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Thorts - Impact of Companies Amendment Bill. Impact of Companies Amendment Bill on related or inter-related persons.

The Companies Amendment Bill 2018 was released for public comment by the

Minister of Trade and Industry on 21 September 2018. One of the important

changes proposed to be introduced by the Bill is the amendment to section 45

of the Companies Act No. 71 of 2008 (" Companies Act "). This amendment will

have important consequences in the structuring of certain acquisitions or

disposals.

It is often the case that in transactions, a related or inter-related person

would play either a direct or indirect role in that transaction - directly as

a vendor or acquirer or indirectly as the provider of security for the payment

of the purchase price or to satisfy any warranty or indemnity claim.

In transactions where there is more than one vendor (and who are related or

inter-related) in relation to a collection of assets which will be disposed of

to an acquirer, the giving by the vendors of joint warranties or indemnities

is regarded as constituting the provision of financial assistance by each

vendor to the other. Joint warranties and indemnities in this context means

the giving of these warranties and indemnities on a joint and several basis.

Obviously s45 only applies where "financial assistance" has been provided as a

first step so it is always necessary to determine whether the assistance is of

a financial nature. Assistance between related or inter-related parties which

is not of a financial nature is not caught by s45.

While the giving of joint warranties or indemnities may be regarded by some as

assistance not of a financial nature, being assistance to consummate a

transaction, the net of s45 is very wide as it contemplates assistance of a

"direct and indirect" nature. So our view is that the ultimate claim under a

joint warranty or indemnity would be a claim sounding in money, requiring

payment by a related or inter-related person to discharge the obligations

which, properly understood, rightfully belong to another party. The joint and

several nature of the liability means that recourse is had to the balance

sheet of the related or inter-related person.

Separately, it is common cause that a seller would look to mitigate its risk

of non-payment if there is a substantial period of time between signature and

completion. By the same token, a buyer would want security to satisfy any

liability under any warranty or liability claim down the line. The most common

form of security given in both instances (due to its minimal cost, and ease of

implementation) is the provision of a parent company guarantee or a guarantee

from another related or inter-related company.

It is in this context that we consider the impact of the proposed amendment to

s45 of the Companies Act. The Bill proposes to limit the net of financial

assistance transactions that fall within s45 by excluding "the giving by a

company of financial assistance to, or for the benefit of, its own

subsidiary." The intention behind this exclusion is laudable, but its

implementation is questionable. Our issues are as follows:

The exclusion uses the specific language of "its own subsidiary". Section 3 of the Companies Act defines what is regarded as a subsidiary very broadly; namely a company is a subsidiary of another juristic person if that juristic person or "one or more other subsidiaries of that juristic person" directly or indirectly control the company. Does the reference to "its own subsidiary" limit this exclusion to only subsidiaries of the juristic person which are held directly by the juristic person? This is not clear.

Why has the limitation been broadened to all subsidiaries whereas, it is submitted, it should only apply to wholly-owned subsidiaries that are excluded under s45? This is because it is difficult to see any mischief arising in a wholly-owned relationship but there is potential mischief in a relationship that involves outside minority shareholders.

The exclusion is, respectfully submitted, in the wrong place. It purports to exclude financial assistance to subsidiaries from the operative provision of s45(2) - but s45(2) merely empowers the board to give financial assistance "subject to subsections (3) and (4)". Does this mean that financial assistance to a company's own subsidiary is therefore not within the remit of the board's authority, regardless of whether it can comply with subsections (3) and (4)? This is not in line with the overview of the Bill on this amendment contained in paragraph 3.11 which states that the purpose is to exclude financial assistance by a company to its subsidiary. This exclusion should therefore be structured as an exclusion to the requirements in subsections (3) and (4).

The aforementioned overview of the Bill states that the provision of financial assistance by a company to its subsidiaries "does not need the adoption of a special resolution". This commentary is problematic as, it is well known, a special resolution is but one of the many requirements applying financial assistance that falls within s45. The commentary therefore differs materially from the ambit of the language of the exclusion such that there may be a conservative interpretation that interprets the exclusion as only excluding the requirement for a special resolution.

