DealMakers - Annual 2025 (released February 2026)
Say what you mean and mean what you say:
Simulated transactions and working around statutes
by Yaniv Kleitman and Roxanne Bain
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What is a simulated transaction?
It is trite law that parties to a transaction may structure it to avoid a statute or a particular provision in a statute. Following a long line of cases, this principle was recently reiterated by the Supreme Court of Appeal in Uys N O and Others v National Credit Regulator and Another 2025 3 All SA 71 (SCA) at 19. Uys confirms that for a court to find that a transaction is simulated (and thus strike it down and uphold its true character), “the Court must be satisfied that there is a real intention, definitely ascertainable, which differs from the simulated intention”. Put differently, a court “must first be satisfied, on the available and admissible evidence, that there was some unexpressed or tacit agreement between the parties which was not reflected in the agreement”.
Take care to avoid the statute in question
In an attempt to work around a statute, transacting parties must make sure that their creative structure is not nevertheless still caught by the ambit or “gravitational pull” of the wording which they are trying to avoid. For instance, if the section sought to be avoided refers to, say, a “disposal” of something, the structure adopted by the parties must, in the first place, not be a disposal, as that word is understood in that context.
For example, in Vantage Goldfields SA (Pty) Ltd & Another v Arqomanzi (Pty) Ltd & Others 2023 3 All SA 667 (SCA), the SCA held that a substantial shareholding dilution in the ultimate holding company of an entity that held a mining right, amounted to an “alienation or other disposal” of a controlling interest in mining rights under section 11 of the Minerals and Petroleum Resources Development Act (MPDRA), requiring Ministerial consent.
Yaniv Kleitman
Roxanne Bain
There was no transfer of the mining right itself, nor a transfer of shareholding (which would be the more obvious and literal examples of “disposal”), but rather a fresh issue of shares at holding company level. The court read section 11 purposively to catch both direct and indirect changes of control so that the MPDRA’s objectives could not be thwarted.
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Another interesting example is Four Arrows Investments 68 (Pty) Ltd v Abigail Construction CC and Another 2016 (1) SA 257 (SCA), where it was held that “sale” (as used in the Subdivision of Agricultural Land Act) included the granting of an option. Thus, even if it were a perfectly valid and genuine option contract and not a simulated sale, it did not assist the parties because, quite simply, “sale” was wide enough to cover preliminary contracts like options anyway.
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Holistic approach
A related point is that a court will characterise a complex and multi-step deal by its overall economic substance, and will look holistically at the transaction in doing so. In Africa Wide Mineral Prospecting and Exploration (Pty) Ltd v PTM (RSA) (Pty) Ltd and Others 2023 (1) SA 98 (GJ), the transaction under scrutiny involved a share sale by way of a scheme of arrangement, with an asset sale (processing plant) taking place immediately prior in order to quickly inject liquidity into the target company in question. Attempts to characterise the asset sale as a stand-alone transaction (which would have triggered a “sale of substantially all assets” minority protection in the shareholders agreement) were rejected by the court. It was held that the transaction was, in truth, a two phase plan aimed at a change of share ownership implemented via a scheme of arrangement. A court will therefore compare the pre- and post-transaction picture, not just ‘step labels’.
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One can demonstrate the reasoning in Africa Wide by applying it to an example sometimes floated in practice: first, a company disposes of its business to a wholly owned subsidiary to invoke the carve out from the requirement of shareholder approval in terms of section 112 of the Companies Act. Then, the subsidiary immediately issues a significant number of shares to an external investor. A court, applying the Africa Wide lens, would likely test whether, in substance, this was really a “disposal to a wholly owned subsidiary” when looking at the end state of affairs.
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This example is sometimes confused with simulation but, in actuality, it is not. A court may accept each step as legally effective, yet still hold that, taken together, the arrangement is nevertheless caught by the relevant section’s wording. Simulation, by contrast, asks whether the parties’ real intention departs from the contract’s tenor. If you have genuinely avoided the statutory wording, your remaining vulnerability is simulation. That is a separate matter, and requires indicators of dishonesty or a contrived structure devoid of commercial substance. We now turn to this question.
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The NWK case: brief panic for dealmakers
In the case of Commissioner for SARS v NWK Ltd 2011 (2) SA 67 (SCA), the SCA concluded that a R96 million “loan” was, in truth, a R50m loan dressed up through same day maize forwards, back to back cessions and a notarial exchange of silo certificates, five minutes apart. These features showed no genuine intention to deliver maize, and no sensible business purpose. On that evidence, the SCA held that the R96m loan was simulated.
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Inter alia, the following remark in NWK caused some consternation: “If the purpose of the transaction is only to achieve an object that allows the evasion of tax, or of a peremptory law, then it will be regarded as simulated.” This confusion has been cleared up in later cases, where the SCA has, on several occasions, held that NWK did not alter the law on simulated transactions. All NWK did was to emphasise that all relevant facts had to be considered, and that the presence of multiple improbable and artificial intra-day transaction steps was evidence of dishonesty or disguise.
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It remains the case, therefore, that parties are perfectly entitled to take the scenic route around a statute, provided there is commercial sense and the agreement reflects their true intention. And whilst the structure in NWK would almost universally be described as “convoluted”, the convolutedness of a transaction is not, of itself, a problem. Rather, NWK’s facts were convoluted and unrealistic, and devoid of any commercial substance, and it is then that the line is crossed and the realms of simulation are entered.
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Kleitman is a Director and Bain a Professional Support Lawyer in Corporate and Commercial |
Cliffe Dekker Hofmeyr
