Determining whether a transaction is affected or fundamental

Service: Litigation & Dispute Resolution


By Keshia Manolios

In order to identify the category into which a transaction falls, one must first identify whether any of the companies involved in the transaction are regulated companies or not.

There are various commercial transactions that trigger compliance with different rules and regulations recorded in the Companies Act, 71 of 2008 (“Act”) and a failure to comply with the rules and regulations applicable to a transaction will have serious ramifications which would include the unenforceability of a transaction. Two categories that are identified by the Act are “affected transactions” and “fundamental transactions”.

In order to identify the category into which a transaction falls, one must first identify whether any of the companies involved in the transaction are regulated companies or not.

The enquiry process can be illustrated by way of a diagram as follows:

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Affected Transactions

A regulated company is defined in the Act as:

  1. A Public company;

  2. A state-owned company, unless exempted in terms of section 9 of the Act; or

  3. A private company if:

3.1 more than 10% of the issued securities of the company have been transferred (other than by transfer between or among related or inter-related persons), within a period of 24 months immediately before the date or a particular affected transaction or offer; or

3.2 the MOI of that company expressly provides that it is subject to Part B, C and the Takeover Regulations of the Act.

If the company constitutes a regulated company, one must then consider whether the intended transaction is an “affected transaction”.

The Act identifies the following transactions as affected transactions:

  • A transaction or series of transactions amounting to the disposal of all or the greater part of the assets or undertaking (“disposal”) of a regulated company;

  • An amalgamation or merger (”merger”), if it involves at least one regulated company;

  • A scheme of arrangement (“scheme”) between a regulated company and its shareholders;

  • The acquisition of, or announced intention to acquire, a beneficial interest in any voting securities of a regulated company (“acquiring a beneficial interest”);

  • The announced intention to acquire a beneficial interest in the remaining voting securities of a regulated company not already held by a person or persons acting in concert (“acquiring a beneficial interest”);

  • a mandatory offer; an

  • a compulsory acquisition.

If a company is a regulated company and the intended transaction falls within one of the above-mentioned transactions, then the Act requires that very specific requirements be met before the transaction can be implemented. In some instances the board of directors is even required by the Act to take or refrain from taking certain action.

While the requirements vary depending on the type of affected transaction, there are also general requirements that apply to all of the transactions; these include passing of special resolutions, and obtaining a compliance certificate from the Takeover Regulation Panel unless the transaction has been exempted by the Panel.

If none of the companies involved in the transaction fall within the definition of a regulated company, then one must consider whether the type of transaction being entered into constitutes a “fundamental transaction”.

Fundamental Transactions

Fundamental Transactions are dealt with in Part A of Chapter 5 of the Act and are divided into three specific transactions namely:

  • Disposal or sale of all or the greater part of the assets or undertaking of a company.

  • Amalgamation or merger with another company.

  • Implementation of a scheme of arrangement.

As in the case with affected transactions, the Act sets out very specific requirements for each of the three fundamental transactions. Passing of certain special resolutions are required as well as ensuring that the solvency and liquidity test is satisfied before the transaction is entered into.

If the transaction is neither an affected transaction nor a fundamental transaction then, the parties to the transaction need only ensure that any requirements set out in their respective memorandums of incorporation are complied with.

It is therefore very important to ensure that a transaction is properly categorised and carefully considered in the Act to ensure compliance with all requirements and successful implementation of the transaction.