If a holding company and its subsidiary provide joint warranties and indemnities to an acquirer, then in terms of the proposed exclusion, it is only the financial assistance provided by the holding company to its subsidiary that would be excluded. Absurdly, the very same financial assistance from the subsidiary to the holding company would continue to be plagued by compliance with s45. Similarly, the giving of a parent company guarantee in favour of a subsidiary's creditors (e.g. to secure the payment by the subsidiary of the purchase price or to secure the subsidiary's liabilities under a warranty or indemnity claim) would be excluded. But if another company within the group (such as an associate or affiliate) gave that guarantee, then this wouldn't fall within the exclusion. This is because the exclusion only applies downwards, and not horizontally or upwards, leading to a continued cost of compliance with s45. In addition, wholly-owned foreign corporations under the control of a company remain within the reach of s45 requiring compliance even though, in substance, there may be no material difference between a foreign subsidiary and a local one.

Unless the Bill is substantially altered to cure the gaps identified above, it

remains imperative that in structuring any M&A deal (specifically the

warranties, indemnities and security aspects), consideration must still be

given as to whether s45 would (still) apply and if so, to insert appropriate

conditions to ensure compliance.

Jennings is a Director and Jojwana a Candidate Attorney in Corporate

Commercial at ENSafrica.

This article first appeared in DealMakers, SA's quarterly M &A publication

DealMakers is SA's M &A publication.

www.dealmakers.co.za

Follow @DealMakers

...back to DealMakers

Corporate Finance activity of the week. Texton Property Fund to repurchase BEE shares

Following the failure of the company's BEE SPV, to maintain the minimum share

cover ratio as per the PIC Loan agreement Texton, will in terms of the PIC's

Put Option, repurchase 51,858,876 BEE shares representing 13.79% of the its

share capital. The amount to be paid to the PIC is not referenced off the

market price per Texton share but rather is contractually to be determined as

an amount equal to the PIC loan balance which equates to 12.90 rand per share. At

the current share price of 4.10 rand this translates to a 215% premium to the

market price. Shareholders will have to approve the repurchase.

Netcare pays special dividend

Netcare has declared a special dividend of 0.40 rand per share to shareholders.

This is in line with the company's investment approach that if attractive

investment opportunities are unavailable then excess capital will be returned

to shareholders.

MMI Holdings repurchases shares

MMI, has since its last announcement in July 2018, repurchased a further

53,585,496 shares at a total cost of 938,06 rand million.

Vunani share repurchase results

The total number of shares repurchased by the company pursuant to the Odd-lot

offer was 2,219 while shareholders holding 7,326 shares sold their shares to

the company in the specific offer. Shares were repurchased at 2.75 rand per share.

Onelogix repurchases shares

Onelogix has repurchased 3,507,669 shares at 3.50 rand per share with a total

value of 12,28 rand million. The shares represent 1.21% of the company's issued

share capital in terms of the general authority granted by shareholders at the

annual general meeting held in November 2017.

Reinet Investments repurchases shares

The company repurchased a 432,462 shares during the period November 20 to 23

at an average price of 205.90 rand per share for a total consideration of 89,04 rand

million. The repurchases were made as part of the share buyback programme

announced on November 19, 2018.

Visual International looks to secure additional funding

The company has advised the additional funding being sought through the

specific issue of shares for cash to Robco and TLP Investments One Five Four,

which was subject to a number of suspensive conditions, has lapsed. The

parties are in discussion regarding the revival of these subscription

agreements including other third parties. An announcement will be made in due

course.

South32 repurchases shares

The company has, this week, repurchased a further 7,052,796 shares for A$22

million (220,38 rand million).

Hammerson plc repurchases shares

This week the company repurchased 1,184,957 shares at a cost of 4,97 million

(87,92 rand million) as part of a share buyback programme for its ordinary shares

to return realised disposal proceeds to shareholders over the next 12 months.

The maximum aggregate consideration under the programme will be "300 million

up to a maximum of 79,422,719 ordinary shares.

Glencore repurchase shares

This week the company repurchased a further 16,250,000 shares at a cost of

46,52 million (823,36 rand million) in terms of its buy-back programme.

