Servitudes: Not for the property owner’s enjoyment
July 1, 2021

Share-buy-backs and the takeover regulation panel: Fundamental principles revisited

Albeit that the exiting shareholder cannot procure an interested third-party buyer or that the company wish to prevent a competitor from acquiring shares in its operations, it is more often than not, that a private profit company may elect to re-acquire an exiting shareholder’s equity. However, when a private profit company elects to repurchase the issued shares from an exiting shareholder, the Takeover Regulations (herein the ”Regulations”) per the Companies Act, Act 71 of 2008 (hereinafter the ”Act”) are usually disregarded. The Regulations may be triggered when affecting a share-buy-back, regardless of the transaction value.

Put in a nutshell, the Regulations regulate all ”Affected Transactions”, involving a ”Regulated Company”, and accordingly the Takeover Regulation Panel (herein the ”TRP”) must give prior approval for an ”Affected Transaction” to be implemented. The test can be said to be two-part. First, one must determine whether the buy-back transaction constitutes an ”Affected Transaction”. If so, then one must determine whether the company is indeed a ”Regulated Company”.

The Act defines several ”Affected Transactions”, one of which is a ”Scheme of Arrangement” between a ”Regulated Company” and its shareholders, and same which may include a share buy-back. Section 48(8) of the Act states that a share-buy-back, involving the acquisition of more than 5% of the Company’s issued equity, will be subject to the provisions of section 114 of the Act (i.e. therefore purporting a section 48(8) share-buy-back transaction to be a ”Scheme of Arrangement” and thus an ”Affected Transaction”).

The implication being that a share-buy-back, involving the acquisition of more than 5% of the Company’s issued equity, must be approved by the shareholders of the company by way of special resolution. This part, most private profit companies get. It is the second part that is often overlooked, namely whether the company is indeed a ”Regulated Company”.

Should the company qualify as a regulated company, the TRP’s approval will have to be attained prior to the transaction being implemented. A private profit company will be considered a ”Regulated Company” if it disposed of 10% or more of its issued shares within 24 months preceding the ”Affected Transaction” (or if the company’s memorandum of incorporation expressly subjects it to the Regulations).

However, there are various academics arguing that a share-buy-back in terms of section 48(8) could not have been intended by the legislator to be an ”Affected Transaction” (as portrayed in section 114 of the Act). The reasoning behind this submission, same with which we agree, is that a share-buy-back transaction in terms of section 48(8) is implemented by way of mutual agreement, between company and shareholders, whereas, in terms of section 114, a ”Scheme of Arrangement” is proposed by the board of directors and forced upon shareholders, if approved by shareholders by way of special resolution.

However, no legal clarity has been provided in respect of the aforementioned interpretation, and it is therefore advised that you seek legal guidance prior to implementing a share-buy-back transaction.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

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