Bowmans: Key considerations prior to a delisting

By Timothy McDougall, Sibonelo Mdluli and Tinille Soupen (Bowmans)

There have been a number of recent examples of private equity funds acquiring assets by way of delisting public companies and this trend is expected to continue in the wake of the Covid-19 pandemic. This article sets out some of the key considerations which an acquiror should take into consideration before embarking on an acquisition by way of a delisting (please note that this article has been drafted in the context of a delisting from the Johannesburg Stock Exchange under South African law).

SCHEMES OF ARRANGEMENT VERSUS TENDER OFFERS

There are a number of ways that an acquirer can structure a takeover of a listed target company, including an acquisition of the whole or greater part of the target’s assets, a statutory merger or amalgamation, a scheme of arrangement or a tender offer. Of these, the most commonly used structure is a scheme of arrangement between the target company and its shareholders (a Scheme) or a tender offer by the acquirer made directly to the shareholders of the target (a Tender Offer).

Schemes

Under a Scheme, the board of the target will propose a transaction whereby the shareholders agree to sell their shares to the purchaser in exchange for the relevant consideration. The target board will convene a meeting of the shareholders to approve the Scheme (75% shareholder approval will be required to approve the Scheme). Where the target has more than one class of shares, separate scheme meetings may have to be convened and each class of shareholders may have to approve the Scheme. The major upside of a scheme is that, if approved by the requisite majority of shareholders, the Scheme will be binding on 100% of the shareholders, meaning that the purchaser is guaranteed to acquire all of the issued shares of the target and will not be stuck with minority shareholders post-transaction.

Therefore, a Scheme is the cleanest way to acquire 100% of the target and proceed with its delisting from the Johannesburg Stock Exchange (JSE).

Under the JSE Listings Requirements, if the Scheme is successfully implemented, the target will simply need to send an application for delisting to the JSE and the JSE will delist it without any further action being required. No shareholder approval will be required and no delisting circular will be required. This is in contrast to the delisting process in the event of a Tender Offer (which we discuss below).

It is worth noting that, since a Scheme is an arrangement between the target and its shareholders, the co-operation of the target’s board is essential to the successful implementation of a Scheme. It can therefore only be used in a “recommended/friendly” takeover and not an “unsolicited/hostile” takeover. If the delisting transaction does not have the support of the target’s board, it may have to be implemented as a Tender Offer.

Tender Offer

A Tender Offer is a general offer to the shareholders of the target offering to acquire their shares in exchange for the relevant consideration. The target’s shareholders will be entitled accept or reject the offer on an individual basis and, unlike a Scheme, will not be bound by the principle of “majority rule”. If the Tender Offer is accepted by at least 90% of the target’s shareholders (other than the purchaser and its related and concert parties) the purchaser may exercise the “squeeze out” rights under the Companies Act and forcefully acquire the shares of any shareholders who did not sell their shares to the purchaser under the Tender Offer. If this occurs, the delisting process is relatively straightforward and, as in the case of a Scheme, the target will simply need to send a simple application for delisting to the JSE and the JSE will delist it without any further action being required. No shareholder approval will be required and no delisting circular will be required.

If, on the other hand, the Tender Offer is accepted by less than 90% of the target’s shareholders (and consequently no squeeze out is exercised), delisting of the target will have to be approved by an ordinary resolution of the shareholders of the target (the Delisting Resolution). The purchaser will have to prepare (alongside the target) a circular to the target’s shareholders providing certain prescribed information (including reasons for the delisting, an offer to remaining minority shareholders giving them an exit opportunity prior to delisting, and the target board’s opinion on the Delisting Resolution). For purposes of the Delisting Resolution, the votes of any “Controlling Shareholder”, its associates, concert parties and “any party which the JSE deems appropriate” will be excluded. Accordingly, it is likely that the purchaser will not be entitled to exercise its votes to push through the Delisting Resolution and will have to rely on other minority shareholders (it is possible to make a Tender Offer conditional upon a Delisting Resolution being approved in advance, although this is typically only a workable solution where the purchaser has the support of the target’s board).

Unlike a Scheme, a Tender Offer may be used in friendly or hostile transactions. The only difference is that in a friendly scenario, a Tender Offer would be accompanied by a board recommendation contained in a joint tender offer circular of the purchaser and the target. Needless to say, in a hostile situation the purchaser and the target will prepare and post separate circulars. There may be strategic reasons for proceeding with a Tender Offer even if the transaction is friendly. For example, where the purchaser is unsure whether it will secure the requisite number votes to approve the Scheme.

Although we have restricted our discussion above to Schemes and Tender Offers, as noted above, a takeover of a public listed company may also be implemented by way of (i) a statutory merger or (ii) an acquisition of all or a greater part of the assets of the target. However, these two acquisition methods are rarely used in the context of a delisting.

Ultimately, deciding on the process to be followed in order to implement a delisting will be a strategic decision which will depend on the dynamics of the target and the purchaser and a potential purchaser should always ensure that it has been fully appraised of all of the options available.

Bowmans is a leading corporate law firm with a highly skilled team, track record and geographical footprint to provide both upstream and downstream services to the private equity sector in Africa. www.bowmanslaw.com/service/private-equity

Disclaimer: Please note that this article is an information-only article of general interest that aims to describe investment opportunities and trends in Africa, it should not be construed as advice of any description. You must obtain professional or specialist advice in relation to your particular circumstances before taking, or refraining from, any action on the basis of this article.