African Rainbow Minerals takes a secondary listing

ARM has taken a secondary listing on A2X, as of November 29, 2018. The company

will retain its primary listing on the JSE and its issued share capital will

be unaffected by the listing on A2X.

Greenbay Properties to trade under new name

Following shareholder approval, the company name will change to Lighthouse

Capital.

PSG Konsult lists on foreign exchange

The company listed on the Stock Exchange of Mauritius on November 27, 2018.

Nine companies issued a profit warning announcement

The following companies issued profit warnings this week: Orion Real Estate,

Consolidated Infrastructure, Adrenna Property, Etion, Alexander Forbes, Purple

Group, PSV Holdings, Rebosis Property Fund and African Phoenix Investments.

Seven companies either issued, renewed or withdrew cautionaries

The following companies advised shareholders: Verimark, Astoria Investments,

Texton Property Fund, Visual International, Putprop, Labat Africa and Brikor.

DealMakers is SA's M &A publication.

www.dealmakers.co.za

Follow @DealMakers

...back to DealMakers

Corporate Finance activity of the week. Texton Property Fund to repurchase BEE shares

Following the failure of the company's BEE SPV, to maintain the minimum share

cover ratio as per the PIC Loan agreement Texton, will in terms of the PIC's

Put Option, repurchase 51,858,876 BEE shares representing 13.79% of the its

share capital. The amount to be paid to the PIC is not referenced off the

market price per Texton share but rather is contractually to be determined as

an amount equal to the PIC loan balance which equates to 12.90 rand per share. At

the current share price of 4.10 rand this translates to a 215% premium to the

market price. Shareholders will have to approve the repurchase.

Netcare pays special dividend

Netcare has declared a special dividend of 0.40 rand per share to shareholders.

This is in line with the company's investment approach that if attractive

investment opportunities are unavailable then excess capital will be returned

to shareholders.

MMI Holdings repurchases shares

MMI, has since its last announcement in July 2018, repurchased a further

53,585,496 shares at a total cost of 938,06 rand million.

Vunani share repurchase results

The total number of shares repurchased by the company pursuant to the Odd-lot

offer was 2,219 while shareholders holding 7,326 shares sold their shares to

the company in the specific offer. Shares were repurchased at 2.75 rand per share.

Onelogix repurchases shares

Onelogix has repurchased 3,507,669 shares at 3.50 rand per share with a total

value of 12,28 rand million. The shares represent 1.21% of the company's issued

share capital in terms of the general authority granted by shareholders at the

annual general meeting held in November 2017.

Reinet Investments repurchases shares

The company repurchased a 432,462 shares during the period November 20 to 23

at an average price of 205.90 rand per share for a total consideration of 89,04 rand

million. The repurchases were made as part of the share buyback programme

announced on November 19, 2018.

Visual International looks to secure additional funding

The company has advised the additional funding being sought through the

specific issue of shares for cash to Robco and TLP Investments One Five Four,

which was subject to a number of suspensive conditions, has lapsed. The

parties are in discussion regarding the revival of these subscription

agreements including other third parties. An announcement will be made in due

course.

South32 repurchases shares

The company has, this week, repurchased a further 7,052,796 shares for A$22

million (220,38 rand million).

Hammerson plc repurchases shares

This week the company repurchased 1,184,957 shares at a cost of 4,97 million

(87,92 rand million) as part of a share buyback programme for its ordinary shares

to return realised disposal proceeds to shareholders over the next 12 months.

The maximum aggregate consideration under the programme will be "300 million

up to a maximum of 79,422,719 ordinary shares.

Glencore repurchase shares

This week the company repurchased a further 16,250,000 shares at a cost of

46,52 million (823,36 rand million) in terms of its buy-back programme.

African Rainbow Minerals takes a secondary listing

ARM has taken a secondary listing on A2X, as of November 29, 2018. The company

will retain its primary listing on the JSE and its issued share capital will

be unaffected by the listing on A2X.

Greenbay Properties to trade under new name

Following shareholder approval, the company name will change to Lighthouse

Capital.

