Historically, our company laws prohibited a company from providing financial assistance for the purchase of its own shares. This restriction was aimed at preserving the company's capital and protecting the minority shareholders and creditors of the company. However, in recent years, it also had the effect of hampering the implementation of black economic empowerment in South Africa in that empowerment partners could not look to the company for financial assistance to take up shares in the company.
At the end of last year, our Companies Act was amended to provide that a company may now provide finance to a purchaser, for instance a potential BEE partner, to take up shares in the company provided that the directors of the company are satisfied that:
- subsequent to the transaction, the assets of the company
will exceed its liabilities (solvency test), and
- the company will be in a position to pay its debts as
they become due in the ordinary course of business both
subsequent to, and for the duration of, the transaction
(liquidity test).
In addition, the shareholders must pass a special resolution (75% in favour) approving the terms upon which the assistance is to be given.
Whilst the amendment tends to facilitate shareholder diversification, it is yet to be seen to what extent it will have an impact on BEE deal activity in the market. Early indications are positive. JSE-listed ceramic tiles retailer Italtile concluded a BEE transaction in terms of which it was proposed that 10.7% of its share capital was to be placed in the hands of black-owned entities and Rainbow Chickens concluded a similar deal in terms of which 15% of its equity was sold to a broad based consortium and company employees for R915,6 million. Both the Italtile and Rainbow BEE transactions were structured on the basis of the amendment to the Companies Act.
In our view, the amendments are welcome as the law now facilitates the financing of BEE deals by the company itself whilst, at the same time, creditors are protected by means of the solvency and liquidity tests and shareholders views are taken into account by requiring a special resolution. Cash flush companies may now be able to use their own funds to restructure without looking to financial institutions for such assistance. The options regarding the financing of company-related transactions have been expanded in real terms.
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