TerraLex Cross-Border Guide to Cross-Border Merger & Acquisition Guide

Generally, there are no special rules related to foreign investors, as the Protection of Investment Act 22 of 2015 requires equal treatment of both foreign and local buyers if the circumstances are the same. That being said, there are restrictions in specific sectors that may be relevant to M&A transactions, the likes of which may for example impose minimum equity requirements, or place limtations of foreign ownership in the sector.

Investments in the South African context are uniquely placed against the regulatory framework aimed at black economic empowerment (“BEE”) i.e. ensuring the economic empowerment of the previously disadvantaged black South Africans. It is generally a key commercial consideration for a company to dispose a significant equity stake to black shareholders and in certain sectors such as mining or telecommunications, it is a legal requirement. To this end, the parties in an M&A transaction will need to consider how the businesses BEE requirements will be met post – closure.

Other restrictions are largely industry specific as aforementioned.

Yes. All money transferred in and out of South Africa is controlled and regulated by the South African Reserve Bank (SARB) who is responsible for the day-to-day administration of exchange control. This activity is governed by the Exchange Control Regulations of 1961 which have been promulgated in terms of the Currency and Exchanges Act 9 of 1933.

These are sector specific, however, incentives are particularly available in the context of "Special Economic Zones". The Special Economic Zones Act 2014, which came into force in February 2016 has the following objectives:

• The determination of the policy and strategy of Special Economic Zones.
• The establishment of the Special Economic Zones Fund to support the development of Special Economic Zones.
• The designation, promotion, operation, and management of Special Economic Zones.
• Regulatory measures and incentives for Special Economic Zones, to attract domestic and foreign direct investment.

The Minister of Trade and Industry may from time to time designate certain areas or zones in South Africa as "Special Economic Zones".

In addition, in terms of value-added tax (VAT) legislation, various benefits and exemptions (in terms of zero-rating of VAT) apply when goods are supplied to operators of Special Economic Zones.

In this jurisdiction, the law does not require employees to have nominees on the board of directors or other management structures, but a company's memorandum of incorporation can provide for this. The protection of employees' rights is a key feature of South African law and has an important effect in the context of corporate mergers and acquisitions. If a transfer of a business takes place, unless otherwise agreed, then section 197 of the Labour Relations Act (the “LRA”) provides that:

• The new employer (purchaser) is automatically substituted in the place of the old employer (seller) for all contracts of employment in existence immediately before the date of transfer.
• All the rights and obligations between the old employer and an employee at the time of the transfer continue in force as if they had been rights and obligations between the new employer and the employee.
• Anything done before the transfer by, or in relation to, the old employer, including the dismissal of an employee or the commission of an unfair labour practice or act of unfair discrimination, is considered to have been done by, or in relation to, the new employer.
• The transfer does not interrupt an employee's continuity of employment, and an employee's contract of employment continues with the new employer as if with the old employer.

It is accepted that a sale of shares in a company (and therefore a change in its owners), as opposed to a sale of its business, does not amount to a "transfer of business" under section 197 of the LRA.

The new employer is deemed to have complied with the above if that employer transferred employees on terms and conditions that are, on the whole, not less favourable to the employees than those on which they were employed by the old employer.

An agreement to exclude the application of the automatic transfer of employees must be in writing and concluded between either the old employer, the new employer, or the old and new employers acting jointly, on the one hand, and the appropriate person or body that represents the old employer's employees (for example, a trade union).

The termination of an employment contract can be brought about in a number of ways, for example, by (i) Exercising a contractual or statutory right to terminate the employment, (ii) agreement, or (iii) operation of law.

The LRA allows three fair reasons for a dismissal including misconduct, incapacity and the employer's operational requirements.

The LRA requires that a dismissal must be fair, which includes both procedural and substantive fairness. The employee's remedy for an unfair dismissal is reinstatement or, under specified circumstances, payment of compensation limited to a maximum of 12 or 24 months' remuneration.

In South Africa, both employers and employees can terminate the employment relationship by providing notice, or for the employer, making a payment in lieu of notice. The required length of notice for employment contracts is set out in the Basic Conditions of Employment Act and depends on the term of the contract.

Redundancies are subject to the same requirements as terminations concerning substantive and procedural fairness. Section 189 and 189A of the LRA regulates redundancies.

Securities Transfer Taxs (STT), are payable in respect of a disposal of shares. For the disposal of shares in an unlisted South African company, STT is payable by the target company at a rate of 0.25% of either the sale condieration or the market value of the shares (whichever is less).

The party disposing of shares in a company, business or assets may be subject to capital gains tax or income tax – and this is dependant on whether the person held the asset as either a capital or revenue asset.

Value added tax (VAT) is charged at a rate of either 15% or 0% on the supply of goods and services of registered VAT vendors. Generally, a sale of shares will be considered an exempt supply for VAT purposes. The sale of a business as a “going concern” may qualify for a zero VAT rating.

The parties to a merger that has an effect in South Africa and that exceeds certain combined asset and/or turnover thresholds established by the Competition Act, may not implement the transaction without first obtaining the approval of the competition authorities.