PSG Konsult lists on foreign exchange

The company listed on the Stock Exchange of Mauritius on November 27, 2018.

Nine companies issued a profit warning announcement

The following companies issued profit warnings this week: Orion Real Estate,

Consolidated Infrastructure, Adrenna Property, Etion, Alexander Forbes, Purple

Group, PSV Holdings, Rebosis Property Fund and African Phoenix Investments.

Seven companies either issued, renewed or withdrew cautionaries

The following companies advised shareholders: Verimark, Astoria Investments,

Texton Property Fund, Visual International, Putprop, Labat Africa and Brikor.

DealMakers is SA's M &A publication.

www.dealmakers.co.za

Follow @DealMakers

...back to DealMakers

Microsoft Becomes World’s Most Valuable Company After Apple Rout. After briefly claiming the top spot on Monday, Microsoft shares rose 0.6

percent Tuesday, pushing the company's market value to $828.1 billion at the

close. That exceeded by more than $1 billion the value of Apple, which has

tumbled this month on concern about iPhone unit sales. The last time

Microsoft's market capitalization was bigger than Apple was in 2010, according

to data compiled by Bloomberg. A recent stock market swoon has taken a toll on

nearly all technology companies. But investors have punished consumer-focused

companies like Apple and Amazon.com Inc. more than firms that mostly cater to

businesses, like Microsoft. It's down 6.3 percent since the start of October,

while Apple has lost 23 percent. Starting more than a decade ago, Microsoft

fell behind Apple as computing shifted from desktop machines to mobile devices

like iPhones, making Microsoft's PC dominance less relevant. Attempts to

regain its footing by acquiring Nokia's handset business and releasing its own

phones led to expensive writedowns. This was particularly galling for the

Redmond, Washington-based company because it once kept Apple afloat with a

cash infusion in the 1990s. The rise of cloud computing changed Microsoft's

fortunes about five years ago. Under Chief Executive Officer Satya Nadella,

the company invested heavily in data centers and other infrastructure to run

applications and store data for corporate customers. And instead of trying to

tie Office work productivity software to its Windows operating system,

Microsoft offered it as a subscription service over the internet and on other

companies' devices -- including Apple's. It also stopped making smartphone

hardware, while boosting the quality of its tablet and PC designs. Microsoft

is now second behind Amazon Web Services in the cloud. That's insulated

Microsoft's stock from worries about declining consumer spending on devices

and increased regulation of digital advertising businesses like Facebook Inc.

and Alphabet Inc.'s Google. DM

Microsoft Becomes World’s Most Valuable Company After Apple Rout. After briefly claiming the top spot on Monday, Microsoft shares rose 0.6

percent Tuesday, pushing the company's market value to $828.1 billion at the

close. That exceeded by more than $1 billion the value of Apple, which has

tumbled this month on concern about iPhone unit sales. The last time

Microsoft's market capitalization was bigger than Apple was in 2010, according

to data compiled by Bloomberg. A recent stock market swoon has taken a toll on

nearly all technology companies. But investors have punished consumer-focused

companies like Apple and Amazon.com Inc. more than firms that mostly cater to

businesses, like Microsoft. It's down 6.3 percent since the start of October,

while Apple has lost 23 percent. Starting more than a decade ago, Microsoft

fell behind Apple as computing shifted from desktop machines to mobile devices

like iPhones, making Microsoft's PC dominance less relevant. Attempts to

regain its footing by acquiring Nokia's handset business and releasing its own

phones led to expensive writedowns. This was particularly galling for the

Redmond, Washington-based company because it once kept Apple afloat with a

cash infusion in the 1990s. The rise of cloud computing changed Microsoft's

fortunes about five years ago. Under Chief Executive Officer Satya Nadella,

the company invested heavily in data centers and other infrastructure to run

applications and store data for corporate customers. And instead of trying to

tie Office work productivity software to its Windows operating system,

Microsoft offered it as a subscription service over the internet and on other

companies' devices -- including Apple's. It also stopped making smartphone

hardware, while boosting the quality of its tablet and PC designs. Microsoft

is now second behind Amazon Web Services in the cloud. That's insulated

Microsoft's stock from worries about declining consumer spending on devices

and increased regulation of digital advertising businesses like Facebook Inc.

and Alphabet Inc.'s Google. DM

Who’s doing what in the African M&A; space? DealMakers AFRICA

Rio Tinto the global diversified miner, is to divest of its 68.62% stake in the Rssing uranium mine in Namibia. China National Uranium Corporation will acquire the stake for a total consideration of $106,5 million. This will be made up by an initial cash payment of $6,5 million which will be payable on completion and a contingent payment, linked to uranium spot prices and Rssing's net income during the next seven calendar years, of up to $100 million following the completion of the transaction.

