Clarification needed on tender offers October 2018

By YANIV KLEITMAN, Published in Company Law

It is understood that a Companies Amendment Bill is in the pipeline. An aspect of our takeover law that could do with some clarification in that process is that of voluntary offers (sometimes referred to as "tender offers") that are made generally to shareholders of a regulated company where the offeror seeks to obtain less than the threshold for "control" as is understood in our takeover law, namely 35% (definitions of "control" and "prescribed percentage" in regulations 81(e) and 86(1)). For example, an offeror announces generally to shareholders of a widely-held public company that it wishes to acquire up to 34.9% of that company, on a first come, first served basis. A "regulated company" is any public company or state-owned company, or a private company where more than 10% of the securities were transferred in the past 24 months amongst unrelated persons (s118(1) of the Companies Act read with regulation 91 of the Regulations).

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In practice, one may accept that such solicitations would be relatively rare as, generally speaking, an offeror would want to obtain control of the target (the "offeree regulated company"). However, in a given case it may nevertheless be the offeror's goal to merely get a foothold in the offeree regulated company through the acquisition of a substantial, but non-controlling, stake. While it is clear that stake-building must be announced ex post facto under s122 of the Companies Act, (71 of 2008), it is unclear whether public tender offers for non-controlling stakes are additionally regulated as "offers" and "affected transactions" from the moment they are made, and thus subject to the general principles of equality, fairness and disclosure in terms of s119 of the Companies Act, and the host of provisions on the conduct of an offer (Chapter 5 of the Regulations). This note addresses the issue from a brief comparative law perspective and recommends that it be clarified by way of an amendment to the Companies Act and/or the Companies Regulations, 2011.

From the list of "affected transactions" in s117(1)(c) of the Companies Act, which are regulated by the Takeover Regulation Panel (TRP), it is clear that not all such transactions necessarily and always involve a change of control. Examples are a scheme of arrangement (s117(1)(c)(iii))1 and an offer for all remaining securities of a regulated company where the offeror already has control (whether at any level of "control", namely 35%, 50% + 1 or 75%) of the offeree regulated company (this would fall within s117(1)(c)(v)). Takeover law (Parts B and C of Chapter 5 of the Companies Act) is thus also concerned with scenarios where the offeree shareholders are placed in "coercive" and pressured situations to accept an offer, and not only with transactions which result in a change of control.

In this regard, one of the affected transactions which has caused considerable debate and consternation since the commencement of the Companies Act is that in s117(1)(c)(iv) – "the acquisition of, or announced intention to acquire, a beneficial interest in any voting securities of a regulated company to the extent and in the circumstances contemplated in section 122 (1)". In turn, s122(1) deals with acquisitions of securities in a regulated company that result in the acquirer holding or crossing 5% multiples of securities – for example, if the acquirer goes from zero to 5%, or from 14% to 16% etc. From early on there was criticism in the commentary and in practice around the inclusion of all such dealings as "affected transactions", as it would be absurd to have all of them regulated by the TRP.

This appeared to culminate in a few things:

  • The TRP's guideline 4/2011 which generally exempts transactions in terms of s122 from s121(b)(i). That is, such transactions need not obtain a compliance certificate from the TRP before they are implemented. Note that the reference in the exempting paragraph in this guideline (paragraph 2) is not to s117(1)(c)(iv), which includes announced offers for 5% multiples, but to s122;
  • The non-inclusion of a specific reference to s117(1)(c)(iv) in the (non-exhaustive) definition of "offeror" in regulation 81(p) of the Regulations. By far the bulk of the operative provisions in takeover law apply only when there is an "offeror" in the first place; and
  • The exemption in regulation 88(1)(a) of "partial offers" that do not result in the offeror reaching 35% or more.

