M&A deal flow is generally perceived to be cyclical. Drivers, such as favourable regulatory changes and the emergence of new technologies, can result in increased M&A activity. Conversely, depressors, such as a global financial crisis resulting in the collapse of major lending institutions, or political uncertainty that affects investors' available cash flows, can result in the market's stagnation. As the world, and South Africa, stepped into a new decade, a pressing question rose on the back of the COVID-19 outbreak, its variants and government lockdowns: What impact would the global pandemic have on M&A deal flow in 2020?
In December 2020, the Competition Commission of South Africa conditionally approved the proposed merger between Google LLC and Fitbit Inc. Significantly, the contentious merger involved a global regulatory review process and was notified in many jurisdictions such as the European Union (EU), the United States of America (USA) and Australia. This merger was assessed in a climate where many large tech firms are facing intense worldwide regulatory scrutiny, exacerbated by the rapid shift to the online economy due to the COVID-19 pandemic.
The relaxation of the rules on loop structures may offer a lifeline to those who developed intellectual property in South Africa and are unable to move that intellectual property offshore and obtain the full commercial benefit thereof. A loop structure will allow them to enter into an asset for share transaction without the need to be concerned.
More intense scrutiny of a wide range of mergers in South Africa is thus likely in diverse industries including banking and financial services, insurance, mobile payments, online retail, digital advertising and application stores, as well as search and social media.
When the President declared the national state of disaster and implemented the South African lockdown, in March 2020, most parties to merger and acquisition (M&A) transactions were focused on the normal considerations and challenges associated with transactions of this nature. This, of course, all changed and, as lawyers, the focus naturally shifted to force majeure under existing commercial agreements, followed by the reality check of whether businesses were going to survive the stringent lockdown provisions.
On 21 December 2020, Acting Judge JT Boltar of the Gauteng Local Division, Johannesburg, handed down a judgment refusing to declare the transfer of a retail pharmacy business by the First Respondent to Arrie Nel Pharmacy Group (Pty) Ltd 'null and void' (CJ Pharmaceutical Enterprises (Pty) Ltd and Others v Main Road Centurion 30201 CC t/a Albermarle Pharmacy and Another (7909/2020)  ZAGPJHC 353 (21 December 2020)), setting it aside and ordering the business to be 'transferred back' to Main Road, after an application was brought by the Applicants to do so. Ultimately, the Applicants sought an order placing Main Road under supervision and commenced business rescue proceedings. They submitted that the 'transfer back' of the retail pharmacy business to Main Road would result in Main Road having sufficient assets to be rehabilitated under the control of a business rescue practitioner.
Clicks Retailers (Pty) Ltd introduced a Loyalty Programme, whereby a subscribing customer would earn loyalty points after presenting their Clicks ClubCard to the cashier upon each purchase. The relationship between Clicks and its Club members, with respect to the Loyalty Programme, is governed by the ClubCard contract. In terms of the contract, a customer earns a point for each R5 spent. A customer must earn 100 ClubCard points within prescribed time periods (referred to as 'reward cycles') in order to qualify for vouchers under the Loyalty Programme. In the event that a customer accumulates the minimum points tally by the end of a particular reward cycle, the taxpayer, Clicks, would issue a voucher to the customer. The customer would be able to use the voucher as payment for the purchase of goods at Clicks; that is, the market price of the goods would be reduced by the value of the voucher. The customer was not entitled to redeem the voucher for cash.
The South African Reserve Bank (SARB), in its first Exchange Control Circular of 2021, announced the lifting of all loop structure restrictions on South African tax resident companies, individuals and private equity funds, with effect from 1 January 2021. According to the SARB, these restrictions have been lifted as a means of encouraging investment into South Africa, at a time when investment is arguably more crucial than ever.
For a commercial transaction attorney, it can be overwhelming to manoeuvre around the red tape that seems hellbent on restricting deal flow. In addition to the red tape, there are many laws, both well-known and obscure, with the potential to have disastrous consequences on otherwise straightforward transactions.