DOB Equity , the Dutch private equity fund, has acquired a stake in Kenyan-based agro-processing company Ten Senses Africa. Ten Senses buys nuts from farmers in Kenya's coastal region. The investment, the size of which was undisclosed, will fund the company's expansion of its processing capacity and finance the launch of new products.

UPL Mauritius , a wholly-owned subsidiary of UPL, is to acquire Bioquim, an agro-chemicals-focused group with entities in Costa Rica, the Caribbean and Central American region.

AfricInvest , a pan-African mid-cap-focussed private equity firm, has invested in Les Centaures Routiers (LCR), an independent transporting company in Cte d'Ivoire. AfricInvest Fund III will provide LCR with "12,2 million in financing which will be used to grow the existing business by reinforcing the company's fleet of trucks, invest in a new site that will consolidate all the freight transport and logistics activities and meet increasing working capital needs of the group.

Continental Reinsurance plc (CRe Nigeria) has advised shareholders that it has received an offer from CRe African Investments to acquire all the outstanding and issued shares of CRe Nigeria. The proposed scheme of "2.04 per share for the 10,37 million shares represents a 46.76% premium to the last traded share price prior on October 5, the date prior to receiving the proposal and 36% premium on the trading price as at the close on November 19.

Gulf Capital and AfricInvest , have partnered to provide a $51 million structured loan and equity investment to iSON Xperiences, one of the largest outsourcing and customer experience and delivery partners operating in 14 countries in Africa and in India.

African Finance Corporation , the leading infrastructure development finance institution in Africa, is to invest in the Nachtigal Hydro Power Company in Cameroon. The "1,2 billion power generation project will consist of a 420MW hydro-electric power station as well as a 50km transmission line. Other lenders in the investment consortium include the IFC, European Bank, Proparco, Socit Gnrale and Standard Chartered.

DealMakers Africa is the Continent's M &A publication.

www.dealmakersafrica.com

Follow @DealMakers

...back to DealMakers

Who’s doing what in the African M&A; space? DealMakers AFRICA

Rio Tinto the global diversified miner, is to divest of its 68.62% stake in the Rssing uranium mine in Namibia. China National Uranium Corporation will acquire the stake for a total consideration of $106,5 million. This will be made up by an initial cash payment of $6,5 million which will be payable on completion and a contingent payment, linked to uranium spot prices and Rssing's net income during the next seven calendar years, of up to $100 million following the completion of the transaction.

DOB Equity , the Dutch private equity fund, has acquired a stake in Kenyan-based agro-processing company Ten Senses Africa. Ten Senses buys nuts from farmers in Kenya's coastal region. The investment, the size of which was undisclosed, will fund the company's expansion of its processing capacity and finance the launch of new products.

UPL Mauritius , a wholly-owned subsidiary of UPL, is to acquire Bioquim, an agro-chemicals-focused group with entities in Costa Rica, the Caribbean and Central American region.

AfricInvest , a pan-African mid-cap-focussed private equity firm, has invested in Les Centaures Routiers (LCR), an independent transporting company in Cte d'Ivoire. AfricInvest Fund III will provide LCR with "12,2 million in financing which will be used to grow the existing business by reinforcing the company's fleet of trucks, invest in a new site that will consolidate all the freight transport and logistics activities and meet increasing working capital needs of the group.

Continental Reinsurance plc (CRe Nigeria) has advised shareholders that it has received an offer from CRe African Investments to acquire all the outstanding and issued shares of CRe Nigeria. The proposed scheme of "2.04 per share for the 10,37 million shares represents a 46.76% premium to the last traded share price prior on October 5, the date prior to receiving the proposal and 36% premium on the trading price as at the close on November 19.

