CAPITULO II: EL PROBLEMA, OBJETIVOS, HIPÓTESIS, Y VARIABLES
2.1 PLANTEAMIENTO DEL PROBLEMA
2.1.2 Antecedentes Teóricos
The Companies Act 71 of 2008 is the principal legislative enactment that regulates the merger and acquisition legislative framework in South Africa.240 In addition, it regulates fundamental transactions, such as schemes of arrangement, amalgamation and mergers and disposals of all or the greater part of the assets or undertaking of a company.241 However, it must be noted that it is not the intention of this discussion to provide a detailed legal analysis of the requirements of fundamental transactions, particularly as contained in Chapter 5 of the Companies Act 71 of 2008, including the related legislation and case law. The discussion is aimed at addressing the question as to whether there rules preventing the target company in a leveraged buyout transaction from giving financial
238Stiglingh, M., Koekemoer, A.D., Van Zyl, L., Wilcocks, J.S. and De Swardt, R.D. (2017), ‘Silke: South African Income Tax’, LexisNexis, Volume 1, January 2017, paragraph 23, at pages 726-774. See Haupt, P. (2015), ‘Notes on South African Income Tax’, 34th edition, at pages 586-587. See also Standing Committee on Finance (SCOF): Report-Back Hearings on the Draft Taxation Laws Amendments Bill, 2013 and Tax Administration Laws Amendment Bill, 2013, Draft Response Document from National Treasury and SARS (Version as presented to Standing Committee on Finance on 11th September 2013). Section 23N provides for an adjustment to the allowable percentage of ‘adjusted taxable income’ to the extent that South Africa's repo rate is subject to an increase beyond ten percent.
239SARS can recommend/suggest amendments but ultimately National Treasury decides on policy considerations which when adopted go through the normal legislative processes.
240Cassim, F.H.I., Cassim, M.F., Cassim, R., Jooste, R.D., Shev, J., and Yeats, J. (2012), ‘Contemporary Company Law’, 2nd edition, Juta and Co, Cape Town, chapter 15, at pages 674-675.
241Although the Companies Act 71 of 2008 does not define the phrase ‘fundamental transaction’, it provides three types of fundamental transactions in Part A of Chapter 5. These transactions, which fundamentally alter a company, compromise: an amalgamation; a disposal of all or greater part of the assets or the undertaking of a company; and a scheme of arrangement. Cassim, F.H.I., Cassim, M.F., Cassim, R., Jooste, R.D., Shev, J., and Yeats, J. (2012), ‘Contemporary Company Law’, 2nd edition, Juta and Co, Cape Town, chapter 15, at page 674.
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assistance for the purpose of assisting a purchase of shares in the target company? If so, how does this affect the ability of a target company in a buyout to give security to lenders?
In simplistic terms, financial assistance in the context of a leveraged buyout arises when the bank(s) or other lenders of the debt take security on the assets of the target company. The bank(s) or lenders would not lend without security provided by the target company. The acquired company is therefore assisting in the raising of the acquisition finance to complete the acquisition.242 Cumming and Zambelli state that:
‘Leveraged buyouts involve the acquisition of the equity capital of a target firm by another company (‘newco’) through the adoption of a large amount of debt relative to the asset value of the acquired firm. The newco obtains debt financing under the expectation that the acquired company will repay it. As a result, the target pays the economic price of its own acquisition.’243
In South Africa, the target company would have to satisfy the procedural requirements of section 44 of the Companies Act 71 of 2008 before the target company would be allowed in the context of a leveraged buyout to assist in financing the purchase of its own shares by third parties.244 In terms of section 44 of the Companies Act 71 of 2008 a company may give financial assistance for the purchase or subscription of its securities if certain requirements are met.245 Financial assistance is not defined except where section 44(1) of the Companies Act 71 of 2008 states that financial assistance does not mean lending of any money by a company whose primary business is the lending of the money. Section 44(1) of the Companies Act 71 of 2008 reads:
‘In this section, ‘financial assistance’ does not include lending money in the ordinary course of business by a company whose primary business is the lending of money’.
The Companies Act 71 of 2008 does not contain a precise definition of financial assistance. Prior to the introduction of the Companies Act 71 of 2008, the courts used certain tests to determine if financial assistance had been given by a company. For instance, the courts applied the impoverishment test in the case Gradwell (Pty) Ltd v Rostra Printers Ltd.246 This test involved asking if a company had become poorer as a result of what was done for the purpose of, or in connection
242Gilligan, J. and Wright, M. (2010), ‘Private Equity Demystified: An Explanatory Guide’, ICAEW Corporate Finance Faculty, 2nd Edition, March 2010, at page 86.
