The Companies Act, 2008, provides a comprehensive legal framework for the regulation of takeovers and other fundamental transactions where the company concerned is of a certain size. Section 118 of the Act, which deals with this aspect of our corporate law, is undergoing notable amendments aimed at refining the application of these regulations to private companies (as opposed to only public companies), marking a shift in how these companies are regulated with respect to affected transactions.
Currently, section 118 of the Companies Act and the regulations promulgated in respect thereof (commonly referred to as the Takeover Regulations) apply primarily to public companies and state-owned enterprises with regard to so-called “affected transactions.” These are transactions that can significantly impact the ownership or structure of a company and include transactions such as takeovers, mergers, acquisitions, disposals of major assets, and schemes of arrangement. Private companies, however, are subject to the Takeover Regulations only under specific circumstances. According to the current wording of section 118(1)(c), private companies come under the scope of these regulations if a certain percentage of their issued securities is transferred within a 24-month period or if they have voluntarily subjected themselves to these regulations through their memorandum of incorporation.
In the latter part of 2024, the President assented to the Companies Amendment Act of 2024, which contains several important amendments to section 118 of the Companies Act. Although the commencement date of these amendments is yet to be proclaimed, it is well worth noting these changes that are in the pipeline. The proposed amendments namely introduce clearer and more stringent criteria for private companies to fall under the Takeover Regulations. These changes reflect a shift from the previous reliance on share transfers toward a broader and more inclusive approach based on shareholder numbers and financial thresholds. One of the most significant changes is found in the new section 118(1)(c)(i). Under this amendment, a private company will be subject to the takeover regulations if it has 10 or more shareholders with direct or indirect shareholding and if it meets or exceeds a financial threshold based on its annual turnover or asset value, which will be determined by the Minister in due course (see below). This will be the case irrespective of the number or percentage of shares in that company that might have changed hands in the past.
The new criteria clearly focuses instead on the size and financial capacity of the company, using the number of shareholders and financial performance as determining factors. This new framework ensures that economically significant private companies, particularly those with substantial financial footprints, are regulated in a manner similar to public companies when it comes to affected transactions.
The second major change involves section 118(2), which is being revised to reflect the new financial threshold test. The current section 118(2) gives the Minister the authority to set a minimum percentage of issued securities, which, if transferred, would subject a private company to the takeover regulations. The proposed amendment will replace this percentage-based criterion with a financial threshold based on a company’s annual turnover or asset value. Under the new section 118(2), the Minister, in consultation with the Takeover Regulation Panel, will determine the financial thresholds that will apply to private companies. These thresholds will be used to identify which private companies should fall under the purview of the Takeover Regulations. This amendment aligns with the broader shift towards a more financially-driven approach to regulation.
The amendments to section 118 will have far-reaching implications for private companies in South Africa and how they are regulated. For private companies with more than 10 shareholders and significant financial metrics, these amendments represent a heightened regulatory burden. They will be required to comply with the stringent rules governing affected transactions, which may include additional reporting requirements and scrutiny from the Takeover Regulation Panel. However, the introduction of an exemption mechanism gives the Panel the authority to exempt specific transactions involving private companies, offering a measure of flexibility. On the other hand, smaller private companies or those with fewer shareholders may remain outside the scope of these regulations, reducing their compliance costs and allowing them to operate with greater regulatory freedom.
This article was prepared by Wildu du Plessis and Tristan Hussey.