Regulated companies must be mindful of takeover laws

A regulated company is either of the following:

• A public company. This is a company which does not have a restriction on the transferability of its securities or the memorandum of incorporation (MOI) of which does not prohibit the company from offering any of its securities to the public. A public company need not necessarily be listed on a stock exchange - the key question rather is whether or not its MOI contains the aforesaid restrictions. However, all listed companies are necessarily public companies because a company's listed securities must be freely transferable.
  
• A state-owned company. These are companies listed in schedule 2 or 3 of the Public Finance Management Act, No 1 of 1999, or companies which are owned by municipalities. These are commonly referred to as 'parastatal' companies which are owned by the State. Major state-owned companies include the likes of Eskom, South African Airways, the South African Post Office and the South African Broadcasting Corporation.
  
• Certain private companies. It is more often than not in the private company arena where the parties to a transaction sometimes overlook the question of whether or not the company involved is a regulated company and therefore whether the takeover laws apply. A private company is a regulated company if more than 10% of its voting securities were transferred in the previous 24 months amongst persons that are not related or inter-related as defined in s1 and s2 of the Companies Act.

However, even if a private company does not fall within the statutory criterion of a regulated company, a private company may in terms of its MOI voluntarily submit itself to the takeover laws, although this is rarely seen in practice as the company and its shareholders would typically not want to be subject to an additional layer of regulation should a potential takeover be proposed in respect of the company.

Affected transactions

The takeover laws apply where a regulated company undergoes an 'affected transaction'. These are listed in s117(1)(c) of the Companies Act and are, in basic terms, takeovers or mergers in respect of regulated companies. One of the affected transactions is a scheme of arrangement in respect of a regulated company (s117(1)(c)(iii) read with s114). It should be noted in this regard that where a company undertakes a share buy-back under s48(8)(b) of the Companies Act, that section provides that such buy-back is subject to s114 and 115 of the Companies Act.

Since a scheme of arrangement under s114 in respect of a regulated company is an 'affected transaction', the same is subject to regulation by the Takeover Regulation Panel (TRP) and the TRP is required to approve all documents and circulars that are submitted to the shareholders. From a legal perspective one can argue both ways as to whether such a buy-back is in fact a scheme of arrangement, but experience has shown that the TRP's view is that such buy-backs are subject to the TRP's jurisdiction and must therefore be 'cleared' by the TRP prior to implementation, under s121 of the Companies Act (alternatively exempted under s119(6)).

Repurchasing shares

Listed companies often include a proposed resolution in their notice of an annual general meeting (AGM) for a general buy-back of shares, under s5.72 of the JSE Listings Requirements. The maximum number of shares that may be repurchased per financial year is 20% (s5.68). This is simply an authority that is requested from the shareholders and it is at that stage not even certain if a buy-back will actually occur after the AGM, let alone whether any particular buy-back or series thereof would fall within s48(8)(b). However, note that if there is a possibility that the company will buy back shares as contemplated in s48(8)(b) (that is, more than 5% in a single transaction or integrated series), then that is still regarded as a scheme of arrangement and as an affected transaction, by the TRP.

If a buy-back resolution is proposed by a regulated company and if it is anticipated that s48(8)(b) could apply, consideration should be given as to whether the AGM notice and the accompanying expert's report are to be submitted to the TRP under regulation 117 of the Companies Regulations, 2011, which provides that all documents relating to an affected transaction as defined under s117(1)(c) of the Companies Act, including announcements and circulars, must be approved by the TRP before being posted or published. Otherwise the company would have to go through all the necessary steps and send a circular to shareholders again at the time that it proposes to actually implement a s48(8)(b) buy-back.

As for the content of the AGM notice, the question arises as to what extent it ought to comply with the requirements of the takeover regulations pertaining to circulars and experts' reports. Regulation 90 deals with the prescribed content for experts' reports and regulation 106 deals with the disclosures that must be made in the circular. These are inter alia financial disclosures in relation to the company and its securities, interests held by directors, trading in securities by directors and the offer price in respect of the securities.

Consult TRP

It is certainly debatable to what extent regulation 106 can, in accordance with its terms, apply to scenarios where a general shareholder authority for a buy-back is being sought, as there is not at that stage any 'offer' made, and no offer consideration, in respect of the regulated company's securities, whereas regulation 106 refers to an offeror circular and an offeree regulated company's response circular.

Be that as it may, each case would have to be assessed on its own merits and the TRP should, in appropriate cases, be consulted for some guidance and advice on the required content of, and disclosures to be made in, the AGM notice. The TRP may require compliance with the content and disclosure requirements as far as is applicable to the matter. Alternatively, an exemption would have to be sought from the TRP on substantial and justifiable grounds. Either way, the TRP's involvement is a necessity in these cases, a fee is levied by the TRP in either case, and companies should be mindful of this potential regulatory step.