A few issues remain unanswered. The exemption in regulation 88(1)(a) regarding certain partial offers is interesting – is "partial offer" (defined in s117(1)(h) as "an offer that, if fully accepted, would result in the offeror, alone or together with a related or inter-related person, or a person acting in concert with any of them, holding less than 100% of the voting securities of the company whose securities are the subject of the offer") limited to an offer which is, in the first place, made equally to all shareholders and which offers to acquire the same, specified percentage of each shareholder's shares? That is, if one simply makes a voluntary offer on a "first come, first served" basis, with no measure of equivalent treatment (and thereby placing offeree shareholders under particularly heavy pressure to decide whether to accept the offer), does that still enjoy the benefit of the exemption in regulation 88(1)? A further point is, from the TRP's guideline and the non-exhaustive definition of "offeror" in regulation 81(p), it appears, arguably, that what was sought to be excluded from regulation by the TRP is purely privately negotiated transactions – not tender offers to a general body of shareholders. After all, the legislature specifically chose to include acquisitions of "announced intentions to acquire" securities as contemplated in s122, in the list of "affected transactions" in s117(1)(c). The term "announced" surely implies a proposal of a general and public nature. This cannot be ignored, even if it is the case that some transactions of this nature cannot appropriately be made subject to takeover law as they are purely private, one-on-one share purchase agreements.

A few observations may be made from other jurisdictions. In the US,2"tender offers" are regulated under takeover law but there is no codified definition of a "tender offer". There the courts apply a test on a case-by-case basis to determine whether the offer is of a public or a purely private nature. Eight factors are weighed up, namely whether: (i) there is an active and widespread solicitation of public security holders; (ii) the solicitation is made for a substantial percentage of the issuer's securities; (iii) the offer is made at a premium over the prevailing market price; (iv) the terms of the offer are firm rather than negotiable; (v) the offer is contingent upon the tender of a fixed minimum and perhaps subject to the ceiling of a fixed maximum number of securities to be purchased; (vi) the offer is open for only a limited period of time; (vii) the offerees are subjected to pressure to sell; and (viii) the public announcements of a purchasing programme precede or accompany a rapid accumulation of large amounts of the target company's securities.3 There is no set threshold of "control" which triggers offer regulation in the US.

In the UK, in terms of the City Code on Takeovers and Mergers all"partial offers" (section P of the Code) and "tender offers" (Appendix 5 to the Code), whether for control (30%) or otherwise, require the UK Panel's consent, and in the case of an offer which could not result in the offeror holding 30% or more, consent will normally be granted (Rule 36.1 of the Code). Even where the Panel gives the go-ahead for such offers, they are nevertheless quite extensively regulated in terms of substantive content and procedure.

In Germany, a public invitation by the offeror for the submission of offers by the holders of securities, aimed at acquiring securities (Any number of securities – the solicitation need not be aimed at gaining "control", which is 30% for purposes of German takeover law) of the target company, is not allowed (s17 of the Securities Acquisition and Takeover Act ( Wertpapiererwerbsund Übernahmegesetz)). The only way to do this is by way of an offer for such securities which is extensively regulated by takeover law (Part 3 of the Securities Acquisition and Takeover Act).

In Canada, on the other hand, regulation by takeover law is triggered only where the tender offer is for control – 20% or more – as tender offers that seek to acquire less than 20% are seen to be very rare and do not warrant regulation by takeover law (Prentice, D "Takeover Bids: Part IX of the Ontario Securities Act 1966" American Journal of Comparative Law Vol. 19, Issue 2 (Spring 1971)). In this regard one should, however, appreciate that the 20% threshold in Canada is particularly low when compared to other jurisdictions.

Hopefully, at some stage, there will be clarity on whether our regulation 88(1)(a) seeks to achieve the Canadian position – as already stated, this turns on how narrowly one construes "partial offer". Until then, caution should be exercised when contemplating tender offers or solicitations for a non-controlling position in a regulated company.

Kleitman is a Director with Cliffe Dekker Hofmeyr.

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1 See Luiz, S "Some Comments on the Scheme of Arrangement as an 'Affected Transaction' as Defined in the Companies Act 71 of 2008" Potchefstroom Electronic Law Journal Vol 15 No. 5 (2012) 101.
2 See e.g. Rachford, L "Takeover Developments - Defining "Tender Offer" And "Manipulation" Under The Williams Act" 40 (1983) Washington & Lee Law Review 1199.
3 Wellman v. Dickinson, 475 F. Supp.783, 823-824 (S.D.N.Y. 1979).