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“With shares being held by a company, close corporation or trust, one would need to look at who in effect controls the voting rights of these entities and then determine what the relationship is. ”

Thought Leadership: Regulated Companies in Terms of the New Companies Act

This article is aimed at company secretarial practitioners for private companies. In terms of the new Companies Act 2008, a private company can now be defined as a regulated company, which could result in additional administration. Many practitioners don't know about this, and in the case of many smaller companies, there is probably no compliance.

The law regarding the Takeover Regulation Panel (TRP) is complex and this article deals only with the situation in which private companies fall within the scope of TRP regulations. Where a private company is defined as regulated and has an affected transaction, compliance is onerous and costly.

One needs ask - was it really necessary to apply this complex and costly compliance to smaller companies?

The takeover regulation panel
For more information on the Takeover Regulation Panel (TRP), refer to its website www.trpanel.co.za

The Companies Act 71 of 2008 (the Act), created the TRP (section 196) to replace the previous Securities Regulation Panel (SRP).

In terms of section 201 of the Act, the TRP is responsible for:

Regulating affected transactions and offers
Investigate complaints on affected transactions and offers
Apply for court orders to wind up companies Consult with the Minister on additions, deletions or amendments to the Takeover Regulations.

Section 119 of the Act deals with the take-over regulation panel. Key aspects are:

Not to consider commercial advantages or disadvantages
Ensure market integrity and fairness to securities holders
Ensure that all shareholders get all the necessary information for a fair and informed decision
Shareholders have adequate time to obtain the necessary advice
Prevent actions by a regulated company designed to impede or defeat an offer, or the making of an informed decision.

Affected transaction
Sections 117 to 127 and the takeover regulations do not apply unless a transaction is an affected transaction or offer as defined in section 117.

Section 117(1)(c) is the cornerstone definition and provides that an affected transaction means:

A transaction or series of transactions amounting to the disposal of all or the greater part of the assets or undertaking of a �regulated company', other than in an approved business rescue plan (section 118[3]). This disposal refers only to the assets, which must exclude liabilities and be greater than 50% of the assets of the company
An amalgamation or merger as contemplated in Section 113, if it involves at least one regulated company (subject to s 118[3])
A scheme of arrangement between a regulated company and its shareholders as contemplated in Section 114 (subject to s 118[3])
A re-acquisition of shares or buyback is included in a scheme of arrangement, if more than 5% of the shares are repurchased.

Buyback of shares
The buyback of shares constituting more than 5% of a share capital class falls within the definition in section 48 (8) (b) of an affected transaction, with sections 114 and 115 kicking in. The Companies Act 2008 does not differentiate between large and small companies (Section 114).

Section 48 (8) (b) says that, subject to the requirements of Sections 114 and s 115, if considered alone or together in a series of affected buy back transactions, then this transaction has to be conducted in terms of sections 114 and 115. This means a private company could become classified as a regulated company.

Regulated company
A regulated company is defined in section 117 (1) (i) as a company in which Part B, Part C and the Takeover Regulations apply in accordance with section 118(1) and (2). This means that in terms of 118 (1) and 118 (2), various types of company (including private) are defined as a regulated company. Section 118 (1) states that the provisions of the Companies Act 2008 and the takeover regulations will apply if the company is:

A public or state-owned company
A private company, if its memorandum of incorporation (MOI) expressly provides that the company and its securities are subject to Part B, Part C of the Takeover Regulations, and if more than the prescribed percentage currently (10%) of its issued securities were transferred (other than between related or interrelated persons) within 24 months before the date of a particular affected transaction or offer.

Refer to the definition of �related' and �interrelated' in section 2 of the Act, as it has a major bearing on whether a private company becomes regulated or not. With regard to individuals, a related party would be a relationship within two degrees of relationship. For example, it could be a brother, but a cousin is more than two relationship degrees removed.

With shares being held by a company, close corporation or trust, one would need to look at who in effect controls the voting rights of these entities and then determine what the relationship is. If they do not fall within two degrees of relationship steps, then they are considered outsiders and a regulated transaction would make the company a regulated company.

In a private company, if securities of 10% or more were transferred within the last 24 months to an unrelated party, this does not necessarily make the company a regulated company. It only becomes such if there is an offer or proposal for an affected transaction in terms of sections 112, 113 and 114.

Click here to view the Decision Chart

Reporting or approval requirements
Section 121 directly applies the takeover provisions of the Act to affected transactions and offers, as any person making an offer:

Must comply with all the reporting or approval requirements as set out in Part B and Part C of the Takeover Regulations (unless exempted from any requirement)
In terms of section 121 (b) must not affect an affected transaction, unless the TRP has issued a compliance certificate or granted an exemption.

What happens if a private company does not make the necessary application to the TRP because of ignorance? This area poses a grave potential risk for secretarial practitioners and company secretaries who do not advise companies correctly.

Exemption
The panel in terms of section 119 (6) may wholly or partially and conditionally or unconditionally exempt an affected transaction from the application of any provision of Part B and Part C or the Takeover Regulations if:

There is no reasonable potential of the affected transaction prejudicing the interest of an existing holder of a regulated company's securities
The cost of compliance is disproportionate to the value of the affected transaction
If doing so is otherwise reasonable with regard to the principles of Part B, Part C and the Takeover Regulations.

Smaller company can make application for exemption, which the TRP will consider at a levy of R3420 per hour. The exemption will likely be granted, but at an exorbitant cost.

Conclusion
I believe that these regulations constitute an �overkill' procedure that doesn't accord with the �small company intent' of the new Companies Act.

A possible solution is for all existing shareholders of the private company to sign a document to the effect that no shareholder is prejudiced. There should be no or minimal cost and an automatic exemption should be granted, with the TRP not needing to spend time on it. asa

Author: Mark Silberman CA(SA) is the Managing Director of Accfin Software.