. What are the remedies for breach of a warranty? What are the time limits for bringing claims under warranties?

Remedies

The general principle applicable to a breach of a warranty is that the purchaser is entitled to claim damages, loss or expenses caused by the breach of warranty so as to be put in the same position as the purchaser would have been in had the warranty not been breached. It is up to the purchaser to prove the damages suffered and the connection between the breach of warranty and the damages or loss suffered.

Time limits for claims under warranties

South African prescription law generally allows a purchaser to make a claim at any time within three years after the cause of action in respect of which its claim arose, although this may be extended where the purchaser does not have knowledge that its cause of action has arisen. Therefore, if a purchaser only finds out about something substantially after the effective date of the sale, it generally has three years from that date within which to make a claim. However, this is normally restricted by contractual limitations (see Question 15).

 

Consideration and acquisition financing

17. What forms of consideration are commonly offered in a share sale?

Forms of consideration

Generally, the forms of consideration are cash and/or shares.

Factors in choice of consideration

Typically, a seller prefers to receive cash as consideration. For shares to be taken as consideration, the seller must decide whether adequate value is being received (as to the number and value of the shares) or whether there is any risk in relation to the future value of the shares. Very often, the seller may be prohibited from selling the shares received, and the seller must consider whether or not it is willing to be bound not to sell the shares for the particular periods proposed. There is a risk that, through no fault of the seller, the value of the shares taken will diminish, thereby resulting in the seller's value from the sale diminishing. From the purchaser's perspective, the issue of shares is generally considered to be a less expensive option, although the purchaser may have negative accounting treatment issues.

 
18. If a buyer listed in your jurisdiction raises cash to fund an acquisition by an issue of shares, how is the issue typically structured? What consents and regulatory approvals are likely to be required?

Structure

An issue of shares to raise cash to fund an acquisition can be structured in a number of different ways. The manner chosen depends on the particular circumstances. An issue of shares can be through a public offering, a rights issue or by private placement, or any combination of these.

Consents and approvals

A prospectus must be registered with the Companies and Intellectual Property Commission (CIPC) if the offer is a public offer.

Requirements for a prospectus

The Companies Act and its Regulations list the requirements for what must be contained in a prospectus. The requirements are extensive and the following discussion is not comprehensive.

As a general requirement, every prospectus must contain all the information that an investor may reasonably require to assess the assets and liabilities, financial position, profits and losses, cash flow and prospects of the company in which a right or interest is to be acquired; andthe securities being offered and rights attached to them.

If it is the intention to acquire a business undertaking or property with the capital raised by the offering, the prospectus must include a brief history of that business undertaking or property, including:

  • Particulars of each business undertaking or property purchased or acquired, or proposed to be purchased or acquired.

  • The amount, if any, paid or payable in cash or securities for any such business undertaking or property, specifying the amount, if any, paid for goodwill.

  • The name and address of the vendor of the business undertaking or property.

  • If there is more than one vendor, the amount payable in cash or securities to each vendor.

If the offer is not being underwritten, the prospectus must either include a statement by the directors setting out the manner in which, and the sources from which, any shortfall in the amount proposed to be raised by means of the offer is to be financed; or state that the offer is conditional on the raising of the specified minimum amount.

In general, the prospectus must include all of the material information concerning the offer, in the following order:

  • Information about the company whose securities are being offered.

  • Information about the offered securities.

  • Various financial statements and reports relating to the offer.

  • Additional material information.

  • Inapplicable or immaterial matters.

Every prospectus must also set out:

  • A general description of the business carried on or to be carried on by the company and any material subsidiary and, if the company or any such subsidiary carries on or proposes to carry on more than one material business, information as to the relative importance of each such business, but only to the extent that there has been a material change in the nature of the company's activities since it last issued an annual financial statement.

  • Details of any material change in the business of the company during the past three years.

  • The opinion of the directors, stating the grounds for that opinion, as to the prospects of the business of the company, any subsidiary of the company and any subsidiary or business undertaking to be acquired or intended to be acquired within one year following the date of the prospectus.

  • A general description giving a fair presentation of the state of affairs of the company and its main business, and that of any material subsidiary, including its issued securities, with details of the shares held by the holding company, and the date on which it became a subsidiary.

