The South African economy has undeniably been in distress, even before the devastating impact expected to be wrought by the COVID-19 virus and the counter-measures required to combat the virus.
South Africa’s Budget for 2020 (presented by the Minister of Finance on 26 February 2020) had identified the structural reforms that were seen to be needed to put South Africa back on a more growth-oriented path.
“The cost of doing business, the cost of finding or conducting work and the cost of living must be meaningfully reduced,” National Treasury says. “Reforms will help to transform the economy by improving the profitability of existing businesses, encouraging the start-up of new enterprises, boosting private-sector investment, creating jobs and reducing unemployment, and improving the purchasing power of all households.”
Investors will welcome plans to modernise South Africa’s foreign-exchange system with a view to loosening controls over capital flows.
PwC Chief Economist Lullu Krugel has highlighted concerns that South Africa may soon lose its remaining investment grade rating, noting that the 2020 Budget acknowledges that “[t]he risk to South Africa’s remaining investment-grade credit ratings has become more pronounced. Indeed, the road ahead for the country’s sovereign ratings is all but rosy.”
There was certainly good news for the ratings agencies in the 2020 Budget. As Krugel points out, efforts to address the public sector wage bill will be a positive, if it is indeed implemented. So too all the intentions for reforms going forward – this has been an important downgrade buffer for Moody’s for some time.
The South African government has outlined a range of measures aimed at mitigating the impact of the COVID-19 pandemic on the South African economy. These will no doubt be augmented and refined over time but at the time of going to press include (without limitation) the following:
South Africa continues to produce world-class businesses which are currently valued at near-historic low multiples. This has prompted opportunistic acquisitions by foreign investors such as the acquisition by Pepsico of Pioneer Foods, and foreign buyers continue to pursue companies which provide access to other African markets but also those companies with skills or technology which is scaleable or exportable.
Goldman Sachs has confirmed it received approval in January 2020 from the South African Reserve Bank to operate as a bank in South Africa and spokesman Ryad Yousuf has explained that:
“South Africa is one of the only emerging market countries that has a strong common-law system originating from Roman-Dutch and English law. For foreign investors, having a strong rule of law and legal infrastructure typically addresses one of their top concerns about investing in emerging markets.
Market participants are encouraged by indications that the Ramaphosa administration is serious in its intent to tackle entrenched corruption and implement structural and economic reforms and by the President’s concerted effort to attract foreign direct investment into the region.”
However, Dealmakers SA has pointed out the stagnation in corporate activity shown in the marked declines in the usual areas of activity, whether total deal value by exchange listed companies, capital raised on exchanges or new listings. On a more positive note, listed SA corporates used the opportunity to buy back stock at lower prices in significantly higher volumes than in previous years.
See 1.1 M&A Market.
See 1.1 M&A Market.
The primary mechanisms for effecting an acquisition in South Africa are explained below.
A Sale of Shares
A sale of shares is generally implemented by the conclusion and implementation of a share purchase agreement. In a sale of shares of a private company, the parties will have to deal with applicable restrictions on transfer (such as board approval, pre-emptive rights and the like). The disposal will require shareholder approval (75%) if the disposal of the shares comprises the greater part of the assets of the seller – this is discussed in more detail below in the Transfer of Business section.
Subscription for Shares
A subscription for shares will generally be implemented pursuant to a written subscription agreement between the company and the subscriber.
The board of the issuing company must resolve that the consideration to be received for the issue of the shares constitutes adequate consideration.
Shareholder approval is required, by way of a special resolution (75%), if the issue of shares is to a director, future director, prescribed officer or future prescribed officer, or any related or inter-related person, and also if the voting power of the class of shares issued as a result of the transaction will be equal to or exceed 30% of the voting power of all the shares of that class held prior to the transaction.
Scheme of Arrangement
The board of a company may propose a scheme of arrangement between the company and its shareholders (or a class of shareholders) which may include a wide range of transactions, such as a repurchase of shares, an exchange of shares or a simple expropriation for cash. The device of a scheme of arrangement provides a useful range of mechanisms to effect different corporate actions, including a takeover of the company by a third-party bidder.
In respect of any scheme of arrangement, the company is required to appoint an independent expert to prepare a report on, inter alia, the material effects of the proposed arrangement on the rights and interests of the holders of shares affected by it. The report must be furnished to all shareholders, whereafter the shareholders of the company are required to approve the scheme of arrangement by way of a special resolution (75%) adopted by persons entitled to exercise voting rights on the matter.
A scheme of arrangement constitutes a "fundamental transaction" in terms of the Companies Act, 2008 (Companies Act). This has a number of consequences in relation to the rights of dissenting shareholders with regard to such a fundamental transaction. Thus, while the sanction of the court is no longer automatically required to give effect to a scheme of arrangement, if shareholders holding 15% or more of the voting rights vote against the transaction, any dissenting shareholder may require the target company to first seek court approval for the transaction before it is implemented. In any event, and even where the dissenting shareholder hold less than 15% of the voting rights, any shareholder who votes against the resolution may itself apply to court for a review of the transaction. The court’s jurisdiction to review the transaction is limited to manifest unfairness and material irregularity.
Furthermore, any shareholder which: (i) has notified the company in advance of its intention to oppose the special resolution; and (ii) which was present at the meeting and voted against the special resolution, will be entitled to exercise "appraisal rights" and may, subject to certain requirements, demand that the company buy its shares back at fair value.
This form of acquisition involves a bidder making an offer to each shareholder of a target company which, if accepted by the holders of 90% of the shares involved, will enable it to also acquire all of those shares from the shareholders who have not accepted the offer (the so-called "squeeze-out" is covered in more detail in 6.10 Squeeze-Out Mechanisms).
A general offer does not require the support of the board of the target company and may be used in a hostile takeover.
While a general offer will not trigger appraisal rights as in the case of a fundamental transaction, shareholders are entitled to apply to court to prevent the squeeze-out or for an order imposing conditions of acquisition different from the original offer.
Transfer of Business
A transfer of business is generally implemented in accordance with the provisions of a written sale agreement, which sets out the assets and liabilities forming part of the sale transaction. It is important to distinguish between a transfer of business as a going concern and a transfer of assets and liabilities which may not constitute a going concern.
The Labour Relations Act, 1995 (LRA) protects employees in relation to a sale as a going concern by providing that the new employer (the purchaser) is automatically substituted in the place of the previous employer (the seller) in respect of all employment contracts which existed immediately before the sale and transfer.
If a transfer of business is advertised in terms of Section 34 of the Insolvency Act, certain creditors of the business are entitled to claim payment of monies due to them, or that will become due and payable in future. If not advertised, the Insolvency Act protects creditors insofar as it provides that the sale will be void as against the creditors of the seller for a period of six months following the sale, and a creditor may, during such period, still execute against the assets sold for monies owed by the seller.
A disposal of all or greater part of a company’s assets or undertaking will generally require the approval of the shareholders of the seller by way of a special resolution (75%) adopted by shareholders entitled to exercise voting rights on the matter. Such a sale of business also amounts to a fundamental transaction as contemplated in the Companies Act, with the consequences in relation to dissenting shareholders set out above.
Merger or Amalgamation
The Companies Act allows two or more profit companies to merge or amalgamate into one entity through a written agreement setting out the terms and means of effecting the amalgamation or merger.
Companies are free to regulate the terms and structure of the amalgamation or merger in the written agreement (for example, shares in the merging companies may be converted into shares in the newly merged company, alternatively the shares of each amalgamated company may be exchanged for "other property" or other forms of consideration).
Each amalgamated or merged company must satisfy the solvency and liquidity test prescribed by the Companies Act upon implementation. The shareholders are required to approve the transaction by way of a special resolution (75%) adopted by shareholder entitled to exercise voting rights on the matter.
