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Thorts - Impact of Companies Amendment Bill
Thorts - Impact of Companies Amendment Bill
Published Date: 2018-11-30 | Source: DealMakers | Author: Brian Jennings & Lusanda Jojwana
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.
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