Gulf Capital and AfricInvest , have partnered to provide a $51 million structured loan and equity investment to iSON Xperiences, one of the largest outsourcing and customer experience and delivery partners operating in 14 countries in Africa and in India.

African Finance Corporation , the leading infrastructure development finance institution in Africa, is to invest in the Nachtigal Hydro Power Company in Cameroon. The "1,2 billion power generation project will consist of a 420MW hydro-electric power station as well as a 50km transmission line. Other lenders in the investment consortium include the IFC, European Bank, Proparco, Socit Gnrale and Standard Chartered.

DealMakers Africa is the Continent's M &A publication.

www.dealmakersafrica.com

Follow @DealMakers

...back to DealMakers

Bitcoin Rises After a Terrible Month, But Don’t Call It a Bottom. That's the assessment of Kenetic Capital's Jehan Chu after the largest digital

token rallied on Wednesday, climbing as much as 15 percent to $4,339. It

closed at $6,302 in October. Gains in Ether, Litecoin, Zcash and XRP helped

propel the Bloomberg Galaxy Crypto Index to a 16 percent increase, paring this

month's rout to 30 percent. "What we are seeing is not yet a bottom but a

short-term buying opportunity," said Chu, managing partner at Kenetic Capital,

a blockchain investment and advisory company. "Until we have broader adoption

of decentralized applications, it will be hard to find a firm floor." One

technical indicator had suggested Bitcoin was due a short-term bounce. The

cryptocurrency's relative strength index dropped to a record this month,

according to Bitstamp prices that incorporate weekend trading, signaling it

may have fallen too fast.

Bitcoin Rises After a Terrible Month, But Don’t Call It a Bottom. That's the assessment of Kenetic Capital's Jehan Chu after the largest digital

token rallied on Wednesday, climbing as much as 15 percent to $4,339. It

closed at $6,302 in October. Gains in Ether, Litecoin, Zcash and XRP helped

propel the Bloomberg Galaxy Crypto Index to a 16 percent increase, paring this

month's rout to 30 percent. "What we are seeing is not yet a bottom but a

short-term buying opportunity," said Chu, managing partner at Kenetic Capital,

a blockchain investment and advisory company. "Until we have broader adoption

of decentralized applications, it will be hard to find a firm floor." One

technical indicator had suggested Bitcoin was due a short-term bounce. The

cryptocurrency's relative strength index dropped to a record this month,

according to Bitstamp prices that incorporate weekend trading, signaling it

may have fallen too fast.

Thorts - Impact of Companies Amendment Bill. Impact of Companies Amendment Bill on related or inter-related persons.

The Companies Amendment Bill 2018 was released for public comment by the

Minister of Trade and Industry on 21 September 2018. One of the important

changes proposed to be introduced by the Bill is the amendment to section 45

of the Companies Act No. 71 of 2008 (" Companies Act "). This amendment will

have important consequences in the structuring of certain acquisitions or

disposals.

It is often the case that in transactions, a related or inter-related person

would play either a direct or indirect role in that transaction - directly as

a vendor or acquirer or indirectly as the provider of security for the payment

of the purchase price or to satisfy any warranty or indemnity claim.

In transactions where there is more than one vendor (and who are related or

inter-related) in relation to a collection of assets which will be disposed of

to an acquirer, the giving by the vendors of joint warranties or indemnities

is regarded as constituting the provision of financial assistance by each

vendor to the other. Joint warranties and indemnities in this context means

the giving of these warranties and indemnities on a joint and several basis.

Obviously s45 only applies where "financial assistance" has been provided as a

first step so it is always necessary to determine whether the assistance is of

a financial nature. Assistance between related or inter-related parties which

is not of a financial nature is not caught by s45.