Notice of the amalgamation or merger must be given to every known creditor of the company, whereafter a creditor may apply to court to review the transaction if the creditor believes that it will be materially prejudiced by it.
An amalgamation or merger constitutes a fundamental transaction as contemplated in the Companies Act.
The main statute regulating mergers and acquisitions is the Companies Act, which established two important regulatory bodies, namely the Companies and Intellectual Property Commission (CIPC) and the Takeover Regulation Panel (TRP). The CIPC is mandated to monitor compliance with the Companies Act and to ensure that contraventions of the Companies Act are properly investigated.
The TRP is responsible for regulating affected transactions which involve regulated companies (which includes public companies, state-owned companies and certain private companies). The TRP is empowered to issue a compliance certificate, or alternatively to grant an exemption, in respect of affected transactions contemplated by a regulated company, including in order to permit the implementation of the proposed transaction.
The Competition Commission is a statutory body constituted in terms of the Competition Act, 1998 (Competition Act) to investigate, control and assess restrictive business practices, mergers and related antitrust matters in South Africa. It works alongside the Competition Tribunal (being the adjudicative body) and the Competition Appeal Court (which considers appeals against decisions of the Competition Tribunal).
The Financial Sector Conduct Authority, established in terms of the Financial Sector Regulation Act, 2017 regulates the financial services sector. Its objectives include to enhance and support the efficiency and integrity of financial markets.
Transactions involving one or more parties listed on the JSE will be subject to the JSE Listings Requirements.
The Broad-Based Black Economic Empowerment (B-BBEE) Commission, established in terms of the Broad-Based Black Economic Empowerment Act, 2003 (B-BBEE Act), oversees, supervises and promotes compliance with the B-BBEE Act (where applicable). It also receives and investigates complaints related to B-BBEE.
The Financial Surveillance Department of the South African Reserve Bank (the FinSurv), assisted by authorised dealers, regulates the flow of capital in and out of South Africa and other countries in the Common Monetary Area in accordance with the South African Exchange Control Regulations (the Exchange Control Regulations). Certain cross-border transactions require the prior approval of the FinSurv. The Common Monetary Area comprises South Africa, Namibia, Lesotho and Swaziland.
Certain industry-specific legislation caters for additional industry-specific regulators (such as those in broadcasting or telecommunications), in addition to the regulators discussed above.
Foreign investors are generally subject to the provisions of local legislation (including, importantly, the Protection of Investment Act, 2015, discussed further in 3.1 Significant Court Decisions or Legal Developments), but may enjoy specific additional rights under the terms of bilateral investment treaties concluded with their host nations.
Furthermore, as already mentioned, cross-border investments are subject to the Exchange Control Regulations.
The B-BBEE Act, the B-BBEE Codes of Good Practice, the various sector-specific codes (collectively the codes) and certain related legislation (B-BBEE Legislation) which establishes the legal framework for the economic empowerment of black people (as defined in the B-BBEE Act), are important considerations for foreign investors. Whilst private companies are not legally required to comply with the B-BBEE Legislation, a company’s B-BBEE status (measured by way of scorecards contained in the codes) is important if, for example, it wishes to provide services to the government, or to large corporates who themselves deal with government. Compliance with the B-BBEE Legislation will also be required to obtain certain permits and/or licences to conduct business, for example, in the mining sector, for which, inter alia, a minimum level of black ownership is required. Companies listed on the JSE are also required to report to the B-BBEE Commission regarding their compliance with B-BBEE.
Whilst not yet in force in its totality, the Competition Amendment Act, 2018 (Competition Amendment Act) contemplates the introduction of a national security review process for mergers involving foreign firms. This national security review process is discussed further in 2.6 National Security Review.
In order to determine whether a transaction is notifiable to the antitrust/competition authorities in South Africa, it must be established whether:
The Competition Act applies to all economic activity “within, or having an effect within” South Africa and transactions between parties having only an indirect presence in South Africa may nevertheless be subject to the jurisdiction of the competition authorities.
A merger occurs when one or more firms (which includes natural persons, juristic persons and trusts) directly or indirectly acquire or establish direct or indirect control over the whole or part of the business of another firm.
A merger is only notifiable to the competition authorities if it is an intermediate or large merger, and may not be implemented without the prior approval of the competition authorities. Administrative penalties (up to 10% of turnover) may be levied on parties that implement a merger without the requisite approval.
Parties to a small merger are not obliged to notify the Competition Commission of the transaction, unless the Competition Commission requires such parties to do so within six months from the date of implementation of the merger. The Competition Commission may take this step if, in its opinion, the merger substantially prevents or lessens competition, or if the merger cannot be justified on public interest grounds.
An intermediate merger occurs if the acquiring firm and the target firm have combined assets or turnover in, into or from South Africa (whichever combination is the higher) of ZAR600 million or more, and the target firm has assets or South African turnover (whichever is the higher) of ZAR100 million or more.
A large merger occurs if the acquiring firm and the target firm have combined assets or South African turnover (whichever combination is the higher) of ZAR6.6 billion or more, and the target firm has assets or South African turnover (whichever is the higher) of ZAR190 million or more.
As already mentioned, when assessing mergers, the competition authorities consider whether the merger may substantially lessen or prevent competition. In addition, importantly, certain non-competition related public interest factors (such as B-BBEE, employment, the ability of small businesses, or firms controlled by historically disadvantaged persons to effectively enter into, participate in or expand within a market, the promotion of a greater spread of ownership in particular to increase the levels of ownership by historically disadvantaged persons) are also considered. These factors may be relied on by the competition authorities, not only to “save” a merger that is otherwise anti-competitive but also to prevent a merger that is otherwise competitively benign.
The key legislation applicable to employees and employment relationships is the following:
Further to the implementation of a national minimum wage of ZAR20 per hour for all employees in January 2019, South Africa will, with effect from 1 March 2020, increase the national minimum wage to ZAR20.76 per hour. Specific sectors have industry-specific rates that differ from the national minimum wage rate. For example, in the agricultural sector, there are specific minimum wage requirements for farm workers.
Transfer of Business
When a business is transferred as a going concern, Section 197 and Section 197A of the LRA will be applicable and must be complied with. As already mentioned above, the employees of the transferring business are automatically employed by the new owner of the business, without the need for new employment contracts.
Employees must be consulted and notified of the transfer, but their consent is not required. The essence of Section 197 is to protect the employees, but the parties may contract out of the provisions of that section by agreement with each relevant employee.
Affirmative Action/Employment Equity
As already mentioned, the EEA regulates affirmative action or "employment equity" in the workplace. The EEA requires that certain designated employers (being, inter alia, employers with 50 or more employees, or employers who employ less than 50 employees whose annual turnover is equal to or more than the amount prescribed under the EEA) take measures to ensure that qualified employees from designated groups (black people, women and people with disabilities) are equally represented and have access to equal opportunities in the workplace.
An employer seeking to dismiss an employee for economic, technological, structural or similar reasons will have to comply with the provisions of Section 189 of the LRA. This requires that the reason for the dismissal as well as the procedure leading up to the dismissal must be fair. Employers must consult with each employee who may be dismissed and allow the employee an opportunity to make representations on alternatives to the dismissal.
Pursuant to their jurisdiction to consider the effect of a merger on employment, the competition authorities commonly impose a condition on the merging parties that no merger-related retrenchments are effected for a reasonable period, for example two years, after the implementation of the merger. Notice of mergers must be provided to employees and their representative organisations (if any).
Employment of Foreign Nationals
An employer may not employ a foreign national without a valid work permit. The employer must further be satisfied that there are no South African citizens or permanent residents within South Africa with suitable skills to fill a vacancy before they recruit a foreign national.
Whilst not yet in force in its totality, the Competition Amendment Act, 2018 (Competition Amendment Act) provides for the establishment of a national security review process for mergers involving foreign firms. It contemplates that an assessment be undertaken by a committee to be appointed by the President of South Africa to determine whether certain transactions may have an adverse effect on the national security interests of South Africa. This assessment is independent of the merger assessment currently prescribed in the Competition Act.
