Drafting of sale of share agreements – Important considerations
04 May 2020
In this article, we have a high-level look at some of the important aspects that must be kept in mind when drafting a sale of share agreement.
To understand a Sale of Share transactions and especially more complex transactions where, for example, risk and benefit passes on a date that differs from the date that ownership passes, one needs to go back to the basics.
A share in a company consists of a bundle of personal incorporeal rights against the company. These bundles of rights are “transferred” by way of cession and it is possible for rights against the company to “transfer” at different stages between the Seller and the Purchaser.
For purposes of this note, we assume that the proposed transaction is between two parties dealing at arm’s length and the subject matter of the agreement is shares in a private company.
Section 8 (2) (b) (ii) (bb) of the Companies Act, 2008, determines that a profit company is a private company if its MOI restricts the transferability of its securities.
If the Seller has a properly drafted MOI, there will usually be a pre-emptive right in favour of the other shareholders contained in the MOI or at least an article that provides that any shareholder to whom a transferor wants to transfer shares must be approved by the other shareholders.
Pre-emptive rights and restrictions can get complex. Before you start drafting your Sale of Share Agreement, ensure that you peruse the latest MOI of the Company in which the shares are held and ensure that there are no shareholder / other agreements that may restrict the transfer of shares. If there are any restrictions that may apply and these restrictions have not been dealt with, ensure that you incorporate the applicable conditions precedent that may relate thereto.
2. THE MATRIMONIAL PROPERTY ACT
If the Seller is a natural person, it is important to determine the marital status of the Seller. If the Seller is married in community of property, section 15 of the Matrimonial Property Act may apply.
Section 15 (2) (c) of the Matrimonial Property Act, 1984, determines that a spouse married in community of property shall not without the written consent of the other spouse alienate, cede or pledge any shares forming part of the joint estate.
Section 15 (6) Matrimonial Property Act, 1984, however, determines that the provisions of section 15 (2) (c) shall not apply where a spouse performs an act contemplated in section 15 (2) (c) in the ordinary course of his profession, trade or business.
3. APPROVAL BY THE SHAREHOLDERS OF THE SELLER
If the Seller is a Company, you will need to establish if the Seller is disposing of all or the greater part of its assets or undertakings.
Section 1 of the Companies Act, 2008, provides that –
“all or the greater part of the assets or undertaking”, when used in respect of a company, means—
(a) in the case of the company’s assets, more than 50% of its gross assets fairly valued, irrespective of its liabilities; or
(b) in the case of the company’s undertaking, more than 50% of the value of its entire undertaking, fairly valued;
If one of the exclusions stipulated in section 112 (1) of the Companies Act 2008 does not apply, the shareholders of the Seller will need to approve the transaction if the Seller is selling all or greater part of its assets or undertakings.
It is also important to consider whether the Seller is a subsidiary of a holding company, and if so, whether the disposal by the Seller (being the subsidiary), constitutes disposal of all or the greater part of the assets or undertakings of the holding company with regard to the consolidated financial statements of the holding company.
If the disposal also constitutes disposal of all or the greater part of the assets of the holding company, then the shareholders of the holding company will also need to approve the transaction by way of a special resolution.
Approval by the shareholders of the Seller (and, if applicable, the shareholders of the Seller’s holding company) is uncertain and the appropriate conditions precedent clauses relating thereto will need to be incorporated in the agreement.
4. TAKEOVER REGULATION PANEL
TRP approval is sometimes overlooked because parties are under the incorrect impression that because it is not a high-value transaction, there is no need for TRP approval.
Small and medium companies seldom expressly stipulate in their MOI that Part B, C and the Takeover Regulations must apply to it. This, however, does not mean that part B, C and the Takeover Regulations will not apply.
If the transaction constitutes disposal of all or the greater part of the Sellers assets as contemplated above, then it is also important to consider whether 10% or more of the issued securities of the Seller have been transferred (other than by transfer between or among related or inter-related persons) within the period of 24 months immediately before the date of a particular transaction or offer (the value of the shares that have been transferred, is irrelevant).
Should there have been a transfer as contemplated in the aforesaid, then the Seller will be regarded as a “regulated company” that is entering into an “affected transaction”.
The Companies Act, 2008, stipulates that the Seller may not dispose or give effect an agreement to dispose of all or the greater part of its assets or undertakings unless the TRP has issued a compliance certificate or exempted the transaction.
