This article highlights some of the key differences between public deals and private deals particularly from a financing perspective and the implications of aspects of the Companies Act, 2008 and the Fundamental Transaction and Takeover regulations comprising regulations to the Companies Act.
References to public deals are to deals where the Takeover Regulations apply.
The Takeover Regulations apply to an affected transaction or offer involving a profit company or its securities if the company is a public company, a state owned company subject to certain exemptions, or a private company. However, in the case of a private company it applies only where the MOI (Memorandum of Incorporation) provides that the Takeover Regulations will apply or where more than 10% of the issued shares of the company have changed hands in the 24-month period leading up to the transaction. In the latter case, the Companies Act allows the parties to approach the Takeover Regulation Panel (TRP) to obtain an exemption and the TRP is given discretion to grant an exemption. In my experience this exemption is granted where all parties consent, although this is not the only statutory ground on which the exemption may be granted. It is important to note that reference to companies here is to South African incorporated companies. The Takeover Regulations do not regulate non South African incorporated companies. So, for example, where a South African incorporated public company acquires a foreign company, the acquisition of that foreign company is not governed by the Takeover Regulations. An affected transaction in turn includes, amongst others, a scheme of arrangement between a regulated company and its shareholders, an acquisition of no less than 5% of the issued shares of a class in a regulated company, the acquisition of the remaining shares of a class of a regulated company not already held by persons acting in concert, and to mandatory offers or compulsory acquisitions where owing to certain shareholders acquiring in excess of a certain prescribed threshold percentage of the shares of a class in a regulated company, the acquirers are either obliged to acquire the remaining shares of the class or the remaining shareholders of the class may oblige the acquirer to acquire their shares of that class. A scheme of arrangements is a very popular way for an acquirer to obtain up to 100% of the shares of a target company without having to agree the terms of the offer with all the shareholders, of the target company. So in relation to public deals where there are numerous shareholders, many are structured as a scheme of arrangement.
The key differences between public deals and private deals, some of which will be relevant to the financing arrangements, can be summarised as:
From a strictly financing perspective, the requirement for a TRP Guarantee where the public deal has a cash consideration element is perhaps the most important consideration. In this article we are concerned only with the case of a wholly or partially financed deal, in other words where the whole or a portion of the cash consideration will be financed and will not just be settled entirely out of cash in escrow. The important consideration here for financiers who are issuing a TRP Guarantee and taking a credit view in whole or in part on the target, is that the TRP Guarantee must be unconditional, that is to say it cannot contain conditions in addition to or inconsistent with the conditions to the actual firm offer.
The implication for bankers being requested to issue TRP Guarantees is that they should be satisfied that the offer itself contains sufficient protection by including the types of protective conditions precedent relating to the target company which would stop the deal from proceeding where it is no longer bankable. This especially given that the transaction may only be implemented months after the firm offer and issue the TRP Guarantee. During this period, the banks issuing the TRP Guarantee will be exposed to being called under the TRP Guarantee, and much can change in the fortunes of the target over these months. These conditions cannot be subjective and give the offeror or its bankers the ability to unilaterally withdraw from the deal. The regulator does not want to give the offeror a free option on the shares of the target or to find that the banks are able to pull the plug on the deal. The regulator wants to ensure that offers are made seriously and that the board of the target does not waste time and money considering offers which can be withdrawn based on the subjective assessment of the offeror. The courtship process here is, therefore, far more Victorian than modern. The type of conditions the TRP may accept, in addition to the obvious regulatory consents required for the transaction, would be deterioration of the net operating profits of the target company beyond a specified threshold or other objectively formulated measures of performance of the target or genuine market disruption types of events. In addition the banks would need to ensure that the conditions to the offer which protect them cannot be unilaterally waived by the offeror. This would need to be specified in the TRP Guarantee or the offer itself, in the latter case probably as a stipulatio alteri (stipulation for the benefit of a third party, in this case, the banks).
In light of the recent spate of offshore acquisitions of targets in the United Kingdom by South African companies, it is perhaps worth mentioning in passing that the approach towards public deals and cash confirmation as has been briefly described is different in the UK, where instead of a guarantee being required for public deals where there is a cash consideration, a so called cash confirmation letter must be issued by the bidder's financial adviser. All the finance documents setting out the financing terms are required to be submitted to the bidder's financial adviser who then evaluates the terms of the financing documents to ensure there are no drawstop conditions which are inconsistent with a certain funds confirmation. Because these documents are then publicly available, it is possible for bankers and lawyers to track progress and trends in the market around funding conditions on public deals. This is not possible in South Africa where the funding terms are not required to be disclosed either to the TRP or to target shareholders.
A further consideration for banks issuing TRP Guarantees, and which also arises out of the unconditional nature of the TRP Guarantee, is that the bank is satisfied that the financing arrangements or other equity raising arrangements to raise the cash consideration required to pay the target shareholders are all in place prior to the issue of the TRP Guarantee. It is often the case that the cash consideration will be settled by way of the banks providing a bridging (short term) facility which is then replaced in due course by a combination of long term debt, debt capital markets issuances and equity through a rights offer. Where a rights offer is envisaged, lawyers and bankers would need to consider a number of things including whether the company wishing to raise the equity has sufficient authorised but unissued share capital to issue the additional shares, whether an equity underwriting should be in place and, if so, the robustness of the equity underwriting arrangements. As far as the long term debt or debt capital markets issuances are concerned, the bank issuing the TRP Guarantee would want to see a signed (possibly underwritten) mandate letter and term sheet mandating the relevant banks to put in place the debt funding.
Apart from some of the considerations around TRP Guarantees, there are further considerations for financiers in public deals:
Finally, in terms of the Companies Act, a public deal can't be implemented without a compliance certificate from the TRP. This is not a regulatory consent as such, rather it is evidence that the TRP has been notified of the transaction and has played its oversight role in respect of the transaction as required by the Companies Act and the Takeover Regulations. Banks participating in the funding of public deals should therefore include receipt of the compliance certificate as a condition to disbursement of funds.
Kyle is a Partner with Webber Wentzel.