As already mentioned, the Competition Act requires the competition authorities to consider the effects of a proposed transaction on the public interest, when it is considers whether or not to approve a transaction. However, no express reference to national security is contemplated thereby.
Significant Court Decisions
Investors, whether in public or private transactions, should take note of the High Court decision in the proceedings brought against the directors of African Bank Investment Limited (ABIL) and African Bank Limited (African Bank) and Deloitte (in its capacity as auditors of ABIL and African Bank) by shareholders Hlumisa and Eyomhlaba. This case confirms the following principles of South African law in relation to losses suffered by shareholders:
The court has since granted the plaintiffs leave to appeal this judgment to the Supreme Court of Appeal.
Significant Legal Developments
Various significant legal developments impacting the South African mergers and acquisitions market have taken place over the past three years.
On 9 June 2017, thresholds were published for major black economic empowerment transactions as contemplated by the B-BBEE Act and its Regulations. In terms thereof, parties to such a transaction concluded on or after 24 October 2014, where the transaction value is ZAR25 million or more, are required to register such transactions with the B-BBEE Commission within 15 days of the conclusion of the transaction.
On 20 December 2017, the International Arbitration Act, 2017 (International Arbitration Act) came into effect, which will govern all international arbitrations seated in South Africa. It incorporates the United Nations Commission on International Trade Law (UNCITRAL) Model Law into South African law. This development is welcomed as it provides for a familiar dispute resolution mechanism to investors.
When the relevant provisions of the Competition Amendment Act (discussed in 2.6 National Security Review) come into full force, it will bring about significant changes to the merger control regime in South Africa.
The Protection of Investment Act, 2015 (Investment Protection Act), which came into effect on 13 July 2018, aims to compensate for the removal of treaty protections by way of domestic legislation. The Investment Protection Act will have no immediate effect on the rights which foreign investors may enjoy under international treaties; such protections will continue to have effect until the respective termination dates of such treaties. The Investment Protection Act affirms the Government’s right to take regulatory measures in order to, inter alia, redress historical, social and economic inequalities.
Land ownership has been a prominent political topic in South Africa over the past few years. Towards the end of 2018, the Joint Constitutional Review Committee recommended that the Constitution of South Africa be amended to allow for expropriation without compensation within certain prescribed parameters. In December 2019, the Constitution Eighteenth Amendment Bill was published for public comment, which Bill aims to amend the Constitution of South Africa to expressly allow for expropriation without compensation. Further, the Draft Expropriation Bill, 2019 was also published which, inter alia, will repeal the Expropriation Act, 1975 and will, if adopted, provide a framework for expropriating property (and related matters).
The JSE Listings Requirements have been amended from time to time over the past two years. In September 2018, the JSE released a consultation paper with the aim of obtaining input from the public regarding potential improvements to its regulatory approach to new and existing listings on the JSE. The release of this paper was largely as a result of various irregularities in the corporate sphere during the preceding year, including those at Steinhoff International. Following the release of the consultation paper, certain provisions of the JSE Listings Requirements were amended in December 2019.
The Companies Amendment Bill, 2018 was published for public comment on 21 September 2018. It proposes various changes to the Companies Act which came into effect in 2011.
Whilst there have been no significant substantive changes to takeover laws during the past 12 months, the Companies Amendment Bill (discussed in 3.1 Significant Court Decisions or Legal Developments) proposes an amendment to the Companies Act which, if implemented, will have the welcome effect of limiting the number of private companies that will be regarded as "regulated companies" subject to the Takeover Regulations.
It is not uncommon for a bidder to build a stake in a target prior to launching an offer.
The specific strategy employed in building a stake will depend on the bidder’s focus, whether it be staving off competition, recovering offer costs and/or as a tool to pressure the target board. For example, a bidder may acquire a significant stake in the target in an effort to discourage counter-bids from competing bidders – in this case the stake would have to be sizeable so as to confer blocking power to the bidder. Another strategy is to corner the target by accumulating a sizeable stake and then to place pressure (the so-called 'bear hug') on the target board to co-operate in a consensual transaction.
In terms of the Companies Act, a person acquiring a beneficial interest in securities amounting to 5%, or any further whole multiple of 5% of that particular class of securities in a regulated company, must notify that company within three business days after such an acquisition. The same applies to a disposal of such a beneficial interest. It will also be necessary for the regulated company to file a copy of the notice with the TRP and inform the holders of securities of the relevant class hereof, unless the disposal is less than 1% of the relevant class of securities.
In the context of listed entities, the JSE Listings Requirements requires an issuer to publish the information provided by an acquirer/disposer in a disclosure notice within 48 hours on the Securities Exchange News Service (SENS).
Under the Companies Act and the JSE Listings Requirements, a public company must disclose shareholdings of more than 5% in its annual reports and the extent of those beneficial interests.
During an offer period, a bidder may not sell the target’s shares, and the target may not acquire its own shares without disclosure and regulatory approval.
Whilst nothing prevents a company from introducing more onerous reporting thresholds in its memorandum of incorporation (being the constitutional document of a company in terms of the Companies Act), a company’s memorandum of incorporation may not provide for less onerous reporting thresholds.
Section 123 of the Companies Act requires a person to make a mandatory offer if that person (alone or in concert with others) acquires shares in excess of the 35% threshold.
In certain sectors a fairly low shareholding threshold will trigger the requirement for regulatory approvals – for example, in the case of certain financial institutions the threshold is as low as 15%.
A bidder should always be mindful of the insider trading laws set out in the Financial Markets Act.
Dealings in derivatives are allowed. A wide range of derivative instruments are listed on the JSE and other exchanges in South Africa.
In terms of the Companies Act, the term "securities" is broadly defined and includes “other instruments, irrespective of their form or title, issued or authorised to be issued by a profit company”. Derivatives that carry general voting rights or that are convertible into voting securities are approached on the same basis as ordinary shares in the Takeover Regulations. Furthermore, if a transaction involving a trade in derivative instruments of a company results in the acquisition of control of that company, as contemplated by the Competition Act (discussed in 2.4 Antitrust Regulations), it may trigger a notifiable merger, which would require the approval of the competition authorities.
An acquirer is not required, in the course of a stakebuilding, to disclose the purpose of its acquisitions. However, the Companies Act requires that, in an offer scenario, an offeror must disclose in its circular the reasons for its offer as well as its intentions regarding the continuation of the business of the offeree company.
Depending on the stage that a deal has reached, different disclosure requirements apply.
Confidentiality and Cautionary Announcement
The Takeover Regulations set out certain obligations regarding confidentiality and transparency, including that all negotiations between the independent board and an offeror must be kept confidential, but if there is a leak, or a reasonable suspicion of a leak, of price-sensitive information, that information must immediately be disclosed in a cautionary announcement. This is consistent with the requirements of the JSE Listings Requirements.
The JSE Listings Requirements also stipulate a general obligation of disclosure to the effect that “with the exception of trading statements, an issuer must, without delay, unless the information is kept confidential for a limited period of time, release an announcement providing details relating, directly or indirectly, to such issuer that constitutes price-sensitive information”. In practice this means that upon the conclusion, by a JSE listed company, of a transaction agreement with an offeror in relation to an offer, the principal terms of the offer are made public. If the agreement qualifies as a "firm intention" by the offeror (ie, the offeror has satisfied the requirements relating to certain funds/cash confirmation and the transaction is no longer subject to subjective conditions such as due diligence) then the announcement will also be required to meet the requirements relating to firm intention announcements (discussed below).
Firm Intention Announcement
A firm intention announcement must be made when an offeror has communicated a firm intention to make an offer and is ready, able and willing to make an offer. The responsibility for making such announcement rests with the independent board.