A "merger", for purposes of merger control, occurs when one or more firms directly or indirectly acquire or establish direct or indirect control over the whole or part of the business of another firm. The term "firm" includes a person, partnership or trust.

The Competition Act establishes three categories of mergers, which are determined with reference to the turnover or assets (whichever is the higher) of the acquiring firm and the target firm.

A small merger occurs where the combined assets or turnover of the acquiring firm and the target firm are below ZAR600 million or the target firm's assets or turnover are below ZAR100 million.

An intermediate merger occurs where the combined assets or turnover of the acquiring firm and the target firm equal or exceed ZAR600 million and the target firm's assets or turnover equal or exceed ZAR100 million.

A large merger occurs where the combined assets or turnover of the acquiring firm and the target firm equal or exceed ZAR6.6 billion and the target firm's assets or turnover equal or exceed ZAR190 million.

For purposes of calculating the thresholds, the entire acquirer group is taken into account. In relation to the target firm, the firm over which control is transferred, together with all firms controlled by such transferred firm, is taken into account.

The parties to an intermediate or large merger may not implement the merger without the approval of the competition authorities. Small mergers have a voluntary notification system.

It is noteworthy that the Competition Commission (the “Commission”) may require parties to notify small mergers within 6 months after the implementation of the merger if the Commission deems that the merger may substantially lessen competition or it is not in the public interest.

On 23 September 2022, the Commission published revised, small merger guidelines to assist it in identifying small mergers and acquisitions involving digital markets. The guidelines came into effect on 1 December 2022.

The small merger guidelines have been revised due to an increased concern by the Commission regarding potential anti-competitive acquisitions in the digital or technology markets, which are potentially able to escape regulatory scrutiny.

The Commission must be informed in writing of all small mergers if, at the time of entering into the transaction, either party is subject to investigation by the Commission or have pending proceedings referred by the Commission to the Competition Tribunal.

The documents commonly produced and executed at closing/signing meetings include the sale of business agreement, the documents of title (share certificates & securitites transfer forms) and all relevant resolutions of the parties approving the transaction and giving authority to enter into the transaction documents.

These meetings may be held in person or vitually after all conditions precedent have been fulfilled.

There are no particular advantages to executing the sale of business or shares agreement outside of SA. While the conditions of closing may vary from deal to deal, the most common conditions precedent (suspensive conditions) which may restrict closing include:

• Approval of the transaction from the Competition Commission
• The Financial Surveillance Department of the South African Reserve Bank in the case of cross-border transactions
• Obtaining industry specific licenses
• Shareholder and Directors resolutions required in terms of the Companies Act 2008
• Assignments of any contracts as well as the relevant consents.

This will be a term of negotiation – but usually subject to the fulfilment of the suspensive conditions.

Subject to approval by the South African Reserve Bank if dealing with a cross-border element of the deal.

Juristic parties will normally be required to produce a board resolution approving the transaction and authorising an individual director (or directors) to execute the documents on behalf of the company. Further due diligences may be carried out in terms of the Financial Intelligence Centre Act 38 of 2012 as amended.

Simple contracts do not carry any formalities. Any “deeds” which are registrable in terms of the Deeds Registeries Act 47 of 1937 (the “act”) must satisfy the requirements and formalities as set out in the act.

A company may be the named party to a simple contract which is signed by a director or other person with authority on the company's behalf. A company must execute a simple contract or deed using the signatures of two authorised signatories.

Simple contracts can be executed by individuals orally. If in writing, a signature is required. To execute a deed, an individual must sign it in the presence of an attesting Notary Public.

This will usually be the same as question 17 above unless the parties agree otherwise, or the entities founding document introduces specific formalities.

Notaries are not usually involved unless the transaction has a cross - border element and requires South African documents to be authenticated or apostilled.

N/A

These are usually in accordance with a tariff or the hourly rate of the notary.

N/A

Company officers are appointed by way of a board resolution. The appointments are then lodged with the Companies and Intellectual Property Commission along with any supporting documents.

The title documents include the share certificate as well as well as the securities transfer form. Other steps in the transfer of title process includes the updating of the share register and the payment of STT.

Any individual who purports to act on behalf of a company must warrant that he is authorized to do so. The relevant board resolution must be obtained.

N/A – subject to the founding document of the company as well as the wishes of parties.

Yes. Further proof of authenticity may lend itself to proving legitimacy of the documents (e.g affidavits, proof of email service etc.)

Yes. In terms of the Electronic Communications and Transactions Act, 2002, digital signatures are generally enforceable, although certain agreements may not be concluded electronically.

Yes. This is usually facilitated for under the relevant clause in the sale agreement.

Yes.

Yes. Parties may conclude an escrow or “hold – back” agreement in terms of which the funds are held in a escrow account to be released subject to the fulfilment of any conditions.

If the purchaser of the shares is a foreign entity, the share certificate must be endorsed as “non- resident” by the South African Reserve Bank. The failure to do so does not impact on the validity of the deal, but precludes the purchaser from receiving dividend pay-outs.

N/A

Transaction dependant.

Yes. Typically between one to three years.