The Companies Act 1973 was easy on the sale of securities in a private company between two persons, even the sale of a controlling stake. Seldom if ever were any regulatory authorities involved.
Not any more.
The Companies Act 2008 has created a complicated structure against which the sale of securities of a profit company must be measured in order to determine if it is a reportable transaction.
This is a little-known but important provision of the Act. It relates to the sale of securities in a private company and the possible involvement of the Takeover Regulation Panel (the “TRP”).
Sale of securities
To fully understand the rather complicated structure, the following definitions are important:
- Securities means any shares, debentures or other instruments, irrespective of their form or title, issued or authorised to be issued by a profit company. For the purpose of a sale of securities it means shares, debentures or other instruments which either has the right to vote generally at a general shareholders’ meeting, or is convertible into an instrument which has such rights.
- Related persons refer to persons who are either married or live together or are separated by no more than 2 degrees of consanguinity.
- Profit company means a company incorporated for the purpose of financial gain for its shareholders. It can thus be either a:
- public company,
- state-owned company,
- personal liability company, or
- a private company.
- Regulated company means either a:
- public company,
- state-owned company, or
- private company if, in the case of a private company:
- the percentage securities transferred – other than between related parties – during the most recent 24 months before the date of the affected transaction, exceeded 10%, or
- its MoI provides that it shall be subject to the provisions of Part C and the Take-over Regulations of the Companies Act, or
- it was incorporated and sold as a shelf company during the most recent 24 months before the date of the affected transaction.
- Affected transaction means:
- one or more transactions involving the disposal of all or most of the assets of a regulated company;
- amalgamation or merger involving at least one regulated company;
- a scheme of arrangement between a regulated company and its shareholders;
- the intention to acquire or to dispose of, or the acquisition or disposal of an interest of at least 5% or multiples thereof, in any voting securities of a regulated company;
- a mandatory offer where either:
- a regulated company repurchases any of its voting securities, or acquires such securities in terms of a scheme of arrangement; or
- one or more persons, including related persons, have collectively acquired voting rights attached to securities of the regulated company which, together with existing voting rights they already hold, is equal to or exceeds the prescribed percentage of all voting rights.
- a compulsory acquisition where at least 90% of the holders of a class of security have, within 4 months following receipt of an offer for the acquisition of such class of security, accepted the offer, the offeror may within a further 2 months inform the remaining holders of the class of such securities of its intention to acquire their interests.
Example to test the rules:
Let us test all the definitions against a typical example. I will consider the sale of a few ordinary shares in a private company which was incorporated under the 1973 Act.
The reason is that the majority of private companies on the register of CIPC fall in this category. I also believe that few of the directors and shareholders of these companies are actually aware of the new requirements that came into effect in 2011.
Rule 1: Is the company considered to be a regulated company?
- it is NOT a regulated company if in the past 24 months:
- less than 10% of its ordinary shares changed hands, or
- any number of shares changed hands between related parties.
Rule 2: If it not considered to be regulated company, can a sale of shares take place?
- Yes, a sale of any number of shares can occur without notice to the TRP.
- However, if this sale is not between related parties and involves 10% or more of the issued shares, the company will be deemed to be a regulated company should the next such sale of shares again occur within 24 months.
Rule 3: If it is considered to be regulated company based on Rule 1, can a sale of shares still take place?
- Yes but a sale of shares is now defined as an affected transaction and:
- if it involves more than 5% of the issued shares it must be notified to the TRP;
- otherwise it can occur without such notice being given.
- It means that any transaction involving 5% or more of its issued securities during the period that it is and remains a regulated company, needs to be reported to the TRP.
Rule 4: Must the company be notified?
- It is always advisable to notify the company if any change in the ownership of its securities occur. The MoI of the company will restrict the transferability of its securities.
- It the company is considered to be a regulated company, a sale in excess of 5% of its issued securities, it must be notified on a prescribed form. The company in turn must notify the TRP.
The practical implication of these provisions is enormous. It is likely that thousands of share transactions which fall within the ambit of these provisions at the private company level, occur each year and needs to be reported to the TRP! It is doubtful if more than a small percentage of these are actually reported to the TRP as set out in the Takeover Regulations. The TRP may however partially or in full and with / without conditions, exempt an offer to acquire securities from these
We only found a few articles relating to a regulated company for further reading:
- Accfinstore.co.za – worth a visit to gain access to their documents for more insight
- OnlineMoI
- FSP Business
Also visit the website of the TRP. Prescribed forms to be completed and submitted to the company and/or the TRP are available.