  • The situation, area and tenure of the principal immovable property held or occupied by the company and any subsidiary including, in the case of leasehold property, the rental and unexpired term of the lease.

  • A statement of the estimated commitments, if any, of the company or a material subsidiary, for the purchase, construction or installation of buildings, plant or machinery, including their estimated date of completion and the commencement of their operational use.

  • Details for each of the preceding three years of:

    • the company's turnover;

    • profits or losses before and after tax;

    • any dividends that have been paid;

    • the amount of dividends paid in cents per share; and

    • the dividend cover for each year.

Particulars of the company's share capital must be set out, including:

  • The different classes of shares, and, in respect of each such class of shares, the number of authorised and issued shares.

  • A description of the respective preferential conversion and exchange rights, rights to dividends, profits or capital, including redemption rights and rights on liquidation or distribution of capital assets.

  • The number of founders' and management or deferred shares, if any, and the special rights attaching to those shares.

A concise summary must be set out of the substance of any agreement or proposed agreement, whereby any option or preferential right of any kind was given, or is proposed to be given, to any person to subscribe for any shares of the company or any subsidiary of the company, giving the number and description of any such shares.

A concise list of existing contracts or proposed contracts must be provided, relating to the directors' and managerial remuneration, royalties, and secretarial and technical fees payable by the company or any subsidiary of the company. An agreement is not considered material if it is entered into in the ordinary course of the business carried on or proposed to be carried on by the company or a subsidiary.

Every prospectus must set out a statement of any consideration paid, or agreed to be paid, by any person within the three years immediately before the date of the prospectus to a director or a related person, or to another company in which the director is beneficially interested; and to other related parties.

The prospectus must give details of:

  • Material loans to the company, or to any subsidiary of the company, at the date of the prospectus, stating with respect to each such loan:

    • whether it is secured or unsecured, and if secured, the details of the security;

    • the names of the lenders, if not debenture-holders;

    • the amount, terms and conditions of repayment and interest rate.

  • Any material loan advanced other than in the ordinary course of business, by the company, or by any subsidiary of the company, and outstanding at the date of the prospectus.

  • The number, if any, of securities that were issued or agreed to be issued by the company, or a subsidiary of the company, within the three years immediately before the prospectus date, to any person other than for cash; and the consideration for which those securities were issued or were agreed to be issued.

  • Any property purchased or acquired by the company, or a subsidiary of the company, or proposed to be purchased or acquired.

Every prospectus must also contain:

  • A statement of the purpose of the offer, giving reasons why it is considered necessary for the company to raise the amount sought under the prospectus; and if the amount sought under the prospectus is more than the amount of the minimum subscription referred to elsewhere, the reasons for the difference between those amounts.

  • The time and date of the opening and the closing of the offer.

  • Particulars of the securities offered, including:

    • the class of securities;

    • the number of securities offered;

    • the issue price;

    • if any securities are secured, particulars of the security, specifying the property comprising the security and the nature of the title to the property; and

    • other conditions of the offer.

  • A statement setting out the dates of issue of securities in the last three years; the price at which they were issued; and the reasons for any differentiation between those prices and the issue price of the securities being offered by the prospectus.

  • The minimum subscription.

  • A statement as to whether or not an application has been made for a listing of the securities offered and, if so, the name of the relevant exchange.

  • If the proceeds, or any part of the proceeds, of the issue of the securities or any other funds are to be applied directly or indirectly in the purchase of any business undertaking or subsidiary, both:

    • a report made by an auditor named in the prospectus on the profits or losses of the business undertaking or subsidiary in respect of each of the three financial years preceding the date of the prospectus; and

    • the assets and liabilities of the business undertaking at the last date to which the financial statements of the business undertaking were made out.

  • A statement by the directors of the company that, in their opinion, the issued capital of the company is adequate for the purposes of the business of the company, and of any subsidiary of the company, for at least 12 months after the date of the prospectus; or if the directors of the company are of the opinion that the issued capital of the company is inadequate for the purposes contemplated, a statement by them setting out the extent of the inadequacy; and the manner in which, and the sources from which, the company and any subsidiary are financed, or are proposed to be financed.