5. MANDATORY OFFERS
It is important to determine whether the Company in which the shares are held (the “Company”) is a “regulated company” as contemplated in Part B – Authority of Panel and Takeover Regulations of the Companies Act, 2008.
If the Company’s MOI does not expressly determine that the Company and its securities are subject to Part B, Part C and the Takeover regulations, then:
- you will need to determine whether 10% or more of the issued securities of the Company have been transferred (other than by transfer between or among related or inter-related persons) within the period of 24 months immediately before the date of a particular transaction or offer.
If there was a transfer or transfers as contemplated in the aforementioned, then you will need to determine the following:
- Was the Purchaser (or the Purchaser and a related or inter-related person or the Purchaser and another person acting in concert) able to exercise less than 35% of all the voting rights attached to securities of the Company?
- If yes, will the Purchaser (or the Purchaser and a related or inter-related person or the Purchaser and another person acting in concert), be able to exercise at least 35% of all the voting rights attached to securities of the Company?
If the Company is a “regulated company” and if both the above questions are answered yes, then the Purchaser will be required to make a mandatory offer to the remaining shareholders of the Company in terms of section 123 of the Companies Act, 2008.
6. COMPETITION AUTHORITY APPROVAL
Firstly, you will need to establish whether there will be an acquisition or establishment of control over the whole or part of the business of the Company as contemplated in the Competition Act (have a look at section 12 of the Competition Act).
If there is an acquisition or establishment of control as contemplated in the aforesaid, then you will need to have a look at the thresholds and categories of mergers to determine whether approval from the Competition Authorities is required. There is a basic merger threshold calculator on the Competition Commissions website – http://www.compcom.co.za/mergers-threshold-calculator/
7. TAX CONSIDERATIONS
SECURITY TRANSFER TAX (“STT”)
This is a tax that is often overlooked, and in a fast-paced business environment trouble in obtaining a tax clearance certificate due to something like STT can have serious consequences for the company and its advisers.
STT is levied on every transfer of a security and was implemented from 1 July 2008 under the Securities Transfer Tax Act, No. 25 of 2007 (STT Act), together with the Securities Transfer Tax Administration Act, No. 26 of 2007.
STT is levied at the rate of 0,25% on, generally, the value of shares transferred. There are various exemptions listed under section 8 of the STT Act. The most notable exemptions would be where the amount of STT payable is less than R100 (or in other words where the value of the shares transferred is less than R40,000) or where the shares are sold in terms of the corporate restructuring rules (asset-for-share or intra-group transactions).
With the transfer of an unlisted security, the company which issued the unlisted security is liable for the STT. The company may however, recover the STT payable from the person to whom the security is transferred.
For unlisted securities: Securities transfer tax must be paid within two months from the end of the month in which the transfer of the unlisted security took place.
TRANSFER DUTY – SALE OF SHARES IN RESIDENTIAL PROPERTY-OWNING COMPANIES
Another tax that is often missed is transfer duty that is payable by the purchaser that purchases the shares in a residential property-owning company and not the immovable property itself.
The Taxation Laws Amendment Act of 2001 provided that there is transfer duty payable on the sale of shares in residential property-owning companies. Transfer duty is payable at the standard rate based on the market value of the property. This excludes commercial / agricultural property-owning companies. The test here is the zoning of the property (not the use).
8. FURTHER CONSIDERATIONS
Further considerations that may also be important are:
- whether the Seller has ceded the shares as security. A well-drafted cession as security agreement will likely require the written consent of the cessionary before the shares can be transferred
- if the Seller is bound as surety or guarantor for the due and proper performance of the Company. If this is the case ensure that the applicable clauses relating to the release or indemnification of the Seller be included in the Agreement
- exchange control regulations that may apply to the transaction
- industry specific regulations (for example in the mining sector)
- listing requirements
Knowing your client and related parties is crucial when drafting Sale of Share Agreements. Even low-value transactions between SMMEs can trigger, for example, a mandatory offer or may require shareholder approval in some way.
By using the contracts.tech contract creation tool you will be able to create your first drafts of the transaction documents in minutes and you will be guided through relevant questions ensuring that you cover important considerations. Give it a try today.
- Potential tax consequences of the waiver of a contractual right
- CIPC mandatory Compliance Checklist
- Section 164 Companies Act: A guide for navigating the treacherous terrain of s164 in the era of shareholder activism and opportunism
- An alternative purchase price mechanism for M&A transactions