A firm intention announcement is required to contain information on a range of matters that are prescribed in the Regulations promulgated under the Companies Act. These matters include the identity of the offeror and its concert parties, the offer consideration, the terms and conditions of the offer, the details of the cash confirmation provided, the anticipated timing of the offer as well as the details of support received from any of the offeree company shareholders.
The offeror is required to publish its offeror circular within 20 business days of the firm intention announcement. The same time period applies if a transaction is consensual, in which case the circular will be a combined offer circular prepared by the offeror and offeree.
In relation to unsolicited offers, the independent board of the offeree company must post the offeree response circular 20 business days after an offeror offer circular has been posted.
In practice, these periods may be extended with the approval of the TRP.
Market practice on timing of disclosures does not differ from the legal requirements described above.
Negotiated transactions invariably involve some level of due diligence by the bidder. In private (unlisted and unregulated) transactions, the parties are free to agree on the scope of the due diligence in light of the interests of the bidder for full information on the target (caveat emptor) and the interests of the target in limiting its exposure under warranties. The extent of disclosure by the target may be limited, not only by statutory restrictions on the sharing of personal information (POPIA) or competitively sensitive information (Competition Act), but also by existing contractual confidentiality undertakings.
In transactions subject to the Takeover Regulations (affecting mainly public companies), parties need to be aware of Regulation 92 which prescribes equality of information amongst bidders. In terms of this regulation, any information provided to a bona fide bidder must be provided “equally and as promptly” to any other bona fide offeror or potential offeror. This rule is derived from the corresponding rule in the London Takeover Code and has been applied on a similar basis.
Furthermore, transactions involving listed securities are subject to the "insider trading" provisions of the Financial Markets Act which, amongst other things, proscribes the disclosure to potential bidders of unpublished material price sensitive information. A bidder may not proceed to acquire shares in the target if it is in possession of such "inside information" unless and until that information is published.
The above considerations will understandably impact the ability and willingness of the offeree company to share confidential information in the course of a negotiated transaction.
It is increasingly common in public market transactions for an offeree company to require an unsolicited bidder to provide assurances regarding the purchase, disposal of or voting of shares in the offeree company.
Conversely, in light of the considerable costs and transaction risks associated with a public market offer, the bidder would generally seek assurances from the offeree that the bidder will have exclusivity. However, offeree directors are generally advised that, in light of their general fiduciary duties as well as their express statutory obligations not to frustrate alternative offers, they may not provide "no-talk" undertakings and at most may commit to "no-shop" commitments, provided these are in the interests of the company and its current shareholders.
In consensual transactions, it is usual for the bidder and the offeree to record the terms and conditions of the offer, and the respective rights and obligations of the parties, in a definitive transaction agreement.
In non-consensual or hostile transactions, the terms of the offer will usually be set out in a "firm intention letter" addressed to the target board, which will trigger an obligation by the target board to publish a firm intention announcement setting out, inter alia, the terms of the offer (as discussed in 5.1 Requirement to Disclose a Deal).
The duration of a corporate or commercial transaction in South Africa varies depending on the nature of the transaction (including whether it is a public market transaction) and the extent of any regulatory approvals required prior to implementation of the transaction.
In most instances, in relation to a public market transaction, the transaction timeline commences upon publication of the firm intention announcement (discussed in 5.1 Requirement to Disclose a Deal), whereafter the offeror circular must be posted within 20 business days (or such longer period as may be agreed to by the TRP). Within 20 business days after the offeror circular is posted, the independent board of the target company must post an offeree response circular. On the 45th business day after the opening date of the offer, an announcement must be made (by no later than 4.30pm on that date) as to whether the offer is unconditional as to acceptances, or has terminated. The consideration must thereafter be settled within six business days following whichever is the later of: (i) the offer being declared wholly unconditional; and (ii) the acceptance of the offer by the relevant shareholder.
The timelines of transactions may be significantly impacted by the extent of regulatory approvals required to approve the transaction. Timelines may also be impacted by any injunctive court proceedings which may arise pursuant to shareholder approval of the transaction, or the exercise by a dissenting shareholder of appraisal rights.
The mandatory offer threshold of 35% may be breached by: (i) repurchases by a target company of its own securities; and/or (ii) acquisitions of a target company’s shares by a third-party bidder acting alone, or two or more inter-related (affiliated) third-party bidders, or two or more persons acting in concert in relation to an offer (collectively, offerors). The obligation to extend a mandatory offer is triggered if, before the acquisition, the offeror(s) was/were able to exercise less than 35% of the voting rights attached to the securities of the target company and, as a result of the acquisition, the offeror(s) are able to exercise at least 35% of the voting rights attached to the securities of the target company.
If a mandatory offer is triggered, the offerors must make an offer (within one business day) to acquire the remaining securities of the relevant target company. The requirement to make a mandatory offer may, in certain circumstances, be waived (by way of a whitewash waiver resolution) by the independent holders of more than 50% of the general voting rights of all issued securities of the target company.
Consideration for acquisitions may be in the form of cash, securities or a combination of cash and securities.
When an offer consideration is wholly or partly in cash, the offer circular must include a statement that the offer includes either: (i) an irrevocable unconditional guarantee issued by a South African registered bank; or (ii) an irrevocable unconditional confirmation from a third party that sufficient cash is held in escrow in favour of the offerees.
The offer consideration must be identical or, (where appropriate) comparable to, the highest consideration paid (excluding commissions, taxes and/or duties) in any acquisition by the bidder or any concert party within the six months preceding the commencement of the offer period. If securities that carry 5% or more of the voting rights, exercisable at a meeting of the relevant class of shareholders, were acquired for cash, the offer must (in addition to being identical or comparable to the highest consideration paid for the prior acquisitions) be accompanied by a cash consideration of not less than the highest cash consideration paid per security. Where an offer consideration is in the form of securities, enhanced disclosure requirements are imposed on the bidder for both the firm intention announcement and the offer circular. Such required disclosures include pro forma earnings and asset value per target company security, confirmation that the bidder has sufficient securities available to settle the consideration and historical audited financial statements in relation to the offered securities.
The Takeover Regulations expressly prohibit an offer being subject to any condition: (i) that depends solely on subjective judgement by the directors of the bidder; or (ii) of which the directors of the bidder are able to control the fulfilment.
Typical conditions to a takeover offer include:
A bidder is entitled to stipulate a minimum acceptance condition which may be at any level. However, the bidder would be advised to make clear in the offer document that such a condition may be waived or the acceptance level lowered at its discretion.
In "affected transactions" (transactions regulated by the TRP), a cash offer may not be conditional on the bidder obtaining financing, as the bidder is required to provide appropriate confirmation as to its ability to satisfy cash commitments prior to the implementation of the transaction (discussed in 6.3 Consideration).
However, if any regulatory approval is required for drawdown of a facility (eg, exchange control approval), the procurement of such approval would usually be included as a condition precedent to the transaction.
Bidders should derive some comfort from the provisions of Section 126 of the Companies Act, which restrict the board of the target company from taking certain actions which may result in the offer being frustrated (discussed in 9.2 Directors’ Use of Defensive Measures).
In addition to seeking irrevocable undertakings from shareholders, a bidder may also seek additional deal security through the use of a break fee (which may be permitted by the TRP provided that the break fee does not exceed an amount equal to 1% of the value of the transaction), and non-solicitation undertakings from the target board. A break fee undertaking provided by a target company to a bidder would require approval from the target company’s shareholders to the extent it constitutes financial assistance in connection with the acquisition of the target company’s securities.
In light of the statutory and fiduciary duties of the directors of the target company, it is generally not regarded as permissible to agree to give a bidder full exclusivity. However, a target board may agree not to solicit other bidders (a so-called "no-shop" undertaking).