  • A report by the directors of the company setting out any material change in the assets or liabilities of the company or any subsidiary that have occurred between the end of the financial year of the company's most recent annual financial statements (or that any subsidiary of the company) and the date of the prospectus.

There are also some additional specific requirements for the prospectus of a mining company.

 
19. Can a company give financial assistance to a potential buyer of shares in that company?

Restrictions

The Companies Act does not impose any restrictions if the potential buyer of shares in the company is not a related or inter-related company. The memorandum of incorporation of the company may impose restrictions but generally does not.

The Companies Act contains an intricate definition of a "related or inter-related company". However, it essentially refers to companies that directly or indirectly control one another or are controlled by one another or by common shareholders.

If the purchaser is a related or inter-related company, before financial assistance can be provided for a subscription or purchase of securities in the company or of a related or inter-related company, the shareholders of the company must have passed a special resolution within the previous two years to approve either (section 44, Companies Act):

  • The specific recipient.

  • A category of potential recipients in which the specific recipient falls.

In addition, the board must be satisfied when making its decision that immediately after providing the financial assistance, the company would satisfy the solvency and liquidity test (as defined in the Companies Act) and the terms under which the financial assistance are proposed to be given are fair and reasonable to the company.

The solvency and liquidity test requires the board to decide whether, at the particular time, considering all reasonably foreseeable financial circumstances of the company:

  • The assets of the company, as fairly valued, equal or exceed the liabilities of the company as fairly valued.

  • That it appears that the company will be able to pay its debts as they become due in the ordinary course of business for a period of 12 months after the date on which the test is considered.

When making it decision, the board must consider the accounting records of the company and financial statements to be properly kept, as well as being a fair valuation of the company's assets and liabilities, including any reasonably foreseeable contingent assets and liabilities, irrespective of whether or not arising as a result of the proposed distribution or otherwise. They may consider any other valuation of the company's assets and liabilities that is reasonable in the circumstances.

A decision by the board of the company to provide financial assistance, or an agreement with respect to the provision of any such assistance, is void to the extent that the provision of that assistance is inconsistent with section 44 of the Companies Act and any prohibition, condition or requirement provided for in the Companies memorandum of incorporation.

Exemptions

There are no exemptions to the aforementioned provisions, all of which must be followed.

 

Signing and closing

20. What documents are commonly produced and executed at signing and closing meetings in a private company share sale?

Signing

The commonly produced documents at signing are the share purchase agreement or sale of business agreement, and resolutions authorising the parties to sign the applicable agreement.

Closing

Share sale agreement. The documents produced and executed include:

  • The share certificates and duly completed share transfer forms, signed by the sellers and reflecting the purchaser as the transferee of the shares or alternatively blank as to transferee.

  • Resignation letters by the existing directors of the company and potentially by the auditors of the company.

  • Resolutions by the directors appointing new directors in place of the resigning directors, and accepting the resigning directors' resignations.

Sale of business agreement. The documents produced and executed include:

  • Assignment agreements relating to contracts and other rights and obligations that are being transferred from the seller to the purchaser.

  • Registration documents relating to assets being sold.

  • The books and records in relation to the business being sold.

 
21. Do different types of document have different legal formalities? What are the formalities for the execution of documents by companies incorporated in your jurisdiction?

There are no specific formalities relating to the execution of documents by companies incorporated in South Africa. The signatory of the documents must be duly authorised by a resolution of the company directors and in some instances by the shareholders. Otherwise, there are no particular formalities.

 
22. What are the formalities for the execution of documents by foreign companies?

There are no specific formalities relating to the execution of documents by foreign companies. The signatory of the documents must be duly authorised to represent the company in signing the agreement. Other than that, there are no particular formalities.

 
23. Are digital signatures binding and enforceable as evidence of execution?

Digital signatures are binding and enforceable as evidence of execution.

 
24. What formalities are required to transfer title to shares in a private limited company?

Delivery of the share certificates and a duly signed share transfer form are required to transfer title to shares in a private limited company. The share transfer secretaries record the transfer in the register.

 

Tax

25. What transfer taxes are payable on a share sale and an asset sale? What are the applicable rates?

Share sale

Securities transfer tax is payable on the value of the shares transferred at a rate of 0.25% of the market value of the shares or the consideration, whichever is the greater.