While the giving of joint warranties or indemnities may be regarded by some as

assistance not of a financial nature, being assistance to consummate a

transaction, the net of s45 is very wide as it contemplates assistance of a

"direct and indirect" nature. So our view is that the ultimate claim under a

joint warranty or indemnity would be a claim sounding in money, requiring

payment by a related or inter-related person to discharge the obligations

which, properly understood, rightfully belong to another party. The joint and

several nature of the liability means that recourse is had to the balance

sheet of the related or inter-related person.

Separately, it is common cause that a seller would look to mitigate its risk

of non-payment if there is a substantial period of time between signature and

completion. By the same token, a buyer would want security to satisfy any

liability under any warranty or liability claim down the line. The most common

form of security given in both instances (due to its minimal cost, and ease of

implementation) is the provision of a parent company guarantee or a guarantee

from another related or inter-related company.

It is in this context that we consider the impact of the proposed amendment to

s45 of the Companies Act. The Bill proposes to limit the net of financial

assistance transactions that fall within s45 by excluding "the giving by a

company of financial assistance to, or for the benefit of, its own

subsidiary." The intention behind this exclusion is laudable, but its

implementation is questionable. Our issues are as follows:

The exclusion uses the specific language of "its own subsidiary". Section 3 of the Companies Act defines what is regarded as a subsidiary very broadly; namely a company is a subsidiary of another juristic person if that juristic person or "one or more other subsidiaries of that juristic person" directly or indirectly control the company. Does the reference to "its own subsidiary" limit this exclusion to only subsidiaries of the juristic person which are held directly by the juristic person? This is not clear.

Why has the limitation been broadened to all subsidiaries whereas, it is submitted, it should only apply to wholly-owned subsidiaries that are excluded under s45? This is because it is difficult to see any mischief arising in a wholly-owned relationship but there is potential mischief in a relationship that involves outside minority shareholders.

The exclusion is, respectfully submitted, in the wrong place. It purports to exclude financial assistance to subsidiaries from the operative provision of s45(2) - but s45(2) merely empowers the board to give financial assistance "subject to subsections (3) and (4)". Does this mean that financial assistance to a company's own subsidiary is therefore not within the remit of the board's authority, regardless of whether it can comply with subsections (3) and (4)? This is not in line with the overview of the Bill on this amendment contained in paragraph 3.11 which states that the purpose is to exclude financial assistance by a company to its subsidiary. This exclusion should therefore be structured as an exclusion to the requirements in subsections (3) and (4).

The aforementioned overview of the Bill states that the provision of financial assistance by a company to its subsidiaries "does not need the adoption of a special resolution". This commentary is problematic as, it is well known, a special resolution is but one of the many requirements applying financial assistance that falls within s45. The commentary therefore differs materially from the ambit of the language of the exclusion such that there may be a conservative interpretation that interprets the exclusion as only excluding the requirement for a special resolution.

If a holding company and its subsidiary provide joint warranties and indemnities to an acquirer, then in terms of the proposed exclusion, it is only the financial assistance provided by the holding company to its subsidiary that would be excluded. Absurdly, the very same financial assistance from the subsidiary to the holding company would continue to be plagued by compliance with s45. Similarly, the giving of a parent company guarantee in favour of a subsidiary's creditors (e.g. to secure the payment by the subsidiary of the purchase price or to secure the subsidiary's liabilities under a warranty or indemnity claim) would be excluded. But if another company within the group (such as an associate or affiliate) gave that guarantee, then this wouldn't fall within the exclusion. This is because the exclusion only applies downwards, and not horizontally or upwards, leading to a continued cost of compliance with s45. In addition, wholly-owned foreign corporations under the control of a company remain within the reach of s45 requiring compliance even though, in substance, there may be no material difference between a foreign subsidiary and a local one.

Unless the Bill is substantially altered to cure the gaps identified above, it

remains imperative that in structuring any M&A deal (specifically the

warranties, indemnities and security aspects), consideration must still be

given as to whether s45 would (still) apply and if so, to insert appropriate

conditions to ensure compliance.

Jennings is a Director and Jojwana a Candidate Attorney in Corporate

Commercial at ENSafrica.

This article first appeared in DealMakers, SA's quarterly M &A publication

DealMakers is SA's M &A publication.

www.dealmakers.co.za

Follow @DealMakers

...back to DealMakers