A bidder may seek governance rights over the target company outside of the default rights provided to shareholders in terms of the Companies Act and the relevant listings requirements in respect of listed shares. Bidders would typically achieve governance rights by requiring representation on the target company’s board of directors.
The bidder may include contractual rights in the transaction agreements (such as "interim period" ordinary course of business undertakings) or, in respect of the long term, to enter into a voting pool agreement with one or more other shareholders, or to require the amendment of the target company’s constitutional documents which would provide the bidder with additional governance rights.
Shareholders may vote by way of proxy in South Africa. Proxies are commonly sought by bidders, and are often the subject of contestation between competing bidders.
Bidders should be aware that obtaining proxy appointments in support of an offer may: (i) result in the bidder and the shareholder granting the proxy to be regarded as "concert parties" under the Takeover Regulations; and (ii) cross the line of "control" for the purposes of the Competition Act and require the approval of the competition authorities prior to implementation of the transaction.
A bidder who enjoys the co-operation of the target company’s board may seek to acquire 100% of the shares of the target company by means of a scheme of arrangement.
Alternatively, a bidder not acting in co-operation with the board may make an offer directly to shareholders. If such offer has been accepted by 90% of the target company’s shareholders (excluding the bidder and any affiliates of the bidder) within four months of the offer having been made, the bidder may, within a further two months thereafter, on notice, squeeze out the remaining minority shareholders and acquire their shares. A shareholder who does not accept the original offer may apply to court within 30 business days following the squeeze-out notice for an order prohibiting the squeeze-out or imposing conditions on the acquisition different to those of the original offer.
It is common for bidders to approach certain shareholders to obtain irrevocable commitments.
Bidders should be cautious, generally, that the extent of their engagement with shareholders does not result in: (i) misuse by the bidder of price-sensitive or inside information; (ii) concert party behaviour with such shareholders; and (iii) the bidder offering favourable conditions to those shareholders which are not being extended to other shareholders.
As noted above, a range of different public announcements may be required during the course of an offer.
For JSE-listed companies, announcements are made through the SENS system (a real-time facility designed to allow listed entities to disseminate corporate news or price-sensitive information). Company information may also then be published in the press and on the company’s website.
Where an offer consideration is in the form of securities, enhanced disclosure requirements are imposed on the bidder for both the firm intention announcement and the offer circular. Such disclosure requirements include, for example:
A share issue that amounts to an "offer to the public" will need to comply with the extensive disclosures, by way of prospectus, required by the Companies Act.
Bidders will need to produce financial statements where the offer consideration consists wholly or partly of securities of the bidder. Financial accounts and statements must be prepared in compliance with the standards and formats prescribed by the Companies Act (the constitutional documents of the company may impose additional requirements).
Transacting parties are obliged in terms of the Takeover Regulations to disclose all documents that may be required to allow shareholders to make an informed decision on the transaction, and thus will often make each relevant transaction document available for inspection. The material terms of the transaction agreements are also required to be disclosed both in the firm intention announcement and in the transaction circular.
The Companies Act has partially codified and extended the common law duties of directors of a company.
The Regulations promulgated under the Companies Act place certain additional responsibilities on the directors of a target company. For example, the target company is required to determine which directors may serve on its independent board, comprising at least three independent directors. This independent board is required to take all reasonable steps to receive all information necessary to reach a fully informed opinion on an offer and to avoid haste and pressured timelines.
In addition, the independent board is required to obtain the advice of an independent expert, in the form of a fair and reasonable opinion on the offer, which must be distributed to all current shareholders of the company. The independent board must consider the opinion received and thereafter form its own opinion, which opinion must also be communicated to the shareholders of the target company.
Directors are also obliged to generally avoid any conflict of interest (discussed below in 8.5 Conflicts of Interest).
If an offeree company (or potential offeree company) has given any information to a preferred or potential offeror, it must, on request, give the same information to a less welcome, but bona fide, offeror or potential offeror.
The Companies Act (Section 126) also restricts the board of a regulated company, which believes that a bona fide offer might be imminent, or which has received such an offer, from taking certain actions which may frustrate the offer, without obtaining the approval of its shareholders and the TRP.
As discussed in 8.1 Principal Directors' Duties, an independent board must be identified for the purposes of considering and dealing with an offer. The Regulations provide that "independent", in relation to a person and a particular offer, refers to a person who has no conflict of interest in relation to the offer, and who is able to take impartial decisions in relation to that offer without fear or favour. Both the Companies Act and its Regulations have additional rules regarding independence and conflict of interest which must be considered in determining a director’s independence.
The Companies Act provides that a director will have satisfied his or her obligation to act in the best interests of the company, and with due care, skill and diligence, if the director: (i) has taken diligent steps to become informed on the matter; (ii) has no conflict of interest (or declared the conflict and recused himself or herself from consideration by the board of the matter); and (iii) makes a decision (or supports a decision) on that matter, and has a rational basis for believing, and did believe, that the decision was in the best interests of the company.
Accordingly, the courts will not "second-guess" and will defer to the judgement of the board where the directors have acted reasonably in the circumstances and otherwise in accordance with their fiduciary duties.
As already mentioned, an independent board is required to appoint an independent expert to opine on the terms of a scheme of arrangement or a general offer (discussed in 2.1 Acquiring a Company and 8.1 Principal Directors’ Duties). In circumstances of a mandatory offer, a partial offer or a disposal of all or the greater part of the company’s business, the target company is required to seek a ruling from the TRP on whether an independent expert is required.
Beyond the independent expert function, various external advisers are involved in advising the board of a target company and an acquiring company in mergers and acquisitions, such as lawyers, corporate advisors and tax advisers to assist with, inter alia, the structuring of the transaction, and the negotiation and the implementation thereof.
The Companies Act requires a director (which includes an alternate director, a prescribed officer and a person who is a member of a committee of the board) to disclose his or her personal financial interest, and that of anyone related to him or her (as contemplated in the Companies Act), in respect of any matter to be considered at a meeting of the board. Such a director will then be prohibited from participating in the consideration of the matter.
In relation to an offer, the Companies Act requires directors of a target company to disclose any conflict or potential conflict of interest and to withdraw from any deliberations in respect of the offer. Furthermore, the independent board of the target company will consider and deal with any offers received.
Unsolicited offers are permitted in South Africa, although they are not common.
As a general rule, the directors of a target company may not take any action in relation to the target company during an offer period that could result in an offer being frustrated or the shareholders of the target company being denied an opportunity to decide on the merits of an offer. In addition, the Companies Act restricts the ability of the board to perform a number of other specific defensive measures during an offer period, including that it may not, without the prior written approval of the TRP and the shareholders, issue shares, enter into contracts otherwise than in the ordinary course of business or make distributions that are abnormal as to timing and amount.
Given the restrictions on frustrating action referred to in 9.2 Directors’ Use of Defensive Measures, the board of a target company has limited scope and authority to defend a hostile takeover. Typically a board would only be able to defend a hostile bid by proving non-compliance with applicable laws (eg, that the bidder is privy to inside information) or by delaying the bid by objecting to relevant regulatory authorities such as the TRP, the Competition Commission and/or industry specific regulators. The most effective defensive measure has been to seek a better offer from an alternative bidder or "white knight". A target board that seeks to block an unsolicited offer on technical grounds would typically struggle to persuade shareholders of the merits of the position of the board if there are no viable alternatives that are in the interests of shareholders.
Directors have a duty to act in the best interests of the company. Directors are also obliged to allow shareholders the opportunity to decide on the merits of an offer.
In addition, during an offer period, directors are subject to an additional set of rules which regulate their handling of, and responses to, an offer. These rules include:
Directors have no obligation to collaborate with a bidder that approaches the target, nor to allow any form of due diligence. However, once the board has allowed due diligence by one bidder, it must provide equal access to any other bona fide bidder or potential bidder.