Asset sale

If immovable property is part of the assets sold, transfer duty is payable on the transfer of the immovable property. The applicable rate depends on the value of the immovable property to be transferred, there being a sliding scale of transfer duty which applies:

  • ZAR0 to ZAR750,000: 0%.

  • ZAR750,001 to ZAR1,250,000: 3% of the value above ZAR750,000.

  • ZAR1,250,001 to ZAR1,750,000: ZAR15,000 plus 6% of the value above ZAR1,250,000.

  • ZAR1,750,001 to ZAR2,250,000: ZAR45,000 plus 8% of the value above ZAR1,750,000.

  • ZAR2,250,001 to ZAR10 million: ZAR85,000 plus 11% of the value exceeding ZAR2,250,000.

  • ZAR10,000,001 and above: ZAR937,500 plus 13% of the value exceeding ZAR10 million.

Other than the above, there are no transfer taxes as such payable on an asset sale.

 
26. What are the main transfer tax exemptions and reliefs in a share sale and an asset sale? Are there any common ways used to mitigate tax liability?

Share sale

There are no transfer tax exemptions and reliefs in a share sale and asset sale between two profit entities, other than if the corporate restructuring provisions are applied.

Asset sale

There are no transfer tax exemptions and reliefs in a share sale and asset sale between two profit entities, other than if the corporate restructuring provisions are applied.

See Question 28 for the principles applicable to corporate restructuring provisions.

 
27. What corporate taxes are payable on a share sale and an asset sale? What are the applicable rates?

Share sale

Capital gains tax (CGT) is payable if the sale of the shares constitutes the disposal of capital assets. CGT is imposed by including, in the taxable income on disposal, gains over the value of the asset on 1 October 2001 or the actual cost in respect of the assets acquired after that date. The inclusion rate depends on the identity of the party making the disposal, as follows:

  • Company (private and public): 80 of the capital gain is included and is taxed at a rate of 28%, resulting in an effective rate of 22.4%.

  • Trust: 80% of the capital gain is included and is taxed at a rate of 41%, leading to an effective rate of 32.8%.

  • Natural persons: 40% of the capital gain is included and is taxed at the natural person's marginal rate of tax, resulting in a maximum rate of 16.4%.

If the sale of the shares constitutes the disposal of trading stock, income tax is payable at normal corporate rates of tax at 28%

Asset sale

The principles and rates of tax as above apply to an asset sale.

 
28. What are the main corporate tax exemptions and reliefs in a share sale and an asset sale? Are there any common ways used to mitigate tax liability?

Share sale

A transaction can be structured on the basis that no capital gains tax will be payable but is instead rolled over where transactions take place between companies within the same group of companies or companies with common shareholders or some common shareholders holding above a particular percentage given in the Income Tax Act.

There are no material corporate tax exemptions in a share sale agreement.

There are various ways to mitigate tax liability, most of which have to do with the structuring of the acquisition or sale. Very often, the interests of the seller and the purchaser are different and the structuring may have a beneficial consequence for one and a negative consequence for the other. Therefore, the structuring is often the subject of negotiation.

Asset sale

The same principles above apply to asset sales.

 
29. Are other taxes potentially payable on a share sale and an asset sale?

There are no other taxes payable on a share sale or asset sale as such, although non-resident sellers of immovable property in South Africa are subject to certain withholding taxes (between 5% and 10%) where the value of the property disposed of exceeds ZAR2 million. In addition, there may be other taxes that become payable as a result of the manner in which the share sale or asset sale is structured, or as a means by which the proceeds of the sale are to be returned to shareholders or owners of the assets or shares.

An example of this is the dividends tax of 15% payable on a dividend, which may arise as a result of the distribution to shareholders of the proceeds of an asset sale. Another example is the recoupment charge applicable to a seller of assets if the assets are sold at more than their written down tax value.

 
30. Are companies in the same group able to surrender losses to each other for tax purposes? For example, can interest expenses incurred by a bid vehicle incorporated in your country be set off against profits of the target before tax?

Each company is taxed individually in its own separate capacity.

There is no group taxation and losses of one corporate entity cannot be settled against another corporate entity or vice versa. In addition, expenses incurred by a bid vehicle cannot be set off against profits of the target.

