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Teething Problems

With the coming into effect of the new Companies Act, 2008, a number of teething problems have emerged. This may be due to the fact that our Companies Act is an amalgamation of a number of company law traditions which do not necessarily sit well with each other.

This note however identifies an anomaly which relates to the definition of beneficial interest, a passing reference to beneficial interest in section 56(2)(d) and mandatory offer requirements in section 123.

The Definition of a Beneficial Interest

A beneficial interest is defined in Section 1 of the Companies Act as follows:

“beneficial interest”, when used in relation to a company’s securities, means the right or entitlement of a person, through ownership, agreement, relationship or otherwise, alone or together with another person to- 

(a)     receive or participate in any distribution in respect of the company’s securities; 

(b)     exercise or cause to be exercised, in the ordinary course, any or all of the rights attaching to the company’s securities; or 

(c)     dispose or direct the disposition of the company’s securities, or any part of a distribution in respect of the securities, 

but does not include any interest held by a person in a unit trust or collective investment scheme in terms of the Collective Investment Schemes Act, 2002 (Act No. 45 of 2002);

This phrase beneficial interest is referred to in section 56(2)(d) of the Companies Act:

A person is regarded to have a beneficial interest in a security of a public company …. if that first person is the holding company of a company that has a beneficial interest in that security…

The mandatory offer provisions triggered by section 123 of the Companies Act applies if, inter alia:

(a)       either- 

    (i)         …; or   

    (ii)        a person acting alone has, … acquired a beneficial interest in voting rights attached to any securities issued by a regulated company; 

(b)       …; and 

(c)       …

For the sake of this note, assume that the jurisdictional requirements for the application of section 123 are met. I now turn to a hypothetical scenario.

Mandatory Offers

Suppose that company A (Pty) Ltd holds 36% of the issued securities of B Ltd, listed on the JSE. Suppose further that C (Pty) Ltd offers to acquire the entire share capital of A (Pty) Ltd. Assume also that neither A (Pty) Ltd nor B Ltd form part of or constitute a pyramid or controlled company or intermediate pyramid as contemplated in the Company Regulations.

In this hypothetical C (Pty) Ltd would become the holding company of A (Pty) Ltd which has a beneficial interest in 36% the securities of B Ltd. In terms of section 123(2)(b) and (c), after the take-over of A (Pty) Ltd by C (Pty) Ltd, C (Pty) Ltd would have acquired a beneficial interest in B Ltd in excess of the prescribed percentage (35% as per Regulation 86(1)).

The Consequence of Unintended Law

The consequence of the unintended law is that the mandatory offer provisions of Section 123 would apply. As such, C (Pty) Ltd would be obliged to make a mandatory offer to the remaining holders of the securities of B Ltd.

If this hypothetical is extended to a situation where the regulated company, B Ltd is a pyramid company as contemplated in the regulations and holds securities in companies below it, an unmanageable situation may arise where C (Pty) Ltd is lawfully obliged to make a mandatory offer in respect of all the securities of companies controlled by B Ltd.

In addition, regulated companies would have to report as holders of beneficial interests, the company holding the interests as well as that company's holding company. In this regard see section 56(7)(b). This cannot be the intended consequence of the reference to beneficial interest in Section 56(2)(d).

It appears then that the reference to beneficial interest in section 56(2)(d) will, along with many other sections in the present Companies Act, have to be pragmatically reconsidered to bring the law in line with commercial realities.

Adam Pike
Author: Adam Pike
Adam Pike holds BA, LLB and LLM degrees from the University of Cape Town. His LLM, attained from the School of Advanced Legal Studies at the University of Cape Town, focused on commercial and corporate law, particularly corporate governance and securities. Adam specialises in the implementation of corporate actions and transactions.

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