Similarly, directors are statutorily obliged to assess each firm offer that is received and express an opinion to the shareholders in relation to the offer, which opinion must be based on advice received from independent advisors.
Litigation is not common in mergers and acquisitions in South Africa, although from time to time parties do find it necessary, or tactically advantageous, to resort to litigation.
Such cases may relate to the enforcement of rights of bidders, the interdicting of competing offers for alleged non-compliance with law, or the enforcement of merger filing obligations.
While, as discussed above, litigation is not a usual feature of takeovers, if a party does resort to instituting proceedings (whether in the High Court or by way of regulatory interventions with one or other regulator) this would typically take place once the definitive terms of an offer are published and an offeror has committed itself to a particular approach.
Shareholder activism is increasing in South Africa, as it is internationally. This trend may be due to the enhanced minority rights provided in the Companies Act, as well as the fact that a large proportion of the shares of locally listed companies are in the hands of foreign owners.
In addition to concerns regarding financial performance, shareholder activists also pursue other issues, such as directors' remuneration, climate change and corporate governance. As an example, in 2019 a South African NGO, Just Share, collaborated with investors to table South Africa’s first climate change related resolution at Standard Bank calling on the lender for better disclosure on these risks and the release of policies that set out the lender’s approach to the financing of fossil fuels.
See 11.1 Shareholder Activism for relevant information.
See 11.1 Shareholder Activism for relevant information.
Landscape and Key Challenges
It has been said that smooth seas never made a skilled sailor. Indeed, South Africa’s current choppy waters require careful and expert navigation but, in our view, they still hold the opportunity of rich lands on the horizon.
The South African economy has been largely stagnant for the last several years due to domestic as well as global factors, with recent growth forecasts for 2020 being below 1%, projected to rise only moderately to around 1.5% in the medium term.
Amongst the domestic issues it faces, the government has recognised that the most pressing is to ensure a stable energy supply through the state-owned utility, Eskom, which has a monopoly on electricity supply and is currently under significant financial and infrastructure strain. A number of government initiatives, including diversifying energy sources to include more renewables, and relaxing restrictions on private energy generation, have been announced but will take some time to implement. Other priorities include the need for structural reform in certain areas (for example, further relaxation of exchange controls, some of which was announced in the February 2020 budget statement), the imperative for greater regulatory certainty, particularly in key industries, and steps to address a ballooning sovereign debt situation. Progress on these matters will allow attention and funding to be more keenly focussed on addressing structural issues such as high levels of inequality, poverty and unemployment; infrastructure (particularly health and education); and service delivery.
On a global level, weak growth (forecast at approximately 2.9% for 2020) and downside risks to the global economy – the coronavirus outbreak, economic slowdowns in key markets (particularly China), natural disasters, rising protectionism, geopolitical uncertainty and trade disputes – are exacerbating the challenges faced by South Africa’s emerging market economy. For example, slow global growth has resulted in weakness in the prices of commodities, metals and minerals, which form much of South Africa’s export basket. The South African Rand is one of the most traded and volatile currencies in the world.
It is not surprising, then, that 2019 was a relatively quiet year for M&A in South Africa.
Despite the significant challenges that it faces, South Africa has undeniable economic potential, and we believe there are reasons for cautious optimism that continuing improvement in governance and the implementation of reforms will generate a recovery of investment and lift business confidence. It also has the deepest and broadest capital markets and the most liquid and widely held stock exchange (the JSE) on the African continent specifically, and the developing world in general.
Below we outline some of the key M&A trends and developments in South Africa, and our expectations for 2020.
Some Reasons for Cautious Optimism
In the longer term, South Africa’s strategic position as a "gateway" to the rest of Africa (which has six of the world’s fastest growing economies) as well as its relatively strong institutions, highly developed financial markets, and sophisticated services sector make it well placed to both contribute to, and benefit from, African development going forward. An example of significant strategic M&A in this regard in the fast-moving consumer goods (FMCG) space is PepsiCo’s USD1.7 billion takeover of the food and beverage distribution group, Pioneer Foods, which was announced in 2019 and is due to be completed in 2020. AB InBev’s USD122 billion acquisition of SABMiller in 2016, which was primarily focussed on the African opportunity and which made AB InBev one of the top four brewers in Africa, is another.
President Cyril Ramaphosa has established an investment drive and set an investment target of USD100 billion by 2023. In his recent State of the Nation Address, the President announced that just over half of this investment commitment (ZAR664 billion) has been raised. As part of the investment drive, an annual South Africa Investment Conference has been introduced to present domestic and international businesses with a portfolio of investment projects in various sectors, and serve as a platform for information exchanges between government, local and international businesses. At the 2019 conference, over 70 companies made investment commitments of ZAR364 billion in the manufacturing, agri-processing, infrastructure, mining, services, tourism and hospitality industries.
There has also been a marked shift under President Ramaphosa’s administration towards a more constructive engagement between business and government. An example of this is the Public-Private Growth Initiative (PPGI). The PPGI is an initiative business and government leaders convened by Dr Nkosazana Dlamini-Zuma, Minister in the Presidency responsible for Planning, Monitoring and Evaluation that is working on building a closer relationship between government and the private sector. The PPGI believes growth of 5% and more is possible, provided certain enablers for the economy are realised, and key inhibitors are eliminated. Another example is the Business Economic Indaba 2020, hosted by Business Unity South Africa (BUSA), attended by the President and various Cabinet Ministers as well as business leaders, with a view to mobilising collective business endeavours to improve the repositioning of the economy and strengthen the working relationship between government and the private sector on key challenges facing the economy.
The President has appointed a technical task team with a mandate to remove obstacles to investment and growth, and consider the policy, legal, regulatory and administrative barriers that have been impeding investment activity. The Task Team reports to the Cabinet monthly. He has also set a target of moving South Africa into the top 50 performers in the World Bank’s Ease of Doing Business Report within a few years.
The President has committed his administration to the National Development Plan 2030 (NDP), on which there has been limited progress since its adoption in 2012. The NDP is intended to provide South Africa with a policy roadmap for, among other things, reindustrialising the economy, improving access to quality education and eliminating poverty by 2030. The current administration has dusted off the NDP and is focussing on seven priorities therein over the next decade to meet the NDP’s 2030 targets, including economic transformation and job creation.
Foreign direct investment (FDI) into the country remained steady in 2019, despite economic headwinds. The United Nations Conference on Trade and Development (UNCTAD) described this as a consolidation of a recovery in FDI in 2018, “with inflows remaining almost constant at a little more than USD5 billion. In addition to intra-company transfers by existing investors, investment to the country was led by M&A deals in business services and petroleum refining”. FDI has mainly come from Europe, the USA, China and Japan. Examples of recent FDI include BMW’s and Nissan’s manufacturing plant in Rosslyn, and the Mara Group’s smartphone manufacturing plant in Durban.
In his 2020 Budget Speech, Minister of Finance Tito Mboweni indicated that the corporate income tax rate will be reduced in the near future to encourage investment and bring South Africa in line with countries with lower, more competitive corporate income tax rates.
The recently concluded African Continental Free Trade Agreement (AfCFTA) represents a significant step towards deeper regional integration in Sub-Saharan Africa, and an excellent opportunity for expanded intra-African trade over the longer term. While trading under the AfCFTA will commence in July 2020, there remain plenty of questions regarding the agreement’s implementation, and significant non-tariff obstacles and risks to trade. AfCFTA’s success or otherwise will depend, in large part, on African governments’ support of implementation efforts, particularly that of the bigger economies. South Africa can use its position as chair of the African Union to drive the implementation of the AfCFTA. If implemented effectively, the benefits of the AfCFTA include increased trade through expanded trading zones, the reduction of obstacles to trade, an improved business environment and upside potential for growth.