 

Employees

31. Are there obligations to inform or consult employees or their representatives or obtain employee consent to a share sale or asset sale?

Asset sale

Section 197 of the Labour Relations Act 1995 (LRA) applies where there is a transfer of a business as a going concern. The term "business" includes the whole or the part of any business, trade, undertaking or service. "Transfer" is defined as the transfer of a business by one employer (old employer) to another employer (new employer) as a going concern.

The LRA provides for the automatic substitution of the new employer for the old employer in respect of all contracts of employment in existence immediately before the transfer, irrespective of whether the contracts of employment were concluded orally or by written agreement. The only way to avoid the transfer is by agreement being reached with the employees in question.

The new employer "steps into the shoes" of the old employer not only in respect of the terms and conditions of employment of employees, but also in respect of disciplinary records, contractual claims and other reciprocal obligations arising from the employment relationship.

Any act performed before the transfer by or in relation to the old employer, including the dismissal of an employee or the commission of an unfair labour practice or act of unfair discrimination, is considered to have been performed by the new employer.

The old and new employer are jointly and severally liable for any claims concerning a term and condition of employment that arose prior to the transfer.

Section 197(7) of the LRA requires the old employer and the new employer to agree on a valuation, as at the date of transfer, of:

  • Leave pay owing to the transferring employees.

  • Severance pay that would have been payable if they were dismissed for a reason based on operational requirements.

  • Any other accrued payments owing to employees but not yet paid by the old employer.

Pursuant to the valuation, the old employer and the new employer must agree in writing which of them will be liable for which proportion of these amounts, as well as any provision made for the payment of the amounts should any employee be entitled to such payment.

The contents of the agreement must be disclosed to the transferring employees.

Both the old employer and the new employer are jointly and severally liable for a period of 12 months to any employee who becomes entitled to any payment as a result of a dismissal based on the new employer's operational requirements or the new employer's liquidation or sequestration, unless the old employer can show that it complied with the provisions of section 197 of the LRA.

Share sale

There is no obligation to inform or consult with employees or their representatives or to obtain their consent to a share sale.

 
32. What protection do employees have against dismissal in the context of a share or asset sale? Are employees automatically transferred to the buyer in a business sale?

Business sale

See Question 31.

Share sale

Employees cannot be dismissed merely by reason of a share sale. Their employment with the target company remains intact and any termination of employment is subject to the usual rules applicable to the termination of employment, meaning that such termination must follow a procedurally fair process and be substantively fair.

Transfer on a business sale

See Question 31.

 

Pensions

33. Do employees commonly participate in private pension schemes established by their employer? If an employee is transferred as part of a business acquisition, is the transferee obliged to honour existing pension rights or provide equivalent rights?

Private pension schemes

Employees commonly participate in private pension schemes established by their employer or in private pension schemes of which their employer is a member or participant.

Pensions on a business transfer

The employees' terms of employment by the new employer must remain the same or substantially the same on an asset sale, and new employer must honour existing pension rights or provide equivalent rights.

See Question 31.

 

Competition/anti-trust issues

34. Outline the regulatory competition law framework that can apply to private acquisitions.

Triggering events/thresholds

Under the Competition Act 1998, a merger occurs when one or more firms directly or indirectly acquire or establish direct or indirect control over the whole or part of the business of another firm.

A merger can be achieved in any manner, including:

  • Purchase or lease of the shares, an interest, or assets of another firm.

  • Amalgamation or other combination with another firm.

A person controls a firm if that person:

  • Beneficially owns more than one half of the issued share capital of that firm.

  • Is entitled to vote a majority of the votes that may be cast at a general meeting of that firm, or has the ability to control the voting of a majority of those votes, either directly or through a controlled entity of that person.

  • Is able to appoint or to veto the appointment of a majority of the directors of that firm.

  • Is a holding company, and that firm is a subsidiary of that company as contemplated in terms of the Companies Act.

  • In the case of a firm that is a trust, has the ability to control the majority of the votes of the trustees, to appoint the majority of the trustees or to appoint or change the majority of the beneficiaries of that trust.

  • In the case of a close corporation, owns the majority of members' interests or controls directly or has the right to control the majority of members' votes in that close corporation.