243Cumming, D.J. and Zambelli, S. (2010), ‘Illegal buyouts’, Journal of Banking and Finance, 34(2) July 2010 at 441-456.
244Cassim, F.H.I., Cassim, M.F., Cassim, R., Jooste, R.D., Shev, J., and Yeats, J. (2012), ‘Contemporary Company Law’, 2nd edition, Juta and Co, Cape Town, at pages 328-329.
245Set out in section 44(3) and section 44(4) of the Companies Act 71 of 2008. 246Gradwell (Pty) Ltd v Rostra Printers Ltd & Another 1959 (4) SA 419 (A).
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with, the purchase of or subscription for the company’s shares.247 In Gradwell (Pty) Ltd v Rostra Printers Ltd,248Schriener JA stated:
'The question whether it was to give financial assistance would depend not on how it obtained the money by loan, secured or not, by realising assets or otherwise but on what it was to do with the money when available.'249
The impoverishment test was also analysed by Miller JA in Lipschitz NO v UDC Bank Ltd,250 where he stated that:
‘the concern is not only at preventing actual loss of company funds but also at the exposure of company funds to possible risk’.251
In Gardner v Margo,252 Van Heerden JA stated:
‘Moreover, financial assistance within the meaning of s 38(1) is given only when the direct object of the transaction is to assist another financially the s 38 prohibition is not contravened when the direct object of the transaction is merely to give another that to which he or she is already entitled’.253
However, section 44(2) of the Companies Act 71 of 2008 provides that financial assistance includes assistance by way of a loan, guarantee, the provision of security or otherwise, to any person for the purpose of, or in connection with, the subscription of any option, or any securities, issued or to be issued by the company or a related or inter-related company, or for the purchase of any securities of the company or a related or inter-related company.254 However, this excludes lending money in the ordinary course of business by a company whose business is lending of money. Furthermore, section 44(2) of the Companies Act 71 of 2008 reads:
‘Except to the extent that the Memorandum of Incorporation of a company provides otherwise, the board may authorise the company to provide financial assistance by way of a loan, guarantee, the provision of security or otherwise to any person for the purpose of, or in connection with, the subscription of any option, or any securities, issued or to be issued by the company or a related
247Gradwell (Pty) Ltd v Rostra Printers Ltd & Another 1959 (4) SA 419 (A) at 425E. 248Gradwell (Pty) Ltd v Rostra Printers Ltd & Another 1959 (4) SA 419 (A).
249Gradwell (Pty) Ltd v Rostra Printers Ltd & Another 1959 (4) SA 419 (A) at 425E. 250Lipschitz NO v UDC Bank Ltd 1979 (1) SA 789 (A).
251Lipschitz NO v UDC Bank Ltd 1979 (1) SA 789 (A) at 797H-798A. 252Gardner v Margo 2006 SCA 36 (SA).
253Gardner v Margo 2006 SCA 36 (SA) at pages 28-29.
254The word ‘securities’ is widely defined in section 1 and includes shares, debt instruments as well as debentures.
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or inter-related company, or for the purchase of any securities of the company or a related or inter-related company, subject to subsections (3) and (4).’255
The question whether financial assistance exists in any given case for the purpose of section 44 of the Companies Act 71 of 2008 will be determined based on the extensive case law that has been built up around the meaning of the words 'or otherwise' in section 38 of the Companies Act 61 of 1973. However, as stated above it is not the intention of this discussion to provide a detailed legal analysis of the capital maintenance rule in terms of section 38 of the Companies Act 61 of 1973 and relevant case law.256
Section 44(2) of the Companies Act 71 of 2008 affords authority to the board of directors of the target company to provide financial assistance.257 However the authority to provide financial assistance is subject to the fulfillment of the requirements of section 44(3) and section 44(4) of the Companies Act 71 of 2008. Section 44(3) and section 44(4) of the Companies Act 71 of 2008 reads:
‘3. Despite any provision of a company’s Memorandum of Incorporation to the contrary, the board may not authorise any financial assistance contemplated in subsection (2), unless—
(a) the particular provision of financial assistance is—
(i) pursuant to an employee share scheme that satisfies the requirements of section 97; or (ii) pursuant to a special resolution of the shareholders, adopted within the previous two years, which approved such assistance either for the specific recipient, or generally for a category of potential recipients, and the specific recipient falls within that category; and (b) the board is satisfied that—
(i) immediately after providing the financial assistance, the company would satisfy the solvency and liquidity test; and
(ii) the terms under which the financial assistance is proposed to be given are fair and reasonable to the company.