South African-based firms, given their local knowledge and understanding of the domestic and regional risks, have been active in pursuing M&A both locally and in Africa. UNCTAD’s World Investment Report 2019 records USD8.7 billion worth M&A in Africa by South African-based firms. We expect outbound M&A into Sub-Saharan Africa by South African firms to continue. There is plenty of "dry powder" in the hands of private equity. Companies need to deploy capital to pursue growth and remain competitive – often, organic growth alone is not enough.
Regardless of the economic cycle, M&A is integral to companies’ ability to compete, grow, survive and create value over time. During economic slowdowns, deal making tends to become slower and more deliberate, but it does not go away. Downturns inevitably create opportunities as markets stall and target company performance weakens. Good businesses and savvy investors will pursue M&A during a downturn for various strategic and financial reasons, including to expand their capabilities, increase market share, or acquire assets at favourable prices.
Companies need to continually review and refine their businesses and strategies to take into account a variety of exogenous factors (including the socio-economic and political environment) and endogenous factors that affect a company’s ability to create value over time. An aspect of this is M&A-decision making, and companies will often undertake M&A to rationalise their businesses and corporate structures.
Consistent with global trends, the market is rewarding simpler, more focused businesses with higher valuations, while discounting more complex businesses and conglomerates. As a result, companies are carrying out demergers and unbundlings to unlock value for shareholders, and are disposing of underperforming business or non-core assets to rationalise their businesses and focus on core competencies. Last year, for example, Naspers spun off its internet assets and listed Prosus, the subsidiary holding them, in Amsterdam. Prosus includes Naspers’ most valuable asset, a 30% stake in Chinese internet giant Tencent, which was trading at a discount in South Africa. Naspers also listed its video entertainment business under the Multichoice Group separately on the Johannesburg Stock Exchange (JSE), simultaneously unbundling shares in this business to its shareholders. In the mining sector, AngloGold Ashanti disposed of its last assets in South Africa in the first quarter of 2020 through the USD300 million sale of its last remaining South African assets to Harmony Gold.
Restructuring and Distressed M&A
Restructuring, which occurs when a group or company is in financial and/or operational distress, involves significant changes to the organisation and operations of a business, outside of the ordinary course of business. Often restructuring entails some M&A component, whether that is a company merging with another company or division, selling a business, or otherwise.
Several large-scale restructurings have been or are being undertaken by a number of companies. The multinational steel company, ArcelorMittal, announced job losses and a large-scale restructuring last year, citing a challenging global steel market and difficult domestic environment. Embattled tech group, EOH, completed ZAR1 billion disposals of non-core assets in 2019 to reduce its ZAR3.1 billion debt following crippling tender fraud – notwithstanding these disposals its shares are now trading near 15-year lows. Struggling infrastructure and resources group, Aveng, has also been disposing of its non-core assets to raise much-needed funds. Agriculture and agri-processing company, Tongaat Hulett, has announced it is seeking to reduce its debt by ZAR8.1 billion by March 2021, through the sale of certain non-core assets as well as an equity capital raise and the disposal of core assets or majority stakes in core assets. Its share price fell by two thirds following a forensic probe that uncovered accounting irregularities.
The restructuring of financially distressed state-owned enterprises, notably Eskom (to be split into three parts), South African Airways (recently placed under business rescue), Passenger Rail Authority of South Africa (placed under administration) and Transnet, will generate significant restructuring work.
Distressed M&A occurs where the target asset or company is financially distressed to the extent that it is faced with liquidity problems and is experiencing difficulty dealing with its liabilities. Distressed companies can represent attractive acquisition targets, with their shares or debt often trading at discounted prices. They are also often under pressure to sell group companies, shares or assets quickly in order to recapitalise or pay down debt.
A variety of factors may push a company into distress including cyclical downturns, structural issues in an economy, market changes, competitive forces, poor management, or specific events such as breaches of debt covenants, cyber-attacks, fraud, corruption or accounting irregularities. A prominent recent example of distressed M&A is that being carried out by the global retailer Steinhoff. Following South Africa’s biggest ever corporate scandal, which resulted in a 98% drop in its share price and USD15 billion being wiped off its market value, Steinhoff was plunged into a deep liquidity crisis, which has forced it to restructure its debt and sell off subsidiaries and assets.
We expect to see more restructurings and distressed M&A in South Africa. The construction, manufacturing, retail and resources sectors are particularly vulnerable.
In line with global trends, South Africa is experiencing increasing levels of shareholder activism and other activist-like interventions, including M&A-related activism. South Africa has a regulatory and corporate governance framework that enables shareholder activism and activist interventions.
In broad terms, it is possible to distinguish between economic activists and governance activists. Economic activists in South Africa primarily comprise institutional investors (such as asset managers, collective investment schemes, hedge funds, insurers, retirement and pension funds) whose activism is often event-driven and is generally directed at extracting greater shareholder value. Governance activists typically seek to influence board composition and company policy, and to improve corporate governance. Activism in South Africa has not been restricted to any particular industry, or by company size or performance.
In the M&A context, activists have pursued campaigns calling for strategic reviews, full sales, the monetising of assets through divestitures, spin-offs and unbundlings, or mergers (of equals or otherwise). A noteworthy example of activist-driven M&A is the disposal of its interests in certain franchises by Grand Parade Investments (GPI), a company with holdings in the food and gaming sectors. A consortium of disgruntled minority shareholders agitated successfully for changes to the board of GPI and the disposal of GPI’s interests in loss-making Dunkin' Donuts and Baskin-Robbins franchises.
Activists are also demonstrating greater willingness to intervene to block or frustrate M&A. Recent examples of the latter include shareholder opposition to a proposed takeover of PPC, and Prudential's opposition to an attempted takeover of poultry producer Sovereign Foods by Country Bird Holdings.
Dissenting shareholders may delay, frustrate or even prevent the implementation of fundamental M&A transactions, such as schemes of arrangement, mergers or sales of all or a greater part of the assets or undertaking. Despite shareholders having approved a special resolution (75%) in respect of such a transaction, a company may not implement it without the approval of a court if: (i) the resolution was opposed by at least 15% of the voting rights exercised thereon, and any of the dissenting shareholders, within five business days of the vote, requires the company to obtain court approval; or (ii) any dissenting shareholder who voted against the resolution, within ten business days of the vote, successfully applies to a court for a review of the resolution. A court may set aside the resolution only if it is satisfied that the resolution is manifestly unfair to a class of shareholders or that the vote was materially tainted by a conflict of interest, inadequate disclosure, a failure to comply with the Companies Act or the company's constitutional document, or some material procedural irregularity. Last year, dissenting shareholders of African Phoenix Investments (API) forced it to apply for and obtain court approval before implementing a share buy-back scheme, which it successfully did in June 2019.
In certain statutorily prescribed circumstances, including fundamental M&A transactions, a dissenting shareholder may force the company to purchase its shares in cash at a price reflecting the fair value of the shares. This is a "no fault" appraisal right that enables a shareholder to sell all of its shares and exit the company.
Local and international institutional investors will continue to play a prominent role in engaging in activist campaigns in South Africa, which will directly and indirectly influence M&A. We also expect to see an increase in campaigns focused on environmental, social and governance (ESG) matters driven by both institutional investors and NGOs, such as Just Share and the Raith Foundation.
ESG, Climate Change and Sustainability
Corporates are experiencing considerable pressure from activists, consumers, governments, lenders, investors and regulators to focus on ESG matters. In particular, companies are being pushed to act on climate change, and consider, measure and report on the sustainability impact of their businesses. JSE-listed companies that are involved in or fund carbon-intensive industries are experiencing increased shareholder activism in respect of sustainability and ESG issues, from both institutional investors and NGOs (such as Just Share, the Raith Foundation, and the Centre for Environmental Rights). Recent instances of this activism have sought to compel companies to: (i) report on and disclose information on their assessment of greenhouse gas emissions attributable to their activities or portfolio; (ii) develop policies on the funding of carbon-emitting operations; and (iii) develop and disclose plans to protect shareholder value in the face of climate-related "transition risks".
