Today’s directors face daunting duties, responsibilities, powers and potential liabilities. Some of these include legislation and navigating their companies through the competitive times, trends and operational as well as economic pressures.
In these tough economic times many companies are faced with restructuring their business. Companies restructure for a variety of reasons, including right sizing, downsizing and for business growth. The steps taken are aimed at the betterment of the business and to grow.
Often, restructuring may result in the disposal of company assets. It is important that the disposal of the company assets is carried out in compliance with, inter alia, the applicable laws.
In this article, we explore the requirements applicable to a disposal of the greater part of a company’s assets or undertakings in terms of section 112 of the Companies Act (Act No. 71 of 2008) (“Companies Act”), read with section 115.
It is important to note that the same legal duties, prescribed in terms of the Companies Act, apply to non-executive as to executive directors. There is no legal distinction between executive and non-executive directors.
Fundamental Transactions – General
Although the Companies Act does not define the phrase “fundamental transaction”, it provides for three types of fundamental transactions, one being a disposal of all or the greater part of the assets or the undertakings of a company – i.e. the sale of the majority of the business assets of a company.
Disposal of all or the greater part of the assets or undertaking
Section 112 is triggered only where a company proposes to dispose of all or the greater part of its assets or undertakings other than in relation to transactions concluded (i) pursuant to a business rescue process or (ii) between a wholly-owned subsidiary and its holding company.
The term “dispose” in the context of section 112 means a permanent transfer of the ownership of the assets of a company. The term “the greater part of the assets or undertakings” in the context of section 112 is defined in section 1 of the Companies Act and in essence means a disposal of more than 50% of a company’s gross assets or entire undertakings, fairly valued. Should this threshold be met, a special resolution of the company’s shareholders is required to approve the contemplated disposal.
Approval and other requirements for section 112 disposal
Section 112(2) states that a company may not dispose of all or the greater part of its assets or undertakings unless:
Section 115(1), in turn states that, despite section 65 and despite any contrary provision of the company’s memorandum of incorporation or any resolution adopted by its board or holders of securities, a company may not dispose of, or give effect to an agreement to dispose of, all or the greater part of its assets or undertakings unless the disposal has been approved in terms of section 115 (which requires, inter alia, shareholder approval).
For sake of completeness, section 112 requires the approval by a special resolution of the shareholders of the disposing company only and is only effective to the extent that it authorises a specific transaction. The approval of the shareholders of the acquiring company is not required in terms of section 112.
Furthermore, it is worth noting that a section 112 disposal must be “authorised” and not “ratified” by a special resolution. Therefore, the company must deliver a notice to each of its shareholders notifying same of the proposed transaction which will result in the disposal of all or the greater part of that company’s assets or undertakings. This notice must be delivered to each of the shareholders of the company within the prescribed time and prescribed manner. In our view, “round robin” or written resolutions of shareholders in relation to the matters dealt with under section 112 are not sufficient. The Companies Act appears to be fairly prescriptive in this regard, obliging a company to hold a meeting at which shareholders are to consider matters contemplated in that section 112, as read with section 115.
Section 62 stipulates the requirements relating to the prescribed time and manner in terms of which the company must adhere to when delivering a notice of meeting to each of its shareholders. In the case of a private company and subject to the company’s memorandum of incorporation, the relevant notice of a meeting must be delivered to each of the shareholders of the company at least 10 (ten) business days before the meeting is to begin. Furthermore, the written notice to the shareholders of the company must stipulate (i) the date, time and place for the meeting; (ii) the general purpose of the meeting; (iii) a copy of the proposed resolution to be considered at the meeting and the percentage of voting rights that will be required for that resolution to be adopted; and (iv) the shareholders right to appoint a proxy to attend and vote on his/her/its behalf.
The special resolution approving the proposed section 112 disposal must be adopted at a shareholders’ meeting called for that purpose. The quorum for the shareholders’ meeting is constituted by the presence of sufficient persons to exercise, in aggregate, at least 25% of all the voting rights that are entitled to be exercised on that matter, or any higher percentage as may be required by the company’s memorandum of incorporation. However, the special resolution must be adopted with the support of at least 75% of the voting rights that are exercised on the resolution.
One should also be cognisant of section 115(4) which prohibits (i) an acquiring party; or (ii) a person related to an acquiring party; or (iii) a person acting in concert with either of them from voting in favour of, or against the special resolution giving effect to the section 112 disposal. Section 115(4) specifically provides that any voting rights controlled by any of the aforementioned persons must be excluded when calculating the:
Section 2 provides, amongst other things, that an individual is related to a juristic person if that individual directly or indirectly controls the juristic person. A person can be said to control another (usually a company) if, amongst other things that person: (a) directly or indirectly is able to exercise or control the exercise of a majority of the voting rights associated with securities of that company (whether pursuant to a shareholder agreement or otherwise), or (b) has the right to appoint or elect, or control the appointment or election of, directors of that company who control a majority of the votes at a meeting of the board, or (c) has the ability to materially influence the policy of that juristic person.
We note that in certain circumstances, a special resolution of a holding company is also required for a disposal in terms of section 112, namely where the company which intends to dispose of all or a greater part of its assets or undertaking is a subsidiary of a South African company or an external company (i.e. a foreign company), and the disposal by that subsidiary will also constitute a disposal of all or the greater part of the assets or undertakings of that holding company. In these circumstances, the relevant proposed disposal transaction will also require the approval of the shareholders of both the disposing subsidiary company and the holding company itself.
Having considered the requirements, a company should always be mindful of the prescribed requirements in terms of the Companies Act and ensure strict compliance to prevent the transaction being rendered non-compliant. In closing, a board of directors should remain mindful that the same legal duties and requirements, as discussed in this article, apply to both non-executive and executive directors.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)