255Section 44 of the Companies Act 71 of 2008 applies to ‘securities’ as stipulated by the Securities Services Act, 36 of 2004 (which was repealed by the Financial Markets Act 19 of 2012), which includes ‘shares, bonds, and debentures’ and this is different to section 38 of the Companies Act 61 of 1973, which only applied to shares.
256The leading South African cases pertaining to the definition of ‘financial assistance’ are: Gardner and Another v Margo 2006 (6) SA 33 (SCA); Gradwell (Pty) Ltd v Rostra Printers Ltd 1959 (4) SA 419 (A); Lewis v Oneanate (Pty) Ltd 1992 (4) SA 811(A); Lipschitz v UDC Bank Ltd 1979 (1) SA 789 (A) 51. The leading English cases are: England Anglo Petroleum Ltd and another v TFB (Mortgages) Ltd 2008 1 BCLC; Arab Bank Plc v Mercantile Holdings Ltd 1994 2 All ER 74; Belmont Finance Corp v William Furniture (No.2) Ltd 1980 1 All ER 393 (CA); Brady v Brady 1989 AC 755 (HL) at 780; Chaston v SWP Group Plc 2003 1 BCLC 675 (CA); Charterhouse Investment Trust Ltd v Tempest Diesels Ltd 1986 BCLC1; Selangor United Rubber Estates Ltd v Craddock (No.3) 1968 1 WLR 1555; Spink (Bournemouth) Ltd v Spink 1936 Ch 544; Trevor v Whitworth 1887 12 App Cas 409 (HL) 416; Victor Battery Co Ltd v Curry's Ltd 1946 Ch 242.
257Section 44(2) reads ‘Except to the extent that the Memorandum of Incorporation of a company provides otherwise, the board may authorise …’.
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4. In addition to satisfying the requirements of subsection (3), the board must ensure that any conditions or restrictions respecting the granting of financial assistance set out in the company’s Memorandum of Incorporation have been satisfied.’258
A target company in the context of a leveraged buyout can provide financial assistance to any other person for the purpose of acquiring or subscribing to any shares in the target company, including providing security to lenders, provided the conditions for financial assistance mentioned above are met. Cassim et al summarises the conditions for financial assistance as follows:259
‘Irrespective of what the Memorandum of Incorporation may say, financial assistance is prohibited unless the requirements set out in s 44(3) and (4) are met. The requirements are:260
the particular provision of financial assistance must be pursuant to an employee share scheme that satisfies the requirements of s 97,261 or pursuant to a special resolution of the shareholders, adopted within the previous two years, which approved such assistance either for the specific recipient, or generally for category of potential recipients, and the specific recipient falls within that category;262
the board must be satisfied that immediately after providing the financial assistance, the company would satisfy the solvency and liquidity test;
the board must be satisfied that the terms under which the financial assistance is proposed to be given are fair and reasonable to the company;263 and
the board must ensure that any conditions or restrictions respecting the granting of financial assistance set out in the company’s Memorandum of Incorporation have been satisfied.’
In terms of the first requirement listed above,264 the financial assistance must either be pursuant to a section 97 employee share scheme, or to a special resolution adopted within the previous two years that approved such assistance for a specific recipient or generally for a category of potential recipients.265 Yeats and Jooste argue that the resolution approving financial assistance generally for a category of potential recipients may prove problematic.266 Cassim et al state:
258The conditions with respect to the granting of financial assistance stipulated in the Memorandum of Incorporation must be satisfied before any decision is made. Section 44(4) of the Companies Act 71 of 2008 requires a board to ensure that all conditions in the Memorandum of Incorporation are complied with.
259Cassim, F.H.I., Cassim, M.F., Cassim, R., Jooste, R.D., Shev, J., and Yeats, J. (2012), ‘Contemporary Company Law’, 2nd edition, Juta and Co, Cape Town, at pages 328.
260Section 44(4) of the Companies Act 71 of 2008. 261Section 44(3)(a)(i) of the Companies Act 71 of 2008. 262Section 44(3)(a)(ii) of the Companies Act 71 of 2008. 263Section 44(3)(b) of the Companies Act 71 of 2008. 264Section 44(3)(a) of the Companies Act 71 of 2008.
265Cassim, F.H.I., Cassim, M.F., Cassim, R., Jooste, R.D., Shev, J., and Yeats, J. (2012), ‘Contemporary Company Law’, 2nd edition, Juta and Co, Cape Town, at page 329.