  • Has the ability to materially influence the policy of that firm in a manner comparable to a person who, in ordinary commercial practice, can exercise an element of control (see above).

Only mergers which exceed certain thresholds (which are varied from time to time) must be notified under the Act. These are called intermediate and large mergers.

An intermediate merger is a merger where either:

  • The combined annual turnover in, into or from South Africa of the acquiring firms and target firms exceeds ZAR560 million.

  • The combined assets in South Africa of the acquiring firms and the target firms exceeds ZAR560 million.

  • The annual turnover in, into or from South Africa of the acquiring firms plus the assets in South Africa of the target firms exceeds ZAR560 million.

  • The annual turnover in, into or from South Africa of the target firms plus the assets in South Africa of the acquiring firms ZAR560 million

  • The annual turnover in, into or from South Africa, of the target firms exceeds ZAR80 million.

  • The asset value of the target firms exceeds ZAR80 million.

A large merger is a merger where the same test as above is applied, but the amount of ZAR80 million is increased to ZAR190 million and the amount of ZAR560 million is increased to ZAR6.6 billion.

An acquiring firm is a firm that either:

  • Would directly or indirectly acquire or establish direct or indirect control over the whole or part of the business of another firm, as a result of the transaction in question.

  • Has direct or indirect control over the whole or part of the business of such a firm.

  • Has the whole or part of its business directly or indirectly controlled by such a firm.

A target firm is a firm that either:

  • Would have the whole or part of its business directly or indirectly controlled by an acquiring firm as a result of the transaction in question.

  • Would directly or indirectly transfer direct or indirect control of the whole or part of its business to an acquiring firm, as a result of the transaction in question.

  • Has the whole or part of its business directly or indirectly controlled by such a firm.

Notification and regulatory authorities

If the transaction constitutes a merger and exceeds the relevant thresholds, the transaction must be notified under the Competition Act.

Either the primary acquiring firm or the primary target firm can submit notification documents. These must be submitted on certain prescribed forms and accompanied by certain required information and reports prepared by the parties. A party who submits information to the Commission can request that the information be treated on a confidential basis. While it is expected that the Commission will act reasonably, the Commission is not obliged to accede to such a request.

The prescribed filing fee must be paid simultaneously with submission of the required documentation, and is ZAR100,000 for an intermediate merger and ZAR350,000 for a large merger. These amounts exclude VAT.

If the proposed merger is an intermediate merger, the Competition Commission must consider the proposed merger within 20 business days of a completed submission, whereupon it must either:

  • Approve the proposed merger by issuing a clearance certificate.

  • Approve the proposed merger subject to conditions.

  • Prohibit implementation of the proposed merger.

The Commission must make the reasons for its decision available to each participant in the merger proceedings and publish a notice of its decision in the Government Gazette. The Commission can extend the period during which it has to consider the proposed merger by a one-off period not exceeding 40 business days. If on the expiry of the 20 business day period (or the extended period), the Competition Commission has not issued any certificate evidencing its determination, then the Commission is deemed to have approved the proposed merger. The Commission must then issue a clearance certificate and publish the approval in the Government Gazette.

If the proposed merger is a large merger, the Commission must submit a recommendation, with reasons for such recommendation, to the Competition Tribunal and Minister of Trade and Industry within 40 business days (or longer period granted by the Tribunal) after receiving the Merger Notice. However, such an extension cannot exceed 15 business days at any one time. Within 15 business days of receiving the Commission's referral the Registrar must schedule a date and time for a hearing and serve notice of it on the parties who have indicated that they wish to participate. However, the Chairman of the Tribunal can extend this period for a further ten days or more, provided the consent of the primary acquiring firm or primary target firm is obtained. At any time before the hearing, the Tribunal can convene a pre-hearing conference of those parties who have indicated an intention to participate. The Tribunal must issue a certificate, within ten business days of completion of the hearing, either unconditionally approving, prohibiting or approving the proposed merger subject to conditions. The Tribunal must then issue written reasons for its decision and publish notice thereof in the Government Gazette within 20 business days.

If the Commission prohibits an intermediate merger, or approves it subject to conditions, the primary target firm or primary acquiring firm can appeal the decision to the Tribunal within five days of the Commission's decision.

