Re-acquisition of shares triggering a Mandatory Offer and possible consequences for Shareholders
By Mervyn Taback and John Mankoe
Where a “regulated company” (i.e. a public company, state-owned company or a private company which meets the requirements of Section 118(1)(c) of the Companies Act), re-acquires its voting shares as contemplated in Section 48 of the Companies Act or in terms of a scheme of arrangement contemplated in Section 114 of the Companies Act and a shareholder that held less than 35% of the voting shares subsequently holds, pursuant to the acquisition by the company of its voting shares, 35% or more of the voting shares of the company (“Affected Shareholder”), then, in terms of Section 123 of the Companies Act, the Affected Shareholder is obliged, within one business day of achieving the 35% threshold, to notify the remaining shareholders of that fact and offer to purchase all of the company’s remaining voting shares (“Mandatory Offer”).
The terms of the Mandatory Offer must comply with the relevant provisions of the Companies Act and the Takeover Regulations promulgated thereunder (“Takeover Regulations”) and be delivered to the other holders of the company’s remaining voting shares within one month of the Affected Shareholder giving the notice.
In terms of Takeover Regulation 111(2), where an Affected Shareholder, or person acting in concert with an Affected Shareholder, has acquired relevant securities in the offeree regulated company within the six months period before the commencement of the offer period, the offer consideration, per security, to the offeree regulated company’s holders of securities of the same class must be:
identical to, or where appropriate, similar to, the highest consideration paid (excluding commission, tax and duty, for those acquisitions); and
accompanied by a cash consideration, at no less than the highest cash consideration paid per security (excluding commission, tax and duty, for those acquisitions) if securities that carry 5% or more of the voting rights currently exercisable at a class meeting of that class were acquired for cash.
The Companies Act and the Takeover Regulations are silent in respect to the price per share that must be offered under a Mandatory Offer where an Affected Shareholder has not acquired shares within a 6 months period immediately preceding the commencement of the offer period for a Mandatory Offer.
The application of Section 123 of the Companies Act (in the case where a regulated company re-acquires its voting shares) may, in certain limited circumstances, prove to be untenable from a practical perspective. For example, where more than one shareholder, concurrently, become Affected Shareholders pursuant to the company acquiring its voting shares, the following questions and challenges come to the fore, in particular:
is each of the Affected Shareholders obliged to make an offer to the other Affected Shareholder (where the Affected Shareholders have not been acting in concert) along with the holders of the remaining voting shares, or only to those shareholders (other than the Affected Shareholder); or
should the Affected Shareholders’ offers be made as one offer to the holders of the remaining voting shares on a pro-rata basis based on such Affected Shareholders’ shareholdings;
at what price per share must the Mandatory Offer be made (bearing in mind that neither Affected Shareholder acquired any shares in the company);
if the provisions of Takeover Regulation 111(2) apply to the one Affected Shareholder and not to the other Affected Shareholder, should the disparity in the offer prices nevertheless apply or a different pricing mechanism should arguably apply considering the Companies Act is silent on pricing where Takeover Regulation 111(2) is inapplicable.
The general consequences arising from a Mandatory Offer for an Affected Shareholder are as follows:
an Affected Shareholder will have to make an offer to the holders of the remaining voting shares and, if accepted by the holders thereof, will be obliged to acquire such voting shares; and
to the extent that the Affected Shareholder has acquired voting shares of the company within a 6 months period before the commencement of the offer period for a Mandatory Offer, the price per share for the remaining voting shares under the Mandatory Offer must be (i) the same as, or similar to, the highest price paid per share for the voting shares acquired by the Affected Shareholder during the 6 months period and (ii) accompanied by a cash consideration if 5% or more of the voting shares exercisable were acquired for cash; or
as the Companies Act and the Takeover Regulations do not prescribe a price other than in circumstances where Takeover Regulation 111(2) applies, presumably the price per share for the Mandatory Offer should be the same price paid per share by the regulated company in acquiring its voting shares. The Takeover Regulation Panel should be consulted for a ruling in these circumstances.
The application of Takeover Regulation 111(2) may also have unforeseen financial consequences for an Affected Shareholder especially where all the holders of the remaining voting shares accept the Mandatory Offer.
An Affected Shareholder may avoid the obligation to make a Mandatory Offer under the circumstance referred to above if the independent holders of more than 50% of the voting rights of all the issued securities of the company adopt a resolution waiving the benefit of a Mandatory Offer in accordance with Takeover Regulation 86(4), read with Section 125(3)(b)(ii) of the Companies Act. An “independent holder of voting rights” is any person who holds securities in a company which entitle it to exercise general voting rights and is neither a related or inter-related person (as defined in Section 2 of the Companies Act) to the Affected Shareholder, or a person acting in concert with the Affected Shareholder or any of its related or inter-related persons.
If a regulated company proposes to acquire its voting shares and, pursuant to the acquisition, is likely to trigger a Mandatory Offer which gives rise to the circumstances referred to above, it is recommended that, prior to the implementation of the acquisition, the company should consider obtaining written undertakings from independent holders of more than 50% of the general voting rights of all the issued securities of the company in terms of which they undertake to vote to waive the benefit of the Mandatory Offer if and when triggered.