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‘Needless to say, the special resolution requirement will have administrative and cost implications for companies (especially large public companies and listed companies). A pragmatic board may therefore decide to propose a suitably drafted resolution at, for example, the annual general meeting every two years. The question then arises whether a category or categories of potential recipients may be so widely framed so as to effectively give the board the discretion whether to provide the assistance or not without consulting the shareholders again. So, for example, would it satisfy the requirements of s 44(3) and (4) if the shareholders resolve that the company may provide financial assistance to any person if, in the opinion of the directors, the provision of such financial assistance would serve to further the BEE objectives of the company? This possibility would largely remove the protection ostensibly afforded to shareholders by the resolution requirement, because in these circumstances the board will be able to provide financial assistance without obtaining shareholder approval. However, nothing that appears from the section militates against such an interpretation, nor is there anything in the Act that prevents the passing of a number of such ‘boilerplate’ resolutions, widely framed, in respect of a number of different categories of recipients every two years as a matter of course.’267
In addition, section 44(3)(b)(ii) of the Companies Act 71 of 2008, requires that the board of the target company may not authorise any financial assistance unless it is satisfied that ‘the terms under which the financial assistance is proposed to be given are fair and reasonable to the company’. According to Yeats and Jooste,268 the language in this section with regard to a board being satisfied has raised a lot of debate as to the actual meaning of the word. These authors are of the view that the wording will bring a lot of ambiguity in the interpretation of the section 44(3)(b)(ii).269 Cassim et al state:270
‘It will be recognised that this requirement makes the Act tougher to negotiate than s 38 of the 1973 Act. As a result of the exception to s 38 introduced by the amendment in 2006, as long as there was a special resolution and the solvency and liquidity criteria were met, there was no contravention of s 38 even if the terms under which the assistance was given were not fair and reasonable to the company. As has been said271 the change is to be welcomes, although it is not clear what is meant by ‘the terms under which the assistance is proposed’ being ‘fair and reasonable to the company’. Does it mean that, viewed from a commercial perspective, the transaction, whatever it might be, will benefit the company? In other words, must there be a reasonable quid pro quo? Or does it simply mean that the company is provided with ‘fair and
267Cassim, F.H.I., Cassim, M.F., Cassim, R., Jooste, R.D., Shev, J., and Yeats, J. (2012), ‘Contemporary Company Law’, 2nd edition, Juta and Co, Cape Town, at page 329.
268Yeats, J. and Jooste, R. (2009), ‘Financial assistance a new approach’, SALJ 126(3), at page 579. 269Yeats, J. and Jooste, R. (2009), ‘Financial assistance a new approach’, SALJ 126(3), at page 579.
270Cassim, F.H.I., Cassim, M.F., Cassim, R., Jooste, R.D., Shev, J., and Yeats, J. (2012), ‘Contemporary Company Law’, 2nd edition, Juta and Co, Cape Town, at pages 330 and 332.
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reasonable’ security? If the latter, and this needs to be clarified …the only rationale for the inclusion of the ‘fair and reasonable’ criterion is s 44(3)(b)(ii) seems to be the possible liability of a director to the company or its shareholders created in s 44(6) of the Act.’272
As discussed above, an important characteristic of leveraged buyouts is the substantial amounts of debt applied in the structure. The target company typically provides security to the lenders for such debt. Importantly, the target company must be satisfied that immediately after the transaction the company will remain solvent and will be liquid for the duration of the transaction.273 The solvency and liquidity test referred to in section 44(3)(b)(i) of the Companies Act 71 of 2008 is governed by the provisions of section 4 of the Companies Act 71 of 2008. Section 4 of the Companies Act 71 of 2008 reads:
‘1. For any purpose of this Act, a company satisfies the solvency and liquidity test at a particular time if, considering all reasonably foreseeable financial circumstances of the company at that time -
(a) the assets of the company, as fairly valued, equal or exceed the liabilities of the company, as fairly valued; and
(b) it appears that the company will be able to pay its debts as they become due in the ordinary course of business for a period of -
(i) 12 months after the date on which the test is considered; or
(ii) in the case of a distribution contemplated in paragraph (a) of the definition of ‘distribution’ in section 1, 12 months following that distribution.
2. For the purposes contemplated in subsection (1) -
(a) any financial information to be considered concerning the company must be based on- (i) accounting records that satisfy the requirements of section 28; and
(ii) financial statements that satisfy the requirements of section 29;
(b) subject to paragraph (c), the board or any other person applying the solvency and liquidity test to a company -
(i) must consider a fair valuation of the company’s assets and liabilities, including any reasonably foreseeable contingent assets and liabilities, irrespective of whether or not arising as a result of the proposed distribution, or otherwise; and
(ii) may consider any other valuation of the company’s assets and liabilities that is reasonable in the circumstances; and
(c) unless the Memorandum of Incorporation of the company provides otherwise, when applying the test in respect of a distribution contemplated in paragraph (a) of the definition