Substantive test

The substantive criteria that applied in considering controlled mergers in South Africa take into account both competitive considerations and the public interest.

The primary concern is whether the merger is likely to substantially prevent or lessen competition. The criteria the competition authorities apply are set out in the Competition Act and include the following:

  • The level of competition from imports.

  • The nature of barriers to entry in the particular market.

  • The level and history of collusion in the relevant market.

  • The degree of countervailing power enjoyed by other parties in the relevant chain (that is, whether buyers from or suppliers to the merged firm would be in a position to negotiate, or whether they would be dictated to by the merged firm).

  • Whether the merged firm would have market power in the relevant market.

  • The extent of vertical integration in the relevant market.

  • Whether either of the parties to the merger could be said to be failing.

  • Whether the merger would lead to the removal of an effective competitor.

If the enquiry finds that the merger would substantially prevent or lessen competition, the authorities must determine whether the merger would result in technological, efficiency or other pro-competitive gains which would be greater than and off-set the loss of competition.

As the last leg of the enquiry, if the anti-competitive effects are not offset by other efficiency or pro-competitive gains, an otherwise problematic merger may be approved, or conversely an otherwise acceptable merger may be refused, by the effect of the merger on the public interest. The public interest considerations that are required to be taken into account include:

  • The effect of the merger on a particular industrial sector or region.

  • The effect of the merger on employment.

  • The effect of the merger on the ability of small businesses or firms controlled by black persons to become competitive.

  • The effect of the merger on the ability of national industries to compete in international markets.

 

Environment

35. Who is liable for clean-up of contaminated land? In what circumstances can a buyer inherit and a seller retain liability in an asset sale and a share sale?

The clean-up of contaminated and polluted land is regulated under section 28 of the National Environmental Act 1998 (NEMA) and Part 8 of Chapter 4 of the National Environmental Management: Waste Act 2008 (NEMWA).

Under section 28 of NEMA, persons liable to clean up pollution on land where any activity is or was performed which causes, has caused, or is likely to cause significant pollution, include the:

  • Owner of the land.

  • Person in control of the land.

  • Person who has a right to use the land.

These persons must take measures to prevent pollution or degradation from occurring. As the section applies retrospectively and adopts the principle of strict liability, these measures must be taken even if the listed persons did not cause the pollution. If a person unlawfully commits an act or omission which causes or is likely to cause significant pollution, they are guilty of an offence and liable to a fine not exceeding ZAR10 million, or to imprisonment not exceeding ten years, or to both. Failing to remediate the land is an unlawful act under this section.

If the listed parties do not take the measures in question, the authorities may do so and recover the costs for reasonable remedial measures from a number of persons. These include, among others, any person who is or was responsible for, or who directly or indirectly contributed to the pollution or degradation, and any person who negligently failed to prevent a situation which caused pollution. A company will be likely to be considered to be a person who has indirectly contributed to pollution if land is contaminated and it failed to take the measures set out in the relevant section.

NEMWA regulates the procedural aspects of cleaning up contaminated land. Under NEMWA, land owners and persons responsible for causing significant contamination must notify the relevant authority of the contamination as soon as they become aware of it. Land that is contaminated is subject to independent site assessments. Based on the site assessment reports, the relevant authority issues an order specifying the remediation and management measures that must be taken.

In an asset sale, a buyer inherits any liability and the seller also retains liability. In a share sale, the company retains liability.

The relevant legislation provides for strict liability and parties cannot contract out of their liability. However, they may undertake indemnification obligations in favour of one another. The clean-up of the contaminated land is usually dealt with under the applicable agreement, with either the buyer or seller undertaking to clean up the contaminated land and/or providing relevant indemnities.

 

Online resources

South African Government Online

W www.gov.za

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Contributor profiles

Andrew Parsons, Director

Norton Rose Fulbright South Africa

T +27 31 5825 600
F +27 31 5825 760
E andrew.parsons@nortonrosefulbright.com
W www.nortonrosefulbright.com

Professional qualifications. South Africa, Attorney

Areas of practice. Corporate and commercial law; mergers and acquisitions.

Languages. English, Afrikaans

Professional associations/memberships. Law Societies of KwaZulu-Natal, Cape Law Society and Law Society of the Northern Provinces.


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