DealMakers - Q2 2020
A guide to take-private transactions in South Africa
by Wildu du Plessis and Tanya Seitz
The fall in equity and other markets brought about by the impact of COVID-19 has led to many listed companies appearing attractively priced.
Accordingly, the focus on take-private transactions (where companies whose shares are publicly listed on one or more listing venues are acquired and de-listed) and delistings is therefore expected to increase. Take-private transactions tend to produce a different set of challenges for buyers more accustomed to transacting in the private context. They are typically characterised by greater regulatory complexity, require more time to plan and implement, present challenges in relation to funding, and may involve a greater number of transacting parties.
Steps to take private
Take-private transactions essentially entail two separate steps: first, the acquisition of all (or a sufficient portion) of the shares of a listed company, and then the delisting of that company from the relevant stock exchange (typically, the Johannesburg Stock Exchange (JSE) for South African companies).
In South Africa, the first leg of a take-private transaction may be implemented through an offer or a fundamental transaction. An offer will usually take the form of a general offer to all shareholders of the listed company (which may be conditional on a certain number of acceptances), or a mandatory offer to all shareholders. If the bidder then acquires 90% or more of the shares in the listed target, minority shareholders who have not accepted the offer may be squeezed out, if certain conditions are met.
Wildu du Plessis
Another way to acquire the requisite shares as part of a take-private transaction is by way of one of the fundamental transactions, which can take the form of a scheme of arrangement or a statutory merger/amalgamation – both of which require a minimum of 75% approval by the shareholders of the listed company. A scheme of arrangement is broadly defined and includes most arrangements concluded between the company and holders of any class of its securities. Common examples are the repurchase by a company of all its securities other than those acquired by the takeover bidder, resulting in the latter becoming the sole shareholder, or the exchange of its securities for securities in the bidder.
The statutory merger or amalgamation provisions of the Companies Act are a recent addition to South African law. In practice, however, they are seldom used as this requires all known creditors of the target to be notified of the transaction, whereupon creditors can intervene in the transaction, even after it is approved by shareholders and a merger agreement is signed. Furthermore, creditors could apply for leave to have the merger reviewed by the courts, which could substantially delay the implementation of the transaction, even if the creditors’ review application should fail.
Conditions and considerations when making an offer to take private
Except where the bidder – or anyone acting in concert with the bidder – has acquired any interest in the securities of the target within the previous six months, there are no restrictions on the nature of consideration or price at which the bid can be made. If the bidder has acquired securities in the target within the six-month period before the commencement of the bidder offer period, the minimum price offered by the bidder must be equal to the highest consideration paid by the bidder for those acquisitions.
The acquisition consideration may be discharged in cash or shares, or a combination of cash and shares. If securities carrying 5% or more of the voting rights are acquired, then the bid must be accompanied by a cash consideration.
A bidder cannot offer shares in a foreign company that is not listed on the JSE as consideration, without the approval of the Exchange Control Department of the South African Reserve Bank (SARB). The Exchange Control Department allows this form of consideration, but is likely to impose conditions regarding the sale of the shares and the repatriation of the proceeds of the sale.
Where the consideration is wholly or partly in cash, the bidder must provide the Takeover Regulation Panel (TRP) with an irrevocable and unconditional guarantee issued by a South African registered bank, or an irrevocable and unconditional confirmation from a third party that sufficient cash is held in escrow, in the prescribed format and to the satisfaction of the TRP, to provide security for payment of the full cash portion of the consideration. Such confirmation must be provided both at the time that the firm intention announcement is made, and also on posting of the bid circular to shareholders.
It is common for takeover bids to be subject to regulatory and other conditions, which typically include antitrust approval, the approval of the South African Reserve Bank (for cross-border transactions) and the approval of industry regulators, depending on the industry sector to which the target belongs. Other conditions may include obtaining shareholder approval, and the consent of counterparties to material contracts of the target that contain change of control provisions. A take-private bid may be made subject to a ‘no material adverse change’ clause, but may not be subject to any condition that is dependent solely on the subjective judgment of the directors of the bidder, or where the directors of the bidder are able to control the fulfilment (or not) of such a condition. Any material adverse change condition must, therefore, be objectively worded and tested.
Finally, bidders should be aware that where a bid has not become or been declared unconditional, and has then been withdrawn or lapsed, neither the bidder nor its concert parties may, for 12 months following the date on which the bid is withdrawn or lapses (except with the consent of the TRP), make an offer for the target, nor acquire any shares in the target which would trigger a mandatory offer requirement.
It is common for the acquirer of the shares to obtain irrevocable undertakings from existing shareholders to support the take-private transaction and to vote in favour of the proposed transaction. This is typically done prior to launching the proposed transaction and is the case irrespective of the acquisition method that will be used – take-over offer, scheme of arrangement or statutory merger/amalgamation. There are certain restrictions relevant to these irrevocable undertakings, particularly around how they should be worded in the case of a take-over offer, to avoid the appearance that parties are acting in concert.
The second leg of a take-private transaction is the delisting of the company. If a company is listed on more than one exchange, the rules and requirements of every relevant exchange on which the company is listed will have to be considered and analysed to determine how the delisting must be approached. We will focus on the requirements of the JSE, as that is likely to be the most relevant exchange for a South African take-private transaction.
Under the JSE’s listing requirements, if a company wishes to delist, it must send a circular to its shareholders seeking their approval to delist. This circular must clearly state the reasons for the delisting and contain an offer to the shareholders for their shares, accompanied by a statement from the board of directors that the bid is fair (who, in turn, have been so advised by an independent expert appointed for that purpose). Such a circular and shareholder approval will not be required if, in terms of a takeover bid, the bidder has acquired more than 90% of the shares, and notice was given by the bidder of its intention to delist the shares in the initial bid document or any subsequent circular sent to the shareholders. It will also not be required following the completion of a scheme of arrangement with shareholders, or if the bidder has acquired all the shares in the company, or the JSE is satisfied (in its discretion) that the company no longer qualifies for a listing. Depending on the mechanism that is used for the first leg of a take-private transaction (ie, how the shares were acquired), a separate delisting process may not be required.
Potential challenges or sensitivities that a bidder in a public-to-private transaction might face
Key challenges and sensitivities in a take-private bid include identifying and managing “concert parties” of bidders. Parties are considered to be “acting in concert” by any action pursuant to an agreement between or among two or more persons, in terms of which any of them cooperate for the purpose of entering into or proposing an affected transaction or offer. Concert parties are excluded from voting at any shareholder vote, for the purposes of approving the bid.
Further, certain protections exist during a takeover that protect the value and shareholders of the target. If the board of the target believes that a bona fide offer might be imminent, or has received such an offer, the board must not:
a) take any action in relation to the affairs of the target that could result in the (i) offer being frustrated or
(ii) shareholders being denied an opportunity to decide on the merits of the offer;
b) issue any shares, options or convertible securities;
c) sell or dispose of, or agree to sell or dispose of, a material asset (except in the ordinary course of business);
d) enter into contracts other than in the ordinary course of business; or
e) make a distribution that is abnormal as to the timing and amount.
Finally, minority shareholders are provided with certain statutory protections in terms of the Companies Act, such as appraisal rights and the right to apply to a court to set a scheme of arrangement aside under certain circumstances.
Du Plessis is a Partner, Head of Banking & Finance, and Seitz a Senior Associate in Corporate M&A Practice, Baker McKenzie Johannesburg