These developments are gaining momentum, and careful consideration of these issues has become essential to corporate strategy and M&A decision-making. Companies which pay inadequate attention to these issues are increasingly likely to become exposed to physical and transition risks (business, credit, market, reputational and legal) that could have a material adverse effect on their businesses over the medium-to-long-term. These risk factors must be taken into account in developing and executing M&A.
A recent example of these developments driving M&A can be seen in relation to coal assets. In a matter of days: Anglo American CEO, Mark Cutifani, announced that the group is looking at options for its coal assets in Colombia and South Africa and may divest of them within five years; Glencore announced that it will exit its investments in South African coal assets within 15 years in order to meet its targets to reduce greenhouse gas emissions; and Exxaro Resources has put out a request for expressions of interest in certain of its coal assets, as part of “its sustainable growth approach [and] an internal portfolio review to evaluate and optimize its current portfolio of coal operations and projects”.
We expect local and international institutional investors, in particular pension funds, mutual funds, and insurers, to play an increasingly active and pivotal role in influencing corporate strategy and M&A with reference to sustainability and ESG factors. BlackRock, the world’s largest asset manager with USD7 trillion of assets under management, announced a sustainability drive earlier this year. It has said it will double the number of sustainably focused exchange traded funds; cut, from its actively managed portfolios, companies that derive more than a quarter of their revenues from thermal coal; and increase its sustainable assets tenfold over the next decade.
On the local front, Regulation 28 of the Pension Funds Act imposes a legal obligation on pension funds to, before making an investment in and while invested in an asset, consider any factor which may materially affect the sustainable long-term performance of the asset, including ESG factors. A recent guidance note issued on this Regulation by the Financial Sector Conduct Authority (FSCA) recommends "active ownership" by pension funds, being the prudent fulfilment of responsibilities relating to the ownership of, or an interest in, an asset. These responsibilities include guidelines to be applied for the identification of sustainability concerns in that asset, and mechanisms of intervention and engagement with the responsible persons in respect of the asset when concerns have been identified. Prudential standards require insurers’ investment policies to take into account any factor which may materially affect the sustainable long-term performance of assets, including ESG factors. Other asset owners such as mutual funds take these factors into account in the administration and management of their own asset portfolios.
Importantly, the finance sector itself is also responding to, and being reshaped by, these developments, and momentum for more "sustainable finance" is building. For example, in September 2019 the Principles for Responsible Banking were launched by 130 banks from 49 countries, representing more than USD47 trillion in assets. Members have committed to, among other things, aligning their business strategy to be consistent with and contribute to individuals’ needs and society’s goals, as expressed in the Sustainable Development Goals, the Paris Climate Agreement and relevant national and regional frameworks. Members also commit to continuously increasing the positive impact, while reducing the negative impact on, and managing the risks to, people and environment resulting from their activities, products and services. To this end, members will set and publish targets where they can have the most significant impact.
South African members of the Principles for Responsible Banking include major banks and insurers: ABSA, FirstRand Group, Industrial Development Corporation (IDC), Land and Agricultural Development Bank of South Africa, Nedbank, Santam, and Standard Bank Group.
Delistings and Take-Private Transactions
Delistings and take-private transactions have picked up in South Africa in recent years. The prevailing economic conditions are likely to make delistings and public to private (P2P) transactions attractive for corporates and investors, including private equity. The relative shortage of quality private assets, high levels of "dry powder", and potentially attractive prices of some public company assets is generating interest in public M&A from private equity.
In 2019, the Johannesburg Stock Exchange had three new listings (primarily due to unbundlings) and 22 delistings. The JSE has indicated that it intends to focus on attracting new in-bound dual listings from the rest of Africa.
Competition/Antitrust: Public Interest and Foreign Investment Review
The recently promulgated Competition Amendment Act, 2018 has both expanded the scope and elevated the importance of public interest issues during the merger review process. It has also introduced an additional review and clearance requirement for mergers which involve a foreign acquiring firm relating to the South African national security interest.
Regarding public interest, it is possible that the competition authorities may approve an anti-competitive merger on the basis that it can be justified on substantial public interest grounds. The competition authorities must first determine, with reference to various factors, whether a proposed merger is likely to substantially prevent or lessen competition. If they find that the merger is likely to substantially prevent or lessen competition, they must then determine whether the merger: (i) is likely to result in any technological efficiency or other pro-competitive gainthat will offset the adverse effects to competition, and would not likely be obtained if the merger is prevented; and (ii) can be justified on substantial public interest grounds. In making the latter determination, the competition authorities must consider the effect that the merger will have on: employment; the ability of small and medium-sized businesses, or firms owned or controlled by historically disadvantaged persons, to compete or expand within the relevant market; the ability of national industries to compete in international markets; and the promotion of a greater spread of ownership, in particular to increase the levels of ownership by historically disadvantaged persons and workers of firms in the market.
For the national security review, which is yet to come into force, the Amendment Act requires the President to appoint a committee to consider whether a merger involving a foreign acquiring firm may have an adverse effect on the national security interests of South Africa. As to what constitutes a national security interest, the President must identify and publish in the Government Gazette a list of national security interests. It remains to be seen how the national security review will be implemented.
The apparent elevation of public interest inquiries and the introduction of a national security review in the context of merger control is not unique to South Africa, but is part of a broader trend towards a more interventionist approach being adopted by many governments and regulators. Given the increased potential for deal disruption associated with these developments, it is critical for foreign investors to factor merger control review into deal planning and analysis, particularly in the context of large mergers.
In the longer term, ongoing debates about corporate purpose, stakeholder inclusivity, and sustainable long-term value creation versus short-termism, are shaping the evolution of corporate governance globally and in South Africa, which will in turn have an impact on M&A decision-making.
From an M&A perspective, directors of South African companies are obliged, when making decisions, to act in the "best interests of the company". Reflecting the growing awareness of the integral societal role companies occupy, the Companies Act essentially promotes the "enlightened shareholder value" approach: boards are permitted to take broader stakeholder interests into account, whilst being cognisant of their principal duty of maximising shareholder value.
Insofar as "good practice" standards are concerned, the King IV Code on Corporate Governance (King Code), which is recognised as one of the world’s leading corporate governance codes, adopts an approach to corporate citizenship based on the view that an organisation has rights, obligations and responsibilities in the society in which it operates. That is, a company is "licensed to operate by its internal and external stakeholders, and by society in the broad sense". In recognition of the interdependent relationship between a company, its stakeholders and the company’s ability to create value, the King Code recommends a stakeholder-inclusive approach in which the board "takes into account the legitimate and reasonable needs, interests and expectations of all material stakeholders in the execution of its duties in the best interests of the [company] over time". Consequently, directors must grapple with finding the right balance between these approaches when pursuing M&A.
COVID-19 Outbreak Prompts Strong Response
After this article was submitted for publication on 29 March 2020, the South African government moved early in response to the COVID-19 pandemic and imposed a strict national lockdown. Five weeks later it has implemented a risk-based approach to reopening the economy, using a five-level system of alerts. On 1 May 2020 the country moved from level 5, lockdown, to level 4, allowing limited reopening of some businesses under strict conditions. These levels could change region by region, depending on the severity of outbreaks within a region.
Revised economic forecasts are sobering: the International Monetary Fund (IMF) forecasts negative growth of 1.6% for sub-Saharan Africa this year. South Africa’s GDP is forecast to contract by between 5.8% and 10%. In late April, President Ramaphosa announced a ZAR500 billion economic stimulus package – the largest in the country’s history – which will be partly financed (ZAR130 billion) from a "reprioritised" budget, with the balance to come from the IMF, the World Bank and other development finance institutions.