DealMakers - Q2 2023 (released August 2023)
No need for “poison pills”? Why hostile takeovers tend to fail in South Africa
by Nicholas De Decker
In the cut-throat realm of corporate power plays, where alliances crumble and ambition knows no bounds, one manoeuvre stands out as the epitome of audacity and strategic cunning – the hostile takeover.
At its core, a hostile takeover is an act of calculated aggressive opportunism, whereby the acquiring firm seeks to seize control of the target entity against the wishes of the target’s incumbent board of directors, the majority of whom are at risk of being replaced.
Nicholas De Decker
With weakening share prices, predatory acquirers seek to obtain attractive targets at opportunistically lower prices, particularly at a time when a sufficient majority of shareholders may be looking to exit their investment in the company, perhaps also disgruntled with the incumbent executive management.
If the hostile acquirer pitches their bid to the shareholders at the right price, they can gain control of the target entity. Unlike an amicable acquisition, where the boards of both the target and acquiring firm negotiate and reach a mutual agreement on pricing, which can be pitched to shareholders through a cooperative scheme of arrangement, a hostile takeover bid is made without the cooperation of the present board of directors.
The poison pill defence
When faced with a hostile takeover attempt, the target company and its board of directors may attempt several defensive measures to try to fend off the unwanted acquirer. One of the most common methods, frequently employed on a global scale, is the shareholders rights plan, aptly coined the “poison pill” defence. This strategy involves making the target firm less attractive and more financially onerous to acquire through a series of rights and privileges that are afforded to pre-existing shareholders in the event of a hostile takeover attempt.
When triggered by a hostile bid, the poison pill provisions entitle current shareholders to subscribe for the target’s shares at a heavily discounted subscription price, thereby increasing the number of issued shares and diluting the share value, making it more difficult for the hostile firm to obtain a controlling stake. This “flip-in” share purchase arrangement was implemented by Twitter in April of 2022 in an attempt to thwart Elon Musk’s initial takeover attempts.
Restrictions on the target company’s board
However, poison pills are not without controversy, as critics argue that they can entrench management and impede shareholders’ rights. In a South African context, section 126 of the Companies Act 71 of 2008 (the Companies Act) applies, and outlines the restrictions placed on a target company’s board of directors in relation to its ability to frustrate takeover actions. In terms of this section, and in the event of a bona fide offer, the board of the target company is prohibited from engaging in any conduct or taking any action that could result in such a bona fide offer being frustrated or which could deny the target company’s shareholders a genuine opportunity to deliberate the offer on its merits.
S126 further prevents the issuing of any authorised but unissued securities; the granting of any options in respect of any unissued securities; and also prohibits any sale or acquisition of any assets of a material nature – other than in the ordinary course of business – along with any distribution that is abnormal with regard to its timing and/or amount. The impact of s126 is evident – poison pill defences, as envisaged by the Companies Act, are not permissible within the framework of South African company law.
So why, despite the prohibition of one of the most effective tools to counteract hostile takeovers, do these types of acquisitions seldom succeed in South Africa?
The role of Competition law
One of the principal reasons may be contained in the stipulations of the Competition Act 89 of 1998, as amended (the Competition Act), as well as the Competition Commission’s Rules of Conduct (the Competition Rules). In the event of a proposed acquisition, whereby a change of control would be effected, the provisions of the Competition Act and the Competition Rules dealing with merger control are triggered.
Depending on the scale of the merger, that is, if it meets the specified thresholds for either an intermediate or large merger, as determined with reference to factors such as annual turnover and asset value, the Competition Commission (the Commission) must be notified. In the event of such, notification, the merger parties (being both the acquiring and target firms) are expected to cooperate and submit a joint notification entailing, inter alia, their financial statements and board reports, as well as comprehensive business plans.
Furthermore, it is customary for the merger parties to submit a collective report to the Commission, outlining the competitive landscape of the markets within which they operate. This report also evaluates the potential impact of the merger on competition within those markets.
The cooperative nature of these engagements means that it is incredibly difficult for a hostile acquirer to secure the active participation of a target firm that is being subjected to a hostile bid. Accordingly, rule 28 of the Competition Rules anticipates this and makes provision for an alternative procedure, allowing the acquiring firm to apply to the Commission for permission to file a separate merger notification. However, there is no prescribed period within which the Commission must furnish the hopeful acquirer with its decision to permit this alternative procedure. While this can delay a merger filing, even with the Commission’s approval of the acquiring firm’s separate notification, rule 28 still affords ample opportunity for the unwilling target entity to prolong proceedings within the confines of the Competition Act.
In the event of a rule 28 notification, the target firm will be directed to prepare the relevant filing documentation pertinent to their company. As a hostile takeover generally entails resistance, the target may not be so acquiescent to this instruction; in which case, if more than 10 business days have elapsed, the acquiring firm must again approach the Commission for permission to file the aforementioned documentation on behalf of the target.
Further scope for delay
The significance of these protracted and delayed filing proceedings is that s13A of the Competition Act mandates that no merger that requires notification shall be implemented until the requisite approval has been obtained by the Commission and, on referral in the case of large mergers, the Competition Tribunal. Further, the rule 30 review period, under which the Commission deliberates on whether or not to approve a merger, can only commence once the filing process has been completed. Accordingly, delays stemming from the target’s lack of cooperation in the filing process can severely obstruct the attempted takeover.
Even if the acquiring firm is able to navigate a successful filing without the participation of the target firm and place the merger before the Commission for consideration, s13B(3) of the Competition Act allows for any party to voluntarily file any document, affidavit, statement or other relevant information with the Commission in respect of the merger in question.
If the merger is hostile, the unwilling target can use this mechanism to make submissions to the Commission, including petitioning them to prohibit the merger on the grounds that it would be anti-competitive and harmful to competition in the markets within which the merger parties operate, if such grounds exist. This could give rise to a litany of new legal complications, all of which could hinder and further delay the hostile takeover bid and its chances of success.
Difficulties with implementation
Evidently, the South African corporate landscape presents a potentially challenging terrain for the implementation of hostile takeovers, even in the absence of obstacles such as poison pill remedies and other director-driven interference. The strictures of the Competition Act, as well as the co-operative complexion of South Africa’s merger control regime, provide a resistant target firm with a plethora of opportunities to prolong merger proceedings to the point where they may become untenable for the acquiring firm. It is, therefore, unsurprising that hostile takeovers tend to fail in South Africa.
De Decker is a Candidate Attorney. Supervised by Jeff Buckland, Director, Head of Corporate & Chairman of the Management Board |