Mergers and Acquisitions or ‘M&As’ have become integral components of South Africa’s corporate landscape and play a crucial role in economic growth and development. In this article, we explore the legal framework and key considerations surrounding M&A transactions in South Africa by looking at the regulatory environment, competition law, due diligence, tax, and transaction structuring that accompanies M&A transactions.
In the dynamic landscape of South African business, M&A represent strategic mechanisms that can reshape industries, bolster market presence, and drive economic growth. There is also a plethora of legal implications involved, and embarking on such ventures is no small feat. South Africa boasts a well-developed legal framework to govern M&A transactions. With M&A transactions often being intricate, they demand astute planning, meticulous execution, and a deep understanding of the unique regulatory environment applicable.
The cornerstone of M&A regulation in South Africa is the Companies Act, 71 of 2008 (“Companies Act”), and Companies Regulations, 2011 (which includes the Takeover Regulations that govern M&As) which provide the framework governing the incorporation, management, and liquidation of companies. Under the Companies Act, mergers can be structured as statutory mergers or amalgamations subject to specific requirements and shareholder approval thresholds being met.
The Companies Act defines ‘amalgamation or mergers’ as “a transaction, or series of transactions, pursuant to an agreement between two or more companies, resulting in –
- the formation of one or more companies, which together hold all of the assets and liabilities that were held by any amalgamating or merging company immediately before the implementation of the agreement, and the dissolution of each of the amalgamating or merging companies; or
- the survival of at least one of the amalgamating or merging companies, with or without the formation of one or more new companies, and the vesting in the surviving company(ies), together with such new companies, of all the assets and liabilities that were held by any of the amalgamating or merging companies immediately before the implementation of the agreement”.
In short, this can be read as meaning that a M&A transaction is where 2 or more companies (Company A and B for example) agree to transact in a manner where the result of the transaction is the creation of a new company (Company C) holding the assets and liabilities of the old companies (A & B) or where 2 or more companies (A & B) agree to transact in a manner where on the surviving companies (A) holds all of the assets and liabilities of the non-surviving company (B).
The Competition Act, 89 of 1998 (“Competition Act”), is another crucial piece of legislation governing M&As in South Africa. The Competition Commission and the Competition Tribunal oversee the enforcement of competition law in the country and all M&A transactions that result in a change of control, a substantial lessening of competition, and that meet the prescribed monetary thresholds are subject to notification and approval by the competition authorities. Stakeholders must conduct thorough competition assessments to determine whether a proposed transaction triggers the need for approval, and if so, they must follow the prescribed procedures. The Competition Act also includes provisions prohibiting cartel behaviour, abuse of dominance, and anti-competitive conduct, which can impact the negotiation and structure of M&A deals.
In addition to the above, stakeholders will do well to take cognizance of the Securities regulation (if applicable), taxation laws, labour and employment laws, foreign exchange control regulations (if applicable), environmental compliance and intellectual property laws.
In addition to the above regulatory framework aspects, key Considerations in M&A Transactions include the following:
Due diligence is critical in any M&A transaction, enabling advisors to assess the risks and opportunities associated with the target company. Legal due diligence involves an exhaustive examination of various aspects, including:
- Corporate structure and governance.
- Contracts and agreements.
- Employment and labour issues.
- Intellectual property rights.
- Regulatory compliance.
- Litigation and contingent liabilities.
In addition to legal due diligence, advisors also need to conduct financial, tax and operational due diligence to uncover any potential red flags or hidden issues that could impact the transaction's success and ensure that these issues identified during the due diligence inform negotiation strategies and purchase price adjustments.
Transaction structuring is a crucial aspect of M&A deals, as it affects the legal, financial and tax implications of the transaction. Advisors must consider various factors when structuring a deal, such as:
- purchase price and payment terms;
- financing options;
- asset or share purchase;
- tax efficiency and implications; and
- post-closing obligations and warranties.
Careful consideration of these factors is essential to ensuring that the chosen structure aligns with the parties' goals and will furthermore mitigate potential risks and tax liabilities.
As mentioned earlier, M&A transactions may be subject to regulatory approvals, especially under the Competition Act or as it may pertain to the Takeover Regulation Panel. Advisors need to coordinate and navigate all approval processes, including preparing and submitting the necessary documentation to the relevant authorities, as failure to obtain the required approvals can lead to legal challenges, fines and potential voiding of the transaction.
Shareholder and stakeholder considerations
Significant emphasis is placed on protecting the rights of minority shareholders and other stakeholders (such as Trade Unions) in M&A transactions. Advisors must ensure that the rights and interests of all parties are considered and adequately protected. This includes addressing issues such as appraisal rights, dissenting shareholder rights, and the provision of information to shareholders and those persons prescribed in terms of the statute.
Labour and transformation considerations
M&A transactions often result in workforce changes, and advisors will have to navigate labour and employment as well as transformation laws in South Africa, including the Labour Relations Act, 66 of 1995, the Basic Conditions of Employment Act, 75 of 1997 and the Broad-Based Black Economic Empowerment Act, 53 of 2003. Advisors should assess the impact of the transaction on employees, negotiate employment terms, and manage potential labour disputes.
The above list can expand exponentially when the complexity of a transaction is increased through the involvement of foreign entities or when dealing with niche business sectors.
M&A in South Africa, although complex, present great growth opportunities, but the success of a transaction hinges on careful planning and understanding of the M&A landscape together with meticulous execution and management of the transaction, including post-conclusion.
Disclaimer: This article is the personal opinion/view of the author(s) and is not necessarily that of the firm. The content is provided for information only and should not be seen as an exact or complete exposition of the law. Accordingly, no reliance should be placed on the content for any reason whatsoever and no action should be taken on the basis thereof unless its application and accuracy have been confirmed by a legal advisor. The firm and author(s) cannot be held liable for any prejudice or damage resulting from action taken based on this content without further written confirmation by the author(s).